31 December Jacobus Petrus (Koos) Bekker Li Dong Sheng lan Charles Stone (Chairman) 107,235 171,166 306,818 Equity and liabilities Equity attributable to equity holders of the Company 28,463 AUDITOR 41,298 80,013 120,035 Non-controlling interests 625 850 518 2,111 2,065 Total equity 57,945 29,088 PricewaterhouseCoopers PRINCIPAL BANKER Grand Cayman KY1-1110 Cayman Islands 24 Shedden Road, George Town 4th Floor, Royal Bank House Royal Bank of Canada Trust Company (Cayman) Limited CAYMAN ISLANDS PRINCIPAL SHARE REGISTRAR AND TRANSFER OFFICE Hong Kong No. 1 Queen's Road East Wanchai 29/F., Three Pacific Place IN HONG KONG Certified Public Accountants PRINCIPAL PLACE OF BUSINESS Shenzhen, 518057 Nanshan District Hi-tech Park Tencent Building Kejizhongyi Avenue TENCENT GROUP HEAD OFFICE Hutchins Drive, P.O. Box 2681 Grand Cayman KY1-1111 Cayman Islands Cricket Square REGISTERED OFFICE The Hongkong and Shanghai Banking Corporation Limited The PRC HONG KONG BRANCH SHARE REGISTRAR AND TRANSFER OFFICE 42,148 82,124 306,818 Comparative figures have been restated retrospectively to conform with the presentation adopted in 2015, whereas, among others, we have extended definition of non-GAAP adjustments to cover that of our material associates. We adopted the new presentation in order to more clearly illustrate our non-GAAP financial measures, and to be more consistent with what we believe to be industry practice. 3 00 Annual Report 2015 Chairman's Statement Ma Huateng Chairman I am pleased to present our annual report for the year ended 31 December 2015 to the shareholders. RESULTS 171,166 The Group's audited profit attributable to equity holders of the Company for the year ended 31 December 2015 was RMB28,806 million, an increase of 21% compared with the results for the previous year. Basic and diluted earnings per share for the year ended 31 December 2015 were RMB3.097 and RMB3.055 respectively. Tencent Holdings Limited 4 BUSINESS REVIEW AND OUTLOOK 1. Internet Industry Trends Chairman's Statement In 2015, the Internet further penetrated everyday life, providing users with new value and additional convenience. Messaging and social networking continued to rank as the highest time spent and widest penetration activities on smart phones, and evolved into increasingly relevant content discovery media. Search queries moved primarily to mobile, and search remained an important content discovery tool, along with application stores. Online shopping became increasingly widespread, especially in lower-tier cities, and eCommerce transaction volumes sustained healthy growth rates. Online advertising activity shifted decisively from PC to mobile, with particular growth in areas such as performance advertising on social networks, pre-roll advertising in video services, and in-feed advertising in news services. Users proved increasingly willing to pay for digital content such as movies, TV series, and music. Mid/Hard-core smart phone games, including PC game franchises moving to smart phones, boosted game industry revenue. China Internet companies in sectors such as ride-hailing, classified listings, group-buying, and online travel services competed with heightened intensity in 2015, leading to rapid user growth but reduced or negative profitability. Consequently, several leading companies in these sectors consolidated with competitors, creating a wave of merger and acquisition activities. Offline-to-Online transaction volumes increased, which, together with the emergence of person-to- person payment transactions, contributed to substantial growth in online payment volumes. 2. The Group's non-GAAP profit attributable to equity holders of the Company for the year ended 31 December 2015 was RMB32,410 million, an increase of 31% compared with the results for the previous year. Non-GAAP basic and diluted EPS for the year ended 31 December 2015 were RMB3.485 and RMB3.437 respectively. 58,463 107,235 56,804 122,100 Non-current liabilities 6,533 12,443 15,505 39,007 60,312 Current liabilities 21,183 75,256 20,665 50,035 124,406 Total liabilities 27,716 33,108 48,772 89,042 184,718 Total equity and liabilities 33,267 Company Strategic Highlights Computershare Hong Kong Investor Hopewell Centre 12,732 15,502 23,810 28,806 Total comprehensive income for the year 8,957 13,619 18,376 21,975 10,203 44,723 to equity holders of the Company Non-GAAP profit attributable to equity holders of the Company* 8,938 13,567 18,327 21,891 44,416 10,940 Total comprehensive income attributable 14,287 Profit attributable to equity holders of the Company 23,888 43,894 60,437 78,932 102,863 Gross profit 18,568 25,687 32,659 48,059 29,108 61,232 12,099 15,051 19,281 29,013 36,216 Profit for the year 10,225 12,785 15,563 Profit before income tax Services Limited 17,008 32,410 56,804 75,256 28,496 Revenues 2015 RMB'Million RMB'Million 2014 2013 Year ended 31 December 2012 RMB'Million RMB'Million 155,378 RMB'Million Financial Summary CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME 2 Tencent Holdings Limited 700 STOCK CODE www.tencent.com COMPANY WEBSITE 183 Queen's Road East Wan Chai, Hong Kong 2011 24,737 75,321 36,509 CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION As at 31 December 2011 2012 2013 RMB'Million RMB'Million RMB'Million RMB'Million 2014 53,686 2015 RMB'Million Non-current assets Current assets Total assets 21,301 38,747 53,549 95,845 151,440 35,503 Assets In 2015, we conducted a series of initiatives to enhance our ongoing businesses in China: Shops 1712-1716, 17th Floor Online games: we reinforced our leadership in the smart phone game market via introducing new titles based on proven IP, adding new game genres, leveraging our PC client game operational expertise, and developing player communities. Company Divisional and Product Highlights 3. Investing in equity stakes in leading companies in related Internet verticals, such as Internet Plus Holdings, to provide best-in-class services to our users. Growing our mobile utility services, including security, browser and application store, strengthening infrastructural supports to our mobile ecosystem. As at Annual Report 2015 9 00 Enriching our payment services and financial products platform. Operating Information Expanding our advertising business, via enhancing our advertising technologies, such as data-mining and look- alike user targeting, enlarging our long-tail advertiser base, and adding more mobile advertising inventory; Growing our digital content businesses, including online video, music and literature, via providing exclusive content to our users and leveraging our users' social relationships; and Investing in and innovating around our core communications and social platforms, especially in areas such as group messaging and video-format content; During 2016, we intend to develop our ongoing businesses and further cultivate our mobile ecosystem via initiatives including: Company Outlook and Strategies for 2016 5. Profit attributable to equity holders of the Company increased by 22% year-on-year to RMB7, 164 million. Non-GAAP profit attributable to equity holders of the Company increased by 28% year-on-year to RMB8,953 million. Online advertising. Revenues from our online advertising business increased by 118% year-on-year to RMB5,733 million. Performance-based advertising revenues grew by 157% to RMB2,916 million, mainly reflecting revenue growth from Mobile Qzone, Weixin Official Accounts, and newly launched advertising services on Weixin Moments. Brand display advertising revenues grew by 89% to RMB2,817 million, reflecting higher contributions from our mobile media platforms such as Tencent Video and Tencent News. VAS. Revenues from our VAS business increased by 35% year-on-year to RMB23,068 million. Our online game business achieved healthy growth in revenues, primarily driven by our expanded smart phone game portfolio, our major PC titles and new PC client games launched in 2015. Our social networks revenues grew by 37% to RMB7,097 million, reflecting revenue growth from digital content subscription services, QQ Membership subscription services, and item sales within our social networking platforms. In the fourth quarter of 2015, revenues increased by 45% year-on-year to RMB30,441 million. Excluding the eCommerce transactions business, revenues increased by 47% year-on-year to RMB30,242 million. Fourth Quarter of 2015 Developing new and emerging smart phone game genres, via leveraging our PC game experiences, smart phone game player communities, and relationships with leading game developers; Chairman's Statement As at As at 0.4% PCU of QQ (for the quarter) 241.1 217.4 10.9% 239.1 0.8% Combined MAU of Weixin and WeChat 697.0 Social platforms: we sustained user growth of Mobile QQ year-on-year, particularly among young users, via promoting entertainment-driven and community-based activities, while expanding the user base of Weixin, via connecting a diversified product and service portfolio to a broad range of users. Our performance-based social advertising revenues more than doubled year-on-year. 500.0 649.5 7.3% MAU of Qzone 640.1 654.1 -2.1% 653.1 00 Year- 39.4% 639.1 8 Profit attributable to equity holders of the Company increased by 21% to RMB28.8 billion. Non-GAAP profit attributable to equity holders of the Company increased by 31% to RMB32.4 billion. 83.7 13.0% 88.5 6.9% Key Platforms For QQ, smart device MAU increased by 11% year-on-year to 642 million at the end of 2015, while overall PCU increased by 11% year-on-year to 241 million. QQ Group user engagement benefited from a revenue- sharing scheme introduced to incentivize group creators. Our QQ Wallet payment service gained popularity with approximately 6 billion red envelopes exchanged via QQ Wallet within six days during the Lunar New Year holidays in early 2016. Tencent Holdings Limited 10 6 94.6 Chairman's Statement For Weixin and WeChat together, MAU reached 697 million at the end of 2015, representing year-on-year growth of 39%. Official Accounts became a leading platform connecting users to content creators, merchants and advertisers. Weixin Pay also became increasingly popular. The volume of red envelopes exchanged via Weixin Pay exceeded 32 billion within six days during the Lunar New Year holidays in early 2016, growing by 9 times year-on- year. With increasing popularity of Weixin Pay, bank handling fees related to C2C payment transactions via Weixin Pay, mainly arising from money transfers, increased significantly, amounting to over RMB300 million (net of related revenue we received from users) for the month of January 2016. To manage these cost pressures, we introduced a new policy with effect from 1 March 2016. Under this new policy, we charge users Weixin Pay balance withdrawal fees if the accumulated amount of money a user withdraws from her Weixin Pay wallet to her bank account exceeds a certain amount. In parallel, we no longer charge users on Weixin Pay C2C money transfers. We will continue to promote Weixin Pay via encouraging users to consume products and services embedded in Weixin, as well as those provided by our online and offline partners. Value-Added Services In 2015, our social networks business achieved 30% year-on-year revenue growth as we improved our digital content subscription services, QQ Membership subscription services, and virtual item sales. Looking forward, we will continue to optimize our user experience and add premium content to our subscription services, such as video and music, and to our literature service. In online games, we extended our market leadership in both PC client game and smart phone game markets. For PC client games, we achieved low double-digit year-on-year revenue growth thanks to increased contributions from key titles and new games launched in 2015. For smart phone games, we generated 53% year-on-year revenue growth on a gross-to-gross basis, with approximately RMB21.3 billion revenue in 2015. We achieved or retained leadership in multiple genres via utilizing proven IPs, extending popular PC game genres to smart phones, and developing player communities. Looking forward, we aim to broaden smart phone game activity in China into new game genres, following the precedent of our category expansion in PC games. Our cloud service business achieved over 100% year-on-year revenue growth as we promoted our services to key enterprise customers from a range of verticals such as eCommerce, 020 services, online games, online video and Internet finance. We will continue investing in enhancing our cloud services, supporting our private and public sector partners in fulfilling their "Internet-Plus" related initiatives. For Qzone, smart device MAU increased by 6% year-on-year to 573 million at the end of 2015. User activity benefited from enhanced features in areas such as sticker sharing and photo album editing. Tencent Holdings Limited Fee-based VAS registered subscriptions 576.8 Online advertising. Revenues from our online advertising business increased by 110% to RMB17.5 billion. Performance-based advertising revenues grew by 172% to RMB8.7 billion, mainly driven by revenue growth from Mobile Qzone, the full year impact of advertising revenues from Weixin Official Accounts, as well as contributions from newly launched advertising services on Weixin Moments. Brand display advertising revenues grew by 72% to RMB8.8 billion, mainly driven by increased traffic and advertising on mobile media platforms such as Tencent Video and Tencent News. VAS. Revenues from our VAS business increased by 27% to RMB80.7 billion. Our online game business achieved healthy growth in revenues, mainly driven by smart phone games, key PC titles and new PC client games launched in 2015. Our social networks revenues expanded, reflecting increased contributions from digital content subscription services, QQ Membership subscription services, and virtual item sales. In 2015, revenues increased by 30% to RMB102.9 billion. Excluding the eCommerce business, revenues increased by 38% to RMB102.2 billion. Year Ended 31 December 2015 Company Financial Performance 4. Customizing advertising solutions for specific advertiser categories. Leveraging new advertising formats, such as auto-play video on Weixin Moments and eCoupons on Official Accounts; and Enhancing advertiser tools, such as self-service advertising platforms and location-based targeted advertising services; -0.7% Looking ahead, we will continue to invest in our brand advertising business, while aiming to grow our performance-based advertising business via: Online Advertising Chairman's Statement Annual Report 2015 7 -2.0% Smart device MAU of Qzone 572.9 539.8 6.1% In 2015, our online advertising business achieved 110% year-on-year revenue growth, mainly reflecting an enlarged advertiser base and more traffic on our platforms. Over 65% of our total advertising revenues was generated on mobile platforms during the year. 11.4% ས AUDIT COMMITTEE CONSOLIDATED INCOME STATEMENT 87 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME 88 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY 90 CONSOLIDATED STATEMENT OF CASH FLOWS 92 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 196 DEFINITION CONSOLIDATED STATEMENT OF FINANCIAL POSITION Corporate Information Executive Directors Ma Huateng (Chairman) Lau Chi Ping Martin Non-Executive Directors Jacobus Petrus (Koos) Bekker Charles St Leger Searle Independent Non-Executive Directors Li Dong Sheng lain Ferguson Bruce DIRECTORS lan Charles Stone 86 83 (Stock Code 股份代號:700) 2015 smart communication inspires Annual Report 智慧溝通 靈感無限 CONTENTS 2 CORPORATE INFORMATION 576.1 98 3 4 CHAIRMAN'S STATEMENT 11 MANAGEMENT DISCUSSION AND ANALYSIS 27 DIRECTORS' REPORT 66 CORPORATE GOVERNANCE REPORT 81 INDEPENDENT AUDITOR'S REPORT FINANCIAL SUMMARY 於開曼群島註冊成立的有限公司 騰訊控股有限公司 lan Charles Stone Media & content: we sustained traffic leadership in multiple online media categories, such as video, sports, music, news and literature, via partnering with premium content providers, such as the NBA, HBO, Paramount, Warner Music, and Sony Music, and investing in original content. We grew our digital content subscription services via leveraging our social platforms and optimizing our premium business models. Tencent Holdings Limited Tencent 腾讯 31 December on-year 2015 2014 change 30 September 2015 5 Quarter- on-quarter (in millions, unless specified) MAU of QQ 853.1 815.3 4.6% 859.7 -0.8% Smart device MAU of QQ 641.5 change lain Ferguson Bruce (Chairman) Annual Report 2015 Chairman's Statement Charles St Leger Searle CORPORATE GOVERNANCE COMMITTEE Charles St Leger Searle (Chairman) lain Ferguson Bruce lan Charles Stone INVESTMENT COMMITTEE Lau Chi Ping Martin (Chairman) Ma Huateng Incorporated in the Cayman Islands with limited liability 00 Charles St Leger Searle Ma Huateng (Chairman) Li Dong Sheng lain Ferguson Bruce lan Charles Stone Charles St Leger Searle REMUNERATION COMMITTEE Promoting our online payment services through enriched payment scenarios, increasing MAU of our mobile payment services by over 7 times year-on-year. Enriching products and services available within our platforms. For example, we introduced personal micro-loan products and municipal services, such as visa applications, to Mobile QQ and Weixin. During the year, we further executed our “Connection" strategy, bringing our own and our partners' products and services to our consumers via cultivating an ecosystem around our core communication and social platforms. Key initiatives for our "Internet-Plus" ecosystem included: NOMINATION COMMITTEE Tencent Holdings Limited The notes on pages 92 to 195 are an integral part of these consolidated financial statements. The Company is an investment holding company. The Company and its subsidiaries (collectively, the "Group") are principally engaged in the provision of value-added services ("VAS") and online advertising services to users in the People's Republic of China (the "PRC"). Repayment of long-term borrowings (2,200) (1,693) Net proceeds from issuance of notes payable 13,619 17,842 4,293 Repayment of notes payable Proceeds from issuance of ordinary shares 169 299 Payments for repurchase of shares (61) Withholding shares for share award schemes (1,917) 8,581 Proceeds from long-term borrowings 2,549 90 06 (63,605) (28,388) Consolidated Statement of Cash Flows For the year ended 31 December 2015 Year ended 31 December 2015 RMB'Million 2014 RMB'Million Cash flows from financing activities Proceeds from short-term borrowings Repayment of short-term borrowings 8,565 (652) The operations of the Group were initially conducted through Shenzhen Tencent Computer Systems Company Limited ("Tencent Computer"), a limited liability company established in the PRC by certain shareholders of the Company on 11 November 1998. Tencent Computer is legally owned by the core founders of the Company who are PRC citizens (the "Registered Shareholders"). (529) 99 42,713 20,228 371 (188) Cash and cash equivalents at end of the year 43,438 Exchange gains/(losses) on cash and cash equivalents 42,713 91 Annual Report 2015 Notes to the Consolidated Financial Statements For the year ended 31 December 2015 1 GENERAL INFORMATION Tencent Holdings Limited (the "Company") was incorporated in the Cayman Islands with limited liability. The address of its registered office is Cricket Square, Hutchins Drive, P.O. Box 2681, Grand Cayman KY1-1111, Cayman Islands. The shares of the Company have been listed on the main board of the Stock Exchange of Hong Kong Limited (the "Stock Exchange") since 16 June 2004. 00 Cash and cash equivalents at beginning of the year 22,673 354 44 Dividends paid to the Company's shareholders (2,640) (1,761) Dividends paid to non-controlling interests (549) (158) Payments for acquisition of non-controlling interests in non-wholly owned subsidiaries (4,547) (103) Net cash flows generated from financing activities 18,528 18,350 Net increase in cash and cash equivalents Proceeds from capital injection from non-controlling interests (2,372) 94 the right to receive the cash received by Tencent Computer from its operations which is surplus to its requirements, having regard to its forecast working capital needs, capital expenditure, and other short-term anticipated expenditure through various commercial arrangements; 97 00 When the Group ceases to have control or significant influence, any retained interest in the entity is re- measured to its fair value at the date when control or significant influence is lost, with the change in carrying amount recognised in the consolidated income statement. The fair value is the initial carrying amount for the purposes of subsequently accounting for the retained interest as an associate, a joint venture or financial asset. In addition, any amounts previously recognised in other comprehensive income in respect of that entity are accounted for as if the Group had directly disposed of the related assets or liabilities. This may mean that amounts previously recognised in other comprehensive income in respect of that entity are reclassified to the consolidated income statement. (iii) Disposal Transactions with non-controlling interests that do not result in a loss of control are accounted for as equity transactions that is, as transactions with the owners of the subsidiary in their capacity as owners. The difference between fair value of any consideration paid and the relevant share acquired of the carrying amount of net assets of the subsidiary is recorded in equity. Gains or losses on disposals to non-controlling interests are also recorded in equity. - Changes in ownership interests in subsidiaries without change of control (ii) The excess of the consideration transferred, the amount of any non-controlling interest in the acquiree and the acquisition-date fair value of any previous equity interest in the acquiree over the fair value of the identifiable net assets acquired is recorded as goodwill. If the total of consideration transferred, non-controlling interest recognised and previously held interest measured is less than the fair value of the net assets of the subsidiary acquired in the case of a bargain purchase, the difference is recognised directly in the consolidated income statement. Any contingent consideration to be transferred by the Group is recognised at fair value at the acquisition date. Subsequent changes to the fair value of the contingent consideration that is deemed to be an asset or liability is recognised in accordance with IAS 39 in profit or loss. Contingent consideration that is classified as equity is not re-measured, and its subsequent settlement is accounted for within equity. (i) Business combinations (Cont'd) For the year ended 31 December 2015 Annual Report 2015 (a) Consolidation (Cont'd) SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Cont'd) Notes to the Consolidated Financial Statements 2 96 96 Tencent Holdings Limited If the business combination is achieved in stages, the acquisition date carrying value of the acquirer's previously held equity interest in the acquiree is re-measured to fair value at the acquisition date; any gains or losses arising from such re-measurement are recognised in profit or loss. Acquisition-related costs are expensed as incurred. The Group applies the acquisition method to account for business combinations. The consideration transferred for the acquisition of a subsidiary is the fair values of the assets transferred, the liabilities incurred to the former owners of the acquiree and the equity interests issued by the Group. The consideration transferred includes the fair value of any asset or liability resulting from a contingent consideration arrangement. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. The Group recognises any non-controlling interest in the acquiree on an acquisition-by-acquisition basis. Non-controlling interests in the acquiree that are present ownership interests and entitle their holders to a proportionate share of the entity's net assets in the event of liquidation are measured at either fair value or the present ownership interests' proportionate share in the recognised amounts of the acquiree's identifiable net assets. All other components of non-controlling interests are measured at their acquisition date fair value, unless another measurement basis is required by IFRS. Business combinations (i) Intra-group transactions, balances and unrealised gains on transactions between group companies are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the transferred asset. When necessary, amounts reported by subsidiaries have been adjusted to conform with the Group's accounting policies. 2.2 Subsidiaries (Cont'd) Subsidiaries are all entities (including structured entities) over which the Group has control. The Group controls an entity when the Group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. Subsidiaries are consolidated from the date on which control is transferred to the Group. They are deconsolidated from the date that control ceases. Notes to the Consolidated Financial Statements 2 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Cont'd) Net cash flows used in investing activities Annual Report 2015 99 00 Unrealised gains on transactions between the Group and its joint ventures are eliminated to the extent of the Group's interest in the joint ventures. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. A full gain or loss is recognised when a transaction involves a business whereas a partial gain or loss is recognised when a transaction involves assets that do not constitute a business, even if those assets are in a subsidiary. Accounting policies of the joint ventures have been changed where necessary to ensure consistency with the policies adopted by the Group. Under IFRS 11 investments in joint arrangements are classified as either joint operations or joint ventures depending on the contractual rights and obligations of each investor. The Group has assessed the nature of its joint arrangements and determined them to be joint ventures. Joint ventures are accounted for using the equity method. Under the equity method of accounting, interests in joint ventures are initially recognised at cost and adjusted thereafter to recognise the Group's share of the post-acquisition profits or losses and movements in other comprehensive income. When the Group's share of losses in a joint venture equals or exceeds its interests in the joint ventures (which includes any long-term interests that, in substance, form part of the Group's net investment in the joint ventures), the Group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the joint ventures. 2.4 Joint arrangements The Group's investments in associates in the form of redeemable preference shares are accounted for as compound financial instruments (Note 2.25). Gains or losses on dilution of equity interest in associates are recognised in the consolidated income statement. Unrealised gains on transactions between the Group and its associates are eliminated to the extent of the Group's interests in the associates. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. A full gain or loss is recognised when a transaction involves a business whereas a partial gain or loss is recognised when a transaction involves assets that do not constitute a business, even if those assets are in a subsidiary. Accounting policies of associates have been changed where necessary to ensure consistency with the policies adopted by the Group. The Group determines at each reporting date whether there is any objective evidence that investments in associates are impaired. If this is the case, the Group calculates the amount of impairment as the difference between the recoverable amount of the associate and its carrying value and recognises the amount in "Other gains/ (losses), net" in the consolidated income statement. 2.3 Associates (Cont'd) For the year ended 31 December 2015 For the year ended 31 December 2015 2 Notes to the Consolidated Financial Statements 98 Tencent Holdings Limited The Group's share of its associates' post-acquisition profit or loss is recognised in the consolidated income statement, and its share of post-acquisition movements in other comprehensive income is recognised in other comprehensive income. The cumulative post-acquisition movements are adjusted against the carrying amount of the investment. When the Group's share of losses in an associate equals or exceeds its interest in the associate, including any other unsecured receivables, the Group does not recognise further losses, unless it has incurred legal or constructive obligations or made payments on behalf of the associate. If the ownership interest in an associate is reduced but significant influence is retained, only a proportionate share of the amounts previously recognised in other comprehensive income is reclassified to consolidated income statement where appropriate. Associates are all entities over which the Group has significant influence but not control, generally accompanying a shareholding of between 20% and 50% of the voting rights. Investments in associates are accounted for using the equity method of accounting and are initially recognised at cost, and the carrying amount is increased or decreased to recognise the investor's share of the profit or loss of the investee after the date of acquisition. The Group's investments in associates include goodwill identified on acquisition, net of any accumulated impairment loss. Upon the acquisition of the ownership interest in an associate, any difference between the cost of the associate and the Group's share of the net fair value of the associate's identifiable assets and liabilities is accounted for as goodwill. 2.3 Associates Impairment testing of the investments in subsidiaries is required upon receiving dividends from these investments if the dividends exceed the total comprehensive income of the subsidiaries in the period the dividends are declared or if the carrying amount of the investments in the separate financial statements exceeds the carrying amount in the consolidated financial statements of the investee's net assets including goodwill. Investments in subsidiaries are accounted for at cost less impairment. Cost includes direct attributable costs of investment. The results of subsidiaries are accounted for by the Company on the basis of dividends received and receivable. In addition, the contribution to the Company's Share Scheme Trust (as defined in Note 43(e)), a controlled structured entity, is stated at cost in "Contribution to Share Scheme Trust" first, and then will be transferred to the "Shares held for share award schemes" under equity when the contribution is used for the acquisition for the shares of the Company. (b) Separate financial statements 2.2 Subsidiaries (Cont'd) SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Cont'd) The PRC regulations restrict foreign ownership of companies that provide value-added telecommunications services, which include activities and services operated by Tencent Computer. In order to enable certain foreign companies to make investments into the business of the Group, the Company established a subsidiary, Tencent Technology (Shenzhen) Company Limited ("Tencent Technology"), which is a wholly foreign owned enterprise incorporated in the PRC, on 24 February 2000. The foreign investors of the Company then subscribed to additional equity interest in the Company. Under a series of contractual arrangements (collectively, “Structure Contracts") entered into among the Company, Tencent Technology, Tencent Computer and the Registered Shareholders, the Company is able to effectively control, recognise and receive substantially all the economic benefit of the business and operations of Tencent Computer. In summary, the Structure Contracts provide the Company through Tencent Technology with, among other things: (a) Consolidation 2 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Cont'd) (a) Amendments to standards adopted by the Group 2.1 Basis of preparation (Cont'd) SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Cont'd) 2 For the year ended 31 December 2015 Notes to the Consolidated Financial Statements Annual Report 2015 93 00 The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group's accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in Note 4. The consolidated financial statements of the Group have been prepared in accordance with all applicable International Financial Reporting Standards ("IFRS"). The consolidated financial statements have been prepared under the historical cost convention, as modified by the revaluation of available-for-sale financial assets, and financial assets and financial liabilities (including derivative financial instruments) at fair value through profit or loss, which are carried at fair values. 2.1 Basis of preparation (b) The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. 2 Similar Structure Contracts were also executed for other PRC operating companies established by the Group similar to Tencent Computer subsequent to 2000. All these PRC operating companies are treated as controlled structured entities of the Company and their financial statements have also been consolidated by the Company. As a result, Tencent Computer is accounted for as a controlled structured entity (see also Note 2.2(a) and Note 43) and the formation of the Group in 2000 was accounted for as a business combination between entities under common control under a method similar to the uniting of interests method for recording all assets and liabilities at predecessor carrying amounts. This approach was adopted because in management's belief it best reflected the substance of the formation. GENERAL INFORMATION (Cont'd) 1 For the year ended 31 December 2015 Notes to the Consolidated Financial Statements 92 Tencent Holdings Limited the right to control the management and financial and operating policies of Tencent Computer. • the right to ensure that Tencent Technology owns the valuable assets of the business through the assignment to Tencent Technology of the principal present and future intellectual property rights of Tencent Computer without making any payment; and SUMMARY OF PRINCIPAL ACCOUNTING POLICIES 2.2 Subsidiaries The following amendments to standards have been adopted by the Group for the first time for the financial year beginning on 1 January 2015. The adoption of these amendments to standards does not have any significant impact on the consolidated financial statements of the Group. IFRSS (amendment) For the year ended 31 December 2015 Notes to the Consolidated Financial Statements Annual Report 2015 95 00 The Group is in the process of assessing the impact of the above new standards on the Group's results and financial position. There are no other IFRSS or IFRIC interpretations that are not yet effective that would be expected to have a material impact on the Group. IFRS 16 "Lease" requires lessees to recognise lease liability reflecting future lease payments and a "right-of-use-asset" for almost all lease contracts, with an exemption for certain short-term leases and leases of low-value assets. This standard is effective for annual periods beginning on or after 1 January 2019. Early adoption is permitted if IFRS 15 is also applied. IFRS 9 "Financial instruments" addresses the classification, measurement and recognition of financial assets and financial liabilities. It replaces the guidance in IAS 39 that relates to the classification and measurement of financial instruments. IFRS 9 retains but simplifies the mixed measurement model and establishes three primary measurement categories for financial assets: amortised cost, fair value through other comprehensive income and fair value through profit or loss. The basis of classification depends on the entity's business model and the contractual cash flow characteristics of the financial asset. Investments in equity instruments are required to be measured at fair value through profit or loss with the irrevocable option at inception to present changes in fair value in other comprehensive income not recycling. There is now a new expected credit losses model that replaces the incurred loss impairment model used in IAS 39. For financial liabilities there were no changes to classification and measurement except for the recognition of changes in own credit risk in other comprehensive income, for liabilities designated at fair value through profit or loss. IFRS 9 relaxes the requirements for hedge effectiveness by replacing the bright line hedge effectiveness tests. It requires an economic relationship between the hedged item and hedging instrument and for the "hedged ratio" to be the same as the one management actually use for risk management purposes. Contemporaneous documentation is still required but is different to that currently prepared under IAS 39. This standard is effective for annual periods beginning on or after 1 January 2018 and early adoption is permitted. • New standards and amendments to standards not yet adopted (Cont'd) (c) 2.1 Basis of preparation (Cont'd) IAS 19 (2011) (amendment) For the year ended 31 December 2015 2 Notes to the Consolidated Financial Statements 94 Tencent Holdings Limited IFRS 15 "Revenue from contracts with customers" deals with revenue recognition and establishes principles for reporting useful information to users of financial statements about the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity's contracts with customers. Revenue is recognised when a customer obtains control of a good or service and thus has the ability to direct the use and obtain the benefits from the good or service. This standard replaces IAS 18 "Revenue" and IAS 11 “Construction contracts" and related interpretations. This standard is effective for annual periods beginning on or after 1 January 2018 and earlier adoption is permitted. A number of new standards and amendments to standards are not effective for the financial year beginning 1 January 2015, and have not been early adopted by the Group in preparing the consolidated financial statements. None of these is expected to have a significant effect on the consolidated financial statements of the Group, except the following: New standards and amendments to standards not yet adopted (c) In addition, the requirements of Part 9 "Accounts and Audit" of the new Hong Kong Companies Ordinance (Cap.622) come into operation during the financial year, as a result, there are changes to presentation and disclosures of certain information in the consolidated financial statements. New Hong Kong Companies Ordinance (Cap.622) Annual improvements to IFRSS 2010-2012 cycle and 2011-2013 cycle Defined benefit plans: employee contributions SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Cont'd) Dividends received (2,320) 515 (1,349) (1,911) Net inflows of cash in respect of the disposal of subsidiaries 82 Purchase of fixed assets, construction in progress and investment properties (5,440) 187 (4,296) Proceeds from disposals of fixed assets 70 40 Payments for acquisition of investments in associates (11,423) (31,929) Proceeds from disposals of investments in associates 1,106 Payments for business combinations, net of cash acquired Cash flows from investing activities 45,431 (4,703) Consolidated Statement of Cash Flows For the year ended 31 December 2015 Cash flows from operating activities Cash generated from operations Income tax paid Net cash flows generated from operating activities Year ended 31 December 1,027 2015 RMB'Million 2014 RMB'Million 38(a) 50,478 37,414 (5,047) Note Payments for acquisition of investments in redeemable 32,711 (2,394) (4,622) Proceeds from disposals of available-for-sale financial assets 223 352 (Payments for)/proceeds from settlement of loan to associates (842) Receipt from maturity of term deposits with initial terms of over three months (13,001) 61,810 Placement of term deposits with initial terms over three months (87,186) (12,428) Interest received 2,274 1,468 preference shares of associates 27,872 Payments for available-for-sale financial assets 63 127 (2,524) Proceeds from disposals of investments in redeemable preference shares of associates 193 Payments for acquisition of investments in joint ventures Purchase/prepayment of intangible assets (4,620) 290 (500) 115 48 Purchase/prepayment of land use rights (3,045) (23) Proceeds from disposals of land use rights Proceeds from disposals of intangible assets (iii) Available-for-sale financial assets For the year ended 31 December 2015 Available-for-sale financial assets are non-derivatives that are either designated in this category or not classified in any other category. They are included in non-current assets unless management intends to dispose of the investment within 12 months after the end of the reporting period. 00 105 Annual Report 2015 Notes to the Consolidated Financial Statements 2 2.15 Offsetting financial instruments 2.14 Financial assets (Cont'd) (b) Recognition and measurement Regular way purchases and sales of investments are recognised on trade-date - the date on which the Group commits to purchase or sell the asset. Investments are initially recognised at fair value plus transaction costs for all financial assets not carried at fair value through profit or loss. Financial assets carried at fair value through profit or loss are initially recognised at fair value, and transaction costs are expensed in the consolidated income statement. Financial assets are derecognised when the rights to receive cash flows from the investments have expired or have been transferred and the Group has transferred substantially all risks and rewards of ownership. Available-for-sale financial assets and financial assets at fair value through profit or loss are subsequently carried at fair value. Loans and receivables are subsequently carried at amortised cost using the effective interest method. Changes in the fair value of monetary and non-monetary securities classified as available-for-sale financial assets are recognised in other comprehensive income. When securities classified as available-for-sale financial assets are sold or impaired, the accumulated fair value adjustments recognised in other comprehensive income are included in the consolidated income statement as gains and losses from investment securities. Dividends on available-for-sale financial assets equity instruments are recognised in the consolidated income statement when the Group's right to receive payments is established. Financial assets and liabilities are offset and the net amount is reported in the consolidated statement of financial position when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or realise the assets and settle the liabilities simultaneously. The legally enforceable right must not be contingent on future events and must be enforceable in the normal course of business and in the event of default, insolvency or bankruptcy of the company or the counterparty. Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets, except for those with maturities greater than 12 months after the end of the reporting period which are classified as non-current assets. The Group's loans and receivables comprise "Accounts receivable", "Deposits and other receivables", "Term deposits", "Restricted cash" and "Cash and cash equivalents" in the consolidated statement of financial position. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Cont'd) Loans and receivables Other intangible assets mainly include game licenses, copyrights, computer software and technology and non-compete agreements. They are initially recognised and measured at cost or estimated fair value of intangible assets acquired through business combinations. Financial assets at fair value through profit or loss are financial assets held for trading. A financial asset is classified in this category if acquired principally for the purpose of selling in the short term. Derivatives are classified as held for trading unless they are designated as hedges. Assets in this category are classified as current assets if expected to be settled within 12 months, otherwise they are classified as non-current. Tencent Holdings Limited Other intangible assets 2.12 Shares held for share award schemes The consideration paid by the Share Scheme Trust (see Note 43(e)) for purchasing the Company's shares from the market, including any directly attributable incremental cost, is presented as “Shares held for share award schemes" and the amount is deducted from total equity. When the Share Scheme Trust transfers the Company's shares to the awardees upon vesting, the related costs of the awarded shares vested are credited to "Shares held for share award schemes", with a corresponding adjustment made to "Share premium". 2.13 Impairment of non-financial assets Assets that have an indefinite useful life or are not yet available for use are not subject to amortisation and are tested annually for impairment. Assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset's carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset's fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). Non-financial assets other than goodwill that suffered impairment are reviewed for possible reversal of the impairment at each reporting date. Tencent Holdings Limited 104 Notes to the Consolidated Financial Statements 2 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Cont'd) For the year ended 31 December 2015 2.14 Financial assets (a) Classification The Group classifies its financial assets in the following categories: at fair value through profit or loss, loans and receivables and available-for-sale financial assets. The classification depends on the purpose for which the financial assets were acquired, management's intentions and whether the assets are quoted in an active market. Management determines the classification of its financial assets at initial recognition. (i) Financial assets at fair value through profit or loss (ii) 106 Cash and cash equivalents include cash in hand, deposits held at call with banks, money market funds and other short-term highly liquid investments with initial maturities of three months or less. 2 108 Notes to the Consolidated Financial Statements For the year ended 31 December 2015 2 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Cont'd) 2.17 Derivative financial instruments and hedging activities (Cont'd) Changes in the fair value of derivatives that are designated and qualified as fair value hedges are recorded in the consolidated income statement, together with any changes in the fair value of the hedged asset or liability that are attributable to the hedged risk. The effective portion of changes in the fair value of derivatives that are designated and qualified as cash flow hedges is recognised in other comprehensive income within "Other fair value gain recognised". The gain or loss relating to the ineffective portion is recognised immediately in the consolidated income statement within ‘other gains/(losses), net'. When the forecast transaction that is hedged results in the recognition of a non-financial asset, the gains and losses previously deferred in equity are transferred from equity and included in the initial measurement of the cost of the asset. Changes in the fair value of any derivative instruments that do not qualify for hedge accounting are recognised immediately in the consolidated income statement in "Other gains/(losses), net". 2.18 Inventories Inventories, mainly consisting of merchandise for sale, are primarily accounted for using the weighted average method and are stated at the lower of cost and net realisable value. 2.19 Accounts receivable Accounts receivable are amounts due from customers or agents for services performed or merchandise sold in the ordinary course of business. If collection of accounts receivable is expected in one year or less, they are classified as current assets. Otherwise, they are presented as non-current assets. Accounts receivable are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less provision for impairment. 2.20 Cash and cash equivalents (c) 00 109 Annual Report 2015 Tencent Holdings Limited Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently re-measured at their fair value. The method of recognising the resulting gain or loss depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. The Group designates certain derivatives as either (i) hedges of the fair value of recognised assets or liabilities or a firm commitment (fair value hedge); (ii) hedges of a particular risk associated with a recognised asset or liability or a highly probable forecast transaction (cash flow hedge); or (iii) hedges of a net investment in a foreign operation (net investment hedge). 2.17 Derivative financial instruments and hedging activities For equity investments, a significant or prolonged decline in the fair value of the security below its cost is also evidence that the assets are impaired. If any such evidence exists, the cumulative loss - measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognised in the consolidated income statement - is removed from equity and recognised in the consolidated income statement. Impairment losses recognised in the consolidated income statement on equity instruments are not reversed through the consolidated income statement. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Cont'd) For the year ended 31 December 2015 2.16 Impairment of financial assets (a) Assets carried at amortised cost The Group assesses at the end of each reporting period whether there is objective evidence that a financial asset or a group of financial assets is impaired. A financial asset or a group of financial assets is impaired and impairment losses are incurred only if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a “loss event") and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. Evidence of impairment may include indications that the debtors or a group of debtors is experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganisation, and where observable data indicate that there is a measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults. For loans and receivables category, the amount of the impairment loss is measured as the difference between the asset's carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset's original effective interest rate. The carrying amount of the asset is reduced and the amount of the impairment loss is recognised in the consolidated income statement. If a loan has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate determined under the contract. As a practical expedient, the Group may measure impairment on the basis of an instrument's fair value using an observable market price. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised (such as an improvement in the debtor's credit rating), the reversal of the previously recognised impairment loss is recognised in the consolidated income statement. Notes to the Consolidated Financial Statements 00 Annual Report 2015 Notes to the Consolidated Financial Statements For the year ended 31 December 2015 2 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Cont'd) 2.16 Impairment of financial assets (Cont'd) (b) Assets classified as available-for-sale financial assets The Group assesses at the end of each reporting period whether there is objective evidence that a financial asset or a group of financial assets is impaired. For debt securities, if any such evidence exists, the cumulative loss - measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognised in the consolidated income statement - is removed from equity and recognised in the consolidated income statement. If, in a subsequent period, the fair value of a debt instrument classified as available for sale increases and the increase can be objectively related to an event occurring after the impairment loss was recognised in the consolidated income statement, the impairment loss is reversed through the consolidated income statement. 107 The licensed online contents mainly include video and music contents. They are initially recognised and measured at cost. Licensed online contents are amortised using an accelerated method or straight-line method reflect the estimated consumption patterns. Other intangible assets are amortised over their estimated useful lives (generally three to ten years) using the straight-line method reflects the pattern in which the intangible asset's future economic benefits are expected to be consumed. 2.11 Intangible assets (Cont'd) (b) Transactions and balances (Cont'd) Changes in the fair value of debt securities denominated in foreign currency classified as available-for-sale financial assets are analysed between translation differences resulting from changes in the amortised cost of the securities, and other changes in the carrying amount of the securities. Translation differences related to changes in the amortised cost and interest income are recognised in the consolidated income statement, and other changes in carrying amount are recognised in other comprehensive income. Translation differences on non-monetary financial assets and liabilities such as equities held at fair value through profit or loss are recognised in the consolidated income statement as part of the fair value gain or loss. Translation differences on non-monetary financial assets, such as equities classified as available-for- sale financial assets, are included in other comprehensive income. (c) Group companies The results and financial position of all the group entities (none of which has the currency of a hyper- inflationary economy) that have a functional currency different from the presentation currency of RMB are translated into the presentation currency as follows: (i) (ii) Assets and liabilities for each statement of financial position presented are translated at the closing rate at the date of that statement of financial position; Income and expenses for each income statement are translated at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the rate on the dates of the transactions); and (iii) All resulting currency translation differences are recognised as a separate component of other comprehensive income. On consolidation, exchange differences arising from the translation of the net investment in foreign operations, and of borrowings and other currency instruments designated as hedges of such investments, are taken to other comprehensive income. Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate. Currency translation differences arising are recognised in other comprehensive income. 00 101 Annual Report 2015 Notes to the Consolidated Financial Statements SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Cont'd) 2 For the year ended 31 December 2015 Notes to the Consolidated Financial Statements (b) Licensed online contents Notes to the Consolidated Financial Statements For the year ended 31 December 2015 2 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Cont'd) 2.4 Joint arrangements (Cont'd) The Group determines at each reporting date whether there is any objective evidence that investments in joint ventures are impaired. If this is the case, the Group calculates the amount of impairment as the difference between the recoverable amount of the joint ventures and its carrying value and recognises the amount in "Other gains/ (losses), net" in the consolidated income statement. 2.5 Investments in associates/joint ventures achieved in stages The cost of associates/joint ventures acquired in stages, except for the change from an associate to a joint venture; is measured as the sum of the fair value of the interest previously held plus the fair value of any additional consideration transferred as of the date when it becomes associate/joint venture. A gain or loss on re-measurement of the previously held interest is taken to the consolidated income statement. Any other comprehensive income recognised in prior periods in relation to the previously held interest is also taken to the consolidated income statement. Any acquisition-related costs are expensed in the period in which the costs are incurred. For the year ended 31 December 2015 2.6 Segment reporting 2.7 Foreign currency translation (a) Functional and presentation currency Items included in the financial statements of each of the Group's entities are measured using the currency of the primary economic environment in which the entity operates (the "functional currency"). The functional currency of the Company and certain of its overseas subsidiaries is United States Dollars ("USD"). As the major operations of the Group are within the PRC, the Group presents its consolidated financial statements in Renminbi ("RMB"), unless otherwise stated. (b) Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the consolidated income statement. Tencent Holdings Limited 100 Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-makers, who are responsible for allocating resources and assessing performance of the operating segments and making strategic decisions. The chief operating decision-makers mainly include the executive directors. 2 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Cont'd) 2.7 Foreign currency translation (Cont'd) All fixed assets are stated at historical costs less accumulated depreciation and accumulated impairment charge. Historical cost includes expenditure that is directly attributable to the acquisition of the items. For the year ended 31 December 2015 2.9 Investment properties Investment properties are held for long-term rental yields and are not occupied by the Group. Investment properties are carried at historical costs less accumulated depreciation and accumulated impairment charges. Historical costs include expenditures that are directly attributable to the acquisition of the items. Depreciation is calculated on the straight-line method to allocate their costs to their residual values over their estimated useful lives of 50 years. Investment properties' residual values and useful lives are reviewed, and adjusted if appropriate, at the end of each reporting period. Investment properties' carrying amounts are written down immediately to their recoverable amounts if their carrying amounts are greater than their estimated recoverable amounts. 2.10 Land use rights Land use rights are up-front payments to acquire long-term interest in land. These payments are stated at cost and charged to the consolidated income statement on a straight-line basis over the remaining period of the lease or capitalised in construction in progress upon completion of construction. 2.11 Intangible assets SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Cont'd) (a) Goodwill For the purpose of impairment testing, goodwill acquired in a business combination is allocated to each of the cash-generating units ("CGUs"), or groups of CGUs, that is expected to benefit from the synergies of the combination. Each unit or group of units to which the goodwill is allocated represents the lowest level within the entity at which the goodwill is monitored for internal management purposes. Goodwill is monitored at the operating segment level. Goodwill impairment reviews are undertaken annually or more frequently if events or changes in circumstances indicate a potential impairment. The carrying value of goodwill is compared to the recoverable amount, which is the higher of value in use and the fair value less costs to sell. Any impairment is recognised immediately as an expense and is not subsequently reversed. 103 Annual Report 2015 00 Notes to the Consolidated Financial Statements For the year ended 31 December 2015 2.8 Fixed assets Goodwill arises on the acquisition of subsidiaries represents the excess of the consideration transferred over the Group's interest in net fair value of the net identifiable assets, liabilities and contingent liabilities of the acquiree and the fair value of the non-controlling interests in the acquiree. 2 2 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Cont'd) Subsequent costs are included in the asset's carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. The carrying amount of the replaced part is derecognised. All other repairs and maintenance are charged to the consolidated income statement during the financial period in which they are incurred. Notes to the Consolidated Financial Statements Depreciation is calculated using the straight-line method to allocate their cost to their residual values over their estimated useful lives, as follows: Buildings Computer equipment Furniture and office equipment Leasehold improvements 20 - 50 years 2 - 5 years Motor vehicles 5 years 102 5 years Gains and losses on disposals are determined by comparing the proceeds with the carrying amount and are recognised in "Other gains/(losses), net" in the consolidated income statement. An asset's carrying amount is written down immediately to its recoverable amount if the asset's carrying amount is greater than its estimated recoverable amount (Note 2.13). Tencent Holdings Limited The assets' residual values and useful lives are reviewed, and adjusted if appropriate, at the end of each reporting period. the shorter of their useful lives and the lease terms Construction in progress represents buildings under construction, which is stated at actual construction cost less any impairment loss. Construction in progress is transferred to fixed assets when completed and ready for use. Annual Report 2015 The Group operates a number of share-based compensation plans (including share option schemes and share award schemes), under which the Group receives services from employees as consideration for equity instruments (including share options and awarded shares) of the Group. The fair value of the employee services received in exchange for the grant of equity instruments of the Group is recognised as an expense over the vesting period, which is the period over which all of the specified vesting conditions are to be satisfied, and credited to share premium under equity. 113 00 From the perspective of the Company, the Company grants its equity instruments to employees of its subsidiaries to exchange for their services related to the subsidiaries. Accordingly, the share-based compensation expenses, which are recognised in the financial statements, are treated as part of the "Investments in subsidiaries" in the Company's statement of financial position. Non-market performance and services conditions are included in assumptions about the number of options that are expected to become vested. For grant of share options, the total amount to be expensed is determined by reference to the fair value of the options granted by using option-pricing models - Black-Scholes valuation model (the "BS Model”) and "Enhanced FAS 123" binomial model (the "Binomial Model”), which include the impact of market performance conditions (such as the Company's share price) but exclude the impact of service condition and non-market performance conditions. For grant of award shares, the total amount to be expensed is determined by reference to the market price of the Company's shares at the grant date. The Group also adopts valuation technique to assess the fair value of other equity instruments of the Group granted under the share-based compensation plans as appropriate. Share-based compensation benefits Tencent Holdings Limited The Group participates in various defined contribution retirement benefit plans which are available to all relevant employees. These plans are generally funded through payments to schemes established by governments or trustee-administered funds. A defined contribution plan is a pension plan under which the Group pays contributions on a mandatory, contractual or voluntary basis into a separate entity. The Group has no legal or constructive obligations to pay further contributions if the fund does not hold sufficient assets to pay all employees the benefits relating to employee service in the current and prior periods. The Group's contributions to the defined contribution plans are expensed as incurred and not reduced by contributions forfeited by those employees who leave the scheme prior to vesting fully in the contributions. (b) Pension obligations 2.27 Employee benefits (Cont'd) For the year ended 31 December 2015 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Cont'd) 2 Notes to the Consolidated Financial Statements Notes to the Consolidated Financial Statements 112 (c) For the year ended 31 December 2015 Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognised even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small. 2.27 Employee benefits (Cont'd) The VAS can be paid by way of prepaid cards and tokens (represented a specific amount of payment unit) sold by the Group through channels such as sales agents appointed by the Group, telecommunication operators, broadband service providers, Internet cafes and banks. The end users can register the prepaid cards and tokens to their user accounts in the Group's platforms and then access the Group's paid online products or relevant paid services. Receipts from the sales of prepaid cards and tokens are deferred and recorded as "Deferred revenue” in the consolidated statement of financial position (see Note 26). The amounts are then recognised as revenue based on the actual utilisation of the respective payment units: (i) when the payment unit is used to purchase services, revenue is recognised when the related services are rendered; (ii) when the payment unit is used to purchase virtual products/items in the Group's Internet/ mobile platforms, the revenue is recognised over the estimated lifespan of the respective virtual products/ items or over the expected user relationship. Revenues from VAS are derived principally from the provision of online/mobile games, community value- added services and applications across various Internet and mobile platforms. (a) VAS The Group principally derives revenues from provision of VAS and online advertising services in the PRC. 2.29 Revenue recognition 2 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Cont'd) For the year ended 31 December 2015 Notes to the Consolidated Financial Statements 2 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Cont'd) 114 Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in the provision due to passage of time is recognised as interest expense. Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events; it is probable that an outflow of resources will be required to settle the obligation; and the amount has been reliably estimated. Provisions are not recognised for further operating losses. 2.28 Provisions If the terms of an equity-settled award are modified, at a minimum an expense is recognised as if the terms had not been modified. An additional expense is recognised for any modification that increases the total fair value of the share-based payment arrangement, or is otherwise beneficial to the employee, as measured at the date of modification. If the Group repurchases vested equity instruments, the payment made to the employee shall be accounted for as a deduction from equity, except to the extent that the payment exceeds the fair value of the equity instruments repurchased, measured at the repurchase date. Any such excess shall be recognised as an expense. When the options are exercised, the proceeds received net of any directly attributable transaction costs are credited to share capital (nominal value) and share premium. At each reporting period end, the Group revise their estimates of the number of options and awarded shares that are expected to ultimately vest. They recognise the impact of the revision of original estimates, if any, in the consolidated income statement of the Group, with a corresponding adjustment made to equity over the remaining vesting period. (c) Share-based compensation benefits (Cont'd) Tencent Holdings Limited Employee entitlements to annual leave are recognised when they accrue to employees. A provision is made for the estimated liability for annual leave as a result of services rendered by employees up to the end of the reporting period. Employee entitlements to sick and maternity leave are not recognised until the time of leave. For the year ended 31 December 2015 2.27 Employee benefits For the year ended 31 December 2015 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Cont'd) Notes to the Consolidated Financial Statements 2 Notes to the Consolidated Financial Statements 110 Tencent Holdings Limited The put option liabilities are current liabilities unless the put option can only be exercised 12 months after the end of the reporting period. 2.24 Borrowings and notes payable Put option is the financial instrument granted by the Group that the counterparty may have the right to request the Group to purchase its own equity instruments for cash or other financial assets when certain conditions are met. If the Group does not have the unconditional right to avoid delivering cash or another financial assets under the put option, it has to recognise a financial liability at the present value of the estimated future cash outflows under the put option. The financial liability is initially recognised at fair value. Subsequently, if the Group revises its estimates of payments, the Group will adjust the carrying amount of the financial liability to reflect actual and revised estimated cash outflows. The Group will recalculate the carrying amount by computing the present value of revised estimated future cash outflows at the financial instrument's original effective interest rate and the adjustments will be recognised as income or expenses in the consolidated income statement. If the put option expires without delivery, the carrying amount of the liability is reclassified as equity. Accounts payable are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method. Accounts payable are obligations to pay for services or goods that have been acquired in the ordinary course of business from suppliers. Accounts payable are classified as current liabilities if payment is due within one year or less. If not, they are presented as non-current liabilities. 2.22 Accounts payable Where any group company purchases the Company's equity share capital (treasury share), the considerations paid, including any directly attributable incremental costs, is deducted from equity attributable to the Company's equity holders until the shares are cancelled or reissued. Where such shares are subsequently reissued, any consideration received (net of any directly attributable incremental transaction costs) is included in equity attributable to the Company's equity holders. Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or share options are shown in equity as a deduction from the proceeds. 2.21 Share capital 2 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Cont'd) Certain VAS service are directly delivered to the Group's customers through various third parties platforms, including certain major telecommunication operators in the PRC. These third party platforms collect the relevant service fees (the "Internet and Mobile Service Fees") on behalf of the Group and they are entitled to a commission fee determined at certain percentages of the service fees (defined as "Channel costs"). The Channel costs are withheld and deducted from the gross Internet and Mobile Service Fees collected by these platforms from the users, with the net amounts remitted to the Group. The Group recognises the Internet and Mobile Service Fees as revenue on a gross basis and treats the Channel costs as cost of revenues. 2.23 Put option liabilities (a) Employee leave entitlements Borrowings and notes payable issued by the Group are recognised initially at fair value, net of transaction costs incurred. They are subsequently carried at amortised cost. Any difference between proceeds (net of transaction costs) and the redemption value is recognised in the consolidated income statement over their period using the effective interest method. Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the end of the reporting period. Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income tax assets and liabilities relate to income taxes levied by the same taxation authority on either the taxable entity or different taxable entities where there is an intention to settle the balances on a net basis. Deferred income tax is provided on temporary differences arising from investments in subsidiaries and associates, except for deferred income tax liability where the timing of the reversal of the temporary difference is controlled by the Group and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred income tax assets are recognised only to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. Deferred income tax is recognised, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. However, the deferred income tax is not accounted for if it arises from initial recognition of goodwill or the initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction neither accounting nor taxable profit or loss is affected. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantively enacted by the end of the reporting period and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled. The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the end of the reporting period in the countries where the Company's subsidiaries operate and generate taxable income. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. It establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities. The tax expense for the period comprises current and deferred tax. Tax is recognised in the consolidated income statement, except to the extent that it relates to items recognised in other comprehensive income or directly in equity. In this case, the tax is also recognised in other comprehensive income or in equity, respectively. 2.26 Current and deferred income tax 2 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Cont'd) Fees paid on the establishment of loan facilities are recognised as transaction costs of the loan to the extent that it is probable that some or all of the facility will be drawn down. In this case, the fee is deferred until the draw-down occurs. To the extent there is no evidence that it is probable that some or all of the facility will be drawn down, the fee is capitalised as a pre-payment for liquidity services and amortised over the period of the facility to which it relates. For the year ended 31 December 2015 Annual Report 2015 111 00 The Group either (i) accounts for different components of the compound financial instruments separately or (ii) designate the entire financial instruments as financial assets/liabilities at fair value through profit or loss. The host component is recognised initially at the difference between the fair value of the compound financial instrument as a whole and the fair value of the conversion component, and is subsequently measured at amortised cost. For financial assets/liabilities at fair value through profit or loss including derivative, they are initially recognised at fair value and subsequently carried at fair value with changes in fair value recognised in the consolidated income statement. Compound financial instruments of the Group comprise redeemable preference shares of associates and convertible bond of a subsidiary that can be converted to share capital at the option of the holder. 2.25 Compound financial instruments General and specific finance costs directly attributable to the acquisition, construction of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets, until such time as the assets are substantially ready for their intended use or sale. During the year ended 31 December 2015, finance cost capitalised was insignificant to the Group. Notes payable are classified as non-current liabilities unless the Group has an unconditional obligation to settle the liability within 12 months after the end of the reporting period. Notes to the Consolidated Financial Statements The Group also opens its Internet and mobile platforms to third-party game/application developers under certain co-operation agreements, of which the Group pays a pre-determined percentage of the fees paid by and collected from the users of the Group's Internet and mobile platforms for the virtual products/items purchased to the third-party game/application developers. The Group recognises the related revenue on a gross or net basis depending on whether the Group is acting as a principal or an agent in the transaction. The Group also defers the related revenue, either on gross or net basis, over the estimated lifespan of the respective virtual products/items or over the expected user relationship periods, given there is an implicit obligation of the Group to maintain and allow access of the users of the games/applications operated by the developers through its platforms. 36 115 Monetary assets, current As at 31 December 2015 RMB'Million As at 31 December 2015, the Group's major monetary assets and liabilities which are exposed to foreign exchange risk, are listed below: For the year ended 31 December 2015 Foreign exchange risk (Cont'd) (i) (a) Market risk (Cont'd) 3.1 Financial risk factors (Cont'd) FINANCIAL RISK MANAGEMENT (Cont'd) 3 Notes to the Consolidated Financial Statements 118 Tencent Holdings Limited The Group manages its foreign exchange risk by performing regular reviews of the Group's net foreign exchange exposures and tries to minimise these exposures through natural hedges, wherever possible and may enter into forward foreign exchange contracts, when necessary. The Group operates internationally and is exposed to foreign exchange risk arising from various currency exposures, primarily with respect to RMB, Hong Kong Dollars ("HKD"), and USD. Foreign exchange risk arises when future commercial transactions or recognised assets and liabilities are denominated in a currency that is not the group entities' functional currency. The functional currency of the Company and majority of its overseas subsidiaries is USD whereas functional currency of the subsidiaries which operate in the PRC is RMB. Foreign exchange risk Monetary liabilities, current As at 31 December 2014 Monetary assets, current Monetary liabilities, current 00 Annual Report 2015 119 00 During the year ended 31 December 2015, the Group reported exchange losses of approximately RMB108 million (2014: RMB316 million). Such losses were recorded in "Finance costs, net” in the consolidated income statement. (270) 2,773 (1,319) (i) (302) 3,075 983 29 (2,186) (7) 3,169 USD Denomination currency 1,049 Market risk RMB The Group's activities expose it to a variety of financial risks: market risk (including foreign exchange risk, price risk and interest rate risk), credit risk and liquidity risk. The Group's overall risk management strategy seeks to minimise the potential adverse effects on the financial performance of the Group. Risk management is carried out by the senior management of the Group. 2 Notes to the Consolidated Financial Statements 116 Tencent Holdings Limited Interest income is recognised on a time proportion basis, taking into account of the principal outstanding and the effective interest rate over the period to maturity, when it is determined that such income will accrue to the Group. 2.30 Interest income Commissions payable to advertising agencies are recognised as a component of the cost of revenues. Online advertising revenues comprise mainly display based and performance based advertisements. Revenue from displaying advertisements to the users of instant messaging, portals, social networks, video streaming and other online and mobile platforms operated by the Group is recognised ratably over the contracted period, with advertisers and their advertising agencies, in which the advertisements are displayed. Revenue from performance based advertisements is recognised based on actual performance measurement. The Group recognise the revenue from the delivery of pay-for click or pay-for instant display advertisements for advertisers to users of the Group based on a per-click basis when the users click on the content, or on a per-display basis, when the advertising contents are displayed to users. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Cont'd) (b) VAS (Cont'd) (a) 2.29 Revenue recognition (Cont'd) 2 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Cont'd) For the year ended 31 December 2015 Notes to the Consolidated Financial Statements (a) Annual Report 2015 Determining whether revenue of the Group should be reported gross or net is based on a continuing assessment of various factors. The primary factor is whether the Group is acting as the principal in offering services to the customer or whether the Group is acting as an agent in the transaction. The Group has determined that it is acting as the principal in offering services, given the Group (i) is the primary obligor in the arrangement; (ii) has latitude in establishing the selling price; (iii) has discretion in suppliers selection; and (iv) has involvement in the determination of product specifications. Therefore, the Group adopted different revenue recognition method based on its specific responsibilities in different VAS offerings. Revenues derived from these arrangements are presented as revenue derived from VAS in the consolidated income statement. For the year ended 31 December 2015 Online advertising Dividend income is recognised when the right to receive payment is established. 3.1 Financial risk factors FINANCIAL RISK MANAGEMENT 2.31 Dividend income 3 For the year ended 31 December 2015 Notes to the Consolidated Financial Statements 117 00 Costs incurred on development projects (relating to the design and testing of new or improved products) are capitalised as intangible assets when recognition criteria are fulfilled and tests for impairment are performed annually. Other development expenditures that do not meet those criterias are recognised as expenses as incurred. Development costs previously recognised as expenses are not recognised as assets in subsequent periods. Capitalised development costs are amortised from the point at which the assets are ready for use on a straight-line basis over their estimated useful lives, not exceeding five years. Research expenditure is recognised as an expense as incurred. Annual Report 2015 2.35 Research and development expenses 2.32 Government grants/subsidies Under these circumstances, the grants/subsidies are recognised as income or matched with the associated costs which the grants/subsidies are intended to compensate. 2.33 Leases Grants/subsidies from government are recognised at their fair value where there is a reasonable assurance that the grants/subsidies will be received and the Group will comply with all attached conditions. 2.34 Dividends distribution Dividends distribution to the Company's shareholders is recognised as a liability in the Group's and Company's financial statements in the period in which the dividend is approved by the Company's shareholders or board of directors where appropriate. Leases in which a significant portion of the risks and rewards of ownership are retained by lessors are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to the consolidated income statement on a straight-line basis over the period of the lease. RMB'Million 4,409 5,271 29,747 Notes payable 7,951 At 31 December 2015 RMB'Million RMB'Million RMB'Million RMB'Million Less than Over 5 years 2 and 5 years 1 and 2 years 1 year Between Between The table below analyses the Group's financial liabilities by relevant maturity groupings based on the remaining period since the end of the reporting period to the contractual maturity date. The Group aims to maintain sufficient cash and cash equivalents and marketable securities. Due to the dynamic nature of the underlying businesses, the Group maintains flexibility in funding by maintaining adequate cash and cash equivalents. 47,378 4,517 Total Long-term payables 8,046 2,347 (c) Liquidity risk 2,716 Notes payable At 31 December 2014 154,032 38,509 12,517 94,960 77,915 77,915 1,282 costs and welfare accruals) (excluding prepayments payables and accruals Accounts payable, other 25,015 6,415 6,826 11,774 Borrowings 3,724 95 received from customers, staff 3.1 Financial risk factors (Cont'd) At 31 December 2015, management considers that any reasonable changes in foreign exchange rates of the above currencies against the two major functional currencies of the Group's entities would not result in a significant change in the Group's results as the net carrying amounts of financial assets and liabilities denominated in a currency other than the respective Group's entities' function currency are considered to be insignificant. Accordingly, no sensitivity analysis is presented for foreign exchange risk (2014: Nil). FINANCIAL RISK MANAGEMENT (Cont'd) 3.1 FINANCIAL RISK MANAGEMENT (Cont'd) 3 Notes to the Consolidated Financial Statements 120 Tencent Holdings Limited The Group's exposure to changes in interest rates is also attributable to its borrowings and notes payable, details of which have been disclosed in Notes 24 and 25. Borrowings and notes payable carry at floating rates expose the Group to cash flow interest-rate risk whereas those carry at fixed rates expose the Group to fair value interest-rate risk. The Group's income and operating cash flows are substantially independent from changes in market interest rates and the Group has no significant interest-bearing assets except for loans to investees and investees' shareholders, term deposits with initial terms of over three months and cash and cash equivalents, details of which have been disclosed in Notes 14, 16 and 17. Interest rate risk (iii) Financial risk factors (Cont'd) The sensitivity analysis is determined based on the exposure to equity price risks of available-for-sale financial assets at the end of the reporting period. If equity prices of the respective instruments held by the Group had been 5% (2014: 5%) higher/lower as at 31 December 2015, the other comprehensive income would have been approximately RMB2,067 million (2014: RMB642 million) higher/lower. Price risk (ii) Foreign exchange risk (Cont'd) (i) (a) Market risk (Cont'd) 3.1 Financial risk factors (Cont'd) FINANCIAL RISK MANAGEMENT (Cont'd) 3 For the year ended 31 December 2015 Notes to the Consolidated Financial Statements The Group is exposed to price risk mainly arising from the investments that classified as available- for-sale financial assets held by the Group (Note 12). To manage its price risk arising from the investments, the Group diversifies its portfolio. The investments made by the Group are either for strategic purposes, or for the purpose of improving investment yield and maintaining high liquidity level simultaneously. Each investment is managed by senior management on a case by case basis. (a) Market risk (Cont'd) (iii) Interest rate risk (Cont'd) 3 Notes to the Consolidated Financial Statements 122 Tencent Holdings Limited The Group does not expose to significant credit risk arising from customers of its performance based advertisements as full advances from most of the customers are received before delivery of the advertisements according to the Group's policies. For other advertising customers, mainly advertising agencies, the credit quality of each customer is assessed, which takes into account its financial position, past experience and other factors. In addition, prepayments representing a certain percentage of the total service fees for each advertising service are required. Provisions are made for past due balances when management considers the loss from non-performance by the customers is likely. The Group's historical experience in collection of receivables falls within the recorded allowances. A large portion of Internet and Mobile Service Fees is derived from the co-operative arrangements with certain third party platform providers, including certain telecommunications operators in the PRC. They usually settle the amounts by them within a period of 30 to 120 days. If the strategic relationship with these providers are terminated or scaled-back; or if they experience financial difficulties in paying us, the Group's VAS might be adversely affected in terms of recoverability of the related receivable balances. To manage this risk, the Group maintains frequent communication with these providers to ensure the co-operation is effective. In view of the history of co-operation with these providers and the sound collection history of receivables due from them, management believes that the credit risk inherent in the Group's outstanding accounts receivable balances from these counterparties is low (see Note 13 for details). (b) Credit risk (Cont'd) 3.1 Financial risk factors (Cont'd) FINANCIAL RISK MANAGEMENT (Cont'd) 3 For the year ended 31 December 2015 Notes to the Consolidated Financial Statements Annual Report 2015 121 00 The Group has policies in place to ensure that revenues of on credit terms are made to counterparties with an appropriate credit history and the management performs ongoing credit evaluations of its counterparties. The Group is exposed to credit risk in relation to its cash and deposits (including restricted cash) placed with banks and financial institutions, other investments, as well as accounts and other receivables. The carrying amount of each class of these financial assets represents the Group's maximum exposure to credit risk in relation to the corresponding class of financial assets. To manage this risk, deposits are mainly placed with state-owned financial institutions in the PRC and reputable international financial institutions outside of the PRC. There has been no recent history of default in relation to these financial institutions. Credit risk (b) For the year ended 31 December 2015, if the average interest rate on variable interest-bearing borrowings had been increased/decreased by 50 basis points (2014: 50 basis points) the Group's profit before income tax for the year would have been approximately RMB42 million (2014: RMB43 million) lower/higher. The Group regularly monitors its interest rate risk to ensure there are no undue exposures to significant interest rate movements and regular reporting is provided to the management for the Group's debt and interest rates exposure. The Group may consider to use any interest rate swaps to hedge its exposure to interest rates risk, however, no interest rate swaps have been entered as at 31 December 2015 and 2014. The Group's borrowings were carried at floating rates and expose the Group to cash flow interest-rate risk whereas the notes payable, which representing the larger portion of the Group's debts, were all carried at fixed rates which do not expose the Group to cash flow interest-rate risk. For the year ended 31 December 2015 For the year ended 31 December 2015 20,452 65,329 29,289 Financial assets 2015 2014 RMB'Million RMB'Million Opening balance Additions 6,276 There were no transfers of financial assets between level 1 and level 2 fair value hierarchy classifications. The following table presents the changes in level 3 instruments for the year ended 31 December 2015: 2,775 2,682 5,939 1,257 Impairment provision (65) (369) Currency translation differences 1,061 14,736 instruments. Other techniques, such as discounted cash flow analysis, are used to determine fair value for financial The fair value of forward foreign exchange contracts is determined using forward exchange rates at the end of the reporting period, with the resulting value discounted back to present value; and 13,277 Convertible bonds 489 489 The fair value of financial instruments traded in active markets is determined based on quoted market prices at the end of the reporting period. A market is regarded as active if quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service, or regulatory agency, and those prices represent actual and regularly occurring market transactions on an arm's length basis. The quoted market price used for financial assets held by the Group is the current bid price. These instruments are included in level 1. The fair value of financial instruments that are not traded in an active market is determined by using valuation techniques. These valuation techniques maximise the use of observable market data where it is available and rely as little as possible on entity specific estimates. If all significant inputs required for evaluating the fair value of a financial instrument are observable, the instrument is included in level 2. 00 125 Annual Report 2015 Notes to the Consolidated Financial Statements 1,604 For the year ended 31 December 2015 3 FINANCIAL RISK MANAGEMENT (Cont'd) 3.3 Fair value estimation (Cont'd) If one or more of the significant inputs are not based on observable market data, the instrument is included in level 3. Specific valuation techniques used to value financial instruments include: . Dealer quotes for similar instruments; (69) Closing balance 27,947 6,276 The Group has to estimate the expected yearly percentage of grantees of share options/awarded shares who will stay within the Group at the end of the vesting periods ("Expected Retention Rate of Grantees") in order to determine the amount of share-based compensation expenses charged into the consolidated income statement. As at 31 December 2015, the Expected Retention Rate of Grantees was assessed to be 85% (2014: 85%). If the Expected Retention Rate of Grantees had been increased/decreased by 5% (2014: 5%), the amount of share-based compensation expenses would be increased/decreased by RMB154 million (2014: RMB73 million). In addition, during the year ended 31 December 2015, the Group repurchased certain vested equity interests in a non-wholly owned subsidiary and exchanged certain unvested equity interests in a non-wholly owned subsidiary for the unvested awarded shares of the Company, which have been accounted for as a deduction from equity. Tencent Holdings Limited 128 Notes to the Consolidated Financial Statements For the year ended 31 December 2015 4 CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS (Cont'd) (b) The estimates of the lifespan of virtual products/items provided in the Group's Internet and mobile platforms As mentioned in Note 2.29(a), the end users purchase certain virtual products/items provided in the Group's Internet and mobile platforms and the relevant revenue is recognised based on the lifespan of the virtual products/ items or the expected user relationship periods. The Group uses the available information, including the historical user pattern and behavior and the stipulated period of validity of the relevant virtual products/items, to estimate the lifespan of these products/items. The Group has adopted policy of assessing the estimated lives of the permanent life virtual products/items on a timely basis. The Group will continue to monitor the average lifespan of the virtual products/items (provided and to be provided), which may differ from the historical period, and any change in the estimates may result in the revenue being recognised on a different basis than in prior periods. (c) Income taxes The Group is subject to income taxes in numerous jurisdictions. Significant judgement is required in determining the worldwide provision for income taxes. The Group recognises liabilities for anticipated tax audit issues based on estimates of whether additional taxes will be due. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact current income tax and deferred income tax liabilities in the period in which such determination is made. Were the actual final outcome (on the judgement areas) to differ by 5% from management's estimates, the Group would need to: Increase the income tax liabilities by RMB80 million (2014: RMB23 million) and the deferred tax liabilities by RMB183 million (2014: RMB147 million), if unfavourable; or Decrease the income tax liabilities by RMB80 million (2014: RMB23 million) and the deferred tax liabilities by RMB183 million (2014: RMB147 million), if favourable. 00 129 Annual Report 2015 The Group also granted awarded shares to its employees at an aggregate fair value of HKD4,287 million (equivalent to approximately RMB3,395 million) in 2015 (2014: HKD3,907 million (equivalent to approximately RMB3,094 million)). 6,276 The fair value of share options granted to employees determined using the Valuation Models was approximately HKD76 million (equivalent to approximately RMB60 million) in 2015 (2014: HKD508 million (equivalent to approximately RMB403 million)). (a) Share-based compensation arrangements Tencent Holdings Limited 126 Notes to the Consolidated Financial Statements 3 FINANCIAL RISK MANAGEMENT (Cont'd) For the year ended 31 December 2015 3.3 Fair value estimation (Cont'd) No significant change in the financial liabilities that in level 3 instruments for the year ended 31 December 2015. Valuation processes of the Group (Level 3) The Group has a team that manages the valuation logistics of level 3 instruments for financial reporting purposes. The team manages the valuation logistics at least once every quarter, in line with the Group's quarterly reporting dates. On an annual basis, the team would also manage the valuation logistics, and use valuation techniques to determine the fair value of the Group's level 3 instruments. External valuation experts will be involved when necessary. The valuation of the level 3 instruments mainly included investments in private funds and unlisted companies, other financial instruments and convertible bonds. As these instruments are not traded in an active market, their fair value have been determined using various applicable valuation techniques, including discounted cash flows, comparable transactions approaches, and other option pricing models etc. Major assumptions used in the valuation include historical financial results, assumptions about future growth rates, estimate of weighted average cost of capital (WACC), recent market transactions, estimate discount for marketing and other exposure etc. 00 127 Annual Report 2015 Notes to the Consolidated Financial Statements For the year ended 31 December 2015 4 CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS Estimates and judgments are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal to the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are addressed below: As mentioned in Note 2.27(c), the Group has granted share options to its employees. The directors have used the BS Model and the Binomial Model ("Valuation Models") to determine the total fair value of the options granted, which is to be expensed over the vesting period. Significant judgement on parameters, such as risk free rate, dividend yield and expected volatility, is required to be made by the directors in applying the Valuation Models (Note 20). 3,370 Changes in fair value Available-for-sale financial assets 3.2 Capital risk management The Group's objectives on managing capital are to safeguard the Group's ability to continue as a going concern and support the sustainable growth of the Group in order to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to enhance shareholders' value in the long term. Capital referred to the equity and external debts (including borrowings and notes payable). In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares, repurchase the Company's shares or raise/repay debts. The Group monitors capital by regularly reviewing debts to adjusted earnings before interest, tax, depreciation and amortisation ("EBITDA”) (Note) ratio, being the measure of the Group's ability to pay off all debts that reflecting financial health and liquidity position. The debts/adjusted EBITDA ratio is calculated by dividing the debts by adjusted EBITDA is as follows: Borrowings Notes payable Total debts Adjusted EBITDA (Note) Debts/Adjusted EBITDA Ratio As at 31 December 2015 2014 RMB'Million RMB'Million 24,351 8,722 40,978 26,862 35,584 45,805 32,710 1.43 1.09 Note: Adjusted EBITDA represents operating profit less interest income and other gains/losses, net, and plus depreciation of fixed assets and investment properties and amortisation of intangible assets and equity-settled share-based compensation expenses. FINANCIAL RISK MANAGEMENT (Cont'd) The movement in the ratio is mainly the result of additional debts issued by the Group for the year. 3 Notes to the Consolidated Financial Statements Long-term payables 1,372 505 287 2,164 Borrowings 3,362 702 3,631 9,072 Accounts payable, other payables and accruals (excluding prepayments received from customers, staff costs and welfare accruals) 21,563 21,563 27,641 6,591 25,965 1,891 62,088 00 123 Annual Report 2015 For the year ended 31 December 2015 Tencent Holdings Limited 5,008 Notes to the Consolidated Financial Statements 9,435 124 Other financial assets 7,419 736 27,485 44,339 462 1,198 Convertible bonds 588 588 As at 31 December 2014 As at 31 December 2015 RMB'Million Total Available-for-sale financial assets RMB'Million 3 FINANCIAL RISK MANAGEMENT (Cont'd) For the year ended 31 December 2015 Level 3 RMB'Million The table below analyses the Group's financial instruments carried at fair value as at 31 December 2015 by level of the inputs to valuation techniques used to measure fair value. Such inputs are categorised into three levels within a fair value hierarchy as follows: • 3.3 Fair value estimation Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices) (level 2); and Inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs) (level 3). Level 1 Level 2 RMB'Million Quoted prices (unadjusted) in active markets for identical assets or liabilities (level 1); At 1 January 2015 Cost 586 6,558 1,671 1,711 2,933 704 (273) Accumulated amortisation 1,118 6,356 Net book amount (165) (2) (3) (21) (139) Currency translation differences (4,694) Total RMB'Million (360) (2,324) (1,142) (532) (63) and impairment 14,163 RMB'Million Game licences Copyrights RMB'Million RMB'Million RMB'Million 751 871 1,581 27 (130) (39) (17) 2,293 751 The land use rights are all related to land in the PRC with remaining lease period of 40 to 50 years. For the year ended 31 December 2015, all of the amortisation was charged to general and administrative expenses. Tencent Holdings Limited Others 136 INTANGIBLE ASSETS Notes to the Consolidated Financial Statements For the year ended 31 December 2015 Computer software and Licensed online Goodwill technology RMB'Million RMB'Million 566 RMB'Million contents RMB'Million 9 609 231 429 (136) (2) (165) Net book amount 6,356 1,118 566 609 226 429 9,304 For the year ended 31 December 2015, amortisation of RMB3,068 million (2014: RMB1,606 million) and RMB408 million (2014: RMB202 million) were charged to cost of revenues and general and administrative expenses, respectively. Tencent Holdings Limited (2,611) 138 Notes to the Consolidated Financial Statements For the year ended 31 December 2015 INTANGIBLE ASSETS (Cont'd) Impairment tests for goodwill Goodwill is allocated to the Group's CGUS identified according to operating segments. Most of the goodwill related to the operating segment of VAS. Goodwill is monitored by the management at each CGU level within VAS, such as online game business, online literature business and others. The recoverable amount of a CGU is the higher of its value-in-use and fair value less costs to sell. For online game business, management calculates fair value less costs to sell based on ratios of EV (enterprise value)/ EBITDA (earnings before interest, tax, depreciation and amortisation) of several public comparable companies multiplied by the EBITDA (ranging from 8.07-14.11x) of the related CGU and discounted for the lack of marketability at the rate of 15%. The public comparable companies are chosen based on factors such as industry similarity, company size, profitability and financial risk. For online literature business, management calculates value-in-use based on discounted cash flows calculations. The discounted cash flows calculations use cash flow projections based on financial budgets approved by management for the purposes of impairment reviews covering a five-year period. Cash flows beyond the five-year period are extrapolated using an estimated annual growth of not more than 3%. Discount rate used of 25% is pre-tax and reflects market assessments of time value and the specific risks relating to the industry the Group operates. The financial projection was determined by the management based on past performance and its expectation for market development. Based on the assessment made by management, the carrying amount of goodwill and other identifiable intangible assets recognised for the investment in a subsidiary had been reduced to their expected recoverable amount by recognising an impairment loss amounting to RMB174 million and related tax impact. The loss and related tax impact had been included in "Other gains, net" and "Income tax expense" in the consolidated income statement for the year ended 31 December 2015. 00 139 Annual Report 2015 (15) 2014 6 226 (329) Amortisation 9,304 Year ended 31 December 2015 Opening net book amount 6,356 1,118 566 609 226 26 429 9,304 Business combinations 845 (281) 132 Additions 450 300 5,665 175 6 6,596 Disposals (97) (37) (53) (6) (193) 1,208 2015 (7,106) Amortisation 541 10,494 2,800 Cost At 1 January 2014 RMB'Million RMB'Million RMB'Million Total Motor Leasehold vehicles improvements and office equipment RMB'Million RMB'Million RMB'Million Buildings equipment Computer Furniture For the year ended 31 December 2015 Notes to the Consolidated Financial Statements FIXED ASSETS (Cont'd) 6 134 Tencent Holdings Limited 9,973 47 873 14,755 Accumulated depreciation 29 334 5,415 2,403 Opening net book amount Year ended 31 December 2014 8,693 512 29 334 1,027 5,415 Net book amount (43) (43) Currency translation differences (6,019) (360) (18) (208) (5,036) (397) 2,403 9 384 5,959 1,027 9 384 5,959 2,594 Closing net book amount 57 34 6 17 9,973 Currency translation differences (31) Transfer to investment properties (3,153) (208) (4) (115) (2,647) (179) Depreciation (36) (31) 29 At 31 December 2015 3,293 2,594 Net book amount (11) 25 ' ཁ། 10 (46) Currency translation differences (11,001) Cost (694) (432) (9,160) (699) Accumulated depreciation 20,985 1,696 25 25 806 15,165 (16) Closing net book amount 512 Business combinations For the year ended 31 December 2015 Notes to the Consolidated Financial Statements Annual Report 2015 135 00 For the year ended 31 December 2015, depreciation of RMB2,191 million (2014: RMB2,115 million), RMB118 million (2014: RMB102 million) and RMB844 million (2014: RMB772 million) were charged to cost of revenues, selling and marketing expenses and general and administrative expenses, respectively. 7,918 423 12 339 5,092 2,052 Net book amount (68) (9) 4 (63) Currency translation differences (8,508) (529) (13) 7 CONSTRUCTION IN PROGRESS Opening net book amount Additions Transfer to fixed assets Disposals Additions Opening net book amount LAND USE RIGHTS 8 As at 31 December 2015, construction in progress mainly comprised new buildings under construction located in the PRC. 3,830 4,248 2 (100) (338) (1,783) 2,199 2,041 3,830 RMB'Million RMB'Million 2014 2015 Closing net book amount Currency translation differences Disposals 1,894 (3) (522) Accumulated depreciation (125) (2,537) (128) Depreciation (134) (41) (16) (11) (66) Disposals (9) 2,616 7 115 2,299 49 Additions 29 4 1 23 1 146 8,693 (190) Transfer to investment properties 16,494 961 25 673 12,261 2,574 Cost At 31 December 2014 7,918 423 (2,989) 12 5,092 2,052 Closing net book amount (25) (8) 3 (20) Currency translation differences (272) (272) 339 (21) 586 Currency translation differences 150,608 RMB'Million RMB'Million 2014 2015 As at 31 December Others Mainland China Operating assets The Group also conducts operations in United States, Europe and other regions, and holds investments (including investments in associates, investments in redeemable preference shares of associates, investments in joint ventures and available-for-sale financial assets) which are traded in other territories. The geographical information on the total assets is as follows: 78,932 102,863 80,975 6,470 72,462 96,251 RMB'Million RMB'Million 2014 2015 - Others Mainland China Revenues The Company is domiciled in the Cayman Islands while the Group mainly operates its businesses in Mainland China. For the year ended 31 December 2015, the geographical information on the total revenues is as follows: For the year ended 31 December 2015 Notes to the Consolidated Financial Statements 6,612 SEGMENT INFORMATION (Cont'd) 44,925 Investments 6 For the year ended 31 December 2015 Notes to the Consolidated Financial Statements Annual Report 2015 133 00 All the revenues derived from any single external customer were less than 10% of the Group's total revenues for the year ended 31 December 2015. in Mainland China and other areas were RMB77,704 million (2014: RMB60,752 million) and RMB16,897million (2014: RMB13,211 million), respectively. As at 31 December 2015, the total non-current assets other than financial instruments and deferred tax assets located 171,166 306,818 69 22,779 93 1,619 2,462 - Europe 7,235 9,036 - Asia excluding Mainland China and Hong Kong 7,422 14,412 - North America 51,067 85,282 Mainland China and Hong Kong - Others 5 132 Tencent Holdings Limited Others advertising VAS Online Year ended 31 December 2014 (2,793) (2,419) 164 (538) joint ventures Share of (losses)/profits of associates and 3,068 Total 2,437 Amortisation 2,191 37 171 1,983 Depreciation 61,232 458 8,527 52,247 Gross profit 102,863 631 RMB'Million RMB'Million RMB'Million The reconciliation of gross profit to profit before income tax is shown in the consolidated income statement. (347) (155) (166) (26) joint ventures Share of losses of associates and 1,606 1,374 232 Amortisation 2,115 38 158 1,919 Depreciation 48,059 1,720 3,648 42,691 Gross profit 78,932 7,314 8,308 63,310 Segment revenues RMB'Million FIXED ASSETS Furniture Buildings RMB'Million 54 836 21,777 Accumulated amortisation and impairment (162) (860) (1,508) (4,935) (495) (387) (8,347) 754 Currency translation differences (8) 9 2 (5) 9 Net book amount 7,155 1,219 697 3,665 259 444 11 8,598 2,196 2,087 (119) (3,476) Impairment provision (99) 666 (44) (30) (1) (174) Currency translation differences 150 13 12 2 (3) 174 Closing net book amount 7,155 1,219 697 3,665 259 444 13,439 At 31 December 2015 Cost 7,306 13,439 4,726 00 (13) (9) 4 (63) Currency translation differences (8,508) (529) (13) (338) (7,106) (522) Accumulated depreciation 16,494 (68) 961 673 12,261 2,574 Cost At 1 January 2015 RMB'Million RMB'Million RMB'Million Total vehicles improvements equipment Motor Leasehold and office Computer equipment RMB'Million RMB'Million 25 Net book amount 2,052 5,092 (4) Disposals 5,212 791 3 167 3,498 753 Additions 6 2 3 1 Business combinations 7,918 423 12 339 5,092 2,052 Opening net book amount Year ended 31 December 2015 7,918 423 12 39 339 137 17,468 80,669 Segment revenues ཝུ¥ 24 102 4,103 325 5,123 Additions 187 346 1,492 89 5 2,119 Disposals (68) (139) (22) 141 (3) 728 Business combinations (158) Net book amount 2,552 470 464 491 24 102 4,103 Year ended 31 December 2014 Opening net book amount 2,552 470 464 64 491 161 3,929 (2) (149) (184) At 31 December 2014 Cost 6,558 1,671 1,711 2,933 704 14,163 Accumulated amortisation and impairment (63) (532) (1,142) (2,324) (360) (273) (4,694) 9,304 Amortisation 429 609 (222) (1,374) (25) (3) (1,808) Impairment provision (64) (13) (77) Currency translation differences 7 (14) (7) Closing net book amount 6,356 1,118 566 226 (3) (56) (146) Online advertising; and VAS; The Group has following reportable segments for the years ended 31 December 2015 and 2014: In light of the reduction in size of the Group's eCommerce business, the segment information previously presented under the "eCommerce transactions" segment has been reclassified to the "Others" segment from 1 January 2015 onwards, both in the internal management reports adopted by the chief operating decision-makers, and in the consolidated financial statements of the Group. The comparative figures have also been reclassified to conform to the new presentation. The above changes in segment information were taken to better reflect the current operations of the Group, as well as the resource allocation and future business developments of the Group. The chief operating decision-makers mainly include executive directors of the Company. They review the Group's internal reporting in order to assess performance and allocate resources, and determine the operating segments based on these reports. (7) SEGMENT INFORMATION 5 For the year ended 31 December 2015 Notes to the Consolidated Financial Statements 130 Tencent Holdings Limited The assessment of the fair values for the investment classified as "available-for-sale financial assets" required significant estimates, which includes estimating the future cash flows, determining appropriate discount rates and other assumptions. Changes in these assumptions and estimates could materially affect the respective fair value of these investments. We monitor our investments for other-than-temporary impairment by considering factors including, but not limited to, current economic, market conditions and recent fund raising transactions undertaken, the operating performance of the companies including current earnings trends and other company- specific information. (e) Fair value measurement of available-for-sale financial assets Judgment is required to determine key assumptions adopted in the valuation models for impairment review purpose. Changing the assumptions selected by management in assessing impairment could materially affect the result of the impairment test and as a result affect the Group's financial condition and results of operations. If there is a significant adverse change in the key assumptions applied, it may be necessary to take additional impairment charge to the consolidated income statement. The Group tests annually whether goodwill has suffered any impairment. Other non-financial assets, mainly including fixed assets, construction in progress, other intangible assets, investment properties, land use rights, and investments in associates and joint ventures etc., are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The recoverable amounts have been determined based on value-in-use calculations or fair value less costs to sell. These calculations require the use of judgments and estimates. (d) Recoverability of non-financial assets Others. CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS (Cont'd) "Others" segment of the Group comprise trademark licensing, software development services, software sales and other services. There were no material inter-segment sales during the years ended 31 December 2015 and 2014. The revenues from external customers reported to the chief operating decision-makers are measured in a manner consistent with that applied in the consolidated income statement. RMB'Million RMB'Million RMB'Million RMB'Million Total Others Online advertising VAS Year ended 31 December 2015 The segment information provided to the chief operating decision-makers for the reportable segments for the years ended 31 December 2015 and 2014 is as follows: 5 SEGMENT INFORMATION (Cont'd) For the year ended 31 December 2015 Notes to the Consolidated Financial Statements Annual Report 2015 131 00 Other information, together with the segment information, provided to the chief operating decision-makers, is measured in a manner consistent with that applied in these consolidated financial statements. There were no segment assets and segment liabilities information provided to the chief operating decision-makers. The chief operating decision-makers assess the performance of the operating segments mainly based on segment revenue and gross profit/(losses) of each operating segment. The selling and marketing expenses and general and administrative expenses are common costs incurred for these operating segments as a whole and therefore they are not included in the measure of the segments' performance which is used by the chief operating decision-makers as a basis for the purpose of resource allocation and assessment of segment performance. Interest income, other gains/(losses), net, finance costs, net and income tax expense are also not allocated to individual operating segment. 4 (2) Notes to the Consolidated Financial Statements Accumulated amortisation 1,441 1,386 1,125 2,698 Cost At 1 January 2014 RMB'Million Game licences Total Others Copyrights RMB'Million contents RMB'Million RMB'Million RMB'Million RMB'Million For the year ended 31 December 2015 (648) (919) RMB'Million ¥ཊུ Annual Report 2015 (950) Notes to the Consolidated Financial Statements For the year ended 31 December 2015 9 INTANGIBLE ASSETS (Cont'd) Licensed software and online Computer technology Currency translation differences (2,809) (271) (21) 7,070 Goodwill 375 45 54,072 32,064 60,171 51,131 2,941 6,230 66,401 24,131 Investments in redeemable preference shares of associates (Note (b)) 19,067 10 INTERESTS IN ASSOCIATES - Unlisted shares Listed shares Investments in associates (Note (a)) RMB'Million RMB'Million 2014 2015 As at 31 December For the year ended 31 December 2015 Notes to the Consolidated Financial Statements Note: 36,040 (a) Investments in associates 10,867 2014 2,888 (437) 60,171 Tencent Holdings Limited 140 Notes to the Consolidated Financial Statements For the year ended 31 December 2015 10 INTERESTS IN ASSOCIATES (Cont'd) Note: (Cont'd) (a) Investments in associates (Cont'd) At end of the year Note: (ii) (iii) (iv) (v) (vi) In April 2015, the Group subscribed for newly issued shares of 58.com Inc. ("58.com"), an existing associate, at a subscription price equivalent to USD52 per American Depositary Share ("ADS"), totalling approximately USD400 million (equivalent to approximately RMB2,457 million). In December 2015, the Group further subscribed for newly issued shares of 58.com at USD62 per ADS, totalling USD132 million (equivalent to approximately RMB846 million), after these transactions, the Group's equity interests in 58.com was increased to approximately 22.9%. In December 2015, the Group invested in an entertainment and media group in the PRC at a consideration of approximately RMB2,508 million. The Group acquired interests in associates, made additional investments in existing associates and recategorized from available-for-sale financial assets or subsidiaries for an aggregate consideration of RMB7,097 million during the year ended 31 December 2015. These associates are principally engaged in online gaming businesses and other Internet- related businesses. During the year ended 31 December 2015, the Group re-designated several investments from associates, including Dianping Holdings Ltd. ("Dianping") of RMB3, 130 million (Note 12(b)), to available-for-sale financial assets as a result of change in the nature of these investments. (i) 2015 Currency translation differences Impairment provision (v) RMB'Million RMB'Million At beginning of the year 51,131 Additions (i), (ii) and (iii) 12,908 40,628 Deemed disposal gains (Note 29 (b) (i)) 1,931 2,402 (1,591) Share of losses of associates (346) Share of other comprehensive income of associates 329 81 Dividends from associates (237) (148) Disposals and transfers (iv) (4,386) (278) (2,802) (1,638) 51,131 The associates of the Group have been accounted by using equity method based on the financial information of the associates prepared under the accounting policies generally consistent with the Group. 1,146 (65) (369) 1,337 (83) 34,904 9,646 (c) 9,688 (i) In October 2015, the Group's equity interests in Dianping was exchanged to that of Internet Plus Holdings. As a result of the exchange, the Group recognised the investment in Internet Plus Holdings as available-for-sale financial assets. In December 2015, the Group further subscribed for the newly issued shares of Internet Plus Holdings at a total consideration of USD1,000 million (equivalent to approximately RMB6,396 million). As at 31 December 2015, the Group's aggregate equity interests in Internet Plus Holdings was approximately 13.6%, on an outstanding basis. The Group acquired certain unlisted interests or made additional investments in existing unlisted interests or transfer from investments in associates for an aggregate consideration of RMB7,902 million during the year ended 31 December 2015. They are principally engaged in the provision of online-to-offline and other Internet-related businesses. During the year ended 31 December 2015, the Group made an impairment provision of RMB586 million (2014: RMB478 million) against the carrying amounts of certain available-for-sale financial assets, with reference to their respective market values, business performance and assessed recoverable amounts. During the year ended 31 December 2015, the Group made an aggregate impairment provision of RMB1,591 million (2014: RMB1,638 million) against the carrying amounts of its investments in certain associates, of which RMB1, 128 million was provided for an associate, based on the results of impairment assessment performed on the carrying amounts of these investments with reference to their recoverable amounts. Tencent Holdings Limited 148 13 ACCOUNTS RECEIVABLE Notes to the Consolidated Financial Statements (ii) 2,682 14,298 6,270 Annual Report 2015 Notes to the Consolidated Financial Statements For the year ended 31 December 2015 12 AVAILABLE-FOR-SALE FINANCIAL ASSETS (Cont'd) Note: (Cont'd) (b) Movement in the unlisted interests is analysed as follows: At beginning of the year Additions (Note (i) and (ii)) Changes in fair value Impairment provision Currency translation differences At end of the year Note: 2015 2014 RMB'Million RMB'Million 9,646 For the year ended 31 December 2015 147 Accounts receivable and their ageing analysis are as follows: 2015 2015 2014 RMB'Million RMB'Million 3,340 1,528 1,500 1,066 As at 31 December 815 1,406 878 7,061 4,588 Online advertising customers, which are mainly advertising agencies related to brand display advertising business, are usually granted with a credit period of 90 days after full execution of the contracted advertisement orders. Telecommunication operators and third party platform providers usually settle the amounts due by them within a period of 30 to 120 days and 60 days, respectively. As at 31 December 2015, insignificant amounts of accounts receivable were past due and related impairment provision was recognised after assessment on the financial condition and credit quality with reference to historical counterparty default rates. The directors of the Company considered that the carrying amounts of the receivable balances approximated to their fair value as at 31 December 2015. 00 1,116 Others Telecommunications operators Third party platform providers 2014 RMB'Million RMB'Million 0-30 days 31 - 60 days 61 - 90 days Over 90 days 3,616 2,032 2,209 1,464 798 667 438 425 7,061 4,588 Accounts receivable were mainly denominated in RMB. The carrying amounts of accounts receivable of the Group's major agents/customers are as follows: As at 31 December 00 In November 2014, the Group signed a share purchase agreement with a company engaged in entertainment and film production, an existing available-for-sale financial asset, to purchase its newly issued shares at consideration of approximately RMB1,280 million. The transaction was completed in August 2015. During 2015, the Group entered into a series of agreements with a third party company, which is a company listed on the New York Stock Exchange and provides Internet content and marketing services of the automobile industry in the PRC, to subscribe for 5.06% of its shares, on an outstanding basis, at a consideration of USD176.5 million (equivalent to approximately RMB1,090 million). 3,626 1,121 Accounts payable (Note 21) 15,700 8,683 Other payables and accruals (excluding prepayments received from customers, staff costs and welfare accruals) 61,627 Long-term payables 12,801 24,351 8,722 146,282 58,189 As at 31 December 2015, financial assets classified as available-for-sale was RMB44,339 million (2014: RMB13,277 million) (Note 12). As at 31 December 2015, financial assets and liabilities at fair value include other financial assets (Note 15) and convertible bonds (Notes 22 and 23) of RMB1,198 million (2014: Nil) and RMB588 million (2014: RMB489 million), respectively. Tencent Holdings Limited 146 Borrowings (Note 24) 26,862 40,978 Notes payable (Note 25) 2,941 Accounts receivable (Note 13) 7,061 4,588 Deposits and other receivables 7,709 4,691 Term deposits (Note 16) 41,005 15,629 Restricted cash (Note 17) 54,731 9,174 Cash and cash equivalents (Note 17) 43,438 42,713 160,174 79,736 Financial liabilities at amortised cost: Notes to the Consolidated Financial Statements 12 AVAILABLE-FOR-SALE FINANCIAL ASSETS Available-for-sale financial assets include the following: Listed equity interests (Note (a)) Unlisted equity investments (Note (b)) 6,198 1,735 Equity interests - Listed in Hong Kong 179 277 Equity interests - Listed in United Kingdom 2,376 1,619 Equity interests - Listed in United States of America 553 Equity interests - Listed in Japan 129 Note: 9,435 3,631 (i) (ii) (iii) Fair value gains recognised for the listed equity interests for during the year ended 31 December 2015 of RMB3,357 million (2014: fair value losses of RMB2,866 million) were recognised in the other comprehensive income. Equity interests - Listed in Mainland China 149 RMB'Million 2014 Other unlisted investments (Note (b)) Note: (a) Listed equity interests include: For the year ended 31 December 2015 As at 31 December 2015 RMB'Million 2014 RMB'Million 9,435 3,631 34,879 9,646 25 44,339 13,277 As at 31 December 2015 RMB'Million Annual Report 2015 Online advertising customers 24,244 Place of incorporation Name of entity Particulars of a material associate of the Group, as determined by the directors, are set out below: (a) Investments in associates (Cont'd) For the year ended 31 December 2015 Note: (Cont'd) 10 INTERESTS IN ASSOCIATES (Cont'd) Notes to the Consolidated Financial Statements 142 Tencent Holdings Limited Management has assessed the level of influence that the Group has on certain associates, with a total carrying amount of RMB31,207 million as at 31 December 2015 (2014: RMB29,311 million), and determined that it has significant influence even though the respective shareholding is below 20% because of the board representation or other arrangements made. Consequently, these investments have been classified as associates. (265) 81 (346) 13,657 64,788 (490) 40 (530) 4,439 3,460 22,959 Non-listed companies Interest held indirectly Principal activities/place of operation JD.com Inc. ("JD.com") Cayman Islands 26,698 49,942 58,468 RMB'Million RMB'Million 2014 2015 As at 31 December There are no contingent liabilities relating to the Group's interest in the associates. Other comprehensive income/(loss) Net loss 56,552 Loss before tax Net Revenues Summarised consolidated statements of operations and comprehensive loss Shareholders' equity Non-current liabilities Current liabilities Non-current assets Current assets Summarised consolidated balance sheet Set out below are the summarised financial information of JD.com extracted from its financial statements prepared under generally accepted accounting principles in the United States. Online direct sales and online marketplace businesses/the PRC 18.03% Loss from operations 225 41 184 2015 income RMB'Miilion RMB'Miilion income operation RMB'Miilion Revenues RMB'Million Liabilities RMB'Million RMB'Million Assets of listed companies as from continuing_comprehensive comprehensive at 31 December Total RMB'Million Other Fair value The Group's share of the results, the revenues, the aggregated assets (including goodwill) and liabilities of its associates, as well as the fair value of the associates which are listed companies, are shown in aggregate as follows: Investments in associates (Cont'd) (a) Note: (Cont'd) 10 INTERESTS IN ASSOCIATES (Cont'd) For the year ended 31 December 2015 Notes to the Consolidated Financial Statements Annual Report 2015 141 00 Profits/ (losses) 16,551 2015 55,557 19,805 10,197 41,829 Listed companies 2014 (2,473) 329 (2,802) 42,364 26,952 87,123 Listed companies (1,032) (1,038) 6,215 7,435 31,566 Non-listed companies 88,090 (1,441) 323 (1,764) 36,149 19,517 6 49,029 Total comprehensive loss 5,459 (i) Transactions with JD.com On 10 March 2014, the Group entered into a strategic co-operation agreement and formed a strategic partnership with JD.com, an associate of the Group. As part of the strategic partnership arrangement, the Group agreed to offer JD.com level 1 access points in the mobile applications Weixin and Mobile QQ and provide Internet traffic and other support from other key platforms to JD.com. The strategic partnership represents a deferred revenue arrangement, and the fair value of this arrangement, at the inception date, was recorded as "deferred revenue" in the consolidated statement of financial position, and has subsequently credited to the consolidated income statement over a period of five years. The revenues recorded by the Group from the aforesaid co-operation arrangements during the years ended 31 December 2015 and 2014 were considered to be insignificant. Tencent Holdings Limited 144 Notes to the Consolidated Financial Statements For the year ended 31 December 2015 10 INTERESTS IN ASSOCIATES (Cont'd) Note: (Cont'd) (c) Transactions with associates (Cont'd) (ii) Transactions with other associates During the years ended 31 December 2015 and 2014, the Group entered into co-operation agreements with certain associates, pursuant to which the associates operate their games/applications on the Group's Internet platforms, which are available to the users of the Group. The Group pays these associates a pre-determined percentage of the fees paid by and collected from end users for the virtual products/items utilised in their games/applications. In addition, as part of certain investment arrangements, the Group also entered into certain similar strategic co-operation arrangements and formed strategic partnership with certain other associates as stated in Note (b) above. The revenues recorded by the Group from the aforesaid co-operation arrangements during the years ended 31 December 2015 and 2014 were considered to be insignificant. The Group was entitled to certain call options/warrants and conversion options of the Group's investments in certain associates. As at 31 December 2015, fair values of these call options/warrants and conversion options of approximate RMB1,198 million (2014: Nil) were recognised in the consolidated financial statements. 00 6,230 Investments in redeemable preference shares of associates (Note 10) 28,995 RMB'Million RMB'Million 2014 The Group also provided/purchased online traffic and other Internet value-added services to/from certain of its associates. Revenues/costs recorded by the Group from such transactions were summarised as below: 2015 As at 31 December 2015, the financial instruments of the Group is analysed as follows: 11 FINANCIAL INSTRUMENTS BY CATEGORY For the year ended 31 December 2015 Notes to the Consolidated Financial Statements Annual Report 2015 145 As at 31 December Transactions with associates Financial assets classified as loan and receivables: During the year ended 31 December 2015, the Group made an impairment provision of approximately RMB47 million (2014: RMB321 million) for the investments in redeemable preference shares of certain associates based on the impairment assessment made with reference to the business performance and recoverable amount of these investments. (9,388) (4,977) (9,402) (5,802) (6,459) 115,002 (4,996) 181,287 2014 RMB'Million 2015 37,498 30,678 (c) RMB'Million 1,159 Year ended 31 December (8,229) The Group held certain redeemable preference shares of the associates, which are principally engaged in online community services, online games development and other Internet-related businesses. The redemption prices of the relevant shares are agreed at not less than their original subscription prices. Investments in redeemable preference shares of associates (108) (b) Note: (Cont'd) 10 INTERESTS IN ASSOCIATES (Cont'd) Notes to the Consolidated Financial Statements For the year ended 31 December 2015 The Group acquired several redeemable preference shares of the associates or made additional investments in existing redeemable preference shares of associates for an aggregate consideration of RMB3,021 million during the year ended 31 December 2015. These investments in redeemable preference shares of associates are principally engaged in online automotive purchase financing business, online gaming businesses and other Internet-related businesses. Annual Report 2015 143 00 (5,104) 2,846 Employee share option schemes: 165 - value of employee services 1,862,110,840 Share capital Share premium RMB'Million RMB'Million Total Shares held for share award schemes RMB'Million 3,822 Number of ordinary shares - shares issued and proceeds received before - value of employee services RMB'Million (1,309) for share award schemes 9,370,678,830 152 Tencent Holdings Limited As at 31 December 2015, the total number of issued ordinary shares of the Company was 9,403,923,992 shares (2014: 9,370,678,830 shares), which included 58,379,035 shares (2014: 88,686,054 shares) held under the Share Award Schemes. They were all fully paid up. Employee share option schemes: Notes to the Consolidated Financial Statements For the year ended 31 December 2015 5,131 18 SHARE CAPITAL, SHARE PREMIUM AND SHARES HELD FOR SHARE AWARD SCHEMES (Cont'd) Number of ordinary shares Share capital Share premium RMB'Million Total RMB'Million RMB'Million At 1 January 2015 (Note (b)) Shares held At 1 January 2014 (Note (a)) (652) For the year ended 31 December 2015 11,488,432 - shares issued and proceeds received (Note (d)) The par value of the ordinary shares of the Company was initially at HKD0.0001 per share. With effect from 15 May 2014, each of the then existing issued and unissued shares of the Company was subdivided into five subdivided shares of HKD0.00002 each (each defined as “Subdivided Share"), after an ordinary resolution was passed at the annual general meeting of the Company held on 14 May 2014 and with an approval obtained from the Stock Exchange (the "Share Subdivision"). Upon the Share Subdivision became effective, the authorised capital of the Company became HKD1,000,000, divided into 50,000,000,000 Subdivided Shares of HKD0.00002 each. The other rights and terms of the shares remain unchanged as at 31 December 2015 (2014: 50,000,000,000 shares at HKD0.00002 per share). 169 Employee share award schemes: - value of employee services - shares withheld for share award schemes (Note (e)) - shares allotted for the share award schemes (Note (f)) 21,756,730 - shares vested from share award schemes and transferred to the grantees (Note (g)) Acquisition of additional equity interests in non-wholly owned subsidiaries (Note 19(d)) At 31 December 2015 (Note (b)) 165 169 2,058 Notes to the Consolidated Financial Statements 00 Annual Report 2015 153 10,350 (1,817) 18 SHARE CAPITAL, SHARE PREMIUM AND SHARES HELD FOR SHARE AWARD SCHEMES (Cont'd) 12,167 4,788 4,788 144 (144) (652) 2,058 9,403,923,992 18 SHARE CAPITAL, SHARE PREMIUM AND SHARES HELD FOR SHARE AWARD SCHEMES 9,013 (b) Restricted cash 3,674 5 58 4,831 3,611 RMB'Million RMB'Million 2014 2015 As at 31 December Other currencies USD term deposits RMB term deposits Included in current assets: 4,831 Other currencies RMB term deposits Included in non-current assets: An analysis of the Group's term deposits by currencies are as follows: The effective interest rate for the term deposits of the Group with initial terms of over three months for the year ended 31 December 2015 was 4.00% (2014: 4.30%). 16 TERM DEPOSITS As at 31 December 2015, other financial assets represents call option rights held by the Group which entitle it to acquire additional equity interests in certain investee companies of the Group. They were presented at their fair value. 15 OTHER FINANCIAL ASSETS For the year ended 31 December 2015 Notes to the Consolidated Financial Statements 150 Tencent Holdings Limited The directors of the Company considered that the carrying amounts of deposits and other assets approximated their respective fair values as at 31 December 2015. Deposits and other assets (excluding financial instrument associated with investee companies) were neither past due nor impaired. Their recoverability was assessed with reference to the credit status of the counterparties and credit history. As at 31 December 2015, the amounts represented loans to investees and investees' shareholders. These balances are repayable in the period of three to ten years (included in non-current assets), or within one year (included in current assets) and majority of the balances are interest-bearing at rates of 0.28% to 10.0% per annum (2014: 0.3% to 8.0% per annum). Note: USD term deposits 36,569 762 10,777 21 Approximately RMB22,150 million (2014: RMB24,343 million) and RMB6,995 million (2014: RMB10,593 million) of the total balance of the Group's cash and cash equivalents was denominated in RMB, which placed with banks in Mainland China and Hong Kong, respectively. The effective interest rate of the term deposits of the Group with initial terms within three months for the year ended 31 December 2015 was 3.08% (2014: 3.55%). 42,713 43,438 27,478 23,593 15,235 19,845 RMB'Million RMB'Million 2014 2015 As at 31 December initial terms within three months Term deposits and highly liquid investments with Bank balances and cash (a) Cash and cash equivalents 37,331 10,798 41,005 15,629 Term deposits with initial terms of over three months were neither past due nor impaired. The directors of the Company considered that the carrying amount of the term deposits with initial terms of over three months approximated their fair value as at 31 December 2015. 00 As at 31 December 2015, restricted deposits held at bank of RMB54,731 million (2014: RMB9,174 million) mainly represents prepayments received from users via online/mobile platforms. These restricted cash are mainly denominated in RMB. 151 (871) 16,877 Annual Report 2015 Notes to the Consolidated Financial Statements For the year ended 31 December 2015 17 BANK BALANCES AND CASH 7,804 1,975 Total 160 Net losses from changes in fair value of Profit appropriations to PRC statutory reserves 357 non-controlling interests lapsed Put option granted to owners of the 20 230 non-wholly owned subsidiaries 68 468 (1,224) 3,746 310 662 (68) available-for-sale financial assets Share of other comprehensive income of associates Currency translation differences Balance at 31 December 2014 (295) 211 211 357 20 230 868 48 468 135 135 125 125 81 18 (1,705) (1,224) 4,236 (1,442) (Note (c)) based PRC Currency for-sale Share- Available- For the year ended 31 December 2015 Capital Notes to the Consolidated Financial Statements diluted in relation to business combinations Equity interests in non-wholly owned subsidiaries in non-wholly owned subsidiaries Acquisition of additional equity interests - Employee share award schemes - Employee share option schemes Value of employee services: Disposal of equity interests in (1,611) financial translation (Note (b)) (Note (a)) RMB'Million RMB'Million RMB'Million RMB'Million Total Others Investments reserve differences in associates RMB'Million RMB'Million RMB'Million RMB'Million assets reserve statutory compensation reserves Balance at 1 January 2014 2,531 (363) With approvals obtained from respective boards of directors of these companies, the Reserve Fund can be used to offset accumulated deficit or to increase capital. Share-based compensation reserve arises from share option schemes and restricted share award schemes adopted by subsidiaries (Note 20 (d)). During the year ended 31 December 2015, the Group acquired additional equity interests (including the outstanding equity settled and cash settled share options and restricted shares under the relevant employees incentive plans) in certain non-wholly owned subsidiaries of the Group at aggregate considerations of RMB9,860 million, which were settled in cash and in the form of awarded shares of the Company. The excess of considerations over the aggregate carrying amounts of acquired non-controlling interests and the carrying amounts of the liabilities for the cash settled share options and restricted shares of RMB8,160 million was recognised directly in equity. Tencent Holdings Limited 158 Notes to the Consolidated Financial Statements For the year ended 31 December 2015 20 SHARE-BASED PAYMENTS (a) Share option schemes The Company has adopted four share option schemes, namely, the Pre-IPO Option Scheme, the Post-IPO Option Scheme I, the Post-IPO Option Scheme II and the Post-IPO Option Scheme III, under which the directors may, at their discretion, grant options to any qualifying participants to subscribe for shares in the Company, subject to the terms and conditions stipulated therein. The Pre-IPO Option Scheme expired on 31 December 2011. The Post-IPO Option Scheme I was terminated upon the adoption of the Post-IPO Option Scheme II. In respect of Post-IPO Option Scheme II and Post-IPO Option Scheme III, the exercise price must be at least the higher of: (1) the closing price of the Company's shares as stated in the Stock Exchange's daily quotations sheet on the date of grant, which must be a business day; (2) the average closing price of the Company's shares as stated in the Stock Exchange's daily quotations sheets for the five business days immediately preceding the date of grant; and (3) the nominal value of the Company's shares. In addition, the option vesting period is determined by the Board provided that it is not later than the last day of a 7-year or 10-year period after the date of grant of option. Upon the Share Subdivision became effective, pro-rata adjustments have been made to the exercise prices and the number of outstanding share options, so as to give the participants the same proportion of the equity capital as that they were entitled to before the effect of the Share Subdivision. (i) Movements in share options Movements in the number of share options outstanding and their related weighted average exercise prices are as follows: In addition, in accordance with the Law of the PRC on Enterprises with Foreign Investments and the stipulated provisions of the articles of association of wholly owned foreign subsidiaries in the PRC, appropriation from net profits (after offsetting accumulated losses brought forward from prior years) should be made by these companies to their respective Reserve Fund. The percentage of net profit to be appropriated to the Reserve Fund is not less than 10% of the net profit. When the balance of the Reserve Fund reaches 50% of the registered capital, such transfer needs not be made. In accordance with the Companies Laws of the PRC and the stipulated provisions of the articles of association of subsidiaries with limited liabilities in the PRC, appropriation of net profits (after offsetting accumulated losses from prior years) should be made by these companies to their respective Statutory Surplus Reserve Funds and the Discretionary Reserve Funds before distributions are made to the owners. The percentage of appropriation to Statutory Surplus Reserve Fund is 10%. The amount to be transferred to the Discretionary Reserve Fund is determined by the equity owners of these companies. When the balance of the Statutory Surplus Reserve Fund reaches 50% of the registered capital, such transfer needs not to be made. Both the Statutory Surplus Reserve Fund and Discretionary Reserves Fund can be capitalised as capital of an enterprise, provided that the remaining Statutory Surplus Reserve Fund shall not be less than 25% of the registered capital. (d) (c) 570 (1,705) 81 (295) 2,129 ། 00 Post-IPO Option Scheme I Average exercise price 157 Notes to the Consolidated Financial Statements For the year ended 31 December 2015 19 OTHER RESERVES (Cont'd) Note: (a) The capital reserve mainly arises from transactions undertaken with non-controlling interests. (b) Annual Report 2015 No. of options Post-IPO Option Scheme II Average exercise price At 31 December 2015 (Note (2)) HKD80.59 25,697,305 HKD31.70 5,000,000 30,697,305 Exercisable as at 31 December 2015 (Note (2)) (717,138) HKD56.85 HKD31.70 1,250,000 10,094,117 00 159 Annual Report 2015 873 8,844,117 129 (717,138) Lapsed (Note (2)) Post-IPO Option Scheme III Total No. of options Average exercise price No. of No. of options HKD39.44 options Granted (Note (2)) Exercised (Note (2)) HKD57.36 36,432,000 HKD149.22 1,470,875 HKD18.28 (11,488,432) HKD31.70 5,000,000 41,432,000 1,470,875 (11,488,432) At 1 January 2015 (Note (2)) 19 OTHER RESERVES (Cont'd) 156 Tencent Holdings Limited (f) (e) (d) (c) The numbers of shares were presented as after the effect of the Share Subdivision. (b) The numbers of shares were presented as before the effect of the Share Subdivision. (a) Note: 18 SHARE CAPITAL, SHARE PREMIUM AND SHARES HELD FOR SHARE AWARD SCHEMES (Cont'd) For the year ended 31 December 2015 Notes to the Consolidated Financial Statements 154 Tencent Holdings Limited 3,822 It represented the effects of adjustments made to the number of shares as a result of the Share Subdivision. During the year ended 31 December 2015, 11,488,432 Post-IPO options (2014: 41,368,995 Post-IPO options) with exercise prices ranging from HKD8.53 to HKD124.30 (2014: HKD0.733 to HKD49.76) were exercised. During the year ended 31 December 2015, the Share Scheme Trust withheld 5,747,513 ordinary shares (2014: 5,435,277 ordinary shares) of the Company for an amount of approximately HKD800 million (equivalent to approximately RMB652 million) (2014: HKD668 million (equivalent to approximately RMB529 million)), which had been deducted from shareholders' equity. During the year ended 31 December 2015, the Company allotted 21,756,730 ordinary shares (2014: 19,520,635 ordinary shares) to the Share Scheme Trust for the purpose of granting awarded shares to the participants under the share award schemes. based PRC Currency for-sale Share- Available- 19 OTHER RESERVES (1,309) For the year ended 31 December 2015 Annual Report 2015 155 00 As at 31 December 2015, included in "Shares held for share award schemes", 12,818,261 ordinary shares of the Company (2014: 6,650,532 ordinary shares) held by the Share Scheme Trust had not yet been granted to the participants. During the year ended 31 December 2015, the Share Scheme Trust transferred 57,811,262 ordinary shares of the Company (2014: 33,778,133 ordinary shares) to the share awardees upon vesting of the awarded shares. (h) (g) Notes to the Consolidated Financial Statements 5,131 9,370,678,830 At 31 December 2014 (Note (b)) 1,350 1,350 - shares withheld for share award schemes (Note (e)) - value of employee services Employee share award schemes: 185 85 (529) 185 Share Subdivision (Note (b), (d)) - shares issued and proceeds received after the 114 114 3,715,616 the Share Subdivision (Note (a), (d)) 60 22,790,915 Capital (529) the Share Subdivision (Note (b), (f)) 7,462,693,824 Effect of Share Subdivision (Note (c)) 628 28 628 non-wholly owned subsidiaries (61) - shares allotted for share award schemes after 619 (153,000) Share Subdivision (Note (a)) Acquisition of additional equity interests in Repurchase and cancellation of shares before the 91 (91) - shares vested from share award schemes and transferred to the grantees (Note (g)) 19,520,635 (61) financial Investments translation 12,575 available-for-sale financial assets Net gains from changes in fair value of 216 216 (1,195) Profit appropriations to PRC statutory reserves Share of other comprehensive income of associates (1,195) Recognition of financial liabilities in respect of the (372) (372) to non-controlling interests Transfer of equity interests of subsidiaries (8,160) (8,160) put options granted to non-controlling interests non-wholly owned subsidiaries (Note (d)) 329 Currency translation differences 9,673 736 1,970 329 12,575 *། *| 2,015 29 1,089 458 15,106 (11,338) Balance at 31 December 2015 Other fair value gain recognised 910 1,970 1,607 160 Acquisition of additional equity interests in 982 RMB'Million RMB'Million RMB'Million RMB'Million RMB'Million RMB'Million RMB'Million RMB'Million (Note (a)) 11,397 reserve reserves differences in associates assets reserve statutory compensation Others 982 (Note (b)) Balance at 1 January 2015 payments of a subsidiary Tax benefit from share-based 273 273 190 190 - Employee share award schemes (Note (c)) - Employee share option schemes 2,129 570 873 (363) 129 2,531 (1,611) Value of employee services: 1,389 RMB'Million Others 357 656 857 2,242 RMB'Million 2014 RMB'Million 2015 As at 31 December Others 1,550 Loan to investees and investees' shareholders (Note) Running royalty fees for online games Prepayment for licensed contents Prepayments for land use rights Included in non-current assets: 14 PREPAYMENTS, DEPOSITS AND OTHER ASSETS For the year ended 31 December 2015 Notes to the Consolidated Financial Statements 999 1,025 Included in current assets: 5,480 553 461 167 Rental deposits and other deposits 303 254 1,339 1,392 Interest receivables 688 Refundable value-added tax 2,507 Running royalty fees for online games 2,252 1,596 Prepaid expenses 1,209 2,028 Loan to investees and investees' shareholders (Note) 3,275 Note: Convertible bonds of a subsidiary related to the convertible bonds assumed in a business combination in 2014 (Note 23). non-controlling shareholders of subsidiaries Present value of liabilities in relation to the put options granted to Payables to the licensed online contents and running royalty fee for online games For the year ended 31 December 2015 Notes to the Consolidated Financial Statements 23 LONG-TERM PAYABLES 166 Tencent Holdings Limited 19,123 588 2,131 3,717 314 Others non-controlling shareholders of a subsidiary Liabilities in relation to the put options granted to 208 386 Interests payable Purchase consideration payables for business combinations 70,199 Convertible bonds assumed in business combination RMB'Million 24 BORROWINGS 12,922 RMB'Million Convertible bonds of a subsidiary (Note) 2014 2015 As at 31 December 2,052 3,626 390 778 Others 489 1,080 487 2,361 RMB'Million RMB'Million 2014 2015 As at 31 December Non-current portion of long-term USD bank borrowings, unsecured (Note (a)) Included in non-current liabilities: 93 773 2,389 407 RMB'Million RMB'Million 2014 2015 As at 31 December 22 OTHER PAYABLES AND ACCRUALS Over 90 days 61 - 90 days 31 - 60 days 0-30 days 10,019 Accounts payable and their ageing analysis are as follows: For the year ended 31 December 2015 Notes to the Consolidated Financial Statements Annual Report 2015 165 00 The Group has to estimate the expected yearly percentage of grantees that will stay within the Group at the end of vesting periods of the options and awarded shares (the "Expected Retention Rate") in order to determine the amount of share-based compensation expenses charged to the consolidated income statement. As at 31 December 2015, the Expected Retention Rate for the grantees from the Group's wholly-owned subsidiaries was assessed to be 85% (2014: 85%). (e) Expected retention rate of grantees Certain subsidiaries of the Group operate their own share-based compensation plans (share option and/or restricted share award schemes). Their exercise prices of the share options, as well as the vesting periods of the share options and awarded shares are determined by the board of directors of these subsidiaries at their sole discretion. Similar to the share option/award schemes adopted by the Company, the share options or restricted shares of the subsidiaries granted are normally vested by several tranches. Participants of some subsidiaries have the right to request the Group to repurchase their vested equity interests of the respective subsidiaries ("Repurchase Transaction"). For certain participants, the Group have discretion to settle the Repurchase Transaction by using either equity instruments of the Company or by cash. For the Repurchase Transaction which the Group have settlement options, there are certain portions that the directors of the Company are currently of the view, that they would be settled by equity instruments of the Company. As a result, they are accounted for using the equity-settled share-based payment method. In addition, in connection with the acquisition of the addition equity interests in a non-wholly owned subsidiary in 2015, the unvested share options and unvested restricted awarded shares of that subsidiary are exchanged for the unvested awarded shares of the Company upon their vesting at a pre-determined conversion formula. As the fair values of unvested share options and unvested restricted awarded shares of that subsidiary and the fair values of the unvested awarded shares of the Company to be exchanged are the same at the relevant contract date, no additional share-based payments costs were recognised by the Group in 2015. (d) Share options and restricted share award schemes adopted by subsidiaries 20 SHARE-BASED PAYMENTS (Cont'd) 21 ACCOUNTS PAYABLE Purchase of land use rights 5,775 936 966 General and administrative expenses accruals 1,409 1,628 Selling and marketing expense accruals 6,019 7,719 Staff costs and welfare accruals 8,949 54,108 1,774 Deposits received from customers RMB'Million 2014 2015 As at 31 December 8,683 15,700 1,354 5,507 618 1,518 RMB'Million Included in current liabilities: Within 1 year 125 2014 2015 As at 31 December Between 4 and 5 years Over 5 years Between 3 and 4 years Between 2 and 3 years Between 1 and 2 years Within 1 year The notes payable were repayable as follows: The aggregate principal amounts of USD notes payable and HKD notes payable were USD5,800 million (31 December 2014: USD4,000 million) and HKD4,200 million (31 December 2014: HKD3,200 million), respectively. The interest rate range of the notes payable is from 2.000% to 4.700% (31 December 2014: 1.860% to 4.625%) per annum. Note: 25 NOTES PAYABLE (Cont'd) For the year ended 31 December 2015 Notes to the Consolidated Financial Statements 168 Tencent Holdings Limited 26,862 40,978 1,834 3,886 Current portion of long-term USD notes payable RMB'Million RMB'Million 3,886 1,834 Annual Report 2015 169 00 Deferred revenue mainly represents service fees prepaid by customers for certain VAS in the form of pre-paid tokens or cards, virtual items and subscription, for which the related services had not been rendered as at 31 December 2015. It also includes customer loyalty incentives offered by the Group to its customers which were valued at their respective fair values at the inception date. As at 31 December 2015, deferred revenue also included fair value of internet traffic and other support to be offered to JD.com and other investee companies in the future periods measured at inception date, as mentioned in Note 10(c). 26 DEFERRED REVENUE As at 31 December 2015, the fair value of the notes payable amounted to RMB41,372 million (2014: RMB27,528 million). The respective fair values are assessed based on the active market price of these notes on the reporting date or by making reference to similar instruments traded in the observable market. There is no security or pledge offered by the Group for issuing these notes. In September 2015, the notes payable with an aggregate principal amount of USD300 million which were issued in September 2013 reached their maturity and they were repaid in full by the Group. During the year ended 31 December 2015, the Company issued four tranches of notes payable under the Programme with aggregate principal amounts of USD1,100 million, USD900 million, USD100 million and HKD1,000 million, respectively. In April 2015, the Company updated the Global Medium Term Note Programme (the "Programme") and increased the limit on the aggregate principal amount from USD5 billion to USD10 billion. Included in current liabilities: 26,862 2,517 6,435 12,169 9,778 3,649 12,930 3,042 4,713 3,651 3,236 40,978 25,028 37,092 2,517 Between 2 and 5 years Between 1 and 2 years For the year ended 31 December 2015 The long-term USD bank borrowings were repayable as follows: The aggregate principal amount of long-term USD bank borrowings was USD2,100 million (2014: USD1, 105 million). Applicable interest rates are at LIBOR plus 1.02% to 1.52% (2014: LIBOR plus 1.35% to 1.75%) per annum. (a) Note: 24 BORROWINGS (Cont'd) For the year ended 31 December 2015 Notes to the Consolidated Financial Statements As at 31 December Annual Report 2015 00 8,722 24,351 3,215 11,429 1,254 714 1,836 10,715 USD bank borrowings, unsecured (Note (b)) 167 RMB bank borrowings, unsecured 2015 RMB'Million 3,509 22,511 33,583 Non-current portion of long-term USD notes payable Non-current portion of long-term HKD notes payable RMB'Million RMB'Million 2014 2015 As at 31 December Included in non-current liabilities: 2014 25 NOTES PAYABLE The aggregate principal amount of short-term USD bank borrowings was USD1,650 million (2014: USD300 million). Applicable interest rates are at LIBOR plus 0.75% to 0.85% or an interest rate of 1.125% (2014: LIBOR plus 0.85% to 1.00%) per annum. (b) 6,761 13,636 4,895 6,299 1,254 612 6,623 714 RMB'Million The carrying amounts of borrowings approximated their fair values as at 31 December 2015. Notes to the Consolidated Financial Statements Current portion of long-term USD bank borrowings, unsecured (Note (a)) Tencent Holdings Limited The numbers of shares and average exercise price were presented as before the effect of the Share Subdivision. (1) Note: 12,527,595 HKD18.07 12,527,595 Exercisable as at 31 December 2014 (Note (2)) 41,432,000 5,000,000 HKD31.70 36,432,000 HKD57.36 At 31 December 2014 (Note (2)) 49,836,452 4,000,000 45,836,452 Effect of Share Subdivision (Note (3)) (286,350) (286,350) HKD90.82 (600,042) (600,000) (2) The numbers of shares and average exercise price were presented as after the effect of the Share Subdivision. (3) It represented the effects of adjustments made to the numbers of shares as a result of the Share Subdivision. 10,964,950 2,851,000 HKD9.10-HKD18.06 405,950 HKD6.35-HKD8.70 2014 2015 Range of exercise price 31 December Number of share options 31 December HKD116.38 7 years commencing from the date of grant of options (Post-IPO Option Scheme II) Details of the expiry dates, exercise prices and the respective numbers of share options which remained outstanding as at 31 December 2015 and 2014 are as follows: (ii) Outstanding share options (a) Share option schemes (Cont'd) 20 SHARE-BASED PAYMENTS (Cont'd) For the year ended 31 December 2015 Notes to the Consolidated Financial Statements 160 Tencent Holdings Limited As a result of the options exercised during the year ended 31 December 2015, 11,488,432 ordinary shares (2014: 41,368,995 ordinary shares) were issued by the Company (Note 18). The weighted average price of the shares at the time these options were exercised was HKD142.75 per share (equivalent to approximately RMB114.57 per share) (2014: HKD109.88 per share (equivalent to approximately RMB87.00 per share)). During the year ended 31 December 2015, no share options were granted to any director of the Company (2014: 1,000,000 share options (before the effect of the Share Subdivision) were granted to an executive director of the Company). Expiry Date HKD25.68-HKD149.80 (42) (22,790,915) exercise price options exercise price No. of No. of Average No. of Average No. of Average Total Post-IPO Option Scheme III Post-IPO Option Scheme II Post-IPO Option Scheme | 164 (i) (a) Share option schemes (Cont'd) SHARE-BASED PAYMENTS (Cont'd) 20 For the year ended 31 December 2015 Notes to the Consolidated Financial Statements options exercise price options options (22,790,915) HKD10.18 (3,715,616) (2,896,392) HKD46.54 (819,224) HKD11.25 2,213,700 2,213,700 HKD123.67 HKD14.53 2,307,500 HKD572.60 Granted before the Share Subdivision (Note (1)) Granted after the Share Subdivision (Note (2)) Exercised before the Share Subdivision (Note (1)) Exercised after the Share Subdivision (Note (2)) Lapsed before the Share Subdivision (Note (1)) Lapsed after the Share Subdivision (Note (2)) 14,467,271 1,000,000 HKD158.50 12,648,005 HKD75.69 819,266 HKD11.25 At 1 January 2014 (Note (1)) 2,307,500 22,846,305 Movements in share options (Cont'd) 25,697,305 26,602,842 Granted after the Share Subdivision (Note (ii)) 1,183,445 Granted before the Share Subdivision (Note (i)) 18,065,996 At 1 January 2014 (Note (i)) 8,574,117 Vested but not transferred as at 31 December 2015 (Note (ii)) 91,786,907 At 31 December 2015 (Note (ii)) (57,811,262) Vested and transferred (Note (ii)) (6,746,336) 74,308,983 Lapsed before the Share Subdivision (Note (i)) 82,035,522 Granted (Note (ii)) At 1 January 2015 (Note (ii)) Number of awarded shares Movements in the number of awarded shares for the years ended 31 December 2015 and 2014 are as follows: Upon the Share Subdivision became effective, pro-rata adjustments have been made to the number of outstanding awarded shares, so as to give the participants the same proportion of the equity capital as that they were entitled to before the effect of the Share Subdivision. The Company has adopted two share award schemes (the "Share Award Schemes"), both of which are administered by an independent trustee appointed by the Group (the "Trustee") as of 31 December 2015. The vesting period of the awarded shares is determined by the Board. (b) Share award schemes 20 SHARE-BASED PAYMENTS (Cont'd) For the year ended 31 December 2015 Notes to the Consolidated Financial Statements 162 Tencent Holdings Limited The expected volatility, measured as the standard deviation of expected share price returns, is determined based on the average daily trading price volatility of the shares of the Company. (2) Lapsed (Note (ii)) (461,220) Lapsed after the Share Subdivision (Note (ii)) (4,730,292) 25,061,100 The related share-based compensation expenses incurred for the year ended 31 December 2015 and 2014 were insignificant to the Group. Wholly-owned subsidiaries of the Company act as general partner of these EISs administer and in essence, control the EISs. These EISS are therefore consolidated by the Company. For aligning the interests of key employees with the Group, the Group established three employees' investment plans in the form of limited liability partnerships in 2011, 2014 and 2015 (the "EISS”), respectively. According to the term of the EISs, the Board may, at its absolute discretion, select any employee of the Group, excluding any director of the Company, to participate in the EISS by subscribing for the partnership interest at cash consideration. The participating employees are entitled to all the economic benefits generated by the EISS, if any, after a specified vesting period under the respective EISs, ranging from up to four to seven years. (c) Employee incentive scheme The outstanding awarded shares as of 31 December 2015 were divided into two to five tranches on an equal basis as at their grant dates. The first tranche can be exercised immediately or after a specified period ranging from two months to four years from the grant date, and the remaining tranches will become exercisable in each subsequent year. The weighted average fair value of awarded shares granted during the year ended 31 December 2015 was HKD147.94 per share (equivalent to approximately RMB120.86 per share) (2014: HKD120.15 per share (equivalent to approximately RMB95.15 per share)). The fair value of the awarded shares was calculated based on the market price of the Company's shares at the respective grant date. The expected dividends during the vesting period have been taken into account when assessing the fair value of these awarded shares. During the year ended 31 December 2015, 75,000 awarded shares (after the effect of the Share Subdivision) were granted to three independent non-executive directors of the Company (2014: 25,000 awarded shares (before the effect of the Share Subdivision) were granted to three independent non-executive directors of the Company). (iii) It represented the effects of adjustments made to the numbers of shares as a result of the Share Subdivision. The numbers of shares were presented as after the effect of the Share Subdivision. (ii) The numbers of shares were presented as before the effect of the Share Subdivision. (i) Note: (b) Share award schemes (Cont'd) Vested and transferred before the Share Subdivision (Note (i)) (226,797) Vested and transferred after the Share Subdivision (Note (ii)) Effect of Share Subdivision (Note (iii)) (32,644,148) 74,245,696 At 31 December 2014 (Note (ii)) The weighted average share price at the grant date was presented as after the effect of the Share Subdivision. 82,035,522 28,160 163 Annual Report 2015 Notes to the Consolidated Financial Statements For the year ended 31 December 2015 20 SHARE-BASED PAYMENTS (Cont'd) Vested but not transferred as at 31 December 2014 (Note (ii)) (1) 00 Expected volatility (Note (2)) 2014 2015 As at 31 December Dividend yield Weighted average share price at the grant date (Note (1)) Other than the exercise price mentioned above, significant judgment on parameters, such as risk free rate, dividend yield and expected volatility, are required to be made by the directors in applying the Valuation Models, which are summarised as below. The directors of the Company have used the Valuation Models to determine the fair value of the options as at the respective grant dates, which is to be expensed over the relevant vesting period. The weighted average fair value of options granted during the year ended 31 December 2015 was HKD51.92 per share (equivalent to approximately RMB41.01 per share (2014: HKD36.97 per share (equivalent to approximately RMB29.28 per share)). Fair value of options (iii) (a) Share option schemes (Cont'd) 20 SHARE-BASED PAYMENTS (Cont'd) For the year ended 31 December 2015 Notes to the Consolidated Financial Statements Annual Report 2015 161 00 The outstanding share options as of 31 December 2015 were divided into three to five tranches on an equal basis as at their grant dates. The first tranche can be exercised after a specified period ranging from one to five years from the grant date, and then the remaining tranches will become exercisable in each subsequent year. 41,432,000 30,697,305 5,000,000 5,000,000 HKD31.70 10 years commencing from the date of grant of options (Post-IPO Option Scheme III) 36,432,000 Note: HKD149.22 0.36%-1.54% HKD113.30 1.56%-1.91% Risk free rate 0.36% 40.00%-41.00% 42.00%-44.50% 0.34% 3,476 Included the amortisation charge for intangible assets in respect of licenses and licensed online contents. Tencent Holdings Limited 174 Bandwidth and server custody fees 4,334 193 Cost of merchandises sold 10,963 17,094 15,451 18,475 Content costs and agency fees (excluding amortisation of intangible assets) Employee benefits expenses (Note (a) and Note 31) RMB'Million RMB'Million 2014 2015 30 EXPENSES BY NATURE (iii) During the year ended 31 December 2015, the Group also recognised total net gains of RMB1,014 million from a number of investees as a result of disposal, re-designation of investments, et cetera. As described in Notes 10(a) (iv) and 12(b), the Group recognised gains from investment in Dianping of RMB868 million during the year ended 31 December 2015. During the year ended 31 December 2015, the Group recognised total net gains of deemed disposals of a number of investments in associates of RMB1,931 million (Note 10(a)) mainly due to new equity interests issued by these associates for additional financing or investment considerations. As a result, the Group's equity interests in these associates were diluted, and dilution gains had been recognised accordingly. These associates are principally engaged in online insurance, online classified listing platform services, online gaming and other Internet-related business. (ii) (i) The disposal gains/deemed disposal gains recognised in "Other gains, net" mainly comprised the following: (b) Note: (Cont'd) 5,492 of RMB718 million (2014: RMB639 million). No development expenses had been capitalised for the year ended 31 December 2015 (2014: Nil). Research and development expenses for the year ended 31 December 2015 were RMB9,039 million (2014: RMB7,581 million), which included employee benefits expenses of RMB7,134 million (2014: RMB6,022 million) and depreciation of fixed assets 15 Amortisation of intangible assets (Note (b) and Note 9) 2,989 3,153 Depreciation of fixed assets (Note (a) and Note 6) 5,833 5,814 Promotion and advertising expenses 2,031 4,691 Channel costs Operating lease rentals in respect of office buildings 896 997 594 1,808 480 4,255 29 OTHER GAINS, NET (Cont'd) Auditor's remuneration - Audit services - Audit-related services - Non-audit services Note: (a) (b) 35 23 2 15 13 Travelling and entertainment expenses For the year ended 31 December 2015 86 Annual Report 2015 575 Credit to other comprehensive income 15 (2,510) 15 At 31 December 2014 (360) (2,033) (172) (377) (2,942) Note: Withholding tax will be levied on the dividends distributed by a company established in certain jurisdictions, including the PRC, to an investor outside the jurisdiction of that company established ("foreign investor"). Tencent Holdings Limited 172 Notes to the Consolidated Financial Statements For the year ended 31 December 2015 27 DEFERRED INCOME TAXES (Cont'd) As at 31 December 2015, the Group recognised the relevant deferred income tax liabilities of RMB1,975 million (2014: RMB2,033 million) on earnings anticipated to be remitted by certain subsidiaries in the foreseeable future. No withholding tax had been provided for the earnings of approximately RMB37,344 million (2014: RMB10,607 million) expected to be retained by the PRC subsidiaries and not to be remitted to a foreign investor in the foreseeable future based on management's estimation of overseas funding requirements. 28 INTEREST INCOME Interest income mainly represents interest income from bank deposits, including current term deposits and non-current term deposits. 29 OTHER GAINS, NET 2015 2014 RMB'Million RMB'Million Impairment provision for investee companies and intangible assets from acquisition (Note (a)) (2,373) 575 the remittance of dividends Withholding tax paid in related to 11 173 00 The impairment provision for investee companies and intangible assets from acquisition recognised in “Other gains, net” mainly comprised impairment provision for investments in associates and redeemable preference shares of associates of RMB1,638 million (2014: RMB1,959 million), impairment provision for available-for-sale financial assets of RMB586 million (2014: RMB478 million) and impairment provision for intangible assets arising from acquisition of RMB148 million (2014: RMB73 million). 2,759 1,886 (164) (149) (300) (470) 144 272 392 331 462 Notes to the Consolidated Financial Statements 5,111 (a) Note: Others Donation to Tencent Charity Funds Dividend income Subsidies and tax rebates Fair value gains on other financial instruments and businesses (Note (b), Note 12(b)) Gains on disposals/deemed disposals of investees (320) 31 EMPLOYEE BENEFITS EXPENSES (1,822) Disposal of a subsidiary 11 3,813 Notes to the Consolidated Financial Statements HKD45,000,001 – HKD60,000,000 Wages, salaries and bonuses HKD129,000,001 – HKD129,500,000 HKD81,000,001 – HKD81,500,000 Emolument bands 108 316 The emoluments of the above four individuals (2014: four) fell within the following bands: 1,618 712,926 49 516,582 471 195,896 195,792 503 RMB'000 2014 2015 RMB'000 Estimated money value of other benefits to consolidated income statement Share-based compensation expenses charged Contributions to pension plans Salaries, bonuses, allowances and benefits in kind The five individuals whose emoluments were the highest in the Group include one director during the year 2015 (2014: one). The emoluments paid/payable to the remaining four (2014: four) individuals during the year were as follows: (b) Five highest paid individuals 31 EMPLOYEE BENEFITS EXPENSES (Cont'd) For the year ended 31 December 2015 Notes to the Consolidated Financial Statements 21431|-- 253 || 1 HKD183,000,001 – HKD183,500,000 1 HKD210,000,001 – HKD210,500,000 HKD274,000,001 – HKD274,500,000 (1,480) 866 1,510 RMB'Million RMB'Million 2014 2015 Exchange losses Interest and related expenses 32 FINANCE COSTS, NET For the year ended 31 December 2015 Notes to the Consolidated Financial Statements Annual Report 2015 177 00 Employees of a foreign subsidiary of the Group. The respective emolument amounts are mainly comprised of charges related to the vesting of share-based compensation and the re-measurement appreciation of cash-settled share-based award grants. 1 2* 1 2* 1 - 1 2014 2015 Number of individuals 559,263 36 362,860 * HKD249,000,001 – HKD249,500,000 2014 2015 Number of individuals 6.0 -11.5% 12.0-21.0% Percentage Housing fund Unemployment insurance Medical insurance Pension insurance Majority of the Group's contributions to pension plans are related to the local employees in the PRC. All local employees of the subsidiaries in the PRC participate in employee social security plans established in the PRC, which cover pension, medical and other welfare benefits. The plans are organised and administered by the governmental authorities. Except for the contributions made to these social security plans, the Group has no other material commitments owing to the employees. According to the relevant regulations, the portion of premium and welfare benefit contributions that should be borne by the companies within the Group as required by the above social security plans are principally determined based on percentages of the basic salaries of employees, subject to certain ceilings imposed. These contributions are paid to the respective labour and social welfare authorities and are expensed as incurred. The applicable percentages used to provide for insurance premium and welfare benefit funds for the years ended 31 December 2015 and 2014 are listed below: Note: 15,451 18,475 49 69 820 1,112 2,497 2,841 862 1,076 11,223 13,377 RMB'Million RMB'Million 2014 2015 Training expenses Contributions to pension plans (Note) Share-based compensation expenses Welfare, medical and other expenses (Note) 0.8-2.0% 10.0 - 12.0% 00 175 357,242 702,039 220,186 535,733 697 136,359 165,607 699 RMB'000 2014 2015 RMB'000 176 Tencent Holdings Limited HKD255,000,001 – HKD315,000,000 HKD105,000,001 – HKD135,000,000 HKD195,000,001 – HKD255,000,000 For the year ended 31 December 2015 HKD75,000,001 – HKD105,000,000 HKD15,000,001 – HKD30,000,000 HKD800,000 - HKD15,000,000 Emolument bands The emoluments of the senior management fell within the following bands: to consolidated income statement Share-based compensation expenses charged Contributions to pension plans Salaries, bonuses, allowances and benefits in kind Senior management includes directors, chief executive officer ("CEO"), president and other senior executives. The aggregate compensation paid/payable to senior management for employee services excluding the directors and the CEO whose details have been reflected in Note 44(a) is as follows: (a) Senior management's emoluments 31 EMPLOYEE BENEFITS EXPENSES (Cont'd) For the year ended 31 December 2015 Notes to the Consolidated Financial Statements Annual Report 2015 HKD30,000,001 – HKD45,000,000 (22) For the year ended 31 December 2015 (280) 27 DEFERRED INCOME TAXES (Cont'd) Notes to the Consolidated Financial Statements (2,620) (2,911) 1 7 (256) 2 11 5 15 (459) 575 326 (1,956) (172) (1,010) (2,620) RMB'Million RMB'Million 2014 2015 (2,942) (3,668) (884) (955) (2,058) (2,713) 322 The movements of deferred income tax assets were as follows: 757 Deferred income 17 72 At 1 January 2015 (Note (ii)) (Note (i)) RMB'Million RMB'Million Total Others tax losses RMB'Million RMB'Million RMB'Million assets sales assets arising from of intangible technology amortisation software and accelerated income tax Deferred arising from tax assets intra-group arising from tax assets For the year ended 31 December 2015 income Deferred Charge to consolidated income statement 116 206 RMB'Million RMB'Million 2,802 346 (9) 1 2,793 347 (i) Cayman Islands and British Virgin Islands corporate income tax ("CIT") The Group was not subject to any taxation in the Cayman Islands and the British Virgin Islands for the years ended 31 December 2015 and 2014. (ii) Hong Kong profits tax Hong Kong profits tax provision has been provided at the rate of 16.5% on the estimated assessable profits for the years ended 31 December 2015 and 2014. Tencent Holdings Limited 178 Notes to the Consolidated Financial Statements For the year ended 31 December 2015 34 TAX EXPENSE (Cont'd) (a) Income tax expense (Cont'd) (iii) PRC corporate income tax CIT provision was made on the estimated assessable profits of entities within the Group incorporated in the PRC for the years ended 31 December 2015 and 2014, calculated in accordance with the relevant regulations of the PRC after considering the available tax benefits from refunds and allowances. The general PRC CIT rate is 25% in 2015. Certain subsidiaries of the Group in the PRC were approved as High and New Technology Enterprise, and accordingly, they were subject to a reduced preferential CIT rate of 15% for the years ended 31 December 2015 and 2014 according to the applicable CIT Law. In addition, according to relevant tax circulars issued by the PRC tax authorities, certain subsidiaries of the Company are entitled to other tax concessions and they are exempt from CIT for two years, followed by a 50% reduction in the applicable tax rates for the next three years, commencing either from the first year of commercial operation or from the first year of profitable operation, after offsetting tax losses generated in prior year. (iv) United States corporate income tax United States CIT provision was provided for the years ended 31 December 2015 and 2014 for the entities within the Group which were incorporated in the United States with estimated assessable profits, at applicable tax rate of 36%. 00 179 Annual Report 2015 1,182 2014 314 2015 34 TAX EXPENSE 443 RMB'Million RMB'Million 2014 2015 As at 31 December 170 Tencent Holdings Limited At end of the year Currency translation differences Business combinations Disposal of a subsidiary (Charge)/credit to other comprehensive income Charge to consolidated income statement (Note 34) Withholding tax paid relating to remittance of dividends At beginning of the year The movements of the deferred income tax assets/liabilities account were as follows: - to be recovered within 12 months ― to be recovered after more than 12 months Deferred income tax liabilities: - to be recovered within 12 months ― to be recovered after more than 12 months Deferred income tax assets: There was no offsetting of deferred income tax assets and liabilities in 2015 and 2014. Deferred income taxes are calculated in full on temporary differences under the liability method using the tax rates which are expected to apply at the time of reversal of the temporary differences. 27 DEFERRED INCOME TAXES Notes to the Consolidated Financial Statements 33 SHARE OF LOSSES OF ASSOCIATES AND JOINT VENTURES Share of losses of associates (Note 10(a)) Share of (profit)/losses of joint ventures (a) Income tax expense 24 209 (Charge)/Credit to consolidated income statement Disposal of a subsidiary (266) 41 Credit/(charge) to consolidated income statement 2 Business combinations (172) (2,033) (360) At 1 January 2015 (Note) RMB'Million RMB'Million RMB'Million RMB'Million RMB'Million RMB'Million Total Others investees assets at fair value by subsidiaries disposals of sale financial combinations to be remitted deemed arising from fair value of available-for- anticipated 5 322 (377) 2 (280) Business combinations (1,441) (57) (187) (1,128) (69) At 1 January 2014 (3,668) (550) (198) (631) (1,975) (314) (4) (2) (459) (459) 326 326 At 31 December 2015 Currency translation differences Charge to other comprehensive income remittance of dividends Withholding tax paid in relation to the 5 (596) (173) (198) (2,942) earnings in business liabilities (134) (3) (30) (101) Charge to consolidated income statement 24 24 Business combinations 431 213 47 47 171 At 1 January 2014 757 252 209 243 53 At 31 December 2015 11 11 Currency translation differences 424 228 (11) 20 226 (19) acquired 2 Currency translation differences 1 change in tax on the assets income tax arising from Withholding Intangible Deferred liabilities income tax Deferred The movements of deferred income tax liabilities were as follows: 27 DEFERRED INCOME TAXES (Cont'd) (1) For the year ended 31 December 2015 Annual Report 2015 At 31 December 2014 72 17 209 24 Notes to the Consolidated Financial Statements 322 (i) (ii) The deferred income tax assets recognised are mainly related to the temporary differences arising from certain intra-group software and technology transfer transactions. The Group only recognises deferred income tax assets for cumulative tax losses if it is probable that future taxable amounts will be available to utilise those tax losses. Management will continue to assess the recognition of deferred income tax assets in future reporting periods. As at 31 December 2015, the Group did not recognise deferred income tax assets of RMB1,017 million (2014: RMB866 million) in respect of cumulative tax losses amounting to RMB4,125 million (2014: RMB3,525 million). These tax losses will expire from 2016 to 2020. 00 171 Note: Interest expenses mainly arose from the borrowings and notes payable mentioned in Notes 24 and 25, respectively. 2014 2015 3,363 RMB'Million 38 CONSOLIDATED CASH FLOW STATEMENT (a) Reconciliation of net profit to cash inflow from operating activities: 2015 2014 RMB'Million RMB'Million 29,108 23,888 Profit for the year Adjustments for: Income tax expense For the year ended 31 December 2015 7,108 Gains on disposals/deemed disposals of investees and businesses (3,813) (5,111) Loss on liquidation of an investee 12 Dividend income (272) (144) Depreciation of fixed assets and investment properties 3,159 2,993 5,125 Notes to the Consolidated Financial Statements Annual Report 2015 183 Profit attributable to equity holders of the Company (RMB'Million) Weighted average number of ordinary shares in issue (million shares) Adjustments for share options and awarded shares (million shares) Weighted average number of ordinary shares for the calculation of diluted EPS (million shares) Diluted EPS (RMB per share) For the year ended 31 December 2015 2015 2014 28,806 23,810 9,300 130 9,231 126 9,430 9,357 3.055 2.545 36 DIVIDENDS The dividends amounted to RMB2,640 million (2014: RMB1,761 million) was paid during the year ended 31 December 2015. A final dividend in respect of the year ended 31 December 2015 of HKDO.47 per share (2014: HKD0.36 per share) was proposed pursuant to a resolution passed by the Board on 17 March 2016 and subject to the approval of the shareholders at the annual general meeting to be held on 18 May 2016. This proposed dividend is not reflected as dividend payable in the consolidated financial statements. 37 BUSINESS COMBINATIONS During the year ended 31 December 2015, the Group acquired and obtained control of certain entities engaging in online game, films production and literature related business. The aggregate consideration for these acquisitions was RMB1,109 million, fair value of net assets acquired (including identifiable intangible assets), non-controlling interests and goodwill recognised were RMB514 million, RMB262 million and RMB857 million, respectively. The acquisition related costs of the business combinations were not significant and had been charged to general and administrative expenses in the consolidated income statement for the year ended 31 December 2015. The revenue and the results contributed by these acquisitions of the Group for the period since the date of acquisitions were insignificant to the Group. The Group's revenue and results for the period would not be materially different if these acquisitions had occurred on 1 January 2015. 00 Amortisation of intangible assets and land use rights 3,515 1,825 Net losses on disposals of land used rights, intangible assets, fixed assets Inventories (17) 1,300 Prepayments, deposits and other receivables (5,081) (1,751) Accounts payable 5,969 1,788 Other payables and accruals 3,654 2,975 Other tax liabilities (106) (25) Deferred revenue 4,439 2,687 Cash generated from operating activities 50,478 37,414 Tencent Holdings Limited 184 Notes to the Consolidated Financial Statements For the year ended 31 December 2015 (1,418) Notes to the Consolidated Financial Statements (2,469) Changes in working capital: and construction in progress 43 57 Interest income (2,327) (1,676) Equity-settled share-based compensation expenses 2,756 1,802 Share of losses of associates and joint ventures 2,793 347 Impairment provision for available-for-sale financial assets, associates and joint ventures RMB'Million 2,437 Fair value gains on other financial assets (462) (86) Impairment of intangible assets 148 73 Exchange losses 108 316 Accounts receivable (b) Diluted (Cont'd) 35 EARNINGS PER SHARE (Cont'd) 182 The tax on the Group's profit before income tax differs from the theoretical amount that would arise using the tax rate of 25% for the years ended 31 December 2015 and 2014, being the tax rate of the major subsidiaries of the Group before enjoying preferential tax treatments. The difference is analysed as follows: 2015 2014 RMB'Million RMB'Million Profit before income tax Share of losses of associates and joint ventures 36,216 2,793 29,013 347 39,009 29,360 Tax calculated at a tax rate of 25% 9,752 7,340 Effects of different tax rates applicable to different subsidiaries of the Group (3,775) (4,038) Effects of tax holiday on assessable profits of subsidiaries (508) (828) Income not subject to tax (14) Expenses not deductible for tax purposes 906 (a) Income tax expense (Cont'd) 698 34 TAX EXPENSE (Cont'd) Notes to the Consolidated Financial Statements Notes to the Consolidated Financial Statements For the year ended 31 December 2015 34 TAX EXPENSE (Cont'd) (a) Income tax expense (Cont'd) (v) Corporate income tax in other countries CIT provision has been provided for the years ended 31 December 2015 and 2014 for the entities within the Group which were incorporated in Europe, East Asia and South America to the extent that there were estimated assessable profits under these jurisdictions, at applicable tax rates ranging from 12.5 % to 35%. (vi) Withholding tax According to applicable PRC tax regulations, dividends distributed by a company established in the PRC to a foreign investor with respect to profits derived after 1 January 2008 are generally subject to a 10% withholding tax. If a foreign investor is incorporated in Hong Kong and meets the conditions or requirements under the double taxation arrangement entered into between the Mainland China and Hong Kong, the relevant withholding tax rate will be reduced from 10% to 5%. Hence, the Group used 5% to accrue the withholding tax for certain Hong Kong intermediate holding companies which are expected to fulfill the aforesaid conditions. Similar tax regulations are also applicable to certain countries and regions. The income tax expense of the Group for the years ended 31 December 2015 and 2014 are analysed as follows: Current tax Deferred income tax (Note 27) Tencent Holdings Limited 180 2015 2014 RMB'Million RMB'Million 6,936 3,169 172 1,956 7,108 5,125 For the year ended 31 December 2015 38 CONSOLIDATED CASH FLOW STATEMENT (Cont'd) Withholding tax on earnings expected to be remitted Unrecognised deferred income tax assets Net VAT and BT payable amount Construction fee for cultural undertakings 3% Advertising income Educational surcharge 5% Net VAT and BT payable amount 35 EARNINGS PER SHARE (a) Basic Basic EPS is calculated by dividing the profit attributable to equity holders of the Company by the weighted average number of ordinary shares in issue during the year. 2015 2014 Profit attributable to equity holders of the Company (RMB'Million) 28,806 23,810 Weighted average number of ordinary shares in issue (million shares) 9,300 9,231 Basic EPS (RMB per share) 3.097 2.579 (b) Diluted The share options and awarded shares granted by the Company have potential dilutive effect on the EPS. Diluted EPS is calculated by adjusting the weighted average number of ordinary shares outstanding by the assumption of the conversion of all potential dilutive ordinary shares arising from share options and awarded shares granted by the Company (collectively forming the denominator for computing the diluted EPS). No adjustment is made to earnings (numerator). In addition, the share options and restricted shares granted by the Company's non-wholly owned subsidiaries and associates, and the convertible bonds of the subsidiaries should also have potential dilutive effect on the EPS. During the year ended 31 December 2015, these share options and restricted shares, and the convertible bonds had either anti-dilutive effect or insignificant dilutive effect to the Group. Tencent Holdings Limited 7% by subsidiaries (Note 27) City construction tax 3-5% Others Income tax expense 266 1,480 421 470 60 3 7,108 5,125 00 181 Annual Report 2015 Notes to the Consolidated Financial Statements For the year ended 31 December 2015 34 TAX EXPENSE (Cont'd) (b) Value-added tax, business tax and related taxes The operations of the Group are also subject to the following taxes in the PRC: Category Value-added tax ("VAT") Tax rate Basis of levy 6-17% Sales value of goods sold and services fee Business tax ("BT") income, offsetting by VAT on purchases Services fee income (b) Major non-cash transactions 2,225 39 COMMITMENTS RMB'Million RMB'Million 2014 2015 As at 31 December Contribution to Share Scheme Trust Prepayments, deposits and other receivables Investments in associates Investments in subsidiaries (Note (b)) Intangible assets Non-current assets Other than the transaction with non-controlling interests described in Note 19(d), there were no material non-cash transactions for the year ended 31 December 2015. (a) Financial position of the Company 42 FINANCIAL POSITION AND RESERVE MOVEMENT OF THE COMPANY There were no material subsequent events during the period from 31 December 2015 to the approval date of these financial statements by the Board of Directors on 17 March 2016. 41 SUBSEQUENT EVENTS Except as disclosed in Note 10(c) (Transactions with associates), Note 14 (Loan to investees and investees' shareholders), Note 20 (Share-based payments), Note 31(a) (Senior management's emoluments), Note 31(b) (Five highest paid individuals) and Note 44 (Benefits and interests of directors) to the consolidated financial statements, the Group had no other material transactions with related parties for the year ended 31 December 2015, and no other material related parties' balances as at 31 December 2015. 40 RELATED PARTIES TRANSACTIONS For the year ended 31 December 2015 Notes to the Consolidated Financial Statements 186 Tencent Holdings Limited 3,349 5,993 5 38 540 45,647 1,278 For the year ended 31 December 2015 Notes to the Consolidated Financial Statements Annual Report 2015 187 00 39,425 57,723 9,828 10,286 Total assets 168 99 Cash and cash equivalents 388 131 Prepayments, deposits and other receivables 9,272 10,056 Amounts due from subsidiaries Current assets 29,597 47,437 21 48 426 36 29,540 42 FINANCIAL POSITION AND RESERVE MOVEMENT OF THE COMPANY (Cont'd) Later than five years Later than one year and not later than five years (b) Operating lease commitments 39 COMMITMENTS (Cont'd) For the year ended 31 December 2015 Notes to the Consolidated Financial Statements Annual Report 2015 185 00 7,144 13,495 3,242 8,376 Construction/purchase of building and purchase of land use rights Authorised but not contracted: 3,902 5,119 912 2,249 494 631 2,496 2,239 Capital investment in investees Purchase of other fixed assets Construction/purchase of buildings and purchase of land use rights Contracted: The future aggregate minimum lease payments under non-cancellable operating leases in respect of buildings are as follows: 1,566 Contracted: 2015 1,778 2,090 Not later than one year RMB'Million RMB'Million 2014 2015 As at 31 December Contracted: The future aggregate minimum payments under non-cancellable bandwidth and server custody leases and online game licensing agreements are as follows: (c) Other commitments 3,293 2,453 1,200 1,198 Later than five years 1,347 827 Later than one year and not later than five years 746 428 Not later than one year RMB'Million RMB'Million 2014 As at 31 December (a) Financial position of the Company (Cont'd) ASSETS Equity attributable to equity holders of the Company RMB'Million reserves earnings Other Retained (c) Reserve movement of the Company All these balances are unsecured and interest-free and their repayments are neither planned nor likely to occur in the foreseeable future. (ii) The amount represents share-based compensation expenses arising from grants of share options and awarded shares of the Company to employees of subsidiaries in exchange for their services provided to the subsidiaries, which were deemed to be investment made by the Company into these subsidiaries. (i) Note: 29,540 45,647 24,315 38,147 5,158 7,381 - Deemed investments arising from share-based compensation (Note (i)) - Advance to subsidiaries (Note (ii)) 67 119 - Investments in equity interests - at cost, unlisted RMB'Million RMB'Million 2014 2015 RMB'Million As at 31 December At 1 January 2014 Profit for the year (a) Capital commitments Capital commitments as at 31 December 2015 are analysed as follows: Annual Report 2015 189 00 (448) 472 (71) (2,640) (1,094) (377) 4,206 At 31 December 2015 EQUITY Dividends paid relating to 2014 Losses for the year At 1 January 2015 (377) 4,206 At 31 December 2014 (377) Currency translation differences (1,761) Dividends paid relating to 2013 3,672 2,295 Investments in subsidiaries: Currency translation differences (b) Investments in subsidiaries 37,092 7,651 10,374 4,206 472 (377) (448) (1,309) 5,131 12,167 (1,817) RMB'Million RMB'Million 2014 2015 As at 31 December Notes payable The amount represents investments in equity interests in subsidiaries of the Company. Details are as follows: Non-current liabilities LIABILITIES Total equity Retained earnings (Note (c)) Other reserves (Note (c)) Shares held for share award schemes Share premium Share capital 25,028 Current liabilities As at 31 December 6,024 Ma Huateng Amounts due to subsidiaries Director Tencent Holdings Limited 188 Director Notes to the Consolidated Financial Statements For the year ended 31 December 2015 42 FINANCIAL POSITION AND RESERVE MOVEMENT OF THE COMPANY (Cont'd) on its behalf: The financial position of the Company was approved by the Board of Directors on 17 March 2016 and was signed 39,425 57,723 Lau Chi Ping Martin 47,349 31,774 4,742 347 Other payables and accruals Notes payable 170 1,834 10,257 6,746 Total liabilities Total equity and liabilities 3,886 18 Management Discussion and Analysis FOURTH QUARTER OF 2015 COMPARED TO THIRD QUARTER OF 2015 Unaudited Three months ended 31 December 30 September 2015 Gross profit (RMB in millions) Revenues Cost of revenues Interest income 30,441 26,594 Tencent Holdings Limited 2015 Profit attributable to equity holders of the Company. Profit attributable to equity holders of the Company increased by 22% to RMB7,164 million for the fourth quarter of 2015 on a year-on-year basis. Non-GAAP profit attributable to equity holders of the Company increased by 28% to RMB8,953 million for the fourth quarter of 2015 on a year-on-year basis. Cost of revenues for our online advertising business increased by 77% to RMB2,794 million for the fourth quarter of 2015 on a year-on-year basis. The increase was primarily driven by higher investment in video content, commissions payable to advertising agencies, as well as traffic acquisition costs. Share of losses of associates and joint ventures. Share of losses of associates and joint ventures increased to RMB1,329 million for the fourth quarter of 2015. The year-on-year increase was mainly attributable to share of losses arising from impairment provisions recognised by a listed associate engaging in the eCommerce business in the fourth quarter of 2015. 587 48% 12,661 8,332 Cost of revenues for "Others" business segment include cost of merchandise sold of principal eCommerce transactions and other eCommerce costs of revenue since the first quarter of 2015. Comparative figures have been reclassified to conform with the new presentation. Cost of revenues for our VAS business increased by 36% to RMB8,383 million for the fourth quarter of 2015 on a year- on-year basis. The increase was mainly driven by higher sharing and content costs (especially for licensed smart phone games) and channel costs, as well as bandwidth and server custody fees. (12,661) Income tax expense. Income tax expense increased by 124% to RMB1,998 million for the fourth quarter of 2015 on a year- on-year basis. The increase primarily reflected greater profit before income tax and higher applicable CIT rate for certain subsidiaries in China. Cost of revenues for our other businesses increased by 153% to RMB1,484 million for the fourth quarter of 2015 on a year-on-year basis. The increase was mainly driven by greater bank handling fees on C2C money transfers. 17 Annual Report 2015 Management Discussion and Analysis Other gains, net. Other gains, net decreased by 27% to RMB249 million for the fourth quarter of 2015 on a year-on-year basis. During the fourth quarter of 2015, net disposal/deemed disposal gains arising from certain investee companies decreased. Partly offsetting this decrease, fair value gains on options we own in an investee company were recognised in the fourth quarter of 2015 and impairment provision charges for certain investee companies decreased. Selling and marketing expenses. Selling and marketing expenses increased by 47% to RMB3,024 million for the fourth quarter of 2015 on a year-on-year basis. The increase mainly reflected greater marketing spending on products and platforms such as online games, online literature, mobile utilities and online media, as well as higher staff costs. As a percentage of revenues, selling and marketing expenses were 10% for the fourth quarter of 2015, broadly stable compared to the fourth quarter of 2014. General and administrative expenses. General and administrative expenses increased by 20% to RMB4,766 million for the fourth quarter of 2015 on a year-on-year basis. The increase was primarily driven by greater research and development expenses as well as staff costs. As a percentage of revenues, general and administrative expenses decreased to 16% for the fourth quarter of 2015 from 19% for the fourth quarter of 2014. Finance costs, net. Finance costs, net increased by 33% to RMB363 million for the fourth quarter of 2015 on a year-on-year basis. The increase mainly reflected higher interest expense driven by higher amount of indebtedness. 00 (11,014) (2,042) 15,580 Profit for the period 7,198 7,584 Attributable to: Equity holders of the Company Non-controlling interests 7,164 7,445 34 139 7,198 7,584 Non-GAAP profit attributable to equity holders of the Company 8,953 8,280 199 19 Annual Report 2015 00 (1,564) (1,998) Income tax expense 9,148 649 559 Other gains, net 249 614 Selling and marketing expenses (3,024) General and administrative expenses (4,766) 17,780 (4,380) 10,888 10,331 Finance costs, net (363) (481) Share of losses of associates and joint ventures (1,329) (702) Profit before income tax Operating profit 9,196 30,441 (RMB in millions) (RMB in millions, unless specified) 28,422 35% 20,619 33% 8,941 4,660 56% 4,268 revenues 90% 76% 41,631 30,873 Cost of revenues for "Others" business segment include cost of merchandise sold of principal eCommerce transactions and other eCommerce costs of revenue since the first quarter of 2015. Comparative figures have been reclassified to conform with the new presentation. Cost of revenues for our VAS business increased by 38% to RMB28,422 million for the year ended 31 December 2015 on a year-on-year basis. The increase mainly reflected: (1) greater sharing and content costs (especially for licensed smart phone games) and channel costs; (2) the impact of the aforementioned adoption of gross revenue recognition; and (3) higher bandwidth and server custody fees. If gross revenue recognition for smart phone games had been adopted for the year ended 31 December of 2014, cost of revenues for our VAS business would have increased by 27%. 00 13 Annual Report 2015 Management Discussion and Analysis 5,594 Amount revenues Amount 78,932 100% Note: (1) (2) We recognise revenues from smart phone games we publish exclusively on a gross basis from the fourth quarter of 2014 onward, primarily to reflect changes in our co-operation models that qualify us the principal, rather than agent, for certain licensed titles. Correspondingly, we record revenue sharing with third-party developers and channel costs of these titles in costs of revenues, instead of treating them as contra-revenue items. Net versus gross revenue recognition does not impact the Group's profits. In light of the reduction in size of our eCommerce business, we include eCommerce in the "Others" business segment in our financial statements from the first quarter of 2015 onwards. Comparative figures have been reclassified to conform to the new presentation. Revenues from our VAS business increased by 27% to RMB80,669 million for the year ended 31 December 2015 on a year-on-year basis. Online games revenues increased by 26% to RMB56,587 million. The increase primarily reflected growth in revenues from smart phone games, mainly driven by our diversified game portfolio and, to a lesser extent, the impact of the aforementioned adoption of gross revenue recognition. Revenues from PC client games also contributed to the increase, primarily driven by our key titles and new games launched in 2015. Social networks revenues grew by 30% to RMB24,082 million. The increase mainly reflected higher subscription revenues from digital content subscription services and QQ Membership, as well as revenue growth from virtual item sales. If gross revenue recognition for smart phone games had been adopted for the year ended 31 December 2014, revenues from our VAS business would have increased by 24%, of which online games revenues would have increased by 23% and social networks revenues would have increased by 27% for the year ended 31 December 2015. Tencent Holdings Limited 12 Management Discussion and Analysis Revenues from our online advertising business increased by 110% to RMB17,468 million for the year ended 31 December 2015 on a year-on-year basis. Performance-based advertising revenues grew by 172% to RMB8,693 million, mainly driven by revenue growth from Mobile Qzone, the full year impact of advertising revenues from Weixin Official Accounts, as well as contributions from newly launched advertising services on Weixin Moments. Brand display advertising revenues increased by 72% to RMB8,775 million, primarily driven by higher revenues from our mobile media platforms such as Tencent Video and Tencent News, which benefited from more traffic. Cost of revenues. Cost of revenues increased by 35% to RMB41,631 million for the year ended 31 December 2015 on a year- on-year basis. The increase primarily reflected greater sharing and content costs, channel costs, as well as bank handling fees on C2C money transfers, partially offset by a decline in cost of merchandise sold due to decreased revenues from principal eCommerce transactions. As a percentage of revenues, cost of revenues increased to 40% for the year ended 31 December 2015 from 39% for the year ended 31 December 2014. The following table sets forth our cost of revenues by line of business for the years ended 31 December 2015 and 2014: VAS Online advertising Others* Total cost of revenues Year ended 31 December 2015 2014 % of segment % of segment Cost of revenues for our online advertising business increased by 92% to RMB8,941 million for the year ended 31 December 2015 on a year-on-year basis. The increase primarily reflected greater traffic acquisition costs, investment in video content, as well as commissions payable to advertising agencies. Cost of revenues for our other businesses decreased by 24% to RMB4,268 million for the year ended 31 December 2015 on a year-on-year basis. The decrease was mainly driven by a decline in cost of merchandise sold due to lower revenues from principal eCommerce transactions, partly offset by greater bank handling fees on C2C money transfers. Other gains, net. Other gains, net decreased by 32% to RMB1,886 million for the year ended 31 December 2015 on a year- on-year basis. The decrease mainly reflected a decline in net disposal/deemed disposal gains arising from certain investee companies, partly offset by fair value gains on options we own in an investee company, which we recognised in the fourth quarter of 2015. Selling and marketing expenses. Selling and marketing expenses increased by 3% to RMB7,993 million for the year ended 31 December 2015 on a year-on-year basis. The increase mainly reflected greater staff costs, partly offset by lower fulfillment expenses due to a decrease in revenues from principal eCommerce transactions. Promotion and advertising expenses were broadly stable, primarily reflecting higher marketing spending on products and platforms such as online games, online literature and mobile utilities, largely offset by reduced subsidies to Weixin Pay users for ride-hailing and decreased marketing expenses for WeChat. As a percentage of revenues, selling and marketing expenses decreased to 8% for the year ended 31 December 2015 from 10% for the year ended 31 December 2014. General and administrative expenses. General and administrative expenses increased by 19% to RMB16,825 million for the year ended 31 December 2015 on a year-on-year basis. The increase was primarily driven by greater research and development expenses as well as staff costs. As a percentage of revenues, general and administrative expenses decreased to 16% for the year ended 31 December 2015 from 18% for the year ended 31 December 2014. Other gains, net 249 343 Selling and marketing expenses (3,024) (2,063) General and administrative expenses (4,766) (3,975) Operating profit 10,888 7,394 Finance costs, net (363) (273) Share of losses of associates and joint ventures (1,329) (275) Profit before income tax 9,196 6,846 443 100% 649 17,780 Finance costs, net. Finance costs, net increased by 37% to RMB1,618 million for the year ended 31 December 2015 on a year-on-year basis. The increase mainly reflected greater interest expense due to higher amount of indebtedness. Income tax expense. Income tax expense increased by 39% to RMB7, 108 million for the year ended 31 December 2015 on a year-on-year basis. The increase primarily reflected higher profit before income tax, partially offset by a decrease in withholding taxes. Profit attributable to equity holders of the Company. Profit attributable to equity holders of the Company increased by 21% to RMB28,806 million for the year ended 31 December 2015 on a year-on-year basis. Non-GAAP profit attributable to equity holders of the Company increased by 31% to RMB32,410 million for the year ended 31 December 2015 on a year-on-year basis. Tencent Holdings Limited 14 Management Discussion and Analysis FOURTH QUARTER OF 2015 COMPARED TO FOURTH QUARTER OF 2014 Unaudited Three months ended 31 December 31 December 2015 2014 (RMB in millions) Revenues Cost of revenues Gross profit Interest income 30,441 20,978 (12,661) (8,332) 12,646 Income tax expense 102,863 9% 2,327 1,676 Other gains, net 1,886 2,759 Selling and marketing expenses (7,993) (7,797) General and administrative expenses 48,059 (16,825) Operating profit 40,627 30,542 Finance costs, net (1,618) (1,182) Share of losses of associates and joint ventures (2,793) (347) (14,155) 61,232 (30,873) (41,631) Chairman's Statement DIVIDEND The Board has recommended the payment of a final dividend of HKD0.47 per share (2014: HKD0.36 per share) for the year ended 31 December 2015, subject to the approval of the shareholders at the 2016 AGM. Such proposed dividend will be payable on 2 June 2016 to the shareholders whose names appear on the register of members of the Company on 25 May 2016. APPRECIATION On behalf of the Board, I would like to express our sincere gratitude to our hard-working employees and management team to carry out the Group's strategy with outstanding professionalism, integrity and dedication. I would also like to thank all our shareholders and stakeholders for their continued trust and confidence. We will strive to continue to enhance people's quality of life through products and services provided by us and our partners. Ma Huateng Chairman Hong Kong, 17 March 2016 Tencent Holdings Limited 10 10 Management Discussion and Analysis YEAR ENDED 31 DECEMBER 2015 COMPARED TO YEAR ENDED 31 DECEMBER 2014 Year ended 31 December 2015 2014 Revenues Cost of revenues Gross profit Interest income 102,863 78,932 Profit before income tax 36,216 29,013 Income tax expense % of total % of total Amount revenues Amount revenues (RMB in millions, unless specified) VAS(1) 80,669 78% 63,310 80% Online advertising 17,468 17% 8,308 11% Others (2) 4,726 5% 7,314 2014 Total revenues 2015 Revenues. Revenues increased by 30% to RMB102.9 billion for the year ended 31 December 2015 on a year-on-year basis. Excluding the eCommerce business, revenues increased by 38% to RMB102.2 billion. The following table sets forth our revenues by line of business for the years ended 31 December 2015 and 2014: (7,108) (5,125) Profit for the year 29,108 23,888 Attributable to: Equity holders of the Company Non-controlling interests Non-GAAP profit attributable to equity holders of the Company* 28,806 302 23,810 78 29,108 23,888 32,410 24,737 In 2015, we have included relevant non-GAAP adjustments for our material associates in our non-GAAP adjustments. We adopted the new presentation in order to more clearly illustrate our non-GAAP financial measures, and to be more consistent with what we believe to be industry practice. Comparative figures have been adjusted to conform with the new presentation. 00 11 Annual Report 2015 Management Discussion and Analysis Year ended 31 December (1,998) 51% Profit for the period Online advertising Others* VAS Cost of revenues. Cost of revenues increased by 52% year-on-year to RMB12,661 million for the fourth quarter of 2015. The increase mainly reflected greater sharing and content costs, channel costs, and bank handling fees on C2C money transfers. As a percentage of revenues, cost of revenues increased to 42% for the fourth quarter of 2015 from 40% for the fourth quarter of 2014. The following table sets forth our cost of revenues by line of business for the fourth quarter of 2015 and the fourth quarter of 2014: Management Discussion and Analysis 16 Tencent Holdings Limited Revenues from our online advertising business increased by 118% year-on-year to RMB5,733 million for the fourth quarter of 2015. Performance-based advertising revenues increased by 157% to RMB2,916 million, mainly reflecting revenue growth from Mobile Qzone and Weixin Official Accounts, as well as contributions from newly launched advertising services on Weixin Moments. Brand display advertising revenues grew by 89% to RMB2,817 million, primarily reflecting higher contributions from our mobile media platforms such as Tencent Video and Tencent News. Revenues from our VAS business increased by 35% year-on-year to RMB23,068 million for the fourth quarter of 2015. Online games revenues grew by 33% to RMB15,971 million. The increase was primarily driven by revenue growth from smart phone games, mainly due to our expanded game portfolio, as well as higher revenues from PC client games, primarily due to our key titles and new games launched in 2015. Social networks revenues increased by 37% to RMB7,097 million. The increase was mainly driven by growth in subscription revenues from digital content subscription services and QQ Membership, as well as higher revenues from virtual item sales. In light of the reduction in size of our eCommerce business, we include eCommerce in the "Others" business segment in our financial statements from the first quarter of 2015 onwards. Comparative figures have been reclassified to conform with the new presentation. 100% 20,978 100% 6% 1,214 5% 1,640 12% Total cost of revenues 2,627 Unaudited Three months ended 31 December 2014 (892) 90% 1,484 60% 1,577 49% 2,794 36% 6,168 36% 8,383 (RMB in millions, unless specified) Amount revenues Amount % of segment % of segment 31 December 2015 19% revenues 82% 00 In 2015, we have included relevant non-GAAP adjustments for our material associates in our non-GAAP adjustments. We adopted the new presentation in order to more clearly illustrate our non-GAAP financial measures, and to be more consistent with what we believe to be industry practice. Comparative figures have been adjusted to conform with the new presentation. 6,981 8,953 5,954 7,198 94 34 5,860 * Non-GAAP profit attributable to equity holders of the Company* Non-controlling interests Equity holders of the Company Attributable to: 5,954 5,733 7,198 15 Annual Report 2015 7,164 Revenues. Revenues increased by 45% to RMB30,441 million for the fourth quarter of 2015 on a year-on-year basis. Excluding the eCommerce business, revenues increased by 47% to RMB30,242 million. The following table sets forth our revenues by line of business for the fourth quarter of 2015 and the fourth quarter of 2014: 76% 17,137 Management Discussion and Analysis 23,068 (RMB in millions, unless specified) revenues Amount Amount % of total % of total revenues 31 December 2015 Unaudited Three months ended Total revenues Others* Online advertising 31 December 2014 VAS the shares of the Company awarded under the Share Award Schemes Beijing BIZCOM Technology Company Limited Beijing Starsinhand Technology Company Limited the board of directors of the Company the corporate governance code provisions set out in Appendix 14 to the Listing Rules corporate income tax customer-to-customer (or person-to-person) Tencent Holdings Limited, a limited liability company organised and existing under the laws of the Cayman Islands and the shares of which are listed on the Stock Exchange PricewaterhouseCoopers, the auditor of the Company Tencent Holdings Limited No consideration provided to third parties for making available directors' services subsisted at the end of the year or at any time during the year. 196 the audit committee of the Company (b) Directors' termination benefits 13 November 2013, being the date on which the Company adopted the 2013 Share Award Scheme 13 December 2007, being the date on which the Company adopted the 2007 Share Award Scheme the bank account opened in the name of the trust pursuant to Trust Deed II, managed by the Trustee, and operated solely for the purposes of operating the 2013 Share Award Scheme, which is held on trust for the benefit of Selected Participants and can be funded by the Company or any of its subsidiaries the bank account opened in the name of the Company to be operated solely for the purposes of operating the 2007 Share Award Scheme and the funds thereof to be held on trust by the Company for the Selected Participants the annual general meeting of the Company to be held on 18 May 2016 or any adjournment thereof (c) Consideration provided to third parties for making available directors' services No director's termination benefit subsisted at the end of the year or at any time during the year. No director received any emolument from the Group as an inducement to join or leave the Group or compensation for loss of office. No director waived or has agreed to waive any emoluments during the years ended 31 December 2015 and 2014. During the year ended 31 December 2015, no share option was granted to any director of the Company, and 75,000 awarded shares were granted to three independent non-executive directors of the Company (2014: 1,000,000 share options (before the effect of the Share Subdivision) were granted to an executive director of the Company, Mr Lau Chi Ping, Martin, and 25,000 awarded shares (before the effect of the Share Subdivision) were granted to three independent non-executive directors of the Company). (iii) Definition For the year ended 31 December 2015 (ii) the articles of association of the Company Term "Internet Plus Holdings" "Corporate Governance Committee" Generally Accepted Accounting Principles Other benefits include leave pay, insurance premium and club membership. earnings per share a person who is eligible to participate in the respective Share Award Schemes earnings before interest, tax, depreciation and amortisation Tencent Cyber (Tianjin) Company Limited the Internal Control Integrated Framework issued by the Committee of Sponsoring Organisations the corporate governance committee of the Company the website of the Company at www.tencent.com Definition "Investment Committee" "IM" "IFRS" "Company Website" "IC" “Hong Kong” "HKD" "HBO" "Hainan Network" "Guangzhou Yunxun" "Group" "Grant Date" "GAAP" "EPS" "Eligible Person" "EBITDA" "Cyber Tianjin❞ "COSO Framework" "IA" (i) Zhang Zhidong (a) Directors' and the chief executive's emoluments (Cont'd) 18 27,566 18 16 56 16,062 in relation to any Awarded Share, the date on which the Awarded Share is, was or is to be granted 75 27,473 Ma Huateng (CEO) (Note (i)) RMB'000 RMB'000 Total money value of other benefits expenses RMB'000 RMB'000 RMB'000 RMB'000 Estimated Share-based compensation Contributions to pension plans benefits in kind Fees Name of director Salaries, bonuses, allowances and Certain of the comparative information of directors' emoluments for the year ended 31 December 2014 previously disclosed in accordance with the predecessor Companies Ordinance have been restated in order to comply with the new scope and requirements by the Hong Kong Companies Ordinance (Cap.622). 16,136 Lau Chi Ping Martin 1,101 15,196 44 BENEFITS AND INTERESTS OF DIRECTORS Notes to the Consolidated Financial Statements 194 Tencent Holdings Limited 121,111 54 59,398 131 58,731 2,797 Charles St Leger Searle (Koos) Bekker Jacobus Petrus Note: 1,112 434 Li Dong Sheng 2,227 1,675 552 lan Charles Stone 2,491 1,781 710 lain Ferguson Bruce 71,579 18 55,264 678 the Company and its subsidiaries "Adoption Date I" Hainan Tencent Network information Technology Company Limited "Reference Date" "Pre-IPO Option Scheme" "Post-IPO Option Scheme I" "Post-IPO Option Scheme II" "Post-IPO Option Scheme III" "PRC" or "China" "PCU" "PC" "Paramount" "020" "Nomination Committee' "SKT CFC" "Sony Music" "Stock Exchange" "TCS CFC" "TCS Co-operation Committee" "Tencent Beijing" "Tencent Charity Funds" "Tencent Chengdu" "Tencent Computer" Definition the lawful currency of the PRC any Eligible Persons selected by the Board to participate in the respective Share Award Schemes the Securities and Futures Ordinance (Cap 571 of the Laws of Hong Kong) as amended, supplemented or otherwise modified from time to time the share award scheme adopted by the Company on 13 December 2007, as amended, and the share award scheme adopted by the Company on 13 November 2013, as amended with effect from 15 May 2014, each existing issued and unissued share of HKD0.0001 each in the share capital of the Company was subdivided into five subdivided shares of HKD0.00002 each, after passing of an ordinary resolution at the annual general meeting of the Company held on 14 May 2014 and granting by the Stock Exchange of the listing of, and permission to deal in, the subdivided shares Shenzhen Shiji Kaixuan Technology Company Limited the co-operation framework contract dated 28 February 2004 entered into between Cyber Tianjin and Shiji Kaixuan Sony Music Entertainment The Stock Exchange of Hong Kong Limited the co-operation framework contract dated 28 February 2004 entered into between Tencent Technology and Tencent Computer the co-operation committee established under the TCS CFC Tencent Technology (Beijing) Company Limited Definition charity funds established by the Group intellectual property the Rules Governing the Listing of Securities on the Stock Exchange For the year ended 31 December 2014 (Restated): "Shiji Kaixuan" "Share Subdivision" "Share Award Schemes" "SFO" "Selected Participant(s)" "RMB" Term Definition 198 Tencent Holdings Limited the remuneration committee of the Company "Remuneration Committee" in respect to a Selected Participant, the date of final approval by the Board of the total number of shares of the Company to be awarded to the relevant Selected Participant on a single occasion pursuant to the 2007 Share Award Scheme the Pre-IPO Share Option Scheme adopted by the Company on 27 July 2001 the Post-IPO Share Option Scheme adopted by the Company on 24 March 2004 the Post-IPO Share Option Scheme adopted by the Company on 16 May 2007 the Post-IPO Share Option Scheme adopted by the Company on 13 May 2009 the People's Republic of China peak concurrent user accounts personal computer Paramount Pictures, Inc. online-to-offline, or offline-to-online the nomination committee of the Company the National Basketball Association NASDAQ Global Select Market the Model Code for Securities Transactions by Directors of Listed Issuers set out in Appendix 10 to the Listing Rules MIH TC Holdings Limited monthly active user accounts mergers and acquisitions initial public offering Tencent Technology (Chengdu) Company Limited Shenzhen Tencent Computer Systems Company Limited "Tencent Information Chongqing" No significant transactions, arrangements and contracts in relation to the group's business to which the Company was a party and in which a director of the Company had a material interest, whether directly or indirectly, subsisted at the end of the year or at any time during the year. (e) Directors' material interests in transactions, arrangements or contracts No loans, quasi-loans and other dealings in favour of directors, controlled bodies corporate by and connected entities with such directors subsisted at the end of the year or at any time during the year. (d) Information about loans, quasi-loans and other dealings in favour of directors, controlled bodies corporate by and connected entities with such directors "NBA" "NASDAQ" "Model Code" "MIH TC" "MAU" "M&A" "Listing Rules' "IPO" "IP" Term Definition Annual Report 2015 197 00 the investment committee of the Company Internet Plus Holdings Ltd., a limited liability company incorporated under the laws of the Cayman Islands Instant messaging International Financial Reporting Standards internal control department of the Company internal audit department of the Company the Hong Kong Special Administrative Region, the PRC the lawful currency of Hong Kong Home Box Office, Inc. 00 195 Annual Report 2015 Definition "Tencent Information Shanghai" Tencent Information Technology (Chongqing) Company Limited Tencent Information Technology (Shanghai) Company Limited 00 199 Annual Report 2015 the share award scheme adopted by the Company on Adoption Date II, as amended the share award scheme adopted by the Company on Adoption Date I, as amended Definition "Company" "CIT" "CG Code" "C2C" Guangzhou Yunxun Technology Company Limited "Board" "Beijing BIZCOM" "Awarded Shares' "Auditor" "Audit Committee" "Articles of Association" "Adoption Date II" "Account II" "Account I" "2016 AGM" "2013 Share Award Scheme" "2007 Share Award Scheme' Term In this annual report, unless the context otherwise requires, the following expressions shall have the following meanings: "Beijing Starsinhand" (a) Directors' and the chief executive's emoluments (Cont'd) 32,725 For the year ended 31 December 2015 100% USD30,000,000 Established in the PRC, Tencent Cyber (Shenzhen) Company Limited by the Group (%) Principal activities capital and nature of legal entity Name Proportion of equity interest held issued/paid-in 44 BENEFITS AND INTERESTS OF DIRECTORS Particulars of 43 SUBSIDIARIES AND CONTROLLED STRUCTURED ENTITIES (Cont'd) For the year ended 31 December 2015 Notes to the Consolidated Financial Statements 190 Tencent Holdings Limited value-added services (note a) Provision of mobile and telecommunications 100% RMB10,000,000 Established in the PRC, limited liability company Beijing Starsinhand Technology Company Limited Provision of mobile and telecommunications value-added services Development of computer software 100% wholly foreign owned enterprise Established in the PRC, wholly foreign owned enterprise China Reading Limited Development and operation of online games 100% USD1,239 Established in the United States, limited liability company Riot Games, Inc. integration services Provision of information system 100% RMB120,000,000 Established in the PRC, limited liability company Tencent Cloud Computing (Beijing) Company Limited Development of computer software and provision of Internet information services 100% USD30,000,000 Established in the PRC, wholly foreign owned enterprise Tencent Technology (Wuhan) Company Limited Development of computer software and provision of information technology services 100% USD120,000,000 Established in the PRC, wholly foreign owned enterprise Tencent Technology (Chengdu) Company Limited Development of computer software and provision of Internet information services 100% USD5,000,000 Tencent Technology (Shanghai) Company Limited Established in the Cayman Islands, limited liability company RMB16,500,000 Beijing BIZCOM Technology Company Limited and provision of information technology services wholly foreign owned enterprise Development of computer software 100% USD2,000,000 Established in the PRC, Tencent Technology eCommerce transactions business Internet advertisement services and telecommunications value-added services, 100% (Note (a)) Provision of Internet and mobile and RMB65,000,000 Established in the PRC, limited liability company Tencent Computer by the Group (%) Principal activities capital and nature of legal entity Name Proportion of equity interest held Particulars of issued/paid-in Place of establishment The following is a list of principal subsidiaries of the Company as at 31 December 2015: 43 SUBSIDIARIES AND CONTROLLED STRUCTURED ENTITIES For the year ended 31 December 2015 Notes to the Consolidated Financial Statements Shenzhen Shiji Kaixuan Technology Company Limited Established in the PRC, limited liability company Established in the PRC, limited liability company 100% (Note (a)) Provision of Internet advertisement services value-added services Provision of mobile and telecommunications 100% RMB10,290,000 Established in the PRC, limited liability company Nanjing Wang Dian Technology Limited information technology services software and provision of Development and sale of computer 100% USD1,000,000 Established in the PRC, wholly foreign owned enterprise Tencent Technology (Beijing) Company Limited Asset management 100% USD100 Established in BVI, limited liability company Tencent Asset Management Limited technology services and provision of information Development of computer software 100% USD90,000,000 Established in the PRC, wholly foreign owned enterprise Tencent Cyber (Tianjin) Company Limited RMB11,000,000 USD66,683 Place of establishment 1,267 Structured entity As mentioned in Note (a) above, the Company has consolidated the operating entities within the Group without any legal interests. In addition, due to the implementation of the share award schemes of the Group mentioned in Note 20 (b), the Company has also set up a structured entity ("Share Scheme Trust”), and its particulars are as follows: Consolidation of structured entities (e) As at 31 December 2015, cash and cash equivalents, term deposits and restricted cash of the Group, amounting to RMB105,151 million are held in Mainland China and are subject to local exchange control and other financial and treasury regulations. The local exchange control and other financial and treasury regulations provide for restrictions on payment of dividends, share repurchase and offshore investments, other than through normal activities. In addition, the restricted cash, mainly arising from the prepayments received from users via online/mobile platforms operated by the Group, of a subsidiary of the Group's structured entity is subject to certain treasury regulations in the PRC. expenses RMB'000 Significant restrictions (d) Share Scheme Trust All subsidiaries' undertakings are included in the consolidation. The proportion of the voting rights in the subsidiary undertakings held directly by the parent company do not differ from its proportion of ordinary shares held. The parent company further does not have any shareholdings in the preference shares of subsidiary's undertakings included in the Group. Note: (Cont'd) 43 SUBSIDIARIES AND CONTROLLED STRUCTURED ENTITIES (Cont'd) For the year ended 31 December 2015 Notes to the Consolidated Financial Statements Annual Report 2015 191 00 The directors of the Company considered that any non-wholly owned subsidiaries that has non-controlling interests are not significant to the Group, therefore, no summarised financial information of these non-wholly owned subsidiaries is presented separately. (c) Principal activities Administering and holding the Company's shares acquired for share award schemes which are set up for the benefits of eligible persons of the Schemes As the Company has the power to govern the financial and operating policies of the Share Scheme Trust and can derive benefits from the contributions of the eligible persons who are awarded with the shares by the schemes, the directors of the Company consider that it is appropriate to consolidate the Share Scheme Trust. RMB'000 pension plans benefits in kind Fees Name of director money value of Estimated Share-based compensation Contributions to Salaries, bonuses, allowances and For the year ended 31 December 2015 For the year ended 31 December 2015: The remuneration of every director and the CEO is set out below: (a) Directors' and the chief executive's emoluments 44 BENEFITS AND INTERESTS OF DIRECTORS Notes to the Consolidated Financial Statements 192 Tencent Holdings Limited For the year ended 31 December 2015, the Company contributed approximately RMB652 million (2014: RMB529 million) to the Share Scheme Trust for financing its acquisition of the Company's shares. As described in Note 1, the Company does not have legal ownership in equity of these subsidiaries. Nevertheless, under certain contractual agreements entered into with the registered owners of these subsidiaries, the Company and its other legally owned subsidiaries control these companies by way of controlling the voting rights, governing their financial and operating policies, appointing or removing the majority of the members of their controlling authorities, and casting the majority of votes at meetings of such authorities. In addition, such contractual agreements also transfer the risks and rewards of these companies to the Company and/or its other legally owned subsidiaries. As a result, they are presented as controlled structured entities of the Company. (b) (a) Note: 2,717 3,387 Li Dong Sheng 545 1,812 Jacobus Petrus (Koos) Bekker Charles St Leger Searle 670 3,222 84 60,604 38 116,613 00 193 Annual Report 2015 Notes to the Consolidated Financial Statements 52,665 RMB'000 lan Charles Stone 2,778 Provision of online literature services 66.44% other benefits Total RMB'000 RMB'000 (Note (i)) Ma Huateng (CEO) 84 3,616 19 Lau Chi Ping Martin 1,169 19,940 53,842 19 74,970 lain Ferguson Bruce 838 32,828 RMB'000 Tencent Technology (Wuhan) Company Limited Tencent Technology (Shenzhen) Company Limited Facsimile: 852-25201148 a trust deed entered into between the Company and the Trustee (as restated, supplemented and amended from time to time) in respect of the appointment of the Trustee for the administration of the 2013 Share Award Scheme Definition Term "Tencent Information Shenzhen" "Tencent Shanghai" "Tencent Technology" Definition Tencent Information Technology (Shenzhen) Company Limited "Tencent Wuhan' "Trust Deed II" "Trustee" "United States" "USD" "VAS" "Wang Dian" "Warner Music" "WFOES" an independent trustee appointed by the Company for managing the Share Award Schemes the United States of America Tencent Technology (Shanghai) Company Limited value-added services Telephone: 852-21795122 Wanchai, Hong Kong No.1 Queen's Road East 29/F., Three Pacific Place Tencent Holdings Limited Hong Kong Office Facsimile: 86-755-86013399 Telephone: 86-755-86013388 the lawful currency of the United States Zipcode : 518057 Tencent Group Head Office Website: www.tencent.com Tencent 腾讯 200 Tencent Holdings Limited Tencent Technology, Cyber Tianjin, Tencent Beijing, Tencent Information Shenzhen, Tencent Chengdu, Tencent Information Chongqing, Tencent Information Shanghai, Tencent Shanghai, Tencent Wuhan and Hainan Network Warner Music Group Corp., a limited liability company incorporated under the laws of the State of Delaware, United States Nanjing Wang Dian Technology Company Limited Tencent Building, Kejizhongyi Avenue, Hi-tech Park Nanshan District, Shenzhen, the PRC 8,424 11,569 12,831 32,710 763 Adjusted EBITDA 495 Non-GAAP Financial Measures 791 45,805 To supplement the consolidated results of the Group prepared in accordance with IFRS, certain non-GAAP financial measures, including non-GAAP operating profit, non-GAAP operating margin, non-GAAP profit for the period, non-GAAP net margin, non-GAAP profit attributable to equity holders of the Company, non-GAAP basic EPS and non-GAAP diluted EPS, have been presented in this annual report. These unaudited non-GAAP financial measures should be considered in addition to, not as a substitute for, measures of the Company's financial performance prepared in accordance with IFRS. In addition, these non- GAAP financial measures may be defined differently from similar terms used by other companies. Net (gains)/ Tencent Holdings Limited 22 22 Management Discussion and Analysis The following tables set forth the reconciliations of the Company's non-GAAP financial measures for the years ended 31 December 2015 and 2014, the fourth quarters of 2015 and 2014, and the third quarter of 2015 to the nearest measures prepared in accordance with IFRS: Year ended 31 December 2015 Adjustments Equity-settled Cash-settled 1,802 The Company's management believes that the non-GAAP financial measures provide investors with useful supplementary information to assess the performance of the Group's core operations by excluding certain non-cash items and certain impact of M&A transactions. In addition, non-GAAP adjustments include relevant non-GAAP adjustments for the Group's material associates based on available published financials of the relevant material associates, or estimates made by the Company's management based on available information, certain expectations, assumptions and premises. 2,756 3,159 Equity-settled share-based (249) (614) (343) Depreciation of fixed assets and investment properties losses from 2,993 826 781 766 Amortisation of intangible assets 3,476 1,808 1,224 867 555 EBITDA 43,049 30,908 12,040 10,806 7,929 compensation Amortisation 2,373 investee Profit attributable to equity holders 28,806 3,221 81 (4,016) 1,149 3,169 32,410 EPS (RMB per share) - basic 32,852 3.097 3.055 Operating margin 39% Net margin 28% 3.485 3.437 41% 32% Year ended 31 December 2014 - diluted 3,185 1,186 (4,016) of intangible Impairment As reported compensation compensation assets provision Non-GAAP* (a) (b) (c) (RMB in millions, unless specified) Operating profit 40,627 2,756 85 (4,275) 198 (2,759) 41,764 Profit for the year 29,108 3,304 85 share-based share-based (1,886) companies (443) (RMB in millions, unless specified) EBITDA (a) 43,049 30,908 12,040 10,806 7,929 Adjusted EBITDA (a) 45,805 32,710 2014 12,831 8,424 Adjusted EBITDA margin (b) 45% 41% 42% 44% 40% Interest expense 1,510 866 11,569 2015 2015 2014 Adjustments Net (gains)/ Management Discussion and Analysis Revenues. Revenues increased by 14% to RMB30,441 million for the fourth quarter of 2015 on a quarter-on-quarter basis. Revenues from our VAS business increased by 12% to RMB23,068 million for the fourth quarter of 2015 on a quarter- on-quarter basis. Online game revenues increased by 11% to RMB15,971 million. The increase was primarily driven by new smart phone games such as The Legend of MIR 2 and Honor of Kings launched in the third quarter of 2015, as well as Six Dragons Hegemony 3D launched in the fourth quarter of 2015. PC client games also registered revenue growth. Social networks revenues increased by 14% to RMB7,097 million. The increase was mainly driven by revenue growth from virtual item sales, as well as from subscription services due to enhanced digital content and mobile privileges. Revenues from our online advertising business increased by 16% to RMB5,733 million for the fourth quarter of 2015 on a quarter-on-quarter basis. Performance-based advertising revenues increased by 22% to RMB2,916 million quarter- on-quarter, primarily driven by higher revenues from social advertising on mobile devices. Brand display advertising revenues increased by 10% to RMB2,817 million quarter-on-quarter, as revenue growth from Tencent News more than offset a slight revenue decline from Tencent Video. Cost of revenues. Cost of revenues increased by 15% to RMB12,661 million for the fourth quarter of 2015 on a quarter-on- quarter basis. The increase primarily reflected greater sharing and content costs, channel costs, and bank handling fees on C2C money transfers. As a percentage of revenues, cost of revenues increased to 42% for the fourth quarter of 2015 from 41% for the third quarter of 2015. Cost of revenues for our VAS business increased by 14% to RMB8,383 million for the fourth quarter of 2015 on a quarter-on-quarter basis. The increase primarily reflected greater sharing and content costs (especially for licensed smart phone games) and channel costs. Cost of revenues for our online advertising business increased by 11% to RMB2,794 million for the fourth quarter of 2015 on a quarter-on-quarter basis. The increase mainly reflected greater investments in video content and traffic acquisition costs. Cost of revenues for our other businesses increased by 32% to RMB1,484 million for the fourth quarter of 2015 on a quarter-on-quarter basis. The increase was primarily driven by greater bank handling fees on C2C money transfers. Selling and marketing expenses. Selling and marketing expenses increased by 48% to RMB3,024 million for the fourth quarter of 2015 on a quarter-on-quarter basis. The increase primarily reflected seasonal marketing and promotion activities for our online games, mobile utilities, and online media products. General and administrative expenses. General and administrative expenses increased by 9% to RMB4,766 million for the fourth quarter of 2015 on a quarter-on-quarter basis. Staff costs as well as research and development expenses increased. Profit attributable to equity holders of the Company. Profit attributable to equity holders of the Company decreased by 4% to RMB7,164 million for the fourth quarter of 2015 on a quarter-on-quarter basis. Non-GAAP profit attributable to equity holders of the Company increased by 8% to RMB8,953 million for the fourth quarter of 2015 on a quarter-on-quarter basis. Tencent Holdings Limited 20 20 OTHER FINANCIAL INFORMATION Management Discussion and Analysis Unaudited Year ended Three months ended 31 December 31 December 30 September 31 December 2015 409 373 264 Net cash (c) Unaudited Three months ended 31 December 31 December 30 September 31 December 2015 2014 2015 2015 2014 (RMB in millions, unless specified) 40,627 30,542 10,888 10,331 7,394 Operating profit Adjustments: Interest income (2,327) (1,676) (649) (559) Year ended Other (gains)/losses, net The following table reconciles our operating profit to our EBITDA and Adjusted EBITDA for the periods presented: Annual Report 2015 19,114 22,758 19,114 21,239 22,758 Capital expenditures (d) 7,709 4,718 1,883 1,653 1,603 Note: (a) EBITDA consists of operating profit less interest income and other gains/losses, net, and plus depreciation of fixed assets and investment properties and amortisation of intangible assets. Adjusted EBITDA consists of EBITDA plus equity-settled share-based compensation expenses. (b) Adjusted EBITDA margin is calculated by dividing Adjusted EBITDA by revenues. (c) (d) Net cash represents period end balance and is calculated as cash and cash equivalents, term deposits, minus borrowings and notes payable. Capital expenditures consist of additions (excluding business combinations) to fixed assets, construction in progress, land use rights and intangible assets (excluding game and other content licenses). 21 00 21 Management Discussion and Analysis Equity-settled Cash-settled share-based 959 Amortisation Annual Report 2015 25 45 Impairment provision for associates, available-for-sale financial assets, and intangible assets arising from acquisitions (d) Amortisation of intangible assets resulting from acquisitions, net of related deferred tax (c) Net (gains)/losses on deemed disposals, disposals of investee companies and businesses, and fair value changes on options we own in investee companies 00 Including put options granted to employees of investee companies on their shares and shares to be issued under investee companies' share-based incentive plans which can be acquired by the Group, and other incentives (b) (a) Note: 34% 38% 0.744 0.752 28% In 2015, we have included relevant non-GAAP adjustments for our material associates in our non-GAAP adjustments. We adopted the new presentation in order to more clearly illustrate our non-GAAP financial measures, and to be more consistent with what we believe to be industry practice. Comparative figures have been adjusted to conform with the new presentation. 35% Management Discussion and Analysis Our net cash positions as at 31 December 2015 and 30 September 2015 are as follows: 75,364 84,443 28,650 41,005 46,714 43,438 (RMB in millions) 2015 Liquidity and Financial Resources 2015 31 December Unaudited Audited Net cash Notes payable Borrowings Term deposits Cash and cash equivalents 30 September 0.625 0.632 Net margin (1,153) 149 495 7,394 Operating profit (RMB in millions, unless specified) (c) Non-GAAP* 13 provision companies compensation compensation As reported Impairment of intangible investee share-based assets 1,170 8,068 Profit for the period Operating margin - diluted - basic EPS (RMB per share) 6,981 1,213 299 (1,157) 136 630 5,860 Profit attributable to equity holders 7,099 1,213 300 (1,154) 149 637 5,954 (24,351) share-based (13,995) (40,130) 2. 1. Note: 5,000,000 24 March 2010 Lau Chi Ping Martin Exercise period price HKD 3. Exercise As at Granted during the year 1 January 2015 Date of grant Name of director As at Number of share options Exercised As at 31 December 2015, there were a total of 10,000,000 (after the effect of the Share Subdivision) outstanding share options granted to the directors of the Company, details of which are as follows: during 31 December the year 2015 The Company has adopted four share option schemes, namely, the Pre-IPO Option Scheme, the Post-IPO Option Scheme I, the Post-IPO Option Scheme II and the Post-IPO Option Scheme III. No further options will be granted under the Pre-IPO Option Scheme and the Post-IPO Option Scheme I. 5,000,000 24 March 2015 to Annual Report 2015 29 29 00 No options were granted, exercised, cancelled or lapsed during the year. For options granted with exercisable date determined based on the grant date of options, the first 20% of the total options can be exercised 1 year after the grant date, and 20% each of the total options will become exercisable in each subsequent year. For options granted with exercisable date determined based on the grant date of options, the first 25% of the total options can be exercised 5 years after the grant date, and 25% each of the total options will become exercisable in each subsequent year. losses from 31.70 10,000,000 (Note 2) 24 March 2021 25 March 2015 to 114.52 - 5,000,000 5,000,000 25 March 2014 23 March 2020 (Note 1) Total: SHARE OPTION SCHEMES Directors' Report 28 As at 31 December 2015, the Company had distributable reserves amounting to RMB10,374 million (2014: RMB7,651 million). The Company may pay dividends out of share premium, retained earnings and any other reserves provided that immediately following the payment of such dividends the Company will be in a position to pay off its debts as they fall due in the ordinary course of business. RESERVES The directors have recommended the payment of a final dividend of HKDO.47 per share for the year ended 31 December 2015. The dividend is expected to be payable on 2 June 2016 to the shareholders whose names appear on the register of members of the Company on 25 May 2016. The total dividend for the year under review is HKDO.47 per share. The results of the Group for the year are set out in the consolidated statement of comprehensive income on page 87 of this annual report. RESULTS AND APPROPRIATIONS The analysis of the Group's revenues and contribution to results by business segments and the Group's revenues by geographical area of operations are set out in Note 5 to the consolidated financial statements. The principal activity of the Company is investment holding. The activities of the principal subsidiaries are set out in Note 43 to the consolidated financial statements. Details of the movements in the reserves of the Group and the Company during the year are set out in the consolidated statement of changes in equity on pages 88 to 89, Note 18, Note 19 and Note 42 to the consolidated financial statements respectively. PRINCIPAL ACTIVITIES Directors' Report 26 Tencent Holdings Limited For the fourth quarter of 2015, the Group had free cash flow of RMB16, 169 million. This was a result of net cash generated from operating activities of RMB18,191 million, offset by payments for capital expenditure of RMB2,022 million. As at 31 December 2015, RMB11,617 million of our financial resources (cash and cash equivalents and term deposits) were denominated in non-RMB currencies. As at 31 December 2015, the Group had net cash of RMB19,114 million, representing a 10% decline quarter-on-quarter mainly due to payments for investments in investee companies and licensed content, partially offset by free cash flow generated during the quarter. Fair value of our stakes in listed investee companies (both associates and available-for-sale financial assets) totalled RMB97,525 million as at 31 December 2015. 21,239 19,114 The directors have pleasure in presenting their report together with the audited financial statements for the year ended 31 December 2015. FIXED ASSETS Details of the movements in fixed assets of the Group during the year are set out in Note 6 to the consolidated financial statements. 00 88 Tencent Holdings Limited Neither the Company nor any of its subsidiaries has purchased, sold or redeemed any of the Company's shares during the year ended 31 December 2015. PURCHASE, SALE OR REDEMPTION OF THE COMPANY'S LISTED SECURITIES A summary of the condensed consolidated results and financial positions of the Group is set out on page 3 of this annual report. FINANCIAL SUMMARY The donation made by the Group in the year was RMB470 million to the Tencent Charity Funds. DONATION Particulars of the Group's borrowings and notes payable are set out in Note 24 and Note 25 to the consolidated financial statements respectively. BORROWINGS Particulars of the Company's principal subsidiaries as at 31 December 2015 are set out in Note 43 to the consolidated financial statements. SUBSIDIARIES Details of the movements in the share capital of the Company during the year are set out in Note 18 to the consolidated financial statements. SHARE CAPITAL Details of the business review of the Group and the proposed dividend for the year ended 31 December 2015 are set out under the "Chairman's Statement". BUSINESS REVIEW AND DIVIDEND Directors' Report Annual Report 2015 27 (40,978) Amortisation 10,000,000 Cash-settled of intangible investee share-based share-based Amortisation losses from Cash-settled Equity-settled Impairment Net (gains)/ Unaudited three months ended 31 December 2015 Management Discussion and Analysis Annual Report 2015 23 23 00 32% 39% Adjustments 2.644 As reported compensation 959 11,533 719 46 (929) 18 ១៖ 7,198 compensation Profit for the period 10,888 Operating profit (RMB in millions, unless specified) (c) Non-GAAP provision assets companies 791 2.680 30% Net margin 30,411 2,510 59 (5,197) 695 1,802 30,542 Operating profit Profit for the year (RMB in millions, unless specified) provision assets Impairment of intangible (a) As reported compensation compensation share-based losses from Non-GAAP* 23,888 2,184 695 39% Operating margin 2.545 - diluted 2.579 - basic EPS (RMB per share) 24,737 2,549 768 (5,179) 637 2,152 23,810 Profit attributable to equity holders 24,933 2,553 776 (5,163) 17 (995) investee companies (b) 1,525 375 267 (783) 17 7,445 Profit attributable to equity holders 8,450 375 8,280 275 18 981 7,584 Profit for the period 10,516 379 46 (1,020) (783) 17 EPS (RMB per share) 0.800 313 Net (gains)/ Equity-settled Unaudited three months ended 31 December 2014 Management Discussion and Analysis 24 24 Tencent Holdings Limited - basic 32% 0.881 0.890 29% Net margin 39% Operating margin 0.792 - diluted 40% 763 Adjustments Operating profit 0.961 24% Net margin 36% Operating margin 0.759 - diluted 0.769 0.949 - basic 8,953 1,525 304 (995) 16 939 Profit attributable to equity holders 10,331 EPS (RMB per share) 38% 7,164 Unaudited three months ended 30 September 2015 (RMB in millions, unless specified) 30% (b) (a) Non-GAAP provision assets Impairment of intangible 9,017 As reported compensation compensation share-based Amortisation losses from Cash-settled investee companies Equity-settled share-based Net (gains)/ Adjustments the year the year 2015 price (Note) USD 01 May 2012 4,672 11,832 74,609 4.351 01 Jun 2012 2,180,334 53,509 31,825 2,095,000 91,113 the year 15 December Date of grant 10,499 3,129 4.351 316,501 4.351 Tencent Holdings Limited 34 34 2015 Directors' Report Granted Exercised As at 1 January during during during Exercise As at Lapsed 444,081 95,843 881,525 16,536 33,003 831,986 8.157 18 Jun 2013 3,957,775 15,683 27,567 3,914,525 8.157 24 Apr 2014 3,630,667 20,489 388,645 3,221,533 25.060 15 May 2013 8.157 412,519 14,208 12,148 13,953 69,742 4.351 28 Sep 2012 653,802 20,237 60,236 11 Jun 2012 573,329 18 Dec 2012 2,015,419 50,013 65,320 1,900,086 4.893 05 Mar 2013 17,354 4.893 330,129 393,834 4.351 231,185 0.100 30 Oct 2009 185,209 185,209 0.100 03 Dec 2009 15,789 2,122 13,667 0.100 27 Jan 2010 200,697 28,388 172,309 0.100 26 Feb 2010 10,420 100,000 241,605 0.085 4,851 19 Jun 2014 4,851 0.082 23 Oct 2008 11,460 11,460 0.082 15 Jan 2009 145,721 120,627 25,094 0.082 13 Apr 2009 10,000 5,000 5,000 24 Sep 2009 100,000 0.100 24 Jun 2010 3.720 24 Oct 2011 792,469 15,146 618 776,705 4.066 01 Nov 2011 26,331 19,630 6,701 4.066 12 Jan 2012 645,939 3,800 30,975 611,164 1,119,719 15,020 21,188 1,155,927 77,000 316,834 0.984 22 Jul 2010 238,234 8,368 - 229,866 0.984 17 Apr 2012 17 Feb 2011 406,354 - 1,455,871 3.720 09 Mar 2011 27,500 27,500 3.720 29 Jun 2011 1,862,225 718,650 Option Scheme I 50,073 Option Scheme 4. Maximum entitlement of each participant The number of ordinary shares in respect of which options may be granted is not permitted to exceed 10% of the number of 1% of the issued share capital of the Company from time to time within any 12-month period up to the date of the latest grant ordinary shares issued and issuable under the scheme. 5. Option period All the options are exercisable in installments from the commencement of the relevant vesting period until 31 December 2011, but on the condition that the Company has been listed in a sizeable securities market. Details The Board may at their discretion 1% of the issued share capital of the Company from time to time within any 12-month period up to the date of the latest grant Post-IPO outstanding. No further option could be granted under the Post- IPO Option Scheme I. Post-IPO Option Scheme II The maximum number of shares in respect of which options may be granted under the Post-IPO Option Scheme II shall be 444,518,270 shares (after the effect of the Share Subdivision), 5% of the relevant class of securities of the Company in issue as at 16 May 2007. The maximum number of shares which may be issued upon exercise of all outstanding options granted and yet to be exercised under the Post-IPO Option Scheme II and any other share option schemes, including the Pre-IPO Option Scheme, the Post- IPO Option Scheme | and the Post-IPO Option Scheme III, must not in aggregate exceed 30% of the issued share capital of the Company from time to time (Note). Post-IPO Option Scheme III The maximum number of shares in respect of which options may be granted under the Post-IPO Option Scheme III shall be 180,093,330 shares (after the effect of the Share Subdivision), 2% of the relevant class of securities of the Company in issue as at 13 May 2009. The maximum number of shares which may be issued upon exercise of all outstanding options granted and yet to be exercised under the Post-IPO Option Scheme III and any other share option schemes, including the Pre-IPO Option Scheme, the Post- IPO Option Scheme | and the Post-IPO Option Scheme II, must not in aggregate exceed 30% of the issued share capital of the Company from time to time (Note). 00 37 Annual Report 2015 Directors' Report Pre-IPO Post-IPO Option Scheme I Post-IPO Option Scheme II 1% of the issued share capital of the Company from time to time within any 12-month period up to the date of the latest grant Option Scheme III determine the specific vesting and exercise days immediately preceding the date of grant; and (iii) the nominal value of the share. Post-IPO Option Scheme II Options granted must be accepted within 28 days of the date of grant, upon payment of HKD1 per grant. The exercise price must be at least the higher of: (i) the closing price of the securities as stated in the Stock Exchange's daily quotations sheet on the date of grant, which must be a business day; (ii) the average closing price of the securities as stated in the Stock Exchange's daily quotations sheets for the five business days immediately preceding the date of grant; and (iii) the nominal value of the share. Post-IPO Option Scheme III Options granted must be accepted within 28 days of the date of grant, upon payment of HKD1 per grant. The exercise price must be at least the higher of: (i) the closing price of the securities as stated in the Stock Exchange's daily quotations sheet on the date of grant, which must be a business day; (ii) the average closing price of the securities as stated in the Stock Exchange's daily quotations sheets for the five business days immediately preceding the date of grant; and (iii) the nominal value of the share. 00 39 Annual Report 2015 25 Sep 2008 five business Options granted must be accepted within 28 days of the date of grant, upon payment of HKD1 per grant. The exercise price must be at least the higher of: (i) the closing price of the securities as stated in the Stock Exchange's daily quotations sheet on the date of grant, which must be a business day; (ii) the average closing price of the securities as stated in the Stock Exchange's daily quotations sheets for the Option Scheme I Post-IPO periods. The option period is determined by the Board provided that the period during which the option may be exercised shall not be less than one year from the date of grant of the options. The option period is determined by the Board provided that it is not later than the last day of the 7-year period after the date of grant of option. There is no minimum period for which an option must be held before it can be exercised. The option period is determined by the Board provided that it is not later than the last day of the 10-year period after the date of grant of option. There is no minimum period for which an option must be held before it can be exercised. Tencent Holdings Limited 388 Pre-IPO As at 16 May 2007, options to subscribe for an aggregate of 60,413,683 shares were Details 6. Acceptance of offer Options granted must be accepted within 15 days of the date of grant, upon payment of RMB1 per grant. 7. Subscription price Price shall be determined by the Board. Directors' Report Option Scheme 1,750 Post-IPO of 72,386,370 shares were 66,068 28.380 26 May 2015 225,668 - 17,881 207,787 28.380 14 Sep 2015 632,970 - 28,395 604,575 36.780 265,013 2,762 262,251 36.780 Total: 66,068 22,301,949 27 Apr 2015 1,540,856 666,827 25.060 21 Aug 2014 447,800 47,289 400,511 25.850 04 Dec 2014 797,020 1,562 83,229 712,229 25.850 11 Mar 2015 1,641,172 2,187 98,129 28.380 2,830,891 960,783 1,031,000 participants employee, including executive directors of the Company Any employee, consultant or director of any company within the Group Any employee (whether full time or part time), executive or officer, director (including executive, non-executive and independent non- executive directors) of any member of the Group or any invested entity, which is any entity in which the Group holds an equity interest, and any consultant, adviser or agent of any member of the Board, who have contributed or will contribute to the growth and development of the Group or any invested entity Any senior executive or senior officer, director (including executive, non-executive and independent non- executive directors) of any member of the Group or any invested entity and any consultant, adviser or agent of any member of the Board, who have contributed or will contribute to the growth and development of the Group or any invested entity Tencent Holdings Limited 36 Directors' Report Pre-IPO Details Option Scheme 3. Maximum number of shares As at 7 June 2004, options to subscribe for an aggregate Any eligible Qualifying 2. To recognise the contribution that certain individuals have made to the Group, to attract the best available personnel and to promote the success of the Group's business 23,141,057 Note: Following the completion of the acquisition of the entire equity interests in Riot by a wholly-owned subsidiary of the Group on 15 December 2015, all outstanding share options under Riot's equity plans were cancelled. 00 35 Annual Report 2015 Directors' Report SUMMARY OF THE SHARE OPTION SCHEMES outstanding. No further option could be granted under the Pre-IPO Option Scheme. Pre-IPO Option Scheme 1. Purposes Post-IPO Option Scheme I Post-IPO Option Scheme II Post-IPO Option Scheme III Details USD 30 Oct 2015 281,250 3,092,375 05 Jul 2010 4 Jul 2017 (Note 1) 5 Jul 2011 to 26.08 137,250 144,000 05 Jul 2010 23 Mar 2017 (Note 5) 24 Mar 2014 to 31.70 366,667 133,333 500,000 24 Mar 2010 23 Mar 2017 (Note 3) 24 Mar 2012 to 18.06 10 Jul 2012 to 9 Jul 2016 (Note 4) 24 Nov 2009 1,250,000 -- - 1,250,000 1,196,250 29.32 23 Nov 2016 (Note 4) 24 Mar 2010 125,000 100,000 25,000 31.70 24 Nov 2012 to 95,625 1,800,500 26.08 5 Jul 2012 to 876,250 38.88 24 Mar 2014 to 23 Mar 2018 (Note 4) 24 Mar 2011 250,000 167,500 250,000 24 Mar 2015 to 23 Mar 2018 (Note 5) 15 Aug 2011 202,625 61,325 12,500 38.88 2,003,750 1,043,750 12 Aug 2017 (Note 3) 4 Jul 2017 (Note 3) 05 Jul 2010 2,610,100 652,600 400,000 1,557,500 26.08 24 Mar 2011 5 Jul 2013 to 13 Aug 2010 25,000 12,500 12,500 30.14 13 Aug 2012 to 4 Jul 2017 (Note 4) 128,800 900,000 10 Jul 2009 9.78 9 Oct 2015 (Note 1) 182,300 30 30 20,000 Tencent Holdings Limited 202,300 10 Jul 2009 1,330,000 1,330,000 17 Feb 2009 128,900 128,900 01 Dec 2008 85,000 85,000 3 Jul 2010 to 2 Jul 2015 (Note 3) 03 Jul 2008 57,930 57,930 - 12.12 10 Oct 2010 to 3 Jul 2011 to 10 Oct 2008 72,500 72,500 9.78 10 Oct 2009 to 10 Oct 2008 2 Jul 2015 (Note 4) 9 Oct 2015 (Note 3) 8.70 1 Dec 2009 to year during 31 December the year 2015 Exercise price Exercise period HKD the year 10 Jul 2009 1,145,950 25,000 664,950 18.06 10 Jul 2011 to 9 Jul 2016 (Note 3) 1,835,900 2,903,750 2015 during 30 Nov 2015 (Note 1) 9.60 17 Feb 2010 to 16 Feb 2016 (Note 1) 18.06 10 Jul 2010 to during the 9 Jul 2016 (Note 1) As at Granted Exercised As at Date of grant 1 January Directors' Report 12.12 37.80 14 Aug 2018 (Note 1) 7. 6. 5. 4. 3. 2. 1. Note: Directors' Report 9 Jul 2022 (Notes 7 and 10) 32 Tencent Holdings Limited 717,138 20,697,305 31,432,000 1,470,875 11,488,432 Total: 10 Jul 2016 to 148.90 80,650 80,650 116.40 12 Dec 2016 to 02 Apr 2015 10 Jul 2015 8. 11 Dec 2021 (Note 8) -- 525,000 149.80 2 April 2016 to 945,875 1 April 2022 (Notes 7 and 9) 945,875 525,000 For options granted with exercisable date determined based on the grant date of options, the first 20% of the total options can be exercised 1 year after the grant date, and 20% each of the total options will become exercisable in each subsequent year. For options granted with exercisable date determined based on the grant date of options, the first 20% of the total options can be exercised on or after 17 May 2009, and 20% each of the total options will become exercisable in each subsequent year. For options granted with exercisable date determined based on the grant date of options, the first 20% of the total options can be exercised 2 years after the grant date, and 20% each of the total options will become exercisable in each subsequent year. Granted during Exercised during Date of grant 2015 the year 1 January the year As at 15 December Exercise 2015 price (Note) Lapsed during the year 12 Dec 2014 As at Directors' Report For options granted with exercisable date determined based on the grant date of options, the first 20% of the total options can be exercised 3 years after the grant date, and 20% each of the total options will become exercisable in each subsequent year. For options granted with exercisable date determined based on the grant date of options, the first 33.33% (one-third) of the total options can be exercised 4 years after the grant date, and 33.33% each of the total options will become exercisable in each subsequent year. For options granted with exercisable date determined based on the grant date of options, the first 33.33% (one-third) of the total options can be exercised 1 year after the grant date, and 33.33% each of the total options will become exercisable in each subsequent year. For options granted with exercisable date determined based on the grant date of options, the first 25% of the total options can be exercised 1 year after the grant date, and 25% each of the total options will become exercisable in each subsequent year. For options granted with exercisable date determined based on the grant date of options, the first 25% of the total options can be exercised 2 years after the grant date, and 25% each of the total options will become exercisable in each subsequent year. The closing price immediately before the date on which the options were granted on 2 April 2015 was HKD148.00. Details of movements of share options granted to employees under the equity plans adopted by Riot Games, Inc. ("Riot”), a subsidiary of the Group, during the year ended 31 December 2015 are as follows: 9. The closing price immediately before the date on which the options were granted on 10 Jul 2015 was HKD146.00. 11. The weighted average closing price immediately before the date on which the options were exercised was HKD142.55. 00 33 Annual Report 2015 10. 15 Aug 2012 to 9 Jul 2021 (Note 7) 124.30 As at Lapsed Exercised Granted As at Directors' Report Annual Report 2015 31 00 12 Sep 2019 (Note 1) 13 Sep 2013 to 49.76 762,500 50,000 812,500 13 Sep 2012 14 Aug 2018 (Note 4) 15 Aug 2011 1,181,050 255,500 97,550 828,000 37.80 Date of grant 15 Aug 2013 to 15 Aug 2011 125,000 25,000 100,000 37.80 15 Aug 2014 to 14 Aug 2018 (Note 3) 1 January 2015 during during the 114.52 25 Mar 2015 to 24 Mar 2021 (Note 1) 22 May 2014 62,500 62,500 3,850,000 112.30 21 May 2021 (Note 6) 10 July 2014 1,881,800 70,524 86,463 1,724,813 22 May 2015 to 10 Jul 2015 to 125,000 25 Mar 2014 the year year the year during 31 December 2015 Exercise price 3,975,000 Exercise period 25 Mar 2014 2,562,500 - - 2,562,500 114.52 25 Mar 2015 to 24 Mar 2021 (Note 6) HKD 200,300 Lapsed 03 Jul 2008 70,000 29 Jan 2008 28 Jan 2015 (Note 2) 17 May 2009 to -- 9.30 362,800 362,800 29 Jan 2008 28 Jan 2015 (Note 1) 29 Jan 2009 to 9.30 Directors' Report Details of movements of share options granted to employees of the Group (apart from directors of the Company) during the year ended 31 December 2015 are as follows: As at Date of grant 1 January 2015 Granted during the year Exercised during the year Lapsed As at during 31 December the year 2015 price Exercise period HKD 29 Jan 2008 1,098,050 1,098,050 200,300 70,000 9.30 Exercise 28 Jan 2015 (Note 3) 29 Jan 2010 to 3 Jul 2009 to -- 12.12 2,540,030 03 Jul 2008 10 Apr 2015 (Note 4) 11 Apr 2011 to 9.54 20,390 20,390 11 Apr 2008 10 Apr 2015 (Note 1) 11 Apr 2009 to 9.54 2,540,030 54,650 18 Feb 2008 54,650 131,350 131,350 -- 9.99 18 Feb 2009 to 17 Feb 2015 (Note 1) 2 Jul 2015 (Note 1) 11 Apr 2008 277,050 25 Mar 2008 277,050 -- 8.53 25 Mar 2009 to 24 Mar 2015 (Note 1) 20,000 5,000 25,000 Li Dong Sheng 24 March 2015 to 85,000 25,000 30,000 24 March 2014 24 March 2019 195,000 15,000 15,000 2 April 2016 to 2 April 2019 Total: 15,000 5,000 35,000 Grand Total: 80,000 2 April 2015 25,000 15,000 2 April 2016 to 75,000 Total: 90,000 30,000 30,000 90,000 lan Charles Stone 17 March 2011 30,000 15,000 17 March 2012 to 17 March 2016 24 March 2014 50,000 10,000 40,000 24 March 2015 to 24 March 2019 2 April 2015 30,000 30,000 2 April 2019 60,000 lan Charles Stone, age 65, has been an independent non-executive director since April 2004. Mr Stone is currently an independent advisor on Technology, Media and Telecoms after retiring from PCCW in Hong Kong in 2011. His career in the last 26 years has been primarily in leading mobile telecoms businesses, and new wireless and Internet technology, during which time he held senior roles in PCCW, SmarTone, First Pacific, Hong Kong Telecom and CSL, as Chief Executive or at Director level, primarily in Hong Kong, and also in London and Manila. Since 2011, Mr Stone has provided telecoms advisory services to telecom companies and investors in Hong Kong, China, South East Asia and the Middle East. Mr Stone has more than 45 years of experience in the telecom and mobile industries. Mr Stone is a fellow member of The Hong Kong Institute of Directors. Mr Stone also serves as an independent non-executive director of a subsidiary of the Company. Tencent Holdings Limited Directors' Report Li Dong Sheng, age 58, has been an independent non-executive director since April 2004. Mr Li is the Chairman and Chief Executive Officer of TCL Corporation, the Chairman of the Hong Kong listed TCL Multimedia Technology Holdings Limited and the Chairman of the Hong Kong listed TCL Communication Technology Holdings Limited, all of which produce consumer electronic products. Mr Li is a non-executive director of Fantasia Holdings Group Co., Limited, a leading property developer and property related service provider in China that is listed on the Stock Exchange. Mr Li is also an independent director of Legrand, the global specialist in electrical and digital building infrastructures, shares of which are listed on New York Stock Exchange Euronext. Mr Li graduated from South China University of Technology in 1982 with a Bachelor degree in radio technology and has more than 21 years of experience in the information technology field. lain Ferguson Bruce, age 75, has been an independent non-executive director since April 2004. Mr Bruce joined KPMG in Hong Kong in 1964 and was elected to its partnership in 1971. He was the Senior Partner of KPMG from 1991 until his retirement in 1996 and served as Chairman of KPMG Asia Pacific from 1993 to 1997. Since 1964, Mr Bruce has been a member of the Institute of Chartered Accountants of Scotland, and is a fellow of the Hong Kong Institute of Certified Public Accountants, with over 51 years of international experience in accounting and consulting. He is also a fellow of The Hong Kong Institute of Directors and the Hong Kong Securities and Investment Institute (formerly known as Hong Kong Securities Institute). Mr Bruce is an independent non-executive director of Citibank (Hong Kong) Limited and MSIG Insurance (Hong Kong) Limited. Mr Bruce is currently an independent non-executive director of Goodbaby International Holdings Limited, a manufacturer of durable juvenile products, Louis XIII Holdings Limited (formerly known as Paul Y. Engineering Group Limited), a construction, engineering services and hotel development company, and Wing On Company International Limited, a department store operating and real property investment company; all of these companies are publicly listed on the Stock Exchange. Mr Bruce is also an independent non-executive director of Noble Group Limited, a commodity trading company that is publicly listed on The Singapore Exchange Securities Trading Limited and of Yingli Green Energy Holding Company Limited, a China-based vertically integrated photovoltaic product manufacturer that is listed on the New York Stock Exchange. Mr Bruce was an independent non-executive director of Vitasoy International Holdings Limited, a beverage manufacturing company, up to 4 September 2014, and of Sands China Ltd., an operator of integrated resorts and casinos, up to 11 March 2016, both of these companies are publicly listed on the Stock Exchange. 2 April 2019 00 47 Annual Report 2015 Directors' Report BIOGRAPHICAL DETAILS OF SENIOR MANAGEMENT Xu Chenye, age 44, Chief Information Officer, oversees the strategic planning and development for the website properties and communities, customer relations and public relations of the Company. Mr Xu is one of the core founders and has been employed by the Group since 1999. Prior to that, Mr Xu had experiences in software system design, network administration as well as marketing and sales management in his previous position at Shenzhen Data Telecommunications Bureau. Mr Xu received a Bachelor of Science degree in Computer Science from Shenzhen University in 1993 and a Master of Science degree in Computer Science from Nanjing University in 1996. Mr Xu currently serves as a director or officer of certain subsidiaries of the Company. 46 Ren Yuxin, age 40, Chief Operating Officer and President of Interactive Entertainment Group and Mobile Internet Group, joined the Company in 2000 and had served as General Manager for the Value-Added Services Development Division and General Manager for Interactive Entertainment Business Division. Since September 2005, Mr Ren has been responsible for the research and development, operations, marketing and sales of gaming products for the Interactive Entertainment Business. Since May 2012, Mr Ren has been appointed as Chief Operating Officer and is now in charge of the Interactive Entertainment Group, Mobile Internet Group and Social Network Group. Prior to joining the Company, Mr Ren has worked in Huawei Technologies Co., Ltd. Mr Ren received a Bachelor of Science degree in Computer Science and Engineering from the University of Electronic Science and Technology of China in 1998 and an EMBA degree from China Europe International Business School (CEIBS) in 2008. Mr Ren currently serves as a director or officer of certain subsidiaries of the Company. James Gordon Mitchell, age 42, Chief Strategy Officer and Senior Executive Vice President, joined the Company in August 2011. He is responsible for various functions, including the Company's strategic planning and implementation, investor relationships, and mergers, acquisitions and investment activity. Prior to joining the Company, Mr Mitchell had worked in investment banking for 16 years. Most recently, Mr Mitchell was a managing director at Goldman Sachs in New York, leading the bank's Communications, Media and Entertainment research team, which analysed Internet, entertainment and media companies globally. Mr Mitchell received a degree from Oxford University and holds a Chartered Financial Analyst Certification. Mr Mitchell currently serves as a director of certain subsidiaries of the Company. Tencent Holdings Limited 48 Directors' Report Tong Tao Sang, age 42, Senior Executive Vice President and President of Social Network Group, joined the Company in 2005. Mr Tong started as a technical architect, and led the product development of the social network platform, Qzone. Since May 2012, Mr Tong has been responsible for the QQ and Qzone messaging and social networking platforms, the VIP subscriptions business, the social and performance advertising and the cloud services. Prior to joining the Company, Mr Tong worked for Sendmail, Inc. on managing the product development of operator-scale messaging systems. Mr Tong also worked for Oracle on the development and testing of Oracle Server and Oracle Applications. Mr Tong received a Bachelor of Science degree in Computer Engineering from University of Michigan, Ann Arbor in 1994 and a Master of Science degree in Electrical Engineering from Stanford University in 1997. Mr Tong currently serves as a director of certain subsidiaries of the Company. Zhang Xiaolong, age 46, Senior Executive Vice President and President of Weixin Group, joined the Company in March 2005 and served as the General Manager for the Guangzhou R&D Division and led the QQ Mail team to be the top mail service provider in China. Later he was promoted to Corporate Vice President and since September 2012, Mr Zhang has been appointed as Senior Vice President in charge of the product and team management of Weixin/WeChat and QQ Mail. He is also responsible for the management and review of major innovation projects. In May 2014, Mr Zhang was promoted to Senior Executive Vice President, in charge of the Weixin Group. Prior to joining the Company, Mr Zhang developed Foxmail independently in 1997 as the first generation of Internet software developer in China. He joined Boda China as Corporate Vice President in 2000, responsible for corporate mail developing. Mr Zhang received his Master's degree in Telecommunications from Huazhong University of Science and Technology in 1994. Lu Shan, age 41, Senior Executive Vice President and President of Technology and Engineering Group, joined the Company in 2000 and had served as General Manager for IM Product Divisions, Vice President for Platform Research and Development System and Senior Vice President for Operations Platform System. Since March 2008, Mr Lu has been in charge of management of the Operations Platform System of the Company. Since May 2012, Mr Lu has been in charge of management of Technical Engineering Group. Prior to joining the Company, he worked for Shenzhen Liming Network Systems Limited. Mr Lu received a Bachelor of Science degree in Computer Science and Technology from University of Science and Technology of China (USTC) in 1998. Mr Lu currently serves as a director or officer of certain subsidiaries of the Company. David A M Wallerstein, age 41, Chief exploration Officer and Senior Executive Vice President, joined the Company in 2001 and drives the Company's active participation in new and emerging technologies, business areas, and ideas from his base in Palo Alto, California. Mr Wallerstein has worked on building Tencent's international footprint and entrance into new business areas since 2001. Prior to joining the Company, Mr Wallerstein worked with Naspers in China, responsible for investments and strategy. Prior to that, Mr Wallerstein worked as a management consultant in China. Mr Wallerstein received a Master's degree from UC Berkeley and a Bachelor's degree from the University of Washington. Mr Wallerstein currently serves as a director of certain subsidiaries of the Company. 49 49 00 Annual Report 2015 Lau Seng Yee, age 49, Senior Executive Vice President and President of Online Media Group, joined the Company in 2006 and is responsible for overseeing the Company's online media business, and the development of the Company's online advertising business model. Mr Lau is a seasoned professional in the media industry with a rare 21 years of on-ground China market experience. In 2007, Mr Lau sat in the advisory board for ad:tech, the globally renowned organisation for Online Marketing. Mr Lau held the post of Vice President of China Advertising Association since 2007. Mr Lau was appointed as the Adjunct Professor of School of Journalism and Communication by Xiamen University in 2010 and also by Fudan University in 2014. Prior to joining the Company, Mr Lau was the Managing Partner of Publicis China and Chief Executive Officer for BBDO China, as well as a few management positions in other multinations. Mr Lau received an EMBA degree from Rutgers State University of New Jersey, USA. He also completed the Advanced Marketing Management program, and the Advanced Management Program (AMP) in Harvard Business School. In 2011, Mr Lau was honoured by New York based AdAge publication as one of "The World's 21 Most Influential People in Marketing and Media Industry, 2009-2010". In 2015, he is named as Global Media Person of the year award by Cannes Lions International Festival of Creativity. Mr Lau currently sits as a board member in the Asia Pacific Advisory Board of Harvard Business School. 210,000 Tencent Holdings Limited Jacobus Petrus (Koos) Bekker, age 63, has been a non-executive director since November 2012. Koos led the founding team of the M-Net/MultiChoice pay-television business in 1985. He was also a founder director of MTN in cellular telephony. Koos headed the MIH group in its international and Internet expansions until 1997, when he became chief executive of Naspers. He serves on the boards of other companies within the group and associates, as well as on public bodies. In April 2015, he succeeded Mr Vosloo as non-executive chair. Academic qualifications include BA Hons and honorary doctorate in commerce (Stellenbosch University), LLB (University of the Witwatersrand) and MBA (Columbia University, New York). 44 Directors' Report DIRECTORS AND SENIOR MANAGEMENT The directors and senior management of the Company during the year and up to the date of this report were: Executive Directors Ma Huateng (Chairman) Lau Chi Ping Martin Non-Executive Directors Jacobus Petrus (Koos) Bekker Charles St Leger Searle Charles St Leger Searle, age 52, has been a non-executive director since June 2001. Mr Searle is currently the Chief Executive Officer of Naspers Internet Listed Assets. He serves on the board of a number of companies associated with the Naspers Group, including Mail.ru Group Limited that is listed on the London Stock Exchange. Prior to joining the Naspers Group, he held positions at Cable & Wireless plc and at Deloitte & Touche in London and Sydney. Mr Searle is a graduate of the University of Cape Town and a member of the Institute of Chartered Accountants in Australia. Mr Searle has more than 22 years of international experience in the telecommunications and Internet industries. Mr Searle also serves as a director of certain subsidiaries of the Company. Independent Non-Executive Directors lain Ferguson Bruce lan Charles Stone In accordance with Article 87 of the Articles of Association, Mr Jacobus Petrus (Koos) Bekker and Mr lan Charles Stone will retire at the 2016 AGM and, being eligible, will offer themselves for re-election. The Company has received from each independent non-executive director an annual confirmation of his independence pursuant to Rule 3.13 of the Listing Rules and the Board considers them independent. 00 45 Annual Report 2015 Directors' Report BIOGRAPHICAL DETAILS OF DIRECTORS Ma Huateng, age 44, is an executive director, Chairman of the Board and Chief Executive Officer of the Company. Mr Ma has overall responsibilities for strategic planning and positioning and management of the Group. Mr Ma is one of the core founders and has been employed by the Group since 1999. Prior to his current employment, Mr Ma was in charge of research and development for Internet paging system development at China Motion Telecom Development Limited, a supplier of telecommunications services and products in China. Mr Ma is a deputy to the 12th National People's Congress. Mr Ma has a Bachelor of Science degree specialising in Computer and its Application obtained in 1993 from Shenzhen University and more than 22 years of experience in the telecommunications and Internet industries. He is a director of Advance Data Services Limited, which has an interest in the shares of the Company which would fall to be disclosed to the Company under the provisions of Divisions 2 and 3 of Part XV of the SFO. Mr Ma also serves as a director of certain subsidiaries of the Company. Lau Chi Ping Martin, age 42, is an executive director and President of the Company. Mr Lau joined the Company in 2005 as the Chief Strategy and Investment Officer and was responsible for corporate strategies, investments, merger and acquisitions and investor relations. In 2006, Mr Lau was promoted as President of the Company to manage the day-to-day operation of the Company. In 2007, he was appointed as an executive director of the Company. Prior to joining the Company, Mr Lau was an executive director at Goldman Sachs (Asia) L.L.C.'s investment banking division and the Chief Operating Officer of its Telecom, Media and Technology Group. Prior to that, he worked at Mckinsey & Company, Inc. as a management consultant. Mr Lau received a Bachelor of Science degree in Electrical Engineering from the University of Michigan, a Master of Science degree in Electrical Engineering from Stanford University and an MBA degree from Kellogg Graduate School of Management, Northwestern University. On 28 July 2011, Mr Lau was appointed as a non-executive director of Kingsoft Corporation Limited, an Internet based software developer, distributor and software service provider listed in Hong Kong. On 10 March 2014, Mr Lau was appointed as a director of JD.com, Inc., an online direct sales company in China, which has been listed on NASDAQ since May 2014. On 31 March 2014, Mr Lau was appointed as a director of Leju Holdings Limited, an online-to-offline real estate services provider in China, which has been listed on New York Stock Exchange since April 2014. Mr Lau also serves as a director/corporate representative of certain subsidiaries of the Company. Li Dong Sheng 2 April 2016 to Total: 30,000 1. Purpose 2007 Share Award Scheme 2013 Share Award Scheme To recognise the contributions and to attract, motivate and retain eligible participants (including any director) of the Group 2. Duration and Termination It shall be valid and effective for a period of 15 years from the Adoption Date I. 3. 4. Maximum number of shares that can be awarded Maximum entitlement of each participant 5. Operation 2% of the issued share capital of the Company as at the Adoption Date | (i.e. 178,776,160 shares (after the effect of the Share Subdivision)) 1% of the issued share capital of the Company as at the Adoption Date | (i.e. 89,388,080 shares (after the effect of the Share Subdivision)) The Board shall select the Eligible Person(s) and determine the number of shares to be awarded. The Board shall, in respect of each Selected Participant, cause to be paid the relevant amount from the Company's resources into the Account I or to the Trustee to be held on trust for the relevant Selected Participant for the purchase and/or subscription of the Awarded Shares as soon as practicable after the Reference Date. It shall be valid and effective unless and until being terminated on the earlier of: (i) the 15th anniversary date of the Adoption Date II; and (ii) such date of early termination as determined by the Board provided that such termination does not affect any subsisting rights of any Selected Participant. 3% of the issued share capital of the Company as at the Adoption Date II (i.e. 278,937,260 shares (after the effect of the Share Subdivision)) 1% of the issued share capital of the Company as at the Adoption Date II (i.e. 92,979,085 shares (after the effect of the Share Subdivision)) The Board may, from time to time, at its absolute discretion select any Eligible Person to be a Selected Participant and grant to such Selected Participant Awarded Shares. The Board may at any time at its discretion, in respect of each Selected Participant, cause to be paid the relevant amount from the Company's resources or any Subsidiary's resources into the Account II for the purchase and/or subscription of Awarded Shares as soon as practicable after the Grant Date. 00 The Company adopted the following two Share Award Schemes with major terms and details set out below: SHARE AWARD SCHEMES Directors' Report 40 Directors' Report Details 8. Remaining life of the scheme Note: Pre-IPO Option Scheme It expired on 31 December 2011. Post-IPO 30,000 It expired on 23 March 2014. Post-IPO 41 Option Scheme II ten years commencing on 16 May 2007. Post-IPO Option Scheme III It shall be valid and effective for a period of ten years commencing on 13 May 2009. The total number of shares available for issue under the Post-IPO Option Scheme II and the Post-IPO Option Scheme III is 240,921,255 and 175,093,330 respectively (after the effect of the Share Subdivision), which is approximately 2.56% and 1.86% respectively of the issued share capital of the Company as at the date of the annual report. MOVEMENTS IN THE SHARE OPTIONS Details of the movements in the share options during the year are set out in Note 20 to the consolidated financial statements. VALUATION OF SHARE OPTIONS Details of the valuation of share options during the year are set out in Note 20 to the consolidated financial statements. Tencent Holdings Limited 40 It shall be valid and effective for a period of Annual Report 2015 Option Scheme I 6. Restrictions Granted during Vested As at during 31 December Name of director Date of grant 2015 the year the year 2015 Vesting period 1 January lain Ferguson Bruce 40,000 20,000 20,000 17 March 2012 to 17 March 2016 24 March 2014 10,000 40,000 24 March 2015 to 24 March 2019 2 April 2015 Directors' Report 17 March 2011 As at 50,000 As at 31 December 2015, there were a total of 210,000 (after the effect of the Share Subdivision) outstanding Awarded Shares granted to the directors of the Company, details of which are as follows: 2007 Share Award Scheme Number of Awarded Shares No award shall be made by the Board and no instructions to acquire shares and allot new shares shall be given by the Board or the Trustee under the 2007 Share Award Scheme where any director is in possession of unpublished price- sensitive information in relation to the Group or where dealings by directors are prohibited under any code or requirement of the Listing Rules and all applicable laws from time to time. 2013 Share Award Scheme approval from any applicable regulatory authorities has not been granted. Tencent Holdings Limited 42 Directors' Report 7. Vesting and Lapse 8. Voting Rights 2007 Share Award Scheme No award may be made by the Board to any Selected Participant: (i) where the Company has information that must be disclosed under Rule 13.09 of the Listing Rules or where the Company reasonably believes there is inside information which must be disclosed under part XIVA of the SFO, until such inside information has been published on the websites of the Stock Exchange and the Company; (ii) after any inside information in relation to the securities of the Company has occurred or has become the subject of a decision, until such inside information has been published; (iii) within the period commencing 60 days (in the case of yearly results), or 30 days (in the case of results for half-year, quarterly or other interim period) immediately preceding the earlier of (1) the date of a meeting of the Board (as such date is first notified to the Stock Exchange) for the approval of the Company's results for any year, half-year, quarterly or other interim period (whether or not required under the Listing Rules); and (2) the deadline for the Company to publish its quarterly, interim or annual results announcement for any such period, and ending on the date of such announcement; or (iv) in any other circumstances where dealings by Selected Participant (including directors) are prohibited under the Listing Rules, SFO or any other applicable law or regulation or where the requisite The Trustee shall not exercise the voting rights in respect of any shares held by it pursuant to the Trustee Deed I (including but not limited to the Awarded Shares and any bonus shares and scrip shares derived therefrom). Awarded Shares and the related income derived therefrom are subject to a vesting scale to be determined by the Board at the date of grant of the award. Vesting of the shares will be conditional on the Selected Participant satisfying all vesting conditions specified by the Board at the time of making the award until and on each of the relevant vesting dates and his/her execution of the relevant documents to effect the transfer from the Trustee. 43 00 During the year, a total of 33,245,162 shares were issued to option holders who exercised their share options granted under the Post-IPO Option Scheme II and the Post-IPO Option Scheme III, and pursuant to the Share Award Schemes. Directors' Report Annual Report 2015 The Company shall comply with the relevant Listing Rules when granting the Awarded Shares. If awards are made to the directors or substantial shareholders of the Group, such awards shall constitute connected transaction under Chapter 14A of the Listing Rules and the Company shall comply with the relevant requirements under the Listing Rules. The Trustee does not exercise any voting rights in respect of any shares held pursuant to the Trustee Deed II or as nominee. Subject to the satisfaction of all vesting conditions as prescribed in the 2013 Share Award Scheme, the Selected Participants will be entitled to receive the Awarded Shares. The vesting of the Awarded Shares is subject to the Selected Participant remaining at all times after the Grant Date and on the date of vesting, an Eligible Person, subject to the rules of the 2013 Share Award Scheme. 2013 Share Award Scheme During the year, a total of 74,308,983 Awarded Shares were granted under the 2013 Share Award Scheme and out of which, 75,000 Awarded Shares were granted to the independent non-executive directors of the Company. Details of the movements in the Share Award Schemes during the year are set out in Note 20 to the consolidated financial statements. The interest comprises 360,000 shares and 85,000 underlying shares in respect of the awarded shares granted pursuant to the 2007 Share Award Scheme and the 2013 Share Award Scheme. Details of the awarded shares granted to this director are set out above under "Share Award Schemes". The interest comprises 380,000 shares and 90,000 underlying shares in respect of the awarded shares granted pursuant to the 2007 Share Award Scheme and the 2013 Share Award Scheme. Details of the awarded shares granted to this director are set out above under "Share Award Schemes". (1) The interest comprises 33,268,000 shares and 10,000,000 underlying shares in respect of the share options granted pursuant to the Post-IPO Option Scheme II and the Post-IPO Option Scheme III. Details of the share options granted to this director are set out above under "Share Option Schemes". (5) (4) (3) (2) These shares are held by Advance Data Services Limited, a British Virgin Islands company wholly-owned by Ma Huateng. The interest comprises 5,000 shares and 35,000 underlying shares in respect of the awarded shares granted pursuant to the 2007 Share Award Scheme and the 2013 Share Award Scheme. Details of the awarded shares granted to this director are set out above under "Share Award Schemes". Tencent Holdings Limited Note: 52 52 (Note 5) 445,000 300,000 Family+ * 0.005% 145,000 Directors' Report Interests of beneficial owner and class of shares held (B) Long position in the shares of associated corporations of the Company Personal* 33 53 Save as disclosed above, none of the directors or chief executive of the Company and their associates, had interests or short positions in any shares, underlying shares or debentures of the Company and its associated corporations as at 31 December 2015. (registered capital) 54.29% RMB5,971,427 (registered capital) 54.29% RMB35,285,705 of issued share capital Percentage Number of shares Personal Shiji Kaixuan Personal Tencent Computer Ma Huateng Nature of interest Name of associated corporation Name of director Interests of spouse or child under 18 as beneficial owner lan Charles Stone Directors' Report 0.005% DIRECTORS' INTERESTS IN SECURITIES Annual Report 2015 51 00 Directors' Report Ma Xiaoyi, age 42, Senior Vice President, joined the Company in 2007 and has been responsible for international publishing of Tencent Games, establishing and maintaining long-term business partnerships and cooperation for the Company since November 2008. Prior to joining the Company, Mr Ma served as a General Manager of Games Division of OPTIC Communication Co., Ltd. Prior to that, Mr Ma worked as a General Manager in Shanghai EasyService Technology Development Ltd. Mr Ma graduated from Shanghai Jiaotong University, and received an EMBA degree from Fudan University in 2008. Mr Ma currently serves as a director of certain subsidiaries of the Company. John Shek Hon Lo, age 47, Chief Financial Officer and Senior Vice President, joined the Company in 2004 and served as the Company's Financial Controller from 2004 to 2008. Mr Lo was appointed as the Company's Vice President and Deputy Chief Financial Officer in 2008 and was appointed as Chief Financial Officer in May 2012. Prior to joining the Company, Mr Lo worked in PricewaterhouseCoopers as Senior Manager (audit services). He is a Fellow of the CPA Australia, a Fellow of the Hong Kong Institute of Certified Public Accountants and a Fellow of the Chartered Institute of Management Accountants. Mr Lo received a Bachelor of Business in Accounting from Curtin University of Technology and an EMBA degree from Kellogg Graduate School of Management, Northwestern University and HKUST. Mr Lo currently serves as a director of certain subsidiaries of the Company. Guo Kaitian, age 43, Senior Vice President, joined the Company in 2002 and has been responsible for overseeing the Company's functional divisions of administration, legal affairs, government relations, charity fund, procurement as well as the functional management of the branches in Beijing, Shanghai and Chengdu. Mr Guo received a Bachelor of Law degree from Zhongnan University of Economics and Law in 1996. Mr Guo currently serves as a director of a subsidiary of the Company. Xi Dan, age 40, Senior Vice President, joined the Company in 2002 and has been responsible for overseeing the Company's talent development and functional management since May 2008. Prior to joining the Company, Mr Xi was responsible for HR management in ZTE Corporation and has more than 20 years of experience in IT and Internet industries. Mr Xi received a Bachelor of Science degree in Applied Computer Science from Shenzhen University in 1996 and an MBA degree from Tsinghua University in 2005. Mr Xi currently serves as a director of certain subsidiaries of the Company. Tencent Holdings Limited 50 Directors' Report DIRECTORS' SERVICE CONTRACTS Mr Ma Huateng has entered into a service contract with the Company for a term of less than 3 years from 25 March 2013 to 31 December 2015. The term of the service contract has been extended for another 3 years by way of a supplemental agreement. The term of the service contract can be further extended by agreement between the Company and Mr Ma. The Company may terminate the service contract by three months' written notice at any time, subject to paying his salary for the shorter of six months and a portion of his annual bonus for the year in which termination occurred pro rata to the portion of the year before the termination becomes effective. Mr Lau Chi Ping Martin has entered into a service contract with the Company for a term of 3 years ended 31 December 2015. The term of the service contract has been extended for another 3 years by way of a supplemental agreement. Mr Lau is entitled to an annual bonus based on the performance of the Company in an amount to be determined by the Remuneration Committee. Mr Lau is entitled to participate in all employee benefit plans, programs and arrangements of the Company. Save as disclosed above, none of the directors who are proposed for re-election at the 2016 AGM has a service contract with the Company which is not determinable by the Company within 1 year without payment of compensation, other than statutory compensation. DIRECTORS' INTERESTS IN CONTRACTS OF SIGNIFICANCE Save as disclosed in this annual report, no transactions or arrangements or contracts of significance in relation to the Group's business to which the Company or any of its subsidiaries was a party and in which a director of the Company or an entity connected with a director of the Company had a material interest, whether directly or indirectly, subsisted at the end of the year or at any time during the year. PERMITTED INDEMNITY PROVISION Annual Report 2015 A permitted indemnity provision for the benefit of the directors of the Company is currently in force and was in force throughout the financial year. The Company has taken out and maintained directors and officers liability insurance which provides appropriate cover for, among others, directors of the Company. As at 31 December 2015, the interests and short positions of the directors and the chief executive of the Company in the shares, underlying shares and debentures of the Company or its associated corporations (within the meaning of Part XV of the SFO) which (a) were required to be notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests and short positions which they have taken, or are deemed to have taken, under such provisions of the SFO); or (b) were required, pursuant to section 352 of the SFO, to be recorded in the register required to be kept by the Company; or (c) were required, pursuant to the Model Code, to be notified to the Company and the Stock Exchange were as follows: (Note 4) (A) Long position in the shares and underlying shares of the Company Name of director 470,000 Personal* lain Ferguson Bruce (Note 3) 0.0004% 40,000 Personal* Li Dong Sheng (Note 2) 0.46% 43,268,000 Personal* Lau Chi Ping Martin 9.10% 855,446,400 Corporate (Note 1) Ma Huateng issued share capital Percentage of shares/underlying shares held Nature of interest Number of 00 11. Pursuant to the co-operation framework agreement entered into between each of the New OPCOS and one of the WFOES, the parties shall cooperate in the provision of communications services. For each agreement, the WFOES shall allow the New OPCOS to use its and its affiliates' assets and provide services to the New OPCOs. The New OPCOS shall transfer all of its Surplus Cash to the WFOES and its affiliates as consideration. Co-operation committees have also been established according to these agreements. During the year, revenue sharing amounting to approximately RMB93,000,000, RMB17,000,000, RMB503,000,000, RMB975, and RMB41,982 was paid or payable by Wang Dian to Tencent Technology, Cyber Tianjin, Tencent Beijing, Tencent Chengdu and Tencent Wuhan, respectively. Revenue sharing amounting to approximately RMB29,000,000, RMB25,000,000, RMB1,000,000, RMB113,000,000, and RMB143,120 I was paid or payable by Beijing BIZCOM to Tencent Technology, Cyber Tianjin, Tencent Beijing, Tencent Chengdu and Tencent Wuhan respectively. Revenue sharing amounting to approximately RMB2,000,000, RMB3, RMB5,000,000 and RMB8,000,000 was paid or payable by Beijing Starsinhand to Tencent Technology, Cyber Tianjin, Tencent Beijing and Tencent Chengdu respectively. No revenue sharing amounting was paid or payable by Guangzhou Yunxun to Tencent Technology, Cyber Tianjin and Tencent Beijing. CONNECTED TRANSACTIONS 00 57 Pursuant to the SKT CFC, the parties shall co-operate in the provision of communications services. Cyber Tianjin and its affiliates shall allow Shiji Kaixuan to use its and its affiliates' assets and to provide services to Shiji Kaixuan. Shiji Kaixuan shall transfer all of its Surplus Cash to Cyber Tianjin and its affiliates as consideration. The parties also established the SKT Co-operation Committee according to this agreement. During the year, no services was transacted under such arrangements, save as disclosed elsewhere in this section. Pursuant to the TCS CFC, the parties shall co-operate in the provision of communications services. Tencent Technology and its affiliates shall allow Tencent Computer to use its and its affiliates' assets and to provide services to Tencent Computer. Tencent Computer shall transfer all of its Surplus Cash to Tencent Technology and its affiliates as consideration. The parties also established the TCS Co-operation Committee according to this agreement. During the year, revenue sharing amounting to approximately RMB29,783,000,000, RMB2,365,000,000, RMB10,659,000,000, RMB1,291,000,000, RMB4, 772,000,000, RMB1,169,000,000, RMB625,000,000, RMB530,000,000, RMB1,773,000,000 and RMB245,000,000 were paid or payable by Tencent Computer to Tencent Technology, Cyber Tianjin, Tencent Beijing, Tencent Chengdu, Tencent Shanghai, Tencent Wuhan, Tencent Information Chongqing, Hainan Network, Tencent Information Shenzhen and Tencent Information Shanghai respectively. In addition, during the year, Internet data center service fee amounting to approximately RMB410,000,000 was paid or payable by Tencent Computer to Cyber Tianjin, and research and development service fee amounting to RMB32,000,000 and RMB53,000,000 were paid or payable to Tencent Chengdu and Tencent Shanghai, respectively. 2. 1. Transactions carried out during the year ended 31 December 2015, which have been eliminated in the consolidated financial statements of the Group, are set out as follows: The Auditor had carried out procedures on the transactions pursuant to the Structure Contracts and had provided a letter to the Board confirming that such transactions had been approved by the Board and had been entered into, in all material respects, in accordance with the relevant Structure Contracts and had been operated so as to transfer the Surplus Cash of the OPCOS as at 31 December 2015 to the WFOEs and that no dividends or other distributions had been made by the OPCOS to the holders of their equity interests. The Company's independent non-executive directors had reviewed the Structure Contracts (as defined in the section "Our History and Structure - Structure Contracts" of the IPO prospectus of the Company) and confirmed that the transactions carried out during the financial year had been entered into in accordance with the relevant provisions of the Structure Contracts and, had been operated so as to transfer by the date of this annual report Tencent Computer's and Shiji Kaixuan's Surplus Cash (as defined in the section “Our History and Structure – Structure Contracts" of the IPO prospectus of the Company) as at 31 December 2015 to Tencent Technology, Cyber Tianjin (formerly known as Shidai Zhaoyang Technology (Shenzhen) Company Limited in the IPO prospectus of the Company), Tencent Beijing, Tencent Information Shenzhen, Tencent Chengdu, Tencent Information Chongqing, Tencent Information Shanghai, Tencent Shanghai, Tencent Wuhan and Hainan Network. The Company's independent non-executive directors had also confirmed that no dividends or other distributions had been made by the OPCOS to the holders of their equity interests and the terms of any new Structure Contracts entered into, renewed and/ or cloned during the relevant financial period are fair and reasonable so far as the Group was concerned and in the interests of the Company's shareholders as a whole. To this extent, similar Structure Contracts were entered into relating to the New OPCOS. Annual Report 2015 Review of the transactions carried out under the Structure Contracts during the financial year 99 56 Tencent Holdings Limited This OPCO was previously owned by PRC nationals. Pursuant to a restructuring during the year ended 31 December 2015, as at 31 December 2015, the entire equity interests in this OPCO was transferred to Tencent Computer. This OPCO was previously owned by PRC nationals. Pursuant to a restructuring during the year ended 31 December 2015, as at 31 December 2015, the entire equity interests in this OPCO was transferred to Shiji Kaixuan. 2. 1. Note: The above OPCOS are significant to the Group as they hold relevant licenses to provide Internet information services and other value-added telecommunications services. The aggregate gross revenue and net asset value of the above OPCOS that are subject to the Structure Contracts amounted to approximately RMB76 billion for the year ended 31 December 2015 and approximately RMB16 billion as at 31 December 2015 respectively. Directors' Report Directors' Report 3. 4. DIRECTORS' RIGHTS TO ACQUIRE SHARES OR DEBENTURES 00 Annual Report 2015 69 59 Pursuant to the technical consultancy services agreement dated 28 February 2004 entered into between Tencent Technology, as consultant, and Shiji Kaixuan, Tencent Technology shall provide specified technical consultancy services to Shiji Kaixuan against payment of an annual consultancy service fee determined by the SKT Cooperation Committee within a range of percentages of Shiji Kaixuan's annual revenues. During the year, no consultancy service was transacted under such arrangements, save as disclosed elsewhere in this section. 10. Directors' Report 58 Tencent Holdings Limited Pursuant to the information consultancy services agreement dated 28 February 2004 entered into between Tencent Technology, as consultant, and Tencent Computer, Tencent Technology shall provide specified information consultancy services to Tencent Computer against payment of an annual consultancy service fee determined by the TCS Co-operation Committee within a range of percentages of Tencent Computer's annual revenues. During the year, no consultancy service was transacted under such arrangements, save as disclosed elsewhere in this section. Pursuant to the trademark licence agreement dated 28 February 2004 entered into between Tencent Technology, as licensor, and Shiji Kaixuan, as licensee, Tencent Technology shall grant to Shiji Kaixuan a non-exclusive licence to use specified trademarks against payment of annual royalties determined as a percentage of Shiji Kaixuan's annual revenues (which may be adjusted pursuant to the agreement or the SKT CFC). During the year, no trademark licence was transacted under such arrangements, save as disclosed elsewhere in this section. Pursuant to the trademark licence agreement dated 28 February 2004 entered into between Tencent Technology, as licensor, and Tencent Computer, as licensee, Tencent Technology shall grant to Tencent Computer a non-exclusive licence to use specified trademarks against payment of annual royalties determined as a percentage of Tencent Computer's annual revenues (which may be adjusted pursuant to the agreement or the TCS CFC). During the year, no trademark licence was transacted under such arrangements, save as disclosed elsewhere in this section. Pursuant to the domain name licence agreement dated 28 February 2004 entered into between Tencent Technology, as licensor, and Shiji Kaixuan, as licensee, Tencent Technology shall grant to Shiji Kaixuan a non-exclusive licence to use specified domain names against payment of annual royalties determined as a percentage of Shiji Kaixuan's annual revenues (which may be adjusted pursuant to the agreement or the SKT CFC). During the year, no domain name licence was transacted under such arrangements, save as disclosed elsewhere in this section. Pursuant to the intellectual property transfer agreement dated 28 February 2004 entered into between Cyber Tianjin and Shiji Kaixuan, Shiji Kaixuan shall assign to Cyber Tianjin its principal present and future intellectual property rights, free from encumbrance (except for licences granted in the ordinary course of Shiji Kaixuan's business) in consideration of Cyber Tianjin's undertaking to provide certain technology and information services to Shiji Kaixuan. During the year, no intellectual property transfer was transacted under such arrangements, save as disclosed elsewhere in this section. Pursuant to the domain name licence agreement dated 28 February 2004 entered into between Tencent Technology, as licensor, and Tencent Computer, as licensee, Tencent Technology shall grant to Tencent Computer a non-exclusive license to use specified domain names against payment of annual royalties determined by the TCS Co-operation Committee within a range of percentages of Tencent Computer's annual revenues. During the year, no domain name license was transacted under such arrangements, save as disclosed elsewhere in this section. Pursuant to the amended and restated intellectual property transfer agreement dated 28 February 2004 entered into between Tencent Technology and Tencent Computer, Tencent Computer shall assign to Tencent Technology its principal present and future intellectual property rights, free from encumbrances (except for licences granted in the ordinary course of Tencent Computer's business) in consideration of Tencent Technology's undertaking to provide certain technology and information services to Tencent Computer. During the year, no intellectual property transfer was transacted under such arrangements, save as disclosed elsewhere in this section. 9. 8. 7. 6. 5. Provision of mobile and telecommunications value-added services Directors' Report Provision of mobile and telecommunications value-added services Provision of mobile and telecommunications value-added services Set out below is the registered owners and business activities of the OPCOS which had entered into continuing connected transactions with the Group under the Structure Contracts during the year ended 31 December 2015: Particulars of the OPCOS Directors' Report 00 Annual Report 2015 55 55 However, the Company's PRC legal advisers also advised that there are substantial uncertainties regarding the interpretation and application of the currently applicable PRC laws, rules and regulations. Accordingly, the PRC regulatory authorities and PRC courts may in the future take a view that is contrary to the position of the Company's PRC legal advisers concerning the Structure Contracts. In the view of the Company's PRC legal advisers, the arrangement of the Structure Contracts does not violate applicable existing PRC laws and regulations as the Company indirectly operates the value-added telecommunication service business, online and mobile games, online advertising and other Internet and wireless portals in the PRC through affiliated OPCOS that hold the necessary licenses for the existing lines of businesses. However, Circular 13 does not provide any interpretation of the term "foreign investors" or make a distinction between foreign online game companies and companies under a corporate structure similar to the Group. Thus, it is unclear whether the State General Administration of Press, Publication, Radio, Film and Television will deem the Group's structure and operations to be in violation of these provisions. Requirements related to Structure Contracts (other than relevant foreign ownership restrictions) include the Notice on Further Strengthening the Administration of Pre-examination and Approval of Online Games and the Examination and Approval of Imported Online Games (關於貫徹落實國務院《“三定”規定》和中央編辦有關解釋,進一步加強網絡遊戲前置審批和進 (the "Circular 13") jointly issued by PRC General Administration of Press and Publication, the National Copyright Administration and the National Office of Combating Pornography and Illegal Publications in September 2009 provides that foreign investors are not permitted to invest in online game-operating businesses in the PRC via wholly owned, equity joint venture or co-operative joint venture investments and further expressly prohibits foreign investors from gaining control over or participating in domestic online game operators through indirect ways such as establishing other joint venture companies or entering into contractual or technical arrangements with the Chinese license holders. 2015 Requirements related to Structure Contracts (other than relevant foreign ownership restrictions) as at 31 December Directors' Report 54 54 Tencent Holdings Limited For a summary of the major terms of the Structure Contracts, please refer to the sections headed “Our History and Structure” and "Structure Contracts" in the IPO prospectus. During the year ended 31 December 2015, there was no material change in the Structure Contracts and/or the circumstances under which they were adopted, and none of the Structure Contracts has been unwound as none of the restrictions that led to the adoption of Structure Contracts has been removed. Current PRC laws and regulations limit foreign investment in businesses providing value-added telecommunications services in China. As foreign-invested enterprises, the WOFEs do not have licenses to provide Internet content or information services and other telecommunications value-added services. Accordingly, the value-added telecommunications business of the Group has been conducted through Tencent Computer, Shiji Kaixuan and the new operating companies (the "New OPCOS") (collectively, the "OPCOS") by itself or through their subsidiaries under the Structure Contracts (as defined in the section "Our History and Structure - Structure Contracts" of the IPO prospectus of the Company). As a result of the Structure Contracts, the Group is able to recognise and receive the economic benefit of the business and operations of the OPCOs. The Structure Contracts are also designed to provide the Company with effective control over and (to the extent permitted by PRC law) the right to acquire the equity interests in and/or assets of the OPCOS. The reasons for using Structure Contracts Reference is made to the waiver granted by the Stock Exchange regarding the compliance with the applicable disclosure, reporting and shareholders' approval requirements under Chapter 14A of the Listing Rules when the Company was listed in June 2004. Registered owners Provision of mobile and telecommunications value-added services Name of the operating companies Tencent Computer 50% by Xie Pingzhang 50% by Liu Yashan Guangzhou Yunxun 50% by Tang Yibin 50% by Chen Guangyu Beijing Starsinhand Tencent Computer (Note 2) Beijing BIZCOM Shiji Kaixuan (Note 1) as at 31 December 2015 Wang Dian Provision of Internet advertisement services Internet advertisement services and eCommerce transactions business telecommunications value-added services, Provision of Internet and mobile and 54.29% by Ma Huateng 22.85% by Zhang Zhidong Shiji Kaixuan 11.43% by Chen Yidan 11.43% by Xu Chenye 54.29% by Ma Huateng 22.85% by Zhang Zhidong Business activities 11.43% by Xu Chenye 11.43% by Chen Yidan Save as disclosed in this annual report, neither the Company nor any of its subsidiaries was a party to any arrangements to enable directors of the Company to acquire benefits by means of the acquisition of shares in, or debentures of, the Company or any other body corporate at any time during the year or at the end of the year. Long position Beneficial owner Annual Report 2015 62 Directors' Report Note: (1) (2) MIH TC is controlled by Naspers Limited through its wholly-owned intermediary companies, MIH (Mauritius) Limited, MIH Ming He Holdings Limited and MIH Holdings Proprietary Limited. As such, Naspers Limited, MIH (Mauritius) Limited, MIH Ming He Holdings Limited and MIH Holdings Proprietary Limited are deemed to be interested in the same block of 3,151,201,900 shares under Part XV of the SFO. As Advance Data Services Limited is wholly-owned by Ma Huateng, Mr Ma has interest in these shares as disclosed under the section of "Directors' Interests in Securities". (3) (i) (ii) Such long position includes derivative interests in 25,267,191 underlying shares of the Company of which 9,070,580 underlying shares are derived from listed and physically settled derivatives, 245,300 underlying shares are derived from listed and cash settled derivatives, 8,843,251 underlying shares are derived from unlisted and physically settled derivatives and 7,108,060 underlying shares are derived from unlisted and cash settled derivatives. It also includes 300,211,641 shares in lending pool. Such short position includes derivative interests in 32,999,844 underlying shares of the Company of which 9,074,980 underlying shares are derived from listed and physically settled derivatives, 11,595,550 underlying shares are derived from listed and cash settled derivatives, 3,609,150 underlying shares are derived from unlisted and physically settled derivatives and 8,720,164 underlying shares are derived from unlisted and cash settled derivatives. Save as disclosed above, the Company had not been notified of any other persons (other than a director or chief executive of the Company) who, as at 31 December 2015, had an interest or short position in the shares and underlying shares in the Company as recorded in the register required to be kept under section 336 of the SFO. MANAGEMENT CONTRACTS No contracts concerning the management and administration of the whole or any substantial part of the business of the Company was entered into or existed during the year. MAJOR CUSTOMERS AND SUPPLIERS For the year ended 31 December 2015, the five largest customers of the Group accounted for approximately 4.41% of the Group's total revenues while the largest customer of the Group accounted for approximately 1.09% of the Group's total revenues. In addition, for the year ended 31 December 2015, the five largest suppliers of the Group accounted for approximately 19.20% of the Group's total purchases while the largest supplier of the Group accounted for approximately 7.71% of the Group's total purchases. None of the directors, their associates or any shareholder of the Company (which to the knowledge of the directors owns more than 5% of the Company's issued capital) had an interest in any of the major customers or suppliers noted above. 83 63 Annual Report 2015 00 Directors' Report AUDIT COMMITTEE The Audit Committee has reviewed the Group's audited consolidated financial statements for the year ended 31 December 2015. The Audit Committee has also reviewed the accounting principles and practices adopted by the Company and discussed auditing, internal control and financial reporting matters. COMPLIANCE WITH THE CORPORATE GOVERNANCE CODE Save as disclosed in the corporate governance report in the 2014 annual report, and the 2015 interim report of the Company, none of the directors of the Company is aware of any information which would reasonably indicate that the Company has not, for any part of the year ended 31 December 2015, complied with the CG Code. As to the deviation from code provisions A.2.1 and A.4.2 of the CG Code, the Board will continue to review the current structure from time to time and shall make necessary changes when appropriate and inform the shareholders accordingly. 62 Tencent Holdings Limited 0.89% 83,683,675 • develops, reviews and monitors the code of conduct and compliance manual (if any) applicable to employees and directors reviews and monitors the Company's policies and practices on the compliance with legal and regulatory requirements reviews and monitors the training and continuous professional development of the directors and senior management team of the Company reviews the Company's corporate governance matters and makes recommendations to the Board • Corporate Governance Committee Corporate Governance Report Annual Report 2015 67 62 00 exercises oversight of the Company's financial reporting system and internal control procedures reviews the Company's financial information ENVIRONMENT AND COMPLIANCE WITH LAWS • Investment manager 95,009,185 Trustee (other than a bare trustee) 24,090 Custodian corporation/ approved lending agent 300,211,641 Total (Note 3(i)): 587,168,379 6.24% Short position Beneficial owner (Note 3(ii)) 191,923,463 • The Group is committed to and has implemented certain policies to minimise the impact on the environment from our business activities. As far as the Board is aware, the Group has complied with the relevant laws and regulations that have a significant impact on the Group in all material respects. The Company has adopted a code of conduct regarding directors' securities transactions on terms no less exacting than the required standard set out in the Model Code. The directors of the Company have complied with such code of conduct throughout the accounting year covered by this annual report. Responsibilities The Board's fundamental responsibility is to exercise its best judgment and to act in the best interests of the Company and its shareholders. The Board oversees management's efforts to promote the Company's success while operating in an effective and responsible manner. The Board also formulates the Company's overall business strategies and monitors management's execution of such strategies. By discharging its responsibilities, the Board has defined the business and governance issues for which it needs to be responsible, and these matters reserved for the Board have been separately defined, and are reviewed periodically, to ensure that the Company maintains the proper level of corporate governance and to ensure they are up to date. In this regard, the Board: determines the Group's mission, provides its strategic direction and is responsible for the approval of strategic plans approves the annual business plan and budget proposed by management retains full and effective control over the Group and monitors management with regard to the implementation of the approved annual budget and business plan appoints the Chief Executive Officer, who reports to the Board, and ensures that succession is planned • approves the Company's financial statements, interim and annual reports • determines the Group's communication policy Tencent Holdings Limited 99 66 • Corporate Governance Report determines director selection, orientation and evaluation ensures that the Group has appropriate risk management, internal control, internal audit and regulatory compliance procedures in place and that it communicates adequately with shareholders and stakeholders establishes Board sub-committees with clear terms of reference and responsibilities as appropriate defines levels of delegation in respect of specific matters, with required authority to Board sub-committees and management monitors non-financial aspects pertaining to the business of the Group • considers and, if appropriate, declares the payment of dividends to shareholders regularly evaluates its own performance and effectiveness The Board delegates the responsibility of day-to-day business and operations to the Company's senior management team, which includes its chief officers, the president and executive vice-presidents. The senior management team meets once every two weeks or as frequent as necessary to formulate policies and make recommendations to the Board. The senior management team administers, enforces, interprets and supervises compliance with the internal rules and operational procedures of the Company as well as its subsidiaries and conducts regular reviews, recommends and advises on appropriate amendments to such rules and procedures. The senior management team reports to the Board on a regular basis and communicates with the Board whenever required. To better serve the long term interests of our stakeholders, the Board dedicates certain matters which require particular time, attention and expertise to be devoted to its committees. The Board has determined that these matters are better dealt with by the committees as they require independent oversight and specialists input. As such, the Board has established five committees to assist the Board: Audit Committee, Corporate Governance Committee, Investment Committee, Nomination Committee and Remuneration Committee. Each of the committees has terms of reference which clearly specifies its powers and authorities. All committees report back to the Board and make recommendations to the Board if necessary. The Company's governance structure of these committees can be summarised as follows: Audit Committee BOARD OF DIRECTORS The Board continues to monitor and review the Company's corporate governance practices and makes necessary changes at an appropriate time. The Company's corporate governance practices are based on the code provisions as set out in the CG Code. The Board is of the view that throughout the year ended 31 December 2015, the Company complied with the applicable code provisions set out in the CG Code, except for the deviation from code provisions A.2.1 regarding the segregation of the role of the chairman and chief executive and A.4.2 regarding the retirement and re-election of directors. CORPORATE GOVERNANCE PRACTICES PRE-EMPTIVE RIGHTS There is no provision for pre-emptive rights under the Articles of Association, or the laws of Cayman Islands, which would oblige the Company to offer new shares on a pro rata basis to existing shareholders. EMPLOYEE AND REMUNERATION POLICIES As at 31 December 2015, the Group had 30,641 employees (2014: 27,690). The number of employees employed by the Group varies from time to time depending on needs and the employees are remunerated based on industry practice. The remuneration policy and package of the Group's employees are periodically reviewed. Apart from pension funds and in- house training programmes, discretionary bonuses, share awards and share options may be awarded to employees according to the assessment of individual performance. The total remuneration cost incurred by the Group for the year ended 31 December 2015 was RMB18,475 million (2014: RMB15,451 million). Tencent Holdings Limited 64 Directors' Report SUFFICIENCY OF PUBLIC FLOAT Based on information that is publicly available to the Company and within the knowledge of its directors, the directors confirm that the Company has maintained during the year the amount of public float as required under the Listing Rules. CLOSURE OF REGISTER OF MEMBERS (A) Entitlement to Attend and Vote at the 2016 AGM ADOPTION OF CODE OF CONDUCT REGARDING DIRECTORS' SECURITIES TRANSACTIONS The register of members will be closed from Monday, 16 May 2016 to Wednesday, 18 May 2016, both days inclusive, during which period no transfer of shares will be registered. In order to be entitled to attend and vote at the 2016 AGM, all duly completed transfer forms accompanied by the relevant share certificates must be lodged with the Company's branch share registrar, Computershare Hong Kong Investor Services Limited, at Shops 1712-1716, 17th Floor, Hopewell Centre, 183 Queen's Road East, Wan Chai, Hong Kong for registration not later than 4:30 p.m. on Friday, 13 May 2016. The register of members will be closed from Tuesday, 24 May 2016 to Wednesday, 25 May 2016, both days inclusive, during which period no transfer of shares will be registered. In order to qualify for the proposed final dividend, all duly completed transfer forms accompanied by the relevant share certificates must be lodged with the Company's branch share registrar, Computershare Hong Kong Investor Services Limited, at Shops 1712-1716, 17th Floor, Hopewell Centre, 183 Queen's Road East, Wan Chai, Hong Kong for registration not later than 4:30 p.m. on Monday, 23 May 2016. AUDITOR The financial statements have been audited by PricewaterhouseCoopers who will retire and, being eligible, offer themselves for re-appointment at the 2016 AGM. On behalf of the Board Ma Huateng Chairman Hong Kong, 17 March 2016 65 99 Annual Report 2015 00 Corporate Governance Report Maintaining the highest standards of corporate governance and ethical business practices are core values of the Group. The Board views effective corporate governance practices as a priority of the Group, with the aim of providing our investors a thorough understanding of the Group's management and how the management oversees and manages different businesses of the Group. Our belief is that investors will recognise significant long-term value when the Group's businesses are conducted in an open and responsible manner. Ethical business practices go hand in hand with strong corporate governance, and we believe that running our businesses in an ethical manner will create trust with the public and ultimately create shareholder value for the Group. (B) Entitlement to the Proposed Final Dividend reviews the shareholders communication policy and makes recommendations to the Board where appropriate to enhance effective communications between the Company and its shareholders reviews the Company's compliance with the code and disclosure in the Corporate Governance Report Investment Committee 61 Annual Report 2015 Directors' Report INTERESTS OF SUBSTANTIAL SHAREHOLDERS As at 31 December 2015, the following persons, other than the directors or chief executive of the Company, had an interest or short position in the shares or underlying shares of the Company which would fall to be disclosed to the Company under the provisions of Divisions 2 and 3 of Part XV of the SFO as recorded in the register required to be kept by the Company under section 336 of the SFO, or who was, directly or indirectly, interested in 5% or more of the issued share capital of the Company: Long/ short position in the shares of the Company Number of Percentage Nature of shares/ underlying Name of shareholder 00 Long/ short position shares held of issued share capital MIH TC Long position Corporate (Note 1) 3,151,201,900 33.51% Advance Data Services Limited Long position Corporate (Note 2) 855,446,400 9.10% interest/capacity 19 Details of risks related to our corporate structure are set out in the paragraph "The risks associated with Structure Contracts and the actions taken by the Company to mitigate the risks" under the section headed “Connected Transactions". Risks Related to Our Corporate Structure Directors' Report The risks associated with Structure Contracts and the actions taken by the Company to mitigate the risks Due to regulatory limitations restricting foreign investment in businesses providing value-added telecommunications services in China, the Company conducts some of its business in the PRC through the OPCOs. These contractual arrangements may not be as effective in providing control as direct ownership. Pursuant to the Structure Contracts, the arbitration tribunal is entitled to decide compensation for the equity interests or property ownership of OPCOS, decide to implement enforceable remedy (including mandatorily requiring OPCOS to transfer the equity interests of OPCOS to the WFOES, etc.) or order the bankruptcy of OPCOS. Prior to the formation of the arbitration tribunal, the courts of the places where the major assets of OPCOS are situated are entitled to implement interim remedies to ensure the enforcement of the future decisions of the arbitration tribunals. The WFOES have been structured and located in order to benefit from preferential tax treatments offered to companies located in designated economic zones and/or operating software-related businesses. Although the relevant governmental authority has granted such preferential tax treatment to certain WOFES and OPCOS, there can be no assurance that the conditions under which these treatments are provided will always be present. The relevant WOFES and OPCOS would use their reasonable endeavours to take all necessary actions, including but not limited to maintaining or acquiring their status as “High and New Technology Enterprise" or "National Key Software Enterprise", in order to continue to enjoy the reduced income tax rate and the other tax concessions. Due to the legal constraints in relation to foreign investment in the telecommunications value-added services industry in the PRC, a number of agreements have been entered into between members of the Group whereby the Company and the WOFES derive substantially all their revenues from transactions with the OPCOS. The recognition of revenues outlined in these intra- group contracts could be challenged by tax authorities and any adjustment in tax treatment could have a material and adverse impact on the taxable profitability of the Group. As advised by the Company's PRC legal advisers, it is unlikely that the tax treatment of revenues will be challenged by the PRC tax authorities, provided that the transactions under these intra-group contracts represent bona fide transactions conducted on an arm's length basis. The Company will take all necessary actions to ensure and monitor that relevant transactions are to be conducted on an arm's length basis to minimize the risks of adjustment in tax treatment. For details of the risks associated with the Structure Contracts, please refer to the section headed "Risk factors - Risks relating to our structure" in the IPO prospectus. Other connected transactions Save as the related parties transaction disclosed in Note 10 (transactions with associates), Note 14 (Loans to investees and investees' shareholders), Note 20 (Share-based payments), Note 31(a) (Senior management's emoluments), Note 31(b) (Five highest paid individuals) and Note 44 (Benefits and interests of directors) to the consolidated financial statements, no related parties transactions disclosed in the consolidated financial statements constitutes a discloseable connected transaction as defined under the Listing Rules. The Company has complied with the disclosure requirements set out in Chapter 14A of the Listing Rules. Tencent Holdings Limited 60 60 Directors' Report RISKS AND UNCERTAINTIES The Company has identified principal risks and uncertainties that the Group faces with respect to economic risks, operational risks, regulatory risks, financial risks, and specific risks related to the Group's corporate structure. The Group's business, future results of operations and prospects could be materially and adversely affected by those risks and uncertainties. The following highlights the principal risks and uncertainties of the Group and it is not meant to be exhaustive. There may be other risks and uncertainties which are not known to the Group or which may not be material now but turn out to be material in the future. Economic Risks A severe or prolonged downturn of the global or PRC economy. Negative effect on our operational, financing or investing activities due to fluctuations in foreign currency exchange rates, inflation, fluctuations of interest rates and other measures relating to financial policies in PRC. Operational Risks Failure to compete in the competitive environment which the Group operates in or to keep up with technological developments. Unexpected network interruptions or undetected programming errors or defects. Regulatory Risks Failure to adhere to laws, regulations and rules, or to obtain or maintain all applicable permits and approvals. Adverse effects arising from change in laws and regulations affecting our businesses. Financial Risks Details of financial risks are set out in Note 3.1 to the consolidated financial statements. JPMorgan Chase & Co. • handles the relationship with the Company's external auditor Participated in continuous professional Name of Director Executive directors Ma Huateng Lau Chi Ping Martin Non-executive directors ✓ 59 We believe ongoing education and training, as well as participation in director education programs, is important for maintaining a current and effective Board. In order to ensure the directors are aware of their responsibilities as directors of the Company and have a proper understanding of the Group's operations and business, and for the Company to take advantage of their rich mix of knowledge and experience, it is our practice that new directors have to undergo an orientation programme and the existing directors have to attend a comprehensive, formal and tailored training on their duties and responsibilities as directors under statute, common law, the Listing Rules, legal and other regulatory requirements provided by external professional advisers. Directors would also regularly meet with senior management team to understand the Group's business, governance policies and regulatory environment. New directors would also receive a directors' handbook on their responsibilities under the Listing Rules, applicable legal requirements and other regulatory requirements and the business and governance policies of the Group. Trainings have been and will continue to be provided by external advisers on a regular basis in relation to any updates of laws and regulations (including the Listing Rules) which relate to the director's responsibilities. During the year ended 31 December 2015, the Company arranged a briefing on topics relating to corporate governance, legal and regulatory environment and business trends which are relevant to the Group's business on 12 August 2015. Below summarises the participation of each of the directors in continuous professional development during the year ended 31 December 2015: 69 Attended training/seminar/conference arranged by the Company or other external parties or read relevant material 1 development¹ Jacobus Petrus (Koos) Bekker lan Charles Stone lain Ferguson Bruce Li Dong Sheng 00 All directors have full and timely access to all relevant information as well as advice and services of the Company's general counsel and the company secretary, with a view to ensuring the Board procedures and all applicable rules and regulations are followed. All directors may also obtain independent professional advice at the Company's expenses for carrying out their functions. Corporate Governance Report 68 • identifies, considers and makes recommendations on mergers, acquisitions and disposals ensures compliance of the Listing Rules and any other relevant laws and regulations of any mergers, acquisitions and disposals Nomination Committee . reviews and monitors the structure, size, composition and diversity of the Board in light of the Company's strategy • • identifies suitably qualified individuals and makes recommendations to the Board to be new Board members reviews and makes recommendations to the Board on individuals nominated to be directors by shareholders assesses the independence of independent non-executive directors reviews and monitors the implementation of the board diversity policy of the Company Remuneration Committee reviews and approves proposals about the policy and structure of remuneration of directors and senior management team ensures these remuneration proposals are aligned to corporate goals and objectives ensures that no director or any of his associates is involved in deciding his own remuneration The work of the committees during the year 2015 is set out on pages 74 to 77. Tencent Holdings Limited Independent non-executive directors Charles St Leger Searle Tencent Holdings Limited 00 Besides, all major decisions have been made in consultation with members of the Board and appropriate committees, as well as the senior management team. Chief officers and senior executives are invited to attend Board meetings from time to time to make presentations and answer Board's enquiries. In addition, directors are encouraged to participate actively in all Board and committee meetings of which they are members, and the Chairman ensures that all issues raised are properly briefed at the Board meetings, and together with the senior management team, provide adequate, accurate, clear, complete and reliable information to members of the Board in a timely manner. Further, the Chairman ensures that adequate time is available for discussion for all items at the Board meetings. During the year ended 31 December 2015, the Chairman held a meeting with the non-executive directors (including the independent non-executive directors) without the presence of the executive directors, presenting diversified perspectives for the Chairman to consider. In view of the ever-changing business environment in which our Group operates, the Chairman and Chief Executive Officer must be proficient in IT knowledge and be sensitive to fast and rapid market changes, including changes in users' preferences, in order to promote the different businesses of the Group. The Board thus considers that a segregation of the role of the Chairman and Chief Executive Officer may create unnecessary costs for the daily operation of the Group. Mr Ma Huateng serves as the Chairman and Chief Executive Officer of the Company. This is at variance with code provision A.2.1 of the CG Code, which provides that the roles of Chairman and chief executive should be separate and should not be performed by the same individual. The division of responsibilities between the Chairman and chief executive should be clearly established and set out in writing. Chairman and Chief Executive Officer 10 company secretary attends trainings in compliance with the Listing Rules requirements trainings have been and will continue to be provided to directors on a timely basis, including briefing the directors on any updates to the Listing Rules and the laws review of the shareholders communication policy has been and will be conducted on a regular basis To stay abreast of the high level of corporate governance and maintain transparency of our corporate governance practices, we have continued to adopt and foster the following corporate governance practices: In addition, the Board has adopted various practices to bring the Group to a high level of corporate governance and in compliance with the CG Code. Maintaining a high level of corporate governance and integrity cannot depend solely on the Board's efforts, each of the Group's employees is also required to contribute to such cause. A code of conduct policy which emphasises on honesty and respect is distributed by the Company to all employees and forms part of their service contracts. Corporate Governance Report Corporate Governance Report The Board is therefore of the view that there are adequate balance of power and safeguards in place. Nevertheless, the Board will continue to regularly monitor and review the Company's current structure and to make necessary changes at an appropriate time. Composition As at the date of this annual report, the Board comprised a total of seven directors, with two executive directors, two non- executive directors and three independent non-executive directors. During the year ended 31 December 2015 and up to the date of this annual report, there is no change to the composition of the Board. A list of directors and their respective biographies are set out on pages 46 to 47 of this annual report. In order to take advantage of the skills, experiences and diversity of perspective of the directors and in order to ensure that the directors give sufficient time and attention to the Group's affairs, we request each of the directors to disclose to the Company quarterly the number and the nature of offices held in public companies or organisations and other significant commitments. The Board's composition is in compliance with the requirement under Rule 3.10A of the Listing Rules that the number of independent non-executive directors must represent at least one-third of the Board. The Board believes that the balance between the executive directors and non-executive directors is reasonable and adequate to provide sufficient checks and balances that safeguard the interests of the shareholders and the Group. The Board values the importance of independent judgment and advice provided by non-executive directors to safeguard the interests of the shareholders. The non-executive directors contribute diversified qualifications and experience to the Group by expressing their views in an independent, constructive and informed manner, and actively participate in Board and committee meetings and to bring independent judgment and advice on issues relating to the Group's strategies, policies, performance, accountability, resources, key appointments, standards of conduct, conflicts of interests and management process, with the shareholders' interests being the utmost important factor. The non-executive directors also exercise their independent judgment and utilise their expertise to scrutinise the Company's performance in achieving agreed corporate goals, and monitor performance reporting. Further, in compliance with Rule 3.10 of the Listing Rules, one of our independent non-executive directors has the appropriate professional qualifications or accounting or related financial management expertise, and provides valuable advice from time to time to the Board. The Company has also received from each independent non-executive director a confirmation annually of his independence and the Nomination Committee has conducted an annual review and considers that all independent non- executive directors are independent, taking into account of the independence guidelines set out in Rule 3.13 of the Listing Rules in the context of the length of service of each independent non-executive director. 71 Annual Report 2015 00 Corporate Governance Report As part of our corporate governance practice to provide transparency to the investor community and in compliance with the Listing Rules and the CG Code, independent non-executive directors are identified as such in all corporate communications containing the names of the directors. In addition, an updated list of directors identifying the independent non-executive directors and the roles and functions of the directors is maintained on the Company Website and the Stock Exchange's website. 70 informal updates and structured monthly updates on the Company's performance, position and prospects are provided to the directors Annual Report 2015 The Board is the core of the Group's success, and with the right membership of the Board, we can benefit from the right set of skills, experience and diversity of perspective to take the Company forward. Therefore, it is essential for the Company to maintain the established formal, considered and transparent procedure for the appointment of new directors to the Board. It is our corporate governance practice and in accordance with the Articles of Association that all directors (except for the Chairman) should be subject to re-election at regular intervals and the resignation and removal of any director should be explained with reasons. In the 2015 annual general meeting, Mr Li Dong Sheng and Mr lain Ferguson Bruce were retired and re-elected. The Board is responsible for overseeing sound risk management and internal control systems on an ongoing basis. The Board has established and maintained a set of procedures to provide effective risk management and internal control systems, which include: Adequate and effective risk management and internal control systems are key to mitigate risk and to safeguard shareholders' interests and the Group's assets against any unauthorised use or disposition. The risk management and internal control systems should also, among others, ensure the maintenance of proper accounting records for the provision of reliable financial information for internal use or for publication and ensure that the Group is in compliance with relevant legislation and regulations. However, such systems are designed to manage rather than eliminate the risk of failure to achieve business objectives, and can only provide reasonable and not absolute assurance against material misstatement or loss. As part of the Board's responsibility, the Board ensures that a balanced and clear assessment of the Group's performance and prospects is presented. The directors acknowledge that it is their responsibility to prepare the accounts that give a true and fair view of the Group's financial position on a going-concern basis and other announcements and financial disclosures. To assist the Board in discharging its responsibilities, the senior management team provides updates to the Board from time to time, including the Group's business and financial position in sufficient detail, to give the directors a balanced, understandable and clear assessment of the performance, position and prospects of the Group. The senior management team also provides all necessary and relevant information to the Board, giving the directors sufficient explanation and information they need to discharge their responsibilities and make an informed assessment of financial and other information put before them for approval. The Company auditor's statement in respect of their reporting responsibilities is set out in the Auditor's Report. The Board also has the responsibility to oversee the risks undertaken by the Group, and to actively consider, analyse and formulate strategies to control the risks the Group is exposed to, and determine the level of risk the Company wishes to and is able to take. The senior management team monitors these risks and develops effective systems and mechanisms to mitigate risks to an acceptable level as determined by the Board. The senior management team reports to the Board periodically and whenever necessary on the risks the Group faces and the actions taken to mitigate them. ACCOUNTS, RISK MANAGEMENT AND INTERNAL CONTROL In respect of non-executive directors, the Remuneration Committee has reviewed the fees payable to them taking into account the particular nature of their duties, relevant guidance available and the requirements of the Listing Rules. Corporate Governance Report 76 Tencent Holdings Limited In conducting its work in relation to the remuneration of directors and senior management team, the Remuneration Committee ensured that no individual and his associates were involved in determining his own remuneration. It also ensured that remuneration awards were determined by reference to the performance of the individual and the Company and were aligned to the market practice and conditions, the Company's goals and strategies. They are designed to attract, retain and motivate high performing individuals, and reflect the specifics of individual roles. reviewed and approved compensation awards granted to senior management team, to recognise their valuable contributions to the Company and to provide incentives for future performances assessed performance and, reviewed and approved amendments to the remuneration packages for the executive directors and members of the senior management team reviewed and recommended to the Board in respect of the remuneration policies and structure of the Company by benchmarking peer companies with similar scale to ensure that the Company's remuneration packages are competitive to recruit the best talents in the industry and to retain key staffs The Remuneration Committee has the delegated responsibility to determine the remuneration packages of each member of the senior management team and make recommendations to the Board on the remuneration packages of each director. During 2015, the Remuneration Committee: The Remuneration Committee met four times in 2015. Individual attendance of each Remuneration Committee member is set out on page 73. The Remuneration Committee comprises only non-executive directors. Its members are Mr lan Charles Stone, Mr Li Dong Sheng (both are independent non-executive directors) and Mr Jacobus Petrus (Koos) Bekker (non-executive director). Mr lan Charles Stone chairs the Remuneration Committee. Remuneration Committee During 2015, the Nomination Committee reviewed board composition and director succession, and the board diversity policy. The Nomination Committee has also assessed the independence of the independent non-executive directors and considers all of them being independent, taking into account of the independence guidelines set out in Rule 3.13 of the Listing Rules in the context of the length of service of each independent non-executive director. The Company recognises the benefits of having a diverse Board, and views diversity at Board level as a business imperative that will help the Company achieve its strategic objectives and maintain a competitive advantage. As such, the Board has set measurable objectives for the implementation of the board diversity policy to ensure that the Board has the appropriate balance of skills, experience and diversity of perspectives that are required to support the execution of its business strategy and maintain the effectiveness of the Board. The Nomination Committee is satisfied that the board diversity policy is successfully implemented with reference to the measurable objectives. The Nomination Committee will continue to monitor the implementation of the board diversity policy and will review the board diversity policy periodically to ensure its continued effectiveness. establishing a distinct organisation structure with defined lines of authority and control responsibilities. Relevant group, division or department heads actively participate in the preparation of strategic plans for achieving annual operational and financial targets. These plans serve as the foundation for the preparation of the Group's annual budget by which resources are allocated in accordance with identified and prioritised business opportunities. The Board approves the annual operating plan and budget on an annual basis Corporate Governance Report if there are any variances against the annual budget, these variances will be analysed and appropriate actions will be taken if necessary to rectify or mitigate any noted deficiencies 77 Apart from participating in the Company's general meetings, the Company's shareholders are provided with contact details of the Company, such as telephone number, email address and postal address which are also available on the Company Website, in order to enable them to make any query that they may have. Shareholders may send their enquiries to the Board directly through these means. Shareholders may also contact the Company's Hong Kong branch share registrar, Computershare Hong Kong Investor Services Limited, if they have any enquiries about their shareholdings and entitlements to dividends. In order to ensure that shareholders' interests and rights are adequately protected, a separate resolution will be proposed for each substantially separate issue at the general meetings, and all resolutions will be voted by poll pursuant to the Articles of Association and the Listing Rules. To ensure the shareholders are familiar with the detailed procedures for conducting a poll, detailed procedures for conducting a poll are explained at the commencement of the general meetings, and all questions from shareholders on the voting procedures can be answered before the poll voting starts. An external scrutineer will be appointed to monitor and count the votes cast by poll. Poll results will be posted on the Company Website and the Stock Exchange's website after each general meeting. Pursuant to the Articles of Association, any one or more shareholder(s) of the Company holding at the date of deposit of the requisition not less than one-tenth of the paid up capital of the Company carrying the right of voting at general meetings of the Company shall at all times have the right, by written requisition to the Board or the company secretary, to require an extraordinary general meeting to be called by the Board for the transaction of any business specified in such requisition; and such meeting shall be held within two months after the deposit of such requisition. 00 Corporate Governance Report 78 Tencent Holdings Limited The Company strives to provide ready, equal, regular and timely disclosure of information that is material to the investor community. Therefore, the Company works to maintain effective and on-going communication with shareholders so that they, along with prospective investors, can exercise their rights in an informed manner based on a good understanding of the Group's operations, business and financial information. The Company also encourages shareholders' active participation in annual general meetings and other general meetings or other proper means. As such, the Company sends notice to shareholders for annual general meetings at least 20 clear business days before the meeting and at least 10 clear business days for all other general meetings. In addition, the Company has developed and maintains the shareholders communication policy which is available on the Company Website. SHAREHOLDERS The Audit Committee reviews the risk management and internal control systems annually on behalf of the Board. The Board is satisfied that the Company's accounting and financial reporting function is adequately resourced with staff of appropriate qualifications and experience, and that the staff receives appropriate and sufficient training and development. Based on the report from the Audit Committee, the Board is satisfied that the Company's internal audit function is adequately resourced and competent to manage the Group's risks and safeguard the Group's assets, and that the external audit process has been effective. The Board, with the recommendation of the Audit Committee, is satisfied that the Group has complied with the provisions regarding internal controls as required under the CG Code and is not aware of any significant issues that would have an adverse impact on the effectiveness and adequacy of the risk management and internal control systems. The overall risk management and internal control status will be reported to the Audit Committee on quarterly basis. In addition to providing advice on setting up and implementing policies and processes to promote effective internal control, IC also promotes risk management and internal control awareness to management and employees across the Group. The IA and IC provide valuable support to the Company's risk management and internal control systems. The IA reviews different business and functional operations and activities of the Group with a special focus on high risk areas. The IA also conducts ad hoc reviews in areas of concern identified by the senior management team. If the IA identifies any deficiencies, the relevant group, division or department heads will be notified on such deficiencies, and will rectify the deficiencies and IA together with management will follow up with the implementations of audit recommendations on timely basis. If the IA considers that the deficiency is a significant internal control weakness, such matter will be brought to the attention of the Audit Committee and the Board if necessary. The IC facilitates the establishment of the risk management and internal control systems with the Company's management and monitors the implementation of effective risk management practices based on the COSO Framework. IC facilitates the senior management team to ensure controls in operational processes are efficient and effective, and regularly communicates with the Audit Committee IA performs independent review of the operational areas and presents its findings and prospective audit plan to the Audit Committee on a quarterly basis Corporate Governance Report Annual Report 2015 00 Annual Report 2015 75 00 • the 2015 first and third quarters results announcements • the 2015 interim report and interim results announcement • the 2014 annual report, including the Corporate Governance Report, Directors' Report and the financial statements, as well as the related results announcement The Audit Committee's main work during the year 2015 included reviewing: The Audit Committee meets not less than four times a year; in 2015 the Audit Committee met eight times. Individual attendance of each Audit Committee member is set out on page 73. In addition to the members of the Audit Committee, meetings were attended by the Chief Financial Officer, the Head of Internal Audit and the Head of Internal Control, and the external auditor at the invitation of the Audit Committee. Appointments, Re-election and Removal The Audit Committee comprises only non-executive directors. Its members are Mr lain Ferguson Bruce, Mr Ian Charles Stone (both are independent non-executive directors) and Mr Charles St Leger Searle (non-executive director). Mr lain Ferguson Bruce chairs the Audit Committee and together with Mr Charles St Leger Searle, have appropriate professional qualifications and experiences in financial matters. Audit Committee As described above, the Board has established five committees which have delegated responsibilities and report back to the Board: Audit Committee, Corporate Governance Committee, Investment Committee, Nomination Committee and Remuneration Committee. The roles and functions of these committees are set out in their respective terms of reference. The terms of reference of the Audit Committee, the Nomination Committee and the Remuneration Committee are available on the Company Website and the Stock Exchange's website. THE COMMITTEES The company secretary ensures that there is a good and timely flow of information to the Board. The company secretary is responsible for taking minutes of all Board and committee meetings and ensuring that sufficient details of the matters considered and decisions reached have been recorded. Draft and final version of the minutes of meetings are sent to the directors for comments and records respectively within a reasonable time after each meeting, and final minutes with the relevant board papers and related materials are kept by the company secretary and are available for review and inspection by the directors at any time. Corporate Governance Report Annual Report 2015 73 compliance with the CG Code, the Listing Rules and relevant laws in relation to the external auditor, their plans, reports and management letter, fees, involvement in non-audit services, and their terms of engagement the plans (including those for 2015), resources and work of the Company's internal auditors • The Nomination Committee met once in 2015. Individual attendance of each Nomination Committee member is set out on page 73. The Nomination Committee comprises a majority of independent non-executive directors. Its members are Mr Ma Huateng, Mr Li Dong Sheng, Mr lain Ferguson Bruce, Mr Ian Charles Stone (all three are independent non-executive directors) and Mr Charles St Leger Searle (non-executive director). The Nomination Committee is chaired by Mr Ma Huateng. Nomination Committee In 2015, the Investment Committee met once and had also considered and passed various resolutions on its decisions on the Group's acquisitions and disposals from time to time. The Investment Committee comprises a majority of executive directors. Its members are Mr Lau Chi Ping Martin, Mr Ma Huateng and Mr Charles St Leger Searle. The Investment Committee is chaired by Mr Lau Chi Ping Martin. Investment Committee During 2015, the Corporate Governance Committee discussed on the arrangements made for directors and senior management team to attend training sessions for continuous professional development, reviewed the Company's compliance with the code and disclosure in the Corporate Governance Report, as well as reviewed the Company's corporate governance policies and practices, and the Company's policies and practices on compliance with legal and regulatory requirements, including the insider dealing policy, the disclosure of inside information policy and the shareholders communication policy. The Corporate Governance Committee met twice in 2015. Individual attendance of each Corporate Governance Committee member is set out on page 73. 19 The Corporate Governance Committee comprises only non-executive directors. Its members are Mr Charles St Leger Searle (non-executive director), Mr lain Ferguson Bruce and Mr lan Charles Stone (both are independent non-executive directors). The Corporate Governance Committee is chaired by Mr Charles St Leger Searle. In view of the new requirements in respect of risk management and internal control systems of listed issuers under the revised CG Code which apply to accounting periods beginning on or after 1 January 2016, the terms of reference of the Audit Committee were revised in December 2015 to align with the revised CG Code. The Audit Committee will continue to oversee the financial reporting system, risk management and internal control systems of the Company. PricewaterhouseCoopers ("PwC") is the Group's external auditor. The Audit Committee annually reviews the relationship of the Company with PwC. Having also reviewed the effectiveness of the external audit process as well as the independence and objectivity of PwC, the Audit Committee is satisfied about this relationship. As such, the Audit Committee has recommended their re-appointment at the 2016 AGM. Corporate Governance Report 74 Tencent Holdings Limited the effectiveness of the Company's financial reporting system, the system of internal controls in operation, risk management system and associated procedures within the Group • the adequacy of resources, qualification and training of the Group's finance department Corporate Governance Committee 79 The Company's general meetings provide a transparent and open platform for the Company's shareholders to communicate with the Board. The Chairman, other members of the Board and relevant members of the senior management team, under usual circumstances, attend to answer questions raised and discuss matters in relation to the Company in an open manner. Save as Mr Jacobus Petrus (Koos) Bekker and Mr Li Dong Sheng, all directors attended the 2015 annual general meeting, with a view to understand the views of the Company's shareholders. The company secretary provided the minutes of 2015 annual general meeting to all directors to have a thorough understanding of the views of the Company's shareholders. The Company's external auditor will also attend the annual general meeting to answer questions relating to the conduct of the audit, the auditor's report and auditor independence. The Company's shareholders may also propose candidates for election as a director of the Company according to the procedures set out in the Company Website. 1/1 6/6 8/8 2/2 1/1 1/1 lan Charles Stone 6/6 8/8 2/2 1/1 4/4 1/1 == At the Board meetings, the Board discussed on a wide range of matters, including the Group's overall strategies, financial and operational performances, approved the annual, interim and quarterly results of the Group, the appointment of directors, business prospects, regulatory compliance and corporate governance, and other significant matters. The company secretary, in consultation with the Chairman and the senior management team, prepares the agendas for each meeting and all directors are given the opportunity to include matters for discussion in the agenda. The company secretary also ensures that all applicable rules and regulations in relation to the Board meetings are followed. The company secretary sends notice of the Board meeting to each of the directors at least fourteen days in advance of each regular Board meeting. The company secretary also sends the agendas, board papers and relevant information relating to the Group to each of the directors at least three days in advance of each regular Board meeting and committee meeting, and keeps the directors updated on the Group's financial performance and latest developments. If any director raises any queries, steps will be taken to respond to such queries as promptly and fully as possible. If there is potential or actual conflict of interests involving a substantial shareholder or a director, such director would declare his interest and will abstain from voting on such matters. The directors may approach the Company's senior management team when necessary. The directors may also seek independent professional advice at the Company's expense in appropriate circumstances. 1/1 lain Ferguson Bruce 6/6 0/1 1/1 4/4 6/6 Jacobus Petrus (Koos) Bekker Non-executive directors 1/1 0/1 Charles St Leger Searle 6/6 8/8 2/2 1/1 1/1 Independent non-executive directors Li Dong Sheng 4/6 3/4 6/6 Lau Chi Ping Martin Ma Huateng Code provision A.4.2 of the CG Code provides that all directors appointed to fill a casual vacancy should be subject to election by shareholders at the first general meeting after appointment. Every director, including those appointed for a specific term, should be subject to retirement by rotation at least once every three years. Since the Chairman, in accordance with the Articles of Association, whilst holding such office is not subject to retirement by rotation nor taken into account in determining the number of directors to retire in each year, code provision A.4.2 of the CG Code is deviated. The Chairman is one of the founders of the Group and he plays a key role in the growth and development of the Group. At present, the Chairman's continuing presence in the Board is vital to assure sustainable development of the Group. Given the importance of the Chairman's role in the development of the Group, the Board considers that the relevant provision in the Articles of Association has no material impact on the operation of the Group as a whole. Tencent Holdings Limited 72 Board Activity The Board meets four times during the year as a minimum and, during the year of 2015, it met six times. The attendance of each director at Board, committee meetings and annual general meeting, whether in person or by means of electronic communication, is detailed in the table below: Attendance/No. of Board, Committee Meetings and Annual General Meeting Corporate Corporate Governance Report General Meeting Audit Name of Director Board Governance Nomination Remuneration Committee Committee Committee Committee Executive directors Annual 2,942 Deferred revenue 26 39,007 3,478 60,312 3,668 3,004 27 Notes payable 2,052 3,626 23 Long-term payables 25,028 37,092 25 5,507 Deferred income tax liabilities 12,922 Retained earnings Borrowings Share capital Tencent Holdings Limited 18 Share premium 18 12,167 5,131 Shares held for share award schemes 2,065 Total equity Non-controlling interests 80,013 120,035 74,062 100,012 2,129 9,673 19 (1,309) (1,817) 18 Equity attributable to equity holders of the Company RMB'Million 2014 RMB'Million Non-current liabilities LIABILITIES 82,124 122,100 2,111 Other reserves 43,438 42,713 155,378 75,321 24 Total assets 171,166 00 83 Annual Report 2015 Consolidated Statement of Financial Position As at 31 December 2015 EQUITY As at 31 December 2015 Note 306,818 84 461 Consolidated Statement of Financial Position Finance costs, net 32 (1,618) (1,182) Share of losses of associates and joint ventures 33 (2,793) Profit before income tax 36,216 29,013 Income tax expense 34(a) (7,108) (5,125) Profit for the year 30,542 29,108 40,627 (14,155) 61,232 48,059 28 2,327 1,676 29 1,886 2,759 Selling and marketing expenses 30 (7,993) (7,797) General and administrative expenses 30 (16,825) Operating profit 23,888 Attributable to: Equity holders of the Company Profit for the year Consolidated Statement of Comprehensive Income For the year ended 31 December 2015 Year ended 31 December 2015 2014 RMB'Million RMB'Million 29,108 23,888 Other comprehensive income, net of tax: Items that may be subsequently reclassified to profit or loss Share of other comprehensive income of associates 329 17(a) 86 98 Tencent Holdings Limited The notes on pages 92 to 195 are an integral part of these consolidated financial statements. Non-controlling interests Earnings per share for profit attributable to equity holders of the Company (in RMB per share) - basic - diluted 28,806 302 23,810 (30,873) 78 23,888 35(a) 3.097 2.579 35(b) 3.055 2.545 29,108 (41,631) 30 78,932 3,215 25 3,886 1,834 Current income tax liabilities 1,608 Other tax liabilities 34(b) 462 566 Deferred revenue 26 21,122 16,153 124,406 11,429 24 19,123 70,199 As at 31 December 2015 As at 31 December 2015 Note RMB'Million 2014 RMB'Million 50,035 Accounts payable 15,700 8,683 Other payables and accruals Borrowings Notes payable 21 22 21 Current liabilities Total liabilities 184,718 Value-added services Online advertising Others 80,669 63,310 17,468 8,308 4,726 7,314 Cost of revenues Gross profit Interest income Other gains, net 58 102,863 Revenues RMB'Million 2014 RMB'Million 89,042 306,818 171,166 The notes on pages 92 to 195 are an integral part of these consolidated financial statements. The consolidated financial statements on pages 83 to 195 were approved by the Board of Directors on 17 March 2016 and were signed on its behalf: Ma Huateng Director Total equity and liabilities Lau Chi Ping Martin Director 00 Annual Report 2015 Consolidated Income Statement For the year ended 31 December 2015 Year ended 31 December 2015 Note 85 9,174 1,705 17(b) 1,509 1,686 Balance at 31 December 2014 5,131 (1,309) 2,129 74,062 80,013 2,111 82,124 The notes on pages 92 to 195 are an integral part of these consolidated financial statements. 177 69 00 Annual Report 2015 The statement of the external auditor of the Company about their reporting responsibilities for the financial statements is set out in the "Independent Auditor's Report" on pages 81 and 82. During the year ended 31 December 2015, the remuneration paid/ payable to the Company's external auditor, PwC, were RMB35 million, RMB2 million and RMB13 million for audit services, audit-related services and non-audit services (2014: RMB23 million, RMB15 million and RMB15 million for audit services, audit-related services and non-audit services), respectively. Audit-related services conducted by the external auditor in 2015 mainly represented professional services rendered in relation to the Company's Global Medium Term Note programme (2014: mainly included special audit performed on certain business and subsidiaries of the Group disposed to a strategic business partner in 2014). Non-audit services for 2014 and 2015 conducted by the external auditor included providing professional service on internal controls, mergers and acquisitions, tax advisory and other relevant services. Framework for Disclosure of Inside Information The Company has put in place a framework for the disclosure of inside information in compliance with the SFO. The framework sets out the procedures and internal controls for the handling and dissemination of inside information in a timely manner so as to allow all the shareholders and stakeholders to apprehend the latest position of the Group. The framework and its effectiveness are subject to review on a regular basis according to established procedures. Tencent Holdings Limited 80 pwc Independent Auditor's Report 羅兵咸永道 To the shareholders of Tencent Holdings Limited 89 (1,972) 302 (438) diluted in relation to business combinations Disposal of equity interests in non-wholly owned subsidiaries 468 468 230 23330 468 4 234 238.3 Acquisition of additional equity interests in non-wholly owned subsidiaries 628 (1,224) (596) (118) (714) Put option granted to owners of the non-controlling interests lapsed 357 357 357 Total transactions with owners recognised directly in equity for the year 2,285 (incorporated in the Cayman Islands with limited liability) We have audited the consolidated financial statements of Tencent Holdings Limited (the "Company") and its subsidiaries set out on pages 83 to 195, which comprise the consolidated statement of financial position as at 31 December 2015, and the consolidated income statement, the consolidated statement of comprehensive income, the consolidated statement of changes in equity and the consolidated statement of cash flows for the year then ended, and a summary of significant accounting policies and other explanatory information. DIRECTORS' RESPONSIBILITY FOR THE CONSOLIDATED FINANCIAL STATEMENTS The directors of the Company are responsible for the preparation of consolidated financial statements that give a true and fair view in accordance with International Financial Reporting Standards and the disclosure requirements of the Hong Kong Companies Ordinance, and for such internal control as the directors determine is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Construction in progress Investment properties 16 9,973 7,918 7 4,248 3,830 292 268 Land use rights 8 2,293 751 Intangible assets 9 13,439 9,304 Investments in associates 10(a) 60,171 51,131 Investments in redeemable preference shares of associates 10(b) 6,230 Fixed assets Equity interests in non-wholly owned subsidiaries Non-current assets 2014 AUDITOR'S RESPONSIBILITY Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. PricewaterhouseCoopers, 22/F Prince's Building, Central, Hong Kong T: +852 2289 8888, F: +852 2810 9888, www.pwchk.com 00 81 Annual Report 2015 Independent Auditor's Report An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation of consolidated financial statements that give a true and fair view in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. OPINION In our opinion, the consolidated financial statements give a true and fair view of the financial position of the Company and its subsidiaries as at 31 December 2015, and of their financial performance and cash flows for the year then ended in accordance with International Financial Reporting Standards and have been properly prepared in compliance with the disclosure requirements of the Hong Kong Companies Ordinance. OTHER MATTERS This report, including the opinion, has been prepared for and only for you, as a body, and for no other purpose. We do not assume responsibility towards or accept liability to any other person for the contents of this report. PricewaterhouseCoopers Certified Public Accountants Hong Kong, 17 March 2016 Tencent Holdings Limited 82 ASSETS Consolidated Statement of Financial Position As at 31 December 2015 As at 31 December 2015 Note RMB'Million RMB'Million 54,731 1,705 Non-controlling interests arising from business combinations 14 Prepayments, deposits and other assets 13,277 44,339 12 Available-for-sale financial assets 322 757 27 Deferred income tax assets 63 5,480 544 2,941 23,810 78 23,888 81 81 (1,705) (1,705) (1,705) (295) (295) Investments in joint ventures 1,209 Term deposits 16 Cash and cash equivalents Restricted cash 10,798 37,331 16 Term deposits 1,198 15 Other financial assets 7,804 11,397 14 Prepayments, deposits and other assets 4,588 7,061 13 Accounts receivable 244 222 Inventories Current assets 95,845 151,440 4,831 3,674 6 (289) (1,919) 23,810 7 1,492 (529) (529) 91 211 (211) (61) (61) 62 (61) (1,761) (1,761) (158) (1,919) Dividends Total contributions by and distributions to owners recognised directly in equity for the year 1,657 (438) 471 (1,972) (282) (82) (364) 1,485 81 (529) (91) 21,891 84 21,975 44 44 160 125 285 25 310 299 299 299 Employee share option schemes: -value of employee services - proceeds from shares issued Employee share award schemes: - value of employee services - shares withheld for share award schemes 1,350 - - vesting of awarded shares Profit appropriations to statutory reserves Repurchase and cancellation of shares 135 ' ་@ Net gains/(losses) from changes in fair value of available-for-sale financial assets (347) (1,705) 12,575 12,575 12,575 329 329 29,108 302 28,806 28,806 29 329 Employee share award schemes: 1,970 - proceeds from shares issued Employee share option schemes: Capital injection The Company has arranged appropriate directors and officers liability insurance in respect of legal action against the directors. Directors and Officers Liability Insurance Each non-executive director, whether independent or not, is appointed for a term of one year and is subject to retirement by rotation at least once every three years. A director appointed to fill a casual vacancy or as an addition to the Board will be subject to re-election by shareholders at the first general meeting after his appointment. Appointment Terms of Non-Executive Directors The Company has adopted the Model Code. The Company has also adopted a securities trading code for employees for securities transactions by employees who are likely to be in possession of inside information relating to the Company, the terms of which are no less exact than those of the Model Code. The Company has made specific enquiries with the directors and the directors have confirmed they have complied with the Model Code throughout 2015. Model Code for Securities Transactions by Directors of Listed Issuers The Company is required to disclose certain information pursuant to the Listing Rules and the CG Code. We set out these information below which has not been covered above. DISCLOSURES OF OTHER INFORMATION Corporate Governance Report Non-controlling interests - value of employee services The notes on pages 92 to 195 are an integral part of these consolidated financial statements. 1,970 1,975 External Auditor and Auditor's Remuneration - shares withheld for share award schemes - value of employee services 169 169 376 21 355 108 10 80 108 5 16 90 190 165 44,723 307 44,416 28,806 15,610 736 I 736 736 169 736 15,615 (1,913) 2,129 74,062 80,013 2,111 82,124 Balance at 1 January 2015 Comprehensive income Profit for the year Other comprehensive income: - share of other comprehensive income of associates - net gains from changes in fair value of available-for-sale financial assets (1,309) -currency translation differences - other fair value gain recognised Total comprehensive income for the year Transactions with owners Currency translation differences 1,975 (289) Items that may not be subsequently reclassified to profit or loss Other fair value gain recognised Total comprehensive income for the year Attributable to: Equity holders of the Company 12,575 - RMB'Million equity interests RMB'Million 44,723 21,975 44,416 307 21,891 84 44,723 21,975 00 87 Annual Report 2015 Consolidated Statement of Changes in Equity For the year ended 31 December 2015 Attributable to equity holders of the Company Shares held Share capital RMB'Million Share for share premium award schemes RMB'Million RMB'Million Other Retained controlling Non- Total reserves RMB'Million earnings RMB'Million Total RMB'Million - - vesting of awarded shares 5,131 Profit appropriations to statutory reserves Consolidated Statement of Changes in Equity Capital injection Transactions with owners Total comprehensive income for the year -currency translation differences available-for-sale financial assets – net losses from changes in fair value of - share of other comprehensive income of associates Other comprehensive income: Profit for the year Comprehensive income Balance at 1 January 2014 For the year ended 31 December 2015 88 122,100 2,065 120,035 100,012 9,673 (1,817) 12,167 Balance at 31 December 2015 (4,747) (353) (4,394) (2,856) Tencent Holdings Limited Attributable to equity holders of the Company Shares held Non- (871) 3,746 52,224 57,945 518 58,463 81 23,810 Tax benefit from share-based payments of a subsidiary equity RMB'Million RMB'Million RMB'Million interests Total earnings RMB'Million RMB'Million 2,846 premium award schemes RMB'Million RMB'Million RMB'Million capital Total controlling Retained Other for share Share Share (8,066) (508) reserves in equity for the year 1,661 (508) 2,248 owners recognised directly in equity for the year Total contributions by and distributions to (3,189) (549) (2,640) (2,640) (216) 216 982 Dividends (Note 36) 982 144 (144) 2,391 2,058 273 23 (652) 2,331 (652) 7,036 60 60 982 (2,856) (652) (360) (1,195) 545 (1,195) Total transactions with owners recognised directly (1,195) the put options granted to non-controlling interests Recognition of financial liabilities in respect of 32 (372) (372) non-controlling interests Transfer of equity interests of subsidiaries to (3,971) 372 (3,372) 85 (599) Non-controlling interests arising from business combinations 278 Disposal of equity interests in non-wholly owned subsidiaries (44) 278 (44) Acquisition of additional equity interests in non-wholly owned subsidiaries (Note 19) 185 4,788 (8,160) RMB'Million 2013 RMB'Million 2014 2015 RMB'Million RMB'Million 2016 RMB'Million 102,863 43,894 60,437 78,932 151,938 Gross profit 2012 25,687 Revenues Year ended 31 December TENCENT GROUP HEAD OFFICE Financial Summary 32,659 183 Queen's Road East Wan Chai, Hong Kong COMPANY WEBSITE www.tencent.com lan Charles Stone Yang Siu Shun (appointed with effect from 1 July 2016) CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME STOCK CODE 700 Kejizhongyi Avenue Tencent Holdings Limited Hi-tech Park Nanshan District Shenzhen, 518057 The PRC 2 Tencent Building 48,059 44,723 84,499 equity holders of the Company* 13,567 18,327 21,891 44,416 48,194 14,287 17,008 24,737 Non-GAAP profit attributable to 32,410 CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION 2012 RMB'Million As at 31 December 2013 2014 2015 2016 RMB'Million RMB'Million RMB'Million RMB'Million 45,420 to equity holders of the Company Total comprehensive income attributable 48,617 Profit before income tax 15,051 19,281 36,216 51,640 Profit for the year 12,785 15,563 23,888 29,108 41,447 Profit attributable to equity holders of the Company 12,732 15,502 23,810 28,806 41,095 Total comprehensive income for the year 13,619 18,376 21,975 61,232 Shops 1712-1716, 17th Floor Hopewell Centre Jacobus Petrus (Koos) Bekker Computershare Hong Kong Investor ENVIRONMENTAL, SOCIAL AND GOVERNANCE REPORT 100 INDEPENDENT AUDITOR'S REPORT 109 CONSOLIDATED INCOME STATEMENT 110 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME 111 CONSOLIDATED STATEMENT OF FINANCIAL POSITION 114 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY 86 116 CONSOLIDATED STATEMENT OF CASH FLOWS 227 DEFINITION Corporate Information DIRECTORS Executive Directors Ma Huateng (Chairman) Lau Chi Ping Martin Non-Executive Directors Charles St Leger Searle Independent Non-Executive Directors 118 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CORPORATE GOVERNANCE REPORT 66 DIRECTORS' REPORT Assets Tencent 腾讯 Tencent Holdings Limited Incorporated in the Cayman Islands with limited liability 騰訊控股有限公司 於開曼群島註冊成立的有限公司 (Stock Code 股份代號:700) 2016 smart communication inspires Annual Report 智慧溝通 靈感無限 CONTENTS 2 CORPORATE INFORMATION 3 FINANCIAL SUMMARY 4 CHAIRMAN'S STATEMENT 11 MANAGEMENT DISCUSSION AND ANALYSIS 27 Li Dong Sheng lain Ferguson Bruce lan Charles Stone Yang Siu Shun PricewaterhouseCoopers Certified Public Accountants PRINCIPAL BANKER The Hongkong and Shanghai Banking Corporation Limited REGISTERED OFFICE Cricket Square Hutchins Drive, P.O. Box 2681 Grand Cayman KY1-1111 Cayman Islands PRINCIPAL PLACE OF BUSINESS IN HONG KONG 29/F., Three Pacific Place No. 1 Queen's Road East Wanchai Hong Kong CAYMAN ISLANDS PRINCIPAL SHARE REGISTRAR AND TRANSFER OFFICE Royal Bank of Canada Trust Company (Cayman) Limited 4th Floor, Royal Bank House 24 Shedden Road, George Town Grand Cayman KY1-1110 Cayman Islands HONG KONG BRANCH SHARE REGISTRAR AND TRANSFER OFFICE AUDITOR Services Limited Jacobus Petrus (Koos) Bekker REMUNERATION COMMITTEE (appointed with effect from 1 July 2016) AUDIT COMMITTEE lain Ferguson Bruce (Chairman) lan Charles Stone Charles St Leger Searle Yang Siu Shun (appointed with effect from 1 July 2016) CORPORATE GOVERNANCE COMMITTEE Charles St Leger Searle (Chairman) lain Ferguson Bruce INVESTMENT COMMITTEE Lau Chi Ping Martin (Chairman) Ma Huateng Charles St Leger Searle NOMINATION COMMITTEE Ma Huateng (Chairman) Li Dong Sheng lain Ferguson Bruce lan Charles Stone Charles St Leger Searle lan Charles Stone (Chairman) Li Dong Sheng Non-current assets 29,013 Total assets 647.2 0.8% PCU of QQ (for the quarter) 243.7 241.1 1.1% 250.0 -2.5% Combined MAU of Weixin and WeChat 1.7% 889.3 Annual Report 2016 9 Adding more services within our social platforms to bring more convenience to our users, and to create business opportunities for our ecosystem partners; During 2017, we intend to further our "Connection" strategy by expanding our ecosystem around our core social and communication platforms via initiatives including: Company Outlook and Strategies for 2017 4. Profit attributable to equity holders of the Company increased by 43% year-on-year. Non-GAAP profit attributable to equity holders of the Company increased by 40%. Free cash flow grew 50%. In celebration of the 18th anniversary of the Company, to recognise the contributions made by our employees, we granted 300 shares to each employee in November 2016. Operating profit grew 38% year-on-year. Operating margin was 37%, down 2 percentage points from the previous year due to a mix change in our revenue streams. We achieved 48% year-on-year revenue growth. Revenue growth was broad based but particularly driven by smart phone games, social and performance advertising, digital content sales, and emerging businesses such as payment related services. 5.0% In fiscal year 2016 641.5 Smart device MAU of QQ Year- As at Quarter- 31 December 31 December on-year 30 September on-quarter 2016 652.5 2015 2016 change (in millions, unless specified) MAU of QQ 868.5 853.1 1.8% 876.7 -0.9% change As at Company Financial Performance Current assets 27.6% 846.1 5.1% MAU of Qzone 638.0 640.1 -0.3% 631.9 1.0% 697.0 Smart device MAU of Qzone 572.9 3.9% 583.6 2.0% Fee-based VAS registered subscriptions 110.2 94.6 16.5% 105.0 595.2 Browser: Our mobile browser strengthened its industry leadership, ranking first in China in terms of MAU according to QuestMobile. Personalised recommendations drove robust year-on-year growth in page views and video views. QQ Browser also made significant contributions to the user growth of our digital literature services. QQ: Smart device MAU increased by 1.7% year-on-year to 652.5 million. PCU including PC and mobile reached 243.7 million. User activities benefited from our new features such as cmShow, photo beautifying, and animated stickers for video. By building AR technology into interactions, QQ attracted 250 million users to open 2 billion sponsored red packets during the 5-day Lunar New Year campaign. Weixin and WeChat: MAU reached 889.3 million, representing year-on-year growth of 27.6%. During the 24 hours of Lunar New Year's Eve, 14 billion red packets were gifted and accepted on Weixin, up 76% from the same period last year. Application Store: Our application store YingYongBao gained notable market share, overtaking the first movers to become the clear market leader. YingYongBao was ranked first among all Android application stores in China by QuestMobile in terms of MAU. In addition to application discovery, we also drove user activities with entertainment oriented content such as videos, cartoons and literature. During the year, YingYongBao has grown into a significant distribution platform for our smart phone games on Android and made meaningful contributions to the growth of our social and performance advertising. Security: Our mobile security application expanded its industry leadership, ranking first in China in terms of MAU according to QuestMobile. We won two world-class security vulnerability discovery contests in 2016, ranking number 1 in both Pwn2Own and Mobile Pwn2Own. During 2016, we strengthened our mobile security leadership in areas such as virus scanning, phony base-station detection, anti-fraudulent phone number library, phone memory optimisation, and speed boosting. Utility Platforms Chairman's Statement 3. 8 Tencent Holdings Limited Including smart phone games revenue attributable to our social networks business. Online literature: We strengthened our contractual relationships with key authors, and helped long-tail authors to achieve better readership via more intelligent content recommendations to readers. The number of daily paying readers reached approximately 2.5 million, more than doubled year-on-year, benefiting from reduced piracy. Qzone: Smart device MAU increased by 3.9% year-on-year to 595.2 million. User activities benefited from upgraded functionalities such as immersive video streaming, live broadcasting, and upgraded photo features that allow family members to maintain joint albums. Digital music: We expanded our industry-leading music library and strengthened anti-piracy measures. DAU of our online karaoke application WeSing reached 35 million in 2016, more than doubled year-on-year, establishing itself as the largest online karaoke community in China. Virtual gifting items have gained popularity on WeSing as a tool for the audience to interact with the singers. News Services: Our news services, including news applications and news plug-ins within our social platforms, maintained industry leadership in terms of DAU. Tencent News, the most popular professional news application in China, focuses on formal and deep news content. By providing attractive and highly personalised casual reading content based on readers' interest graph, Kuaibao established itself as one of the most popular news applications in China. - Media and Digital Content Platforms Smart phone games: We remained the top smart phone game publisher in China. For iOS, we ranked the number 1 publisher in the Global Grossing Chart, according to AppAnnie. Our games generally generate more revenue on Android than on iOS, because there are more Android users in China, and some of our games appeal more to young users who use Android phones more. We achieved approximately RMB10.7 billion revenue¹ in the fourth quarter of 2016, representing 51% year-on-year revenue growth, benefiting from portfolio expansion and strong operating performance of our major player-versus-player games and role-playing games. As of the end of 2016, Honour of Kings surpassed 50 million DAU, setting a new record for smart phone games on our platforms. During 2016, we continued to gain ground in role playing games with the success of titles such as Fantasy Zhu Xian Mobile, JX Mobile, ZhengTu Mobile, and Legend of YuLong Mobile. PC client games: We maintained our leadership as the largest game operator and publishing platform in China, operating all three top PC client games in China, namely League of Legends, Dungeon & Fighter and Cross Fire. In particular, League of Legends ranked first globally among all PC client games in terms of revenue in 2016, according to SuperData. Smart phone games had some negative effect on hours spent on playing PC games, especially where we operate both a PC and smart phone game utilising the same IP for example, our shooting game Cross Fire. However the combined usage of these IPs across PC and smart phone has generally increased substantially. Online Game Platforms Chairman's Statement Annual Report 2016 7 Online Video: Our video service ranked first in China in terms of mobile video views. The number of paying users exceeded 20 million, more than tripled year-on-year. During the year, we gained initial success in original content with popular titles such as Candle in the Tomb and When a Snail Falls in Love. As at Social and Communication Platforms Company Product Highlights Non-current liabilities 186,247 122,100 82,124 58,463 42,148 Total equity 11,623 2,065 12,443 120,035 518 850 Comparative figures have been restated retrospectively to conform with the presentation adopted in 2015, whereas, among others, we have extended the definition of non-GAAP adjustments to cover that of our material associates. We adopted the new presentation in order to more clearly illustrate our non-GAAP financial measures, and to be more consistent with what we believe to be industry practice. Non-controlling interests 57,945 41,298 Equity attributable to equity holders of the Company Equity and liabilities 395,899 80,013 2,111 306,818 15,505 60,312 Operating Information 395,899 306,818 171,166 107,235 75,256 209,652 184,718 89,042 39,007 48,772 Total equity and liabilities Total liabilities 101,197 124,406 50,035 33,267 20,665 Current liabilities 108,455 33,108 171,166 174,624 75,256 In 2016, we strengthened our "Connection" strategy by making our social platforms more interactive for users to share and communicate, and by connecting our social platforms to a broader range of online and offline services. We increasingly sought to differentiate user experience between our QQ and Weixin platforms. QQ increasingly catered to a younger user base by enriching and optimising its entertainment-oriented functionalities. From a social perspective, QQ introduced a series of features to make chatting and sharing experience more entertaining, such as facial beautifying tools, painting-styled photos, and animated video stickers. From a content perspective, QQ stimulated user activities with entertainment-oriented content such as literature, cartoons, and short videos. Weixin focused on providing more convenience to users' daily life. During the year, Weixin enriched its content ecosystem around official accounts and boosted merchant and user adoption for Weixin Pay. In January 2017, Weixin launched Mini Program that we believe over time should help us broaden and deepen our service offering in low-frequency use cases, connect more offline services to online users, and provide more venues for users to sample functionalities offered by apps and thus increase the conversion rate for app downloads. We also sought to deepen "Connection" between our users and our core business engines: - Online games: Our online games business delivered another year of solid growth. Through data mining, we improved performance of our existing titles and gained deeper insights into player behaviours. In China, several of our self-created games such as Honour of Kings, Legend of YuLong Mobile and Naruto Mobile achieved significant success, and we reinforced our position as the preferred China publisher for local and overseas game developers. Internationally, we expanded our presence via investments in companies such as Supercell and Paradox; and we also published a few of our internally developed smart phone games in Southeast Asia. Smart phone games: Our strategy is to engage a large pool of casual gamers and gradually advance them to mid- core and hard-core categories. During the year, we strengthened our leading position in player-versus-player games and expanded our presence in role playing games with a series of successful in-house and licensed titles. PC client games: We strived to serve hard-core gamers better via attractive new content for existing titles and via user behavioural insights gained from data mining. As a result, our paying user ratio increased year over year. We broadened user engagement with our major PC game titles via eSports, game video streaming, and game interest groups. Our integrated PC game community, Tencent Game Platform, plays an important role in introducing new titles to gamers. Advertising: For key accounts, we increased our penetration by offering integrated solutions across brand and performance advertising products. For long-tail accounts, we successfully grew the number of small and regional marketers by sharpening our targeting algorithms, and upgrading our self-service tools for campaign management and results measuring. 5 Annual Report 2016 Chairman's Statement 107,235 Brand advertising: For video, we prioritised sponsorship advertising to better capitalise on our premium inventory. For our news applications, we further upgraded our targeting capabilities. Digital content: Our social platforms played an important role in propelling user growth of our digital content platforms, accelerating their growth into successful standalone businesses. Paying users grew significantly during the year benefiting from enhanced content, easier payment solutions, and the improved copyright protection environment in China. For video, we expanded our subscriber base via further investments in premium content, in particular exclusive content where we are deeply involved in production. For music, we drove subscription growth with premium content, achieved initial success in digital albums sales, and boosted virtual gifting consumption on our karaoke platform. For literature, we boosted user acquisition through reading channels on our portfolio applications such as QQ Browser and Mobile QQ, strengthened our anti-piracy efforts, and sought to enhance IP value via original productions of movies and TV series. Payment related services: We surpassed 600 million mobile payment MAU and average daily payment transactions in December 2016. Our payment related services provide fast and seamless experience for a widening range of offline consumption scenarios such as taxi booking, convenience stores, restaurants, and supermarkets. We drove merchant adoption by working with merchant acquirer agencies and simplifying on-boarding procedures. Our fast growing commercial payment transaction volume is diversifying from large online merchants to a broad range of offline merchants. Our robust payment infrastructure, which made continuous improvements in payment security, service reliability and transaction speed, enabled us to process peak volume of 760,000 red packets per second during the Lunar New Year. Cloud services: Through continued investments in cloud services, we made several internally developed technologies available to our corporate clients and partners. We established clear leadership in providing game and video industry solutions, and strengthened our position in providing 020 and financial services solutions. During the year, we made continued investments in technology and infrastructure, grew our sales force and channel partners to drive adoption by more small-scale application developers, and strengthened our overseas capability to help Chinese enterprises to deploy their services globally. Our cloud services revenue more than tripled year-on- year in 2016 as both the number of enterprise accounts and usage of existing accounts increased substantially. Tencent Holdings Limited 6 Chairman's Statement In addition, we are investing in forefront technologies such as artificial intelligence and machine learning to position our "Connection" strategy for the future. We intend to use machine learning to personalise recommendations within our digital content services, sharpen our advertising targeting capability, enrich social interactions via features such as animated face masks, and save costs by optimising our customer service needs. 2. Chairman's Statement Company Strategic Highlights Social and performance advertising: Our social advertising inventory remained as a key attraction to advertisers, leveraging our platform's superior targeting capability, unparalleled consumer reach, and premium brand image. We innovated around advertisement formats to enable more native and immersive experience for users, hence enhancing performance for marketers. We enabled advertisers and Weixin Official Accounts to select each other, better matching relevant advertisements with appropriate content. By improving click-through and sell- through rates of our existing inventory, we achieved satisfactory revenue growth without dramatically increasing advertisement loading rates. BUSINESS REVIEW AND OUTLOOK 149,154 1. 155,378 75,321 53,686 246,745 151,440 95,845 53,549 38,747 36,509 Annual Report 2016 Chairman's Statement Ma Huateng Chairman I am pleased to present our annual report for the year ended 31 December 2016 to the shareholders. 4 RESULTS The Group's audited profit attributable to equity holders of the Company for the year ended 31 December 2016 was RMB41,095 million, an increase of 43% compared with the results for the previous year. Basic and diluted earnings per share for the year ended 31 December 2016 were RMB4.383 and RMB4.329, respectively. The Group's non-GAAP profit attributable to equity holders of the Company for the year ended 31 December 2016 was RMB45,420 million, an increase of 40% compared with the results for the previous year. Non-GAAP basic and diluted EPS for the year ended 31 December 2016 were RMB4.844 and RMB4.784, respectively. 3 Tencent Holdings Limited One of our important businesses is our online gaming business. We need to comply with the laws, regulations and policy requirements in relation to online gaming in the PRC. Healthy Environment for our Users We actively participate in shaping the development of the industry framework on privacy protection and we have been accredited with privacy certifications from TRUSTe for WeChat, which is the leading global data privacy management company and powers trust in the data economy by enabling businesses to safely collect and use customer data across web, mobile, cloud and advertising channels. To ensure that our users understand how we protect their personal information and enhance the transparency of how we collect and process the data, we publish our privacy protection policies on our product websites and in-app products. We also provide communication channels for our users to file complaints and raise enquiries whenever they are in doubt. We provide training to our employees to enhance their privacy protection awareness and build up the cultural awareness of the importance of privacy protection. 97 Annual Report 2016 We have a dedicated privacy team within the Legal Department which is responsible for handling data protection matters. We have devised specific procedures to collect and process user data to ensure that we provide our products and services in accordance with applicable legal requirements. We evaluate specific products from the perspective of privacy protection on a regular basis and perform privacy risk assessments before the launch of new products to ensure that our products are not exposed to the risk of privacy infringement or leakage of user data. To uphold our dedication to value creation for our users, amongst other user specific aims, one of our important missions is to protect the privacy of user data and other sensitive information. We comply with all the applicable laws on privacy protection, and incorporate applicable legal and regulatory requirements on privacy protection into our internal compliance policies taking into account the specific features of our products and services. The government authorities in the PRC which regulate the online gaming business include: (i) the Ministry of Culture; (ii) the State Administration of Press, Publication, Radio, Film and Television; (iii) the Ministry of Industry and Information Technology; and (iv) the State Administration for Industry & Commerce. User Privacy Environmental, Social and Governance Report The laws, regulations and policies relating to online gaming mainly include: (i) "The Regulation on Internet Information Service of the People's Republic of China" promulgated by the State Council; (ii) "The Provisions on the Administration of Online Publishing Services" promulgated by the State Administration of Press, Publication, Radio, Film and Television and the Ministry of Industry and Information Technology; and (iii) "The Interim Provisions on the Administration of Internet Culture" and "The Interim Measures for the Administration of Online Games" promulgated by the Ministry of Culture. The aims of such laws include the regulation of the qualifications of operating entities of online games, the regulation of the content of online games, the protection for the physical and mental health of online game users and adolescents and the privacy protection of the personal data of users. Looking forward, we will continue to devote great efforts and resources to observe and protect IP rights. Tencent Holdings Limited 98 Environmental, Social and Governance Report Intellectual Property Rights We are a technology-oriented company and we stress the importance of the observation and protection of IP rights. We have established a dedicated IP team with approximately 80 employees as of 31 December 2016 that is responsible for the day-to- day management of legal matters involving trademark, patent, copyright, domain names and other IP rights. We began a comprehensive programme for the management of IP at an early stage. We have consistently applied for the registration of IP rights since the early stages of its establishment. With the successful development of our business, we have expanded our global IP portfolio to cover more than 100 countries and regions. As of 31 December 2016, we had obtained over 10,000 officially registered trademarks and over 5,000 issued patents. Coupled with our creation of a vast amount of copyrighted content, we have accumulated IP assets of considerable value. Our IP team has developed a comprehensive database for our patents, trademarks and copyrights and our strong data analytical skills enable us to manage and monitor our IP rights in a meticulous and efficient manner. To combat infringement of IP rights, our IP team has also established a comprehensive and efficient monitoring and maintenance system, and has devised various civil, criminal and administrative enforcement measures to enforce our IP rights. Please see further details on the Company Website (https://www.tencent.com/ legal/html/en-us/property.html). We actively participate in public affairs and strive to promote the awareness of IP protection in the Internet industry. As members of the China National Information Technology Standardisation Committee, the China Intellectual Property Society, the Patent Protection Association of China, the World Wide Web Consortium, the International Trademark Association and the China Trademark Association, we have participated in the consultations on legislative amendments to the PRC laws and regulations relating to patents, trademarks and anti-competition and have made recommendations in the development of industry standards. Within the past decade, we have several times been awarded “China Patent Gold Awards" by the State Intellectual Property Office of the PRC and “China Trademark Awards" jointly by World Intellectual Property Organization and the State Administration for Industry & Commerce of the PRC, signifying our contribution to the development of independent innovation of the PRC. We have also several times been awarded "National Copyright Demonstration Unit", recognising our outstanding performance in management and protection of copyright. 99 Annual Report 2016 Medical care We strive to provide the best user experience and pay high attention to the quality of our products and services. We conduct strict reviews of our product and service offerings and related sales and marketing strategies and materials to ensure their compliance with applicable laws and regulations. We also build in safeguards on user privacy, product safety and IP rights as described below. We have been actively implementing various measures to ensure compliance with the relevant laws, regulations and policies. For instance, we have already obtained the relevant credentials for operating online games, for example, the Telecommunication Business Operation Permit, the Online Publishing Service Licence and the Internet Culture Business Permit. To safeguard the physical and mental health of online game users and adolescents, we have implemented the real- name system and anti-addiction system in accordance with the regulatory requirements of the PRC and strengthened the promotion of healthy gaming and anti-addiction through various channels. PRODUCT RESPONSIBILITY Environmental, Social and Governance Report In the course of supplier engagement, potential suppliers are required to conduct self-assessment on their commitment, amongst other things, to environmental protection, social responsibility, and health and safety at work (the "Self-Assessment”). Suppliers which are formally engaged by us are also required to agree to the terms of a declaration and undertaking in relation to anti-commercial bribery in doing business with our Group (the "Anti-commercial Bribery Declaration"). Environmental, Social and Governance Report Annual Report 2016 91 We strive to create a casual yet sophisticated communication channel with customised content for our employees. There are annual rallies for employees and management, face-to-face discussion forums, featured magazines and social media platforms. The corporate strategy and culture are communicated and reinforced through these products and communication channels. Communication Our contribution to social insurance in the PRC is in compliance with applicable laws and regulations and we offer various supplemental insurance benefits to employees and their families (including medical insurance, critical illness insurance, accident insurance and life insurance). We have a designated team in charge of the physical and mental health of employees. We arrange annual medical checkups for employees and organise health seminars, fitness sessions, on-site medical consultations as well as face-to-face and telephone counselling from time to time. We strive to provide a safe and comfortable work environment for our employees. There are well-established security and fire service systems and food safety monitoring system. Occupational Health and Safety We also organise a wide variety of recreational and leisure activities (e.g. running, photography, music, dance, language classes) for employees. We have implemented various initiatives such as flexi-time arrangements and volunteer service leave to help employees strike a good work-life balance. The leave scheme allows employees to enjoy annual leave, fully-paid sick leave, half-paid leave of absence and fully-paid special Chinese New Year leave which are above the statutory standard. Also, female employees are entitled to take fully-paid maternity leave, while male employees are also entitled to take fully-paid paternity leave. Employees can also apply for one day of fully-paid volunteer service leave per year. Work-Life Balance We value our relationship with our employees and handle employee departure (whether by resignation or dismissal) strictly in accordance with applicable laws and regulations. Employee Departure Environmental, Social and Governance Report 90 06 COMMUNITY Community Investment In June 2007, the Tencent Foundation leveraged on our Internet technical capabilities and online platforms to build the first online public fundraising platform. It is designed, developed and operated by the Tencent Foundation while we provide server, broadband and other technical support for free. The platform is open for eligible charitable organisations free of charge. It allows charitable works to be performed more conveniently, smoothly and transparently. This is a good example of the application of the concept of "Internet+". Over 4,000 charitable organisations have joined our online charity platform and initiated more than 20,000 charity projects in different locations with different focuses. The total number of donations made by the Internet users is approximately 91 million and the total amount of the funds raised is over RMB1.57 billion. Community development Environmental, Social and Governance Report Annual Report 2016 93 The Tencent Foundation is keen on environmental protection and cultural preservation. For example, it donated RMB6.1 million to the Sichuan Western Nature Preservation Foundation in 2015 and RMB12.5 million to the China Foundation for Cultural Heritage Conservation for the establishment of "Great Wall Funds" in 2016. Ecological conservation and cultural preservation The Tencent Foundation has set up scholarships to promote education in the PRC, Hong Kong and other countries throughout the years. There are also specific donations for different education initiatives. For example, it donated RMB100 million to support the future education reform in a secondary school in Shenzhen. In 2013, it also set up a RMB1 million fund to sponsor the five-year development programme of a secondary school in Sichuan after the earthquake of that year. In 2016, it donated RMB5.35 million in aggregate in the education related projects. Education Tencent Holdings Limited In 2009, the Tencent Foundation donated no less than RMB50 million on an experimental charity project in Yunnan for the purpose of rediscovering the value of villages and connecting villagers by increasing Internet penetration in rural areas. In response to recent natural disasters in the PRC as well as globally, the Tencent Foundation has created a multifaceted disaster relief model by combining our various products including online platforms, instant messengers, online payment and Internet search to help the public follow the latest news, participate in rescue efforts and make donations. In addition, the Tencent Foundation has made donations to support the rescue missions and post-disaster reconstructions. For example, the Tencent Foundation donated RMB2 million for the earthquake in Nepal in 2015 and paid the transportation costs of RMB100,000 for the relief supplies. In 2016, it donated approximately RMB4 million to support the emergency rescue missions in the PRC floods. Disaster relief Environmental, Social and Governance Report 92 92 Tencent Holdings Limited In addition to operating the online charity platform, the Tencent Foundation is also actively involved in charity work in the following areas: (i) disaster relief; (ii) rural development; (iii) education; (iv) ecological conservation and cultural preservation; (v) community development; and (vi) medical care. As of 31 December 2016, our Group and our employees have donated over RMB1.9 billion and RMB60 million in total to the Tencent Foundation respectively since its establishment. During the year 2016, our Group and our employees have donated RMB570 million and RMB10.5 million to the Tencent Foundation respectively. Rural development Employees may apply for promotion during their interim and year-end performance reviews, provided that they satisfy the requirements with regards to the length of service and performance. Depending on the practice area, the promotion will be reviewed and considered by different internal committees. The promotion review process is fair and open there is a formal channel for our employees to provide and receive feedback. The promotion review is conducted in compliance with applicable laws and regulations. Promotion We have been voted as one of the best employers in the PRC for five consecutive years since 2012 in a survey jointly conducted by zhaopin.com and the Institute of Social Science Survey, Peking University. We care for the well-being of our employees. For example, we celebrate special occasions of our employees (e.g. anniversary of joining us, wedding and festivities) by giving them different employee benefits. We strive to create work-life balance and a safe and comfortable work environment for employees. Employees have the flexibility to choose the most suitable insurance plans for themselves and their families. 95 Annual Report 2016 Anti-Money Laundering In 2016, the Group strictly abided by all applicable laws and regulations on anti-money laundering and anti-terrorism financing, and fulfilled its social responsibilities and legal obligations on anti-money laundering. We treat financial security as the lifeline of our business and have implemented sound financial crime control mechanisms in our business development. We have robust systems and measures to detect, deter and protect our business from involvement in financial crimes such as money laundering and terrorist financing. Our protective measures include, but are not limited to, the following: Three lines of defence Our first line of defence is the product team and the business development team. The risk management team and anti-money laundering team serve as the second line while the internal audit team acts as the third line of defence. Anti-money laundering and internal control systems When a report of suspected fraudulent activities is received, the anti-fraud investigation team, which consists of professionals with profound knowledge in fraud risk management and solid fraud investigation experiences, is assigned to handle the investigation independently. After an investigation has been completed, the employee found and proven to have committed such fraud shall be subject to immediate dismissal, and corrective actions shall be taken in response to the findings at the same time. In the event that any fraudulent activity violates any relevant laws or regulations, such cases shall be reported to government authorities. We have: (i) formulated a set of anti-money laundering policies based on the applicable anti-money laundering laws and regulations; (ii) implemented an anti-money laundering monitoring system; and (iii) set up a dedicated anti-money laundering team, which is solely responsible for compliance management, anti-money laundering name screening and suspicious Other control measures We have further improved the anti-money laundering compliance and internal risk control mechanisms by: (i) recruiting more anti-money laundering professionals for suspicious transaction review and analysis in order to enhance the effectiveness and specialisation level of anti-money laundering; (ii) strengthening the requirements for the know-your-customer procedures; (iii) enhancing the overall monitoring system of suspicious transaction and manual analysis; (iv) cooperating with regulators and law enforcement on anti-money laundering investigation; (v) actively participating in the strike on terrorism and corruption internationally, in order to prevent money laundering and upstream criminal activities; and (vi) carrying out various forms of training, education, and public relation activities on anti-money laundering. Tencent Holdings Limited 96 Environmental, Social and Governance Report SUPPLY CHAIN MANAGEMENT Our supply chain management programme attaches supreme importance to managing the ethics risk associated with the relationship between our procurement employees and our business partners. It also focuses on teaching those employees who are involved in procurement to recognise and mitigate the inherent risks. To enhance the social responsibility awareness of our employees, we have formulated a code of conduct which those employees engaging in procurement activities must adhere to. To minimise the ethics risks, such employees are also required to declare any relationship they may have with our suppliers in writing. transaction monitoring. During the year ended 31 December 2016, all suppliers which were formally engaged have completed the Self-Assessment and signed the Anti-commercial Bribery Declaration. We are not aware of any of our suppliers engaging in commercial bribery, or being materially and adversely affected by issues relating to environmental and social responsibility. Concurrently, in order to protect and safeguard the interests of the Group and to maintain integrity in the Group's business dealings, we have adopted an Anti-fraud and Whistleblowing Policy (the "Policy"), which clearly conveys the message of zero- tolerance in relation to fraudulent activity to all the employees and suppliers/business partners. All employees and suppliers/ business partners are encouraged to report genuine concerns about any potential fraudulent activities. The Policy outlines the multiple whistleblowing channels and how the Group should deal with such concerns, so that employees and suppliers/ business partners can report their good faith concerns without fear of reprisal or potential retaliation. Anti-Corruption The basic benefits system was built and is maintained in accordance with relevant laws, regulations and market practice. In addition, certain special benefits are created to motivate employees and advance our strategy. Benefits We offer competitive pay and employee benefits to attract and retain talent. The remuneration and bonus system is performance-based and designed to reward employees with high performance and great potential. Compensation Compensation and Benefits We have a full-time staff of 38,775 as at 31 December 2016. Our employment practice is in compliance with applicable laws and regulations (including but not limited to those which prohibit child and forced labour) and does not discriminate on the grounds of gender, ethnicity, race, disability, age, religious belief, sexual orientation or family status. Diversity is well supported in our corporate culture. Equal Opportunities and Diversity Environmental, Social and Governance Report In 2005, we formulated the Sunshine Code based on the core value of the Group -“Integrity". All employees of the entire Group are required to follow and to strictly comply with the Sunshine Code. It expressly prohibits all kinds of fraudulent activity, bribery, and any other activities which are not in compliance with applicable laws and regulations. To ensure our employees comply with the requirements stipulated in the Sunshine Code, all employees are required to complete e-learning programmes and attend various face-to-face training programmes introducing the rules and standards of the Sunshine Code on a regular basis. The Tencent Foundation has donated approximately RMB13 million in aggregate to help underprivileged children with medical conditions (such as autism and cerebral palsy) in developing areas. For example, in 2016, it donated RMB5 million to the Ai You Foundation to set up two child focused medical care centres for orphaned patients in Chongqing and Urumqi. It also donated RMB200,000 to the Shenzhen Children's Hospital to build an interactive activity room "Vcare" for children patients. In 2006, some of our employees founded the Tencent Volunteers' Association on their own initiative in response to our corporate vision of being “the most respected Internet company". Since then, the Tencent Volunteers' Association has contributed more than 100,000 hours of voluntary services. We launch more than 200 volunteering activities with more than 5,000 participants every year. In 2016, the Tencent Volunteers' Association was awarded a spot in the list of Top 10 Best Volunteer Organisations in Guangdong Province. There are eight sub-divisions under the Tencent Volunteers' Association in various cities including Beijing, Shanghai, Chengdu and Guangzhou. These sub-divisions include poverty support, scholarship, environmental protection, care for children with special needs and green network. The Tencent Volunteers' Association works closely with the Tencent Foundation in relation to the funding of the projects. The Tencent Volunteers' Association combines its expertise in technology to help the community. For example, it has set up an online platform to help search for missing persons with the assistance of our marketing and advertising resources and technology. As at the date of this report, more than 40 missing children have been found through our platform. In order to encourage employees to participate in volunteer service, employees, since April 2012, have been granted one day of fully-paid volunteer service leave per year. Tencent Holdings Limited 94 94 Environmental, Social and Governance Report Volunteering We set up the Tencent Charity Foundation (the "Tencent Foundation") on 26 June 2007. It is a non-public fundraising foundation incorporated in the PRC and a separate legal entity. We commit to donating certain portion of our profits to the Tencent Foundation every year for the purpose of supporting charitable works including but not limited to developing an online charity platform, poverty relief, disaster relief and education development. As the first charity foundation set up by an Internet company in the PRC, the Tencent Foundation promotes the idea of "Charity 2.0" (i.e. everyone can participate in the charity work anytime and anywhere, and even small donations count). The Tencent Foundation has sponsored charitable organisations such as the China Charity Foundation Development Centre, the China Foundation for Development of Financial Education and the China Charity Alliance. The notes on pages 118 to 226 are an integral part of these consolidated financial statements. Revenues RMB'Million 2015 RMB'Million Note 2016 Year ended 31 December For the year ended 31 December 2016 Consolidated Income Statement 108 Value-added services Tencent Holdings Limited Certified Public Accountants PricewaterhouseCoopers The engagement partner on the audit resulting in this independent auditor's report is Wilson W. Y. Chow. From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor's report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. Independent Auditor's Report Annual Report 2016 107 Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion. Hong Kong, 22 March 2017 Online advertising Others 107,810 3,594 7 2,327 2,619 6∞ ∞ Selling and marketing expenses Other gains, net 61,232 84,499 (41,631) (67,439) 8 102,863 151,938 500 Interest income Gross profit Cost of revenues 4,726 17,158 17,468 26,970 80,669 Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation. concern. Conclude on the appropriateness of the directors' use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group's ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor's report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor's report. However, future events or conditions may cause the Group to cease to continue as a going Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the directors. Key Audit Matter Independent Auditor's Report 104 Tencent Holdings Limited We also assessed the terms and conditions of selected significant investments, including evaluation of indication or evidence of power found in the detailed arrangement of these investments, in order to assess whether appropriate classification had been adopted by management in relation to those investments based on the consideration of the totality of facts, which we found no material exceptions. We read the contracts and agreements in relation to those significant investments made in the current year and discussed with management to obtain an understanding on the details of such investments, including relevant activities of the investee companies and how decisions about those activities are made, how the Group and other investors participate in the decisions, the rights and power of the Group and other investors on the investee companies, other arrangements or transactions among the Group, other investors and the investee companies and respective returns from the investments. We also discussed with management and obtained management assessment to understand their critical judgements and the classification that they had applied. We focused on this area due to the magnitude of the investments and the fact that significant judgements were made by management in determining the appropriate classification for certain investments that involved complex terms and arrangements. During the year ended 31 December 2016, the Group made significant amounts of investments under different arrangements or in different forms of financial instruments, in an aggregate amount of approximately RMB61,525 million. Refer to Note 20, 22, 23, 39 and 40 to the consolidated financial statements Classification of investments We independently tested, on a sample basis, the accuracy of mathematical calculation applied in the valuation models and the calculation of impairment charges. We did not identify any material exceptions from our testing. In respect of the impairment assessments of cash generating units that containing goodwill and investments in associates using market approach, we assessed the valuation assumptions including the selection of comparable companies, recent market transactions, and liquidity discount for lack of marketability, etc. We assessed these key assumptions adopted by management with the involvement of our internal valuation experts based on our industry knowledge and independent research performed by us. We considered that the key assumptions adopted by management are in line with our expectation and evidence obtained. How our audit addressed the Key Audit Matter Impairment assessments of goodwill, investments in associates and investments in redeemable instruments of associates (Cont'd) Key Audit Matter Independent Auditor's Report Annual Report 2016 103 In respect of the impairment assessments of cash generating units that containing goodwill, investments in associates and investments in redeemable instruments of associates using discounted cash flows, we assessed the key assumptions adopted including revenue growth rate, discount rate and other working capital requirement assumptions by examining the approved financial/business forecast models, and comparing actual results for the year against the previous period's forecasts and the applicable industry/business data external to the Group. We assessed certain of these key assumptions with the involvement of our internal valuation experts. We considered that the key assumptions adopted by management are in line with our expectation and evidence obtained. Management adopted different valuation models, on a case by case basis, in carrying out the impairment assessments, mainly including discounted cash flows and market approach. We assessed, on a sample basis, the basis management used to identify separate groups of cash generating units that containing goodwill, the impairment approaches and the valuation models used in management's impairment assessments, which we found them to be appropriate. We also tested, on a sample basis, key controls in respect of the impairment assessments, including the determination of appropriate impairment approaches, valuation models and assumptions and the calculation of impairment provisions, which we found no material exceptions. We tested management's assessment including periodic impairment indications evaluation as to whether indicators of impairment exist by corroborating with management and market information. Annual Report 2016 Fair value measurement of financial instruments, including available-for-sale financial assets and other derivative 1,886 financial instruments As at 31 December 2016, the Group's financial assets which were carried at fair value comprised available-for-sale financial assets and other derivative financial instruments of approximately RMB83,806 million and RMB3,409 million, respectively, of which approximately RMB65,599 million of these financial assets were measured based on significant unobservable inputs and classified as "Level 3 financial instruments". Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group's internal control. Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. As part of an audit in accordance with ISAs, we exercise professional judgment and maintain professional scepticism throughout the audit. We also: Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion. We report our opinion solely to you, as a body, and for no other purpose. We do not assume responsibility towards or accept liability to any other person for the contents of this report. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements. AUDITOR'S RESPONSIBILITIES FOR THE AUDIT OF THE CONSOLIDATED FINANCIAL STATEMENTS Independent Auditor's Report 106 Tencent Holdings Limited In preparing the consolidated financial statements, the directors are responsible for assessing the Group's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or to cease operations, or have no realistic alternative but to do so. Those charged with governance are responsible for overseeing the Group's financial reporting process. The directors of the Company are responsible for the preparation of the consolidated financial statements that give a true and fair view in accordance with IFRSS and the disclosure requirements of the Hong Kong Companies Ordinance, and for such internal control as the directors determine is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. RESPONSIBILITIES OF DIRECTORS AND THOSE CHARGED WITH GOVERNANCE FOR THE CONSOLIDATED FINANCIAL STATEMENTS If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. In connection with our audit of the consolidated financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. Our opinion on the consolidated financial statements does not cover the other information and we do not express any form of assurance conclusion thereon. The directors of the Company are responsible for the other information. The other information comprises all of the information included in the annual report other than the consolidated financial statements and our auditor's report thereon. OTHER INFORMATION Independent Auditor's Report Annual Report 2016 105 We involved our internal valuation experts to discuss with management and assess the appropriateness of valuation methodology and assumptions used. We tested, on a sample basis, valuation of Level 3 financial instruments as at 31 December 2016 by evaluating the underlying assumptions including discount rates, projected growth rates, marketability discount, market information of comparable companies (such as recent transactions and earnings multiples) based on our industry knowledge as well as underlying supporting documentation. We also tested, on a sample basis, the arithmetical accuracy of the valuation computation. We found that the valuation methodology of Level 3 financial instruments is acceptable and the assumptions made by management are supported by available evidence. In respect of the fair value measurement of Level 3 financial instruments, we tested the key controls, on a sample basis, in relation to the valuation process including the adoption of applicable valuation methodology and the application of appropriate assumptions in different circumstances, by inspection of the evidence of management's review, which we found no material exceptions. How our audit addressed the Key Audit Matter We focused on this area due to the high degree of judgement required in determining the respective fair values of Level 3 financial instruments, which do not have direct open market quoted values, with respect to the adoption of applicable valuation methodology and the application of appropriate assumptions in the valuation. Refer to Notes 3.3, 23 and 25 to the consolidated financial statements 109 8 (7,993) Profit before income tax (2,793) (2,522) 10 (1,618) (1,955) Independent Auditor's Report pwc To the shareholders of Tencent Holdings Limited (incorporated in the Cayman Islands with limited liability) 51,640 OPINION 羅兵咸永道 The consolidated financial statements of Tencent Holdings Limited (the "Company") and its subsidiaries (the "Group") set out on pages 109 to 226, which comprise: • the consolidated statement of financial position as at 31 December 2016; • the consolidated income statement for the year then ended; • • the consolidated statement of comprehensive income for the year then ended; the consolidated statement of changes in equity for the year then ended; What we have audited 36,216 Income tax expense 11 3.055 4.329 12(b) 3.097 4.383 12(a) 29,108 41,447 302 352 28,806 41,095 - diluted - basic (in RMB per share) Earnings per share for profit attributable to equity holders of the Company Non-controlling interests Equity holders of the Company Attributable to: 29,108 41,447 (7,108) (10,193) the consolidated statement of cash flows for the year then ended; and • the notes to the consolidated financial statements, which include a summary of significant accounting policies. Our opinion How our audit addressed the Key Audit Matter We discussed with management and evaluated their judgements on key assumptions in determining the estimated lifespan of the virtual products/items that were based on the expected users' relationship periods. We tested, on a sample basis, key controls in respect of the recognition of revenue from sales of virtual products/ items, including management's review and approval of (i) determination of the estimated lifespan of new virtual products/items prior to their launches; and (ii) changes in the estimated lifespan of existing virtual products/items based on periodic reassessment on any indications triggering such changes. We also assessed the data generated from the Group's information system supporting the management's review, including testing the information system logic for generation of reports, and checking, on a sample basis, the monthly computation of revenue recognised on selected virtual products/items generated directly from the Group's information system. We assessed, on a sample basis, the expected users' relationship periods adopted by management by testing the data integrity of historical users' consumption pattern and calculation of the churn rates. We also evaluated the consideration made by management in determining the underlying assumptions for expected users' relationship periods with reference to historical operating and marketing data of the relevant games. We also assessed, on a sample basis, the historical accuracy of the management's estimation process by comparing the actual users' relationship periods for the year against the original estimation for selected virtual products/items. We found that the results of our procedures performed to be materially consistent with management's supporting documentation. Tencent Holdings Limited 102 Independent Auditor's Report Key Audit Matter Impairment assessments of goodwill, investments in associates and investments in redeemable instruments of associates Refer to Notes 4(b), 19, 20 and 22 to the consolidated financial statements As at 31 December 2016, the Group held significant amounts of goodwill, investments in associates and investments in redeemable instruments of associates amounting to RMB22,927 million, RMB70,042 million and RMB9,627 million, respectively. Impairment provision of RMB277 million, RMB2,117 million and RMB1,298 million had been recognised during the year ended 31 December 2016 against the carrying amounts, respectively. We focused on this area due to the magnitude of the carrying amounts of these assets and the fact that significant judgements were required by management (i) to identify whether any impairment indicators existed for any of these assets during the year; (ii) to determine the appropriate impairment approaches, i.e. fair value less costs of disposal or value in use; and (iii) to select key assumptions to be adopted in the valuation models, including discounted cash flows and market approach, for the impairment assessments. How our audit addressed the Key Audit Matter 9 Finance costs, net 40,627 56,117 Operating profit (16,825) (22,459) 8 General and administrative expenses We focused on this area due to the fact that management applied significant judgements in determining the expected users' relationship periods for certain virtual products/ items. These judgements included (i) the determination of key assumptions applied in the expected users' relationship periods, including but not limited to historical users' consumption pattern, churn rates and reactivity on marketing activities, games life-cycle, as well as the Group's marketing strategy; and (ii) the identification of events that may trigger changes in the expected users' relationship periods. (12,136) During the year ended 31 December 2016, a majority of the Group's revenue from value added services was contributed from online/mobile games and was predominately derived from the sales of virtual products/items. Refer to Note 4(a) to the consolidated financial statements In our opinion, the consolidated financial statements give a true and fair view of the consolidated financial position of the Group as at 31 December 2016, and of its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards ("IFRSS") and have been properly prepared in compliance with the disclosure requirements of the Hong Kong Companies Ordinance. Tencent Holdings Limited 100 Independent Auditor's Report BASIS FOR OPINION We conducted our audit in accordance with International Standards on Auditing ("ISAs"). Our responsibilities under those standards are further described in the Auditor's Responsibilities for the Audit of the Consolidated Financial Statements section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Independence We are independent of the Group in accordance with the International Ethics Standards Board for Accountants' Code of Ethics for Professional Accountants ("IESBA Code"), and we have fulfilled our other ethical responsibilities in accordance with the IESBA Code. KEY AUDIT MATTERS Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated financial statements of the current period. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Key audit matters identified in our audit are summarised as follows: • Revenue recognition on provision of online/mobile games value added services estimates of the lifespan of virtual products/items Impairment assessments of goodwill, investments in associates and investments in redeemable instruments of associates • Classification of investments Fair value measurement of financial instruments, including available-for-sale financial assets and other derivative financial instruments 101 Annual Report 2016 Independent Auditor's Report Key Audit Matter Revenue recognition on provision of online/mobile games value added services estimates of the lifespan of virtual products/ items The Group has recognised revenue from sales of virtual products/items to the users in respect of value added services rendered on the Group's Internet and mobile platforms. The relevant revenue is recognised over the lifespan of respective virtual products/items which was determined by the management, on an item by item basis, with reference to the expected users' relationship periods or the stipulated period of validity of the relevant virtual products/items, depending on the terms of the virtual products/items. Profit for the year Share of losses of associates and joint ventures Land use rights - value of employee services - shares withheld for share award schemes 2,058 (652) 23 -vesting of awarded shares 169 (144) 273 2,331 60 2,391 (652) (652) 8¥ 169 169 376 736 15,610 28,806 44,416 307 ཝ། | 736 44,723 108 108 1665 165 190 355 21 144 736 Tax benefit from share-based payments of a subsidiary 982 (3,372) (599) (3,971) (44) (44) (372) Transfer of equity interests of subsidiaries to non-controlling interests (372) Recognition of financial liabilities in respect of the put options granted to non-controlling interests (1,195) (1,195) (1,195) Total transactions with equity holders at their capacity as 372 Disposal of subsidiaries (8,160) 4,788 982 Profit appropriations to statutory reserves 216 (216) 1 Dividends (Note 15) (2,640) (2,640) (549) (3,189) Non-controlling interests arising from business combinations 278 278 Acquisition of additional equity interests in non-wholly owned subsidiaries (Note 31) 982 1,975 5 1,970 Tencent Holdings Limited 114 Balance at 1 January 2015 Comprehensive income Profit for the year Other comprehensive income, net of tax: 186,247 -share of other comprehensive income of associates For the year ended 31 December 2016 Attributable to equity holders of the Company Shares held Non- Share capital RMB'Million RMB'Million Consolidated Statement of Changes in Equity 11,623 174,624 136,743 99 516 Total transactions with equity holders at their capacity as equity holders for the year Balance at 31 December 2016 5,157 (1,319) 6,921 (4,364) 6,395 9,135 15,530 17,324 (3,136) 23,693 Share for share premium award schemes RMB'Million Other Retained reserves earnings RMB'Million RMB'Million controlling Total interests RMB'Million RMB'Million 12,586 - transfer to profit or loss upon disposal of available-for- sale financial assets -currency translation differences - other fair value gains, net Total comprehensive income for the year Transactions with equity holders Capital injection Employee share option schemes: -value of employee services - proceeds from shares issued Employee share award schemes: (11) (11) (11) 1,970 12,586 equity holders for the year 12,586 329 Total equity RMB'Million 5,131 (1,309) 2,129 74,062 80,013 2,111 82,124 329 28,806 28,806 302 29,108 329 - net gains from changes in fair value of available-for-sale financial assets 7,036 (508) (8,066) Tencent Holdings Limited 116 Consolidated Statement of Cash Flows For the year ended 31 December 2016 Year ended 31 December 2016 (63,605) RMB'Million RMB'Million Cash flows from financing activities Proceeds from short-term borrowings Repayment of short-term borrowings Proceeds from long-term borrowings Repayment of long-term borrowings Repayment of convertible bonds 2,387 8,565 (1,734) 55,394 2015 (70,923) 515 719 (842) Proceeds from settlement of loan to investees and other receipts related to investees 4,046 Receipt from maturity of term deposits with initial terms of over three months 42,319 61,810 Placement of term deposits with initial terms of over three months (57,049) (87,186) Interest received 1,718 2,274 Dividends received Net cash flows used in investing activities 8,581 (13,957) (2,200) (494) Dividends paid to the Company's shareholders Dividends paid to non-controlling interests Net cash flows generated from financing activities Net increase in cash and cash equivalents Cash and cash equivalents at beginning of the year Exchange gains on cash and cash equivalents Cash and cash equivalents at end of the year The notes on pages 118 to 226 are an integral part of these consolidated financial statements. (1,364) (4,547) (3,699) (2,640) (907) (549) 31,443 18,528 non-wholly owned subsidiaries (2,994) Payment for acquisition of non-controlling interests in non-wholly owned subsidiary Net proceeds from issuance of notes payable 13,619 Repayment of notes payable (4,132) (1,917) Proceeds from issuance of ordinary shares 225 169 Shares withheld for share award schemes (1,936) (652) Proceeds from capital injection from non-controlling interests 1,393 99 Proceeds from disposals of non-controlling interests in a 267 516 Payments for loan to investees 1,637 2016 Note RMB'Million 2015 RMB'Million Cash generated from operations Year ended 31 December Income tax paid 41(a) 76,034 50,478 (10,516) (5,047) 65,518 Net cash flows generated from operating activities Cash flows from operating activities For the year ended 31 December 2016 Consolidated Statement of Cash Flows (2,856) (4,394) (353) (4,747) Balance at 31 December 2015 12,167 (1,817) 9,673 100,012 120,035 2,065 122,100 The notes on pages 118 to 226 are an integral part of these consolidated financial statements. 115 Annual Report 2016 45,431 Cash flows from investing activities Proceeds from/(Payments for) business combinations, net of cash acquired Net inflow of cash in respect of the disposal of subsidiaries Purchase of property, plant and equipment, construction in 1,285 Proceeds from disposals of investments in joint ventures 3 Purchase/Prepayment of intangible assets (8,849) (4,620) Proceeds from disposals of intangible assets 115 Purchase/Prepayment of land use rights (1,506) (3,045) Payments for available-for-sale financial assets and related derivative financial instruments (33,556) (13,001) Proceeds from disposals of available-for-sale financial assets (500) 223 (62) 266 (1,349) 619 82 progress and investment properties Proceeds from disposals of property, plant and equipment Payments for acquisition of investments in associates Proceeds from disposals of investments in associates Payments for acquisition of investments in redeemable instruments of associates (8,399) 31 (5,440) 70 (8,934) (11,423) 1,107 1,106 (3,324) (2,394) Proceeds from disposals of investments in redeemable instruments of associates Payments for acquisition of investments in joint ventures 26,038 516 Write-back of financial liabilities upon termination of the put 12,922 Notes payable 34 36,204 37,092 Long-term payables 57,549 35 3,626 Other financial liabilities 2,576 Deferred income tax liabilities 26 5,153 4,935 33 Borrowings Non-current liabilities (3,136) (1,817) 23,693 9,673 136,743 100,012 174,624 120,035 Non-controlling interests Total equity 11,623 2,065 186,247 122,100 LIABILITIES 3,668 12,167 Deferred revenue 2,038 www 27,413 15,700 20,873 70,199 33 Borrowings 12,278 Notes payable 34 3,466 3,886 Current income tax liabilities 5,219 11,429 38 Other payables and accruals 37 3,004 108,455 60,312 Tencent Holdings Limited 112 Current liabilities Consolidated Statement of Financial Position As at 31 December 2016 As at 31 December 2016 Note RMB'Million 2015 RMB'Million Accounts payable 36 17,324 wwww 31 263 222 Accounts receivable 28 Prepayments, deposits and other assets 24 Inventories Other financial assets Term deposits Restricted cash Cash and cash equivalents 29 222222 10,152 25 Current assets 151,440 246,745 23 83,806 44,339 24 7,363 5,480 25 1,760 26 7,033 757 Term deposits 27 5,415 3,674 7,061 14,118 11,397 1,649 As at 31 December 2016 Note RMB'Million 2015 RMB'Million Equity attributable to equity holders of the Company Share capital 30 Share premium 30 Shares held for share award schemes Other reserves Retained earnings 30 EQUITY 1,608 As at 31 December 2016 Annual Report 2016 1,198 27 50,320 37,331 29 750 54,731 71,902 43,438 149,154 155,378 Total assets 395,899 306,818 111 Consolidated Statement of Financial Position Other tax liabilities 745 462 225 25 225 - value of employee services 3,453 34 225 - shares withheld for share award schemes 394 3,847 68 3,915 (1,936) (1,936) (1,936) 403 35 368 Transactions with equity holders Capital injection Employee share option schemes: -value of employee services - proceeds from shares issued Employee share award schemes: 7,099 41,095 48,194 423 ༄། ། 48,617 1,414 1,414 311 57 -vesting of awarded shares (617) 617 Tax benefit from share-based payments of a subsidiary Transfer of equity interests of subsidiaries to non-controlling interests 1,785 (2,523) (738) (494) (1,232) (3) (3) 7,842 7,842 300 8,142 (927) (927) 927 Partial disposal of equity interests in subsidiaries and businesses Total comprehensive income for the year Disposal of subsidiaries Acquisition of additional equity interests in non- 897 897 897 Profit appropriations to statutory reserves 665 (665) Dividends (Note 15) (3,699) (3,699) (914) (4,613) Non-controlling interests arising from business combinations (Notes 39 and 40) 7,802 7,802 wholly owned subsidiaries (Note 31) option granted to non-controlling interests - other fair value gains, net 356 Consolidated Statement of Changes in Equity For the year ended 31 December 2016 Balance at 1 January 2016 Comprehensive income Profit for the year Other comprehensive income, net of tax: Annual Report 2016 -share of other comprehensive income of associates Shares held Non- Share Share capital RMB'Million for share premium award schemes RMB'Million RMB'Million Other Attributable to equity holders of the Company 113 Director Lau Chi Ping Martin Deferred revenue 36 31,203 21,122 101,197 124,406 Total liabilities Total equity and liabilities 209,652 184,718 395,899 306,818 The notes on pages 118 to 226 are an integral part of these consolidated financial statements. The consolidated financial statements on pages 109 to 226 were approved by the Board of Directors on 22 March 2017 and were signed on its behalf: Ma Huateng Director Retained controlling reserves RMB'Million earnings RMB'Million - net gains from changes in fair value of available-for- sale financial assets 2,929 2,929 2,929 - transfer to profit or loss upon disposal of available-for- sale financial assets (1,176) (1,176) (1,176) -currency translation differences 4,127 4,127 71 4,198 356 863 356 863 352 Total RMB'Million interests RMB'Million Total equity RMB'Million 12,167 (1,817) 9,673 100,012 120,035 2,065 122,100 863 41,095 41,095 41,447 322 354 42,713 4,674 17 9,973 13,900 16 Investment properties Construction in progress Property, plant and equipment 4,248 Non-current assets RMB'Million 2015 RMB'Million Note 2016 As at 31 December As at 31 December 2016 Consolidated Statement of Financial Position ASSETS 44,723 854 18 Available-for-sale financial assets 544 630 Investments in joint ventures 6,230 9,627 22 Investments in redeemable instruments of associates 292 60,171 20 Investments in associates 13,439 36,467 19 Intangible assets 2,293 5,174 70,042 48,617 307 44,416 2,929 Net gains from changes in fair value of available-for-sale financial assets Transfer to profit or loss upon disposal of available-for-sale financial assets Currency translation differences 329 863 Share of other comprehensive income of associates Items that may be subsequently reclassified to profit or loss 29,108 41,447 12,586 RMB'Million RMB'Million 2016 Year ended 31 December Other comprehensive income, net of tax: Profit for the year For the year ended 31 December 2016 Consolidated Statement of Comprehensive Income 43,438 2015 (1,176) (11) 4,198 48,194 423 44,723 48,617 15,615 7,170 736 (244) 110 Tencent Holdings Limited The notes on pages 118 to 226 are an integral part of these consolidated financial statements. Non-controlling interests Equity holders of the Company Attributable to: Total comprehensive income for the year Other fair value (losses)/gains Items that may not be subsequently reclassified to profit or loss 600 Other fair value gains 1,975 Prepayments, deposits and other assets Other financial assets Deferred income tax assets the right to ensure that Tencent Technology owns the valuable assets of the business through the assignment to Tencent Technology of the principal present and future intellectual property rights of Tencent Computer without making any payment; and Notes to the Consolidated Financial Statements For the year ended 31 December 2016 1 GENERAL INFORMATION (Cont'd) As a result, Tencent Computer is accounted for as a controlled structured entity (see also Note 2.2(a) and Note 46) and the formation of the Group in 2000 was accounted for as a business combination between entities under common control under a method similar to the uniting of interests method for recording all assets and liabilities at predecessor carrying amounts. This approach was adopted because in management's belief it best reflected the substance of the formation. Similar Structure Contracts were also executed for other PRC operating companies established by the Group similar to Tencent Computer subsequent to 2000. All these PRC operating companies are treated as controlled structured entities of the Company and their financial statements have also been consolidated by the Company. See details in Note 46. 118 2 The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. 2.1 Basis of preparation The preparation of financial statements in conformity with IFRSS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group's accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in Note 4. 119 Annual Report 2016 2,426 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES Tencent Holdings Limited The consolidated financial statements of the Group have been prepared in accordance with all applicable International Financial Reporting Standards ("IFRSS"). The consolidated financial statements have been prepared under the historical cost convention, as modified by the revaluation of available-for-sale financial assets and derivative financial instruments, which are carried at fair value. • the right to control the management and financial and operating policies of Tencent Computer. 371 71,902 117 Annual Report 2016 Notes to the Consolidated Financial Statements For the year ended 31 December 2016 43,438 Tencent Holdings Limited (the "Company") was incorporated in the Cayman Islands with limited liability. The address of its registered office is Cricket Square, Hutchins Drive, P.O. Box 2681, Grand Cayman KY1-1111, Cayman Islands. The shares of the Company have been listed on the main board of the Stock Exchange of Hong Kong Limited (the "Stock Exchange") since 16 June 2004. The Company is an investment holding company. The Company and its subsidiaries (collectively, the "Group") are principally engaged in the provision of value-added services ("VAS") and online advertising services to users in the People's Republic of China (the "PRC"). The operations of the Group were initially conducted through Shenzhen Tencent Computer Systems Company Limited ("Tencent Computer"), a limited liability company established in the PRC by certain shareholders of the Company on 11 November 1998. Tencent Computer is legally owned by the core founders of the Company who are PRC citizens (the "Registered Shareholders"). The PRC regulations restrict foreign ownership of companies that provide value-added telecommunications services, which include activities and services operated by Tencent Computer. In order to enable certain foreign companies to make investments into the business of the Group, the Company established a subsidiary, Tencent Technology (Shenzhen) Company Limited ("Tencent Technology"), which is a wholly foreign owned enterprise incorporated in the PRC, on 24 February 2000. The foreign investors of the Company then subscribed to additional equity interest in the Company. Under a series of contractual arrangements (collectively, “Structure Contracts") entered into among the Company, Tencent Technology, Tencent Computer and the Registered Shareholders, the Company is able to effectively control, recognise and receive substantially all the economic benefit of the business and operations of Tencent Computer. In summary, the Structure Contracts provide the Company through Tencent Technology with, among other things: the right to receive the cash received by Tencent Computer from its operations which is surplus to its requirements, having regard to its forecast working capital needs, capital expenditure, and other short-term anticipated expenditure through various commercial arrangements; 1 GENERAL INFORMATION 2.1 Basis of preparation (Cont'd) SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Cont'd) 2 2.2 Subsidiaries There will be no impact on the Group's accounting for financial liabilities, as the new requirements only affect the accounting for financial liabilities that are designated at fair value through profit or loss, while the Group does not have any such liabilities. Annual Report 2016 Notes to the Consolidated Financial Statements 121 The new hedge accounting rules will align the accounting for hedging instruments more closely with the Group's established risk management practices. As a general rule, more hedge relationships might be eligible for hedge accounting, given the standard introduces a more principle-based approach. Nevertheless, the Group has not yet undertaken a detailed assessment but management expect that the Group's current hedge relationships might likely be qualified as continuing hedges upon the adoption of IFRS 9. (b) The derecognition rules have been transferred from IAS 39 "Financial Instruments: Recognition and Measurement" and have not been changed. For the year ended 31 December 2016 New standards and amendments to standards that have been issued but not effective (Cont'd) The accounting for lessors will not significantly change. The standard will affect primarily the accounting for Group's operating leases. However, the Group has just commenced its assessment and have not yet determined to what extent its commitments will result in the recognition of an asset and a liability for future payments and how this will affect the Group's profit and classification of cash flows. IFRS 9 "Financial instruments" (Cont'd) The new impairment model requires the recognition of impairment provisions based on expected credit losses rather than only incurred credit losses as is the case under IAS 39. It applies to financial assets classified at amortised cost, debt instruments measured at fair value through other comprehensive income, contract assets under IFRS 15 "Revenue from Contracts with Customers", lease receivables, loan commitments and certain financial guarantee contracts. While the Group has not yet undertaken a detailed assessment of how its impairment provisions would be affected by the new model, management expects it might result in an earlier recognition of credit losses. The new standard also introduces expanded disclosure requirements and changes in presentation. These are expected to change the nature and extent of the Group's disclosures about its financial instruments particularly in the year of the adoption of the new standard. IFRS 9 must be applied for financial years commencing on or after 1 January 2018. Early adoption is permitted. The Group does not intend to adopt this standard before its mandatory effective date. (iii) IFRS 16 "Lease" IFRS 16 will result in almost all leases being recognised on the statement of financial position, as the distinction between operating and finance leases is removed. Under the new standard, an asset (the right to use the leased item) and a financial liability to pay rentals are recognised. The only exceptions are short-term and low-value leases. The new standard is mandatory for financial years commencing on or after 1 January 2019. The Group does not intend to adopt this standard before its effective date. Tencent Holdings Limited 122 Notes to the Consolidated Financial Statements 2 IFRS 9 retains but simplifies the mixed measurement model and establishes three primary measurement categories for financial assets: amortised cost, fair value through other comprehensive income and fair value through profit or loss. Investments in equity instruments are required to be measured at fair value through profit or loss with the irrevocable option at inception to present changes in fair value in other comprehensive income which will not be recycling to the profit and loss. While management of the Group has just commenced an assessment on the classification and measurement of its financial assets, the potential impact to the future financial statements has yet to be determined but management considers that certain investments in equity instruments currently classified as available-for-sale financial assets might fall within the classification as at fair value through profit or loss, hence, there might be a change to the accounting of these assets. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Cont'd) (ii) IFRS 9 "Financial instruments" addresses the classification, measurement and derecognition of financial assets and financial liabilities, introduces new rules for hedge accounting and a new impairment model for financial assets. A number of new standards and amendments to standards are not effective for the financial year beginning (ii) Notes to the Consolidated Financial Statements SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Cont'd) 2.1 Basis of preparation (Cont'd) (a) Amendments to standards adopted by the Group The following amendments to standards have been adopted by the Group for the first time for the financial year beginning on 1 January 2016. The adoption of these amendments does not have any significant impact on the consolidated financial statements of the Group. IFRS 11 (amendment) Accounting for acquisitions of interests in joint operations IAS 16 and IAS 38 (amendment) Clarification of acceptable methods of depreciation and amortisation IAS 1 (amendment) IFRSS (amendment) Disclosure initiative Annual improvements 2014 (b) IFRS 9 "Financial instruments' New standards and amendments to standards that have been issued but not effective 1 January 2016, and have not been early adopted by the Group in preparing the consolidated financial statements. None of these is expected to have a significant effect on the consolidated financial statements of the Group, except for set out below: (i) IFRS 15 "Revenue from contracts with customers" IFRS 15 "Revenue from contracts with customers" replaces IAS 18 "Revenue" and IAS 11 "Construction contracts" and related interpretations. Revenue is recognised when a customer obtains control of a goods or service and thus has the ability to direct the use and obtain the benefits from the goods or service. This standard is effective for annual periods beginning on or after 1 January 2018 and earlier adoption is permitted. The standard permits either a full retrospective or a modified retrospective approach for the adoption. At this stage, the Group does not intend to adopt this standard before its effective date while a full retrospective approach is expected to be applied upon the adoption. Management is currently assessing the effects of applying the new standard on the Group's financial statements and has identified that the application of IFRS 15 may affect the measurement and timing of recognition of revenues as a result of identification of different performance obligations and behaviors of different customers portfolios. At this stage, the Group is not in a position to estimate the impact on the Group's consolidated financial statements while the Group will make more detailed assessments of the impact over the next twelve months. Tencent Holdings Limited 120 Notes to the Consolidated Financial Statements 2 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Cont'd) For the year ended 31 December 2016 2.1 Basis of preparation (Cont'd) (b) New standards and amendments to standards that have been issued but not effective (Cont'd) For the year ended 31 December 2016 (a) Consolidation Subsidiaries are all entities (including structured entities) over which the Group has control. The Group controls an entity when the Group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. Subsidiaries are consolidated from the date on which control is transferred to the Group. They are deconsolidated from the date that control ceases. Intra-group transactions, balances and unrealised gains on transactions between group companies are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the transferred asset. When necessary, amounts reported by subsidiaries have been adjusted to conform with the Group's accounting policies. For the year ended 31 December 2016 Notes to the Consolidated Financial Statements Annual Report 2016 127 Items included in the financial statements of each of the Group's entities are measured using the currency of the primary economic environment in which the entity operates (the "functional currency"). The functional currency of the Company and certain of its overseas subsidiaries is United States Dollars ("USD"). As the major operations of the Group are within the PRC, the Group presents its consolidated financial statements in Renminbi ("RMB"), unless otherwise stated. (a) Functional and presentation currency 2.8 Foreign currency translation Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-makers, who are responsible for allocating resources and assessing performance of the operating segments and making strategic decisions. The chief operating decision-makers mainly include the executive directors. 2.7 Segment reporting 2 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Cont'd) When the Group loses significant influence over an associate, it measures any retained investment at fair value. A profit or loss is recognised at any difference between the fair value of any retained interest plus any proceeds from disposing of the part interest in the associate and the carrying amount of the investment at the date the equity method was discontinued. The amounts previously recognised in other comprehensive income by an associate should be reclassified to the consolidated income statement or transferred to another category of equity as specified and permitted by applicable IFRSS when the Group loses significant influence over the associate. The cost of associates/joint ventures acquired in stages, except for the change from an associate to a joint venture; is measured as the sum of the fair value of the interest previously held plus the fair value of any additional consideration transferred as of the date when it becomes associate/joint venture. A gain or loss on re-measurement of the previously held interest is taken to the consolidated income statement. Any other comprehensive income recognised in prior periods in relation to the previously held interest is also taken to the consolidated income statement. Any acquisition-related costs are expensed in the period in which the costs are incurred. 2.5 Investments in associates/joint ventures achieved in stages SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Cont'd) 2 For the year ended 31 December 2016 Notes to the Consolidated Financial Statements 126 Tencent Holdings Limited Unrealised gains on transactions between the Group and its joint ventures are eliminated to the extent of the Group's interest in the joint ventures. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. A full gain or loss is recognised when a transaction involves a business whereas a partial gain or loss is recognised when a transaction involves assets that do not constitute a business, even if those assets are in a subsidiary. Accounting policies of the joint ventures have been changed where necessary to ensure consistency with the policies adopted by the Group. 2.6 Partial disposal of associates to available-for-sale financial assets Under IFRS 11 investments in joint arrangements are classified as either joint operations or joint ventures depending on the contractual rights and obligations of each investor. The Group has assessed the nature of its joint arrangements and determined them to be joint ventures. Joint ventures are accounted for using the equity method. Under the equity method of accounting, interests in joint ventures are initially recognised at cost and adjusted thereafter to recognise the Group's share of the post-acquisition profits or losses and movements in other comprehensive income. When the Group's share of losses in a joint venture equals or exceeds its interests in the joint ventures (which includes any long-term interests that, in substance, form part of the Group's net investment in the joint ventures), the Group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the joint ventures. 2.8 Foreign currency translation (Cont'd) Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the consolidated income statement. Annual Report 2016 129 Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate. Currency translation differences arising are recognised in other comprehensive income. On consolidation, exchange differences arising from the translation of the net investment in foreign operations, and of borrowings and other currency instruments designated as hedges of such investments, are taken to other comprehensive income. (iii) All resulting currency translation differences are recognised as a separate component of other comprehensive income. Income and expenses for each income statement are translated at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the rate on the dates of the transactions); and (ii) Assets and liabilities for each statement of financial position presented are translated at the closing rate at the date of that statement of financial position; (i) (b) Transactions and balances The results and financial position of all the group entities (none of which has the currency of a hyper- inflationary economy) that have a functional currency different from the presentation currency of RMB are translated into the presentation currency as follows: 2.8 Foreign currency translation (Cont'd) For the year ended 31 December 2016 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Cont'd) 2 Notes to the Consolidated Financial Statements 128 Tencent Holdings Limited Translation differences on non-monetary financial assets and liabilities such as equities held at fair value through profit or loss are recognised in the consolidated income statement as part of the fair value gain or loss. Translation differences on non-monetary financial assets, such as equities classified as available-for- sale financial assets, are included in other comprehensive income. Changes in the fair value of debt securities denominated in foreign currency classified as available-for-sale financial assets are analysed between translation differences resulting from changes in the amortised cost of the securities, and other changes in the carrying amount of the securities. Translation differences related to changes in the amortised cost and interest income are recognised in the consolidated income statement, and other changes in carrying amount are recognised in other comprehensive income. (c) Group companies For the year ended 31 December 2016 2.4 Joint arrangements Gains or losses on dilution of equity interest in associates are recognised in the consolidated income statement. Transactions with non-controlling interests that do not result in a loss of control are accounted for as equity transactions that is, as transactions with the owners of the subsidiary in their capacity as owners. The difference between fair value of any consideration paid and the relevant share acquired of the carrying amount of net assets of the subsidiary is recorded in equity. Gains or losses on disposals to non-controlling interests are also recorded in equity. - Changes in ownership interests in subsidiaries without change of control (ii) The excess of the consideration transferred, the amount of any non-controlling interest in the acquiree and the acquisition-date fair value of any previous equity interest in the acquiree over the fair value of the identifiable net assets acquired is recorded as goodwill. If the total of consideration transferred, non-controlling interest recognised and previously held interest measured is less than the fair value of the net assets of the subsidiary acquired in the case of a bargain purchase, the difference is recognised directly in the consolidated income statement. Any contingent consideration to be transferred by the Group is recognised at fair value at the acquisition date. Subsequent changes to the fair value of the contingent consideration that is deemed to be an asset or liability is recognised in accordance with IAS 39 in profit or loss. Contingent consideration that is classified as equity is not re-measured, and its subsequent settlement is accounted for within equity. (i) Business combinations (Cont'd) (a) Consolidation (Cont'd) 2.2 Subsidiaries (Cont'd) 2 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Cont'd) For the year ended 31 December 2016 Notes to the Consolidated Financial Statements Annual Report 2016 123 If the business combination is achieved in stages, the acquisition date carrying value of the acquirer's previously held equity interest in the acquiree is re-measured to fair value at the acquisition date; any gains or losses arising from such re-measurement are recognised in profit or loss. Acquisition-related costs are expensed as incurred. The Group applies the acquisition method to account for business combinations. The consideration transferred for the acquisition of a subsidiary is the fair values of the assets transferred, the liabilities incurred to the former owners of the acquiree and the equity interests issued by the Group. The consideration transferred includes the fair value of any asset or liability resulting from a contingent consideration arrangement. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. The Group recognises any non-controlling interest in the acquiree on an acquisition-by-acquisition basis. Non-controlling interests in the acquiree that are present ownership interests and entitle their holders to a proportionate share of the entity's net assets in the event of liquidation are measured at either fair value or the present ownership interests' proportionate share in the recognised amounts of the acquiree's identifiable net assets. All other components of non-controlling interests are measured at their acquisition date fair value, unless another measurement basis is required by IFRSS. Business combinations (i) (iii) Disposal of subsidiaries The Group's investments in associates in the form of redeemable instruments are accounted for as compound financial instruments (Note 2.27). When the Group ceases to have control, any retained interest in the entity is re-measured to its fair value at the date when control is lost, with the change in carrying amount recognised in the consolidated income statement. The fair value is the initial carrying amount for the purposes of subsequently accounting for the retained interest as an associate, a joint venture or financial asset. In addition, any amounts previously recognised in other comprehensive income in respect of that entity are accounted for as if the Group had directly disposed of the related assets or liabilities. It means that amounts previously recognised in other comprehensive income are reclassified to the consolidated income statement or transferred to another category of equity as specified/permitted by applicable IFRSS. 124 Unrealised gains on transactions between the Group and its associates are eliminated to the extent of the Group's interests in the associates. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. A full gain or loss is recognised when a transaction involves a business whereas a partial gain or loss is recognised when a transaction involves assets that do not constitute a business, even if those assets are in a subsidiary. Accounting policies of associates have been changed where necessary to ensure consistency with the policies adopted by the Group. The Group determines at each reporting date whether there is any objective evidence that investments accounted for using the equity method, including associates and joint arrangements (Note 2.4), are impaired. If this is the case, the Group calculates the amount of impairment as the difference between the recoverable amount of the investment and its carrying value and recognises the amount in "Other gains/(losses), net" in the consolidated income statement. 2.3 Associates (Cont'd) 2 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Cont'd) For the year ended 31 December 2016 Notes to the Consolidated Financial Statements Annual Report 2016 125 The Group's share of its associates' post-acquisition profit or loss is recognised in the consolidated income statement, and its share of post-acquisition movements in other comprehensive income is recognised in other comprehensive income. The cumulative post-acquisition movements are adjusted against the carrying amount of the investment. When the Group's share of losses in an associate equals or exceeds its interest in the associate, including any other unsecured receivables, the Group does not recognise further losses, unless it has incurred legal or constructive obligations or made payments on behalf of the associate. Tencent Holdings Limited If the ownership interest in an associate is reduced but significant influence is retained, only a proportionate share of the amounts previously recognised in other comprehensive income is reclassified to consolidated income statement where appropriate. 2.3 Associates Impairment testing of the investments in subsidiaries is required upon receiving dividends from these investments if the dividends exceed the total comprehensive income of the subsidiaries in the period the dividends are declared or if the carrying amount of the investments in the separate financial statements exceeds the carrying amount in the consolidated financial statements of the investee's net assets including goodwill. Investments in subsidiaries are accounted for at cost less impairment. Cost includes direct attributable costs of investment. The results of subsidiaries are accounted for by the Company on the basis of dividends received and receivable. In addition, the contribution to the Company's Share Scheme Trust (as defined in Note 46(e)), a controlled structured entity, is stated at cost in "Contribution to Share Scheme Trust”, and will be transferred to the "Shares held for share award schemes" under equity when the contribution is used for the acquisition of the Company's shares. (b) Separate financial statements 2.2 Subsidiaries (Cont'd) SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Cont'd) For the year ended 31 December 2016 Notes to the Consolidated Financial Statements 2 Associates are all entities over which the Group has significant influence but not control, generally accompanying a shareholding of between 20% and 50% of the voting rights. Investments in associates are accounted for using the equity method of accounting and are initially recognised at cost, and the carrying amount is increased or decreased to recognise the investor's share of the profit or loss of the investee after the date of acquisition. The Group's investments in associates include goodwill identified on acquisition, net of any accumulated impairment loss. Upon the acquisition of the ownership interest in an associate, any difference between the cost of the associate and the Group's share of the net fair value of the associate's identifiable assets and liabilities is accounted for as goodwill. 2 Assets that have an indefinite useful life or are not yet available for use are not subject to amortisation and are tested annually for impairment. Assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset's carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset's fair value less costs to sell and value in use. For the purpose of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). Non-financial assets other than goodwill that suffered impairment are reviewed for possible reversal of the impairment at each reporting date. Tencent Holdings Limited Notes to the Consolidated Financial Statements Tencent Holdings Limited The Group documents at the inception of the transaction the relationship between hedging instruments and hedged items, as well as its risk management objectives and strategy for undertaking various hedging transactions. The Group also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items. Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently re-measured at their fair value. The method of recognising the resulting gain or loss depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. The Group designates certain derivatives as either (i) hedges of the fair value of recognised assets or liabilities or a firm commitment (fair value hedge); (ii) hedges of a particular risk associated with a recognised asset or liability or a highly probable forecast transaction (cash flow hedge); or (iii) hedges of a net investment in a foreign operation (net investment hedge). 2.18 Derivative financial instruments and hedging activities For debt securities, if any such evidence exists, the cumulative loss - measured as the difference between the acquisition cost (net of any principle repayment and amortisation) and the current fair value, less any impairment loss on that financial asset previously recognised in the consolidated income statement - is reclassified from equity and recognised in the consolidated income statement. If, in a subsequent period, the fair value of a debt instrument classified as available for sale increases and the increase can be objectively related to an event occurring after the impairment loss was recognised in the consolidated income statement, the impairment loss is reversed through the consolidated income statement. For equity investments, a significant or prolonged decline in the fair value of the security below its cost is also evidence that the assets are impaired. If any such evidence exists, the cumulative loss measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognised in the consolidated income statement - is removed from equity and recognised in the consolidated income statement. Impairment losses recognised in the consolidated income statement on equity instruments are not reversed through the consolidated income statement. (b) Assets classified as available-for-sale financial assets 2.17 Impairment of financial assets (Cont'd) 2 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Cont'd) For the year ended 31 December 2016 Notes to the Consolidated Financial Statements Annual Report 2016 135 If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised (such as an improvement in the debtor's credit rating), the reversal of the previously recognised impairment loss is recognised in the consolidated income statement. For loans and receivables category, the amount of the impairment loss is measured as the difference between the asset's carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset's original effective interest rate. The carrying amount of the asset is reduced and the amount of the impairment loss is recognised in the consolidated income statement. If a loan has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate determined under the contract. As a practical expedient, the Group may measure impairment on the basis of an instrument's fair value using an observable market price. 136 Notes to the Consolidated Financial Statements For the year ended 31 December 2016 2 2 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Cont'd) For the year ended 31 December 2016 Notes to the Consolidated Financial Statements Annual Report 2016 137 Cash and cash equivalents include cash in hand, deposits held at call with banks, money market funds and other short-term highly liquid investments with initial maturities of three months or less. 2.21 Cash and cash equivalents Evidence of impairment may include indications that the debtors or a group of debtors is experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganisation, and where observable data indicate that there is a measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults. Accounts receivable are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less provision for impairment. 2.20 Accounts receivable Inventories, mainly consisting of merchandise for sale, are primarily accounted for using the weighted average method and are stated at the lower of cost and net realisable value. 2.19 Inventories Changes in the fair value of any derivative instruments that do not qualify for hedge accounting are recognised immediately in the consolidated income statement in "Other gains/(losses), net". Changes in the fair value of derivatives that are designated and qualified as fair value hedges are recorded in the consolidated income statement, together with any changes in the fair value of the hedged asset or liability that are attributable to the hedged risk. The effective portion of changes in the fair value of derivatives that are designated and qualified as cash flow hedges is recognised in other comprehensive income. The gain or loss relating to the ineffective portion is recognised immediately in the consolidated income statement within "other gains/(losses), net". When the forecast transaction that is hedged results in the recognition of a non-financial asset, the gains and losses previously deferred in equity are transferred from equity and included in the initial measurement of the cost of the asset. 2.18 Derivative financial instruments and hedging activities (Cont'd) SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Cont'd) Accounts receivable are amounts due from customers or agents for services performed or merchandise sold in the ordinary course of business. If collection of accounts receivable is expected in one year or less, they are classified as current assets. Otherwise, they are presented as non-current assets. 2.22 Share capital A financial asset or a group of financial assets is impaired and impairment losses are incurred only if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a "loss event") and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. The Group assesses at the end of each reporting period whether there is objective evidence that a financial asset or a group of financial assets is impaired. Available-for-sale financial assets are non-derivatives that are either designated in this category or not classified in any other category. They are included in non-current assets unless management intends to dispose of the investment within 12 months after the end of the reporting period. (iii) Available-for-sale financial assets Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets, except for those with maturities greater than 12 months after the end of the reporting period which are classified as non-current assets. The Group's loans and receivables comprise "Accounts receivable", "Deposits and other receivables", "Term deposits", "Restricted cash" and "Cash and cash equivalents" in the consolidated statement of financial position. Loans and receivables (ii) Financial assets at fair value through profit or loss are financial assets held for trading. A financial asset is classified in this category if acquired principally for the purpose of selling in the short term. Derivatives are classified as held for trading unless they are designated as hedges. Assets in this category are classified as current assets if expected to be settled within 12 months, otherwise they are classified as non-current. (i) Financial assets at fair value through profit or loss The Group classifies its financial assets in the following categories: financial assets at fair value through profit or loss, loans and receivables and available-for-sale financial assets. The classification depends on the purpose for which the financial assets were acquired, management's intentions and whether the assets are quoted in an active market. Management determines the classification of its financial assets at initial recognition. (a) Classification 2.15 Financial assets SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Cont'd) 2 For the year ended 31 December 2016 Notes to the Consolidated Financial Statements 132 133 Annual Report 2016 Notes to the Consolidated Financial Statements For the year ended 31 December 2016 2.17 Impairment of financial assets For the year ended 31 December 2016 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Cont'd) 2 Notes to the Consolidated Financial Statements 134 Tencent Holdings Limited (a) Assets carried at amortised cost Financial assets and liabilities are offset and the net amount is reported in the consolidated statement of financial position when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or realise the assets and settle the liabilities simultaneously. The legally enforceable right must not be contingent on future events and must be enforceable in the normal course of business and in the event of default, insolvency or bankruptcy of the company or the counterparty. Interest on available-for-sale securities calculated using the effective interest method is recognised in the consolidated income statement as part of other income. Dividends on available-for-sale financial assets equity instruments are recognised in the consolidated income statement when the Group's right to receive payments is established. When securities classified as available-for-sale financial assets are sold or impaired, the accumulated fair value adjustments recognised in other comprehensive income are included in the consolidated income statement as gains and losses from investment securities. Changes in the fair value of monetary and non-monetary securities classified as available-for-sale financial assets are recognised in other comprehensive income. Regular way purchases and sales of investments are recognised on trade-date – the date on which the Group commits to purchase or sell the asset. Investments are initially recognised at fair value plus transaction costs for all financial assets not carried at fair value through profit or loss. Financial assets carried at fair value through profit or loss are initially recognised at fair value, and transaction costs are expensed in the consolidated income statement. Financial assets are derecognised when the rights to receive cash flows from the investments have expired or have been transferred and the Group has transferred substantially all risks and rewards of ownership. Available-for-sale financial assets and financial assets at fair value through profit or loss are subsequently carried at fair value. Loans and receivables are subsequently carried at amortised cost using the effective interest method. (b) Recognition and measurement 2.15 Financial assets (Cont'd) 2 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Cont'd) 2.16 Offsetting financial instruments Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or share options are shown in equity as a deduction from the proceeds. Where any Group company purchases the Company's equity share capital (treasury share), the considerations paid, including any directly attributable incremental costs, is deducted from equity attributable to the Company's equity holders until the shares are cancelled or reissued. Where such shares are subsequently reissued, any consideration received (net of any directly attributable incremental transaction costs) is included in equity attributable to the Company's equity holders. 2.23 Accounts payable Tencent Holdings Limited 130 Notes to the Consolidated Financial Statements 2 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Cont'd) For the year ended 31 December 2016 2.10 Investment properties Investment properties are held for long-term rental yields and are not occupied by the Group. Investment properties are carried at historical costs less accumulated depreciation and accumulated impairment charges. Historical costs include expenditures that are directly attributable to the acquisition of the items. Depreciation is calculated on the straight-line method to allocate their costs to their residual values over their estimated useful lives of 20-50 years. Investment properties' residual values and useful lives are reviewed, and adjusted if appropriate, at the end of each reporting period. Investment properties' carrying amounts are written down immediately to their recoverable amounts if their carrying amounts are greater than their estimated recoverable amounts. 2.11 Land use rights Land use rights are up-front payments to acquire long-term interest in land. These payments are stated at cost and charged to the consolidated income statement on a straight-line basis over the remaining period of the lease or capitalised in construction in progress upon completion of construction. 2.12 Intangible assets (a) Goodwill Goodwill arises on the acquisition of subsidiaries represents the excess of the consideration transferred over the Group's interest in net fair value of the net identifiable assets, liabilities and contingent liabilities of the acquiree and the fair value of the non-controlling interests in the acquiree. Gains and losses on disposals are determined by comparing the proceeds with the carrying amount and are recognised in "Other gains/(losses), net" in the consolidated income statement. An asset's carrying amount is written down immediately to its recoverable amount if the asset's carrying amount is greater than its estimated recoverable amount (Note 2.14). Construction in progress represents buildings under construction, which is stated at actual construction cost less any impairment loss. Construction in progress is transferred to property, plant and equipment when completed and ready for use. The assets' residual values and useful lives are reviewed, and adjusted if appropriate, at the end of each reporting period. For the year ended 31 December 2016 2 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Cont'd) 2.9 Property, plant and equipment All property, plant and equipment are stated at historical costs less accumulated depreciation and accumulated impairment charges. Historical costs includes expenditure that are directly attributable to the acquisition of the items. Subsequent costs are included in the asset's carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. The carrying amount of the replaced part is derecognised. All other repairs and maintenance are charged to the consolidated income statement during the financial period in which they are incurred. Depreciation is calculated using the straight-line method to allocate their cost to their residual values over their estimated useful lives, as follows: 20-50 years For the purpose of impairment testing, goodwill acquired in a business combination is allocated to each of the cash-generating units ("CGUs"), or groups of CGUs, that is expected to benefit from the synergies of the combination. Each unit or group of units to which the goodwill is allocated represents the lowest level within the entity at which the goodwill is monitored for internal management purposes. Goodwill is monitored at the operating segment level. Buildings 2 - 5 years Furniture and office equipment 5 years 5 years Shorter of their useful lives and the lease terms Motor vehicles Leasehold improvements Computer equipment Goodwill impairment reviews are undertaken annually or more frequently if events or changes in circumstances indicate a potential impairment. The carrying value of goodwill is compared to the recoverable amount, which is the higher of value in use and the fair value less costs to sell. Any impairment is recognised immediately as an expense and is not subsequently reversed. 131 Annual Report 2016 2.26 Borrowings and notes payable The financial guarantee is initially recognised in the financial statements at fair value on the date the guarantee was given. Subsequent to initial recognition, the Company's liabilities under such guarantees are measured at the higher of the initial amount, less amortisation of fees recognised in accordance with IAS 18, and the best estimate of the amount required to settle the guarantee. The financial guarantee contract of the Group is the contract that represents guarantee provided by the Group in respect of a put arrangement granted by an investee to the employees of its subsidiary. 2.25 Financial guarantee contracts For the year ended 31 December 2016 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Cont'd) 2 Notes to the Consolidated Financial Statements 138 Tencent Holdings Limited The put option liabilities are current liabilities unless the put option can only be exercised 12 months after the end of the reporting period. Put option is the financial instrument granted by the Group that the counterparty may have the right to request the Group to purchase its own equity instruments for cash or other financial assets when certain conditions are met. If the Group does not have the unconditional right to avoid delivering cash or another financial assets under the put option, it has to recognise a financial liability at the present value of the estimated future cash outflows under the put option. The financial liability is initially recognised at fair value. Subsequently, if the Group revises its estimates of payments, the Group will adjust the carrying amount of the financial liability to reflect actual and revised estimated cash outflows. The Group will recalculate the carrying amount by computing the present value of revised estimated future cash outflows at the financial instrument's original effective interest rate and the adjustments will be recognised as income or expenses in the consolidated income statement. If the put option expires without delivery, the carrying amount of the liability is reclassified as equity. 2.24 Put option liabilities Accounts payable are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method. Accounts payable are obligations to pay for services or goods that have been acquired in the ordinary course of business from suppliers. Accounts payable are classified as current liabilities if payment is due within one year or less. If not, they are presented as non-current liabilities. Borrowings and notes payable issued by the Group are recognised initially at fair value, net of transaction costs incurred. They are subsequently carried at amortised cost. Any difference between proceeds (net of transaction costs) and the redemption value is recognised in the consolidated income statement over their period using the effective interest method. Fees paid on the establishment of loan facilities are recognised as transaction costs of the loan to the extent that it is probable that some or all of the facility will be drawn down. In this case, the fee is deferred until the draw-down occurs. To the extent there is no evidence that it is probable that some or all of the facility will be drawn down, the fee is capitalised as a pre-payment for liquidity services and amortised over the period of the facility to which it relates. Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the end of the reporting period. Other intangible assets mainly include game licences, copyrights, computer software and technology and non-compete agreements. They are initially recognised and measured at cost or estimated fair value of intangible assets acquired through business combinations. 2 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Cont'd) 2.12 Intangible assets (Cont'd) (b) Licensed online contents The licensed online contents mainly include video and music contents. They are initially recognised and measured at cost or estimated fair value of intangible assets acquired through business combinations. Licensed online contents are amortised using a straight-line method or accelerated method which reflect the estimated consumption patterns. (c) Other intangible assets Notes payable are classified as non-current liabilities unless the Group has an unconditional obligation to settle the liability within 12 months after the end of the reporting period. Other intangible assets are amortised over their estimated useful lives (generally three to ten years) using the straight-line method which reflects the pattern in which the intangible asset's future economic benefits are expected to be consumed. 2.13 Shares held for share award schemes The consideration paid by the Share Scheme Trust (see Note 46(e)) for purchasing the Company's shares from the market, including any directly attributable incremental cost, is presented as "Shares held for share award schemes" and the amount is deducted from total equity. When the Share Scheme Trust transfers the Company's shares to the awardees upon vesting, the related costs of the awarded shares vested are credited to "Shares held for share award schemes", with a corresponding adjustment made to "Share premium". 2.14 Impairment of non-financial assets Annual Report 2016 139 General and specific finance costs directly attributable to the acquisition, construction of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets, until such time as the assets are substantially ready for their intended use or sale. During the year ended 31 December 2016, finance cost capitalised was insignificant to the Group. For the year ended 31 December 2016 Notes to the Consolidated Financial Statements Notes to the Consolidated Financial Statements Annual Report 2016 advertisements. The Group's exposure to changes in interest rates is also attributable to its borrowings and notes payable, details of which have been disclosed in Notes 33 and 34, which representing substantial portion of the Group's debts. Borrowings and notes payable carried at floating rates expose the Group to cash flow interest-rate risk whereas those carried at fixed rates expose the Group to fair value interest-rate risk. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Cont'd) 2 Notes to the Consolidated Financial Statements 144 Tencent Holdings Limited In respect of the Group's VAS services directly delivered to the Group's customers and paid through various third parties platforms, these third party platforms collect the relevant service fees (the "Internet and Mobile Service Fees") on behalf of the Group and they are entitled to a pre-determined percentage of commission fee (defined as "Channel costs"). The Channel costs are withheld and deducted from the gross Internet and Mobile Service Fees collected by these platforms from the users, with the net amounts remitted to the Group. The Group recognises the Internet and Mobile Service Fees as revenue on a gross basis, given it is the principal in these transactions, and recognises the Channel costs as cost of revenues. Revenue is recognised from the sales of online services when the services are rendered. Revenue is recognised from the virtual products/items in the Group's Internet/mobile platforms over the estimated lifespan of the respective virtual products/items. The estimated lifespan of different virtual products/items are determined by the management based on either the expected user relationship periods or the stipulated period of validity of the relevant virtual products/items depending on the respective term of virtual products/ items. For the year ended 31 December 2016 The Group sells the prepaid credits through various channels such as sales agents appointed by the Group, telecommunication operators, third party platform providers, broadband service providers and Internet cafes, etc. The end users can register the prepaid credits to their user accounts in the Group's platforms and then gain access to the Group's paid online products or services. Receipts from the sales of prepaid credits are deferred and recorded as “Deferred revenue” in the consolidated statement of financial position (see Note 36). Revenues from VAS are derived principally from the provision of online/mobile games, community value- added services and applications across various Internet and mobile platforms. (a) VAS The Group principally derives revenues from provision of VAS and online advertising services in the PRC. 2.31 Revenue recognition 2 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Cont'd) For the year ended 31 December 2016 Notes to the Consolidated Financial Statements The VAS can be paid directly by end users by way of online payment channels or utilising the prepaid cards and tokens (represented a specific amount of payment unit) issued by the Group. In addition, certain VAS are paid through various third parties platforms. Annual Report 2016 2.31 Revenue recognition (Cont'd) (b) 2.33 Dividend income Interest income is recognised on a time proportion basis, taking into account of the principal outstanding and the effective interest rate over the period to maturity, when it is determined that such income will accrue to the Group. 2.32 Interest income 2 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Cont'd) For the year ended 31 December 2016 Notes to the Consolidated Financial Statements Annual Report 2016 (a) 145 Revenue from displaying advertisements is recognised ratably over the respective contract periods with the advertisers and their advertising agencies, when the related advertisements are displayed. Revenue from performance based advertisements is recognised based on actual performance measurement. The Group recognises the revenue from the delivery of pay-for click, pay-for download or pay-for instant display advertisements for advertisers to users of the Group based on the relevant performance measures. Online advertising revenues mainly comprise revenues derived from performance based and display based Online advertising Determining whether revenue of the Group should be reported gross or net is based on a continuing assessment of various factors. The primary factor is whether the Group acting as the principal in offering services to the customer or as an agent in the transaction. The Group has determined that it is acting as the principal in offering services wherever the Group (i) is the primary obligor in the arrangement; (ii) has latitude in establishing the selling price; (iii) has discretion in suppliers selection; and (iv) has involvement in the determination of product or services specifications. The Group adopted different revenue recognition methods based on its specific responsibilities/obligations in different VAS offerings. The Group also opens its Internet and mobile platforms to third-party game/application developers under certain co-operation agreements, of which the Group pays a pre-determined percentage of the fees paid by and collected from the users of the Group's Internet and mobile platforms for the virtual products/items purchased to the third-party game/application developers. The Group recognises the related revenue on a gross or net basis depending on whether the Group is acting as a principal or an agent in the transaction. The Group also defers the related revenue, either on gross or net basis, over the estimated lifespan of the respective virtual products/items, given there is an implicit obligation of the Group to maintain and allow access of the users of the games/applications operated by the developers through its platforms. VAS (Cont'd) Commissions payable to advertising agencies are recognised as a component of the cost of revenues. Dividend income is recognised when the right to receive payment is established. 143 Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognised even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small. For the year ended 31 December 2016 Notes to the Consolidated Financial Statements Annual Report 2016 141 The Group participates in various defined contribution retirement benefit plans which are available to all relevant employees. These plans are generally funded through payments to schemes established by governments or trustee-administered funds. A defined contribution plan is a pension plan under which the Group pays contributions on a mandatory, contractual or voluntary basis into a separate entity. The Group has no legal or constructive obligations to pay further contributions if the fund does not hold sufficient assets to pay all employees the benefits relating to employee service in the current and prior periods. The Group's contributions to the defined contribution plans are expensed as incurred and not reduced by contributions forfeited by those employees who leave the scheme prior to vesting fully in the contributions. Pension obligations (b) 2 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Cont'd) Employee entitlements to annual leave are recognised when they accrue to employees. A provision is made for the estimated liability for annual leave as a result of services rendered by employees up to the end of the reporting period. Employee entitlements to sick and maternity leave are not recognised until the time of leave. 2.29 Employee benefits Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income tax assets and liabilities relate to income taxes levied by the same taxation authority on either the taxable entity or different taxable entities where there is an intention to settle the balances on a net basis. Deferred income tax assets are recognised on deductible temporary differences arising from investments in subsidiaries, associates and joint arrangements only to the extent that it is probable the temporary difference will reverse in the future and there is sufficient taxable profit available against which the temporary difference can be utilised. Deferred income tax is provided on temporary differences arising from investments in subsidiaries and associates, except for deferred income tax liability where the timing of the reversal of the temporary difference is controlled by the Group and it is probable that the temporary difference will not reverse in the foreseeable future. Generally the Group is unable to control the reversal of the temporary difference for associates. Only when there is an agreement in place that gives the Group the ability to control the reversal of the temporary difference in the foreseeable future, deferred tax liability in relation to taxable temporary differences arising from the associate's undistributed profits is not recognised. 2.28 Current and deferred income tax (Cont'd) For the year ended 31 December 2016 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Cont'd) (a) Employee leave entitlements Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in the provision due to passage of time is recognised as interest expense. 2.29 Employee benefits (Cont'd) The Group operates a number of share-based compensation plans (including share option schemes and share award schemes), under which the Group receives services from employees and other qualifying participants as consideration for equity instruments (including share options and awarded shares) of the Group. The fair value of the employee and other qualifying participants services received in exchange for the grant of equity instruments of the Group is recognised as an expense over the vesting period, which is the period over which all of the specified vesting conditions are to be satisfied, and credited to share premium under equity. Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events; it is probable that an outflow of resources will be required to settle the obligation; and the amount has been reliably estimated. Provisions are not recognised for further operating losses. 2.30 Provisions If the terms of an equity-settled award are modified, at a minimum an expense is recognised as if the terms had not been modified. An additional expense is recognised for any modification that increases the total fair value of the share-based payment arrangement, or is otherwise beneficial to the employee and other qualifying participants, as measured at the date of modification. If the Group repurchases vested equity instruments, the payment made to the employee and other qualifying participants shall be accounted for as a deduction from equity, except to the extent that the payment exceeds the fair value of the equity instruments repurchased, measured at the repurchase date. Any such excess shall be recognised as an expense. When the options are exercised, the proceeds received net of any directly attributable transaction costs are credited to share capital (nominal value) and share premium. (c) Share-based compensation benefits (Cont'd) 2.29 Employee benefits (Cont'd) (c) Share-based compensation benefits SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Cont'd) Notes to the Consolidated Financial Statements 2 142 Tencent Holdings Limited At each reporting period end, the Group revise their estimates of the number of options and awarded shares that are expected to ultimately vest. They recognise the impact of the revision of original estimates, if any, in the consolidated income statement of the Group, with a corresponding adjustment made to equity over the remaining vesting period. Non-market performance and services conditions are included in assumptions about the number of options that are expected to become vested. For grant of share options, the total amount to be expensed is determined by reference to the fair value of the options granted by using option-pricing models - Black-Scholes valuation model (the "BS Model”) and "Enhanced FAS 123" binomial model (the “Binomial Model”), which include the impact of market performance conditions (such as the Company's share price) but exclude the impact of service condition and non-market performance conditions. For grant of award shares, the total amount to be expensed is determined by reference to the market price of the Company's shares at the grant date. The Group also adopts valuation technique to assess the fair value of other equity instruments of the Group granted under the share-based compensation plans as appropriate. For the year ended 31 December 2016 2.34 Government grants/subsidies Grants/Subsidies from government are recognised at their fair value where there is a reasonable assurance that the grants/subsidies will be received and the Group will comply with all attached conditions. Under these circumstances, the grants/subsidies are recognised as income or matched with the associated costs which the grants/subsidies are intended to compensate. (37) (2,186) 286 3,169 Monetary liabilities, non-current Monetary liabilities, current Monetary assets, current (3,509) As at 31 December 2015 4,965 (5,470) (276) Monetary liabilities, non-current (177) (3,365) Monetary liabilities, current (4,612) 1,035 983 During the year ended 31 December 2016, the Group reported exchange gains of approximately RMB212 million (2015: exchange losses of approximately RMB108 million) within "Finance costs, net" in the consolidated income statement. The Group's income and operating cash flows are substantially independent from changes in market interest rates and the Group has no significant interest-bearing assets except for loan to investees and investees' shareholders, term deposits with initial terms of over three months, restricted cash and cash and cash equivalents, details of which have been disclosed in Notes 24, 27 and 29. (iii) Interest rate risk The Group is exposed to price risk mainly arising from investments that are classified as available- for-sale financial assets held by the Group (Note 23). To manage its price risk arising from the investments, the Group diversifies its portfolio. The investments made by the Group are either for strategic purposes, or for the purpose of achieving investment yield and balancing the Group's liquidity level simultaneously. Each investment is managed by senior management on a case by case basis. Sensitivity analysis is performed by management to assess the exposure of the Group's financial results to equity price risks of available-for-sale financial assets at the end of each of the reporting period. If equity prices of the respective instruments held by the Group had been 5% (2015: 5%) higher/lower as at 31 December 2016, the other comprehensive income would have been approximately RMB3,879 million (2015: RMB2,067 million) higher/lower. Price risk At 31 December 2016, management considers that any reasonable changes in foreign exchange rates of the above currencies against the two major functional currencies of the Group's entities would not result in a significant change in the Group's results, as the net carrying amounts of financial assets and liabilities denominated in a currency other than the respective Group's entities' function currency are considered to be insignificant. Accordingly, no sensitivity analysis is presented for foreign exchange risk (2015: Nil). For the year ended 31 December 2016 (ii) (3,260) Foreign exchange risk (Cont'd) (a) Market risk (Cont'd) 3.1 Financial risk factors (Cont'd) FINANCIAL RISK MANAGEMENT (Cont'd) 3 Notes to the Consolidated Financial Statements 148 Tencent Holdings Limited (i) 8,606 Monetary assets, current RMB'Million (a) The Group's activities expose it to a variety of financial risks: market risk (including foreign exchange risk, price risk and interest rate risk), credit risk and liquidity risk. The Group's overall risk management strategy seeks to minimise the potential adverse effects on the financial performance of the Group. Risk management is carried out by the senior management of the Group. 3.1 Financial risk factors For the year ended 31 December 2016 Notes to the Consolidated Financial Statements FINANCIAL RISK MANAGEMENT 3 Market risk 146 Costs incurred on development projects (relating to the design and testing of new or improved products) are capitalised as intangible assets when recognition criteria are fulfilled and tests for impairment are performed annually. Other development expenditures that do not meet those criterias are recognised as expenses as incurred. Development costs previously recognised as expenses are not recognised as assets in subsequent periods. Research expenditure is recognised as an expense as incurred. 2.37 Research and development expenses Dividends distribution to the Company's shareholders is recognised as a liability in the Group's and Company's financial statements in the period in which the dividend is approved by the Company's shareholders or board of directors where appropriate. 2.36 Dividends distribution Leases in which a significant portion of the risks and rewards of ownership are retained by lessors are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to the consolidated income statement on a straight-line basis over the period of the lease. 2.35 Leases Tencent Holdings Limited (i) Foreign exchange risk The Group operates internationally and is exposed to foreign exchange risk arising from various currency exposures, primarily with respect to RMB, Hong Kong Dollars ("HKD"), USD and Euro ("EUR"). Foreign exchange risk arises when future commercial transactions or recognised assets and liabilities are denominated in a currency that is not the respective functional currency of the Group's entities. The functional currency of the Company and majority of its overseas subsidiaries is USD whereas the functional currency of the subsidiaries which operate in the PRC is RMB. RMB'Million Non-USD denominated denominated USD As at 31 December 2016 As at 31 December 2016, the Group's major monetary assets and liabilities that exposed to foreign exchange risk are listed below: Foreign exchange risk (Cont'd) (i) (a) Market risk (Cont'd) 3.1 Financial risk factors (Cont'd) FINANCIAL RISK MANAGEMENT (Cont'd) 3 For the year ended 31 December 2016 Notes to the Consolidated Financial Statements Annual Report 2016 147 The Group manages its foreign exchange risk by performing regular reviews of the Group's net foreign exchange exposures and tries to minimise these exposures through natural hedges, wherever possible, and may enter into forward foreign exchange contracts, when necessary. 149 From the perspective of the Company, the Company grants its equity instruments to employees of its subsidiaries to exchange for their services related to the subsidiaries. Accordingly, the share-based compensation expenses, which are recognised in the financial statement, are treated as part of the "Investments in subsidiaries" in the Company's statement of financial position. 2 The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the end of the reporting period in the countries where the Company's subsidiaries operate and generate taxable income. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. It establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities. Notes to the Consolidated Financial Statements For the year ended 31 December 2016 2 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Cont'd) 2.27 Compound financial instruments Compound financial instruments held by the Group comprise equity instruments with redemption features of associates and convertible bonds of a subsidiary that can be converted to share capital at the option of the holder. The Group either (i) accounts for different components of the compound financial instruments separately or (ii) designate the entire financial instruments as financial assets/liabilities at fair value through profit or loss. The host component is recognised initially at the difference between the fair value of the compound financial instrument as a whole and the fair value of the embedded derivatives. The subsequent measurement of the host component and embedded derivatives follow the respective accounting policy of financial instruments as stated in Notes 2.15 and 2.18. For convertible bonds issued by a subsidiary of the Group, the entire instrument is designated as liabilities at fair value through profit or loss including derivative, they are initially recognised at fair value and subsequently carried at fair value with changes in fair value recognised. 2.28 Current and deferred income tax The tax expense for the period comprises current and deferred tax. Tax is recognised in the consolidated income statement, except to the extent that it relates to items recognised in other comprehensive income or directly in equity. In this case, the tax is also recognised in other comprehensive income or in equity, respectively. Deferred income tax is recognised, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. However, the deferred income tax is not accounted for if it arises from initial recognition of goodwill or the initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction neither accounting nor taxable profit or loss is affected. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantively enacted by the end of the reporting period and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled. Deferred income tax assets are recognised only to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. Tencent Holdings Limited 140 If one or more of the significant inputs are not based on observable market data, the instrument is included in level 3. Specific valuation techniques used to value financial instruments include: . Dealer quotes for similar instruments; 6,444 Other techniques, such as discounted cash flow analysis, are used to determine fair value for financial 3.3 Fair value estimation (Cont'd) The fair value of interest rate swaps is calculated as the present value of the estimated future cash flows based on observable yield curves; and For the year ended 31 December 2016 The fair value of financial instruments traded in active markets is determined based on quoted market prices at the end of the reporting period. A market is regarded as active if quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service, or regulatory agency, and those prices represent actual and regularly occurring market transactions on an arm's length basis. The quoted market price used for financial assets held by the Group is the current bid price. These instruments are included in level 1. 3 Notes to the Consolidated Financial Statements 154 Tencent Holdings Limited The fair value of financial instruments that are not traded in an active market is determined by using valuation techniques. These valuation techniques maximise the use of observable market data where it is available and rely as little as possible on entity specific estimates. If all significant inputs required for evaluating the fair value of a financial instrument are observable, the instrument is included in level 2. instruments. FINANCIAL RISK MANAGEMENT (Cont'd) During the year ended 31 December 2016, an available-for-sale financial asset was transferred from level 2 to level 1 of fair value hierarchy classifications. RMB'Million Financial assets 2016 2015 Financial liabilities 2016 2015 588 RMB'Million RMB'Million RMB'Million Opening balance 27,947 6,276 588 489 The following table presents the changes of financial instruments in level 3 instruments for the years ended 31 December 2016 and 2015: 588 27,485 1,198 Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices) (level 2); and Inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs) (level 3). Level 1 RMB'Million Level 2 RMB'Million Level 3 RMB'Million Total RMB'Million As at 31 December 2016 Available-for-sale financial assets 19,995 508 63,303 83,806 Convertible bonds Other financial assets 2,296 3,409 Other financial liabilities 2,576 2,576 As at 31 December 2015 Available-for-sale financial assets 9,435 7,419 Additions 44,339 Other financial assets 736 462 1,113 30,757 5,651 2,557 For the year ended 31 December 2016 4 CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS Estimates and judgments are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal to the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are addressed below: (a) The estimates of the lifespan of virtual products/items provided in the Group's Internet and mobile platforms As mentioned in Note 2.31(a), the end users purchase certain virtual products/items provided in the Group's Internet and mobile platforms and the relevant revenue is recognised based on the estimated lifespan of the virtual products/items. The estimated lifespan of different virtual products/items are determined by the management based on either the expected users' relationship periods or the stipulated period of validity of the relevant virtual products/items depending on the respective terms of virtual products/items. Significant judgements are required in determining the expected users' relationship periods, included but not limited to historical users' consumption pattern, churn out rate and reactivity on marketing activities, games life- cycle, and the Group's marketing strategy. The Group has adopted a policy of assessing the estimated lifespan of virtual products/items on a regular basis whenever there is any indication of change in the expected users' relationship periods. The Group will continue to monitor the average lifespan of the virtual products/items. The results may differ from the historical period, and any change in the estimates may result in the revenue being recognised on a different basis than in prior periods. 157 Annual Report 2016 Notes to the Consolidated Financial Statements For the year ended 31 December 2016 4 CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS (Cont'd) Notes to the Consolidated Financial Statements (b) Recoverability of non-financial assets and investments in redeemable instruments of associates The Group tests annually whether goodwill has suffered any impairment. Goodwill and other non-financial assets, mainly including property, plant and equipment, construction in progress, other intangible assets, investment properties, land use rights, and investments in associates and joint ventures, as well as investments in redeemable instruments of associates are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The recoverable amounts have been determined based on value-in- use calculations or fair value less costs to sell. These calculations require the use of judgments and estimates. Judgment is required to identify any impairment indicators existed for any of the Group's goodwill and non-financial assets, to determine appropriate impairment approaches, i.e., fair value less costs of disposal or value in use, for impairment reviews purpose, and to select key assumptions applied in the adopted valuation models, including discounted cash flows and market approach. Changing the assumptions selected by management in assessing impairment could materially affect the result of the impairment test and as a result affect the Group's financial condition and results of operations. If there is a significant adverse change in the key assumptions applied, it may be necessary to take additional impairment charge to the consolidated income statement. The fair values assessment of available-for-sale financial assets and other financial assets that are measured at level 3 fair value hierarchy required significant estimates, which includes estimating the future cash flows, determining appropriate discount rates and other assumptions. Changes in these assumptions and estimates could materially affect the respective fair value of these investments. The Group monitors its investments for impairment by considering factors including, but not limited to, current economic and market conditions, recent fund raising transactions undertaken by the investees, the operating performance of the investees including current earnings trends and other company-specific information. Tencent Holdings Limited 158 Notes to the Consolidated Financial Statements For the year ended 31 December 2016 4 CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS (Cont'd) (d) Classification of investments The Group made certain significant amounts of investments that involved complex terms and arrangements, and in different forms of financial instruments during the year. Judgement is required in determining the appropriate classification for these investments including assessing the relevant activities of the investee companies and its decisions making process on those activities that involving the Group, if any and its other investors, the rights and power of the Group and other investors on the investee companies, any other arrangements or transactions among the Group, its other investors and/or the investee companies, and the Group's returns from the investments. Different conclusions around these judgements may materially impact how these investments presented and measured in the consolidated statement of financial position of the Group. (e) Share-based compensation arrangements As mentioned in Note 2.29(c), the Group has granted share options to its employees and other qualifying participants. The directors have adopted the dividend adjusted Black-Scholes option pricing model and “Enhanced FAS 123" binomial model (“Valuation Models") to determine the total fair value of the options granted, which is to be expensed over the respective vesting periods. Significant judgement on parameters, such as risk free rate, dividend yield and expected volatility, is required to be made by the directors in applying the Valuation Models (Note 32). The fair value of share options granted to employees and other qualifying participants determined using the Valuation Models was approximately HKD668 million (equivalent to approximately RMB560 million) in 2016 (2015: HKD76 million (equivalent to approximately RMB60 million)). The Group has to estimate the expected yearly percentage of grantees that will stay within the Group at the end of vesting periods of the options and awarded shares (the "Expected Retention Rate") in order to determine the amount of share-based compensation expenses charged to the consolidated income statement. As at 31 December 2016, the Expected Retention Rate of the Group and its wholly-owned subsidiaries was assessed to be 88%-96% (2015: 85%-97%). 159 Annual Report 2016 (c) Fair value measurement of available-for-sale financial assets and other financial assets 15,766 156 The components of the level 3 instruments mainly include investments in private investment funds and unlisted companies, other financial instruments and convertible bonds. As these instruments are not traded in an active market, their fair values have been determined using various applicable valuation techniques, including discounted cash flows, comparable transactions approaches, and other option pricing models etc. Major assumptions used in the valuation include historical financial results, assumptions about future growth rates, estimate of weighted average cost of capital (WACC), recent market transactions, discount for lack of marketability and other exposure etc. Other financial liabilities included guarantee provided by the Group on certain put arrangements of an investee company and put options issued by the Group to certain investors of an investee company, at a pre-determined pricing formula. The fair values of these instruments determined by the Group requires significant judgement, including the likelihood of non-performing by the investee company, financial performance of the investee company, market value of comparable companies as well as discount rate, etc. Disposals and transfers/settlement (526) (491) Changes in fair value Quoted prices (unadjusted) in active markets for identical assets or liabilities (level 1); 5,939 (98) 67 Impairment provision (708) (65) Currency translation differences 2,478 1,061 Tencent Holdings Limited 20 Closing balance 65,599 27,947 2,576 588 155 Annual Report 2016 Notes to the Consolidated Financial Statements For the year ended 31 December 2016 3 FINANCIAL RISK MANAGEMENT (Cont'd) 3.3 Fair value estimation (Cont'd) Valuation processes of the Group (Level 3) The Group has a team of personnel who perform valuation on these level 3 instruments for financial reporting purposes. The team performs valuation, or necessary updates, at least once every quarter, which coincide with the Group's quarterly reporting dates. On an annual basis, the team adopts various valuation techniques to determine the fair value of the Group's level 3 instruments. External valuation experts may also be involved and consulted when it is necessary. 32 • (1,030) Fair value estimation 46,009 8,224 26,603 Notes to the Consolidated Financial Statements For the year ended 31 December 2016 3 Long-term payables FINANCIAL RISK MANAGEMENT (Cont'd) (a) Market risk (Cont'd) (iii) Interest rate risk (Cont'd) The Group regularly monitors its interest rate risk to identify if there are any undue exposures to significant interest rate movements and manages its cash flow interest rate risk by using interest rate swaps, whenever considered necessary. During the year ended 31 December 2016, the Group entered into certain interest rate swap contracts to hedge its exposure arising from its borrowings carried at floating rates. Under these interest rate swap contracts, the Group agreed with the counterparties to exchange, at specified interval, the difference between fixed contract rates and floating-rate interest amounts calculated by reference to the agreed notional amounts. These interest rate swap contracts have the economic effect of converting borrowings from floating rates to fixed rates and were qualified as hedging accounting. The Group's outstanding interest rate swap contracts as at 31 December 2016 have been detailed in Note 25. At 31 December 2016 and 2015, management considers that any reasonable changes in the interest rates would not result in a significant change in the Group's results as Group's exposure to cash flow interest-rate risk arising from its borrowings and notes payable carried at floating rates after considering the effect of hedging are considered to be insignificant. Accordingly, no sensitivity analysis is presented for interest rate risk. 3.1 Financial risk factors (Cont'd) 2,005 2,178 917 56,162 37,904 37,904 staff costs and welfare accruals) customers and others, prepayments received from and accruals (excluding Accounts payable, other payables 74,461 3,367 51,110 6,464 13,520 Borrowings 5,100 Tencent Holdings Limited 150 Notes to the Consolidated Financial Statements 3 The table below analyses the Group's financial liabilities by relevant maturity groupings based on the remaining period since the end of the reporting period to the contractual maturity date. Less than Between 1 year 1 and 2 years Between 2 and 5 years Over 5 years Total RMB'Million RMB'Million RMB'Million RMB'Million RMB'Million The table below analyses the Group's financial instruments carried at fair value as at 31 December 2016 by level of the inputs to valuation techniques used to measure fair value. Such inputs are categorised into three levels within a fair value hierarchy as follows: Notes payable The Group aims to maintain sufficient cash and cash equivalents and marketable securities. Due to the dynamic nature of the underlying businesses, the Group maintains flexibility in funding by maintaining adequate cash and cash equivalents. 14,913 (c) Liquidity risk FINANCIAL RISK MANAGEMENT (Cont'd) FINANCIAL RISK MANAGEMENT (Cont'd) For the year ended 31 December 2016 3.1 Financial risk factors (Cont'd) (b) Credit risk The Group is exposed to credit risk in relation to its cash and deposits placed with banks and financial institutions, other debt investments, as well as accounts and other receivables. The carrying amount of each class of these financial assets represents the Group's maximum exposure to credit risk in relation to the corresponding class of financial assets. To manage this risk, deposits are mainly placed with state-owned financial institutions in the PRC and reputable international financial institutions outside of the PRC. There has been no recent history of default in relation to these financial institutions. The Group has policies in place to ensure that revenues of on credit terms are made to counterparties with an appropriate credit history and the management performs ongoing credit evaluations of its counterparties. The Group's online advertising that are sales to/through advertising agencies or directly to the advertisers at term of full advances, partial advances or sales on credit according to the Group's credit policies. The credit period granted to the customers is usually not more than 90 days and the credit quality of these customers are assessed, which takes into account their financial position, past experience and other factors. Provisions are made for past due balances when management considers the loss from the customers is likely. The Group's historical experience in collection of receivables falls within the recorded allowances. The Group's revenues from VAS are generally paid by end users by way of online payment channels or utilising the prepaid cards and tokens issued and sold by the Group, whereas the revenue from VAS that delivered to its end users through third party platforms were collected by these third party platform providers and remitted to the Group under a credit period of 30 to 120 days. In addition, the Group also sold prepaid credits through various channels such as sales agents, telecommunication operators, third party platform providers and Internet cafes, etc. Apart from a credit period of 30 to 120 days granted to the telecommunication operators and third party platform providers, full advances were required from other channels. In view of the history of co-operation with these third party platform providers and telecommunication operators, and the sound financial position and collection history of receivables due from these counterparties, management believes that the credit risk inherent in the Group's outstanding accounts receivable balances from these counterparties is low (see Note 28 for details). 151 Annual Report 2016 Notes to the Consolidated Financial Statements For the year ended 31 December 2016 3 4,738 3.1 Financial risk factors (Cont'd) 79,891 At 31 December 2016 163,474 69,827 RMB'Million RMB'Million 2015 2016 As at 31 December 24,351 Note: Adjusted EBITDA (Note) Total debts Notes payable Borrowings The Group monitors capital by regularly reviewing debts to adjusted earnings before interest, tax, depreciation and amortisation ("EBITDA”) (Note) ratio, being the measure of the Group's ability to pay off all debts that reflecting financial health and liquidity position. The total debts/adjusted EBITDA ratio calculated by dividing the total debts by adjusted EBITDA is as follows: Capital referred to the equity and external debts (including borrowings and notes payable). In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares, repurchase the Company's shares or raise/repay debts. Total debts/Adjusted EBITDA Ratio 39,670 40,978 109,497 12,508 FINANCIAL RISK MANAGEMENT (Cont'd) 3 For the year ended 31 December 2016 Notes to the Consolidated Financial Statements Annual Report 2016 153 The movement in the ratio is mainly caused by additional borrowings during the year ended 31 December 2016. expenses. Adjusted EBITDA represents operating profit less interest income and other gains, net, and plus depreciation of property, plant and equipment and investment properties, amortisation of intangible assets and equity-settled share-based compensation 1.43 1.64 45,805 66,863 65,329 The Group's objectives on managing capital are to safeguard the Group's ability to continue as a going concern and support the sustainable growth of the Group in order to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to enhance shareholders' value in the long term. 3.2 Capital risk management 3.3 FINANCIAL RISK MANAGEMENT (Cont'd) 11,774 Borrowings 3,724 95 For the year ended 31 December 2016 1,282 6,826 Long-term payables 7,951 29,747 4,409 5,271 Notes payable At 31 December 2015 47,378 6,415 2,347 Accounts payable, other payables 25,015 Notes to the Consolidated Financial Statements 152 Tencent Holdings Limited 154,032 8,046 38,509 3 94,960 77,915 77,915 staff costs and welfare accruals) customers and others, prepayments received from and accruals (excluding 12,517 (27) 2,802 2,549 RMB'Million RMB'Million 2015 Share of profits of joint ventures 166 Tencent Holdings Limited Share of losses of associates (Note 20) 10 SHARE OF LOSSES OF ASSOCIATES AND JOINT VENTURES Interest and related expenses mainly arose from the borrowings and notes payable disclosed in Notes 33 and 34. 1,618 2016 2,522 167 11 TAXATION Depreciation of property, plant and equipment (Note 16) Certain subsidiaries of the Group in the PRC were approved as High and New Technology Enterprise, and accordingly, they were subject to a reduced preferential corporate income tax rate of 15% for the years ended 31 December 2016 and 2015. Moreover, according to announcement and circular issued by relevant government authorities, for the year of 2015 and beyond, software enterprise that entitled to a national key software enterprise which will be subject to a preferential tax rate of 10%, shall at the time of final tax settlement each year, file with tax authorities for record in accordance with the relevant requirements. The filing record will be subject to verification by relevant government authorities. Accordingly, PRC corporate income tax for the subsidiary has been provided for at a tax rate of 15% during the year and corresponding tax adjustments in relation to the change in applicable tax rate will be accounted for in the period upon the verification process is completed. PRC corporate income tax has been provided for at applicable tax rates under the relevant regulations of the PRC after considering the available tax benefits from refunds and allowances, and on the estimated assessable profits of entities within the Group established in the PRC for the years ended 31 December 2016 and 2015. The general PRC corporate income tax rate is 25% in 2016. (iii) PRC corporate income tax Hong Kong profits tax has been provided for at the rate of 16.5% on the estimated assessable profits for the years ended 31 December 2016 and 2015. Hong Kong profits tax (ii) The Group was not subject to any taxation in the Cayman Islands and the British Virgin Islands for the years ended 31 December 2016 and 2015. Cayman Islands and British Virgin Islands corporate income tax (i) Income tax expense is recognised based on management's best knowledge of the income tax rates expected for the financial year. For the year ended 31 December 2016 Notes to the Consolidated Financial Statements Income tax expense (a) 2,793 1,955 8 EXPENSES BY NATURE (Cont'd) (212) 13 36 123 16 - Non-audit services 13 165 35 - Audit-related services - Audit services Auditor's remuneration 3,153 3,699 Annual Report 2016 46 Annual Report 2016 Notes to the Consolidated Financial Statements For the year ended 31 December 2016 1,510 2,167 RMB'Million RMB'Million 2015 2016 Exchange (gains)/losses Interest and related expenses FINANCE COSTS, NET 9 (b) Mainly included the amortisation charge of intangible assets in respect of game licences and licensed online contents. No significant development expenses had been capitalised for the years ended 31 December 2016 and 2015. During the year ended 31 December 2016, the Group incurred expenses for the purpose of research and development of approximately RMB11,845 million (2015: RMB9,039 million), which comprised employee benefits expenses of RMB9,290 million (2015: RMB7,134 million). (a) Note: 108 Notes to the Consolidated Financial Statements 51,640 11 TAXATION (Cont'd) (14) (112) Income not subject to tax (508) (496) Effects of tax holiday on assessable profits of certain subsidiaries Expenses not deductible for tax purposes (3,775) Effects of different tax rates applicable to different subsidiaries of the Group 9,752 13,540 Tax calculated at a tax rate of 25% 39,009 54,162 (6,191) 1,157 906 Withholding tax on earnings expected to be remitted Notes to the Consolidated Financial Statements Annual Report 2016 7,108 10,193 60 (91) 421 686 266 1,700 169 Income tax expense Others Unrecognised deferred income tax assets by subsidiaries (Note 26) 2,793 For the year ended 31 December 2016 2,522 36,216 168 Tencent Holdings Limited Deferred income tax (Note 26) Current tax The income tax expense of the Group are analysed as follows: Withholding taxes on dividends distribution at respective applicable tax rates are under certain jurisdictions that the Group's entities operate. 2016 According to applicable tax regulations prevailing in the PRC, dividends distributed by a company established in the PRC to a foreign investor with respect to profits derived after 1 January 2008 are generally subject to a 10% withholding tax. Under the double taxation arrangement between the Mainland China and Hong Kong, the relevant withholding tax rate applicable to the Group will be reduced from 10% to 5% subject to the fulfilment of certain conditions. (v) Income tax on profits arising from other jurisdictions, including the United States, Europe, East Asia and South America has been calculated on the estimated assessable profits for the year at the rates prevailing in the relevant jurisdictions, ranging from 12.5 % to 36%. (iv) Corporate income tax in other countries In addition, according to relevant tax circulars issued by the PRC tax authorities, certain subsidiaries of the Company are entitled to other tax concessions and they are exempt from corporate income tax for two years, followed by a 50% reduction in the applicable tax rates for the next three years, commencing either from the first year of commercial operation or from the first year of profitable operation, after offsetting tax losses generated in prior years. (iii) PRC corporate income tax (Cont'd) (a) Income tax expense (Cont'd) Withholding tax 2015 RMB'Million RMB'Million Profit before income tax RMB'Million RMB'Million 2015 2016 The taxation on the Group's profit before income tax differs from the theoretical amount that would arise using the tax rate of 25% for the year (2015: 25%), being the tax rate of the major subsidiaries of the Group before enjoying preferential tax treatments, as follows: (a) Income tax expense (Cont'd) 11 TAXATION (Cont'd) For the year ended 31 December 2016 Notes to the Consolidated Financial Statements 7,108 10,193 6,936 172 (598) 10,791 Share of losses of associates and joint ventures 3,476 For the year ended 31 December 2016 (b) Gains on disposals and deemed disposals of investee companies (Note (a)) 6,966 3,813 assets from acquisition (Note (b)) Fair value gains on other financial instruments Dividend income Subsidies and tax rebates Donation to Tencent Charity Funds Others Note: (a) (i) (4,809) (2,373) 658 462 563 272 380 331 (570) (470) 406 (149) 3,594 1,886 The disposal and deemed disposal gains during the year ended 31 December 2016 mainly comprised the following: RMB'Million (ii) RMB'Million 2016 175,642 150,608 56,152 44,925 108,715 85,282 22,310 14,412 21,645 2,462 11,322 9,036 113 93 395,899 306,818 As at 31 December 2016, the total non-current assets other than financial instruments and deferred tax assets located in Mainland China and other regions amounted to RMB117,415 million (2015: RMB77,704 million) and RMB19,115 million (2015: RMB16,897 million), respectively. All the revenues derived from any single external customer were less than 10% of the Group's total revenues during the years ended 31 December 2016 and 2015. 163 Annual Report 2016 Notes to the Consolidated Financial Statements For the year ended 31 December 2016 6 INTEREST INCOME Interest income mainly represents interest income from bank deposits, including bank balance and term deposits. 7 OTHER GAINS, NET 2015 RMB'Million (iii) net gains of approximately RMB2,091 million arising from dilution of the Group's equity interests in certain associates due to new equity interests being issued by these associates (Note 20). These associates are principally engaged in Internet- related business; 2016 2015 RMB'Million RMB'Million Employee benefits expenses (Note (a) and Note 13) 23,433 18,475 Content costs and agency fees (excluding amortisation of intangible assets) 22,328 17,094 Bandwidth and server custody fees 7,876 5,492 Channel costs 7,893 4,691 Promotion and advertising expenses 9,219 5,814 Operating lease rentals in respect of office buildings 1,117 896 Travelling and entertainment expenses 800 594 Amortisation of intangible assets (Note (b) and Note 19) 8,930 2,373 a gain of approximately RMB1,505 million arising from a deemed disposal of an associate as it became a subsidiary of the Group; 4,809 366 a gain of approximately RMB1,130 million arising from the disposal of certain listed shares of a game company classified as available-for-sale financial assets; and (iv) aggregate net gains of approximately RMB2,240 million on disposal, acquisition achieved in stages or partial disposal of various financial investments of the Group. Tencent Holdings Limited 164 7 OTHER GAINS, NET (Cont'd) Notes to the Consolidated Financial Statements For the year ended 31 December 2016 Note: (Cont'd) The impairment provision for investee companies and intangible assets arising from acquisitions was mainly set up against the carrying amounts of the following items: Investments in associates (Note 20) Investments in redeemable instruments of associates (Note 22) Available-for-sale financial assets (Note 23) Others 8 EXPENSES BY NATURE 2016 2015 RMB'Million RMB'Million 2,117 1,591 1,298 47 1,028 586 149 RMB'Million Impairment provision for investee companies and intangible 2016 Year ended 31 December 2016 VAS Online advertising Others Total RMB'Million RMB'Million RMB'Million RMB'Million Segment revenues 107,810 26,970 17,158 151,938 Gross profit Depreciation 70,188 11,574 2,737 84,499 1,854 200 537 2,591 Amortisation 2,982 5,295 The segment information provided to the chief operating decision-makers for the reportable segments for the years ended 31 December 2016 and 2015 is as follows: 8,277 5 SEGMENT INFORMATION (Cont'd) Notes to the Consolidated Financial Statements 4 CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS (Cont'd) (e) Share-based compensation arrangements (Cont'd) If the Expected Retention Rate had been increased/decreased by 5% (2015: 5%), the amount of share-based compensation expenses would be increased/decreased by RMB230 million (2015: RMB154 million). In addition, during the year ended 31 December 2016, the Group repurchased certain vested equity interests in a non-wholly owned subsidiary and exchanged certain unvested equity interests in a non-wholly owned subsidiary for the unvested awarded shares of the Company, which have been accounted for as shareholders' transactions with gain or loss reflected within equity. (f) Income taxes The Group is subject to income taxes in numerous jurisdictions. Significant judgement is required in determining the worldwide provision for income taxes. The Group recognises liabilities for anticipated tax audit issues based on estimates of whether additional taxes will be due. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact current income tax and deferred income tax liabilities in the period in which such determination is made. Were the actual final outcome (on the judgement areas) to differ by 5% from management's estimates, the Group would need to: Increase the income tax liabilities by RMB261 million (2015: RMB80 million) and the deferred tax liabilities by RMB258 million (2015: RMB183 million), if unfavourable; or Decrease the income tax liabilities by RMB261 million (2015: RMB80 million) and the deferred tax liabilities by RMB258 million (2015: RMB183 million), if favourable. Tencent Holdings Limited 160 Notes to the Consolidated Financial Statements For the year ended 31 December 2016 5 SEGMENT INFORMATION The chief operating decision-makers mainly include executive directors of the Company. They review the Group's internal reporting in order to assess performance and allocate resources, and determine the operating segments based on these reports. The Group has following reportable segments for the years ended 31 December 2016 and 2015: VAS; Online advertising; and Others. "Others" segment of the Group primarily comprises payment related services, cloud services and other services. The chief operating decision-makers assess the performance of the operating segments mainly based on segment revenue and gross profit of each operating segment. The selling and marketing expenses and general and administrative expenses are common costs incurred for these operating segments as a whole and therefore they are not included in the measure of the segments' performance which is used by the chief operating decision-makers as a basis for the purpose of resource allocation and assessment of segment performance. Interest income, other gains/(losses), net, finance income/(costs), net and income tax expense are also not allocated to individual operating segment. There were no material inter-segment sales during the years ended 31 December 2016 and 2015. The revenues from external customers reported to the chief operating decision-makers are measured in a manner consistent with that applied in the consolidated income statement. Other information, together with the segment information, provided to the chief operating decision-makers, is measured in a manner consistent with that applied in these consolidated financial statements. There were no segment assets and segment liabilities information provided to the chief operating decision-makers. 2015 Annual Report 2016 For the year ended 31 December 2016 Year ended 31 December 2015 161 VAS SEGMENT INFORMATION (Cont'd) Notes to the Consolidated Financial Statements For the year ended 31 December 2016 The Company is domiciled in the Cayman Islands while the Group mainly operates its businesses in Mainland China. During the year ended 31 December 2016, the geographical information on the total revenues is as follows: Revenues Mainland China - Others 2016 2015 RMB'Million RMB'Million 144,371 96,251 5 7,567 102,863 The Group also conducts operations in the United States, Europe and other regions, and holds investments (including investments in associates, investments in redeemable instruments of associates, investments in joint ventures and available-for-sale financial assets) in various territories. The geographical information on the total assets is as follows: Operating assets Mainland China Others Investments - Mainland China and Hong Kong - North America - Europe - Asia excluding Mainland China and Hong Kong - Others As at 31 December Online 151,938 162 6,612 The reconciliation of gross profit to profit before income tax is shown in the consolidated income statement. advertising Tencent Holdings Limited Others Total RMB'Million RMB'Million RMB'Million RMB'Million 80,669 17,468 4,726 102,863 Gross profit Segment revenues 2,191 8,527 458 61,232 Depreciation 1,983 171 37 3,068 Amortisation 631 2,437 52,247 2,574 12,261 and office 25 961 16,494 673 Cost equipment RMB'Million RMB'Million RMB'Million RMB'Million RMB'Million Total vehicles improvements Computer equipment Accumulated depreciation Motor Leasehold At 1 January 2015 (522) 339 (338) 7,918 Buildings RMB'Million Year ended 31 December 2015 423 12 5,092 2,052 Net book amount (68) 4 (63) Currency translation differences (8,508) (529) (13) (7,106) Furniture 20,374 For the year ended 31 December 2016 (544) (11,610) (807) Accumulated depreciation and impairment 27,595 1,787 31 902 4,501 Cost At 31 December 2016 13,900 1,048 Opening net book amount 13 (18) 16 PROPERTY, PLANT AND EQUIPMENT (Cont'd) (807) Currency translation differences Notes to the Consolidated Financial Statements 178 Tencent Holdings Limited 13,900 1,048 13 377 8,768 3,694 Net book amount 91 68 19 19 4 (13,786) 2,052 2,594 339 (432) (9,160) (699) Accumulated depreciation 20,985 1,696 25 806 15,165 3,293 Cost At 31 December 2015 9,973 1,027 9 (16) 384 (694) Currency translation differences 377 Annual Report 2016 179 During the year ended 31 December 2016, depreciation of RMB2,591 million (2015: RMB2, 191 million), RMB132 million (2015: RMB118 million) and RMB976 million (2015: RMB844 million) were charged to cost of revenues, selling and marketing expenses and general and administrative expenses, respectively. 9,973 1,027 9 384 5,959 2,594 Net book amount (11) 25 10 (46) (11,001) 5,959 2,594 Closing net book amount 5,212 791 3 167 3,498 753 Additions 6 2 3 1 Business combinations 7,918 423 12 Disposals (4) (13) (15) 57 34 6 17 Currency translation differences (31) (31) 5,092 Transfer to investment properties (208) (4) (115) (2,647) (179) Depreciation (36) (3,153) 8,768 3,694 Closing net book amount 80 101,661 94 64,291 5,003 691 378 313 Yang Siu Shun (Note (iv)) 171,129 Charles St Leger Searle 2,019 1,438 581 Li Dong Sheng 3,685 2,969 716 lan Charles Stone 3,896 Jacobus Petrus (Koos) Bekker 175 Annual Report 2016 Notes to the Consolidated Financial Statements RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 Total in kind expenses plans and benefits to pension compensation Salaries and bonuses Fees Name of director Allowances Share-based Contributions During the year ended 31 December 2015: (a) Directors' and the chief executive's emoluments (Cont'd) 14 BENEFITS AND INTERESTS OF DIRECTORS (Cont'd) For the year ended 31 December 2016 3,001 895 lain Ferguson Bruce 122,017 Name of director 9 Share-based Contributions During the year ended 31 December 2016: The remuneration of every director and the CEO is set out below: (a) Directors' and the chief executive's emoluments 14 BENEFITS AND INTERESTS OF DIRECTORS For the year ended 31 December 2016 Notes to the Consolidated Financial Statements 1 1 ||2- 21||-| - 2 2015 2016 Number of individuals 174 Tencent Holdings Limited HKD262,500,001 – HKD263,000,000 HKD274,000,001 – HKD274,500,000 HKD310,500,001 – HKD311,000,000 Fees RMB'000 RMB'000 to pension compensation 61 93,875 26,832 1,249 Lau Chi Ping Martin 38,821 19 94 37,459 1,249 Ma Huateng (CEO) (Note (i)) RMB'000 RMB'000 RMB'000 RMB'000 Total in kind expenses plans and benefits Salaries and bonuses RMB'000 (Note (i)) Ma Huateng (CEO) 32,725 806 15,165 3,293 Cost At 1 January 2016 RMB'Million RMB'Million RMB'Million Total Leasehold vehicles improvements Motor Furniture and office equipment equipment RMB'Million RMB'Million Buildings RMB'Million Computer 16 PROPERTY, PLANT AND EQUIPMENT For the year ended 31 December 2016 Notes to the Consolidated Financial Statements Annual Report 2016 177 A final dividend in respect of the year ended 31 December 2016 of HKD0.61 per share (2015: HKDO.47 per share) was proposed pursuant to a resolution passed by the Board on 22 March 2017 and subject to the approval of the shareholders at the annual general meeting to be held on 17 May 2017. This proposed dividend is not reflected as dividend payable in the consolidated financial statements. The dividends amounted to RMB3,699 million (2015: RMB2,640 million) was paid during the year ended 31 December 2016. 15 DIVIDENDS 25 No significant transactions, arrangements and contracts in relation to the group's business to which the Company was a party and in which a director of the Company had a material interest, whether directly or indirectly, subsisted at the end of the year or at any time during the year. 25 20,985 Opening net book amount Year ended 31 December 2016 9,973 1,027 9 384 5,959 2,594 Net book amount (11) 25 10 (46) Currency translation differences (11,001) (694) (16) (432) (9,160) (699) Accumulated depreciation 1,696 HKD231,000,001 – HKD231,500,000 (e) Directors' material interests in transactions, arrangements or contracts (d) Information about loans, quasi-loans and other dealings in favour of directors, controlled bodies corporate by and connected entities with such directors 1,812 384 545 Li Dong Sheng 3,387 2,717 670 lan Charles Stone 3,616 2,778 838 lain Ferguson Bruce 74,970 19 53,842 19,940 1,169 Lau Chi Ping Martin 32,828 19 84 Jacobus Petrus (Koos) Bekker No loans, quasi-loans and other dealings in favour of directors, controlled bodies corporate by and connected entities with such directors subsisted at the end of the year or at any time during the year. Charles St Leger Searle 3,222 No consideration provided to third parties for making available directors' services subsisted at the end of the year or at any time during the year. (c) Consideration provided to third parties for making available directors' services No director's termination benefit subsisted at the end of the year or at any time during the year. (b) Directors' termination benefits 14 BENEFITS AND INTERESTS OF DIRECTORS (Cont'd) For the year ended 31 December 2016 Notes to the Consolidated Financial Statements 176 Tencent Holdings Limited Mr Yang Siu Shun was appointed as independent non-executive director with effect from 1 July 2016. No director received any emolument from the Group as an inducement to join or leave the Group or compensation for loss of office. No director waived or has agreed to waive any emoluments during the years ended 31 December 2016 and 2015. During the year ended 31 December 2016, 3,750,000 options were granted to one executive director of the Company (2015: nil), and 61,474 awarded shares were granted to four independent non-executive directors of the Company (2015: 75,000 awarded shares were granted to three independent non-executive directors of the Company). (iv) (iii) (ii) (i) Allowances and benefits in kind include leave pay, insurance premium and club membership. 116,613 38 60,604 84 52,665 Note: HKD210,000,001 – HKD210,500,000 HKD183,000,001 – HKD183,500,000 Emolument bands 9,376 Weighted average number of ordinary shares in issue (million shares) 28,806 41,095 Profit attributable to equity holders of the Company (RMB'Million) 2015 2016 Basic earnings per share ("EPS") is calculated by dividing the profit attributable to equity holders of the Company by the weighted average number of ordinary shares in issue during the year. (a) Basic 12 EARNINGS PER SHARE Net VAT and BT payable amount 5% Net VAT and BT payable amount 7% City construction tax Educational surcharge Taxable advertising income 3% the period prior to May 2016) Construction fee for cultural undertakings Services fee income 5% Business tax ("BT") (applicable for 9,300 Sales value of goods sold and services fee income, offsetting by VAT on purchases Basic EPS (RMB per share) 3.097 130 118 9,300 9,376 28,806 41,095 2015 2016 13 EMPLOYEE BENEFITS EXPENSES Diluted EPS (RMB per share) calculation of diluted EPS (million shares) Weighted average number of ordinary shares for the Profit attributable to equity holders of the Company (RMB'Million) Weighted average number of ordinary shares in issue (million shares) Adjustments for share options and awarded shares (million shares) In addition, the share options and restricted shares granted by the Company's non-wholly owned subsidiaries and associates, and the convertible bonds of the subsidiaries should also have potential dilutive effect on the EPS. During the years ended 31 December 2016 and 2015, these share options, restricted shares and convertible bonds had either anti-dilutive effect or insignificant dilutive effect to the Group. The share options and awarded shares granted by the Company have potential dilutive effect on the EPS. Diluted EPS is calculated by adjusting the weighted average number of ordinary shares outstanding by the assumption of the conversion of all potential dilutive ordinary shares arising from share options and awarded shares granted by the Company (collectively forming the denominator for computing the diluted EPS). No adjustment is made to earnings (numerator). (b) Diluted 12 EARNINGS PER SHARE (Cont'd) For the year ended 31 December 2016 Notes to the Consolidated Financial Statements 170 Tencent Holdings Limited 4.383 9,494 6-17% Tax rate (22) (51) Depreciation (133) (3,150) (134) (5) (277) (3,699) Impairment (2) Transfer to investment properties (139) | ❁ Currency translation differences 50 9 (1) (140) 43 102 (1) Basis of levy (8) Disposals Value-added tax ("VAT") Category The operations of the Group are also mainly subject to the following taxes in the PRC: (b) Value-added tax, business tax and related taxes 11 TAXATION (Cont'd) For the year ended 31 December 2016 Notes to the Consolidated Financial Statements 1,027 9,973 Business combinations 54 6 33 93 Additions 1,372 5,877 120 10 245 7,624 (20) 5,959 9,430 3.055 - 244 4 4 1 1 HKD165,000,001 – HKD215,000,000 HKD215,000,001 – HKD315,000,000 HKD65,000,001 – HKD115,000,000 HKD40,000,001 – HKD65,000,000 HKD15,000,001 – HKD40,000,000 HKD800,000 - HKD15,000,000 Emolument bands 2015 2016 Number of individuals The emoluments of the senior management fell within the following bands: (a) Senior management's emoluments (Cont'd) 13 EMPLOYEE BENEFITS EXPENSES (Cont'd) For the year ended 31 December 2016 Notes to the Consolidated Financial Statements 702,039 1 1,005,603 2 (b) Five highest paid individuals The emoluments of the above four individuals (2015: four) fell within the following bands: (b) Five highest paid individuals (Cont'd) 13 EMPLOYEE BENEFITS EXPENSES (Cont'd) For the year ended 31 December 2016 Notes to the Consolidated Financial Statements 712,926 Annual Report 2016 173 926,422 49 33 195,792 503 516,582 608,757 316,874 758 2015 RMB'000 2016 RMB'000 Allowances and benefits in kind Share-based compensation expenses Contributions to pension plans Salaries and bonuses The five individuals whose emoluments were the highest in the Group include one director during the year 2016 (2015: one). All of these individuals including that one director (Note 14(a)) have not received any emolument from the Group as an inducement to join the Group during the years ended 31 December 2016 and 2015. The emoluments paid/payable to the remaining four (2015: four) individuals during the year were as follows: 1 4.329 165,607 699 535,733 227,989 826 18,475 23,433 69 85 Training expenses 1,076 1,841 Welfare, medical and other expenses (Note) 2,841 4,455 Share-based compensation expenses 1,112 1,426 Contributions to pension plans (Note) 13,377 15,626 Wages, salaries and bonuses RMB'Million RMB'Million 2015 2016 171 776,788 Annual Report 2016 For the year ended 31 December 2016 2015 RMB'000 2016 RMB'000 172 Tencent Holdings Limited Share-based compensation expenses Contributions to pension plans Salaries, bonuses, allowances and benefits in kind Senior management includes directors, chief executive officer ("CEO"), president and other senior executives. The aggregate compensation paid/payable to senior management for employee services excluding the directors and the CEO whose details have been reflected in Note 14(a) is as follows: 10.0-12.0% 0.5-1.5% 6.0-11.5% 12.0-20.0% Percentage (a) Senior management's emoluments Housing fund Unemployment insurance Medical insurance Pension insurance Majority of the Group's contributions to pension plans are related to the local employees in the PRC. All local employees of the subsidiaries in the PRC participate in employee social security plans established in the PRC, which cover pension, medical and other welfare benefits. The plans are organised and administered by the governmental authorities. Except for the contributions made to these social security plans, the Group has no other material commitments owing to the employees. According to the relevant regulations, the portion of premium and welfare benefit contributions that should be borne by the companies within the Group as required by the above social security plans are principally determined based on percentages of the basic salaries of employees, subject to certain ceilings imposed. These contributions are paid to the respective labour and social welfare authorities and are expensed as incurred. The applicable percentages used to provide for these social security plans for the years ended 31 December 2016 and 2015 are listed below: Note: 13 EMPLOYEE BENEFITS EXPENSES (Cont'd) Notes to the Consolidated Financial Statements Allowances 1,267 (261) Other payables and accruals (excluding prepayments received from customers and others, staff costs and welfare accruals) (Note 38) Borrowings (Note 33) 10,491 61,627 69,827 24,351 152,336 146,282 Tencent Holdings Limited 188 Notes to the Consolidated Financial Statements For the year ended 31 December 2016 21 FINANCIAL INSTRUMENTS BY CATEGORY (Cont'd) As at 31 December 2016, financial assets classified as available-for-sale were RMB83,806 million (2015: RMB44,339 million) (Note 23). As at 31 December 2016, financial assets and liabilities at fair value include other financial assets (Note 25) and other financial liabilities of RMB3,409 million (2015: RMB1, 198 million) and RMB2,576 million (2015: RMB588 million), respectively. 22 INVESTMENTS IN REDEEMABLE INSTRUMENTS OF ASSOCIATES As at 31 December 2016, the Group's investments in redeemable instruments of associates of RMB9,627 million (2015: RMB6,230 million) were stated at amortised cost. These investments mainly comprised investee companies that are principally engaged in online community services, online financing business, online games development and other Internet-related businesses. The redemption prices of the relevant instruments are agreed at not less than their respective original subscription prices. During the year ended 31 December 2016, the Group made aggregate investments in redeemable instruments of associates, including certain additional investments in existing investees of the Group, of RMB3,628 million. These investments mainly invested in companies that are principally engaged in online automotive financing business, online game businesses and other Internet-related businesses. During the year ended 31 December 2016, the Group also made an impairment provision of approximately RMB1,298 million (2015: RMB47 million) against the carrying amounts of certain investments in redeemable instruments of associates based on the impairment assessment performed with reference to the business performances and recoverable amounts of these investee companies. 189 Annual Report 2016 (396) contents RMB'Million Copyrights 15,700 27,413 Accounts payable (Note 37) 3,626 6,230 Accounts receivable (Note 28) 10,152 7,061 Deposits and other receivables (Note 24) 9,267 7,709 Term deposits (Note 27) 55,735 41,005 Restricted cash (Note 29(b)) Others 750 Cash and cash equivalents (Note 29(a)) 71,902 43,438 157,433 160,174 Financial liabilities at amortised cost: Notes payable (Note 34) 39,670 40,978 Long-term payables (Note 35) 4,935 54,731 Total RMB'Million RMB'Million RMB'Million 9,304 Year ended 31 December 2015 Opening net book amount 6,356 1,118 566 609 69 26 226 429 429 9,304 845 231 132 1,208 Additions 450 300 5,665 175 6 6,596 Business combinations 9,627 226 566 At 1 January 2015 Cost 6,558 1,671 1,711 2,933 586 704 14,163 Accumulated amortisation and impairment (63) 609 (532) (2,324) (360) (273) (4,694) Currency translation differences (139) (21) (165) Net book amount 6,356 1,118 (1,142) Investments in redeemable instruments of associates (Note 22) Financial assets classified as loan and receivables: RMB'Million Management has assessed the level of influence that the Group exercises on certain associates, with a total carrying amount of RMB37,131 million as at 31 December 2016 (2015: RMB31,207 million), and determined that it has significant influence thereon through the board representation or other arrangements made, even though the respective shareholding is below 20%. Consequently, these investments have been classified as associates. Particulars of a material associate of the Group, as determined by the directors, are set out below: Interest Name of entity JD.com Place of incorporation Cayman Islands held indirectly Principal activities/place of operation 18.22% Online direct sales and online marketplace businesses/the PRC Set out below are the summarised financial information of JD.com extracted from its financial statements prepared under generally accepted accounting principles in the United States. Summarised consolidated balance sheet 42 As at 31 December 2015 RMB'Million RMB'Million Current assets 106,932 58,468 Non-current assets 53,891 26,698 Current liabilities 104,843 2016 49,028 For the year ended 31 December 2016 Annual Report 2016 (1,686) 2015 Listed entities 55,557 19,517 36,149 (1,764) 323 (1,441) 88,090 Non-listed entities Notes to the Consolidated Financial Statements 31,566 6,215 (1,038) 6 (1,032) 87,123 26,952 42,364 (2,802) 329 (2,473) 185 7,435 Disposals Non-current liabilities 5,460 (9,402) (3,474) (9,388) 1,187 1,159 (2,287) (8,229) Transactions with associates (i) Transactions related to online services During the year ended 31 December 2016, the Group had undertaken transactions relating provision of online traffic, online advertising and other online services to certain associates (including JD.com), under but not limited to certain co-operation arrangements. The revenues recorded by the Group from the aforesaid co-operation arrangements during the years ended 31 December 2016 and 2015 were considered to be insignificant. (3,294) (ii) The Group placed certain deposits in the form of wealth management products with an associate in the ordinary course of business. During the year ended and as at 31 December 2016, the balances of these deposits and interest income thereon were considered to be insignificant. 187 Annual Report 2016 Notes to the Consolidated Financial Statements For the year ended 31 December 2016 21 FINANCIAL INSTRUMENTS BY CATEGORY As at 31 December 2016, the financial instruments of the Group is analysed as follows: As at 31 December 2016 2015 RMB'Million Other transactions 14,665 (6,459) 181,287 Redeemable non-controlling interests 7,057 Shareholders' equity 34,258 30,678 Tencent Holdings Limited 186 Notes to the Consolidated Financial Statements 20 INVESTMENTS IN ASSOCIATES (Cont'd) Summarised consolidated statements of operations and comprehensive loss Net Revenues (2,081) Loss from operations Net loss Other comprehensive income Total comprehensive loss There are no contingent liabilities relating to the Group's interest in the associates. For the year ended 31 December 2016 Year ended 31 December 2016 2015 RMB'Million RMB'Million 260,186 Loss before tax (97) (37) (53) RMB'Million licences technology Goodwill online Game software and Licensed Computer For the year ended 31 December 2016 Notes to the Consolidated Financial Statements RMB'Million RMB'Million 19 INTANGIBLE ASSETS Tencent Holdings Limited The land use rights represent prepaid operating lease payments in respect of land in the PRC with remaining lease period of 39 to 50 years. During the year ended 31 December 2016, all of the amortisation was charged to general and administrative expenses. 2,293 5,174 (39) (95) 1,581 2,976 751 2,293 RMB'Million 180 RMB'Million contents Copyrights RMB'Million RMB'Million RMB'Million Total Accumulated amortisation and impairment 54,211 3,147 869 20,880 3,515 2,643 23,157 Cost At 31 December 2016 36,467 Others (860) Accumulated amortisation and impairment 21,777 836 754 8,598 2,196 2,087 7,306 Cost At 1 January 2016 RMB'Million (162) (439) 2015 Closing net book amount Notes to the Consolidated Financial Statements (7,772) (139) (362) (8,930) Impairment provision (277) (2) (87) (366) Currency translation differences For the year ended 31 December 2016 198 11 15 3 6 251 Closing net book amount 22,927 1,535 1,635 7,776 242 18 2016 17 CONSTRUCTION IN PROGRESS Additions Amortisation Additions Opening net book amount 18 LAND USE RIGHTS As at 31 December 2016, construction in progress mainly comprised new buildings and internet data centres under construction located in the PRC. 4,248 4,674 2 17 (440) (1,783) Opening net book amount (1,710) 2,559 3,830 4,248 RMB'Million RMB'Million 2015 2016 Closing net book amount Currency translation differences Transfer to investment properties Transfer to property, plant and equipment 2,199 863 (1,118) (13,121) Cost 7,306 2,087 2,196 8,598 754 836 21,777 Accumulated amortisation and impairment (162) (860) At 31 December 2015 (1,508) (495) (387) (8,347) Currency translation differences 11 (8) 9 2 15 9 Net book amount (4,935) 7,155 13,439 259 (6) (193) Amortisation (281) (329) (2,611) (136) (3,476) Impairment provision (99) (44) 444 (30) Currency translation differences 150 13 12 2 174 Closing net book amount 7,155 1,219 697 3,665 (174) (1,900) 1,219 3,665 19 INTANGIBLE ASSETS (Cont'd) For the year ended 31 December 2016 Notes to the Consolidated Financial Statements Annual Report 2016 181 36,467 2,352 42 242 7,776 1,635 Computer 1,535 Net book amount 260 3 17 20 10 209 Currency translation differences (18,004) (796) (630) 22,927 697 Licensed Game 259 444 13,439 Tencent Holdings Limited 182 Notes to the Consolidated Financial Statements For the year ended 31 December 2016 19 INTANGIBLE ASSETS (Cont'd) During the year ended 31 December 2016, amortisation of RMB8,277 million (2015: RMB3,068 million) and RMB653 million (2015: RMB408 million) were charged to cost of revenues and general and administrative expenses, respectively. During the year ended 31 December 2016, goodwill and other identifiable intangible assets of certain subsidiaries have been impaired to the extent of RMB366 million (Note 7) as a result of significant decline in revenues and unsatisfactory operating performance of these subsidiaries. Impairment tests for goodwill Goodwill is allocated to the Group's CGUS and most of the goodwill is related to the VAS. The recoverable amount of a CGU is the higher of its value-in-use and fair value less costs to sell. The key assumptions used for the calculations of the recoverable amounts of major CGUS are as follows: software and For online game business, management calculates the fair value less costs to sell based on ratios of EV (enterprise value) divided by EBITDA (earnings before interest, tax, depreciation and amortisation) of several comparable public companies multiplied by the EBITDA (ranging within 10-18x) of the related CGU and discounted for the lack of marketability at a range of 10% to 20%. The comparable public companies are chosen based on factors such as industry similarity, company size, profitability and financial risks. 183 Annual Report 2016 Notes to the Consolidated Financial Statements For the year ended 31 December 2016 20 INVESTMENTS IN ASSOCIATES RMB'Million RMB'Million RMB'Million licences technology Goodwill online For online literature business and online music business, management calculates value-in-use based on discounted cash flows calculations. The discounted cash flows calculations use cash flow projections developed based on financial budgets approved by management of the Group covering a five-year period. Cash flows beyond the five-year period are extrapolated using an estimated annual growth of not more than 5%. Pre-tax discount rates of 20% to 25% adopted for the online music business and the online literature business, respectively, which reflects market assessments of time value and the specific risks relating to the industry that the Group operates. The financial projections were determined by the management based on past performance and its expectation for market development. (2,549) 20 INVESTMENTS IN ASSOCIATES (Cont'd) 58,224 - Unlisted entities - Listed entities Investments in associates (1,508) (4,935) (495) As at 31 December (387) Currency translation differences 11 (8) 2 9 Net book amount (8,347) 2016 2015 RMB'Million 51,131 60,171 Additions (Note (i), (ii) and (iii)) At beginning of the year RMB'Million RMB'Million 2015 2016 60,171 70,042 24,131 31,526 36,040 38,516 RMB'Million 7,155 1,219 697 3,665 2,204 64,031 18,923 Additions 569 1,331 11,074 125 148 13,247 Disposals (45) (38) (4) (97) 794 9,900 1 15,896 259 444 13,439 Year ended 31 December 2016 Opening net book amount 7,155 1,219 697 667 3,665 259 50 444 13,439 Business combinations (Notes 39 and 40) 28 12,705 2,352 2,091 operation income income RMB'Million RMB'Million RMB'Million Liabilities Revenues RMB'Million RMB'Million Assets RMB'Million of listed companies as at from continuing comprehensive comprehensive Total 31 December RMB'Million Amortisation Losses Fair value The Group's share of the results, the revenues, the aggregated assets (including goodwill) and liabilities of its associates, as well as the fair value of the associates which are listed entities, are shown in aggregate as follows: The associates of the Group have been accounted by using equity method based on the financial information of the associates prepared under the accounting policies generally consistent with the Group. During the year ended 31 December 2016, the Group made an aggregate impairment provision of RMB2, 117 million (2015: RMB1,591 million) against the carrying amounts of a number of associates. Within the amount, RMB775 million was provided for an associate, based on the results of impairment assessment performed on the carrying amount against its respective recoverable amount. The impairment loss mainly resulted from revisions of long-term financial outlook and the changes in business models of the affected associates. (vi) Other 2016 Listed entities 33,378 Deemed disposal gains (Note 7(a)(ii)) 52,576 (1,141) 484 884 (657) 68,565 Non-listed entities 56,371 24,846 11,455 (1,408) 379 (1,029) 128,265 (v) Note: (Cont'd) 71,894 For the year ended 31 December 2016 (2,117) Impairment provision (Note (v)) (4,183) (1,706) Disposals and transfers (Note (iv)) Share of losses of associates (Note 10) (151) Dividends from associates 329 863 Share of other comprehensive income of associates (2,802) (2,549) 20 INVESTMENTS IN ASSOCIATES (Cont'd) 1,931 (1,591) Currency translation differences (237) The Group also acquired certain other associates and made additional investments in existing associates, with an aggregate amount of RMB7,406 million during the year ended 31 December 2016. These associates are principally engaged in online game business and other Internet-related businesses. Notes to the Consolidated Financial Statements Tencent Holdings Limited Disposals and transfers mainly comprised derecognition of our earlier minority investment in China Music Corporation ("CMC") from an associate as detailed in Note 39, and other disposals during the year ended 31 December 2016. In August 2016, the Group subscribed for new shares of WeBank Co., Ltd., an associate and a privately-owned commercial bank in China, in proportion to its then shareholding percentage together with the other investors, at a cash consideration of RMB1,166 million. In August 2016, the Group acquired from the market additional listed American Depositary Shares of an associate, JD.com, Inc. ("JD.com"), totalling approximately USD200 million (equivalent to approximately RMB1,328 million). 3,540 (iii) (iv) (i) Note: 60,171 70,042 At end of the year 2,888 (ii) 184 Revenues from our other businesses increased by 263% to RMB17,158 million for the year ended 31 December 2016 on a year-on-year basis. The increase was mainly driven by growth in revenues from our payment related and cloud services. Revenues from our online advertising business increased by 54% to RMB26,970 million for the year ended 31 December 2016 on a year-on-year basis. Performance-based advertising revenues grew by 81% to RMB15,765 million, mainly reflecting growth in advertising revenues derived from Weixin Moments, our mobile news apps, and Weixin Official Accounts. Brand display advertising revenues grew by 28% to RMB11,205 million, primarily due to higher revenues from our mobile media platforms such as Tencent News and Tencent Video. % of segment 100% 102,863 Tencent Holdings Limited Revenues from our VAS business increased by 34% to RMB107.8 billion for the year ended 31 December 2016 on a year-on-year basis. Online games revenues increased by 25% to RMB70,844 million. The increase was mainly driven by revenue growth from our major smart phone games such as Honour of Kings, Cross Fire Mobile and JX Mobile. The increase was also driven by higher revenues from certain major PC client games. Social networks revenues increased by 54% to RMB36,966 million. The increase primarily reflected growth in revenues from digital content services, as well as higher revenues from virtual item sales. 12 Year ended 31 December Cost of revenues. Cost of revenues increased by 62% to RMB67,439 million for the year ended 31 December 2016 on a year- on-year basis. The increase mainly reflected greater sharing and content costs, costs of payment related services, and channel costs. As a percentage of revenues, cost of revenues increased to 44% for the year ended 31 December 2016 from 40% for the year ended 31 December 2015, primarily due to business mix changes. The following table sets forth our cost of revenues by line of business for the years ended 31 December 2016 and 2015: VAS Online advertising Others Total cost of revenues 2016 2015 Management Discussion and Analysis 100% revenues 5% % of segment % of total % of total Amount Amount revenues (RMB in millions, unless specified) 107,810 151,938 71% 78% 26,970 18% 17,468 17% 17,158 11% 4,726 80,669 Amount Tencent Holdings Limited Amount Cost of revenues for our online advertising business increased by 72% to RMB15,396 million for the year ended 31 December 2016 on a year-on-year basis. The increase was mainly driven by greater investment in video content, to a lesser extent by higher traffic acquisition costs and staff costs. Cost of revenues for our other businesses increased by 238% to RMB14,421 million for the year ended 31 December 2016 on a year-on-year basis. The increase was primarily driven by greater costs in payment related and cloud services. 13 Annual Report 2016 Management Discussion and Analysis Other gains, net. We recorded net other gains, totalling RMB3,594 million for the year ended 31 December 2016, which primarily consisted of net disposal and deemed disposal gains arising from certain investee companies, and fair value gains on options we own in an investee company, partially offset by impairment provision charges for certain investee companies and donations made to the Tencent Charity Funds. Selling and marketing expenses. Selling and marketing expenses increased by 52% to RMB12, 136 million for the year ended 31 December 2016 on a year-on-year basis. The increase mainly reflected greater marketing spending on products and platforms such as online media, online games and payment related services, as well as higher staff costs. As a percentage of revenues, selling and marketing expenses were 8% for the year ended 31 December 2016, broadly stable compared to the year ended 31 December 2015. General and administrative expenses. General and administrative expenses increased by 33% to RMB22,459 million for the year ended 31 December 2016 on a year-on-year basis. The increase was mainly driven by greater research and development expenses as well as staff costs. As a percentage of revenues, general and administrative expenses decreased to 15% for the year ended 31 December 2016 from 16% for the year ended 31 December 2015. Finance costs, net. Finance costs, net increased by 21% to RMB1,955 million for the year ended 31 December 2016 on a year-on-year basis. The increase was mainly driven by higher interest expenses as a result of greater amount of indebtedness. Income tax expense. Income tax expense increased by 43% to RMB10, 193 million for the year ended 31 December 2016 on a year-on-year basis. The increase was mainly driven by greater profit before income tax and withholding taxes. Profit attributable to equity holders of the Company. Profit attributable to equity holders of the Company increased by 43% to RMB41,095 million for the year ended 31 December 2016 on a year-on-year basis. Non-GAAP profit attributable to equity holders of the Company increased by 40% to RMB45,420 million for the year ended 31 December 2016. 2015 14 Management Discussion and Analysis FOURTH QUARTER OF 2016 COMPARED TO FOURTH QUARTER OF 2015 Unaudited Three months ended 31 December 31 December Cost of revenues for our VAS business increased by 32% to RMB37,622 million for the year ended 31 December 2016 on a year-on-year basis. The increase primarily reflected greater sharing and content costs as well as channel costs as a result of higher revenues. 41,631 67,439 90% revenues (RMB in millions, unless specified) 37,622 35% 28,422 35% 15,396 2016 revenues (RMB in millions) Cost of revenues Gross profit 57% 8,941 51% 14,421 84% 4,268 Revenues 2016 Finance costs, net Total revenues Year ended 31 December 2016 2015 (RMB in millions) Revenues Cost of revenues Gross profit Interest income YEAR ENDED 31 DECEMBER 2016 COMPARED TO YEAR ENDED 31 DECEMBER 2015 151,938 (67,439) (41,631) 84,499 61,232 2,619 2,327 Other gains, net 3,594 102,863 1,886 Management Discussion and Analysis 10 Chairman's Statement DIVIDEND Expanding the popularity of our major smart phone games while adding new genre-driven PC games; Expanding our advertising market share by synchronising our capabilities in brand and performance advertising, and growing our number of small and regional advertisers with deeper targeting algorithms and more convenient self-service tools; Growing our digital content subscriber bases; Boosting usage frequency of our payment related services by covering more online and offline consumption scenarios; and Developing our capabilities in emerging technology areas such as machine learning and cloud services. The Board has recommended the payment of a final dividend of HKD0.61 per share (2015: HKDO.47 per share) for the year ended 31 December 2016, subject to the approval of the shareholders at the 2017 AGM. Such proposed dividend will be payable on 2 June 2017 to the shareholders whose names appear on the register of members of the Company on 24 May 2017. 10 APPRECIATION 2016 31 December 30 September Three months ended Unaudited Ma Huateng Chairman Hong Kong, 22 March 2017 Tencent Holdings Limited On behalf of the Board, I would like to take this opportunity to thank our dedicated staff and management team for their commitment, diligence and professionalism. I would also like to express our sincere gratitude to the continuing support of our shareholders and stakeholders. We will continue to enrich our platforms with quality products and services for the development of a healthy and prosperous Internet ecosystem. Year ended 31 December Selling and marketing expenses (7,993) Equity holders of the Company Non-controlling interests 41,095 28,806 352 302 41,447 29,108 Attributable to: Non-GAAP profit attributable to equity holders of the Company 32,410 11 Annual Report 2016 Management Discussion and Analysis Revenues. Revenues increased by 48% to RMB151.9 billion for the year ended 31 December 2016 on a year-on-year basis. The following table sets forth our revenues by line of business for the years ended 31 December 2016 and 2015: VAS Online advertising Others 45,420 (12,136) 29,108 Profit for the year General and administrative expenses (22,459) (16,825) Operating profit 56,117 40,627 2016 (1,955) 41,447 (1,618) (2,522) (2,793) Profit before income tax 51,640 36,216 Income tax expense (10,193) (7,108) Share of losses of associates and joint ventures 2015 (522) Revenues (3,277) 37% General and administrative expenses (6,909) (5,883) Operating profit 13,930 14,460 Finance costs, net (483) (604) Share of losses of associates and joint ventures (522) (619) Profit before income tax 12,925 13,237 Income tax expense (2,402) (4,462) (2,461) Selling and marketing expenses 1,022 31 December 2015 % of segment % of segment Amount revenues Amount revenues (RMB in millions, unless specified) 10,734 Interest income 43,864 40,388 (20,238) (18,560) 23,626 21,828 653 637 Other gains, net 1,155 Profit for the period 10,523 10,776 20,238 12,661 Cost of revenues for our VAS business increased by 28% to RMB10,734 million for the fourth quarter of 2016 on a year- on-year basis. The increase was mainly due to greater sharing and content costs, as well as channel costs. Cost of revenues for our online advertising business increased by 58% to RMB4,424 million for the fourth quarter of 2016 on a year-on-year basis. The increase was primarily driven by greater investment in video content. Staff costs and traffic acquisition costs also increased. Cost of revenues for our other businesses increased by 242% to RMB5,080 million for the fourth quarter of 2016 on a year-on-year basis. The increase mainly reflected greater costs in payment related and cloud services. 17 17 Annual Report 2016 Management Discussion and Analysis Other gains, net. We recorded net other gains, totalling RMB1,022 million for the fourth quarter of 2016, which mainly consisted of net disposal and deemed disposal gains arising from certain investee companies, partly offset by impairment provision charges for certain investee companies and donations made to the Tencent Charity Funds. Selling and marketing expenses. Selling and marketing expenses increased by 48% to RMB4,462 million for the fourth quarter of 2016 on a year-on-year basis. The increase was mainly driven by greater marketing and promotional expenses due to our expanded business scope. As a percentage of revenues, selling and marketing expenses were 10% for the fourth quarter of 2016, broadly stable compared to the fourth quarter of 2015. General and administrative expenses. General and administrative expenses increased by 45% to RMB6,909 million for the fourth quarter of 2016 on a year-on-year basis. The increase primarily reflected greater research and development expenses, as well as staff costs, including those arising from higher share-based compensation expenses. As a percentage of revenues, general and administrative expenses were 16% for the fourth quarter of 2016, broadly stable compared to the fourth quarter of 2015. Finance costs, net. Finance costs, net increased by 33% to RMB483 million for the fourth quarter of 2016 on a year-on-year basis, mainly due to greater amount of indebtedness. Income tax expense. Income tax expense increased by 20% to RMB2,402 million for the fourth quarter of 2016 on a year-on- year basis. The increase primarily reflected greater profit before income tax and withholding tax, partly offset by the impact of income tax preferential treatment recognised by a subsidiary. Profit attributable to equity holders of the Company. Profit attributable to equity holders of the Company increased by 47% to RMB10,529 million for the fourth quarter of 2016 on a year-on-year basis. Non-GAAP profit attributable to equity holders of the Company increased by 38% to RMB12,332 million. Tencent Holdings Limited 18 Management Discussion and Analysis FOURTH QUARTER OF 2016 COMPARED TO THIRD QUARTER OF 2016 90% 1,484 80% 5,080 Attributable to: Equity holders of the Company 10,529 10,646 Non-controlling interests (6) 130 10,523 10,776 31 December 2016 Non-GAAP profit attributable to equity holders of the Company 11,737 19 Annual Report 2016 8,383 36% 4,424 53% 2,794 49% 12,332 Unaudited Three months ended Total cost of revenues Others (483) (363) Share of losses of associates and joint ventures (1,329) Profit before income tax 12,925 9,196 Income tax expense (2,402) (1,998) Profit for the period 10,523 7,198 Attributable to: Equity holders of the Company Non-controlling interests 10,529 7,164 (6) Finance costs, net 10,888 13,930 Operating profit Cost of revenues Gross profit Interest income 43,864 30,441 (20,238) (12,661) 23,626 17,780 34 653 Other gains, net 1,022 249 Selling and marketing expenses (4,462) (3,024) General and administrative expenses (6,909) (4,766) 649 (RMB in millions) 10,523 Non-GAAP profit attributable to equity holders of the Company 5,733 19% 6,385 15% 1,640 5% 43,864 100% 30,441 100% Revenues from our VAS business increased by 27% to RMB29,191 million for the fourth quarter of 2016 on a year- on-year basis. Online games revenues grew by 16% to RMB18,469 million. The increase was primarily driven by contributions from our major PvP and RPG genre smart phone games. Social networks revenues increased by 51% to RMB10,722 million. The increase mainly reflected revenue growth from digital content services, including our expanded digital music business, and virtual item sales. Revenues from our online advertising business increased by 45% to RMB8,288 million for the fourth quarter of 2016 on a year-on-year basis. Performance-based advertising revenues grew by 77% to RMB5,168 million, mainly driven by higher contributions from advertising revenues derived from Weixin Moments, our mobile news apps, and Weixin Official Accounts. Brand display advertising revenues increased by 11% to RMB3, 120 million, primarily driven by growth in revenues from our mobile media platforms such as Tencent News and Tencent Video, partly offset by performance inventory replacing some brand inventory. Revenues from our other businesses increased by 289% to RMB6,385 million for the fourth quarter of 2016 on a year- on-year basis. The increase was mainly due to revenue growth from our payment related and cloud services. Tencent Holdings Limited 16 Management Discussion and Analysis Cost of revenues. Cost of revenues increased by 60% to RMB20,238 million for the fourth quarter of 2016 on a year-on-year basis. The increase mainly reflected greater costs of payment related services, sharing and content costs, as well as bandwidth and server custody fees. As a percentage of revenues, cost of revenues increased to 46% for the fourth quarter of 2016 from 42% for the fourth quarter of 2015, primarily due to business mix changes. The following table sets forth our cost of revenues by line of business for the fourth quarter of 2016 and the fourth quarter of 2015: VAS Online advertising 19% 8,288 76% 23,068 12,332 8,953 15 Annual Report 2016 Management Discussion and Analysis Revenues. Revenues increased by 44% to RMB43,864 million for the fourth quarter of 2016 on a year-on-year basis. The following table sets forth our revenues by line of business for the fourth quarter of 2016 and the fourth quarter of 2015: VAS Online advertising Others Total revenues 7,198 Unaudited Three months ended 31 December 2015 % of total % of total Amount revenues Amount (RMB in millions, unless specified) 29,191 66% 31 December 2016 revenues (550) 199 - to be recovered after more than 12 months 3,272 443 - to be recovered within 12 months 3,761 314 7,033 757 Deferred income tax liabilities: - to be recovered after more than 12 months (4,777) (2,713) - to be recovered within 12 months (376) (955) (5,153) (3,668) 193 Annual Report 2016 Notes to the Consolidated Financial Statements For the year ended 31 December 2016 26 DEFERRED INCOME TAXES (Cont'd) The movements of the deferred income tax assets/liabilities account were as follows: At beginning of the year Credit/(charge) to consolidated income statement (Note 11) Withholding tax paid relating to remittance of dividends Credit/(charge) to consolidated statement of changes in equity Disposal of a subsidiary RMB'Million RMB'Million 2015 2016 260 254 Rental deposits and other deposits 199 167 Others 2,522 1,550 14,118 11,397 21,481 16,877 Note: Business combinations As at 31 December 2016, the amounts represented loan to investees and investees' shareholders. These balances are repayable within a period of two to nine years (included in non-current assets), or within one year (included in current assets), and are interest-bearing at rates of not higher than 8.0% per annum (2015: not higher than 10.0% per annum). Tencent Holdings Limited 192 Notes to the Consolidated Financial Statements For the year ended 31 December 2016 25 OTHER FINANCIAL ASSETS As at 31 December 2016, the Group's non-current other financial assets comprised the embedded derivatives bifurcated from the host component (Note 23(i)) and interest rate swap contracts of RMB1, 176 million and RMB584 million, respectively. As at 31 December 2016, the Group had several outstanding interest rate swap contracts to exchange floating interest rates into fixed interest rates with the aggregate notional principal amount of USD4,001 million (equivalent to approximately RMB27,755 million) (2015: Nil). These interest rate swap contracts were qualified as hedging accounting. As at 31 December 2016, the Group's current other financial assets represent call option rights held by the Group which entitle it to acquire additional equity interests in certain investee companies of the Group. Other financial assets were measured at their fair values. 26 DEFERRED INCOME TAXES Deferred income taxes are calculated in full on temporary differences under the liability method using the tax rates which are expected to apply at the time of reversal of the temporary differences. There was no offsetting of deferred income tax assets and liabilities in 2016 and 2015. Deferred income tax assets: As at 31 December As at 31 December 2016, the carrying amounts of deposits and other assets (excludes prepayments and refundable value-added tax), were approximate to their fair values. Deposits and other assets were neither past due nor impaired. Their recoverability was assessed with reference to the credit status of the counterparties and credit history. Refundable value-added tax Other additions At end of the year Currency translation differences At 31 December 2016 Accelerated amortisation Share-based of intangible Accrued assets RMB'Million Tax losses RMB'Million expenses RMB'Million payments and others Total RMB'Million RMB'Million (Note) 243 209 ། 305 757 4 4 399 Annual Report 2016 23 1,604 Other additions income statement (Charge)/credit to consolidated Business combinations Tencent Holdings Limited 194 2016 2015 RMB'Million RMB'Million (2,911) (2,620) 598 (172) 300 326 362 Currency translation differences (459) (381) 2 3,851 61 7 1,880 (2,911) Notes to the Consolidated Financial Statements For the year ended 31 December 2016 26 DEFERRED INCOME TAXES (Cont'd) The movements of deferred income tax assets were as follows: Deferred income tax assets on temporary differences arising from At 1 January 2016 5 367 1,392 Interest receivables 2,066 2,376 13,552 553 204 131 129 20,477 9,435 62,580 34,879 749 25 83,806 44,339 2016 2015 RMB'Million RMB'Million 44,339 13,277 37,319 18,039 (2,755) (932) 2,567 13,045 179 615 6,198 3,909 Notes to the Consolidated Financial Statements For the year ended 31 December 2016 23 AVAILABLE-FOR-SALE FINANCIAL ASSETS Equity investments in listed entities Mainland China – Hong Kong - United Kingdom - United States of America - Sweden - South Korea - Japan Equity investments in unlisted entities Others (1,028) Movement of available-for-sale financial assets is analysed as follows: Additions (Note (i), (ii) and (iii)) Disposals and transfers Changes in fair value (Note (iv)) Impairment provision (Note (v)) Currency translation differences At end of the year Tencent Holdings Limited 190 As at 31 December 2016 RMB'Million 2015 RMB'Million At beginning of the year 2,293 (586) 1,496 Included in non-current assets: Prepayment for licensed online contents and game licences 3,942 857 Prepayments for land use rights 2,242 Running royalty fees for online games 685 357 Loan to investees and investees' shareholders (Note) 1,113 999 Others 1,623 1,025 7,363 5,480 Included in current assets: Running royalty fees for online games 2,506 2,252 Prepaid expenses 4,659 3,275 Loan to investees and investees' shareholders (Note) 1,679 2,507 RMB'Million 2015 RMB'Million 2016 83,806 44,339 Notes to the Consolidated Financial Statements For the year ended 31 December 2016 23 AVAILABLE-FOR-SALE FINANCIAL ASSETS (Cont'd) Note: (i) (ii) (iii) (iv) (v) (vi) On 21 June 2016, a limited liability company and its subsidiaries established by the Group (the "Consortium") agreed to acquire a majority equity interest in Supercell Oy ("Supercell") ("Supercell Acquisition"). The acquisition consideration paid by the Consortium was funded by the Group, which subscribed for certain voting and non-voting redeemable and convertible shares and other instruments issued by the Consortium, certain co-investors, which subscribed for ordinary shares and preference shares issued by the Consortium, and bank borrowings obtained by the Consortium ("Supercell Financing"). 3,364 The Supercell Financing was completed upon finalisation of bank facilities agreements and investments made by the Group and co-investors in October 2016. According to the investment agreements entered into by the Group and co-investors in respect of their investment in Consortium, the Group considers its voting interests together with other arrangements do not give rise to sufficient ability for the Group to control the Consortium. The Supercell Acquisition was completed after the completion of Supercell Financing and the Consortium acquired 76.9% interest in Supercell. The Group provided a guarantee and a put arrangement which were recognised as other financial liabilities and measured at their respective fair values. During the year ended 31 December 2016, the Group acquired certain interests or made additional investments of approximately RMB7,277 million in listed entities in the United States, PRC, Sweden and South Korea. Among which, approximately USD737 million (equivalent to approximately RMB5,052 million) was invested by the Group to acquire approximately 2.2% of common stocks of Tesla, Inc. ("Tesla"), a listed company in US which is principally engaged in the development and sales of electric vehicles, sustainable energy generation and storage equipment. Subsequently, the Group acquired additional common stocks of Tesla and its aggregate equity interest in Tesla amounted to approximately 5% of the total issued common stocks of Tesla as of March 2017. During the year ended 31 December 2016, the Group acquired certain interests or made additional investments of approximately RMB11,057 million in unlisted entities mainly operated in the PRC and the United States. These companies are engaged in technology, online-to-offline and other Internet-related services. Fair value gains of RMB2,567 million (2015: RMB13,045 million) were recognised in other comprehensive income during the year ended 31 December 2016 as a result of the remeasurement of the changes in fair values of the available-for-sale financial assets as at 31 December 2016. The Group made an aggregate impairment provision of RMB1,028 million (2015: RMB586 million) against the carrying amounts of certain available-for-sale financial assets during the year ended 31 December 2016, with reference to their assessed fair values as at 31 December 2016. As at 31 December 2016, the balance of the Group's available-for-sale financial assets comprise of a large number of individual investments, among which the investment in Supercell represented the single largest investment in available-for-sale financial assets and was the only significant investment of the Group which triggered the disclosure requirements pursuant to Chapter 14 of the Listing Rules at the time when the Group made such investment. 191 Annual Report 2016 Notes to the Consolidated Financial Statements For the year ended 31 December 2016 24 PREPAYMENTS, DEPOSITS AND OTHER ASSETS As at 31 December The Group's investment in the Consortium was accounted for as compound financial instruments with the host component (substantially equity) recognised as available-for-sale financial assets of RMB 18,985 million and embedded derivative recognised as other financial assets of RMB1, 176 million (Note 25). 2,343 (27) 1,794 6 5 5,415 3,674 46,118 36,569 2,708 762 1,494 50,320 37,331 55,735 41,005 The effective interest rate for the term deposits of the Group with initial terms of over three months during the year ended 31 December 2016 was 3.41% (2015: 4.00%). Term deposits with initial terms of over three months were neither past due nor impaired. As at 31 December 2016, the carrying amounts of the term deposits with initial terms of over three months approximated their fair values. 197 Annual Report 2016 Notes to the Consolidated Financial Statements For the year ended 31 December 2016 28 ACCOUNTS RECEIVABLE Accounts receivable and their ageing analysis, based on recognition date, are as follows: 0-30 days 31 - 60 days 61-90 days Over 90 days As at 31 December 2016 58 2015 3,611 RMB'Million 326 (459) 2,057 (1,975) (631) (198) (3,668) Tencent Holdings Limited 196 Notes to the Consolidated Financial Statements For the year ended 31 December 2016 26 DEFERRED INCOME TAXES (Cont'd) As at 31 December 2016, the Group recognised the relevant deferred income tax liabilities of RMB3,391 million (2015: RMB1,975 million) on earnings anticipated to be remitted by certain subsidiaries in the foreseeable future. No withholding tax had been provided for the earnings of approximately RMB41,220 million (2015: RMB37,344 million) expected to be retained by the PRC subsidiaries and not to be remitted to a foreign investor in the foreseeable future based on several factors, including management's estimation of overseas funding requirements. 27 TERM DEPOSITS An analysis of the Group's term deposits by currencies are as follows: As at 31 December Included in non-current assets: RMB term deposits USD term deposits Other currencies Included in current assets: RMB term deposits USD term deposits Other currencies 2016 RMB'Million 2015 5,409 RMB'Million RMB'Million 3,260 As at 31 December 2016, the carrying amounts of the accounts receivable approximated their fair values. Tencent Holdings Limited 198 29 BANK BALANCES AND CASH (a) Cash and cash equivalents Notes to the Consolidated Financial Statements For the year ended 31 December 2016 Bank balances and cash Term deposits and highly liquid investments with initial terms within three months As at 31 December 2016 2015 RMB'Million RMB'Million 39,804 19,845 32,098 23,593 71,902 43,438 The effective interest rate of the term deposits of the Group with initial terms within three months during the year ended 31 December 2016 was 2.47% (2015: 3.08%). Approximately RMB28,154 million (2015: RMB22,150 million) and RMB1,856 million (2015: RMB6,995 million) of the total balance of the Group's cash and cash equivalents was denominated in RMB, which had been placed with banks in Mainland China and Hong Kong, respectively. (b) Restricted cash As at 31 December 2016, restricted deposits held at bank of RMB750 million (2015: RMB54,731 million) were mainly denominated in RMB. As at 31 December 2015, the cash amount deposited with banks under users' entrustment (the "Entrustment Value") had been presented and recognised as "Restricted cash" under current assets with corresponding liability in equivalent amount as “Other payables and accruals" (Note 38) under current liabilities. During the year ended 31 December 2016, in light of changes in operating environment in the PRC, and based on the advice of the Company's legal advisor, the Group has formed a view that it holds the Entrustment Value as a custodian and the Group has amended its relevant users' agreements to reflect such effect. Accordingly, the Group has no longer recognised the Entrustment Value since 2 July 2016, being the effective date of amendments to the users' agreements. The Entrustment Value amounted to approximately RMB125 billion on 2 July 2016. As at 31 December 2016, insignificant amounts of accounts receivable were past due and related impairment provision was recognised after assessment on the financial condition and credit quality with reference to the past history. Online advertising customers, which are mainly advertising agencies related to brand display advertising business, are usually granted with a credit period of 90 days after full execution of the contracted advertisement orders. Third party platform providers and telecommunication operators usually settle the amounts due by them within 60 days and a period of 30 to 120 days, respectively. 7,061 10,152 3,616 4,019 2,209 1,294 798 1,579 438 10,152 7,061 Majority of the Group's accounts receivable were denominated in RMB. The carrying amounts of accounts receivable of the Group's major agents/customers are as follows: Online advertising customers Third party platform providers (459) Telecommunications operators As at 31 December 2016 2015 RMB'Million RMB'Million 4,679 3,340 2,252 1,500 928 815 2,293 1,406 Others ล (314) 2 Annual Report 2016 Notes to the Consolidated Financial Statements For the year ended 31 December 2016 26 DEFERRED INCOME TAXES (Cont'd) The movements of deferred income tax liabilities were as follows: Deferred income tax liabilities on temporary differences arising from Withholding Change in At 1 January 2016 Business combinations Intangible tax on the fair value of assets earnings available- acquired in anticipated to for-sale Deemed business combinations by subsidiaries be remitted financial disposals of assets 326 RMB'Million RMB'Million 195 The Group only recognises deferred income tax assets for cumulative tax losses if it is probable that future taxable amounts will be available to utilise those tax losses. Management will continue to assess the recognition of deferred income tax assets in future reporting periods. As at 31 December 2016, the Group did not recognise deferred income tax assets of RMB957 million (2015: RMB1,017 million) in respect of cumulative tax losses amounting to RMB4,064 million (2015: RMB4, 125 million). These tax losses will expire from 2017 to 2021. Note: 757 3,851 7 71 78 66 3,661 2,541 7,033 642 189 At 1 January 2015 17 209 investees RMB'Million 96 (Charge)/credit to consolidated income statement 226 Currency translation differences == (11) 209 424 11 At 31 December 2015 243 209 305 322 Others RMB'Million RMB'Million (425) (461) Total At 1 January 2015 (360) (2,033) (172) (377) (2,942) Business combinations 2 2 Credit/(charge) to consolidated income statement 41 (266) (198) (173) (596) Disposal of a subsidiary 5 5 Withholding tax paid in relation to the remittance of dividends Charge to consolidated statement of changes in equity Currency translation differences At 31 December 2015 (269) (3,391) (5,153) (17) RMB'Million (314) (1,975) (631) (198) (550) (3,668) (385) (607) Credit/(charge) to consolidated income statement 94 (1,700) Withholding tax paid in relation to (385) 300 (16) the remittance of dividends 362 362 300 (1,745) (2) (227) At 31 December 2016 Currency translation differences changes in equity Credit to consolidated statement of 88 - value of employee services Employee share award schemes: - shares issued (Note (a)) - value of employee services Employee share option schemes: 30 SHARE CAPITAL, SHARE PREMIUM AND SHARES HELD FOR SHARE AWARD SCHEMES As at 31 December 2016 and 2015, the authorised share capital of the Company comprises 50,000,000,000 ordinary shares with par value of HKD0.00002 per share. For the year ended 31 December 2016 Notes to the Consolidated Financial Statements At 1 January 2016 - shares withheld for share award schemes (Note (b)) In addition, in accordance with the Law of the PRC on Enterprises with Foreign Investments and the stipulated provisions of the articles of association of wholly owned foreign subsidiaries in the PRC, appropriation from net profits (after offsetting accumulated losses brought forward from prior years) should be made by these companies to their respective Reserve Fund. The percentage of net profit to be appropriated to the Reserve Fund is not less than 10% of the net profit. When the balance of the Reserve Fund reaches 50% of the registered capital, such transfer needs not be made. fully paid Annual Report 2016 205 In respect of the Post-IPO Option Scheme II and the Post-IPO Option Scheme III, the Board may, at their discretion, grant options to any qualifying participants to subscribe for shares in the Company, subject to the terms and conditions stipulated therein. The exercise price must be in compliance with the requirement under The Rules Governing the Listing of Securities on the Stock Exchange. In addition, the option vesting period is determined by the Board provided that it is not later than the last day of a 7-year or 10-year period after the date of grant of option. The Pre-IPO Option Scheme and the Post-IPO Option Scheme I expired on 31 December 2011 and 23 March 2014 respectively. The Company has adopted four share option schemes, namely, the Pre-IPO Option Scheme, the Post-IPO Option Scheme I, the Post-IPO Option Scheme II and the Post-IPO Option Scheme III. (a) Share option schemes 32 SHARE-BASED PAYMENTS For the year ended 31 December 2016 Notes to the Consolidated Financial Statements 204 Tencent Holdings Limited During the year, the Group has acquired non-controlling interests in certain non-wholly owned subsidiaries and the aggregate net excess of considerations over the carrying amounts of acquired non-controlling interests of RMB2,523 million (2015: RMB8,160 million) was recognised directly in equity. Out of which includes an agreement to entire non-controlling interests (including the outstanding equity-settled and cash-settled share options and restricted shares under the relevant employees incentive plans) in a non-wholly owned subsidiary entered into by the Group in 2015. The considerations were settled in cash and awarded shares of the Company. This acquisition was partially completed in 2015 and 2016. Share-based compensation reserve arises from share option schemes and share award schemes adopted by the subsidiaries of the Group (Note 32(d)). With approvals obtained from respective boards of directors of these companies, the Reserve Fund can be used to offset accumulated deficit or to increase capital. In accordance with the Companies Laws of the PRC and the stipulated provisions of the articles of association of subsidiaries with limited liabilities in the PRC, appropriation of net profits (after offsetting accumulated losses from prior years) should be made by these companies to their respective Statutory Surplus Reserve Funds and the Discretionary Reserve Funds before distributions are made to the owners. The percentage of appropriation to Statutory Surplus Reserve Fund is 10%. The amount to be transferred to the Discretionary Reserve Fund is determined by the equity owners of these companies. When the balance of the Statutory Surplus Reserve Fund reaches 50% of the registered capital, such transfer needs not to be made. Both the Statutory Surplus Reserve Fund and Discretionary Reserves Fund can be capitalised as capital of an enterprise, provided that the remaining Statutory Surplus Reserve Fund shall not be less than 25% of the registered capital. (d) (c) (b) The capital reserve mainly arises from transactions undertaken with non-controlling interests. (a) Note: 31 OTHER RESERVES (Cont'd) For the year ended 31 December 2016 Notes to the Consolidated Financial Statements Annual Report 2016 Notes to the Consolidated Financial Statements 9,673 For the year ended 31 December 2016 (a) Share option schemes (Cont'd) (74,151) - (74,151) (2,500,000) (8,718,788) 5,000,000 30,697,305 11,843,070 HKD31.70 HKD80.59 25,697,305 HKD160.11 11,843,070 HKD29.69 (6,218,788) HKD31.70 HKD42.72 Issued and Exercised Granted At 1 January 2016 No. of options options price No. of Average exercise No. of options price exercise Average Total Post-IPO Option Scheme III Post-IPO Option Scheme II Movements in the number of share options outstanding and their related weighted average exercise prices are as follows: (i) Movements in share options 32 SHARE-BASED PAYMENTS (Cont'd) 736 2,015 1,089 Share of other comprehensive income of associates (11) available-for-sale financial assets Transfer to profit or loss upon disposal of 12,586 available-for-sale financial assets Net gains from changes in fair value of Profit appropriations to PRC statutory reserves (1,195) put options granted to non-controlling interests Recognition of financial liabilities in respect of the (372) non-controlling interests Transfer of equity interests of subsidiaries to (8,160) non-wholly owned subsidiaries (Note (d)) Acquisition of additional equity interests in 2,129 570 873 (363) 129 2,531 (1,611) (Note (c)) 329 29 Currency translation differences Other fair value gains, net 1,607 736 736 1,970 1,970 329 (11) 12,586 216 216 (1,195) (372) At 31 December 2016 (8,160) 982 273 273 190 190 1 203 586 458 15,106 (11,338) Balance at 31 December 2015 982 HKD120.95 31,247,436 HKD31.70 2,500,000 33,747,436 Exercisable as (b) Share award schemes 32 SHARE-BASED PAYMENTS (Cont'd) For the year ended 31 December 2016 Notes to the Consolidated Financial Statements 208 Tencent Holdings Limited The expected volatility, measured as the standard deviation of expected share price returns, is determined based on the average daily trading price volatility of the shares of the Company. 35.00% 40.00%-41.00% 0.36% 0.32%-0.33% HKD149.22 0.36%-1.54% 0.69%-1.08% HKD160.04 2015 2016 Note: Expected volatility (Note) Dividend yield Risk free rate Weighted average share price at the grant date Other than the exercise price mentioned above, significant judgment on parameters, such as risk free rate, dividend yield and expected volatility, are required to be made by the directors in applying the Valuation Models, which are summarised as below. The directors of the Company have used the Valuation Models to determine the fair value of the options as at the respective grant dates, which is to be expensed over the relevant vesting period. The weighted average fair value of options granted during the year ended 31 December 2016 was HKD56.41 per share (equivalent to approximately RMB47.33 per share) (2015: HKD51.92 per share (equivalent to approximately RMB41.01 per share)). Fair value of options (iii) (a) Share option schemes (Cont'd) The Company has adopted two share award schemes (the "Share Award Schemes"), both of which are administered by an independent trustee appointed by the Group (the "Trustee") as of 31 December 2016. The vesting period of the awarded shares is determined by the Board. Movements in the number of awarded shares for the years ended 31 December 2016 and 2015 are as follows: Number of awarded shares At 1 January 2016 Annual Report 2016 209 During the year ended 31 December 2016, 61,474 awarded shares were granted to four independent non- executive directors of the Company (2015: 75,000 awarded shares were granted to three independent non- executive directors of the Company). 8,574,117 91,786,907 (57,811,262) (6,746,336) 74,308,983 82,035,522 277,291 86,365,812 (53,989,266) 32 SHARE-BASED PAYMENTS (Cont'd) (3,803,259) 91,786,907 Vested but not transferred as at 31 December 2015 At 31 December 2015 Vested and transferred Lapsed Granted At 1 January 2015 Vested but not transferred as at 31 December 2016 At 31 December 2016 Vested and transferred Lapsed Granted 52,371,430 (Note (b)) For the year ended 31 December 2016 Annual Report 2016 For the year ended 31 December 2016 Notes to the Consolidated Financial Statements 206 Tencent Holdings Limited As a result of the options exercised during the year ended 31 December 2016, 8,718,788 ordinary shares (2015: 11,488,432 ordinary shares) were issued by the Company (Note 30). The weighted average price of the shares at the time these options were exercised was HKD173.65 per share (equivalent to approximately RMB148.82 per share) (2015: HKD142.75 per share (equivalent to approximately RMB114.57 per share)). During the year ended 31 December 2016, 3,750,000 options were granted to a director of the Company (2015: Nil). HKD56.85 8,844,117 HKD31.70 1,250,000 10,094,117 at 31 December 2015 Exercisable as HKD80.59 25,697,305 HKD31.70 5,000,000 30,697,305 (717,138) 1,470,875 (11,488,432) HKD39.44 (717,138) At 31 December 2015 HKD18.28 (11,488,432) Lapsed Exercised HKD149.22 1,470,875 5,000,000 41,432,000 HKD57.36 36,432,000 HKD31.70 Granted At 1 January 2015 9,617,778 HKD86.69 9,617,778 at 31 December 2016 32 SHARE-BASED PAYMENTS (Cont'd) (a) Share option schemes (Cont'd) (ii) Outstanding share options Details of the expiry dates, exercise prices and the respective numbers of share options which remained outstanding as at 31 December 2016 and 2015 are as follows: 207 The outstanding share options as of 31 December 2016 were divided into three to five tranches on an equal basis as at their grant dates. The first tranche can be exercised after a specified period ranging from one to five years from the grant date, and then the remaining tranches will become exercisable in each subsequent year. 30,697,305 33,747,436 5,000,000 2,500,000 HKD31.70 date of grant of options (Post-IPO Option Scheme III) 25,697,305 31,247,436 14,751,338 26,242,111 Notes to the Consolidated Financial Statements HKD112.30-HKD174.86 5,005,325 HKD26.08-HKD49.76 2,851,000 HKD18.06 2015 31 December 31 December 2016 Range of exercise price Number of share options 10 years commencing from the 7 years commencing from the date of grant of options (Post-IPO Option Scheme II) Expiry Date 8,094,967 (Note (a)) Lapsed RMB'Million During the year ended 31 December 2016, the Share Scheme Trust withheld 13,242,861 ordinary shares (2015: 5,747,513 ordinary shares) of the Company for an amount of approximately HKD2,267 million (equivalent to approximately RMB1,936 million) (2015: HKD800 million (equivalent to approximately RMB652 million)), which had been deducted from the equity. During the year ended 31 December 2016, the Company allotted 64,440,700 ordinary shares (2015: 21,756,730 ordinary shares) to the Share Scheme Trust for the purpose of granting awarded shares to the participants under the share award schemes. During the year ended 31 December 2016, the Share Scheme Trust transferred 53,989,266 ordinary shares of the Company (2015: 57,811,262 ordinary shares) to the share awardees upon vesting of the awarded shares (Note 32(b)). 201 Annual Report 2016 Notes to the Consolidated Financial Statements For the year ended 31 December 2016 31 OTHER RESERVES Available- for-sale Currency PRC Capital financial reserve (d) (c) (b) During the year ended 31 December 2016, 8,718,788 Post-IPO options (2015: 11,488,432 Post-IPO options) with exercise prices ranging from HKD18.06 to HKD148.90 (2015: HKD8.53 to HKD124.30) were exercised. - shares vested from share award schemes and transferred to the grantees (Note (d)) (144) 144 Acquisition of additional equity interests in non-wholly owned subsidiaries At 31 December 2015 assets 9,403,923,992 4,788 12,167 (1,817) 10,350 As at 31 December 2016, the total number of issued ordinary shares of the Company included 82,075,537 shares (2015: 58,379,035 shares) held under the Share Award Schemes. Note: (a) 4,788 in associates Investments translation differences Share-based statutory compensation 2,015 736 9,673 Value of employee services: -Employee share option schemes - Employee share award schemes Tax benefit from share-based payments of a subsidiary 1,089 Acquisition of additional equity interests in 57 394 394 897 897 (2,523) (927) 57 21,756,730 1,607 15,106 reserve reserve Others Total RMB'Million RMB'Million RMB'Million RMB'Million 458 RMB'Million RMB'Million RMB'Million (Note (a)) (Note (b)) (Note (c)) Balance at 1 January 2016 (11,338) RMB'Million - shares allotted for share award schemes (Note (c)) (652) (652) 225 3,453 3,453 (1,936) (1,936) - shares allotted for share award schemes (Note (c)) 64,440,700 311 - shares vested from share award schemes -- (617) 617 Acquisition of additional equity interests in non-wholly owned subsidiaries (Note 31(d)) - 1,785 1,785 At 31 December 2016 and transferred to the grantees (Note (d)) 9,477,083,480 225 311 Shares held for ordinary shares Share Share share award capital RMB'Million ཆསྶ RMB'Million Total RMB'Million 9,403,923,992 12,167 (1,817) 10,350 8,718,788 schemes RMB'Million 516 17,324 14,188 3,822 At 1 January 2015 9,370,678,830 Employee share option schemes: - value of employee services - shares issued (Note (a)) Employee share award schemes: (1,309) 165 169 165 169 - value of employee services - shares withheld for share award schemes (Note (b)) 2,058 2,058 11,488,432 (3,136) 5,131 Total Tencent Holdings Limited 200 Notes to the Consolidated Financial Statements For the year ended 31 December 2016 30 SHARE CAPITAL, SHARE PREMIUM AND SHARES HELD FOR SHARE AWARD SCHEMES (Cont'd) Shares Issued and RMB'Million fully paid ordinary shares Share Share share award capital RMB'Million premium RMB'Million schemes RMB'Million held for 99 premium RMB'Million 665 for-sale Available- For the year ended 31 December 2016 Notes to the Consolidated Financial Statements Tax benefit from share-based payments of a subsidiary - Employee share award schemes Value of employee services: Balance at 1 January 2015 31 OTHER RESERVES (Cont'd) 23,693 1,092 3,363 356 356 4,127 Currency 863 PRC Share-based financial 7,842 RMB'Million RMB'Million Total Others reserve reserve differences in associates RMB'Million RMB'Million RMB'Million RMB'Million assets reserve statutory compensation translation Investments Capital (1,176) - Employee share option schemes Write-back of financial liabilities upon termination of the put 2,929 Transfer to profit or loss upon disposal of available-for-sale financial assets (1,176) Share of other comprehensive income of associates 863 4,127 4127 665 Other fair value gains, net Balance at 31 December 2016 (6,430) 16,859 1,321 5,734 1,754 Tencent Holdings Limited 202 ། ། available-for-sale financial assets Net gains from changes in fair value of Currency translation differences 7,842 Profit appropriations to PRC statutory reserves non-wholly owned subsidiaries (Note (d)) Transfer of equity interests of subsidiaries to non-controlling interests (927) (2,523) option granted to non-controlling interests 99 516 Partial disposal of equity interests in subsidiaries and businesses 2,929 1,459 857 Purchase of land use rights and construction related costs 966 1,160 265 1,417 Prepayments received from customers and others Purchase consideration payables for investee companies 1,628 2,530 General and administrative expenses accruals 394 54,108 Interests payable 403 5,045 588 314 102 Others Convertible bonds of a subsidiary non-controlling shareholders of subsidiaries Deposits received from customers (Note 29(b)) Liabilities in relation to the put options granted to 386 7,719 351 8,965 Selling and marketing expense accruals Staff costs and welfare accruals 3,626 4,935 778 873 487 203 Others non-controlling shareholders of subsidiaries 2,361 3,859 Payables to the licensed online contents and running royalty fee for online games Present value of liabilities in relation to the put options granted to RMB'Million RMB'Million 36 DEFERRED REVENUE 2015 As at 31 December 35 LONG-TERM PAYABLES For the year ended 31 December 2016 Notes to the Consolidated Financial Statements Annual Report 2016 213 As at 31 December 2016, the fair value of the notes payable amounted to RMB40,379 million (2015: RMB41,372 million). The respective fair values are assessed based on the active market price of these notes on the reporting date or by making reference to similar instruments traded in the observable market. In December 2016, the notes payable with an aggregate principal amount of USD600 million which were issued in December 2011 reached their maturity and they were fully repaid by the Group. 40,978 39,670 6,435 6,880 27,421 2016 Deferred revenue mainly represents service fees prepaid by customers for certain VAS in the form of pre-paid tokens or cards, virtual items and subscription, for which the related services had not been rendered as at 31 December 2016. It also includes customer loyalty incentives offered by the Group to its customers which were valued at their respective fair values at the inception date. As at 31 December 2016, deferred revenue also included fair value of internet traffic and other support to be offered to JD.com and other investee companies in the future periods measured at their respective inception dates, as mentioned in Note 20. 37 ACCOUNTS PAYABLE Accounts payable and their ageing analysis, based on recognition date, are as follows: RMB'Million RMB'Million 2015 2016 As at 31 December For the year ended 31 December 2016 Notes to the Consolidated Financial Statements 38 OTHER PAYABLES AND ACCRUALS 15,700 27,413 2,389 2,363 1,518 1,495 1,774 2,740 10,019 20,815 RMB' Million RMB'Million 2015 2016 As at 31 December 214 Tencent Holdings Limited Over 90 days 61 - 90 days 31 - 60 days 0-30 days 2,415 20,873 2,793 39 CMC INTEGRATION Income tax expense Adjustments for: 29,108 41,447 RMB'Million RMB'Million 2015 2016 Profit for the year 10,193 (a) Reconciliation of net profit to cash inflow from operating activities: 41 For the year ended 31 December 2016 Notes to the Consolidated Financial Statements Annual Report 2016 217 The revenue and the results contributed by these acquired entities for the period since respective acquisition dates were insignificant to the Group. The Group's revenue and results for the year would not be materially different if these acquisitions had occurred on 1 January 2016. The acquisition related costs of the business combinations were not significant and had been charged to general and administrative expenses during the year ended 31 December 2016. During the year ended 31 December 2016, the Group also acquired certain insignificant subsidiaries. The aggregate considerations for these acquisitions was RMB314 million, fair value of net assets acquired (including identifiable intangible assets), non-controlling interests and goodwill recognised were RMB291 million, RMB95 million and RMB118 million, respectively. 40 OTHER BUSINESS COMBINATIONS CONSOLIDATED CASH FLOW STATEMENT The Group recognised a deemed disposal gain of RMB1,505 million recorded as “Other gains, net" during the year ended 31 December 2016, being the difference between the fair value of the Previously Held Interest in CMC as at the completion date and its then carrying value (Note 7). 7,108 (6,966) 2,522 Share of losses of associates and joint ventures 2,756 4,313 (2,327) (2,619) 43 60 Equity-settled share-based compensation expenses Gains on disposals and deemed disposals of investees and businesses property, plant and equipment and construction in progress Interest income 3,515 9,025 3,159 3,716 Depreciation of property, plant and equipment and investment properties Amortisation of intangible assets and land use right (272) (563) Dividend income (3,813) Net losses on disposals of land used rights, intangible assets, The revenue and the results contributed by CMC to the Group for the period since the completion date were insignificant. The Group's revenue and results for the year would not be materially different should the CMC Integration otherwise occur on 1 January 2016. Transaction costs of CMC Integration were not significant and were charged to general and administrative expenses in the consolidated income statement during the year ended 31 December 2016. The fair value of the non-controlling interest in CMC was estimated by making reference to the above consideration of the CMC Integration. This consideration was adjusted for control premium and lack of marketability that market participants would consider when estimating the fair value of the non-controlling interest in CMC. Cash and cash equivalents Recognised amounts of identifiable assets acquired and liabilities assumed: 10,292 2,483 The Previously Held Interest in CMC deemed to be disposed 7,809 The fair value of the equity interest of the Group's Online Music Business deemed to be issued by the Group RMB'Million date 1,286 24,281 Total consideration: 39 CMC INTEGRATION (Cont'd) For the year ended 31 December 2016 Notes to the Consolidated Financial Statements Annual Report 2016 215 The following table summarises the fair value of assets acquired, liabilities assumed and the non-controlling interest recognised, on a provisional basis, as a result of the CMC Integration at the completion date. As a result of the CMC Integration, the Group is expected to increase its presence in online music industry in China. Goodwill arising from the CMC Integration was attributable to operating synergies and economies of scale expected from integrating the operations of the Group's Online Music Business with CMC. The goodwill recognised was not expected to be deductible for income tax purpose. On 12 July 2016, the Group completed the integration of its online music business with CMC, a then existing associate of the Group which also operates online music business in the PRC. The Group injected its online music related operating assets and liabilities (the "Group's Online Music Business") into CMC in exchange for CMC's new ordinary shares (the "CMC Integration"). Upon completion of the CMC Integration, the Group's then prevailing 15.8% ordinary shares in CMC ("Previously Held Interest") was derecognised as a deemed disposal and CMC became a non-wholly owned subsidiary in which the Group owns 61.6% of the issued and outstanding shares. At completion Other current assets 349 Intangible assets (mainly include licensed online contents and contractual customer relationship) 39 CMC INTEGRATION (Cont'd) For the year ended 31 December 2016 Notes to the Consolidated Financial Statements 216 Tencent Holdings Limited 10,292 15,778 (7,707) 2,221 Goodwill Non-controlling interests Total identifiable net assets (385) Deferred income tax liabilities (668) Other liabilities (1,778) Other payables and accruals 390 Other non-current assets 3,027 70,199 3,236 34 NOTES PAYABLE 3,886 Inventories (38) (17) Prepayments, deposits and other receivables (4,108) (5,081) Accounts payable 7,060 5,969 (2,469) Other payables and accruals 3,654 Other tax liabilities 49 (106) Deferred revenue 8,428 4,439 Cash generated from operating activities 76,034 2,506 50,478 (2,930) Changes in working capital: For aligning the interests of key employees with the Group, the Group established five employees' investment plans in the form of limited liability partnerships in 2011, 2014, 2015 and 2016 (the "EIS") respectively. According to the term of the EISs, the Board may, at its absolute discretion, select any employee of the Group, excluding any director of the Company, to participate in the EISS by subscribing for the partnership interest at cash consideration. The participating employees are entitled to all the economic benefits generated by the EISS, if any, after a specified vesting period under the respective EISS, ranging from up to four to seven years. Wholly-owned subsidiaries of the Company act as general partner of these EISS administer and in essence, control the EISs. These EISS are therefore consolidated by the Company as structured entities. (c) Employee incentive schemes The outstanding awarded shares as of 31 December 2016 were divided into two to five tranches on an equal basis as at their grant dates. The first tranche can be exercised immediately or after a specified period ranging from four months to four years from the grant date, and the remaining tranches will become exercisable in each subsequent year. The weighted average fair value of awarded shares granted during the year ended 31 December 2016 was HKD165.25 per share (equivalent to approximately RMB141.89 per share) (2015: HKD147.94 per share (equivalent to approximately RMB120.86 per share)). The fair value of the awarded shares was calculated based on the market price of the Company's shares at the respective grant date. The expected dividends during the vesting period have been taken into account when assessing the fair value of these awarded shares. (b) Share award schemes (Cont'd) 32 SHARE-BASED PAYMENTS (Cont'd) For the year ended 31 December 2016 Notes to the Consolidated Financial Statements Accounts receivable 4,443 Fair value gains on other financial assets (658) (462) Impairment of intangible assets 366 148 Exchange (gains)/losses (212) 108 2,225 The related share-based compensation expenses incurred for the years ended 31 December 2016 and 2015 were insignificant to the Group. (b) Major non-cash transactions Tencent Holdings Limited The future aggregate minimum lease payments under non-cancellable operating leases in respect of buildings are as follows: Contracted: As at 31 December 2016 2015 RMB'Million RMB'Million Not later than one year 302 (b) Operating lease commitments 428 years 632 827 1,156 1,198 2,090 2,453 219 Annual Report 2016 Later than one year and not later than five Later than five years Other than the transaction with non-controlling interests described in Note 31(d) and CMC integration described in Note 39, there were no material non-cash transactions during the year ended 31 December 2016. 5,119 2,249 218 42 COMMITMENTS (a) Capital commitments Notes to the Consolidated Financial Statements For the year ended 31 December 2016 Capital commitments as at 31 December 2016 are analysed as follows: As at 31 December 2016 2015 4,821 RMB'Million Contracted: Construction/Purchase of buildings and purchase of land use rights Purchase of other property, plant and equipment Capital investment in investees 1,911 2,239 44 631 2,866 RMB'Million 5,043 Tencent Holdings Limited Notes to the Consolidated Financial Statements 32,461 Non-current portion of long-term USD notes payable RMB'Million 2015 RMB'Million 2016 As at 31 December For the year ended 31 December 2016 Notes to the Consolidated Financial Statements 33,583 Included in non-current liabilities: Tencent Holdings Limited As at 31 December 2016, the carrying amounts of borrowings approximated their fair values. (c) The aggregate principal amount of short-term USD bank borrowings was USD1,750 million (2015: USD1,650 million). Applicable interest rates are at LIBOR plus 0.70% to 0.75% (2015: LIBOR plus 0.75% to 0.85% or an interest rate of 1.125%) per annum. 13,636 57,688 3,226 6,299 48,947 212 6,623 Non-current portion of long-term HKD notes payable 3,509 3,466 RMB'Million RMB'Million 2015 2016 As at 31 December All of these notes payable issued by the Group were unsecured. More than 5 years Between 1 and 2 years Between 2 and 5 years 3,743 Within 1 year The aggregate principal amounts of USD notes payable and HKD notes payable were USD5,200 million (2015: USD5,800 million) and HKD4,200 million (2015: HKD4,200 million), respectively. The interest rate range of the notes payable is from 2.00% to 4.70% (2015: 2.00% to 4.70%) per annum. 40,978 39,670 3,886 3,466 Current portion of long-term USD notes payable Included in current liabilities: 37,092 36,204 The notes payable were repayable as follows: 210 5,376 139 57,549 RMB'Million RMB'Million 2015 2016 As at 31 December Included in current liabilities: Non-current portion of long-term USD bank borrowings, unsecured (Note (a)) Included in non-current liabilities: 12,922 33 BORROWINGS Notes to the Consolidated Financial Statements Annual Report 2016 211 The Group has to estimate the expected yearly percentage of grantees that will stay within the Group at the end of vesting periods of the options and awarded shares (the "Expected Retention Rate") in order to determine the amount of share-based compensation expenses charged to the consolidated income statement. As at 31 December 2016, the Expected Retention Rate from the Group's wholly-owned subsidiaries was assessed to be 88%-96% (2015: 85%-97%). (e) Expected retention rate of grantees Certain subsidiaries of the Group operate their own share-based compensation plans (share option and/or share award schemes). Their exercise prices of the share options, as well as the vesting periods of the share options and awarded shares are determined by the board of directors of these subsidiaries at their sole discretion. Similar to the share option/award schemes adopted by the Company, the share options or restricted shares of the subsidiaries granted are normally vested by several tranches. Participants of some subsidiaries have the right to request the Group to repurchase their vested equity interests of the respective subsidiaries ("Repurchase Transaction"). The Group has discretion to settle the Repurchase Transaction by using either equity instruments of the Company or by cash. For the Repurchase Transaction which the Group has settlement options, the directors of the Company are currently of the view that they would be settled by equity instruments of the Company. As a result, they are accounted for using the equity-settled share-based payment method. (d) Share options and share award schemes adopted by subsidiaries 32 SHARE-BASED PAYMENTS (Cont'd) For the year ended 31 December 2016 For the year ended 31 December 2016 714 USD bank borrowings, unsecured (Note (b)) 10,715 RMB'Million RMB'Million 2015 2016 As at 31 December More than 5 years Between 1 and 2 years Between 2 and 5 years Within 1 year The long-term USD bank borrowings were repayable as follows: 12,139 The aggregate principal amount of long-term USD bank borrowings was USD8,316 million (2015: USD2,100 million). Applicable interest rates are at LIBOR plus 0.85% to 1.35% or an interest rate of 1.875% (2015: LIBOR plus 1.02% to 1.52%) per annum. (a) Note: 24,351 69,827 11,429 12,278 714 139 Current portion of long-term USD bank borrowings, unsecured (Note (a)) (b) Impairment provision for available-for-sale financial assets, associates, investments in redeemable instruments of associates and joint ventures (a) Financial position of the Company Development of softwares and provision of 100% USD90,000,000 Established in the PRC, wholly foreign owned enterprise Tencent Cyber (Tianjin) Company Limited Provision of Internet advertisement services in the PRC information technology services in the PRC 100% (Note (a)) RMB11,000,000 Established in the PRC, Shenzhen Shiji Kaixuan Technology Company Limited Development of softwares and provision of information technology services in the PRC wholly foreign owned enterprise 100% limited liability company USD2,000,000 Established in BVI, limited liability company 100% Established in the PRC, Beijing BIZCOM Technology Company Limited Provision of value-added services in the PRC 100% (Note (a)) limited liability company RMB10,290,000 USD100 Established in the PRC, Development and sale of softwares and provision of information technology services in the PRC 100% USD1,000,000 Established in the PRC, wholly foreign owned enterprise Tencent Technology (Beijing) Company Limited Asset management in Hong Kong Nanjing Wang Dian Technology Company Limited RMB216,500,000 Established in the PRC, Provision of value-added services and Internet advertisement services in the PRC 472 At 31 December 2015 (71) Currency translation differences (2,640) Dividends paid relating to 2014 (448) (1,094) (377) 4,206 At 1 January 2015 126 4,031 At 31 December 2016 Losses for the year Tencent Technology 223 Notes to the Consolidated Financial Statements 100% (Note (a)) limited liability company RMB65,000,000 Established in the PRC, Tencent Computer by the Group (%) Principal activities and place of operation Annual Report 2016 Proportion of equity interest held and nature of legal entity Name Place of establishment The following is a list of principal subsidiaries of the Company as at 31 December 2016: 46 SUBSIDIARIES AND CONTROLLED STRUCTURED ENTITIES For the year ended 31 December 2016 Particulars of issued/paid-in capital limited liability company 100% (Note (a)) Provision of value-added services in the PRC 100% HKD1,000 Established in Hong Kong, integration services in the PRC (Note (a)) limited liability company Investment holding and provision of Provision of information system RMB120,000,000 Established in the PRC, Tencent Cloud Computing (Beijing) Company Limited Morespark Limited Development of softwares and provision of Internet information services in the PRC 100% USD30,000,000 100% Established in the PRC, wholly foreign owned enterprise limited liability company Beijing Tencent Culture Media Established in the Cayman Islands, limited liability company China Reading Limited in the United States Development and operation of online games 100% USD1,239 online advertisement services in Hong Kong Established in the United States, limited liability company Design and production of advertisement in the PRC limited liability company Company Limited 100% RMB5,000,000 Established in the PRC, Riot Games, Inc. Tencent Technology (Wuhan) Company Limited Development of softwares and provision of information technology services in the PRC 100% 224 Tencent Holdings Limited wholly foreign owned enterprise Development of softwares in the PRC 100% USD30,000,000 Notes to the Consolidated Financial Statements Established in the PRC, Provision of value-added services in the PRC 100% (Note (a)) limited liability company RMB10,000,000 Established in the PRC, Beijing Starsinhand Technology Company Limited Tencent Cyber (Shenzhen) Company Limited For the year ended 31 December 2016 46 SUBSIDIARIES AND CONTROLLED STRUCTURED ENTITIES (Cont'd) Particulars of USD170,000,000 Established in the PRC, wholly foreign owned enterprise Tencent Technology (Chengdu) Company Limited Development of softwares and provision of Internet information services in the PRC wholly foreign owned enterprise 100% USD5,000,000 Established in the PRC, Tencent Technology (Shanghai) Company Limited by the Group (%) Principal activities and place of operation capital Proportion of equity interest held issued/paid-in Place of establishment and nature of legal entity Name 574 USD66,683 Currency translation differences Dividends paid relating to 2015 464 1,278 1,346 45,647 54,097 38 426 42 RMB'Million 2015 2016 As at 31 December Contribution to Share Scheme Trust Prepayments, deposits and other receivables RMB'Million Investments in associates 67 56,016 Total assets 10,286 11,752 99 1,629 Cash and cash equivalents 48 131 Prepayments, deposits and other receivables 10,056 10,108 Amounts due from subsidiaries Current assets 47,437 15 67,768 Investments in subsidiaries Non-current assets 2,090 3,404 Not later than one year RMB'Million RMB'Million 2015 Later than one year and not later than five years 2016 Contracted: The future aggregate minimum payments under non-cancellable bandwidth and server custody leases and online game and online content licensing agreements are as follows: (c) Other commitments 42 COMMITMENTS (Cont'd) For the year ended 31 December 2016 Notes to the Consolidated Financial Statements As at 31 December Intangible assets 4,081 Later than five years ASSETS 45 FINANCIAL POSITION AND RESERVE MOVEMENT OF THE COMPANY For the year ended 31 December 2016 Notes to the Consolidated Financial Statements 220 Tencent Holdings Limited 3,363 There were no material subsequent events during the period from 31 December 2016 to the approval date of these financial statements by the Board of Directors on 22 March 2017. Except as disclosed in Note 13(a) (Senior management's emoluments), Note 13(b) (Five highest paid individuals), Note 14 (Benefits and interests of directors), Note 20 (Transactions with associates), Note 24 (Loan to investees and investees' shareholders) and Note 32 (Share-based payments) to the consolidated financial statements, the Group had no other material transactions with related parties during the year ended 31 December 2016, and no other material balances with related parties as at 31 December 2016. 43 RELATED PARTIES TRANSACTIONS 5,993 9,025 540 1,540 44 SUBSEQUENT EVENTS 57,723 221 Annual Report 2016 Total equity and liabilities 47,349 49,423 Total liabilities 10,257 11,294 67,768 3,886 Notes payable 347 363 Other payables and accruals 6,024 7,465 3,466 Amounts due to subsidiaries 57,723 222 7,258 Profit for the year (448) RMB'Million Other reserves 472 Tencent Holdings Limited At 1 January 2016 earnings Retained (b) Reserve movement of the Company 45 FINANCIAL POSITION AND RESERVE MOVEMENT OF THE COMPANY (Cont'd) For the year ended 31 December 2016 Notes to the Consolidated Financial Statements RMB'Million Current liabilities 37,092 38,129 As at 31 December LIABILITIES Total equity Retained earnings (Note (b)) Other reserves (Note (b)) Shares held for share award schemes 2016 Share premium Equity attributable to equity holders of the Company EQUITY (a) Financial position of the Company (Cont'd) 45 FINANCIAL POSITION AND RESERVE MOVEMENT OF THE COMPANY (Cont'd) For the year ended 31 December 2016 Notes to the Consolidated Financial Statements Share capital 2015 RMB'Million RMB'Million 1,925 Other financial liabilities 37,092 36,204 Notes payable Non-current liabilities 10,374 18,345 472 4,031 (448) 126 (1,817) 12,167 17,324 (3,136) (3,699) 64.35% Tencent Asset Management Limited Tencent Music Entertainment Group earnings before interest, tax, depreciation and amortisation any person(s) eligible to participate in the respective Share Award Schemes earnings per share Generally Accepted Accounting Principles in relation to any Awarded Share, the date on which the Awarded Share is, was or is to be granted the Company and its subsidiaries Tencent Holdings Limited daily active user accounts 228 Term "Hainan Network" "HKD" “Hong Kong” "IA" "IAS" Definition Tencent Cyber (Tianjin) Company Limited the Internal Control Integrated Framework issued by the Committee of Sponsoring Organisations the corporate governance committee of the Company "DAU" "EBITDA" "Eligible Person(s)" "EPS" "GAAP" "Grant Date" "Group" Definition Beijing BIZCOM Technology Company Limited Beijing Starsinhand Technology Company Limited the board of directors of the Company the corporate governance code as set out in Appendix 14 to the Listing Rules Tencent Music Entertainment Group (formerly known as China Music Corporation), a limited liability company incorporated under the laws of the Cayman Islands Tencent Holdings Limited, a limited liability company organised and existing under the laws of the Cayman Islands and the shares of which are listed on the Stock Exchange the website of the Company at www.tencent.com "IC" "Cyber Tianjin❞ "IFRS" "Investment Committee" intellectual property initial public offering the Rules Governing the Listing of Securities on the Stock Exchange mergers and acquisitions monthly active user accounts MIH TC Holdings Limited the investment committee of the Company the Model Code for Securities Transactions by Directors of Listed Issuers set out NASDAQ Global Select Market the nomination committee of the Company online-to-offline, or offline-to-online 229 Annual Report 2016 Provision of online literature services in the PRC in Appendix 10 to the Listing Rules Instant messaging International Financial Reporting Standards internal control department of the Company "IP" "IPO" "M&A" "MAU" "MIH TC" "Model Code" "NASDAQ❞ "Nomination Committee" "020" Definition Hainan Tencent Network Information Technology Company Limited the lawful currency of Hong Kong the Hong Kong Special Administrative Region, the PRC internal audit department of the Company International Accounting Standards "IM" "COSO Framework" "Listing Rules' "Company Website' Significant restrictions As at 31 December 2016, cash and cash equivalents, term deposits and restricted cash of the Group, amounting to RMB86,250 million were held in Mainland China and they are subject to local exchange control and other financial and treasury regulations. The local exchange control, and other financial and treasury regulations provide for restrictions, on payment of dividends, share repurchase and offshore investments, other than through normal activities. (e) Consolidation of structured entities As mentioned in Note (a) above and Note 32(c), the Company has consolidated the operating entities within the Group without any legal interests and the EISS out of which wholly-owned subsidiaries of the Company act as general partner. In addition, due to the implementation of the share award schemes of the Group mentioned in Note 30(b), the Company has also set up a structured entity ("Share Scheme Trust”), and its particulars are as follows: Structured entity (d) Share Scheme Trust Administering and holding the Company's shares acquired for share award schemes which are set up for the benefits of eligible persons of the Schemes As the Company has the power to govern the financial and operating policies of the Share Scheme Trust and can derive benefits from the contributions of the eligible persons who are awarded with the shares by the schemes, the directors of the Company consider that it is appropriate to consolidate the Share Scheme Trust. During the year ended 31 December 2016, the Company contributed approximately RMB1,936 million (2015: RMB652 million) to the Share Scheme Trust for financing its acquisition of the Company's shares. Tencent Holdings Limited 226 Definition Principal activities Note: (Cont'd) For the year ended 31 December 2016 Notes to the Consolidated Financial Statements "Corporate Governance Committee” Established in the Cayman Islands, limited liability company USD211,137 62.45% Provision of online music entertainment services in the PRC Note: (a) (b) (c) As described in Note 1, the Company does not have legal ownership in equity of these structured entities or their subsidiaries. Nevertheless, under certain contractual agreements entered into with the registered owners of these structured entities, the Company and its other legally owned subsidiaries control these companies by way of controlling the voting rights, governing their financial and operating policies, appointing or removing the majority of the members of their controlling authorities, and casting the majority of votes at meetings of such authorities. In addition, such contractual agreements also transfer the risks and rewards of these companies to the Company and/or its other legally owned subsidiaries. As a result, they are presented as controlled structured entities of the Company. The directors of the Company considered that the non-wholly owned subsidiaries with non-controlling interests are not significant to the Group, therefore, no summarised financial information of these non-wholly owned subsidiaries is presented separately. All subsidiaries' undertakings are included in the consolidation. The proportion of the voting rights in the subsidiary undertakings held directly by the parent company do not differ from its proportion of ordinary shares held. The parent company further does not have any shareholdings in the preference shares of subsidiary's undertakings included in the Group. 225 Annual Report 2016 In this annual report, unless the context otherwise requires, the following expressions have the following meanings: Term 46 SUBSIDIARIES AND CONTROLLED STRUCTURED ENTITIES (Cont'd) "2013 Share Award Scheme" augmented reality the amended and restated articles of association of the Company adopted by special resolution passed on 14 May 2014 the audit committee of the Company PricewaterhouseCoopers, the auditor of the Company 227 Annual Report 2016 Definition Term "Beijing BIZCOM" "Beijing Starsinhand" "Board" "CG Code" "CMC" "2007 Share Award Scheme" "Company" 13 November 2013, being the date on which the Company adopted the 2013 Share Award Scheme 13 December 2007, being the date on which the Company adopted the 2007 Share Award Scheme the share(s) of the Company awarded under the Share Award Schemes "Account II" "Account I" the bank account opened in the name of the trust pursuant to Trust Deed II, I managed by the Trustee, and operated solely for the purposes of operating the 2013 Share Award Scheme, which is held on trust for the benefit of Selected Participants and can be funded by the Company or any of its subsidiaries "Adoption Date I" "Adoption Date II" "AR" "2017 AGM" "Audit Committee❞ "Auditor" "Articles of Association" Definition the share award scheme adopted by the Company on Adoption Date I, as amended the share award scheme adopted by the Company on Adoption Date II, as amended the annual general meeting of the Company to be held on 17 May 2017 or any adjournment thereof the bank account opened in the name of the Company to be operated solely for the purposes of operating the 2007 Share Award Scheme and the funds thereof to be held on trust by the Company for the Selected Participants "Awarded Share(s)" "Stock Exchange" "Supercell" "TCS CFC" "SKT Co-operation Committee" "TCS Co-operation Committee' "Tencent Beijing" "Tencent Charity Funds" "Tencent Chengdu" "Tencent Computer" "Tencent Information Chongqing" "Tencent Information Shanghai" the co-operation framework contract dated 28 February 2004 entered into between Cyber Tianjin and Shiji Kaixuan "Tencent Shanghai" "Tencent Technology" "Tencent Wuhan" Definition with effect from 15 May 2014, each existing issued and unissued share of HKD0.0001 each in the share capital of the Company was subdivided into five subdivided shares of HKD0.00002 each, after passing of an ordinary resolution at the annual general meeting of the Company held on 14 May 2014 and granting by the Stock Exchange of the listing of, and permission to deal in, the subdivided shares the co-operation committee established under the SKT CFC "SKT CFC" Shenzhen Shiji Kaixuan Technology Company Limited "Tencent Information Shenzhen" "Shiji Kaixuan" Paradox Interactive AB (publ), a company incorporated in Sweden and listed on NASDAQ First North Term "Share Award Schemes" The Stock Exchange of Hong Kong Limited "SFO" Definition personal computer peak concurrent user accounts the Post-IPO Share Option Scheme adopted by the Company on 24 March 2004 the Post-IPO Share Option Scheme adopted by the Company on 16 May 2007 the Post-IPO Share Option Scheme adopted by the Company on 13 May 2009 the People's Republic of China the Pre-IPO Share Option Scheme adopted by the Company on 27 July 2001 player versus player "Share Subdivision" in respect to a Selected Participant, the date of final approval by the Board of the total number of shares of the Company to be awarded to the relevant Selected Participant on a single occasion pursuant to the 2007 Share Award Scheme the lawful currency of the PRC role playing game any Eligible Person(s) selected by the Board to participate in the Share Award Schemes the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong) as amended, supplemented or otherwise modified from time to time the 2007 Share Award Scheme and the 2013 Share Award Scheme Tencent Holdings Limited 230 Definition the remuneration committee of the Company Supercell Oy, a private company incorporated in Finland Website: www.tencent.com the co-operation committee established under the TCS CFC Facsimile 852-25201148 Telephone: 852-21795122 No.1 Queen's Road East Wanchai, Hong Kong 29/F., Three Pacific Place Tencent Holdings Limited Hong Kong Office Facsimile: 86-755-86013399 Telephone: 86-755-86013388 Zipcode : 518057 an independent trustee appointed by the Company for managing the Share Award Tencent Building, Kejizhongyi Avenue, Hi-tech Park Nanshan District, Shenzhen, the PRC Tencent 腾讯 232 Tencent Holdings Limited Tencent Technology, Cyber Tianjin, Tencent Beijing, Tencent Information Shenzhen, Tencent Chengdu, Tencent Information Chongqing, Tencent Information Shanghai, Tencent Shanghai, Tencent Wuhan and Hainan Network Nanjing Wang Dian Technology Company Limited value-added services "Selected Participant(s)" the lawful currency of the United States Tencent Group Head Office the co-operation framework contract dated 28 February 2004 entered into between Tencent Technology and Tencent Computer a trust deed entered into between the Company and the Trustee (as restated, supplemented and amended from time to time) in respect of the appointment of the Trustee for the administration of the 2013 Share Award Scheme Definition Tencent Technology (Beijing) Company Limited charity funds established by the Group Tencent Technology (Chengdu) Company Limited Shenzhen Tencent Computer Systems Company Limited Tencent Information Technology (Chongqing) Company Limited Tencent Information Technology (Shanghai) Company Limited Tencent Information Technology (Shenzhen) Company Limited Tencent Technology (Shanghai) Company Limited Tencent Technology (Shenzhen) Company Limited Tencent Technology (Wuhan) Company Limited 231 Annual Report 2016 a trust deed entered into between the Company and the Trustee (as restated, supplemented and amended from time to time) in respect of the appointment of the Trustee for the administration of the 2007 Share Award Scheme Definition "Trust Deed I" "Trust Deed II" "Trustee❞ "United States" "USD" "VAS" "Wang Dian" "WFOES" Term "RPG" Schemes "Remuneration Committee" "RMB" the United States of America Definition "Paradox" "PC" Term "Post-IPO Option Scheme I" "Post-IPO Option Scheme II" "Post-IPO Option Scheme III" "PRC" or "China" "Pre-IPO Option Scheme" "PvP" "Reference Date" "PCU" (249) equipment and investment Depreciation of property, plant and (1,886) (3,594) (1,155) (637) Other (gains)/losses, net (2,327) (2,619) (649) properties (653) Interest income (1,022) 1,007 3,513 826 1,098 1,720 Equity-settled share-based compensation 43,049 62,550 12,040 15,865 933 16,775 3,476 8,930 1,224 2,264 40,627 3,159 3,716 EBITDA 56,117 2015 14,460 Adjusted EBITDA margin is calculated by dividing Adjusted EBITDA by revenues. (b) EBITDA consists of operating profit less interest income and other gains/losses, net, and plus depreciation of property, plant and equipment as well as investment properties, and amortisation of intangible assets. Adjusted EBITDA consists of EBITDA plus equity- settled share-based compensation expenses. (a) Note: 7,709 12,100 1,883 3,651 2,839 Capital expenditures (d) 19,114 18,140 19,114 8,368 (c) Net cash represents period end balance and is calculated as cash and cash equivalents, term deposits, minus borrowings and notes payable. (d) Capital expenditures consist of additions (excluding business combinations) to property, plant and equipment, construction in progress, land use rights and intangible assets (excluding online games and other content licences). 13,930 Operating profit Adjustments: 31 December 2016 Year ended (RMB in millions, unless specified) 2015 2016 10,888 2016 Three months ended Unaudited The following table reconciles our operating profit to our EBITDA and Adjusted EBITDA for the periods presented: Management Discussion and Analysis Annual Report 2016 21 21 31 December 30 September 31 December Amortisation of intangible assets The directors have pleasure in presenting their report together with the audited financial statements for the year ended 31 December 2016. - basic (a) Including put options granted to employees of investee companies on their shares and shares to be issued under investee companies' share-based incentive plans which can be acquired by the Group, and other incentives Note: Management Discussion and Analysis Annual Report 2016 25 25 32% 41% 3.437 3.485 28% Net margin 39% Operating margin 3.055 (b) - diluted (c) Including net (gains)/losses on deemed disposals, disposals of investee companies and businesses, and fair value changes on options we own in investee companies 71,902 (RMB in millions) 2016 2016 Unaudited 30 September 31 December Audited Net cash Notes payable Term deposits Cash and cash equivalents Our net cash positions as at 31 December 2016 and 30 September 2016 are as follows: LIQUIDITY AND FINANCIAL RESOURCES Impairment provision for associates, available-for-sale financial assets, and intangible assets arising from acquisitions Amortisation of intangible assets resulting from acquisitions, net of related deferred tax (d) 3.097 - basic EPS (RMB per share) 85 2,756 40,627 Operating profit (RMB in millions, unless specified) Non-GAAP provision Impairment Amortisation of intangible assets As reported compensation compensation companies Adjustments Net (gains)/ losses from investee Equity-settled Cash-settled share-based share-based Year ended 31 December 2015 30% 791 (4,275) 198 2,373 41,764 32,410 3,169 1,149 (4,016) 81 3,221 28,806 52,417 Profit attributable to equity holders 3,185 1,186 (4,016) 85 3,304 29,108 Profit for the year 32,852 55,735 47,919 127,637 1 January As at Number of share options As at 31 December 2016, there were a total of 11,250,000 outstanding share options granted to a director of the Company, details of which are as follows: The Company has adopted four share option schemes, namely, the Pre-IPO Option Scheme, the Post-IPO Option Scheme I, the Post-IPO Option Scheme II and the Post-IPO Option Scheme III. The Pre-IPO Option Scheme and the Post-IPO Option Scheme I expired on 31 December 2011 and 23 March 2014 respectively. SHARE OPTION SCHEMES Directors' Report 88 28 Tencent Holdings Limited Neither the Company nor any of its subsidiaries has purchased, sold or redeemed any of the Company's shares during the year ended 31 December 2016. PURCHASE, SALE OR REDEMPTION OF THE COMPANY'S LISTED SECURITIES A summary of the condensed consolidated results and financial positions of the Group is set out on page 3 of this annual report. FINANCIAL SUMMARY The donation made by the Group to Tencent Charity Funds in the year was RMB570 million. Granted during Name of director Date of grant 2016 - diluted Operating margin Net margin 4.383 4.329 37% 27% 4.844 DONATION 4.784 Lau Chi Ping Martin Exercise period price HKD Exercise As at Exercised during 31 December the year 2016 the year 24 March 2010 EPS (RMB per share) Particulars of the Group's borrowings and notes payable are set out in Note 33 and Note 34 to the consolidated financial statements respectively. Particulars of the Company's principal subsidiaries as at 31 December 2016 are set out in Note 46 to the consolidated financial statements. PRINCIPAL ACTIVITIES Directors' Report 26 26 Tencent Holdings Limited For the fourth quarter of 2016, the Group had free cash flow of RMB17,156 million. This was a result of net cash flow generated from operating activities of RMB20,000 million, offset by payments for capital expenditure of RMB2,844 million. As at 31 December 2016, RMB46.1 billion of our financial resources (cash and cash equivalents and term deposits) were denominated in non-RMB currencies. As at 31 December 2016, the Group had net cash of RMB18,140 million. The sequential increase in net cash was mainly due to free cash flow generation, recoupment of approximately USD1.2 billion as a result of Supercell financing arrangements, partly offset by payments for M&A initiatives and licensed content. Fair value of our stakes in listed investee companies (both associates and available-for-sale financial assets) totalled RMB89 billion as at 31 December 2016. 8,368 18,140 (42,178) (39,670) (49,790) (69,827) 100,336 The principal activity of the Company is investment holding. The activities of the principal subsidiaries are set out in Note 46 to the consolidated financial statements. The analysis of the Group's revenues and contribution to results by business segments and the Group's revenues by geographical area of operations are set out in Note 5 to the consolidated financial statements. RESULTS AND APPROPRIATIONS The results of the Group for the year are set out in the consolidated statement of comprehensive income on page 110 of this annual report. 38% SUBSIDIARIES Details of the movements in the share capital of the Company during the year are set out in Note 30 to the consolidated financial statements. SHARE CAPITAL Details of the business review of the Group and the proposed dividend for the year ended 31 December 2016 are set out under the "Chairman's Statement". BUSINESS REVIEW AND DIVIDEND Directors' Report BORROWINGS Annual Report 2016 Details of the movements in property, plant and equipment of the Group during the year are set out in Note 16 to the consolidated financial statements. PROPERTY, PLANT AND EQUIPMENT Details of the movements in the reserves of the Group and the Company during the year are set out in the consolidated statement of changes in equity on pages 114 to 115, Note 30, Note 31 and Note 45 to the consolidated financial statements respectively. As at 31 December 2016, the Company had distributable reserves amounting to RMB18,345 million (2015: RMB10,374 million). The Company may pay dividends out of share premium, retained earnings and any other reserves provided that immediately following the payment of such dividends the Company will be in a position to pay off its debts as they fall due in the ordinary course of business. RESERVES The directors have recommended the payment of a final dividend of HKD0.61 per share for the year ended 31 December 2016. The dividend is expected to be payable on 2 June 2017 to the shareholders whose names appear on the register of members of the Company on 24 May 2017. The total dividend for the year under review is HKDO.61 per share. 27 4,313 Borrowings Adjusted EBITDA Year ended 31 December 30 September 31 December Three months ended Unaudited Management Discussion and Analysis OTHER FINANCIAL INFORMATION 20 31 December 20 Profit attributable to equity holders of the Company. Profit attributable to equity holders of the Company decreased by 1% to RMB10,529 million for the fourth quarter of 2016 on a quarter-on-quarter basis. Non-GAAP profit attributable to equity holders of the Company increased by 5% to RMB12,332 million. General and administrative expenses. General and administrative expenses increased by 17% to RMB6,909 million for the fourth quarter of 2016 on a quarter-on-quarter basis. The increase was primarily driven by greater research and development expenses, as well as staff costs, including greater share-based compensation expenses. Selling and marketing expenses. Selling and marketing expenses increased by 36% to RMB4,462 million for the fourth quarter of 2016 on a quarter-on-quarter basis. The increase mainly reflected seasonal marketing and promotion activities for our online games and greater marketing spending on our payment related services. Cost of revenues for our online advertising business decreased by 7% to RMB4,424 million for the fourth quarter of 2016. The decrease was mainly due to lower amortisation expenses from video content rights. Cost of revenues for our VAS business increased by 10% to RMB10,734 million for the fourth quarter of 2016. The increase mainly reflected greater sharing and content costs, as well as channel costs. Cost of revenues. Cost of revenues increased by 9% to RMB20,238 million for the fourth quarter of 2016 on a quarter-on- quarter basis. The increase was primarily driven by greater costs of payment related services, staff costs including share-based compensation expenses, as well as bandwidth and server custody fees. As a percentage of revenues, cost of revenues was 46% for the fourth quarter of 2016, broadly stable compared to the third quarter of 2016. Revenues from our online advertising business increased by 11% to RMB8,288 million for the fourth quarter of 2016. The increase was mainly driven by revenue growth from performance-based advertising which increased by 18% to RMB5,168 million, primarily due to higher advertising revenues from Weixin Moments, our app store and our mobile news apps. Brand display advertising revenues increased slightly by 1% to RMB3, 120 million, impacted by a high base effect from Olympics-related advertising in the prior quarter. Tencent Holdings Limited 2016 2016 2015 42% Adjusted EBITDA margin (b) 45,805 66,863 12,831 16,963 18,495 Adjusted EBITDA (a) 43,049 62,550 12,040 15,865 16,775 EBITDA (a) (RMB in millions, unless specified) 2015 2016 Revenues. Revenues increased by 9% to RMB43,864 million for the fourth quarter of 2016 on a quarter-on-quarter basis. Revenues from our VAS business increased by 4% to RMB29, 191 million for the fourth quarter of 2016. Online games revenues grew by 2% to RMB18,469 million. The increase primarily reflected higher revenues from our smart phone games, partly offset by weaker seasonality for PC online games in the fourth quarter, which we did not experience in the fourth quarter of 2015 due to new virtual item releases within one of our major PC game titles during the time. Social networks revenues increased by 9% to RMB10,722 million. The increase was mainly driven by higher contributions from digital content services, as well as from virtual item sales. 42% Management Discussion and Analysis 397 29 No options were cancelled or lapsed during the year. (b) Non-GAAP provision assets companies 29 As reported compensation compensation of intangible investee share-based Amortisation 6. The closing price immediately before the date on which the options were granted on 21 March 2016 was HKD157.9. 5. Impairment Annual Report 2016 5,000,000 45,420 4,809 58,154 Profit for the year 41,447 5,085 142 (7,786) 1,651 5,452 45,991 Profit attributable to equity holders 41,095 4,982 141 (7,770) 1,547 5,425 (7,624) 42% 44% 45% 16 (995) 304 1,525 8,953 EPS (RMB per share) - basic 939 0.769 0.759 Operating margin 36% Net margin 24% 0.961 0.949 - diluted 7,164 Profit attributable to equity holders 9,017 (c) (RMB in millions, unless specified) Operating profit 10,888 791 18 (929) 46 719 11,533 Profit for the period 7,198 959 17 (995) 313 1,525 38% 30% Tencent Holdings Limited 24 (a) (b) (c) (d) (RMB in millions, unless specified) Operating profit 56,117 4,313 142 18,140 Net cash (c) 1,510 2,167 409 585 611 Interest expense Non-GAAP The closing price immediately before the date on which the options were exercised on 30 March 2016 was HKD157.3. provision companies 24 Management Discussion and Analysis Year ended 31 December 2016 Adjustments Net (gains)/ Equity-settled Cash-settled losses from Amortisation share-based share-based investee of intangible Impairment As reported compensation compensation assets For options granted with exercisable date determined based on the grant date of options, the first 25% of the total options can be exercised 1 year after the grant date, and each 25% of the total options will become exercisable in each subsequent year. For options granted with exercisable date determined based on the grant date of options, the first 20% of the total options can be exercised 1 year after the grant date, and each 20% of the total options will become exercisable in each subsequent year. For options granted with exercisable date determined based on the grant date of options, the first 25% of the total options can be exercised 5 years after the grant date, and each 25% of the total options will become exercisable in each subsequent year. 12,332 810 493 (1,440) 34 1,906 10,529 EPS (RMB per share) Profit attributable to equity holders 828 541 (1,440) 34 1,946 10,523 Profit for the period 12,432 - basic 1.121 - diluted Equity-settled Net (gains)/ Adjustments Unaudited three months ended 30 September 2016 Management Discussion and Analysis Annual Report 2016 23 23 28% 34% 1.298 1.313 24% Net margin 32% Operating margin 1.108 14,946 602 162 (1,502) Cash-settled Equity-settled Adjustments Net (gains)/ Unaudited three months ended 31 December 2016 The following tables set forth the reconciliations of the Group's non-GAAP financial measures for the fourth quarters of 2016 and 2015, the third quarter of 2016, and the years ended 31 December 2016 and 2015 to the nearest measures prepared in accordance with IFRS: Management Discussion and Analysis 22 22 Tencent Holdings Limited The Company's management believes that the non-GAAP financial measures provide investors with useful supplementary information to assess the performance of the Group's core operations by excluding certain non-cash items and certain impact of M&A transactions. In addition, non-GAAP adjustments include relevant non-GAAP adjustments for the Group's material associates based on available published financials of the relevant material associates, or estimates made by the Company's management based on available information, certain expectations, assumptions and premises. To supplement the consolidated results of the Group prepared in accordance with IFRS, certain non-GAAP financial measures, including non-GAAP operating profit, non-GAAP operating margin, non-GAAP profit for the period, non-GAAP net margin, non-GAAP profit attributable to equity holders of the Company, non-GAAP basic EPS and non-GAAP diluted EPS, have been presented in this annual report. These unaudited non-GAAP financial measures should be considered in addition to, not as a substitute for, measures of the Group's financial performance prepared in accordance with IFRS. In addition, these non-GAAP financial measures may be defined differently from similar terms used by other companies. NON-GAAP FINANCIAL MEASURES 45,805 66,863 12,831 16,963 18,495 losses from Cash-settled Amortisation share-based 34 1,720 13,930 Operating profit (RMB in millions, unless specified) (c) (b) (a) Non-GAAP provision assets companies compensation compensation As reported Impairment of intangible investee share-based 2,756 losses from share-based share-based (Note 4) 24 March 2015 to 31.70 2,500,000 losses from Cash-settled Equity-settled share-based 23 March 2020 (Note 1) Adjustments Net (gains)/ 30% 37% 1.236 1.251 27% Net margin 36% Unaudited three months ended 31 December 2015 25 March 2014 5,000,000 5,000,000 2,500,000 11,250,000 10,000,000 3,750,000 Total: 20 March 2023 (Note 3) 21 March 2017 to 158.10 3,750,000 3,750,000 (Note 5) 21 March 2016 24 March 2021 (Note 2) 4. 3. 2. 1. Note: 25 March 2015 to 114.52 Operating margin 1.121 - diluted 1.134 (2,404) 34 1,098 14,460 Operating profit (RMB in millions, unless specified) (c) (b) Non-GAAP provision assets companies compensation compensation As reported Impairment of intangible investee 139 Amortisation 1,710 Profit for the period - basic EPS (RMB per share) 11,737 1,742 389 (2,297) 33 1,224 10,646 Profit attributable to equity holders 11,929 1,743 426 (2,309) 34 1,259 10,776 15,037 2,500,000 Maximum entitlement 13 Aug 2012 to Post-IPO Option Scheme II 1% of the issued share capital of the Company from time to time within any 12-month period up to the date of the latest grant Post-IPO Option Scheme III 1% of the issued share capital of the Company from time to time within any 12-month period up to the date of the latest grant Pre-IPO Details Option Scheme 4. Maximum entitlement of each participant The number of ordinary shares in respect of which options may be granted shall not exceed 10% of the number of ordinary shares issued and issuable under the scheme. 5. Option period All the options The option period Pre-IPO 36 Tencent Holdings Limited The option period is determined by the Board provided that it is not later than the last day of the 10-year period after the date of grant of option. There is no minimum period for which an option must be held before it can be exercised. The option period is determined by the Board provided that it is not later than the last day of the 7-year period after the date of grant of option. There is no minimum period for which an option must be held before it can be exercised. is determined by the Board provided that the period during which the option may be exercised shall not be less than one year from the date of grant of the options. 1% of the issued share capital of the Company from time to time within any 12-month period up to the date of the latest grant periods. specific vesting determine the The Board may at their discretion securities market. has been listed in a sizeable are exercisable in installments from the commencement of the relevant vesting period until 31 December 2011, but on the condition that the Company and exercise Details Option Scheme | Directors' Report 12 Aug 2017 (Note 2) For options granted with exercisable date determined based on the grant date of options, the first 33.33% (one-third) of the total options can be exercised 4 years after the grant date, and each 33.33% of the total options will become exercisable in each subsequent year. the Group Any employee (whether full time or part time), executive, officer or director (including executive, non-executive and independent non- executive directors) of any member of the Group or any invested entity, which is any entity in which the Group holds an equity interest, and any consultant, adviser or agent of any member of the Board, who have contributed or will contribute to the growth and development of the Group or any invested entity Any senior executive, senior officer or director (including executive, non-executive and independent non- executive directors) of any member of the Group or any invested entity, and any consultant, adviser or agent of any member of the Board, who have contributed or will contribute to the growth and development of the Group or any invested entity Tencent Holdings Limited 34 34 Directors' Report Pre-IPO Details Option Scheme 3. Maximum number of shares As at 7 June 2004, options to subscribe for an aggregate Annual Report 2016 35 The maximum number of shares in respect of which options may be granted under the Post-IPO Option Scheme III shall be 180,093,330 shares (after the effect of the Share Subdivision), 2% of the relevant class of securities of the Company in issue as at 13 May 2009. The maximum number of shares which may be issued upon exercise of all outstanding options granted and yet to be exercised under the Post-IPO Option Scheme III and any other share option schemes, including the Pre-IPO Option Scheme, the Post- IPO Option Scheme | and the Post-IPO Option Scheme II, must not in aggregate exceed 30% of the issued share capital of the Company from time to time (Note). Option Scheme III Post-IPO The maximum number of shares in respect of which options may be granted under the Post-IPO Option Scheme II shall be 444,518,270 shares (after the effect of the Share Subdivision), 5% of the relevant class of securities of the Company in issue as at 16 May 2007. The maximum number of shares which may be issued upon exercise of all outstanding options granted and yet to be exercised under the Post-IPO Option Scheme II and any other share option schemes, including the Pre-IPO Option Scheme, the Post- IPO Option Scheme | and the Post-IPO Option Scheme III, must not in aggregate exceed 30% of the issued share capital of the Company from time to time (Note). Post-IPO Option Scheme II outstanding. No further option could be granted under the Post- IPO Option Scheme I. As at 16 May 2007, options to subscribe for an aggregate of 60,413,683 shares were Option Scheme | Post-IPO outstanding. No further option could be granted under the Pre-IPO Option Scheme. of 72,386,370 shares were Post-IPO Option Scheme 6. Acceptance Post-IPO Option Scheme III It shall be valid and effective for a period of ten years commencing on 13 May 2009. 8. Remaining life of the scheme It expired on 31 December 2011. It expired on 23 March 2014. Note: The total numbers of shares available for issue under the Post-IPO Option Scheme II and the Post-IPO Option Scheme III are 229,078,185 and 175,093,330 respectively, which represent approximately 2.42% and 1.85% respectively of the issued shares of the Company as at the date of this annual report. MOVEMENTS IN THE SHARE OPTIONS Details of the movements in the share options during the year are set out in Note 32 to the consolidated financial statements. VALUATION OF SHARE OPTIONS Details of the valuation of share options during the year are set out in Note 32 to the consolidated financial statements. Tencent Holdings Limited 38 3. Maximum number of shares It shall be valid and effective for a period of 15 years from the Adoption Date I. Duration and Termination 2. To recognise the contributions and to attract, motivate and retain eligible participants (including any director) of the Group ten years commencing on 16 May 2007. 2013 Share Award Scheme Purpose 1. The Company adopted the following two Share Award Schemes with major terms and details set out below: SHARE AWARD SCHEMES Directors' Report 38 2007 Share Award Scheme It shall be valid and effective for a period of Option Scheme II Post-IPO the nominal value of grant; and (iii) preceding the date days immediately five business Options granted must be accepted within 28 days of the date of grant, upon payment of HKD1 per grant. The exercise price must be at least the higher of: (i) the closing price of the securities as stated in the Stock Exchange's daily quotations sheet on the date of grant, which must be a business day; (ii) the average closing price of the securities as stated in the Stock Exchange's daily quotations sheets for the of the share. Option Scheme | Directors' Report Price shall be determined by the Board. Exercise price 7. Options granted must be accepted within 15 days of the date of grant, upon payment of RMB1 per grant. of offer Post-IPO 24 Mar 2011 Post-IPO Options granted must be accepted within 28 days of the date of grant, upon payment of HKD1 per grant. Option Scheme | Post-IPO Option Scheme Pre-IPO Details Directors' Report Option Scheme II Annual Report 2016 The exercise price must be at least the higher of: (i) the closing price of the securities as stated in the Stock Exchange's daily quotations sheet on the date of grant, which must be a business day; (ii) the average closing price of the securities as stated in the Stock Exchange's daily quotations sheets for the five business days immediately preceding the date of grant; and (iii) the nominal value of the share. Options granted must be accepted within 28 days of the date of grant, upon payment of HKD1 per grant. Option Scheme III Post-IPO quotations sheet on the date of grant, which must be a business day; (ii) the average closing price of the securities as stated in the Stock Exchange's daily quotations sheets for the five business days immediately preceding the date of grant; and (iii) the nominal value of the share. The exercise price must be at least the higher of: (i) the closing price of the securities as stated in the Stock Exchange's daily 37 that can be awarded 876,250 798,750 945,875 10 Jul 2015 1 Apr 2022 (Note 6) 2 Apr 2016 to 149.80 --- 525,000 525,000 2 Apr 2015 11 Dec 2021 (Note 7) 12 Dec 2016 to 116.40 80,650 80,650 12 Dec 2014 9 Jul 2021 (Note 6) 10 Jul 2015 to 124.30 114.52 25 Mar 2015 to 24 Mar 2021 (Note 1) 22 May 2014 62,500 62,500 39,387 112.30 21 May 2021 (Note 5) 10 July 2014 1,724,813 179,309 5,376 1,540,128 22 May 2015 to 3,725,000 3,225 148.90 For options granted with exercisable date determined based on the grant date of options, the first 20% of the total options can be exercised 1 year after the grant date, and each 20% of the total options will become exercisable in each subsequent year. 8. 7. 6. 5. 4. 3. 2. 1. Note: Directors' Report Annual Report 2016 31 5 Jul 2023 (Notes 6 and 9) 22,497,436 74,151 20,697,305 8,093,070 6,218,788 10 Jul 2016 to 9 Jul 2022 (Note 6) 21 Mar 2016 6,675,000 6,675,000 158.10 903,263 21 Mar 2017 to 1,418,070 20 Mar 2023 (Notes 6 and 8) 1,418,070 174.86 6 Jul 2017 to Total: 6 Jul 2016 125,000 3,850,000 25 Mar 2014 Number of share options Granted As at Directors' Report 14 Aug 2018 (Note 2) 15 Aug 2013 to 37.80 620,700 14 Aug 2018 (Note 1) 30 30 Tencent Holdings Limited 207,300 828,000 15 Aug 2011 15 Aug 2012 to 37.80 38.88 24 Mar 2014 to 23 Mar 2018 (Note 3) 24 Mar 2011 250,000 250,000 Exercised 38.88 23 Mar 2018 (Note 4) 15 Aug 2011 128,800 44,050 7,250 77,500 24 Mar 2015 to Lapsed As at 1 January 13 Sep 2012 762,500 47,750 9,500 705,250 49.76 14 Aug 2018 (Note 3) 13 Sep 2013 to 25 Mar 2014 2,562,500 2,562,500 114.52 25 Mar 2015 to 24 Mar 2021 (Note 5) 12 Sep 2019 (Note 1) 77,500 15 Aug 2014 to 50,000 during during Date of grant 2016 the year the year (Note 10) 37.80 during 31 December the year 2016 price Exercise period HKD 15 Aug 2011 100,000 50,000 Exercise For options granted with exercisable date determined based on the grant date of options, the first 20% of the total options can be exercised 2 years after the grant date, and each 20% of the total options will become exercisable in each subsequent year. 4. 5. 0.29 1 Oct 2016 to 31 Dec 2015 3,448,491 31 Dec 2015 345,300 1 Mar 2016 908,000 30 Sep 2025 (Note 1) 3,448,491 0.29 31 Dec 2016 to 30 Dec 2025 (Note 1) 908,800 345,300 31 Dec 2016 to 30 Dec 2025 (Note 1) 908,000 0.29 1 Mar 2017 to 28 Feb 2026 (Note 1) 1 Mar 2016 500,000 33,000 467,000 0.29 1 Mar 2017 to 28 Feb 2026 (Note 2) 0.000083 30,000 938,800 1 Oct 2015 26,880,000 26,880,000 0.29 1 Mar 2016 to 28 Feb 2025 (Note 2) 1 Mar 2015 7,482,654 of each participant 0.35 1 Mar 2016 to 28 Feb 2025 (Note 2) 30 Mar 2015 3,869,842 3,869,842 0.29 30 Mar 2016 to 29 Mar 2025 (Note 1) 1 Jul 2015 200,000 200,000 0.29 1 Jul 2016 to 30 Jun 2025 (Note 1) 1 Jul 2015 3,600,000 3,600,000 0.29 1 Jul 2016 to 30 Jun 2025 (Note 2) 31 Mar 2016 390,000 390,000 0.29 1. The first 25% of the total options can be exercised 1 year after the commencement date as specified in the relevant grant letter, and each 12.5% of the total options will become exercisable in each subsequent six months. 2. 3. 4. The first 25% of the total options can be exercised 1 year after the commencement date as specified in the grant letter, and each 6.25% of the total options will become exercisable in each subsequent quarter. When a certain condition is satisfied, the vesting schedule for the remaining options will be accelerated by 1 year and the remaining options can be exercised in equal installments on a quarterly basis during the accelerated vesting period. All the options can be exercised 1 year after the commencement date as specified in the relevant grant letter if a certain condition is satisfied. No options were granted, exercised or cancelled during the period. SUMMARY OF THE SHARE OPTION SCHEMES Pre-IPO Details Option Scheme Any employee, consultant or director of any company within executive directors of the Company including employee, participants Any eligible Qualifying 2. To recognise the contribution that certain individuals have made to the Group, to attract the best available personnel and to promote the success of the Group's business Option Scheme III Post-IPO Option Scheme II Option Scheme I Post-IPO Post-IPO Purposes 1. Note: 1 Mar 2015 Directors' Report 29 Jun 2026 (Note 1) 31 Mar 2017 to 1 Jun 2016 800,000 1 Jun 2016 6,521,513 30 Jun 2016 600,000 30 Jun 2016 12,430,852 Total: 98,821,647 33 33 30 Mar 2026 (Note 1) 800,000 0.000083 1 Jun 2017 to 30 May 2026 (Note 2) 6,521,513 0.29 1 Jun 2017 to 30 May 2026 (Note 3) 600,000 0.000083 30 Jun 2016 to 29 Jun 2026 (Note 1) 12,430,852 0.29 30 Jun 2016 to 2,116,800 96,704,847 Annual Report 2016 28 Feb 2025 (Note 1) 7,482,654 0.29 56,750 80,500 137,250 5 Jul 2010 23 Mar 2017 (Note 4) 24 Mar 2014 to 31.70 366,667 366,667 24 Mar 2010 23 Mar 2017 (Note 2) 24 Mar 2012 to 31.70 25,000 25,000 24 Mar 2010 23 Nov 2016 (Note 3) 24 Nov 2012 to 29.32 1,250,000 1,250,000 1 Mar 2016 to 9 Jul 2016 (Note 3) 10 Jul 2012 to -- 18.06 2,003,750 2,003,750 10 Jul 2009 9 Jul 2016 (Note 2) 26.08 10 Jul 2011 to 5 Jul 2011 to 5 Jul 2010 Operation 2% of the issued share capital of the Company as at the Adoption Date | (i.e. 178,776,160 shares (after the effect of the Share Subdivision)) 1% of the issued share capital of the Company as at the Adoption Date | (i.e. 89,388,080 shares (after the effect of the Share Subdivision)) The Board shall select the Eligible Person(s) and determine the number of shares to be awarded. The Board shall, in respect of each Selected Participant, cause to be paid the relevant amount from the Company's resources into the Account I or to the Trustee to be held in trust for the relevant Selected Participant for the purchase and/or subscription of the Awarded Shares as soon as practicable after the Reference Date. It shall be valid and effective unless and until being terminated on the earlier of: (i) the 15th anniversary of the Adoption Date II; and (ii) such date of early termination as determined by the Board provided that such termination does not affect any subsisting rights of any Selected Participant. 3% of the issued share capital of the Company as at the Adoption Date II (i.e. 278,937,260 shares (after the effect of the Share Subdivision)) 1% of the issued share capital of the Company as at the Adoption Date II (i.e. 92,979,085 shares (after the effect of the Share Subdivision)) The Board may, from time to time, at its absolute discretion select any Eligible Person to be a Selected Participant and grant to such Selected Participant Awarded Shares. The Board may at any time at its discretion, in respect of each Selected Participant, cause to be paid the relevant amount from the Company's resources or any subsidiary's resources into the Account II for the purchase and/or subscription of Awarded Shares as soon as practicable after the Grant Date. 39 30.14 12,500 12,500 13 Aug 2010 4 Jul 2017 (Note 3) 5 Jul 2013 to 26.08 1,363,800 193,700 1,557,500 5 Jul 2010 4 Jul 2017 (Note 2) 5 Jul 2012 to 26.08 1,057,575 48,800 694,125 1,800,500 4 Jul 2017 (Note 1) -- 18.06 24 Nov 2009 664,950 The weighted average closing price immediately before the date on which the options were exercised was HKD180.6. Tencent Holdings Limited 32 Directors' Report Details of movements of share options granted to employees and certain external consultants under the equity plans adopted by CMC, a subsidiary in the Group, during the period commencing from the date of completion of the CMC integration (i.e. 12 July 2016) and ending on 31 December 2016 are as follows: As at Date of grant 664,950 Granted during the period Number of share options Exercised during the period Cancelled Lapsed As at during the period during 31 December the period Exercise 2016 price Exercise period USD 1 Mar 2015 14,780,435 --- 14,780,435 0.000083 1 Mar 2016 to 28 Feb 2025 (Note 1) 1 Mar 2015 15,125,760 - 2,053,800 13,071,960 10. The closing price immediately before the date on which the options were granted on 6 July 2016 was HKD176.4. 12 July 2016 The closing price immediately before the date on which the options were granted on 21 March 2016 was HKD157.9. Date of grant 2016 the year the year during 31 December the year 2016 Exercise (Note 10) As at price HKD 10 Jul 2009 182,300 182,300 - 18.06 10 Jul 2010 to 9 Jul 2016 (Note 1) 10 Jul 2009 Exercise period 9. For options granted with exercisable date determined based on the grant date of options, the first 20% of the total options can be exercised 3 years after the grant date, and each 20% of the total options will become exercisable in each subsequent year. For options granted with exercisable date determined based on the grant date of options, the first 25% of the total options can be exercised 2 years after the grant date, and each 25% of the total options will become exercisable in each subsequent year. For options granted with exercisable date determined based on the grant date of options, the first 25% of the total options can be exercised 1 year after the grant date, and each 25% of the total options will become exercisable in each subsequent year. For options granted with exercisable date determined based on the grant date of options, the first 33.33% (one-third) of the total options can be exercised 1 year after the grant date, and each 33.33% of the total options will become exercisable in each subsequent year. Directors' Report Details of movements of share options granted to employees of the Group (apart from a director of the Company) during the year ended 31 December 2016 are as follows: As at Granted 1 January during Annual Report 2016 Number of share options Exercised during Lapsed Xu Chenye, age 45, Chief Information Officer, oversees the strategic planning and development for the website properties and communities, customer relations and public relations of the Company. Mr Xu is one of the core founders and has been employed by the Group since 1999. Prior to that, Mr Xu had experiences in software system design, network administration as well as marketing and sales management in his previous position at Shenzhen Data Telecommunications Bureau. Mr Xu received a Bachelor of Science degree in Computer Science from Shenzhen University in 1993 and a Master of Science degree in Computer Science from Nanjing University in 1996. Mr Xu currently serves as a director or officer of certain subsidiaries of the Company. Name of director BIOGRAPHICAL DETAILS OF SENIOR MANAGEMENT Directors' Report Yang Siu Shun, age 61, has been an independent non-executive director since July 2016. Mr Yang is currently serving as a Member of the 12th National Committee of the Chinese People's Political Consultative Conference, a Justice of the Peace in Hong Kong, a Member of the Exchange Fund Advisory Committee of the Hong Kong Monetary Authority, a Steward of the Hong Kong Jockey Club, the Deputy Chairman of the Council of the Open University of Hong Kong, a Board Member and the Audit Committee Chairman of the Hang Seng Management College and an independent non-executive director of Industrial and Commercial Bank of China Limited which is publicly listed on the Stock Exchange and the Shanghai Stock Exchange. Mr Yang retired from PricewaterhouseCoopers ("PwC") on 30 June 2015. Before his retirement, he served as the Chairman and Senior Partner of PwC Hong Kong, the Executive Chairman and Senior Partner of PwC China and Hong Kong, one of the five members of the Global Network Leadership Team of PwC and the PwC Asia Pacific Chairman. Mr Yang graduated from the London School of Economics and Political Science in 1978. Mr Yang is a Fellow Member of the Institute of Chartered Accountants in England and Wales, the Hong Kong Institute of Certified Public Accountants and the Chartered Institute of Management Accountants. 47 Annual Report 2016 Annual Report 2016 49 David A M Wallerstein, age 42, Chief exploration Officer and Senior Executive Vice President, joined the Company in 2001. He drives the Company's active participation in new and emerging technologies, business areas, and ideas from his base in Palo Alto, California. Mr Wallerstein has worked on Tencent's entrance into new business areas since 2001. Prior to joining the Company, Mr Wallerstein worked with Naspers in China. Mr Wallerstein currently serves as a director of a subsidiary of the Company. Lu Shan, age 42, Senior Executive Vice President and President of Technology and Engineering Group, joined the Company in 2000 and had served as General Manager for IM Product Divisions, Vice President for Platform Research and Development System and Senior Vice President for Operations Platform System. Since March 2008, Mr Lu has been in charge of management of the Operations Platform System of the Company. Since May 2012, Mr Lu has been in charge of management of Technical Engineering Group. Prior to joining the Company, he worked for Shenzhen Liming Network Systems Limited. Mr Lu received a Bachelor of Science degree in Computer Science and Technology from University of Science and Technology of China (USTC) in 1998. Mr Lu currently serves as a director or officer of certain subsidiaries of the Company. Tong Tao Sang, age 43, Senior Executive Vice President and President of Social Network Group, joined the Company in 2005. Mr Tong started as a technical architect, and led the product development of the social network platform, Qzone. He drove the open platform initiative of Qzone, which led to the development of the performance advertising business and the cloud services. Since May 2012, Mr Tong has been responsible for the QQ messaging and Qzone social networking platforms, the VIP subscriptions business, QQ Music and the Tencent Cloud services. Prior to joining the Company, Mr Tong worked for Sendmail, Inc. on managing the product development of operator-scale messaging systems. Mr Tong also worked for Oracle on the development and testing of Oracle Server and Oracle Applications. Mr Tong received a Bachelor of Science degree in Computer Engineering from University of Michigan, Ann Arbor in 1994 and a Master of Science degree in Electrical Engineering from Stanford University in 1997. Mr Tong currently serves as a director of certain subsidiaries of the Company. Zhang Xiaolong, age 47, Senior Executive Vice President and President of Weixin Group, joined the Company in March 2005 and served as the General Manager for the Guangzhou R&D Division and led the QQ Mail team to be the top mail service provider in China. Later he was promoted to Corporate Vice President and since September 2012, Mr Zhang has been appointed as Senior Vice President in charge of the product and team management of Weixin/WeChat and QQ Mail. He is also responsible for the management and review of major innovation projects. In May 2014, Mr Zhang was promoted to Senior Executive Vice President, in charge of the Weixin Group. Prior to joining the Company, Mr Zhang developed Foxmail independently in 1997 as the first generation of Internet software developer in China. He joined Boda China as Corporate Vice President in 2000, responsible for corporate mail developing. Mr Zhang received his Master's degree in Telecommunications from Huazhong University of Science and Technology in 1994. Directors' Report 48 Tencent Holdings Limited Lau Seng Yee, age 50, Senior Executive Vice President and Chairman of Tencent Advertising, Group Marketing and Global Branding, joined the Company in 2006. Mr Lau serves as Chairman of Tencent Advertising, Group Marketing and Global Branding starting from 24 March 2017 and is responsible for overseeing the Company's Advertising, Group Marketing and Global Branding businesses as well as developing international strategic partnership relationship. Before that, he was in charge of Online Media Group. Mr Lau is a seasoned professional in the media industry with a rare 22 years of on-ground China market experience. In 2007, Mr Lau sat in the advisory board for ad:tech, the globally renowned organisation for Online Marketing. Mr Lau held the post of Vice President of China Advertising Association since 2007. Mr Lau was appointed as the Adjunct Professor of School of Journalism and Communication by Xiamen University in 2010 and also by Fudan University in 2014. Prior to joining the Company, Mr Lau was the Managing Partner of Publicis China and Chief Executive Officer for BBDO China, as well as a few management positions in other multinations. Mr Lau received an EMBA degree from Rutgers State University of New Jersey, USA. He also completed the Advanced Marketing Management program, and the Advanced Management Program (AMP) in Harvard Business School. In 2011, Mr Lau was honoured by New York based AdAge publication as one of "The World's 21 Most Influential People in Marketing and Media Industry, 2009-2010". In 2015, he is named as Global Media Person of the year award by Cannes Lions International Festival of Creativity. Mr Lau currently sits as a board member in the Asia Pacific Advisory Board of Harvard Business School. Ren Yuxin, age 41, Chief Operation Officer and President of Interactive Entertainment Group, Mobile Internet Group and Online Media Group, joined the Company in 2000 and had served as General Manager for the Value-Added Services Development Division and General Manager for Interactive Entertainment Business Division. Since September 2005, Mr Ren has been responsible for the research and development, operations, marketing and sales of gaming products for the Interactive Entertainment Business. Since May 2012, Mr Ren has been appointed as Chief Operating Officer and is now in charge of the overall operation of the Interactive Entertainment Group, Mobile Internet Group and Social Network Group. He is also in charge of the operation of Online Media Group starting from 24 March 2017. Prior to joining the Company, Mr Ren has worked in Huawei Technologies Co., Ltd. Mr Ren received a Bachelor of Science degree in Computer Science and Engineering from the University of Electronic Science and Technology of China in 1998 and an EMBA degree from China Europe International Business School (CEIBS) in 2008. Mr Ren currently serves as a director or officer of certain subsidiaries of the Company. James Gordon Mitchell, age 43, Chief Strategy Officer and Senior Executive Vice President, joined the Company in August 2011. He is responsible for various functions, including the Company's strategic planning and implementation, investor relationships, and mergers, acquisitions and investment activity. Prior to joining the Company, Mr Mitchell had worked in investment banking for 16 years. Most recently, Mr Mitchell was a managing director at Goldman Sachs in New York, leading the bank's Communications, Media and Entertainment research team, which analysed Internet, entertainment and media companies globally. Mr Mitchell received a degree from Oxford University and holds a Chartered Financial Analyst Certification. Mr Mitchell currently serves as a director of certain subsidiaries of the Company. lan Charles Stone, age 66, has been an independent non-executive director since April 2004. Mr Stone is currently an independent advisor on Technology, Media and Telecoms after retiring from PCCW in Hong Kong in 2011. His career in the last 27 years has been primarily in leading mobile telecoms businesses, and new wireless and Internet technology, during which time he held senior roles in PCCW, SmarTone, First Pacific, Hong Kong Telecom and CSL, as Chief Executive or at Director level, primarily in Hong Kong, and also in London and Manila. Since 2011, Mr Stone has provided telecoms advisory services to telecom companies and investors in Hong Kong, China, South East Asia and the Middle East. Mr Stone has more than 46 years of experience in the telecom and mobile industries. Mr Stone is a fellow member of The Hong Kong Institute of Directors. Mr Stone also serves as an independent non-executive director of a subsidiary of the Company. Directors' Report 31 December 46 lain Ferguson Bruce 17 March 2011 20,000 20,000 - 17 March 2012 to 17 March 2016 24 March 2014 40,000 10,000 30,000 24 March 2015 to 24 March 2019 2 April 2015 30,000 7,500 22,500 2 April 2019 21 March 2016 Vesting period 2016 31 December during the year The vesting of the Awarded Shares is subject to the Selected Participant remaining, at all times after the Grant Date and on the date of vesting, an Eligible Person, subject to the rules of the 2013 Share Award Scheme. Subject to the satisfaction of all vesting conditions as prescribed in the 2013 Share Award Scheme, the Selected Participants will be entitled to receive the Awarded Shares. The Trustee does not exercise any voting rights in respect of any shares held pursuant to the Trustee Deed II or as nominee. The Company shall comply with the relevant Listing Rules when granting the Awarded Shares. If awards are made to the directors or substantial shareholders of the Group, such awards shall constitute connected transaction under Chapter 14A of the Listing Rules and the Company shall comply with the relevant requirements under the Listing Rules. During the year, a total of 52,371,430 Awarded Shares were granted under the 2013 Share Award Scheme and out of which, 61,474 Awarded Shares were granted to the independent non-executive directors of the Company. Details of the movements in the Share Award Schemes during the year are set out in Note 32 to the consolidated financial statements. During the year, a total of 73,159,488 shares were issued to option holders who exercised their share options granted under the Post-IPO Option Scheme II and the Post-IPO Option Scheme III, and pursuant to the Share Award Schemes. 41 Annual Report 2016 Directors' Report 20,000 As at 31 December 2016, there were a total of 192,724 outstanding Awarded Shares granted to the directors of the Company, details of which are as follows: As at 1 January Granted during Vested As at Name of director Date of grant 2016 the year Number of Awarded Shares 2013 Share Award Scheme 20,000 21 March 2020 20,000 20,000 21 March 2017 to 21 March 2020 Total: 85,000 20,000 32,500 72,500 Tencent Holdings Limited 42 42 Number of Awarded Shares Directors' Report As at 1 January Granted during Vested during As at 21 March 2016 2 April 2019 2 April 2016 to 22,500 Total: 90,000 20,000 37,500 72,500 lan Charles Stone 17 March 2011 15,000 15,000 21 March 2017 to 17 March 2012 to 24 March 2014 40,000 10,000 30,000 24 March 2015 to 24 March 2019 2 April 2015 30,000 7,500 17 March 2016 The Trustee shall not exercise the voting rights in respect of any shares held by it pursuant to the Trustee Deed I (including but not limited to the Awarded Shares and any bonus shares and scrip shares derived therefrom). 2 April 2016 to 2007 Share Award Scheme Ma Huateng (Chairman) Executive Directors The directors and senior management of the Company during the year and up to the date of this annual report were: DIRECTORS AND SENIOR MANAGEMENT Directors' Report Annual Report 2016 43 192,724 78,750 61,474 210,000 Grand Total: 11,474 11,474 Total: 6 July 2020 6 July 2017 to 11,474 11,474 Lau Chi Ping Martin Non-Executive Directors Jacobus Petrus (Koos) Bekker Charles St Leger Searle Tencent Holdings Limited lain Ferguson Bruce, age 76, has been an independent non-executive director since April 2004. Mr Bruce joined KPMG in Hong Kong in 1964 and was elected to its partnership in 1971. He was the Senior Partner of KPMG from 1991 until his retirement in 1996 and served as Chairman of KPMG Asia Pacific from 1993 to 1997. Since 1964, Mr Bruce has been a member of the Institute of Chartered Accountants of Scotland, and is a fellow of the Hong Kong Institute of Certified Public Accountants, with over 52 years of international experience in accounting and consulting. He is also a fellow of The Hong Kong Institute of Directors and the Hong Kong Securities and Investment Institute (formerly known as Hong Kong Securities Institute). Mr Bruce is an independent non-executive director of Citibank (Hong Kong) Limited and MSIG Insurance (Hong Kong) Limited. Mr Bruce is currently an independent non-executive director of Goodbaby International Holdings Limited, a manufacturer of durable juvenile products, The 13 Holdings Limited (formerly known as Louis XIII Holdings Limited), a construction, engineering services and hotel development company, and Wing On Company International Limited, a department store operating and real property investment company; all of these companies are publicly listed on the Stock Exchange. Mr Bruce is also a non-executive director of Noble Group Limited, a commodity trading company that is publicly listed on The Singapore Exchange Securities Trading Limited and an independent non-executive director of Yingli Green Energy Holding Company Limited, a China-based vertically integrated photovoltaic product manufacturer that is listed on the New York Stock Exchange. Mr Bruce was an independent non-executive director of Vitasoy International Holdings Limited, a beverage manufacturing company, up to 4 September 2014, and of Sands China Ltd., an operator of integrated resorts and casinos, up to 11 March 2016, both of these companies are publicly listed on the Stock Exchange. Awarded Shares and the related income derived therefrom are subject to a vesting scale to be determined by the Board at the date of grant of the award. Vesting of the shares will be conditional on the Selected Participant satisfying all vesting conditions specified by the Board at the time of making the award until and on each of the relevant vesting dates and his/her execution of the relevant documents to effect the transfer from the Trustee. Charles St Leger Searle, age 53, has been a non-executive director since June 2001. Mr Searle is currently the Chief Executive Officer of Naspers Internet Listed Assets. He serves on the board of a number of companies associated with the Naspers Group, including Mail.ru Group Limited that is listed on the London Stock Exchange and MakeMyTrip Limited that is listed on NASDAQ. Prior to joining the Naspers Group, he held positions at Cable & Wireless plc and at Deloitte & Touche in London and Sydney. Mr Searle is a graduate of the University of Cape Town and a member of the Institute of Chartered Accountants in Australia and New Zealand. Mr Searle has more than 23 years of international experience in the telecommunications and Internet industries. Mr Searle also serves as a director of certain subsidiaries of the Company. Directors' Report Annual Report 2016 45 Jacobus Petrus (Koos) Bekker, age 64, has been a non-executive director since November 2012. Koos led the founding team of the M-Net/MultiChoice pay-television business in 1985. He was also a founder director of MTN in cellular telephony. Koos headed the MIH group in its international and Internet expansions until 1997, when he became chief executive of Naspers. He serves on the boards of other companies within the group and associates, as well as on public bodies. In April 2015, he succeeded Mr Vosloo as non-executive chair. Academic qualifications include BA Hons and honorary doctorate in commerce (Stellenbosch University), LLB (University of the Witwatersrand) and MBA (Columbia University, New York). Ma Huateng, age 45, is an executive director, Chairman of the Board and Chief Executive Officer of the Company. Mr Ma has overall responsibilities for strategic planning and positioning and management of the Group. Mr Ma is one of the core founders and has been employed by the Group since 1999. Prior to his current employment, Mr Ma was in charge of research and development for Internet paging system development at China Motion Telecom Development Limited, a supplier of telecommunications services and products in China. Mr Ma is a deputy to the 12th National People's Congress. Mr Ma has a Bachelor of Science degree specialising in Computer and its Application obtained in 1993 from Shenzhen University and more than 23 years of experience in the telecommunications and Internet industries. He is a director of Advance Data Services Limited, which has an interest in the shares of the Company which would fall to be disclosed to the Company under the provisions of Divisions 2 and 3 of Part XV of the SFO. Mr Ma also serves as a director of certain subsidiaries of the Company. Lau Chi Ping Martin, age 43, is an executive director and President of the Company. Mr Lau joined the Company in 2005 as the Chief Strategy and Investment Officer and was responsible for corporate strategies, investments, merger and acquisitions and investor relations. In 2006, Mr Lau was promoted as President of the Company to manage the day-to-day operation of the Company. In 2007, he was appointed as an executive director of the Company. Prior to joining the Company, Mr Lau was an executive director at Goldman Sachs (Asia) L.L.C.'s investment banking division and the Chief Operating Officer of its Telecom, Media and Technology Group. Prior to that, he worked at Mckinsey & Company, Inc. as a management consultant. Mr Lau received a Bachelor of Science degree in Electrical Engineering from the University of Michigan, a Master of Science degree in Electrical Engineering from Stanford University and an MBA degree from Kellogg Graduate School of Management, Northwestern University. On 28 July 2011, Mr Lau was appointed as a non-executive director of Kingsoft Corporation Limited, an Internet based software developer, distributor and software service provider listed in Hong Kong. On 10 March 2014, Mr Lau was appointed as a director of JD.com, Inc., an online direct sales company in China, which has been listed on NASDAQ since May 2014. On 31 March 2014, Mr Lau was appointed as a director of Leju Holdings Limited, an online-to-offline real estate services provider in China, which has been listed on New York Stock Exchange since April 2014. Mr Lau also serves as a director/corporate representative of certain subsidiaries of the Company. 6 July 2016 BIOGRAPHICAL DETAILS AND OTHER INFORMATION OF DIRECTORS 44 Tencent Holdings Limited The Company has received from each independent non-executive director an annual confirmation of his independence pursuant to Rule 3.13 of the Listing Rules and the Board considers them independent. In accordance with Article 87 of the Articles of Association, Mr Lau Chi Ping Martin and Mr Charles St Leger Searle will retire at the 2017 AGM and, being eligible, will offer themselves for re-election. In addition, in accordance with Article 86(3) of the Articles of Association, Mr Yang Siu Shun, who was appointed as director with effect from 1 July 2016, will hold office until the 2017 AGM and, being eligible, will offer himself for re-election. Yang Siu Shun (appointed with effect from 1 July 2016) lan Charles Stone lain Ferguson Bruce Li Dong Sheng Independent Non-Executive Directors Directors' Report Yang Siu Shun Li Dong Sheng, age 59, has been an independent non-executive director since April 2004. Mr Li is the Chairman and Chief Executive Officer of TCL Corporation and the Chairman of the Hong Kong listed TCL Multimedia Technology Holdings Limited, both of which produce consumer electronic products. Mr Li is a non-executive director of Fantasia Holdings Group Co., Limited, a leading property developer and property related service provider in China that is listed on the Stock Exchange. Mr Li is also an independent director of Legrand, the global specialist in electrical and digital building infrastructures, shares of which are listed on New York Stock Exchange Euronext. Mr Li graduated from South China University of Technology in 1982 with a Bachelor degree in radio technology and has more than 22 years of experience in the information technology field. Mr Li is the Chairman of TCL Communication Technology Holdings Limited, which was delisted for privatisation from the Stock Exchange on 30 September 2016. 8,750 the year the year 2016 Date of grant Directors' Report 6. Restrictions 2007 Share Award Scheme No award shall be made by the Board and no instructions to acquire shares and allot new shares shall be given by the Board or the Trustee under the 2007 Share Award Scheme where any director is in possession of unpublished price- sensitive information in relation to the Group or where dealings by directors are prohibited under any code or requirement of the Listing Rules and all applicable laws from time to time. 2016 2013 Share Award Scheme from any applicable regulatory authority has not been granted. Tencent Holdings Limited 40 40 Directors' Report 7. Vesting and Lapse Voting Rights 36,250 No award may be made by the Board to any Selected Participant: (i) where the Company has information that must be disclosed under Rule 13.09 of the Listing Rules or where the Company reasonably believes there is inside information which must be disclosed under part XIVA of the SFO, until such inside information has been published on the websites of the Stock Exchange and the Company; (ii) after any inside information in relation to the securities of the Company has occurred or has become the subject of a decision, until such inside information has been published; (iii) within the period commencing 60 days (in the case of yearly results), or 30 days (in the case of results for half-year, quarterly or other interim period) immediately preceding the earlier of (1) the date of a meeting of the Board (as such date is first notified to the Stock Exchange) for the approval of the Company's results for any year, half-year, quarterly or other interim period (whether or not required under the Listing Rules); and (2) the deadline for the Company to publish its quarterly, interim or annual results announcement for any such period, and ending on the date of such announcement; or (iv) in any other circumstances where dealings by Selected Participant (including directors) are prohibited under the Listing Rules, the SFO or any other applicable law or regulation or where the requisite approval Vesting period 8. 24 March 2014 Li Dong Sheng 35,000 Total: 21 March 2020 21 March 2017 to 10,000 10,000 21 March 2016 2 April 2019 10,000 11,250 3,750 15,000 2 April 2015 24 March 2019 24 March 2015 to 15,000 20,000 2 April 2016 to 5,000 0.004% 240,000 Yang Siu Shun (Note 5) 160,000 Personal 400,000 Personal Family+ 0.005% lan Charles Stone (Note 4) 490,000 * Personal lain Ferguson Bruce * 0.0004% ↓ (Note 3) Advance Data Services Limited, a British Virgin Islands company wholly-owned by Ma Huateng, holds 729,507,500 shares directly and 98,000,000 shares indirectly through its wholly-owned subsidiary, Ma Huateng Global Foundation. 52 Interests of beneficial owner 36,300 The interest comprises 11,474 underlying shares in respect of the awarded shares granted pursuant to the 2013 Share Award Scheme. Details of the awarded shares granted to this director are set out above under "Share Award Schemes". The interest comprises 327,500 shares and 72,500 underlying shares in respect of the awarded shares granted pursuant to the 2007 Share Award Scheme and the 2013 Share Award Scheme. Details of the awarded shares granted to this director are set out above under "Share Award Schemes". The interest comprises 417,500 shares and 72,500 underlying shares in respect of the awarded shares granted pursuant to the 2007 Share Award Scheme and the 2013 Share Award Scheme. Details of the awarded shares granted to this director are set out above under "Share Award Schemes". The interest comprises 50 shares and 36,250 underlying shares in respect of the awarded shares granted pursuant to the 2007 Share Award Scheme and the 2013 Share Award Scheme. Details of the awarded shares granted to this director are set out above under "Share Award Schemes". The interest comprises 32,468,000 shares and 11,250,000 underlying shares in respect of the share options granted pursuant to the Post-IPO Option Scheme II and the Post-IPO Option Scheme III. Details of the share options granted to this director are set out above under "Share Option Schemes". 6. 5. 4. 3. 2. 1. Directors' Report Note: (Note 6) 0.0001% 11,474 52 Tencent Holdings Limited * Directors' Report Li Dong Sheng DIRECTORS' RIGHTS TO ACQUIRE SHARES OR DEBENTURES A permitted indemnity provision for the benefit of the directors of the Company is currently in force and was in force throughout the financial year. The Company has taken out and maintained directors and officers liability insurance which provides appropriate cover for, among others, directors of the Company. PERMITTED INDEMNITY PROVISION Save as disclosed in this annual report, no transaction, arrangement or contract of significance in relation to the Group's business to which the Company or any of its subsidiaries was a party and in which a director of the Company or an entity connected with a director of the Company had a material interest, whether directly or indirectly, subsisted at the end of the year or at any time during the year. DIRECTORS' INTERESTS IN TRANSACTIONS, ARRANGEMENTS OR CONTRACTS Save as disclosed above, none of the directors who are proposed for re-election at the 2017 AGM has a service contract with the Company which is not determinable by the Company within one year without payment of compensation, other than statutory compensation. Mr Lau Chi Ping Martin has entered into a service contract with the Company for a term of three years ending 31 December 2018. Mr Lau is entitled to an annual bonus based on the performance of the Company in an amount to be determined by the Remuneration Committee. Mr Lau is entitled to participate in all employee benefit plans, programmes and arrangements of the Company. Mr Ma Huateng has entered into a service contract with the Company for a term of three years from 1 January 2016 to 31 December 2018. The term of the service contract can be extended by agreement between the Company and Mr Ma. The Company may terminate the service contract by three months' written notice at any time, subject to paying his salary for the shorter of six months and a portion of his annual bonus for the year in which termination occurred pro rata to the portion of the year before the termination becomes effective. Save as disclosed in this annual report, neither the Company nor any of its subsidiaries was a party to any arrangements to enable directors of the Company to acquire benefits by means of the acquisition of shares in, or debentures of, the Company or any other body corporate at any time during the year or at the end of the year. DIRECTORS' SERVICE CONTRACTS 50 Tencent Holdings Limited Xi Dan, age 41, Senior Vice President, joined the Company in 2002 and has been responsible for overseeing the Company's talent development and functional management since May 2008. Prior to joining the Company, Mr Xi was responsible for HR management in ZTE Corporation and has more than 21 years of experience in IT and Internet industries. Mr Xi received a Bachelor of Science degree in Applied Computer Science from Shenzhen University in 1996 and an MBA degree from Tsinghua University in 2005. Mr Xi currently serves as a director or officer of certain subsidiaries of the Company. Guo Kaitian, age 44, Senior Vice President, joined the Company in 2002 and has been responsible for overseeing the Company's functional divisions of administration, legal affairs, government relations, charity fund, procurement as well as the functional management of the branches in Beijing, Shanghai and Chengdu. Mr Guo received a Bachelor of Law degree from Zhongnan University of Economics and Law in 1996. Mr Guo currently serves as a director of a subsidiary of the Company. John Shek Hon Lo, age 48, Chief Financial Officer and Senior Vice President, joined the Company in 2004 and served as the Company's Financial Controller from 2004 to 2008. Mr Lo was appointed as the Company's Vice President and Deputy Chief Financial Officer in 2008 and was appointed as Chief Financial Officer in May 2012. Prior to joining the Company, Mr Lo worked in PricewaterhouseCoopers as Senior Manager (audit services). He is a Fellow of the CPA Australia, a Fellow of the Hong Kong Institute of Certified Public Accountants and a Fellow of the Chartered Institute of Management Accountants. Mr Lo received a Bachelor of Business in Accounting from Curtin University and an EMBA degree from Kellogg Graduate School of Management, Northwestern University and HKUST. Mr Lo currently serves as a director of certain subsidiaries of the Company. Ma Xiaoyi, age 43, Senior Vice President, joined the Company in 2007 and has been responsible for international publishing of Tencent Games, establishing and maintaining long-term business partnerships and cooperation for the Company since November 2008. Prior to joining the Company, Mr Ma served as a General Manager of Games Division of OPTIC Communication Co., Ltd. Prior to that, Mr Ma worked as a General Manager in Shanghai EasyService Technology Development Ltd. Mr Ma graduated from Shanghai Jiaotong University, and received an EMBA degree from Fudan University in 2008. Mr Ma currently serves as a director of certain subsidiaries of the Company. Directors' Report Interests of spouse or child under 18 as beneficial owner Directors' Report 51 Annual Report 2016 DIRECTORS' INTERESTS IN SECURITIES (Note 2) 0.46% 43,718,000 8.73% 827,507,500 Corporate (Note 1) * Personal Lau Chi Ping Martin Ma Huateng of shareholding shares held Nature of interest Name of director Approximate % shares/ underlying Number of (A) Long position in the shares and underlying shares of the Company As at 31 December 2016, the interests and short positions of the directors and the chief executive of the Company in the shares, underlying shares and debentures of the Company or its associated corporations (within the meaning of Part XV of the SFO) which (a) were required to be notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests and short positions which they have taken, or are deemed to have taken, under such provisions of the SFO); or (b) were required, pursuant to section 352 of the SFO, to be recorded in the register required to be kept by the Company; or (c) were required, pursuant to the Model Code, to be notified to the Company and the Stock Exchange were as follows: Personal (B) Long position in the shares of associated corporations of the Company Tencent Holdings Limited Name of associated corporation Pursuant to the intellectual property transfer agreement dated 28 February 2004 entered into between Cyber Tianjin and Shiji Kaixuan, Shiji Kaixuan shall assign to Cyber Tianjin its principal present and future intellectual property rights, free from encumbrance (except for licences granted in the ordinary course of Shiji Kaixuan's business) in consideration of Cyber Tianjin's undertaking to provide certain technology and information services to Shiji Kaixuan. During the year, no intellectual property transfer was transacted under such arrangements, save as disclosed elsewhere in this section. Pursuant to the amended and restated intellectual property transfer agreement dated 28 February 2004 entered into between Tencent Technology and Tencent Computer, Tencent Computer shall assign to Tencent Technology its principal present and future intellectual property rights, free from encumbrances (except for licences granted in the ordinary course of Tencent Computer's business) in consideration of Tencent Technology's undertaking to provide certain technology and information services to Tencent Computer. During the year, no intellectual property transfer was transacted under such arrangements, save as disclosed elsewhere in this section. Pursuant to the SKT CFC, the parties shall co-operate in the provision of communications services. Cyber Tianjin and its affiliates shall allow Shiji Kaixuan to use its and its affiliates' assets and to provide services to Shiji Kaixuan. Shiji Kaixuan shall transfer all of its Surplus Cash to Cyber Tianjin and its affiliates as consideration. The parties also established the SKT Co-operation Committee according to this agreement. During the year, no services was transacted under such arrangements, save as disclosed elsewhere in this section. Pursuant to the TCS CFC, the parties shall co-operate in the provision of communications services. Tencent Technology and its affiliates shall allow Tencent Computer to use its and its affiliates' assets and to provide services to Tencent Computer. Tencent Computer shall transfer all of its Surplus Cash to Tencent Technology and its affiliates as consideration. The parties also established the TCS Co-operation Committee according to this agreement. During the year, revenue sharing amounting to approximately RMB40,525,000,000, RMB3,129,000,000, RMB13,948,000,000, RMB4,233,000,000, RMB4,687,000,000, RMB1,270,000,000, RMB669,000,000, RMB693,000,000, RMB4,514,000,000 and RMB525,000,000 were paid or payable by Tencent Computer to Tencent Technology, Cyber Tianjin, Tencent Beijing, Tencent Chengdu, Tencent Shanghai, Tencent Wuhan, Tencent Information Chongqing, Hainan Network, Tencent Information Shenzhen and Tencent Information Shanghai respectively. In addition, during the year, Internet data center service fee amounting to approximately RMB486,000,000 was paid or payable by Tencent Computer to Cyber Tianjin, and IOS account usage fee amounting to RMB50,000, RMB50,000, RMB50,000 and RMB50,000 were paid or payable to Tencent Technology, Cyber Tianjin, Tencent Beijing and Tencent Shanghai respectively. 4. 3. 1. Transactions carried out during the year ended 31 December 2016, which have been eliminated in the consolidated financial statements of the Group, are set out as follows: Directors' Report 56 57 56 The Auditor had carried out procedures on the transactions pursuant to the Structure Contracts and had provided a letter to the Board confirming that such transactions had been approved by the Board and had been entered into, in all material respects, in accordance with the relevant Structure Contracts and had been operated so as to transfer the Surplus Cash of the OPCOS as at 31 December 2016 to the WFOES and that no dividends or other distributions had been made by the OPCOs to the holders of their equity interests. The Company's independent non-executive directors had reviewed the Structure Contracts (as defined in the section "Our History and Structure Structure Contracts" of the IPO prospectus of the Company) and confirmed that the transactions carried out during the financial year had been entered into in accordance with the relevant provisions of the Structure Contracts and, had been operated so as to transfer by the date of this annual report Tencent Computer's and Shiji Kaixuan's Surplus Cash (as defined in the section “Our History and Structure - Structure Contracts" of the IPO prospectus of the Company) as at 31 December 2016 to Tencent Technology, Cyber Tianjin (formerly known as Shidai Zhaoyang Technology (Shenzhen) Company Limited in the IPO prospectus of the Company), Tencent Beijing, Tencent Information Shenzhen, Tencent Chengdu, Tencent Information Chongqing, Tencent Information Shanghai, Tencent Shanghai, Tencent Wuhan and Hainan Network. The Company's independent non-executive directors had also confirmed that no dividends or other distributions had been made by the OPCOS to the holders of their equity interests and the terms of any new Structure Contracts entered into, renewed and/ or cloned during the relevant financial period are fair and reasonable so far as the Group was concerned and in the interests of the Company's shareholders as a whole. To this extent, similar Structure Contracts were entered into relating to the New OPCOS. Review of the transactions carried out under the Structure Contracts during the financial year The above OPCOs are significant to the Group as they hold relevant licences to provide Internet information services and other value-added telecommunications services. The aggregate gross revenue and net asset value of the above OPCOS that are subject to the Structure Contracts amounted to approximately RMB100 billion for the year ended 31 December 2016 and approximately RMB18 billion as at 31 December 2016 respectively. Directors' Report Annual Report 2016 55 55 Provision of value-added services in the PRC 50% by Chen Guangyu 50% by Tang Yibin Tencent Holdings Limited Beijing Starsinhand 52 Directors' Report Name of director Annual Report 2016 59 59 The WFOES have been structured and located in order to benefit from preferential tax treatments offered to companies located in designated economic zones and/or operating software-related businesses. Although the relevant governmental authority has granted such preferential tax treatment to certain WFOES and OPCOs, there can be no assurance that the conditions under which these treatments are provided will always be present. The relevant WFOES and OPCOS would use their reasonable endeavours to take all necessary actions, including but not limited to maintaining or acquiring their status as “High and New Technology Enterprise" or "National Key Software Enterprise", in order to continue to enjoy the reduced income tax rate and the other tax concessions. The risks associated with Structure Contracts and the actions taken by the Company to mitigate the risks Due to regulatory limitations restricting foreign investment in businesses providing value-added telecommunications services in China, the Company conducts some of its business in the PRC through the OPCOs. These contractual arrangements may not be as effective in providing control as direct ownership. Pursuant to the Structure Contracts, the arbitration tribunal is entitled to decide compensation for the equity interests or property ownership of OPCOS, decide to implement enforceable remedy (including mandatorily requiring OPCOS to transfer the equity interests of OPCOS to the WFOES, etc.) or order the bankruptcy of OPCOS. Prior to the formation of the arbitration tribunal, the courts of the places where the major assets of OPCOS are situated are entitled to implement interim remedies to ensure the enforcement of the future decisions of the arbitration tribunals. Pursuant to the co-operation framework agreement entered into between each of the New OPCOS and one of the WFOES, the parties shall cooperate in the provision of communications services. For each agreement, the WFOES shall allow the New OPCOS to use its and its affiliates' assets and provide services to the New OPCOs. The New OPCOS shall transfer all of its Surplus Cash to the WFOES and its affiliates as consideration. Co-operation committees have also been established according to these agreements. During the year, revenue sharing amounting to approximately RMB42,000,000, RMB9,000,000, and RMB313,000,000 was paid or payable by Wang Dian to Tencent Technology, Cyber Tianjin and Tencent Beijing respectively. Revenue sharing amounting to approximately RMB21,000,000, RMB109,000,000, and RMB358,625 was paid or payable by Beijing BIZCOM to Tencent Technology, Cyber Tianjin and Tencent Beijing respectively. Revenue sharing amounting to approximately RMB739,544, RMB6,000,000, and RMB3,000,000 was paid or payable by Beijing Starsinhand to Tencent Technology, Cyber Tianjin, and Tencent Beijing respectively. 11. Directors' Report 58 Annual Report 2016 Pursuant to the technical consultancy services agreement dated 28 February 2004 entered into between Tencent Technology, as consultant, and Shiji Kaixuan, Tencent Technology shall provide specified technical consultancy services to Shiji Kaixuan against payment of an annual consultancy service fee determined by the SKT Co-operation Committee within a range of percentages of Shiji Kaixuan's annual revenues. During the year, no consultancy service was transacted under such arrangements, save as disclosed elsewhere in this section. Pursuant to the trademark licence agreement dated 28 February 2004 entered into between Tencent Technology, as licensor, and Shiji Kaixuan, as licensee, Tencent Technology shall grant to Shiji Kaixuan a non-exclusive licence to use specified trademarks against payment of annual royalties determined as a percentage of Shiji Kaixuan's annual revenues (which may be adjusted pursuant to the agreement or the SKT CFC). During the year, no trademark licence was transacted under such arrangements, save as disclosed elsewhere in this section. Pursuant to the trademark licence agreement dated 28 February 2004 entered into between Tencent Technology, as licensor, and Tencent Computer, as licensee, Tencent Technology shall grant to Tencent Computer a non-exclusive licence to use specified trademarks against payment of annual royalties determined as a percentage of Tencent Computer's annual revenues (which may be adjusted pursuant to the agreement or the TCS CFC). During the year, no trademark licence was transacted under such arrangements, save as disclosed elsewhere in this section. Pursuant to the domain name licence agreement dated 28 February 2004 entered into between Tencent Technology, as licensor, and Shiji Kaixuan, as licensee, Tencent Technology shall grant to Shiji Kaixuan a non-exclusive licence to use specified domain names against payment of annual royalties determined as a percentage of Shiji Kaixuan's annual revenues (which may be adjusted pursuant to the agreement or the SKT CFC). During the year, no domain name licence was transacted under such arrangements, save as disclosed elsewhere in this section. Pursuant to the domain name licence agreement dated 28 February 2004 entered into between Tencent Technology, as licensor, and Tencent Computer, as licensee, Tencent Technology shall grant to Tencent Computer a non-exclusive licence to use specified domain names against payment of annual royalties determined by the TCS Co-operation Committee within a range of percentages of Tencent Computer's annual revenues. During the year, no domain name licence was transacted under such arrangements, save as disclosed elsewhere in this section. 10. 9. 8. 7. 6. 5. Pursuant to the information consultancy services agreement dated 28 February 2004 entered into between Tencent Technology, as consultant, and Tencent Computer, Tencent Technology shall provide specified information consultancy services to Tencent Computer against payment of an annual consultancy service fee determined by the TCS Co-operation Committee within a range of percentages of Tencent Computer's annual revenues. During the year, no consultancy service was transacted under such arrangements, save as disclosed elsewhere in this section. Provision of value-added services in the PRC 2. Provision of Internet advertisement services in the PRC The reasons for using Structure Contracts Reference is made to the waiver granted by the Stock Exchange regarding the compliance with the applicable disclosure, reporting and shareholders' approval requirements under Chapter 14A of the Listing Rules when the Company was listed in June 2004. CONNECTED TRANSACTIONS Directors' Report Annual Report 2016 33 53 Save as disclosed above, none of the directors or chief executive of the Company and their associates, had interests or short positions in any shares, underlying shares or debentures of the Company and its associated corporations as at 31 December 2016. (registered capital) 54.29% RMB5,971,427 (registered capital) Provision of value-added services in the PRC RMB35,285,705 Approximate % of shareholding and class of shares held Number of shares Personal Shiji Kaixuan Personal Tencent Computer Ma Huateng Nature of interest Current PRC laws and regulations limit foreign investment in businesses providing value-added telecommunications services in China. As foreign-invested enterprises, the WFOES do not have licences to provide Internet content or information services and other telecommunications value-added services. Accordingly, the value-added telecommunications business of the Group has been conducted through Tencent Computer, Shiji Kaixuan and the new operating companies (the "New OPCOS") (collectively, the "OPCOS") by itself or through their subsidiaries under the Structure Contracts (as defined in the section "Our History and Structure Structure Contracts" of the IPO prospectus of the Company). As a result of the Structure Contracts, the Group is able to recognise and receive the economic benefit of the business and operations of the OPCOs. The Structure Contracts are also designed to provide the Company with effective control over and (to the extent permitted by PRC law) the right to acquire the equity interests in and/or assets of the OPCOS. For a summary of the major terms of the Structure Contracts, please refer to the sections headed “Our History and Structure” and "Structure Contracts" in the IPO prospectus. During the year ended 31 December 2016, there was no material change in the Structure Contracts and/or the circumstances under which they were adopted, and none of the Structure Contracts has been unwound as none of the restrictions that led to the adoption of Structure Contracts has been removed. 54.29% 2016 Requirements related to Structure Contracts (other than relevant foreign ownership restrictions) as at 31 December 54.29% by Ma Huateng 22.85% by Zhang Zhidong 11.43% by Xu Chenye 11.43% by Chen Yidan Shiji Kaixuan 54.29% by Ma Huateng 22.85% by Zhang Zhidong 11.43% by Xu Chenye 11.43% by Chen Yidan Beijing BIZCOM Wang Dian Shiji Kaixuan Provision of value-added services and Internet advertisement services in the PRC Business activities as at 31 December 2016 Name of the operating companies Registered owners Set out below is the registered owners and business activities of the OPCOS which had entered into transactions with the Group during the year ended 31 December 2016: Particulars of the OPCOS Tencent Computer Directors' Report In the view of the Company's PRC legal advisers, the arrangement of the Structure Contracts does not violate applicable existing PRC laws and regulations as the Company indirectly operates the value-added telecommunication service business, online and mobile games, online advertising and other Internet and wireless portals in the PRC through affiliated OPCOS that hold the necessary licences for the existing lines of businesses. However, Circular 13 does not provide any interpretation of the term "foreign investors" or make a distinction between foreign online game companies and companies under a corporate structure similar to the Group. Thus, it is unclear whether the State General Administration of Press, Publication, Radio, Film and Television will deem the Group's structure and operations to be in violation of these provisions. However, the Company's PRC legal advisers also advised that there are substantial uncertainties regarding the interpretation and application of the currently applicable PRC laws, rules and regulations. Accordingly, the PRC regulatory authorities and PRC courts may in the future take a view that is contrary to the position of the Company's PRC legal advisers concerning the Structure Contracts. Tencent Holdings Limited Tencent Computer Requirements related to Structure Contracts (other than relevant foreign ownership restrictions) include the Notice on Further Strengthening the Administration of Pre-examination and Approval of Online Games and the Examination and Approval of Imported Online Games (關於貫徹落實國務院《“三定”規定》和中央編辦有關解釋,進一步加強網絡遊戲前置審批和進 □)(the “Circular 13") jointly issued by PRC General Administration of Press and Publication, the National Copyright Administration and the National Office of Combating Pornography and Illegal Publications in September 2009 provides that foreign investors are not permitted to invest in online game-operating businesses in the PRC via wholly owned, equity joint venture or co-operative joint venture investments and further expressly prohibits foreign investors from gaining control over or participating in domestic online game operators through indirect ways such as establishing other joint venture companies or entering into contractual or technical arrangements with the Chinese licence holders. 54 54 62 Directors' Report No contracts concerning the management and administration of the whole or any substantial part of the business of the Company was entered into or existed during the year. The Audit Committee has reviewed the Group's audited consolidated financial statements for the year ended 31 December 2016. The Audit Committee has also reviewed the accounting principles and practices adopted by the Group and discussed auditing, risk management, internal control and financial reporting matters. COMPLIANCE WITH THE CORPORATE GOVERNANCE CODE Save as disclosed in the 2016 interim report and the corporate governance report in the 2015 annual report of the Company, none of the directors of the Company is aware of any information which would reasonably indicate that the Company has not, for any part of the year ended 31 December 2016, complied with the code provisions as set out in the CG Code. AUDIT COMMITTEE 62 MAJOR CUSTOMERS AND SUPPLIERS None of the directors, their associates or any shareholder (which to the knowledge of the directors owns more than 5% of the number of issued shares of the Company) had an interest in any of the major customers or suppliers noted above. For the year ended 31 December 2016, the five largest customers of the Group accounted for approximately 3.67% of the Group's total revenues while the largest customer of the Group accounted for approximately 1.20% of the Group's total revenues. In addition, for the year ended 31 December 2016, the five largest suppliers of the Group accounted for approximately 19.45% of the Group's total purchases while the largest supplier of the Group accounted for approximately 6.55% of the Group's total purchases. Such short position includes derivative interests in 35,228,087 underlying shares of the Company of which 8,227,800 underlying shares are derived from listed and physically settled derivatives, 14,010,790 underlying shares are derived from listed and cash settled derivatives, 4,128,936 underlying shares are derived from unlisted and physically settled derivatives and 8,810,561 underlying shares are derived from unlisted and cash settled derivatives. As to the deviation from code provisions A.2.1 and A.4.2 of the CG Code, the Board will continue to review the current structure from time to time and shall make necessary changes when appropriate and inform the shareholders accordingly. Save as disclosed above, the Company had not been notified of any other persons (other than a director or chief executive of the Company) who, as at 31 December 2016, had interests or short positions in the shares and underlying shares in the Company as recorded in the register required to be kept under section 336 of the SFO. MANAGEMENT CONTRACTS Tencent Holdings Limited ENVIRONMENT AND COMPLIANCE WITH LAWS The remuneration policy and package of the Group's employees are periodically reviewed. Apart from pension funds and in- house training programmes, discretionary bonuses, share awards and share options may be awarded to employees according to the assessment of individual performance. ADOPTION OF CODE OF CONDUCT REGARDING DIRECTORS' SECURITIES TRANSACTIONS Such long position includes derivative interests in 35,842,496 underlying shares of the Company of which 11,670,973 underlying shares are derived from listed and physically settled derivatives, 2,565,400 underlying shares are derived from listed and cash settled derivatives, 14,768,059 underlying shares are derived from unlisted and physically settled derivatives and 6,838,064 underlying shares are derived from unlisted and cash settled derivatives. It also includes 283,913,097 shares in lending pool. The register of members will be closed from Monday, 15 May 2017 to Wednesday, 17 May 2017, both days inclusive, during which period no transfer of shares will be registered. In order to be entitled to attend and vote at the 2017 AGM, all duly completed transfer forms accompanied by the relevant share certificates must be lodged with the Company's branch share registrar, Computershare Hong Kong Investor Services Limited, at Shops 1712-1716, 17th Floor, Hopewell Centre, 183 Queen's Road East, Wan Chai, Hong Kong for registration not later than 4:30 p.m. on Friday, 12 May 2017. (A) Entitlement to Attend and Vote at the 2017 AGM CLOSURE OF REGISTER OF MEMBERS Directors' Report Based on information that is publicly available to the Company and within the knowledge of its directors, the directors confirm that the Company has maintained during the year the amount of public float as required under the Listing Rules. SUFFICIENCY OF PUBLIC FLOAT The total remuneration cost incurred by the Group for the year ended 31 December 2016 was RMB23,433 million (2015: RMB18,475 million). As at 31 December 2016, the Group had 38,775 employees (2015: 30,641). The number of employees employed by the Group varies from time to time depending on needs and employees are remunerated based on industry practice. EMPLOYEE AND REMUNERATION POLICIES Directors' Report Annual Report 2016 63 83 There is no provision for pre-emptive rights under the Articles of Association, or the laws of the Cayman Islands, which would oblige the Company to offer new shares on a pro rata basis to existing shareholders. PRE-EMPTIVE RIGHTS The Company has adopted a code of conduct regarding directors' securities transactions on terms no less exacting than the required standard set out in the Model Code. The directors of the Company have complied with such code of conduct throughout the accounting year covered by this annual report. The Group is committed to minimising the impact on the environment from our business activities and the details of such efforts are set out in the section headed “Environment” in the Environmental, Social and Governance Report in this annual report. As far as the Board is aware, the Group has complied with the relevant laws and regulations that have a significant impact on the Group in all material respects. (ii) Approximate % 3. 60 60 Directors' Report INTERESTS OF SUBSTANTIAL SHAREHOLDERS As at 31 December 2016, the following persons, other than the directors or chief executive of the Company, had interests or short positions in the shares or underlying shares of the Company which would fall to be disclosed to the Company under the provisions of Divisions 2 and 3 of Part XV of the SFO as recorded in the register required to be kept by the Company under section 336 of the SFO, or who was, directly or indirectly, interested in 5% or more of the shares of the Company: Long/ short position in the shares of the Company Number of Name of shareholder Long/ short position Nature of interest/capacity shares/underlying Tencent Holdings Limited (B) Entitlement to the Proposed Final Dividend of shareholding MIH TC Long position Corporate (Note 1) 3,151,201,900 33.25% Advance Data Services Limited Long position Corporate (Note 2) 827,507,500 8.73% JPMorgan Chase & Co. shares held (i) Save as the related parties transaction disclosed in Note 13(a) (Senior management's emoluments), Note 13(b) (Five highest paid individuals), Note 14 (Benefits and interests of directors), Note 20 (Transactions with associates), Note 24 (Loan to investees and investees' shareholders) and Note 32 (Share-based payments) to the consolidated financial statements, no related parties transactions disclosed in the consolidated financial statements constitutes a discloseable connected transaction as defined under the Listing Rules. The Company has complied with the disclosure requirements set out in Chapter 14A of the Listing Rules. For details of the risks associated with the Structure Contracts, please refer to the section headed "Risk factors - Risks relating to our structure" in the IPO prospectus. Advance Data Services Limited holds 729,507,500 shares directly and 98,000,000 shares indirectly through its wholly-owned subsidiary, Ma Huateng Global Foundation. As Advance Data Services Limited is wholly-owned by Ma Huateng, Mr Ma has an interest in these shares as disclosed under the section of "Directors' Interests in Securities". MIH TC is controlled by Naspers Limited through its wholly-owned intermediary companies, MIH (Mauritius) Limited, MIH Ming He Holdings Limited and MIH Holdings Proprietary Limited. As such, Naspers Limited, MIH (Mauritius) Limited, MIH Ming He Holdings Limited and MIH Holdings Proprietary Limited are deemed to be interested in the same block of 3,151,201,900 shares under Part XV of the SFO. 2. 1. Note: Directors' Report Annual Report 2016 53 61 (Note 3(ii)) 0.71% Other connected transactions 66,820,440 Short position 5.97% 565,917,112 Total (Note 3(i)): 283,913,097 agent approved lending Custodian corporation/ 43,070 180,688,514 101,272,431 Due to the legal constraints in relation to foreign investment in the telecommunications value-added services industry in the PRC, a number of agreements have been entered into between members of the Group whereby the Company and the WFOES derive substantially all their revenues from transactions with the OPCOs. The recognition of revenues outlined in these intra- group contracts could be challenged by tax authorities and any adjustment in tax treatment could have a material and adverse impact on the taxable profitability of the Group. As advised by the Company's PRC legal advisers, it is unlikely that the tax treatment of revenues will be challenged by the PRC tax authorities, provided that the transactions under these intra-group contracts represent bona fide transactions conducted on an arm's length basis. The Company will take all necessary actions to ensure and monitor that relevant transactions are to be conducted on an arm's length basis to minimise the risks of adjustment in tax treatment. Beneficial owner The register of members will be closed from Tuesday, 23 May 2017 to Wednesday, 24 May 2017, both days inclusive, during which period no transfer of shares will be registered. In order to qualify for the proposed final dividend, all duly completed transfer forms accompanied by the relevant share certificates must be lodged with the Company's branch share registrar, Computershare Hong Kong Investor Services Limited, at Shops 1712-1716, 17th Floor, Hopewell Centre, 183 Queen's Road East, Wan Chai, Hong Kong for registration not later than 4:30 p.m. on Monday, 22 May 2017. Hong Kong, 22 March 2017 54 Corporate Governance Report Corporate Governance Committee reviews the Company's corporate governance and makes recommendations to the Board; reviews and monitors the training and continuous professional development of the directors and senior management team; reviews and monitors the Company's policies and practices on its compliance with legal and regulatory requirements; • develops, reviews and monitors the code of conduct and compliance manual (if any) applicable to employees and directors; • Annual Report 2016 reviews the shareholders communication policy and makes recommendations to the Board where appropriate to enhance effective communications between the Company and its shareholders; and Investment Committee • identifies, considers and makes recommendations on mergers, acquisitions and disposals; and ensures compliance with the Listing Rules and any other relevant laws and regulations of any mergers, acquisitions and disposals. Nomination Committee • • reviews the Company's compliance with the CG Code and disclosure in the Corporate Governance Report. 67 oversees the risks undertaken by the Company including determining the level or risk the Company expects to and is able to take. reviews the work done by the Company's management with respect to risk management and internal control systems; and Corporate Governance Report determines director selection, orientation and evaluation; ensures that the Group has appropriate risk management, internal control, internal audit and regulatory compliance procedures in place and that it communicates adequately with shareholders and stakeholders; establishes Board sub-committees with clear terms of reference and responsibilities as appropriate; defines levels of delegation in respect of specific matters, with required authority to Board sub-committees and management; monitors non-financial aspects pertaining to the businesses of the Group; • considers and, if appropriate, declares the payment of dividends to shareholders; and regularly evaluates its own performance and effectiveness. The Board delegates the responsibility of day-to-day business and operations to the Company's senior management team, which includes its chief officers, the president and executive vice-presidents. The senior management team meets once every two weeks or as frequent as necessary to formulate policies and make recommendations to the Board. The senior management team administers, enforces, interprets and supervises compliance with the internal rules and operational procedures of the Company as well as its subsidiaries and conducts regular reviews, recommends and advises on appropriate amendments to such rules and procedures. The senior management team reports to the Board on a regular basis and communicates with the Board whenever required. To better serve the long term interests of our stakeholders, the Board delegates certain matters requiring particular time, attention and expertise to its committees. The Board has determined that these matters are better dealt with by the committees as they require independent oversight and specialist input. As such, the Board has established five committees to assist the Board: Audit Committee, Corporate Governance Committee, Investment Committee, Nomination Committee and Remuneration Committee. Each of the committees has terms of reference which clearly specify its powers and authorities. All committees report back to the Board and make recommendations to the Board if necessary. The Company's governance structure of these committees can be summarised as follows: Audit Committee handles the relationship with the Company's external auditor; • reviews the Company's financial information; exercises oversight of the Company's financial reporting system; reviews and monitors the structure, size, composition and diversity of the Board in light of the Company's strategy; • identifies suitable and qualified individuals and makes recommendations to the Board as to new Board members, reviews and makes recommendations to the Board on individuals nominated to be directors by shareholders; Li Dong Sheng lain Ferguson Bruce lan Charles Stone Yang Siu Shun² Participated in continuous professional development' V V Independent non-executive directors √ 1 Attended training/ seminar/ conference arranged by the Company or other external parties or read relevant materials. 2 Mr Yang Siu Shun was appointed as an independent non-executive director of the Company with effect from 1 July 2016. Maintaining a high level of corporate governance and integrity cannot depend solely on the Board's efforts; each of the Group's employees is also required to contribute to such cause. A code of conduct policy with an emphasis on integrity and respect is distributed by the Company to all employees and forms part of their employment agreements. 69 Annual Report 2016 V Charles St Leger Searle Jacobus Petrus (Koos) Bekker Non-executive directors • assesses the independence of independent non-executive directors; and reviews and monitors the implementation of the board diversity policy of the Company. Remuneration Committee reviews and approves proposals about the policy and structure of remuneration of directors and senior management team; ensures these remuneration proposals are aligned to corporate goals and objectives; and ensures that no director or any of his associates is involved in deciding his own remuneration. Tencent Holdings Limited 68 Corporate Governance Report The work of the committees during the year 2016 is set out on pages 74 to 77. All directors have full and timely access to all relevant information as well as the advice and services of the Company's general counsel and the company secretary, with a view to ensuring Board procedures and all applicable rules and regulations are followed. All directors may also obtain independent professional advice at the Company's expense for carrying out their functions. We believe education and training are important for maintaining an effective Board. New directors undergo an orientation programme designed to provide a thorough understanding of the Group's operations and businesses, and also receive a handbook outlining their responsibilities under the Listing Rules and applicable laws. Existing directors are provided with tailored training programmes covering topics such as best practices in corporate governance, legal and regulatory trends and, given the nature of our business, emerging technologies and products. Directors also regularly meet with the senior management team to understand the Group's businesses, governance policies and regulatory environment. During the year ended 31 December 2016, the Company arranged training on topics relating to corporate governance, legal and regulatory updates and product trends which are relevant to the Group's businesses. The chart below summarises the participation of each of the directors in continuous professional development during the year ended 31 December 2016: Name of director Executive directors Ma Huateng Lau Chi Ping Martin by taking into account the individual's experience, knowledge, skills and background, as well as the Listing Rules requirements; Tencent Holdings Limited Beneficial owner Investment manager Trustee (other than a bare trustee) retains full and effective control over the Group and monitors management with regard to the implementation of the approved annual business plan and budget; 66 99 Tencent Holdings Limited determines the Group's communication policy; approves the Company's financial statements and interim and annual reports; • appoints the Chief Executive Officer, who reports to the Board, and ensures that succession is planned; • determines the Group's mission, provides its strategic direction and is responsible for the approval of strategic plans; approves the annual business plan and budget proposed by management; • The Board has defined the business and governance issues for which it needs to be responsible, and these matters are reviewed periodically to ensure that the Company maintains effective and up-to-date corporate governance practices. In this regard, the Board: The Board's fundamental responsibility is to exercise its best judgment and to act in the best interests of the Company and its shareholders. The Board oversees management's efforts to promote the Company's success while operating in an effective and responsible manner. The Board also formulates the Company's overall business strategy and monitors management's execution of such strategy. BOARD OF DIRECTORS The Board continues to monitor and review the Company's corporate governance practices and makes necessary changes at the appropriate time. Responsibilities CORPORATE GOVERNANCE PRACTICES 64 Directors' Report AUDITOR The financial statements have been audited by PricewaterhouseCoopers who will retire and, being eligible, offer themselves for re-appointment at the 2017 AGM. On behalf of the Board The Company's corporate governance practices are based on the code provisions as set out in the CG Code. The Board believes that throughout the year ended 31 December 2016, the Company complied with the applicable code provisions set out in the CG Code, except for the deviation from code provisions A.2.1 regarding the segregation of the role of the chairman and chief executive and A.4.2 regarding the retirement and re-election of directors. Chairman Ma Huateng 55 65 Annual Report 2016 Corporate Governance Report Maintaining the highest standards of corporate governance and ethical business practices are core values of the Group. The Board views effective corporate governance practices as a priority of the Group, with the aim of providing our investors with a thorough understanding of the Group's management and how such management oversees and manages different businesses of the Group. Our belief is that investors will realise significant long-term value when the Group's businesses are conducted in an open and responsible manner. Ethical business practices go hand in hand with strong corporate governance, and we believe that running our businesses in an ethical manner will lead to public trust and will ultimately create shareholder value for the Group. Long position Executive directors 1/1 Ma Huateng Lau Chi Ping Martin 5/5 5/5 == The Board is therefore of the view that there is an adequate balance of power and that appropriate safeguards are in place. Nevertheless, the Board will continue to regularly monitor and review the Company's current structure and to make necessary changes at an appropriate time. 1/1 Non-executive directors Jacobus Petrus (Koos) Bekker 5/5 4/4 Charles St Leger Searle Meeting 1/1 Tencent Holdings Limited Committee Committee A list of directors and their respective biographies are set out on pages 45 to 47 of this annual report. As at the date of this annual report, the Board is comprised of eight directors, with two executive directors, two non-executive directors and four independent non-executive directors. During the year ended 31 December 2016 and up to the date of this annual report, there is no change to the composition of the Board except that Mr Yang Siu Shun has been appointed as an independent non-executive director with effect from 1 July 2016. Composition Corporate Governance Report 10 2/2 8/8 Corporate Governance Report In addition, the Board has adopted various practices to bring the Group to a high level of corporate governance and compliance with the CG Code. In order to take advantage of the skills, experiences and diversity of perspectives of the directors and in order to ensure that the directors give sufficient time and attention to the Group's affairs, we request each of the directors to disclose to the Company, on a quarterly basis, the number and the nature of offices held in public companies or organisations and other significant commitments. The Board's composition is in compliance with the requirement under Rule 3.10A of the Listing Rules that the number of independent non-executive directors must represent at least one-third of the Board. The Board believes that the balance between the executive directors and the non-executive directors is reasonable and adequate to provide sufficient checks and balances that safeguard the interests of the shareholders and the Group. To stay abreast of the high level of corporate governance and maintain transparency of our corporate governance practices, we have continued to adopt and foster the following corporate governance practices: • review of the shareholders communication policy has been and will be conducted on a regular basis; 70 the company secretary attends training in compliance with the Listing Rules requirements; and informal updates from time to time and structured monthly updates on the Company's performance, position and prospects are provided to the directors. Chairman and Chief Executive Officer Mr Ma Huateng serves as the Chairman and Chief Executive Officer of the Company. This is at variance with code provision A.2.1 of the CG Code, which provides that the roles of chairman and chief executive should be separate and should not be performed by the same individual. The division of responsibilities between the chairman and chief executive should be clearly established and set out in writing. In view of the ever-changing business environment in which our Group operates, the Chairman and Chief Executive Officer must be technically sophisticated and sensitive to fast and rapid market changes, including changes in users' preferences, in order to promote the different businesses of the Group. The Board thus considers that a segregation of the role of the Chairman and Chief Executive Officer may create unnecessary costs for the daily operation of the Group. Besides, all major decisions have been made in consultation with members of the Board and appropriate committees, as well as the senior management team. Chief officers and senior executives are invited to attend Board meetings from time to time to make presentations and answer Board's enquiries. In addition, directors are encouraged to participate actively in all Board and committee meetings of which they are members, and the Chairman ensures that all issues raised are properly briefed at the Board meetings, and together with the senior management team, provide adequate, accurate, clear, complete and reliable information to members of the Board in a timely manner. Further, the Chairman ensures that adequate time is available for discussion for all items at the Board meetings. During the year ended 31 December 2016, the Chairman held a meeting with the non-executive directors (including the independent non-executive directors) without the presence of the executive directors as required by the Listing Rules. • The Board values the importance of professional judgment and advice provided by non-executive directors to safeguard the interests of the shareholders. The non-executive directors contribute diversified qualifications and experience to the Group by expressing their views in professional, constructive and informed manner, and actively participate in Board and committee meetings and to bring professional judgment and advice on issues relating to the Group's strategies, policies, performance, accountability, resources, key appointments, standards of conduct, conflicts of interests and management process, with the shareholders' interests being the utmost important factor. The non-executive directors also exercise their professional judgment and utilise their expertise to scrutinise the Company's performance in achieving agreed corporate goals, and monitor performance reporting. Further, in compliance with Rule 3.10 of the Listing Rules, two of our independent non-executive directors have the appropriate professional qualifications of accounting or related financial management expertise, and provide valuable advice from time to time to the Board. The Company has also received from each independent non-executive director a confirmation annually of his independence and the Nomination Committee has conducted an annual review and considers that all independent non-executive directors are independent, taking into account of the independence guidelines set out in Rule 3.13 of the Listing Rules in the context of the length of service of each independent non-executive director. As part of our corporate governance practice to provide transparency to the investor community and in compliance with the Listing Rules and the CG Code, independent non-executive directors are identified as such in all corporate communications containing the names of the directors. In addition, an updated list of directors identifying the independent non-executive directors and the roles and functions of the directors is maintained on the Company Website and the Stock Exchange's website. General Remuneration Nomination Governance Audit Committee Board Name of director Annual Corporate Attendance/ No. of Board, Committee Meetings and Annual General Meeting The Board meets four times during the year as a minimum and, during the year of 2016, it met five times. The attendance of each director at Board, committee meetings and annual general meeting, whether in person or by means of electronic communication, is detailed in the table below: Board Activity Corporate Governance Report 72 Tencent Holdings Limited The Chairman, in accordance with the Articles of Association, whilst holding such office is not subject to retirement by rotation nor taken into account in determining the number of directors to retire in each year. Therefore, there is a deviation from code provision A.4.2 of the CG Code. The Chairman is one of the founders of the Group and he plays a key role in the growth and development of the Group and his continuing presence in the Board is vital to assure sustainable development of the Group. Given the importance of the Chairman's role in the development of the Group, the Board considers that the deviation from code provision A.4.2 of the CG Code has no material impact on the operation of the Group as a whole. The Board is the core of the Group's success, and with the appropriate composition of the Board, we can benefit from the right set of skills, experience and diversity of perspectives to take the Company forward. Therefore, it is essential for the Company to maintain a formal, considered and transparent procedure for the appointment of new directors to the Board. It is our corporate governance practice and in accordance with the Articles of Association that all directors (except for the Chairman) should be subject to re-election at regular intervals and the resignation and removal of any director should be explained with reasons. In the 2016 annual general meeting, Messrs Jacobus Petrus (Koos) Bekker and lan Charles Stone retired and were re-elected. Code provision A.4.2 of the CG Code provides that all directors appointed to fill a casual vacancy should be subject to election by shareholders at the first general meeting after appointment. Every director, including those appointed for a specific term, should be subject to retirement by rotation at least once every three years. Appointments, Re-election and Removal Corporate Governance Report Annual Report 2016 71 Committee training has been and will continue to be provided to directors on a timely basis, including briefing the directors on any updates to the Listing Rules and relevant laws; 5/5 the adequacy of resources, qualifications and training of the Group's finance department; and 73 Annual Report 2016 Corporate Governance Report The company secretary ensures that there is a good and timely flow of information to the Board. The company secretary is responsible for taking minutes of all Board and committee meetings and ensuring that sufficient details of the matters considered and decisions reached have been recorded. Draft and final version of the minutes of meetings are sent to the directors for comments and records respectively within a reasonable time after each meeting, and final minutes with the relevant board papers and related materials are kept by the company secretary and are available for review and inspection by the directors at any time. THE COMMITTEES As described above, the Board has established five committees each of which has been delegated responsibilities and reports back to the Board: Audit Committee, Corporate Governance Committee, Investment Committee, Nomination Committee and Remuneration Committee. The roles and functions of these committees are set out in their respective terms of reference. The terms of reference of each of the Corporate Governance Committee, the Investment Committee and the Nomination Committee were revised in July 2016 to ensure they continue to meet the needs of the Company and to ensure compliance with the CG Code. The terms of reference of the Audit Committee, the Nomination Committee and the Remuneration Committee are available on the Company Website and the Stock Exchange's website. Audit Committee The Audit Committee comprises only non-executive directors. Its members are Mr lain Ferguson Bruce, Mr lan Charles Stone, Mr Yang Siu Shun (appointed as a member of the Audit Committee with effect from 1 July 2016) (all of them are independent non-executive directors) and Mr Charles St Leger Searle (non-executive director). Mr lain Ferguson Bruce, who chairs the Audit Committee, and Mr Charles St Leger Searle and Mr Yang Siu Shun have appropriate professional qualifications and experiences in financial matters. The Audit Committee meets not less than four times a year; in 2016 the Audit Committee met eight times. Individual attendance of each Audit Committee member is set out on page 73. In addition to the members of the Audit Committee, meetings were attended by the Chief Financial Officer, the Head of IA and the Head of IC, and the external auditor at the invitation of the Audit Committee. The Audit Committee's main work during the year 2016 includes reviewing: the 2015 annual report, including the Corporate Governance Report, Directors' Report and the financial statements, as well as the related results announcement; the 2016 interim report and interim results announcement; At the Board meetings, the Board discussed a wide range of matters, including the Group's overall strategies, financial and operational performances, approved the annual, interim and quarterly results of the Group, the appointment of directors, business prospects, regulatory compliance and corporate governance, and other significant matters. The company secretary, in consultation with the Chairman and the senior management team, prepares the agenda for each meeting and all directors are given the opportunity to include matters for discussion in the agenda. The company secretary also ensures that all applicable rules and regulations in relation to the Board meetings are followed. The company secretary sends notice of the Board meeting to each of the directors at least 14 days in advance of each regular Board meeting. The company secretary also sends the agenda, board papers and relevant information relating to the Group to each of the directors at least 3 days in advance of each regular Board meeting and committee meeting, and keeps the directors updated on the Group's financial performance and latest developments. If any director raises any queries, steps will be taken to respond to such queries as promptly and fully as possible. If there is potential or actual conflict of interests involving a substantial shareholder or a director, such director will declare his interest and will abstain from voting on such matters. The directors may approach the Company's senior management team when necessary. The directors may also seek independent professional advice at the Company's expense in appropriate circumstances. • • compliance with the CG Code, the Listing Rules and relevant laws; in relation to the external auditor, their plans, reports and management letter, fees, involvement in non-audit services, and their terms of engagement; Tencent Holdings Limited 74 Corporate Governance Report • the plans (including those for 2016), resources and work of the Company's internal auditors; the effectiveness of the Company's financial reporting system, the system of internal controls in operation, risk management system and associated procedures within the Group. PricewaterhouseCoopers ("PwC") is the Group's external auditor. The Audit Committee annually reviews the relationship of the Company with PwC. Having also reviewed the effectiveness of the external audit process as well as the independence and objectivity of PwC, the Audit Committee is satisfied with this relationship. As such, the Audit Committee has recommended their re-appointment at the 2017 AGM. Corporate Governance Committee The Corporate Governance Committee comprises only non-executive directors. Its members are Mr Charles St Leger Searle (non-executive director), Mr lain Ferguson Bruce, Mr lan Charles Stone and Mr Yang Siu Shun (appointed as a member of the Corporate Governance Committee with effect from 1 July 2016) (all of them are independent non-executive directors). The Corporate Governance Committee is chaired by Mr Charles St Leger Searle. the 2016 first and third quarters results announcements; During 2016, the Corporate Governance Committee discussed on the arrangements made for directors and senior management team to attend training sessions for continuous professional development, reviewed the Company's compliance with the CG Code and disclosure in the Corporate Governance Report, and reviewed the Company's policies and practices on corporate governance, and legal and regulatory compliance, including the insider dealing policy, the disclosure of inside information policy and the shareholders communication policy. Mr Yang Siu Shun was appointed as an independent non-executive director of the Company with effect from 1 July 2016. 1/1 1/1 == 1/1 1/1 Independent non-executive directors Li Dong Sheng 5/5 1/1 1/4 0/1 lain Ferguson Bruce 5/5 * 8/8 1/1 1/1 lan Charles Stone 5/5 8/8 2/2 1/1 4/4 1/1 Yang Siu Shun* 3/3 4/4 2/2 Investment Committee The Corporate Governance Committee met twice in 2016. Individual attendance of each Corporate Governance Committee member is set out on page 73. In 2016, the Investment Committee met once, and had also considered and passed various resolutions on its decisions on the Group's acquisitions and disposals. The First Line of Defence -- Operation and Management The first line of defence is mainly formed by the business and functional departments of each business group of the Company who are responsible for the day-to-day operation and management. It is responsible for designing and implementing controls to address the risks. The Second Line of Defence -- Risk Management The second line of defence is mainly the IC. This line of defence is responsible for formulating policies related to the risk management and internal control of the Company and for planning and implementing the establishment of integrated risk control systems. For ensuring effective implementation of such systems, this line of defence also assists and supervises the first line of defence in the establishment and improvement of risk management and internal control systems. The Third Line of Defence -- Independent Assurance The third line of defence mainly consists of the functions of internal audit and anti-fraud investigation under the IA. The IA holds a high degree of independence and is responsible for providing an independent evaluation on the effectiveness of the Company's risk management and internal control systems. The anti-fraud investigation function is responsible for receiving whistleblower reports through various channels and for following up and investigating alleged fraudulent activities. It also assists management in promoting the "Tencent Sunshine Code of Conduct" (the "Sunshine Code") and the value of integrity to all employees of the Company. The IA has direct reporting lines to the Audit Committee. These systems are designed to manage rather than eliminate the risk of failure to achieve business objectives, and can only provide reasonable but not absolute assurance against material misstatement or loss. Risk Management The Company is committed to continuously improving the risk management system, including structure, process and culture, through the enhancement of risk management ability, to ensure long-term growth and sustainable development of the Company's business. The Company has established a risk management system (including the "three lines of defence" model as detailed above) which sets out the roles and responsibilities of each relevant party as well as the relevant risk management policies and processes. Each business group of the Company, on a regular basis, identifies and assesses risk factors that may negatively impact the achievement of its objectives, and formulates appropriate response measures. Tencent Holdings Limited 78 Corporate Governance Report Risk Management Process Being an Internet company with a wide variety of rapidly-changing businesses, the Company has adopted the following dynamic risk management process in response to the ever-changing risk landscape: Business and functional departments of each business group identify, assess and respond to risks in the course of operation in a systematic manner, escalating concerns and communicating results to the IC; The IC collects, analyses and consolidates a list of significant risks at the company level, and provides input on risk response strategies and control measures for such risks. These significant risks as well as the corresponding risk responses and control measures will be reviewed by senior management and subsequently by the Audit Committee before reporting to the Board; The IC reviews and evaluates the responses to significant risks from time to time, and reports to the Audit Committee at least once a year; and The Audit Committee, on behalf of the Board, assesses and determines the nature and level of the risks that the Company is willing to take in order to achieve its business objectives and formulates appropriate response strategies which includes designating responsible departments for handling each significant risk. The Audit Committee provides guidance to the Company's management to implement effective risk management system with supports from the IC. Significant Risks of the Company In 2016, the Company identified and determined the significant risks of the Company through the risk management process detailed above. On behalf of the Board, the Audit Committee assists the Board in supervising the overall risk status of the Company and evaluating the change in the nature and severity of the Company's major risks. The Audit Committee considers that management has taken appropriate measures to address and manage the key risks which they are responsible for at a level acceptable to the Board. Below is a summary of the significant risks of the Company along with the applicable response strategies. With the growth of business scale, extent, complexity and the changing external environment, the Company's risk profile may change and the list below is not intended to be exhaustive. 79 Annual Report 2016 The Investment Committee comprises a majority of executive directors. Its members are Mr Lau Chi Ping Martin, Mr Ma Huateng and Mr Charles St Leger Searle. The Investment Committee is chaired by Mr Lau Chi Ping Martin. Annual Report 2016 Corporate Governance Report To ensure that the risk management and internal control systems are effective, the Company, under the supervision and guidance of the Board and factoring the actual needs of the Company, has adopted the "three lines of defence" model as an official organisational structure for risk management and internal control. Nomination Committee The Nomination Committee comprises a majority of independent non-executive directors. Its members are Mr Ma Huateng, Mr Li Dong Sheng, Mr lain Ferguson Bruce, Mr lan Charles Stone (all three are independent non-executive directors) and Mr Charles St Leger Searle (non-executive director). The Nomination Committee is chaired by Mr Ma Huateng. The Nomination Committee met once in 2016. Individual attendance of each Nomination Committee member is set out on page 73. 75 Annual Report 2016 Corporate Governance Report During 2016, the Nomination Committee reviewed board composition and director succession, and the board diversity policy. The Nomination Committee has also identified, discussed, considered and made a recommendation to the Board on the proposed appointment of Mr Yang Siu Shun as an independent non-executive director of the Company. The Nomination Committee has also assessed the independence of the independent non-executive directors and considers all of them to be independent, taking into account of the independence guidelines set out in Rule 3.13 of the Listing Rules in the context of the length of service of each independent non-executive director. The Company recognises the benefits of having a diverse Board, and views diversity at Board level as a business imperative that will help the Company achieve its strategic objectives and maintain a competitive advantage. As such, the Board has set measurable objectives for the implementation of the board diversity policy to ensure that the Board has the appropriate balance of skills, experience and diversity of perspectives that are required to support the execution of its business strategy and maintain the effectiveness of the Board. The Nomination Committee is satisfied that the board diversity policy is successfully implemented with reference to the measurable objectives. The Nomination Committee will continue to monitor the implementation of the board diversity policy and will review the board diversity policy periodically to ensure its continued effectiveness. Remuneration Committee The Remuneration Committee comprises only non-executive directors. Its members are Mr lan Charles Stone, Mr Li Dong Sheng (both are independent non-executive directors) and Mr Jacobus Petrus (Koos) Bekker (non-executive director). The Remuneration Committee is chaired by Mr lan Charles Stone. 77 The Remuneration Committee has the delegated responsibility to determine the remuneration packages of each member of the senior management team and make recommendations to the Board on the remuneration packages of each director. The Remuneration Committee's main work during the year 2016 includes the following: The Remuneration Committee met four times in 2016. Individual attendance of each Remuneration Committee member is set out on page 73. reviewing and recommending to the Board on the remuneration packages for the directors, including Mr Yang Siu Shun (who was appointed as an independent non-executive director with effect from 1 July 2016); The Board acknowledges that it is the Board's responsibility to ensure that the Company has established and maintained adequate and effective risk management and internal control systems. The Board delegates its responsibility to the Audit Committee to review the practices of management with respect to risk management and internal control, including the design, implementation and supervision of the risk management and internal control systems. This review formally takes place on a quarterly basis. The Audit Committee also reviews the effectiveness of the risk management and internal control systems on an annual basis. The Board is responsible for overseeing the risk appetite of the Company including determining the level of risk the Company expects and is able to take, and proactively considering, analysing and formulating strategies to manage the key risks that the Company is exposed to. The Audit Committee oversees the management of the design, implementation and monitoring of risk management and internal control systems. Adequate and effective risk management and internal control systems are key to safeguarding the achievement of the Company's business strategies. The risk management and internal control systems shall also ensure the achievement of the Company's objectives in operational effectiveness and efficiency, reliable financial reporting, and compliance with applicable laws, regulations and policies. As part of the Board's responsibility, the Board ensures that a balanced and clear assessment of the Group's performance and prospects is presented. The directors acknowledge that it is their responsibility to prepare the accounts that give a true and fair view of the Group's financial position on a going-concern basis and other announcements and financial disclosures. To assist the Board in discharging its responsibilities, the senior management team provides updates to the Board from time to time, including the Group's business and financial position in sufficient detail, to give the directors a balanced, understandable and clear assessment of the performance, position and prospects of the Group. The senior management team also provides all necessary and relevant information to the Board, giving the directors sufficient explanation and information they need to discharge their responsibilities and make an informed assessment of financial and other information put before them for approval. The Company auditor's statement in respect of their reporting responsibilities is set out in the "Independent Auditor's Report". reviewing and recommending to the Board in respect of the remuneration policies and structure of the Company by benchmarking peer companies with a similar scale to ensure that the Company's remuneration packages are competitive to recruit the best talents in the industry and to retain key staff; In respect of non-executive directors, the Remuneration Committee has reviewed the fees payable to them taking into account the particular nature of their duties, relevant guidance available and the requirements of the Listing Rules. ACCOUNTS, RISK MANAGEMENT AND INTERNAL CONTROL Corporate Governance Report 76 Tencent Holdings Limited reviewing and approving compensation awards granted to senior management team, to recognise their contributions to the Company and to provide incentives for future performances. assessing performance and, reviewing and approving amendments to the remuneration packages for the members of the senior management team; and In conducting its work in relation to the remuneration of directors and senior management team, the Remuneration Committee ensured that no individual or any of his associates was involved in determining his own remuneration. It also ensured that remuneration awards were determined by reference to the performance of the individual and the Company and were aligned to the market practice and conditions, the Company's goals and strategies. They are designed to attract, retain and motivate high performing individuals, and reflect the specifics of individual roles. With the Company's increased investment activities, it is important for the Company to adopt robust procedures in the formulation of investment strategies and strong treasury management, both at the investment evaluation stage as well as the post-investment stage. Failure to promptly manage investment risks could hinder the realisation of investment strategies. 3. Acquisition and investment management risk In order to mitigate this risk, the Company has backup infrastructure and a disaster recovery mechanism in place to support disaster recovery functions. In addition, the Company has established dedicated teams to develop business contingency plans and perform periodic drills on the plans to ensure its effectiveness. Various business departments are also engaged in emergency procedures, to ensure the smooth operation of the Company's businesses and business continuity. The stability of servers and network infrastructure for products and platforms of the Company is of vital importance for the successful operation of the Company's business as well as the provision of high quality user experience. Any material functional defect, interruption, breakdown or other issue in connection is likely to materially adversely impact the Company's businesses. Business continuity risk Our ESG Direction The Company not only encourages its employees to innovate, but also allocates considerable resources to the research and development of new technologies and the optimatisation of features as well as enhancement of user experience of products. The Company focuses on user experience by keeping track of the development of new technologies in a timely manner, capturing changes in user experience, and continuously developing products to meet the expectations of the market. In addition, as a proponent of "Internet+" and in order to foster its leading position in the industry, the Company has established a number of open platforms and strengthened its cooperation with business partners with the aim of enhancing mutual benefit to achieve the win-win objective. The Internet industry is highly competitive, innovative and ever-changing due to the relatively low entry barrier and evolving preferences of users. Therefore, one of the challenges of the Company is to attract new users while maintaining its existing market share. Absence of new technology and product innovation would impair the core competitiveness of the Company. Market competition and innovation risk 1. Corporate Governance Report The Company takes the management of investment risks seriously, and has, amongst other things, established an Investment Committee under the Board, dedicated an investment team to identify investment opportunities, appointed finance, legal and other relevant professional teams to manage relevant risks and put in place the investment risk evaluation and approval process. 2. In addition, there is a designated professional team that regularly reviews the Company's cash position and, continuously expands financing channels and capabilities to meet the needs from the Company's business operations as well as acquisitions. Tencent Holdings Limited 80 Business operations 1. Five Dimensions of our ESG Strategy At the heart of our ESG strategy is our vision to become the most respected Internet company. In pursuit of this vision, we embrace the principle of sustainability, uphold integrity and promote shared growth and development within the industry; environmental protection, staff development and community welfare are always at the forefront. We conduct and review our ESG strategy in five dimensions as detailed below. We believe that it is important to formulate effective strategies to balance the economic, environmental and social benefits of our activities with our other business aims. We have fully integrated ESG considerations into our operations as part of our corporate development strategy, with a particular focus on fostering closer connections with our stakeholders, listening to the voices of our users, working openly with partners to overcome challenges, caring for and growing with employees, and taking on more responsibility within society. ESG STRATEGY, MANAGEMENT APPROACH, PRIORITIES AND OBJECTIVES This report aims to provide a balanced representation of the Group's ESG performance in terms of environment, workplace, community, supply chain management and product responsibility. We will focus on each of these areas in turn in this report, in particular those economic, environmental and social issues that could have a material impact on the sustainability of our operations and that are of interest to stakeholders. SCOPE OF THIS REPORT This report provides information on the Group's environmental, social and governance ("ESG") performance for the year of 2016. It should be read in conjunction with this annual report, in particular the Corporate Governance Report contained in this annual report, as well as the sections headed "Corporate Governance" and "Culture" on the Company Website. OVERVIEW Environmental, Social and Governance Report Annual Report 2016 85 87 Annual Report 2016 Environmental, Social and Governance Report "Internet+" has significant implications for our ESG initiatives. Important changes can be achieved through connecting millions of Internet users as well as developing their modes of communication and living, and creating more exciting opportunities for society. In addition, through the "smart living" system in QQ and Weixin/WeChat, people and public services can be digitally connected, facilitating developments in transport, healthcare, environmental protection, public safety and other social arenas. This is important for optimising the distribution of societal resources, driving innovation in public services, improving service quality, breaking down communication barriers and ultimately benefiting the wider community. We will leverage our core capability in the Internet, technology and communication spheres to develop innovative approaches to resolving social issues, promoting social development and protecting the interests of the public. We also aim to drive ESG awareness in society, through collaborating with our stakeholders and other industry players. Going forward, we will continue to enhance our corporate management system and integrate ESG considerations into our operations. We will closely cooperate with our stakeholders with the aim of creating a better future. ENVIRONMENT We recognise the importance of environmental protection and conservation of natural resources in our business operations. Starting from our office buildings in Shenzhen, we have implemented a number of energy-saving measures and we plan to adopt the same in our office spaces in other locations. We have also strived to build our data centres with environmental considerations as one of our key priorities. Energy Saving Measures taken in our Office Buildings In order to reduce the energy consumption in our Shenzhen headquarter, we have optimised the air conditioning system, upgraded the building automation system, and installed equipment with new functions for better efficiency. These optimisations have enabled us to efficiently reduce energy consumption for the air conditioning system and for the whole building, and to reduce our CO2 emissions. This energy saving project has been certified by the China Academy of Building Research and accredited by Shenzhen local authority. We are among the first companies which were granted subsidies from the Ministry of Housing and Urban-Rural Development of the PRC for the energy saving efforts. The project has set a good precedent not only for our other office buildings but also for other office buildings in Shenzhen. In addition, we have installed a direct drinking water system in our Shenzhen headquarter in replacement of bottled water. It reduces the use of plastic packaging materials and indirectly reduces the CO2 emissions generated from the delivery of bottled water. This effective energy saving measure will also be implemented in our offices in other PRC cities in the future. We are also actively involved in the design of our new office building in Shenzhen and have taken energy saving considerations into account during the process. Tencent Holdings Limited Under the framework, if an employee is aware of any project, transaction, information or situation which he thinks could potentially be inside information, he should contact the Head of Compliance, the General Counsel and the Company Secretary as soon as possible. Legal analysis and consultations with the Company's directors and senior executives will be made so as to identify whether any such information constitutes inside information and is required to be disclosed to the public pursuant to the SFO. The framework and its effectiveness are subject to review on a regular basis according to established procedures. 88 Environmental, Social and Governance Report Energy Saving Measures taken in our Data Centres • Operate in compliance with applicable laws and regulations • Operate with integrity and protect shareholders' interests • Through this approach we are able to create a favourable environment that will enable us to provide quality services to Internet users and promote the positive development of wider society. Remain committed to environmental sustainability Adopt a sustainable investment strategy • Make protection of the environment one of our priorities Environment 5. Contribute to the industry and continue to provide an open platform • . Promote innovation and the establishment of a legal framework to protect IP rights Establish a platform for charity donations Community Combat behaviours which are harmful to the interest of our partners by setting up an independent steering group on business ethics and anti-bribery practice Hold regular meetings with our partners to review their performance and explore possible collaboration opportunities Allow investee companies to maintain autonomy for their business development and meet them on a regular basis for exchange of industry knowledge and know-how We endeavour to fulfil our responsibility to protect the environment by applying innovative technology to our data centres. Ensure our partners receive fair treatment and benefit from their collaboration with us • Business partners (including suppliers and investee companies) Prioritise users' interests in business decision-making Be honest to users and protect their interests Consistently listen to the voices of our users, concurrently enhancing product and service quality . Users 4. 3. 2. Environmental, Social and Governance Report 86 Tencent Holdings Limited Care for employees and provide them with training and development opportunities Establish a diverse corporate culture • Our ESG strategy requires the participation of all of our product lines and platforms, and participation from across the wider Internet industry. We will continue to place more emphasis on ESG, encouraging every individual, enterprise and organisation to take part in the implementation of our ESG strategy. Our T-block west lab is the fourth generation of our data centres and it is the most innovative. It has adopted: (i) photovoltaic + HVDC technology for electrical design which offers a clean and effective energy source; (ii) indirect evaporative cooling units to cool down entire block modules; and (iii) machine-learning automated system which monitors the energy level for rack space and minimises the power usage effectiveness (the index of which is lower when it is more effective). These technologies tremendously improve the energy efficiency of the data centre. For example, our T-block west lab now only needs 70% of previously required energy for the same capability. For our Qingpu data centre, we have one of the largest photovoltaic grids used by a data centre in the PRC which provides 100% clean energy. In phase one of the project, we have built 3,000 square metres of photovoltaic grid which produces 300MWh electricity and reduces CO2 emission by 200 tonnes on an annual basis. The solar panel on the rooftop is also thermally insulated so it helps save energy in summer. 82 Tencent Holdings Limited In addition, the IC supervises the establishment of the risk management and internal control systems set up by management, ensure that management has implemented appropriate measures and report the general situation of risk management and internal control of the Company to the Audit Committee on a quarterly basis. The IA, serving as the independent third line of defence, conducts objective evaluation on the effectiveness of the Company's risk management and internal control systems and reports the results to the Audit Committee. In order to further strengthen the accountability of the management team in the internal control systems of the Company and to assist in determining the effectiveness of such internal control systems, the management team of each business group conducts self-assessment and confirms the internal control status of the business group for which it is responsible. The IC assists the management in preparing a self-assessment questionnaire according to the COSO Framework, and guides the management of each business group to carry out the self-assessment. The IC is also responsible for collecting and summarising the results of self-assessment. The Chief Executive Officer of the Company reviews this summarised self- assessment of each business group, assesses the general effectiveness of the internal control systems of the Company, and submits the written confirmation thereof on behalf of the senior management team of the Company to the Audit Committee and the Board. Management Self-assessment The Company's internal control systems clearly define roles and responsibilities of each party as well as authorisations and approvals required for key actions of the Company. Policies and procedures are put in place for the key business processes. This information is also clearly conveyed to employees in practice and plays an important role in internal control systems. All employees must strictly follow the policies which cover, amongst other things, financial, legal and operational issues that set the control standards for the management of each business process. Management of the Company is responsible for the design, implementation and maintenance of the effectiveness of internal control systems. The Board and the Audit Committee are responsible for monitoring and overseeing the performance of management over the internal control systems to ensure it is appropriate and effective. Framework. The Company has always valued the importance of the internal control systems, and has been implementing the COSO Internal Control The Company has long been endeavoring to promote the healthy development of the Internet industry, and efforts are being made to make the products and platforms of the Company exert a positive community influence. The Company strictly controls third party access to the content on the Company's platform and products and prohibits businesses that are not in compliance with laws and regulations. The Company has also established supervisory and whistleblowing mechanisms to minimise and manage the spread of illegal and malicious information. Corporate Governance Report Annual Report 2016 81 With the diverse products and platforms of the Company and its expanding user base, the products and platforms of the Company have gained considerable influence in wider society. The Company's products and platforms are subject to increased scrutiny from a social responsibility perspective. Social responsibility risk 6. The Company has set up several professional departments and teams that work closely with management of business groups to monitor and identify changes in any relevant laws and regulations, so as to take appropriate actions or measures to ensure the Company is in compliance with applicable laws and regulations. In addition, the Company also actively exchanges view and information with relevant regulatory authorities on the trend and development of Internet industry. Although the Internet and technology industry is still evolving, regulatory authorities in numerous jurisdictions have been, in an attempt to keep up with such evolution, developing more comprehensive and stringent regulations to regulate the industry. As the Company is continuously expanding its businesses in the PRC and overseas, it is required to comply with the new applicable laws and regulations in different jurisdictions that are specifically relevant to the Company's businesses, such as laws relating to data protection, Internet information security, IP, gaming and Internet finance. Governance policies and regulations risk 5. The Company is obliged to protect sensitive user information and as such, the Company strives to provide the highest level of protection to such data. In this regard, the Company has formulated policies and control measures to protect user data. Information security is ensured through effective management systems, encryption, access restrictions and process protocols. In addition, the Company performs review periodically and engages independent specialists to review the Company's data protection practices and provides training programmes to employees to enhance their awareness of information security. Protecting user data is the top priority of the Company, and the Company is fully aware that any loss or leakage of sensitive user information could have a negative impact on affected users and the Company's reputation, even lead to potential legal action against the Company. Information security risk 4. Moreover, the Company has allocated delicated resources from IA and IC perspectives to support management of its controlling subsidiaries to continuously established sound risk management and internal control systems. The Company has also designated finance, legal and other relevant professional teams to support and monitor the performance of the investee companies. These teams periodically analyse and review relevant operating and financial information of the investee companies to ensure that they continue to satisfy the Company's investment strategies. Corporate Governance Report 80 Corporate Governance Report Effectiveness of Risk Management and Internal Control The Audit Committee, on behalf of the Board, continuously reviews the risk management and internal control systems. The review process comprises, among other things, of meetings with management of business groups, IA, IC, legal, and the external auditors, reviewing the relevant work reports and information of key performance indicators, the management self- assessment on internal control as detailed above and discussing the major risks with the senior management of the Company. The Board is of the view that throughout the year ended 31 December 2016, the risk management and internal control systems of the Company are effective and adequate. In addition, the Board believes that the Company's accounting and financial reporting functions have been performed by staff of the appropriate qualifications and experience and that such staff receives appropriate and sufficient training and development. Based on the work report from the Audit Committee, the Board also believes that the Company's internal audit function is adequate with sufficient resources and budget. The relevant staff has appropriate qualifications and experience, and receives sufficient training and development. WORKPLACE Employee Development and Training We have a well-established performance management system. A performance assessment for each employee is conducted by that employee's supervisor every six months and employees are required to work with their supervisors to set a performance target after each assessment. Supervisors are encouraged to provide constructive feedback from time to time to assist the personal growth of each employee. As employees are one of our most important assets, we have been investing heavily in employee development and training. In 2007, we founded our own corporate university, Tencent Academy. Throughout 2016, the number of the average in-house training hours per employee was 26.1 while the number of online trainings completed by our employees in total was 157,753. Tencent Academy offers different training programmes for each stage of an employee's career, including an induction, on- the-job training and leadership training. It has also set up an online learning platform and a mobile learning system in order to allow employees to learn anytime and anywhere. We also intend to open up our training resources to our business partners and industry players in order to enhance the market standard. 89 Annual Report 2016 The Company has put in place a framework for the handling and disclosure of inside information in compliance with the SFO. The framework sets out the procedures and internal controls for the handling and dissemination of inside information in a timely manner so as to allow all the shareholders and stakeholders to assess the latest position of the Group. Framework for Disclosure of Inside Information The statement of the external auditor of the Company about their reporting responsibilities for the financial statements is set out in the "Independent Auditor's Report" on pages 100 to 108. During the year ended 31 December 2016, the remuneration paid/payable to the Company's external auditor, PwC, was disclosed in Note 8 to the consolidated financial statements. The audit and audit-related services conducted by the external auditor mainly comprise of statutory audits and reviews for the Group, certain of its subsidiaries and acquired entities. The non-audit services conducted by the external auditor mainly include professional services on risk management and internal control review, mergers and acquisitions advisory and tax advisory. External Auditor and Auditor's Remuneration The Company has arranged appropriate directors and officers liability insurance in respect of legal action against the directors and officers. Directors and Officers Liability Insurance Corporate Governance Report 84 In our Shanghai Qingpu CCHP (Combined Cooling Heating and Power) project, we have built a distributed power station that uses a natural gas generator and flue gas hot water type lithium bromide unit as the core component for electricity and cooling capability required by the data centre. The natural gas-fired distributed power system enables energy cascading. We use high- quality natural gas with high efficiency to generate high-quality electricity. Steam and condensation produced from the power generation are re-used for cooling. The overall energy utilisation can be increased by up to approximately 80%. Tencent Holdings Limited Appointment Terms of Non-Executive Directors The Company has adopted the Model Code. The Company has also adopted an insider dealing policy for employees for securities transactions by employees who are likely to be in possession of inside information relating to the Company, the terms of which are no less exacting than those of the Model Code. The Company has made specific enquiries with the directors and the directors have confirmed they have complied with the Model Code throughout 2016. Model Code for Securities Transactions by Directors of Listed Issuers The Company is required to disclose certain information pursuant to the Listing Rules and the CG Code. We set out these information below which has not been covered above. DISCLOSURE OF OTHER INFORMATION Apart from participating in the Company's general meetings, the Company's shareholders are provided with contact details of the Company, such as telephone number and email address which are available on the Company Website, in order to enable them to make any query that they may have. Shareholders may send their enquiries to the Board directly through these means. Shareholders may also contact the Company's Hong Kong branch share registrar, Computershare Hong Kong Investor Services Limited, if they have any enquiries about their shareholdings and entitlements to dividends. In order to ensure that shareholders' interests and rights are adequately protected, a separate resolution will be proposed for each substantially separate issue at the general meetings, and all resolutions will be voted by poll pursuant to the Articles of Association and the Listing Rules. To ensure the shareholders are familiar with the detailed procedures for conducting a poll, detailed procedures for conducting a poll are explained at the commencement of the general meetings, and all questions from shareholders on the voting procedures will be answered before the poll voting starts. An external scrutineer will be appointed to monitor and count the votes cast by poll. Poll results will be posted on the Company Website and the Stock Exchange's website after each general meeting. Pursuant to the Articles of Association, any one or more shareholder(s) of the Company holding at the date of deposit of the requisition not less than one-tenth of the paid up capital of the Company carrying the right of voting at general meetings of the Company shall at all times have the right, by written requisition to the Board or the Company Secretary, to require an extraordinary general meeting to be called by the Board for the transaction of any business specified in such requisition; and such meeting shall be held within two months after the deposit of such requisition. Corporate Governance Report Annual Report 2016 83 The Company's general meetings provide a transparent and open platform for the Company's shareholders to communicate with the Board and the senior management team. The Chairman, other members of the Board and relevant members of the senior management team, under normal circumstances, attend to answer questions raised and discuss matters in relation to the Company in an open manner. Save as Mr Li Dong Sheng, all directors attended the 2016 annual general meeting, with a view to understand the views of the Company's shareholders. The company secretary provided the minutes of 2016 annual general meeting to all directors to have a thorough understanding of the views of the Company's shareholders. The Company's external auditor will also attend the annual general meeting to answer questions relating to the conduct of the audit, the auditor's report and auditor independence. The Company's shareholders may also propose candidates for election as a director of the Company according to the procedures set out in the Company Website. The Company strives to provide ready, equal, regular and timely disclosure of information that is material to the investor community. Therefore, the Company works to maintain effective and on-going communication with shareholders so that they, along with prospective investors, can exercise their rights in an informed manner based on a good understanding of the Group's operations, businesses and financial information. The Company also encourages shareholders' active participation in annual general meetings and other general meetings or other proper means. As such, the Company sends notices to shareholders for annual general meetings at least 20 clear business days before the meeting and at least 10 clear business days for all other general meetings. In addition, the Company has developed and maintains the shareholders communication policy, which is available on the Company Website. SHAREHOLDERS Each non-executive director, whether independent or not, is appointed for a term of one year and is subject to retirement by rotation at least once every three years. A director appointed to fill a casual vacancy or as an addition to the Board will be subject to re-election by shareholders at the first general meeting after his appointment. • The PRC Tencent Holdings Limited Ma Huateng Chairman Chairman's Statement 3 Annual Report 2017 Comparative figures have been restated retrospectively to conform with the presentation adopted in 2015, whereas, among others, we have extended the definition of non-GAAP adjustments to cover that of our material associates. We adopted the new presentation in order to more clearly illustrate our non-GAAP financial measures, and to be more consistent with what we believe to be industry practice. 554,672 395,899 306,818 171,166 107,235 Total equity and liabilities 277,579 209,652 184,718 89,042 48,772 Total liabilities I am pleased to present our annual report for the year ended 31 December 2017 to the shareholders. RESULTS The Group's audited profit attributable to equity holders of the Company for the year ended 31 December 2017 was RMB71,510 million, an increase of 74% compared with the results for the previous year. Basic and diluted EPS for the year ended 31 December 2017 were RMB7.598 and RMB7.499, respectively. The Group's non-GAAP profit attributable to equity holders of the Company for the year ended 31 December 2017 was RMB65,126 million, an increase of 43% compared with the results for the previous year. Non-GAAP basic and diluted EPS for the year ended 31 December 2017 were RMB6.920 and RMB6.830, respectively. 60 Payment related services: We extended our leadership in mobile payment in terms of active user accounts and further increased our presence in commercial transactions. For social transactions, total transaction volume increased year-on-year and money transfers kept on growing while red envelope gifting volume decreased. For commercial transactions, our offline transaction volume more than doubled year-on-year. We deepened our relationships with key channel partners and empowered more small merchants with technologies to enhance their operational efficiency. Payment is also an important platform for upselling our Internet finance products. LiCaiTong, our wealth management platform, aggregated more than RMB300 billion assets under management as of the end of January 2018. WeBank achieved rapid growth in its unsecured consumer loan business, Weilidai, which managed outstanding loans of over RMB100 billion as of the end of 2017 while maintaining a low non-performing loan ratio. In October 2017, we attained an insurance distribution license in China and started to partner with insurance companies in offering customized insurance products. Advertising: For social and others advertising, we deployed our Al technology and data analysis capabilities to further strengthen the user targeting capabilities of our advertising platform, enabling our advertisers to achieve higher ROI and effectiveness. Catering to advertiser demand, we increased our ad load for Weixin Moments in certain first-tier cities and lowered the traffic threshold for advertisements in Weixin Official Accounts. The number of advertisers for social advertisements grew strongly, helped by our self-service platform and our partner platforms. For media advertising, the popularity of our original and licensed video content contributed to traffic growth, user engagement, and helped to attract more branding and sponsorship advertisements. We have completed the revamp of our news feed advertising system and started to resume monetization at the end of 2017. To facilitate effective placement by advertisers, we launched a unified advertising platform which integrated the advertising inventory of all our news feed products. Digital content: Tencent Video achieved rapid growth in traffic and paying users driven by the popularity of our exclusive drama series, movies and self-commissioned content. We became the leading video streaming platform in China with over 137 million mobile DAU during the fourth quarter and 56 million subscriptions as of the end of 2017. In November, we successfully listed our online literature business, China Literature, on the Main Board of The Stock Exchange of Hong Kong Limited. China Literature operates one of the largest and most diverse libraries of online literary content in China. We remain its controlling shareholder and will continue to leverage its rich and diverse content library for exploring adaptation into other media formats. Tencent Music operates the three most popular music apps in China by DAU, namely QQ Music, Kugou and WeSing. It increased subscription revenues and achieved robust virtual gifting sales. In the area of news feed content and short video, we upgraded Tencent Open Media Platform to centralize the content library and facilitate content curation for distribution across our news, browser and social properties. Chairman's Statement 5 Annual Report 2017 Online games: We sustained another year of strong growth in both smart phone and PC games. On the mobile front, our in-house developed MOBA game, Honour of Kings, achieved mass adoption and became the most popular smart phone game in China in terms of DAU. It consistently ranked top in app stores' grossing charts for China. We achieved some initial success with the launch of its overseas version, Arena of Valor, in South East Asia. We further strengthened our leadership as the preferred publishing partner in China for domestic and international smart phone game developers. Successfully launching several licensed role playing games enhanced our presence in this high-revenue game genre. We also diversified our smart phone game portfolio by launching strategy and car-racing titles. On PC, we solidified our leading position in 2017 against a challenging market environment. We strengthened core user engagement by organizing eSports tournaments and live streaming activities. Through attaining the PC publishing rights and mobile development rights for the popular survival shooter game “PUBG” in China, we are well-positioned to develop this emerging category of games during 2018, as evidenced by the late- mover success of the mobile game PUBG: Exciting Battleground launched before Chinese New Year. 151,740 We continued to achieve solid growth across core business segments: QQ: We focused on rolling out entertainment-oriented features which appealed to young users, driving their time spent on smart devices. Our KanDian news feed service targets the entertainment-oriented information needs of young users. We have strengthened KanDian's curation capability and recommendation algorithms to offer a more personalized news feed service and to enhance user stickiness. QQ released a series of Al-enabled features which encourage users to interact in rich media formats with entertaining tools, such as face swap effects and video chat filters. In 2017, we fortified our "Connection" strategy by enriching our content and services, thus promoting interaction and sharing among our users in innovative ways. Chairman's Statement Company Strategic Highlights 1. BUSINESS REVIEW AND OUTLOOK Tencent Holdings Limited 4 Weixin and WeChat: We further grew Weixin's and WeChat's user bases, such that their combined monthly active users exceeded 1 billion accounts after the Chinese New Year. Since the launch of Mini Programs in January 2017, we have been enhancing Mini Programs' functionalities, in order to facilitate their discovery by users and the development process. Mini Programs connect users across a wide spectrum of online and offline services including retail, eCommerce, lifestyle services, municipal services and games. In particular, Mini Games (a subset of Mini Programs) received a warm user reception following their launch in December 2017, further driving wide adoption of Mini Programs among users. As of January 2018, 580,000 Mini Programs were launched with over 170 million DAU. Tencent Holdings Limited 101,197 50,035 Non-controlling interests 57,945 Equity attributable to equity holders of the Company Equity and liabilities 554,672 395,899 306,818 171,166 107,235 178,446 149,154 155,378 376,226 246,745 151,440 95,845 75,321 53,686 518 80,013 2,111 120,035 174,624 33,267 Current liabilities 125,839 108,455 60,312 39,007 15,505 Non-current liabilities 124,406 277,093 122,100 82,124 58,463 Total equity 21,019 11,623 2,065 256,074 186,247 53,549 Chairman's Statement 2. 0.4% 551.8 -9.1% 609.4 554.0 Smart device MAU of Qzone¹ -0.9% 568.4 -11.7% 638.0 563.3 MAU of Qzone 0.9% 980.0 11.2% 889.3 988.6 Fee-based VAS registered subscriptions 134.6 110.2 22.1% 9 Annual Report 2017 Total fee-based VAS subscriptions grew by 22% year-on-year to 135 million, primarily driven by video and music streaming services. Tencent Video became the leading online video platform in China in terms of mobile DAU and subscriptions. Our mobile video DAU increased by 44% year-on-year to 137 million during the fourth quarter of 2017 and our subscriptions increased by 121% year-on-year to 56 million as of the end of 2017. Leveraging our diversified content strategy and proven operations expertise, we further grew our online video subscriptions to approximately 62.6 million as of the end of February 2018. Our IP portfolio under China Literature and Tencent Games provides a rich source for adaptation of the quality content into video. We have accumulated an exclusive content library covering TV drama series, movies, variety shows, animation, documentaries and music programs. We are committed to investing in high quality content to solidify our position as the largest and most rapidly growing online video platform in China. Digital Content Smart phone games achieved approximately RMB16.9 billion revenues, up 59% year-on-year. The number of active users remained healthy while ARPU was down quarter-on-quarter. Our shooter game CFM rolled out a survival mode which greatly expanded its user base but with no immediate monetization. Several RPG games entered into the post- launch user consolidation phase and their revenues reduced sequentially during the quarter. We have extended our leadership in smart phone games through the roll out of new game genres. We launched two PUBG mobile games - PUBG: Exciting Battleground, which has achieved by far the highest DAU within the survival shooter game genre, and PUBG: Full Ahead, which has attained solid DAU. Currently, we focus on user experience and are yet to monetize these games. In December, we launched QQ Speed Mobile, which achieved breakout success with over 20 million DAU and healthy monetization. Its successful launch illustrated our capability to create an original game IP, operate it successfully on PC, and then extend its success to mobile. PC client games achieved approximately RMB12.8 billion revenues, representing 13% year-on-year revenue growth, mainly contributed by the increase in DnF and LoL. Active users declined due to the general user migration to mobile devices while revenues were impacted by reduced item-sales marketing in the fourth quarter of 2017. PC game revenues are likely to remain under pressure in future quarters impacted by the mobile shift. We will continue to develop the PC game franchise by enhancing our core users' engagement through organizing professional eSports tournaments, promoting breakout new games such as PUBG and Fortnite, and discovering innovative game titles such as Subnautica to strengthen our platform. Online Games Chairman's Statement Combined MAU of Weixin and WeChat Tencent Holdings Limited Since the first quarter of 2017, we have adjusted historical smart device QQ and Qzone MAU figures so as to include users who only participate in certain activities inside the QQ and Qzone applications, such as interest groups, listening to online music, or reading online literature. These changes had a relatively immaterial impact on the MAU count and growth rates, but we feel better reflect the broadening range of user activities within QQ. 1 Weixin and WeChat: Combined MAU was 988.6 million, representing year-on-year growth of 11.2%. Following the Chinese New Year, the combined MAU exceeded 1 billion. We fine-tuned the Weixin user interface to enable more prominent featuring of Mini Programs. The launch of Mini Games in the end of 2017 gained widespread attention and accelerated adoption among users. Qzone: Smart device MAU was down 9.1% year-on-year to 554.0 million. Campus Qzone further increased coverage in high schools and colleges. QQ: Smart device MAU was up by 1.7% year-on-year to 683.0 million while PCU, including PC and mobile, increased by 11.1% year-on-year to 270.8 million. Smart device MAU for users aged 21 years or below increased year-on-year and their time spent per user also increased, indicating higher stickiness among young users. We launched Al-enabled features designed to attract young users to create amusing photo-, audio- and video-based messages. During the Chinese New Year, we encouraged users to send short-form greeting videos for receiving red envelopes, and to personalize greetings with Chinese New Year-themed animation and background music. Social and Communication 7.4% 125.3 8 Cloud services: Tencent Cloud continued to grow rapidly during the year. We maintained our leading market position in cloud services verticals including online games and video cloud services. We deepened our penetration among the leading Internet industries with more key clients, and expanded our client base in cloud services for financial services and government sectors. Our sales, channel and big data capabilities enabled us to offer smart retail solutions targeted at supermarkets, department stores, and fast moving consumer goods companies. We are committed to investing in Artificial Intelligence (AI) and applying Al technologies to our existing products, such as performance advertising systems, content services and financial services. In addition to these core business use cases, we are deploying Al in new areas such as medical healthcare and translation. We launched an Al-empowered diagnostic medical imaging product called Al Medical Innovation System ("") which is now being deployed in close to 100 hospitals in China with accuracy rates of over 90% for diagnoses of esophageal cancer. Our Al Lab rolled out an Al-assisted translation software. In view of demand among traditional retailers to undergo digital transformation, we launched our smart retail strategy to empower offline retailers with our technological capabilities including payment, cloud, data analytics and Al technologies. We also provide traffic support to enable merchants access into our online user base. In addition, Weixin Official Accounts and Mini Programs can act as CRM systems for retailers to better connect with their customers. -0.5% 11.1% 30 September on-year 31 December 31 December Quarter- As at Year- As at As at Operating Information 3. Company Business Highlights Chairman's Statement 7 Annual Report 2017 We achieved 56% year-on-year revenue growth. Smart phone games and PC games, payment related services, digital content subscriptions and sales, and social and video advertising were key contributors to the overall revenue growth. Operating profit grew by 61% year-on-year. Operating margin was 38%, up 1 percentage point from the previous year. Profit attributable to equity holders of the Company increased by 74% year-on-year. Non-GAAP profit attributable to equity holders of the Company increased by 43%. Free cash flow grew by 70%. In fiscal year 2017 Company Financial Performance on-quarter 2017 2016 change 243.7 270.8 PCU of QQ (for the quarter) 4.6% 652.9 1.7% 671.6 683.0 272.2 Smart device MAU of QQ¹ 843.2 -9.8% 868.5 783.4 MAU of QQ (in millions, unless specified) change 2017 -7.1% Total assets Tencent 腾讯 Non-current assets Ma Huateng (Chairman) NOMINATION COMMITTEE Charles St Leger Searle Ma Huateng Lau Chi Ping Martin (Chairman) INVESTMENT COMMITTEE Yang Siu Shun lan Charles Stone lain Ferguson Bruce Charles St Leger Searle (Chairman) CORPORATE GOVERNANCE COMMITTEE Yang Siu Shun Charles St Leger Searle lan Charles Stone lain Ferguson Bruce (Chairman) AUDIT COMMITTEE Yang Siu Shun Li Dong Sheng lain Ferguson Bruce lan Charles Stone Charles St Leger Searle Shenzhen, 518057 Hi-tech Park Nanshan District Kejizhongyi Avenue Tencent Building TENCENT GROUP HEAD OFFICE Grand Cayman KY1-1111 Cayman Islands Hutchins Drive, P.O. Box 2681 Cricket Square lan Charles Stone REGISTERED OFFICE Bank of China Limited PRINCIPAL BANKERS Certified Public Accountants PricewaterhouseCoopers AUDITOR Li Dong Sheng Jacobus Petrus (Koos) Bekker lan Charles Stone (Chairman) REMUNERATION COMMITTEE The Hongkong and Shanghai Banking Corporation Limited PRINCIPAL PLACE OF BUSINESS lain Ferguson Bruce Independent Non-Executive Directors 12 CHAIRMAN'S STATEMENT 4 FINANCIAL SUMMARY 3 CORPORATE INFORMATION 2 CONTENTS Annual Report 智慧溝通 靈感無限 2017 smart communication inspires (Stock Code 股份代號:700) 於開曼群島註冊成立的有限公司 騰訊控股有限公司 Incorporated in the Cayman Islands with limited liability Current assets MANAGEMENT DISCUSSION AND ANALYSIS 29 DIRECTORS' REPORT 72 Charles St Leger Searle Jacobus Petrus (Koos) Bekker Non-Executive Directors Lau Chi Ping Martin Ma Huateng (Chairman) Executive Directors DIRECTORS Corporate Information Li Dong Sheng 00 128 CONSOLIDATED STATEMENT OF CASH FLOWS 126 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY 123 CONSOLIDATED STATEMENT OF FINANCIAL POSITION 122 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME 121 CONSOLIDATED INCOME STATEMENT 112 INDEPENDENT AUDITOR'S REPORT 93 ENVIRONMENTAL, SOCIAL AND GOVERNANCE REPORT CORPORATE GOVERNANCE REPORT 130 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS IN HONG KONG 239 DEFINITION No. 1 Queen's Road East Wanchai 48,617 44,723 21,975 18,376 Total comprehensive income for the year 71,510 41,095 28,806 23,810 15,502 Profit attributable to equity holders of the Company 72,471 41,447 29,108 23,888 15,563 Profit for the year 79,061 Total comprehensive income attributable to equity holders of the Company Non-GAAP profit attributable to Assets 29/F., Three Pacific Place 2017 RMB'Million 2014 2015 2016 RMB'Million RMB'Million RMB'Million As at 31 December RMB'Million 2013 CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION 88,215 65,126 32,410 24,737 17,008 78,218 48,194 44,416 21,891 equity holders of the Company* 45,420 51,640 18,327 29,013 CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Financial Summary Tencent Holdings Limited 2 700 STOCK CODE www.tencent.com COMPANY WEBSITE Year ended 31 December 2014 2015 Wan Chai, Hong Kong Services Limited Computershare Hong Kong Investor HONG KONG BRANCH SHARE REGISTRAR AND TRANSFER OFFICE Grand Cayman, KY1-1110 Cayman Islands SMP Partners (Cayman) Limited Royal Bank House - 3rd Floor 24 Shedden Road P.O. Box 1586 CAYMAN ISLANDS PRINCIPAL SHARE REGISTRAR AND TRANSFER OFFICE 36,216 Hong Kong Shops 1712-1716, 17th Floor Hopewell Centre 2013 183 Queen's Road East RMB'Million Profit before income tax 2016 116,925 84,499 61,232 48,059 19,281 Gross profit 237,760 32,659 102,863 78,932 60,437 Revenues 2017 RMB'Million RMB'Million RMB'Million 151,938 RMB'Million • Community . • Contribute to the industry and continue to provide an open platform Promote innovation and the establishment of a legal framework to protect IP rights Environment • Make protection of the environment one of our priorities Establish a platform for charity donations Combat behaviours which are harmful to the interest of our partners by setting up an independent steering group on business ethics and anti-bribery practice Prioritise users' interests in business decision-making • Hold regular meetings with our partners to review their performance and explore possible collaboration opportunities Below are the environmental key performance indicators of the Group. Unless otherwise specified, such data covers the Group's operation in China only; the data in relation to our office buildings excludes the data of Tencent Binhai Building which has only commenced partial operation since the last quarter of 2017 and the data in relation to our data centres only covers the main data centres which were built in the past three years. Allow investee companies to maintain autonomy for their business development and meet them on a regular basis for exchange of industry knowledge and know-how Ensure our partners receive fair treatment and benefit from their collaboration with us • Business partners (including suppliers and investee companies) Be honest to users and protect their interests Consistently listen to the voices of our users, concurrently enhancing product and service quality • Adopt a sustainable investment strategy 5. Users . • Remain committed to environmental sustainability Environmental, Social and Governance Report Stakeholder analysis Table of Environmental Key Performance Indicators 4. We have shared our experience and technology in building green data centres with other industry players so that HVDC, micro module and indirect evaporative cooling technologies have been widely adopted in the PRC data centre business. We have also helped to establish the industry standards for HVDC and micro module technologies in order to enhance energy saving efforts among the industry players. Our data centres are one of the first in the industry to use the combined cooling heating and power system and photovoltaic technology to generate clean energy. In addition, we are building an advanced data centre with a high level of privacy, defence and security in Gui'an in the PRC, which will serve as a highly reliable and environmentally friendly data centre for our Group and our eco-friendly business partners. In the Gui'an data centre, we will apply our self-developed T-block technology and leverage on the local climate and landscape to build a technologically advanced and energy efficient data centre with an innovative approach. T-block technology (comprising (i) photovoltaic + High Voltage Direct Current ("HVDC") technology for electrical design; (ii) indirect evaporative cooling units; (iii) smart control system; and (iv) fully commercialised project delivery solution) has been used in the fourth generation of our data centres, including the new data centre in Guangming, Shenzhen. Our PRC data centres are in the leading position in terms of power usage effectiveness in the PRC industry. According to a press release published by the Ministry of Industry and Information Technology of the PRC in April 2017, the power usage effectiveness of newly built big data centres in the PRC should be below 1.5 on average while that of our recently built Shenzhen data centre (which is located in a low-altitude climate zone) was below 1.25. We endeavour to fulfil our responsibility to protect the environment by applying innovative technology to our data centres and be the exemplar of green data centres in the PRC industry. Energy Saving Measures taken in our Data Centres We monitor the levels of air pollutants such as PM2.5, PM10, carbon dioxide, carbon monoxide, sulfur dioxide, nitro dioxide inside and outside our office building with an online monitoring system and display the data on a real-time basis. To ensure the air quality in the building, we have installed induced ventilation system (which regulates the ventilation automatically in response to the level of carbon monoxide) in the underground parking garage and fresh air ventilation system (which regulates the ventilation automatically in response to the level of carbon dioxide) in the office area. We have upgraded the kitchen ventilation units in the kitchens in our office building. The units comprise fire-resistant environmental friendly exhaust hoods to remove oil and purify air with photolysis purification function and the activated carbon filter and air ioniser to neutralise odors. The emission of cooking fumes is in compliance with the PRC national standards GB18483-2001. 95 Annual Report 2017 Our new office building has adopted a centralised system to collect, purify and recycle rainwater and condensed water from the air conditioning system for the purposes of flushing, watering plants and cleaning the parking lot. In addition, we have installed a direct drinking water system in replacement of bottled water. It reduces the use of plastic packaging materials and indirectly reduces the CO2 emissions generated from the delivery of bottled water. Through this approach we are able to create a favourable environment that will enable us to provide quality services to Internet users and promote the positive development of wider society. We have optimised the air conditioning system and the integrated building management system in order to automate the energy saving and monitoring process. The air conditioning system uses pumps controlled by frequency-conversion technology for the enhancement of energy efficiency. We have also reduced energy consumption of the air conditioning system by partially deploying natural ventilation in autumn and winter. Energy Saving Measures taken in our New Office Building We recognise the importance of environmental protection and conservation of natural resources in our business operations. Starting from our office buildings in Shenzhen, we have implemented a number of energy-saving measures and we plan to adopt the same in our office spaces in other locations. We have also strived to build our data centres with environmental considerations as one of our key priorities. ENVIRONMENT Going forward, we will continue to enhance our corporate management system and integrate ESG considerations into our operations. We will closely cooperate with our stakeholders with the aim of creating a better future. "Internet+" has significant implications for our ESG initiatives. Important changes can be achieved through connecting millions of Internet users as well as developing their modes of communication and living, and creating more exciting opportunities for society. In addition, through the "smart living" system in QQ and Weixin/WeChat, people and public services can be digitally connected, which in effect facilitate developments in transport, healthcare, environmental protection, public safety and other social arenas. This is important for optimising the distribution of societal resources, driving innovation in public services, improving service quality, breaking down communication barriers and ultimately benefiting the wider community. We will leverage our core capability in the Internet, technology and communication spheres to develop innovative approaches to resolving social issues, promoting social development and protecting the interests of the public. We also aim to drive ESG awareness in society, through collaborating with our stakeholders and other industry players. Environmental, Social and Governance Report Tencent Holdings Limited 94 Our ESG strategy requires the participation of all of our product lines and platforms, and participation from across the wider Internet industry. We will continue to place more emphasis on ESG, and encourage every individual, enterprise and organisation to take part in the implementation of our ESG strategy. Our ESG Direction We understand the importance of the feedback from our stakeholders (including our users, investors, employees and business partners) on our ESG performance. Therefore, we have an effective communication channel with our stakeholders, which includes conducting an employee satisfaction survey annually and user experience research, engaging in constant discussion with our users directly before and after the launch of our products and services, and sharing our ESG strategies with our business partners. We have taken environmental protection as one of our priorities when designing our new office building, Tencent Binhai Building, in Shenzhen. The construction has been completed in accordance with LEED-EB standards. The property management company of the Shenzhen headquarters has obtained ISO 14001 (environmental management) certification, ISO 9001 (quality management) certification and GB/T 23331 (energy management system) certification. We have also implemented various measures to enhance efficiency of energy use and reduce water consumption and emissions. 3. The Company is required to disclose certain information pursuant to the Listing Rules and the CG Code. We set out these information below which has not been covered above. Environmental, Social and Governance Report The Company has arranged appropriate directors and officers liability insurance in respect of legal action against the directors and officers. Directors and Officers Liability Insurance Corporate Governance Report 91 Annual Report 2017 Each non-executive director, whether independent or not, is appointed for a term of one year and is subject to retirement by rotation at least once every three years. A director appointed to fill a casual vacancy or as an addition to the Board will be subject to re-election by shareholders at the first general meeting after his appointment. Appointment Terms of Non-Executive Directors The Company has adopted the Model Code. The Company has also adopted an insider dealing policy for employees for securities transactions by employees who are likely to be in possession of inside information relating to the Company, the terms of which are no less exacting than those of the Model Code. The Company has made specific enquiries with the directors and the directors have confirmed they have complied with the Model Code throughout 2017. Model Code for Securities Transactions by Directors of Listed Issuers DISCLOSURE OF OTHER INFORMATION Apart from participating in the Company's general meetings, the Company's shareholders are provided with contact details of the Company such as telephone number and email address which are available on the Company Website, in order to enable them to make any query that they may have. Shareholders may send their enquiries to the Board directly through these means. Shareholders may also contact the Company's Hong Kong branch share registrar, Computershare Hong Kong Investor Services Limited, if they have any enquiries about their shareholdings and entitlements to dividends. External Auditor and Auditor's Remuneration In order to ensure that shareholders' interests and rights are adequately protected, a separate resolution will be proposed for each substantially separate issue at the general meetings, and all resolutions will be voted by poll pursuant to the Articles of Association and the Listing Rules. To ensure the shareholders are familiar with the detailed procedures for conducting a poll, detailed procedures for conducting a poll are explained at the commencement of the general meetings, and all questions from shareholders on the voting procedures will be answered before the poll voting starts. An external scrutineer will be appointed to monitor and count the votes cast by poll. Poll results will be posted on the Company Website and the Stock Exchange's website after each general meeting. Corporate Governance Report Tencent Holdings Limited The Company's general meetings provide a transparent and open platform for the Company's shareholders to communicate with the Board and the senior management team. The Chairman, other members of the Board and relevant members of the senior management team, under normal circumstances, attend to answer questions raised and discuss matters in relation to the Company in an open manner. Save as Mr Li Dong Sheng, all directors attended the 2017 annual general meeting and the extraordinary general meeting held on 17 May 2017, with a view to understanding the views of the Company's shareholders. The company secretary provided the minutes of 2017 annual general meeting and the aforesaid extraordinary general meeting to all directors to have a thorough understanding of the views of the Company's shareholders. The Company's external auditor will also attend the annual general meeting to answer questions relating to the conduct of the audit, the auditor's report and auditor independence. The Company's shareholders may also propose candidates for election as a director of the Company according to the procedures set out in the Company Website. The Company strives to provide ready, equal, regular and timely disclosure of information that is material to the investor community. Therefore, the Company works to maintain effective and on-going communication with shareholders so that they, along with prospective investors, can exercise their rights in an informed manner based on a good understanding of the Group's operations, businesses and financial information. The Company also encourages shareholders' active participation in annual general meetings and other general meetings or other proper means. As such, the Company sends notices to shareholders for annual general meetings at least 20 clear business days before the meeting and at least 10 clear business days for all other general meetings. In addition, the Company has developed and maintains the shareholders communication policy, which is available on the Company Website. SHAREHOLDERS In addition, the Board believes that the Company's accounting and financial reporting functions have been performed by staff of the appropriate qualifications and experience and that such staff receives appropriate and sufficient training and development. Based on the audit report of the Audit Committee, the Board also believes that sufficient resources have been obtained for the Company's internal audit function and that its staff qualifications and experience, training programmes and budgets are sufficient. The review process comprises, among other things, of meetings with management of business groups, IA, IC, legal, and the external auditor, reviewing the relevant work reports and information of key performance indicators, the management self- assessment on internal control as detailed above and discussing the major risks with the senior management of the Company. The Board is of the view that throughout the year ended 31 December 2017, the risk management and internal control systems of the Company are effective and adequate. The Audit Committee, on behalf of the Board, continuously reviews the risk management and internal control systems. Effectiveness of Risk Management and Internal Control 96 Corporate Governance Report Pursuant to the Articles of Association, any one or more shareholder(s) of the Company holding at the date of deposit of the requisition not less than one-tenth of the paid up capital of the Company carrying the right of voting at general meetings of the Company shall at all times have the right, by written requisition to the Board or the company secretary, to require an extraordinary general meeting to be called by the Board for the transaction of any business specified in such requisition; and such meeting shall be held within two months after the deposit of such requisition. The statement of the external auditor of the Company about their reporting responsibilities for the financial statements is set out in the "Independent Auditor's Report" on pages 112 to 120. During the year ended 31 December 2017, the remuneration paid/payable to the Company's external auditor, PwC, was disclosed in Note 8 to the consolidated financial statements. The audit and audit-related services conducted by the external auditor mainly comprise of statutory audits and reviews for the Group and certain of its subsidiaries. The amounts of audit and audit-related services for the year ended 31 December 2017 also included the services fees in connection with the initial public offering of a subsidiary of the Company. The non-audit services conducted by the external auditor mainly include professional services on risk management and internal control review, mergers and acquisitions advisory and tax advisory. Framework for Disclosure of Inside Information The Company has put in place a framework for the handling and disclosure of inside information in compliance with the SFO. The framework sets out the procedures and internal controls for the handling and dissemination of inside information in a timely manner so as to allow all the shareholders and stakeholders to assess the latest position of the Group. 93 Annual Report 2017 Establish a diverse corporate culture • Care for employees and provide them with training and development opportunities . Operate with integrity and protect shareholders' interests . Operate in compliance with applicable laws and regulations • Business operations 1. Five Dimensions of our ESG Strategy At the heart of our ESG strategy is our vision to become the most respected Internet company. In pursuit of this vision, we embrace the principle of sustainability, uphold integrity and promote shared growth and development within the industry; environmental protection, staff development and community welfare are always at the forefront. We conduct and review our ESG strategy in five dimensions as detailed below. We believe that it is important to formulate effective strategies to balance the economic, environmental and social benefits of our activities with our other business targets. We have fully integrated ESG considerations into our operations as part of our corporate development strategy, with a particular focus on fostering closer connections with our stakeholders, listening to the voices of our users, working openly with partners to overcome challenges, caring for and growing with employees, and taking on more responsibility within society. ESG STRATEGY, MANAGEMENT APPROACH, PRIORITIES AND OBJECTIVES This report aims to provide a balanced representation of the Group's ESG performance in terms of environment, workplace, community, supply chain management and product responsibility. We will focus on each of these areas in turn in this report, in particular those economic, environmental and social issues that could have a material impact on the sustainability of our operations and that are of interest to stakeholders. SCOPE OF THIS REPORT This report provides information on the Group's environmental, social and governance ("ESG") performance for the year of 2017. It should be read in conjunction with this annual report, in particular the Corporate Governance Report contained in this annual report, as well as the sections headed "Corporate Governance" and "Culture" on the Company Website. OVERVIEW Environmental, Social and Governance Report Tencent Holdings Limited 92 42 Under the framework, if an employee is aware of any project, transaction, information or situation which he thinks could potentially be inside information, he should contact the Head of Compliance, the General Counsel and the Company Secretary as soon as possible. Legal analysis and consultations with the Company's directors and senior executives will be made so as to identify whether any such information constitutes inside information and is required to be disclosed to the public pursuant to the SFO. The framework and its effectiveness are subject to review on a regular basis according to established procedures. 2. Tencent Holdings Limited Note: Environmental, Social and Governance Report 920,006 1.28-1.50 751,464.65 751,464.65 1,739.07 1,739.07 753,203.73 Running water consumption (tonnes) Average PUE Including: Electricity (MWh) Indirect energy consumption (MWh) 90 Including: Diesel (MWh) Total energy consumption (MWh) 2.2 Data Centres 5,261 Recycled water consumption (tonnes) 14.43 Running water consumption per employee (tonnes per employee) 612,700.27 Running water consumption (tonnes) 0.15 Total energy consumption per floor area (MWh per square metre) 2.67 Direct energy consumption (MWh) 1 Total energy consumption is worked out by the data of electricity and fuel with reference to the coefficients in the "General Principles for Calculation of the Comprehensive Energy Consumption (GB/T 2589-2008)" published by the General Administration of Quality Supervision, Inspection and Quarantine of the People's Republic of China, and the Standardization Administration of the People's Republic of China. 2 99 Annual Report 2017 We also intend to open up our training resources to our business partners and industry players in order to enhance the market standard. As at 31 December 2017, there were approximately 600 face-to-face courses, 5,000 online courses and over 1,000 internal part-time instructors. Over the past decade, we ran face-to-face courses over 8,000 times per year and over 1,000 courses were livestreamed per year. The aggregate number of training hours of our employees in the past 10 years exceeds 5 million. Throughout 2017, the number of the average in-house training hours per employee was 39 and the percentage of employees who received training is 99%. In 2007, we founded our own corporate university, Tencent Academy. It offers different training programmes for each stage of an employee's career, including an induction, on-the-job training and leadership training. It has also set up an online learning platform and a mobile learning system in order to allow employees to learn anytime and anywhere. In 2016, we won the Innovation in Talent Development Award by the Association for Talent Development. We are the first Chinese enterprise which received such honour in that category. As our staff is one of our most important assets, we invest heavily in employee development and training. We encourage employees to attend external and internal trainings. We have adopted relevant policies to ensure that employee trainings are provided and managed in a systematic manner. For example, supervisors are required to assist in designing the professional development plans for the employees and evaluate the effectiveness of the trainings received by the employees. To ensure the quality of the trainings, we have also developed policies which set out requirements for the qualifications and experience of the instructors and the objectives of the programmes and worked with external educational institutions from time to time to jointly develop training programmes. We have a well-established performance management system. A performance assessment for each employee is conducted by that employee's supervisor every six months and employees are required to work with their supervisors to set a performance target after each assessment. Supervisors are encouraged to provide constructive feedback from time to time to assist the personal growth of each employee. Employee Development and Training WORKPLACE Data of packaging materials is not applicable to the Group. Water fees in some data centres are borne by the operators so such running water consumption data not available. Data on running water consumption in our data centres reported here only covers the data centres whose water fees are borne by the Group. Average PUE (Power Usage Effectiveness) is yearly average data of PUE of the Group's data centres. PUE, an indicator of the power efficiency of a data centre, is the ratio of total amount of energy used by a data centre to the energy delivered to the computing equipment. 8 7 6 Environmental, Social and Governance Report Tencent Holdings Limited 98 Fees for diesel in some data centres are borne by the operators so such diesel data is not available. Data on diesel consumed by our data centres reported here only covers the data centres whose diesel fees are borne by the Group. Electricity fees in some data centres are borne by the operators so the relevant electricity consumption data is not available. The data on electricity purchased by our data centres reported here only covers the data centres whose electricity fees are borne by the Group. Recycled water consumption is the recycled domestic water treated by the waste water treatment system equipped at Tencent Tower A in Chengdu Province. 5 4 3 The Group's water resources come from municipal water supply. Total energy consumption per employee (MWh per employee) 1. Emissions 101,816.32 10,892.20 0.00005 2.21 0.09 1.63 573,876.20 573,876.20 2,129.82 463.05 190.92 2,783.79 576,659.99 3,954.46 0.09 Non-hazardous waste per employee (tonnes per employee) Hazardous waste per employee (tonnes per employee) Hazardous waste (tonnes) Total GHG emissions in the office buildings per floor area (tonnes per square metre) Total GHG emissions in the office buildings per employee (tonnes per employee) Including: Electricity (tonnes) Indirect GHG emissions (Scope 2) (tonnes) Natural gas (tonnes) Diesel (tonnes) Including: Gasoline (tonnes) Direct GHG emissions (Scope 1) (tonnes) Total GHG emissions (Scopes 1 and 2) (tonnes) Non-hazardous waste (tonnes) Note: 1 2 22.04 779.92 11,694.16 113,510.48 Including: Electricity (MWh) Indirect energy consumption (MWh) Natural gas (MWh) Diesel (MWh) Including: Petrol (MWh) Direct energy consumption (MWh) Total energy consumption (MWh) 2.1 Office Buildings 2. Energy and resources consumption 99 Environmental, Social and Governance Report 97 Annual Report 2017 Non-hazardous waste produced by the Group's operation mainly includes domestic waste and waste electronic devices. Domestic waste, including office waste and kitchen waste, is disposed of by the property management company and kitchen waste recycling vendors, and its data is not yet available for statistics, so we made estimation with reference to “Handbook on Domestic Discharge Efficiencies for Towns in the First Nationwide Census on Contaminant Discharge" published by the State Council. Waste electronic devices are recycled by wasting recycling vendors. Hazardous waste produced by the Group's operation mainly includes waste toner cartridge and waste ink cartridge from printing equipment at office buildings, as well as waste lead-acid accumulators at data centres. Waste toner cartridge and waste ink cartridge are collected and disposed of by printing suppliers, whereas lead-acid accumulators are disposed of by qualified waste recycling vendors. In 2017, there was no waste lead-acid accumulators. 5 4 Diesel was consumed for backup generators. 3 The Group's GHG inventory includes carbon dioxide, methane and nitrous oxide. GHG emissions data is presented in carbon dioxide equivalent and is based on the "2015 Baseline Emission Factors for Regional Power Grids in China" issued by the National Development and Reform Commission of China, and the "2006 IPCC Guidelines for National Greenhouse Gas Inventories" issued by the Intergovernmental Panel on Climate Change (IPCC). Due to its business nature, the significant air emissions of the Group are GHG emissions, arising mainly from electricity and fuels derived from fossil fuels. 101,816.32 90 Environmental, Social and Governance Report 100 Disaster relief In response to the recent natural disasters in the PRC as well as globally, the Tencent Foundation has created a multifaceted disaster relief model by combining our various products including online platforms, instant messengers, online payment and Internet search to help the public follow the latest news, participate in rescue efforts and make donations. In addition, the Tencent Foundation has made donations to support the rescue missions and post-disaster reconstructions. In 2017, we donated an aggregate of approximately RMB5.9 million to the China Foundation for Poverty Alleviation, the One Foundation, Ai You Foundation and other charitable organisations in response to the earthquake in Xinjiang and the landslides in Sichuan and for the post-disaster child care programme following the earthquake in Ya'an city. 102 Tencent Holdings Limited Environmental, Social and Governance Report Rural development In 2015, WeCountry, our open platform built on the "Internet + Village" model, was launched to offer villagers access digital technology which will benefit their communities. As of 31 December 2017, 16 provincial administrative areas with approximately 5,800 villages (or communities) joined WeCountry platform. The number of verified villagers is over 2 million and they interacted with each other via the platform for over 160 million times as of 31 December 2017. Education The Tencent Foundation has set up scholarships to promote education in the PRC, Hong Kong and other countries throughout the years. There are also specific donations for different education initiatives. In 2017, the Tencent Foundation donated approximately RMB50 million in education related projects. For example, we set up a scholarship with each of China Children and Teenagers' Fund, Li Po Chun United World College of Hong Kong and the Taxation Institute of Hong Kong. We sponsored activities of the Institute of Accountants Exchange and supported an education programme run by the China Children and Teenagers' Fund. Ecological conservation and cultural preservation The Tencent Foundation is keen on environmental protection and cultural preservation. In 2017, the Tencent Foundation donated approximately RMB28 million to the China Foundation for Cultural Heritage Conservation and other ecological conservation organisations to continue to preserve and repair the Great Wall and for the ecological conservation project in China. Community development In 2017, the Tencent Foundation donated RMB7.6 million to China Association of Social Workers and other community organisations in support of the community organisations to promote philanthropy and innovation in charity work. Poverty relief In 2017, the Tencent Foundation donated approximately RMB140 million to support poverty relief initiatives through Ai You Foundation and other charitable organisations. Annual Report 2017 Tencent Holdings Limited 00 104 In 2016, we updated the Risk Management and Internal Control Policy (the "Policy") with a system comprising three lines of defence. The first line is business and functional departments. The risk management and internal control department serves as the second line while the internal audit department and anti-fraud team act as the third line of defence. The Policy sets out the roles and responsibilities of different stakeholders in risk management and controls (including those in relation to frauds). It is emphasized in the Policy that the management of each business group is primarily responsible for the risk management and internal controls of its department. If any fraudulent activity is detected, the management of the relevant department shall improve the control procedures promptly to prevent recurrence of similar incidents. The management may be subject to disciplinary actions if a fraudulent act occurs as a result of management's failure to implement any internal control measures. Each business group has its designated team to provide internal control and risk management support. We apply continuous auditing to key businesses in order to detect irregularities and identify risks in a timely and systematic manner and to improve the effectiveness of fraud risk management and control. Risk Management and Internal Control Policy Tencent embraces the value of integrity, proactivity, collaboration and innovation. To promote integrity, we have developed robust systems and measures to prevent, detect and deter corruption or any other fraudulent activities and internal audit is conducted to ensure the Group's compliance with ethical standards which we promote and strive to uphold. In addition to promoting philanthropy through the online charity platform, the Tencent Foundation makes direct donation in the following areas: (i) disaster relief; (ii) rural development; (iii) education; (iv) ecological conservation and cultural preservation; (v) community development; and (vi) poverty relief. Anti-Corruption The Tencent Volunteers' Association combines its expertise in technology to help the community. For example, it has been broadcasting information on missing persons via Weixin/WeChat and QQ and with the latest facial recognition and blockchain technologies, the number of successful cases increased tenfold from approximately 40 in 2016 to approximately 400 in 2017. In 2016, the Tencent Volunteers' Association also established the China IT-Philanthropy Union which promotes the "Internet + Charity" model by holding summits and publishing white papers on the successful examples of how the information technology has changed the landscape of charity work. There are sub-divisions under the Tencent Volunteers' Association in Beijing, Shanghai, Chengdu, Shenzhen, Wuhan and Guangzhou formed by different business groups, each with a special focus on online charity, emergency support, poverty relief, scholarship, environmental protection, care for children with special needs, animal protection and green network. The Tencent Volunteers' Association works closely with the Tencent Foundation in various projects. In 2006, some of our employees founded the Tencent Volunteers' Association on their own initiative in response to our corporate vision of being “the most respected Internet company". Since then, the Tencent Volunteers' Association has contributed more than 100,000 hours of voluntary services. We launch more than 200 volunteering activities with more than 5,000 participants every year. In 2016, the Tencent Volunteers' Association was awarded a spot in the list of Top 10 Best Volunteer Organisations in Guangdong Province. Volunteering Environmental, Social and Governance Report 103 In order to encourage employees to participate in volunteer service, employees, since April 2012, have been granted one day of fully-paid volunteer service leave per year. Tencent Sunshine Code of Conduct The highlight of the Tencent Foundation's charity efforts is the annual "99 Charity Day" campaign where it matches the donations made by the Internet users between 7 September and 9 September via its online platform. In 2017, the Tencent Foundation donated RMB300 million for the campaign, of which 37% is for poverty relief, disaster relief and medical care, 31% is for education initiatives and the remaining 32% is for environmental protection initiatives and others. The Tencent Foundation believes that everyone can participate in charity work anytime and anywhere through technology. In June 2007, the Tencent Foundation leveraged on our Internet technical capabilities and online platforms to build the first online public fundraising platform. It is designed, developed and operated by the Tencent Foundation while we provide server, broadband and other technical support for free. The platform is open for eligible charitable organisations free of charge. It allows charitable works to be performed more conveniently, smoothly and transparently. This is a good example of the application of the concept of "Internet+". As of 31 December 2017, there had been approximately 5,300 active charitable organisations and over 15,000 charity projects in different locations with different focuses. Occupational Health and Safety We also organise a wide variety of recreational and leisure activities (e.g. running, photography, music, dance, language classes) for employees. We have implemented various initiatives such as flexi-time arrangements and volunteer service leave to help employees strike a good work-life balance. The leave scheme allows employees to enjoy annual leave, fully-paid sick leave, half-paid leave of absence and fully-paid special Chinese New Year leave which are above the statutory standard. Also, female employees are entitled to take fully-paid maternity leave, while male employees are also entitled to take fully-paid paternity leave. Employees can also apply for one day of fully-paid volunteer service leave per year. Work-Life Balance We value our relationship with our employees and handle employee departure (whether by resignation or dismissal) strictly in accordance with applicable laws and regulations. We arrange an exit interview with each of the departing employees to understand the reasons for his/her departure and welcome any suggestions for improvement. All of our employees enter into written employment contracts which detail, among other things, the grounds for termination of the employment. Employee Departure Environmental, Social and Governance Report Tencent Holdings Limited Our contribution to social insurance in the PRC is in compliance with applicable laws and regulations and we offer various supplemental insurance benefits to employees and their families (including medical insurance, critical illness insurance, accident insurance and life insurance). Employees may apply for promotion during their interim and year-end performance reviews, provided that they satisfy the requirements with regards to the length of service and performance. Depending on the practice area, the promotion will be reviewed and considered by different internal committees. The promotion review process is fair and open there is a formal channel for our employees to provide and receive feedback. The promotion review is conducted in compliance with applicable laws and regulations. - Promotion We care for the well-being of our employees. For example, we celebrate special occasions of our employees (e.g. anniversary of joining us, wedding and festivities) by giving them different employee benefits. We strive to create work-life balance and a safe and comfortable work environment for employees. Employees have the flexibility to choose the most suitable insurance plans for themselves and their families. We were awarded by Universum as the most attractive employer in the Internet industry in 2015. We have also been voted as one of the best employers in the PRC for 12 consecutive years since 2006 in a survey jointly conducted by zhaopin.com and the Institute of Social Science Survey, Peking University. The basic benefits system was built and is maintained in accordance with relevant laws, regulations and market practice. In addition, certain special benefits are created to motivate employees and implement our strategy. Benefits We set up the Tencent Charity Foundation (the "Tencent Foundation") on 26 June 2007. It is a non-public fundraising foundation incorporated in the PRC and a separate legal entity. We commit to donating certain portion of our profits to the Tencent Foundation every year for the purpose of supporting charitable works. As of 31 December 2017, our Group and our employees donated over RMB2.72 billion and RMB67 million in total to the Tencent Foundation respectively since its establishment. During the year 2017, our Group and our employees donated RMB820 million and RMB5.4 million to the Tencent Foundation respectively. Community Investment COMMUNITY Environmental, Social and Governance Report 101 Annual Report 2017 The Tencent Foundation has also applied technology to various charitable initiatives such as WeCountry for rural development and Tencent Three-dimensional Disaster Relief Programme in response to recent natural disasters in China via the online platform. In 2017, the total number of donations made by the Internet users is approximately 63 million and the total amount of the funds raised is over RMB1.6 billion. We strive to create a casual yet sophisticated communication channel with customised content for our employees. There are annual rallies for employees and management, face-to-face discussion forums, featured magazines and social media platforms. The corporate strategy and culture are communicated and reinforced through these products and communication channels. Environmental, Social and Governance Report Equal Opportunities and Diversity We had 44,796 employees as at 31 December 2017. Our employment practice is in compliance with applicable laws and regulations (including but not limited to those which prohibit child and forced labour) and does not discriminate on the grounds of gender, ethnicity, race, disability, age, religious belief, sexual orientation or family status. Diversity is well supported in our corporate culture. The recruitment process strictly abides by the guidelines of the Group's Human Resource Department. Every job applicant is required to provide information on his/her education background, qualification and job experience in a recruitment questionnaire, which is reviewed by Human Resource Department and verified by professional background check agency. This allows the Group to hire suitable candidate in accordance with the job requirements and, to the extent possible, avoid child and forced labour. Compensation and Benefits Compensation We offer competitive pay and employee benefits to attract and retain talent. The remuneration and bonus system is performance-based and designed to reward employees with high performance and great potential. Communication We strive to provide a safe and comfortable work environment for our employees. There are well-established security and fire service systems and food safety monitoring system. All employees of the entire Group are required to follow and to strictly comply with the Tencent Sunshine Code of Conduct (the "Sunshine Code"). It expressly prohibits all kinds of fraudulent activity, bribery, extortion and any other activities which are not in compliance with applicable laws and regulations. The Sunshine Code will be reviewed annually against the changing needs of the Group and revised when appropriate, in order to ensure that it reflects the positions under applicable laws and regulations and captures all kinds of fraudulent activities. To ensure our employees comply with the requirements and ethical standards stipulated in the Sunshine Code, all employees are required to complete e-learning programmes and attend various face-to-face training programmes with a view to understanding and refreshing the rules and standards of the Sunshine Code on a regular basis. For positions with high bribery risk, those employees are required to attend face-to-face training course at least once a year. We have adopted an Anti-fraud and Whistleblowing Policy (the "Whistleblowing Policy"), which clearly conveys the message of zero tolerance in relation to fraudulent activity to all the employees and suppliers/business partners. All employees and suppliers/business partners are encouraged to report genuine concerns about any potential fraudulent activities. The Whistleblowing Policy outlines the multiple whistleblowing channels and how the Group should deal with such concerns, so that employees and suppliers/business partners can report their good faith concerns without fear of reprisal or potential retaliation. We strive to provide the best user experience and pay high attention to the quality of our products and services. We conduct strict reviews of our product and service offerings and related sales, marketing and advertising strategies and materials to ensure their compliance with applicable laws and regulations. We also build in safeguards on user privacy, product safety and IP rights as described below. User Privacy Anti-fraud and Whistleblowing Policy We have a dedicated privacy team within the Legal Department which is responsible for handling data protection matters. We have devised specific procedures to collect and process user data to ensure that we provide our products and services in accordance with applicable legal requirements. We evaluate specific products from the perspective of privacy protection on a regular basis and perform privacy risk assessments before the launch of new products to ensure that our products are not exposed to the risk of privacy infringement or leakage of user data. We provide training to our employees to enhance their privacy protection awareness and build up the cultural awareness of the importance of privacy protection. To ensure that our users understand how we protect their personal information and enhance the transparency of how we collect and process the data, we publish our privacy protection policies on our product websites and in-app products. We also provide communication channels for our users to file complaints and raise enquiries whenever they are in doubt. We actively participate in shaping the development of the industry framework on privacy protection. For example, we have been accredited with privacy certifications from TrustArc for WeChat, which is the leading global data privacy management company and powers trust in the data economy by certifying businesses', compliance and security level for their customer data collection and usage across web, mobile, cloud and advertising channels. The privacy policy of Weixin has been approved in the joint review by the Cyberspace Administration of China, the Ministry of Industry and Information Technology of the PRC, the Ministry of Public Security of the PRC and the Standardisation Administration of the PRC. Our data security management has been internationally recognised - For example, Tencent Cloud have been ISO27001 (information security management), ISO22301 (business continuity) and ISO20000 (service management system) certified. 108 Tencent Holdings Limited Environmental, Social and Governance Report Customer Service The Tencent Customer Service Centre consists of more than 2,000 staff members and is responsible for handling complaints and responding to enquiries from customers for our businesses. We commit to providing solutions to our customers in a timely manner through different means including customer service hotline, online customer support, Weixin/WeChat and face-to-face meeting. We have established the following management system to handle complaints from our customers effectively: 1. 2. 3. 4. There is a designated team within the customer service department to handle complaints and deal with compensation requests. The team is responsible for conducting investigation based on the information provided by the complainant, explaining the relevant procedures to the complainant and notifying the complainant of the investigation results with the aim of providing him with a satisfactory solution. For better user experience, we have established a set of complaint handling procedures which set out clearly the responsibilities within the customer service department and the timeframe within which a complaint needs to be resolved. We have strengthened our system infrastructure which allows classification of complaints by urgency and risk level so that the customer service staff can better prioritise the cases and deal with the complaints in a timely manner. We have a designated team of staff who is responsible for handling complaints from customers who visit our offices and for better risk control we have designed a set of protocols for different types of incidents. Healthy Environment for our Users One of our important businesses is our online gaming business. We need to comply with the laws, regulations and policy requirements in relation to online gaming in the PRC. The authorities in the PRC which regulate online gaming mainly include: (i) the General Administration of Press and Publication; (ii) the Ministry of Culture and Tourism; (iii) the Ministry of Industry and Information Technology; and (iv) the State Administration for Market Supervision. The laws, regulations and policies relating to online gaming mainly include: (i) "The Regulation on Internet Information Service of the People's Republic of China" promulgated by the State Council; (ii) "The Provisions on the Administration of Online Publishing Services” promulgated by the former State Administration of Press, Publication, Radio, Film and Television and the Ministry of Industry and Information Technology; and (iii) "The Interim Provisions on the Administration of Internet Culture", "The Interim Measures for the Administration of Online Games" and "The Notice on Regulating Online Game Operation and Strengthening Concurrent and Ex-Post Supervisions" promulgated by the former Ministry of Culture. The aims of such laws include the regulation of the qualifications of operating entities of online games, the regulation of the content of online games, the protection for the physical and mental health of online game users and adolescents and the privacy protection of the personal data of users. Annual Report 2017 109 PRODUCT RESPONSIBILITY We evaluate the performance of our suppliers from time to time and take appropriate steps to address any issues with the quality of the suppliers as part of our supply chain management. For suppliers with unsatisfactory performance, subject to the applicable contractual arrangements, we may (i) discuss with them on the remedial steps to be taken by them; (ii) suspend the cooperation; (iii) reduce the order volume; (iv) impose penalties; or (v) suspend payment. The procurement department may disqualify a supplier for the following events: (i) we suffer from material economic losses as a result of the delayed delivery, quality issue or breach of contract by the supplier; (ii) the supplier has received the lowest rating in the rating scale for two consecutive quarters; and (iii) the supplier has in serious breach of business ethnics. To uphold our dedication to value creation for our users, amongst other user specific aims, one of our important missions is to protect the privacy of user data and other sensitive information. We comply with all the applicable laws on privacy protection, and incorporate applicable legal and regulatory requirements on privacy protection into our internal compliance policies taking into account the specific features of our products and services. 107 Fraud detection and corruption prevention When a report of suspected fraudulent activities is received, the anti-fraud investigation team, which consists of professionals with profound knowledge in fraud risk management and solid fraud investigation experiences, is assigned to handle the investigation independently. After an investigation has been completed, the employee found and proven to have committed such fraud shall be subject to immediate dismissal, and corrective actions shall be taken in response to the findings at the same time. If we find any supplier or business partner engaging in corruption or any other fraudulent activities, we will put any supplier or business partner on the blacklist and terminate the contracts with them immediately. In the event that any fraudulent activity violates any relevant laws or regulations, such cases shall be reported to government authorities. In order to convey a message regarding our determination to fight against fraud and to introduce our whistleblowing system externally, we send a letter to our suppliers and business partners (including the current ones and the ones who ceased to work with us in the past two years) and request them to complete a questionnaire annually. Annual Report 2017 105 Environmental, Social and Governance Report Anti-Money Laundering The Group strictly abides by all applicable laws and regulations on anti-money laundering and counter-terrorist financing, and fulfills its social responsibilities and legal obligations on anti-money laundering. In 2017, we established an Anti-Money Laundering Committee (the "AML Committee”) chaired by our executive director and President, Mr. Lau Chi Ping Martin, with heads of each relevant business group as committee members. The AML Committee supervises and monitors the implementation of the anti-money laundering and counter-terrorist financing measures at the group level and at the subsidiary level with a unified approach. The objective is to centralise the management of the anti- money laundering efforts within the Group. We continued to improve our anti-money laundering and counter-terrorist financing systems in various aspects such as infrastructure, know-your-customer process, procedures for identification and reporting of suspicious transactions and training. We have robust systems and measures to detect, deter and protect our business from involvement in financial crimes such as money laundering and terrorist financing. Environmental, Social and Governance Report Three lines of defence The Group has implemented a three-line defence mechanism. Our first line of defence is the product team and the business development team, which are responsible for enhancing the awareness of anti-money laundering requirements and implementing anti-money laundering measures. The risk management team and anti-money laundering team serve as the second line and they are responsible for organising and coordinating the anti-money laundering efforts within the Group including but not limited to conducting assessments on the anti-money laundering governance and compliance, supervising the construction of the anti-money laundering compliance framework and organising trainings and public relations events relating to anti-money laundering. The internal audit team acts as the third line of defence and its main responsibilities include conducting the annual anti-money laundering audit and independent assessment on anti-money laundering governance. Anti-money laundering and internal control systems Our protective measures include, but are not limited to, the following: 106 Annual Report 2017 We have: (i) formulated a set of anti-money laundering policies based on the applicable anti-money laundering laws and regulations; (ii) implemented an anti-money laundering monitoring system; and (iii) set up a dedicated anti-money laundering team, which is solely responsible for compliance management, anti-money laundering name screening and suspicious transaction monitoring. The procurement department looks for qualified suppliers in the market and conducts standard or simplified verification on the suppliers depending on the duration of the cooperation, the order volume and the nature of the request. We have maintained a database of qualified suppliers which are ready to take orders from us. During the year ended 31 December 2017, all suppliers which were formally engaged had completed the Self-Assessment and signed the Anti-commercial Bribery Declaration. We are not aware of any of our suppliers engaging in commercial bribery, or being materially and adversely affected by issues relating to environmental and social responsibility. In the course of supplier engagement, potential suppliers are required to conduct self-assessment on their commitment, amongst other things, to environmental protection, social responsibility, and health and safety at work (the "Self-Assessment"). Suppliers which are formally engaged by us are also required to agree to the terms of a declaration and undertaking in relation to anti-commercial bribery in doing business with our Group (the "Anti-commercial Bribery Declaration"). To enhance the social responsibility awareness of our employees, we have formulated a code of conduct which those employees engaging in procurement activities must adhere to. To minimise the ethics risks, such employees are also required to declare any relationship they may have with our suppliers in writing. We have an internal policy which sets out the procedures for supplier onboarding. Before engaging a supplier, we will form a supplier assessment team to conduct the background check (including site visit) on the supplier. The team will consist of members from the procurement department, the requesting department, the technology department (if applicable) and the risk management department. The assessment results will be reported to the procurement department for a final determination. We normally ask for price quotations from at least three vendors. Other factors including delivery time and technical capabilities of the vendors will be taken into consideration when selecting vendors. If there is only one vendor available for selection as it dominates the relevant market or it is the only vendor with access to the required goods/services, the exclusive procurement arrangement with such vendor will require special approval with a satisfactory justification provided by the technology department or the requesting department. SUPPLY CHAIN MANAGEMENT We have further improved the anti-money laundering compliance and internal risk control mechanisms by: (i) recruiting more anti-money laundering professionals for suspicious transaction review and analysis in order to enhance the effectiveness and specialisation level of anti-money laundering; (ii) strengthening the requirements for the know-your-customer procedures; (iii) enhancing the overall monitoring system of suspicious transaction and manual analysis; (iv) cooperating with regulators and law enforcement bodies on anti-money laundering investigation; (v) actively participating in the strike on terrorism and corruption internationally, in order to prevent money laundering and upstream criminal activities; and (vi) carrying out various forms of training, education and public relation activities on anti-money laundering. Other control measures Environmental, Social and Governance Report Tencent Holdings Limited Our supply chain management programme attaches supreme importance to managing the ethics risk associated with the relationship between our procurement employees and our business partners. It also focuses on teaching those employees who are involved in procurement to recognise and mitigate the inherent risks. We have a designated team in charge of the physical and mental health of employees. We arrange annual medical checkups for employees and organise health seminars, fitness sessions, on-site medical consultations as well as face-to-face and telephone counselling from time to time. Environmental, Social and Governance Report We have been actively implementing various measures to ensure compliance with the relevant laws, regulations and policies. For instance, we have already obtained the relevant credentials for operating online games, for example, the Telecommunication Business Operation Permit, the Online Publishing Service Licence and the Internet Culture Business Permit. To safeguard the physical and mental health of online game users and adolescents, we have implemented the real name system and anti-addiction system in accordance with the regulatory requirements of the PRC and strengthened the promotion of healthy gaming and anti-addiction through various channels. In February 2017, we have launched a series of services on "Tencent Game Guardian Platform" (http://jiazhang.qq.com) which assists parents to monitor the gaming habits of their underage children. This is the platform dedicated to healthy gaming of underage children in the online game industry. In July 2017, we have implemented an anti-addiction system on Honour of Kings, which sends reminders to players or forces logout from the game if players spend too much time on the game in one day. So far it is one of the strictest anti-addiction measures taken by a gaming company in the PRC mobile game industry. In addition, we have worked with School of Brain and Cognitive Science of Beijing Normal University and Data Centre of the China Internet (DCCI) to publish "Guide on Healthy Use of the Internet for Teenagers" and "Research on Online Gaming Behaviours of and Online Protections for Teenagers". Parents, education institutions and industry players can download these documents free of charge for their reference. Monitoring of and Protection for Original User-generated Content Each of Weixin/WeChat and QQ provides a mechanism for users to report any fake or in appropriate content circulated on its platform. To protect the original user-generated content, Weixin/WeChat has launched a new feature in December 2017 for the Weixin/WeChat official account holders to declare the originality of the content generated by them on Weixin/WeChat so as to help identify and deter copyright infringement more effectively. Intellectual Property Rights As at 31 December 2017, the Group's financial assets which were carried at fair value comprised available-for-sale financial assets and other derivative financial instruments of approximately RMB127,218 million and RMB5,624 million, respectively, of which approximately RMB77,131 million of these financial assets were measured based on significant unobservable inputs and classified as “Level 3 financial instruments". Tencent Holdings Limited Fair value measurement of financial instruments, including available-for-sale financial assets and other derivative Key Audit Matter Independent Auditor's Report We independently tested, on a sample basis, the accuracy of mathematical calculation applied in the valuation models and the calculation of impairment charges. We did not identify any material exceptions from our testing. In respect of the impairment assessments of cash generating units that containing goodwill and investments in associates using market approach, we assessed the valuation assumptions including the selection of comparable companies, recent market transactions, and liquidity discount for lack of marketability, etc. We assessed these key assumptions adopted by management with the involvement of our internal valuation experts based on our industry knowledge and independent research performed by us. We considered that the key assumptions adopted by management are in line with our expectation and evidence obtained. Tencent Holdings Limited 116 How our audit addressed the Key Audit Matter Impairment assessments of goodwill, investments in associates and investments in redeemable instruments of associates (Cont'd) Key Audit Matter Independent Auditor's Report 115 Annual Report 2017 In respect of the impairment assessments of cash generating units that containing goodwill, investments in associates and investments in redeemable instruments of associates using discounted cash flows, we assessed the key assumptions adopted including revenue growth rate, discount rate and other working capital requirement assumptions by examining the approved financial/business forecast models, and comparing actual results for the year against the previous period's forecasts and the applicable industry/business data external to the Group. We assessed certain of these key assumptions with the involvement of our internal valuation experts. We considered that the key assumptions adopted by management are in line with our expectation and evidence obtained. by case basis, in carrying out the impairment assessments, mainly including discounted cash flows and market approach. We assessed, on a sample basis, the basis management used to identify separate groups of cash generating units that containing goodwill, the impairment approaches and the valuation models used in management's impairment assessments, which we found them to be appropriate. Management adopted different valuation models, on a case We also tested, on a sample basis, key controls in respect of the impairment assessments, including the determination of appropriate impairment approaches, valuation models and assumptions and the calculation of impairment provisions, which we found no material exceptions. We tested management's assessment including periodic impairment indications evaluation as to whether indicators of impairment exist by corroborating with management and market information. How our audit addressed the Key Audit Matter carrying amounts of these assets and the fact that significant judgements were required by management (i) to identify whether any impairment indicators existed for any of these assets during the year; (ii) to determine the appropriate impairment approaches, i.e. fair value less costs of disposal or value in use; and (iii) to select key assumptions to be adopted in the valuation models, including discounted cash flows and market approach, for the impairment assessments. We focused on this area due to the magnitude of the As at 31 December 2017, the Group held significant amounts of goodwill, investments in associates and investments in redeemable instruments of associates amounting to RMB23,608 million, RMB113,779 million and RMB22,976 million, respectively. Impairment provision of RMB124 million, RMB1,277 million and RMB607 million had been recognised during the year ended 31 December 2017 against the carrying amounts, respectively. Refer to Notes 4(b), 19, 20 and 22 to the consolidated financial statements Impairment assessments of goodwill, investments in associates and investments in redeemable instruments of associates Key Audit Matter financial instruments Independent Auditor's Report 119 concern. We focused on this area due to the high degree of judgement required in determining the respective fair values of Level 3 financial instruments, which do not have direct open market quoted values, with respect to the adoption of applicable valuation methodology and the application of appropriate assumptions in the valuation. How our audit addressed the Key Audit Matter In respect of the fair value measurement of Level 3 financial instruments, we tested the key controls, on a sample basis, in relation to the valuation process including the adoption of applicable valuation methodology and the application of appropriate assumptions in different circumstances, by inspection of the evidence of management's review, which we found no material exceptions. We involved our internal valuation experts to discuss with management and assess the appropriateness of valuation methodology and assumptions used. We tested, on a sample basis, valuation of Level 3 financial instruments as at 31 December 2017 by evaluating the underlying assumptions including discount rates, projected growth rates, marketability discount, market information of comparable companies (such as recent transactions and earnings multiples) based on our industry knowledge as well as underlying supporting documentation. We also tested, on a sample basis, the arithmetical accuracy of the valuation computation. We found that the valuation methodology of Level 3 financial instruments is acceptable and the assumptions made by management are supported by available evidence. Annual Report 2017 117 Independent Auditor's Report OTHER INFORMATION The directors of the Company are responsible for the other information. The other information comprises all of the information included in the annual report other than the consolidated financial statements and our auditor's report thereon. Our opinion on the consolidated financial statements does not cover the other information and we do not express any form of assurance conclusion thereon. In connection with our audit of the consolidated financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. RESPONSIBILITIES OF DIRECTORS AND THOSE CHARGED WITH GOVERNANCE FOR THE CONSOLIDATED FINANCIAL STATEMENTS The directors of the Company are responsible for the preparation of the consolidated financial statements that give a true and fair view in accordance with IFRSS and the disclosure requirements of the Hong Kong Companies Ordinance, and for such internal control as the directors determine is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. In preparing the consolidated financial statements, the directors are responsible for assessing the Group's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or to cease operations, or have no realistic alternative but to do so. Those charged with governance are responsible for overseeing the Group's financial reporting process. 118 Tencent Holdings Limited Independent Auditor's Report AUDITOR'S RESPONSIBILITIES FOR THE AUDIT OF THE CONSOLIDATED FINANCIAL STATEMENTS Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion. We report our opinion solely to you, as a body, and for no other purpose. We do not assume responsibility towards or accept liability to any other person for the contents of this report. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements. As part of an audit in accordance with ISAs, we exercise professional judgment and maintain professional scepticism throughout the audit. We also: Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group's internal control. Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the directors. Conclude on the appropriateness of the directors' use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group's ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor's report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor's report. However, future events or conditions may cause the Group to cease to continue as a going Annual Report 2017 Refer to Notes 3.3, 24 and 26 to the consolidated financial statements Tencent Holdings Limited We found that the results of our procedures performed to be materially consistent with management's supporting documentation. the notes to the consolidated financial statements, which include a summary of significant accounting policies. • the consolidated statement of cash flows for the year then ended; and the consolidated statement of changes in equity for the year then ended; the consolidated statement of comprehensive income for the year then ended; • • the consolidated income statement for the year then ended; • the consolidated statement of financial position as at 31 December 2017; The consolidated financial statements of Tencent Holdings Limited (the "Company") and its subsidiaries (the "Group") set out on pages 121 to 238, which comprise: What we have audited OPINION (incorporated in the Cayman Islands with limited liability) TO THE SHAREHOLDERS OF TENCENT HOLDINGS LIMITED 羅兵咸永道 pwc Independent Auditor's Report 111 Annual Report 2017 Looking forward, we will continue to devote great efforts and resources to observe and protect IP rights. Within the past decade, we have several times been awarded “China Patent Gold Awards" by the State Intellectual Property Office of the PRC, "China Trademark Awards" jointly by World Intellectual Property Organisation and the State Administration for Industry & Commerce of the PRC and "China Copyright Gold Awards" by the National Copyright Administration of the PRC and the World Intellectual Property Organisation, signifying our contribution to the development of independent innovation of the PRC. We have also several times been awarded "National Copyright Demonstration Unit", recognising our outstanding performance in management and protection of copyright. In November 2017, we were awarded “China Appearance Design Gold Award" by the State Intellectual Property Office of the PRC and the World Intellectual Property Organisation and this is the first time where a graphic user interface won such title. We actively participate in public affairs and strive to promote the awareness of IP protection in the Internet industry. As members of the China National Information Technology Standardisation Committee, the China Intellectual Property Society, the Patent Protection Association of China, the World Wide Web Consortium, the International Trademark Association and the China Trademark Association, we have participated in the consultations on legislative amendments to the PRC laws and regulations relating to patents, trademarks and anti-competition and have made recommendations in the development of industry standards. We began a comprehensive programme for the management of IP at an early stage. We have consistently applied for the registration of IP rights since the early stages of its establishment. With the successful development of our business, we have expanded our global IP portfolio to cover more than 100 countries and regions. As of 31 December 2017, we had obtained over 14,000 officially registered trademarks and over 6,000 issued patents. Coupled with our creation of a vast amount of copyrighted content, we have accumulated IP assets of considerable value. Our IP team has developed a comprehensive database for our patents, trademarks and copyrights and our strong data analytical skills enable us to manage and monitor our IP rights in a meticulous and efficient manner. To combat infringement of IP rights, our IP team has also established a comprehensive and efficient monitoring and maintenance system, and has devised various civil, criminal and administrative enforcement measures to enforce our IP rights. Please see further details on the Company Website (https://www.tencent.com/ legal/html/en-us/property.html). Environmental, Social and Governance Report Our opinion 114 In our opinion, the consolidated financial statements give a true and fair view of the consolidated financial position of the Group as at 31 December 2017, and of its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards ("IFRSS") and have been properly prepared in compliance with the disclosure requirements of the Hong Kong Companies Ordinance. Tencent Holdings Limited We assessed, on a sample basis, the expected users' relationship periods adopted by management by testing the data integrity of historical users' consumption patterns and calculation of the churn rates. We also evaluated the consideration made by management in determining the underlying assumptions for expected users' relationship periods with reference to historical operating and marketing data of the relevant games. We also assessed, on a sample basis, the historical accuracy of the management's estimation process by comparing the actual users' relationship periods for the year against the original estimation for selected virtual products/items. We tested, on a sample basis, key controls in respect of the recognition of revenue from sales of virtual products/ items, including management's review and approval of (i) determination of the estimated lifespans of new virtual products/items prior to their launches; and (ii) changes in the estimated lifespans of existing virtual products/items based on periodic reassessment on any indications triggering such changes. We also assessed the data generated from the Group's information system supporting the management's review, including testing the information system logic for generation of reports, and checking, on a sample basis, the monthly computation of revenue recognised on selected virtual products/items generated directly from the Group's information system. We discussed with management and evaluated their judgements on key assumptions in determining the estimated lifespans of the virtual products/items that were based on the expected users' relationship periods. How our audit addressed the Key Audit Matter We focused on this area due to the fact that management applied significant judgements in determining the expected users' relationship periods for certain virtual products/ items. These judgements included (i) the determination of key assumptions applied in the expected users' relationship periods, including but not limited to historical users' consumption patterns, churn rates and reactivity on marketing activities, games life-cycle, as well as the Group's marketing strategy; and (ii) the identification of events that may trigger changes in the expected users' relationship periods. During the year ended 31 December 2017, a majority of the Group's revenue from value-added services was contributed from online games and was predominately derived from the sales of virtual products/items. The Group has recognised revenue from sales of virtual products/items to the users in respect of value-added services rendered on the Group's online platforms. The relevant revenue is recognised over the lifespans of respective virtual products/items which was determined by the management, on an item by item basis, with reference to the expected users' relationship periods or the stipulated period of validity of the relevant virtual products/items, depending on the terms of the virtual products/items. Revenue recognition on provision of online games value-added services - estimates of the lifespans of virtual products/items Refer to Note 4(a) to the consolidated financial statements Key Audit Matter Independent Auditor's Report 113 Annual Report 2017 Fair value measurement of financial instruments, including available-for-sale financial assets and other derivative financial instruments • • Impairment assessments of goodwill, investments in associates and investments in redeemable instruments of associates Revenue recognition on provision of online games value-added services - estimates of the lifespans of virtual products/ items Key audit matters identified in our audit are summarised as follows: Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated financial statements of the current period. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. KEY AUDIT MATTERS We are independent of the Group in accordance with the International Ethics Standards Board for Accountants' Code of Ethics for Professional Accountants ("IESBA Code"), and we have fulfilled our other ethical responsibilities in accordance with the IESBA Code. Independence We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. We conducted our audit in accordance with International Standards on Auditing ("ISAs"). Our responsibilities under those standards are further described in the Auditor's Responsibilities for the Audit of the Consolidated Financial Statements section of our report. BASIS FOR OPINION Independent Auditor's Report 112 • We are a technology-oriented company and we stress the importance of the observation and protection of intellectual property ("IP") rights. We have established a dedicated IP team with approximately 80 employees as of 31 December 2017 that is responsible for the day-to-day management of legal matters involving trademark, patent, copyright, domain names and other IP rights. 110 50 Deferred income tax liabilities 2,576 2,154 Other financial liabilities 4,935 3,862 36 Long-term payables 36,204 29,363 35 Notes payable 57,549 82,094 34 Borrowings Non-current liabilities LIABILITIES 186,247 277,093 11,623 21,019 Total equity 27 5,975 5,153 Deferred revenue 29,433 39 Other payables and accruals 27,413 50,085 38 Accounts payable RMB'Million 2016 RMB'Million Note 2017 As at 31 December As at 31 December 2017 Consolidated Statement of Financial Position Current liabilities Tencent Holdings Limited 124 108,455 125,839 2,038 2,391 37 Non-controlling interests 174,624 256,074 136,743 Annual Report 2017 395,899 554,672 Total assets 149,154 178,446 71,902 105,697 30 750 1,606 30 Cash and cash equivalents Restricted cash 50,320 36,724 28 Term deposits 1,649 465 26 Other financial assets 14,118 123 20,873 Consolidated Statement of Financial Position EQUITY 202,682 23,693 35,158 32 (3,136) (3,970) 31 Retained earnings Other reserves Shares held for share award schemes 17,324 22,204 31 Share premium 31 Share capital Equity attributable to equity holders of the Company RMB'Million 2016 RMB'Million Note 2017 As at 31 December As at 31 December 2017 Borrowings 34 15,696 (9,316) (118) (9,198) (9,198) -currency translation differences (2,561) (2,561) (2,561) financial assets 50 16,854 16,854 16,854 - net gains from changes in fair value of available-for-sale financial assets 907 907 907 -share of other comprehensive income of associates 72,471 961 71,510 71,510 186,247 706 11,623 706 706 171 1,379 98 1,281 60 60 60 79,061 171 56 156 1,125 4.3 843 78,218 71,510 6,708 Employee share award schemes: -value of employee services - proceeds from shares issued Employee share option schemes: Transactions with equity holders Capital injection Total comprehensive income for the year - other fair value gains, net ། 174,624 136,743 23,693 395,899 554,672 209,652 277,579 Total equity and liabilities Total liabilities 101,197 151,740 31,203 42,132 37 Deferred revenue 745 934 Other tax liabilities 5,219 8,708 Current income tax liabilities 3,466 4,752 35 Notes payable 12,278 The notes on pages 130 to 238 are an integral part of these consolidated financial statements. The consolidated financial statements on pages 121 to 238 were approved by the Board of Directors on 21 March 2018 and were signed on its behalf: Ma Huateng Director Lau Chi Ping Martin (3,136) 17,324 RMB'Million Total equity interests RMB'Million RMB'Million Total controlling Retained reserves earnings RMB'Million RMB'Million Other Share for share premium award schemes RMB'Million RMB'Million 17,110 Share capital RMB'Million Shares held Attributable to equity holders of the Company Other comprehensive income, net of tax: Profit for the year Comprehensive income Balance at 1 January 2017 For the year ended 31 December 2017 Consolidated Statement of Changes in Equity 125 Annual Report 2017 Director Non- 25 Prepayments, deposits and other assets 10,152 Equity holders of the Company Attributable to: 41,447 72,471 Profit for the year (10,193) (15,744) 11 Income tax expense 51,640 88,215 Profit before income tax (2,522) 821 10 Share of profit/(loss) of associates and joint ventures (1,955) (2,908) 9 Finance costs, net 56,117 90,302 Operating profit Non-controlling interests (22,459) Earnings per share for profit attributable to equity holders of the Company - basic RMB'Million 2017 Year ended 31 December Other comprehensive income, net of tax: Profit for the year For the year ended 31 December 2017 Consolidated Statement of Comprehensive Income 121 Annual Report 2017 The notes on pages 130 to 238 are an integral part of these consolidated financial statements. - diluted 4.329 7.499 12(b) 4.383 7.598 12(a) 41,447 72,471 352 961 41,095 71,510 (in RMB per share) (33,051) 8 General and administrative expenses Others Online advertising Value-added services Revenues RMB'Million 2016 RMB'Million 2017 Year ended 31 December Note For the year ended 31 December 2017 Consolidated Income Statement Tencent Holdings Limited 120 Hong Kong, 21 March 2018 Certified Public Accountants PricewaterhouseCoopers The engagement partner on the audit resulting in this independent auditor's report is Tong Yu Keung. From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor's report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion. Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation. Independent Auditor's Report 153,983 107,810 40,439 26,970 (12,136) (17,652) 3,594 20,140 7 2,619 3,940 6 8 18 Selling and marketing expenses Other gains, net 2016 84,499 (67,439) (120,835) 8 151,938 237,760 5000 Interest income Gross profit Cost of revenues 17,158 43,338 116,925 171 RMB'Million 41,447 24 Available-for-sale financial assets 630 7,826 23 Investments in joint ventures 9,627 22,976 22 Investments in redeemable instruments of associates 70,042 113,779 20 Investments in associates 36,467 40,266 19 Intangible assets 5,174 5,111 18 Land use rights 854 127,218 800 83,806 25 16,549 29 Accounts receivable 263 295 Inventories Current assets 246,745 376,226 5,415 5,365 28 Term deposits 7,033 9,793 27 Deferred income tax assets 1,760 5,159 26 Other financial assets 7,363 11,173 Prepayments, deposits and other assets 4,674 3,163 17 Tencent Holdings Limited 122 The notes on pages 130 to 238 are an integral part of these consolidated financial statements. Non-controlling interests Equity holders of the Company Attributable to: Total comprehensive income for the year Other fair value losses Items that may not be subsequently reclassified to profit or loss 600 756 Other fair value gains 4,198 (9,316) (1,176) (2,561) 2,929 16,854 Net gains from changes in fair value of available-for-sale financial assets Transfer to profit or loss upon disposal of available-for-sale financial assets Currency translation differences 863 907 Share of other comprehensive income of associates Items that may be subsequently reclassified to profit or loss (50) (244) 6,590 7,170 13,900 23,597 16 Investment properties Construction in progress Property, plant and equipment Non-current assets ASSETS RMB'Million 2016 RMB'Million 72,471 Note As at 31 December As at 31 December 2017 Consolidated Statement of Financial Position 48,617 79,061 423 843 48,194 78,218 48,617 79,061 2017 -value of employee services -transfer to profit or loss upon disposal of available-for-sale 107 136,743 174,624 11,623 186,247 The notes on pages 130 to 238 are an integral part of these consolidated financial statements. Annual Report 2017 127 Consolidated Statement of Cash Flows For the year ended 31 December 2017 Year ended 31 December 2017 Note RMB'Million 23,693 2016 Cash flows from operating activities Cash generated from operations Income tax paid Net cash flows generated from operating activities 40(a) 120,002 76,034 (13,862) (10,516) 106,140 65,518 Cash flows from investing activities (Payments for)/proceeds from business combinations, net of cash acquired RMB'Million (21) (3,136) 15,530 Disposal of subsidiaries Partial disposal of equity interests in subsidiaries and businesses Transfer of equity interests of subsidiaries to non-controlling interests Termination of the put option granted to non-controlling interests (738) (494) (1,232) (3) (3) 7,842 7,842 300 8,142 17,324 (927) 927 516 516 516 Total transactions with equity holders at their capacity as equity holders for the year Balance at 31 December 2016 5,157 (1,319) 6,921 (4,364) 6,395 9,135 (927) (2,523) 1,285 (3) Proceeds from disposals of available-for-sale financial assets 4,705 1,637 Payments for loans to investees and others (2,219) (2,994) Proceeds from settlement of loans to investees and others 1,533 4,046 Payments for acquisition of other financial assets (995) Proceeds from settlement of other financial assets 995 (33,556) Receipt from maturity of term deposits with initial terms of over three months 42,319 Placement of term deposits with initial terms of over three months (72,520) (57,049) Interest received 3,529 1,718 Dividends received 2,009 719 Net cash flows used in investing activities (96,392) (70,923) 86,166 Net (outflow)/inflow of cash in respect of disposals of subsidiaries Purchase of property, plant and equipment, construction in progress (47,716) Payments for available-for-sale financial assets and related derivative 619 and investment properties Proceeds from disposals of property, plant and equipment Payments for acquisition of investments in associates Proceeds from disposals of investments in associates Payments for acquisition of investments in redeemable instruments of associates Proceeds from disposals of investments in redeemable instruments of associates Payments for acquisition of investments in joint ventures (16,384) (12,108) (8,399) 28 31 (17,528) (8,934) financial instruments 608 (3,324) 507 266 (7,091) 9 (62) 3 (19,850) (8,849) (46) (1,506) Proceeds from disposals of investments in joint ventures Purchase of/prepayment for intangible assets Purchase of/prepayment for land use rights 1,107 1,785 owned subsidiaries Acquisition of additional equity interests in non-wholly Share capital RMB'Million Share for share premium award schemes RMB'Million RMB'Million Other Retained reserves earnings RMB'Million RMB'Million controlling Total interests RMB'Million RMB'Million Total equity RMB'Million 12,167 (1,817) 9,673 100,012 120,035 Non- 2,065 863 41,095 41,095 352 41,447 863 863 - net gains from changes in fair value of available-for-sale financial assets 2,929 2,929 2,929 - transfer to profit or loss upon disposal of available-for-sale financial assets 122,100 (1,176) Shares held For the year ended 31 December 2017 26 76 669 Total transactions with equity holders at their capacity as equity holders for the year Balance at 31 December 2017 126 Tencent Holdings Limited 4,880 (834) 4,757 (5,571) 3,232 Attributable to equity holders of the Company 8,553 22,204 (3,970) 35,158 202,682 256,074 21,019 277,093 Balance at 1 January 2016 Comprehensive income Profit for the year Other comprehensive income, net of tax: -share of other comprehensive income of associates Consolidated Statement of Changes in Equity 11,785 2,045 (1,176) -currency translation differences 394 - shares withheld for share award schemes (1,936) I 3,847 68 3,915 (1,936) (1,936) 881 -vesting of awarded shares (617) 617 3,453 Tax benefit from share-based payments of a subsidiary 897 897 Profit appropriations to statutory reserves 665 (665) Dividends (Note 15) (3,699) (3,699) (914) (4,613) Non-controlling interests arising from business combinations 7,802 7,802 897 - value of employee services 225 225 4,127 4,127 71 4,198 356 ། 356 356 7,099 41,095 48,194 423 48,617 - other fair value gains, net Total comprehensive income for the year Transactions with equity holders Capital injection Employee share option schemes: -value of employee services - proceeds from shares issued Employee share award schemes: 1,414 1,414 311 57 368 35 403 225 | 128 Tencent Holdings Limited Consolidated Statement of Cash Flows (2,551) Dividends paid to non-controlling interests (946) (907) Net cash flows generated from financing activities Net increase in cash and cash equivalents Cash and cash equivalents at beginning of the year Exchange (losses)/gains on cash and cash equivalents 26,598 31,443 36,346 26,038 71,902 43,438 4,254 2,426 Cash and cash equivalents at end of the year 105,697 71,902 The notes on pages 130 to 238 are an integral part of these consolidated financial statements. Annual Report 2017 (3,699) 129 (5,052) (927) 55,394 Repayment of long-term borrowings Repayment of convertible bonds Repayment of notes payable (5,281) (13,957) (494) (3,450) (4,132) Proceeds from issuance of ordinary shares 171 225 Shares withheld for share award schemes (2,232) (1,936) Proceeds from issuance of additional equity of non-wholly owned subsidiaries Proceeds from disposals of non-controlling interests in a non-wholly owned subsidiary Payments for acquisition of non-controlling interests in non-wholly owned subsidiaries Dividends paid to the Company's shareholders 6,466 1,393 106 267 (1,364) 33,517 (2,045) 13,741 Profit appropriations to statutory reserves 244 '$ 244 '༔ 244 Tax benefit from share-based payments of a subsidiary 1,398 (1,398) - vesting of awarded shares 10 (2,232) (2,232) 4,767 106 4,661 407 (2,232) - shares withheld for share award schemes 519 (2,045) (519) (5,052) 7,363 6,378 6,378 (133) (133) (293) (69) (224) Lapse of put option granted to non-controlling interests Transfer of equity interests of subsidiaries to non-controlling interests Dilution of interests in subsidiaries Disposal of subsidiaries (952) 728 owned subsidiaries Acquisition of additional equity interests in non-wholly (5,995) (943) (5,052) Dividends (Note 15) (1,734) (1,176) 2,387 (12,450) For the year ended 31 December 2017 Year ended 31 December RMB'Million 2016 2017 Cash flows from financing activities Proceeds from short-term borrowings Repayment of short-term borrowings Proceeds from long-term borrowings 16,676 RMB'Million IFRS 15 must be applied for financial years commencing on or after 1 January 2018 and earlier adoption is permitted. The Group will apply the full retrospective approach upon the adoption since 1 January 2018. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Cont'd) 2 Notes to the Consolidated Financial Statements For the year ended 31 December 2017 Tencent Holdings Limited 134 The standard permits either a full retrospective or a modified retrospective approach for the adoption. Based on the management's assessment on the adoption of IFRS 15, the Group expects the effects of applying the new standard on the Group's financial statements to be insignificant. A number of new standards and amendments to standards are not effective for the financial year beginning 1 January 2017, and have not been early adopted by the Group in preparing the consolidated financial statements. In respect of IFRS 9 "Financial instruments”, IFRS 15 "Revenue from contracts with customers" and IFRS 16 "Lease”, none of these is expected to have a significant effect on the consolidated financial statements of the Group except IFRS 9, details of which are set out below. IFRS 15 "Revenue from contracts with customers" will replace IAS 18 "Revenue" and IAS 11 "Construction contracts" and the related interpretation's on revenue recognition. IFRS 9 "Financial instruments" addresses the classification, measurement and derecognition of financial assets and financial liabilities, introduces new rules for hedge accounting and a new impairment model for financial assets. IFRS 9 "Financial instruments" (i) 2.1 New standards and amendments to standards that have been issued but not effective (b) IFRS 15 establishes a comprehensive framework for determining when to recognize revenue and how much revenue to recognize through a five step approach: (i) identify the contract(s) with a customer; (ii) identify separate performance obligations in a contract; (iii) determine the transaction price; (iv) allocate transaction price to performance obligations; and (v) recognize revenue when performance obligation is satisfied. IFRS 15 also provides specific guidance on contract costs and license arrangements. It also includes a cohesive set of disclosure requirements about revenue and cash flows arising from the contracts with customers. Basis of preparation (Cont'd) The new standard is mandatory for financial years commencing on or after 1 January 2019. The Group does not intend to adopt this standard before its effective date. New standards and amendments to standards that have been issued but not effective (Cont'd) (a) Consolidation (Cont'd) 2.2 Subsidiaries (Cont'd) 2 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Cont'd) For the year ended 31 December 2017 Notes to the Consolidated Financial Statements 135 Annual Report 2017 Intra-group transactions, balances and unrealised gains on transactions between group companies are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the transferred asset. When necessary, amounts reported by subsidiaries have been adjusted to conform with the Group's accounting policies. Subsidiaries are all entities (including structured entities) over which the Group has control. The Group controls an entity when the Group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. Subsidiaries are consolidated from the date on which control is transferred to the Group. They are deconsolidated from the date that control ceases. (a) Consolidation 2.2 Subsidiaries Clarification of disclosure requirement of interests in entities classified as held for sale The accounting for lessors will not be significantly changed. The standard will affect primarily the accounting for Group's operating leases. However, the Group has just commenced its assessment and have not yet determined to what extent its commitments will result in the recognition of an asset and a liability for future payments and how this will affect the Group's profit and classification of cash flows. IFRS 16 will result in almost all leases being recognised on the statement of financial position, as the distinction between operating and finance leases is removed. Under the new standard, an asset (the right to use the leased item) and a financial liability to pay rentals are recognised. The only exceptions are short-term and low-value leases. (iii) IFRS 16 "Lease" (b) Recognition of deferred tax assets for unrealised losses (a) Amendments to standards adopted by the Group IFRS 12 (amendment) 1 For the year ended 31 December 2017 Notes to the Consolidated Financial Statements Tencent Holdings Limited 130 the right to control the management, financial and operating policies of Tencent Computer. the right to ensure that Tencent Technology owns the valuable assets of the business through the assignment to Tencent Technology of the principal present and future intellectual property rights of Tencent Computer; and the right to receive the cash received by Tencent Computer from its operations which is surplus to its requirements, having regard to its forecast working capital needs, capital expenditure, and other short-term anticipated expenditure through various commercial arrangements; • The PRC regulations restrict foreign ownership of companies that provide value-added telecommunications services, which include activities and services operated by Tencent Computer. In order to enable certain foreign companies to make investments into the business of the Group, the Company established a subsidiary, Tencent Technology (Shenzhen) Company Limited ("Tencent Technology"), which is a wholly foreign owned enterprise incorporated in the PRC, on 24 February 2000. The foreign investors of the Company then subscribed to additional equity interests in the Company. Under a series of contractual arrangements (collectively, "Structure Contracts") entered into among the Company, Tencent Technology, Tencent Computer and the Registered Shareholders, the Company is able to effectively control, recognise and receive substantially all the economic benefit of the business and operations of Tencent Computer. In summary, the Structure Contracts provide the Company through Tencent Technology with, among other things: The operations of the Group were initially conducted through Shenzhen Tencent Computer Systems Company Limited ("Tencent Computer"), a limited liability company established in the PRC by certain shareholders of the Company on 11 November 1998. Tencent Computer is legally owned by the core founders of the Company who are PRC citizens (the "Registered Shareholders"). The Company is an investment holding company. The Company and its subsidiaries (collectively, the "Group") are principally engaged in the provision of value-added services ("VAS") and online advertising services to users in the People's Republic of China (the "PRC"). Tencent Holdings Limited (the "Company") was incorporated in the Cayman Islands with limited liability. The address of its registered office is Cricket Square, Hutchins Drive, P.O. Box 2681, Grand Cayman KY1-1111, Cayman Islands. The shares of the Company have been listed on the main board of The Stock Exchange of Hong Kong Limited (the "Stock Exchange") since 16 June 2004. 1 GENERAL INFORMATION For the year ended 31 December 2017 GENERAL INFORMATION (Cont'd) As a result, Tencent Computer is accounted for as a controlled structured entity (see also Note 2.2(a) and Note 45) and the formation of the Group in 2000 was accounted for as a business combination between entities under common control under a method similar to the uniting of interests method for recording all assets and liabilities at predecessor carrying amounts. This approach was adopted because in management's belief it best reflected the substance of the formation. Similar Structure Contracts were also executed for other PRC operating companies established by the Group similar to Tencent Computer subsequent to 2000. All these PRC operating companies are treated as controlled structured entities of the Company and their financial statements have also been consolidated by the Company. See details in Note 45. 2 IAS 12 (amendment) IAS 7 (amendment) The following amendments to standards have been adopted by the Group for the first time for the financial year beginning on 1 January 2017. The adoption of these amendments does not have any significant impact on the consolidated financial statements of the Group. (i) Basis of preparation (Cont'd) 2.1 2 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Cont'd) Disclosure initiative For the year ended 31 December 2017 131 Annual Report 2017 The preparation of financial statements in conformity with IFRSS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group's accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in Note 4. The consolidated financial statements of the Group have been prepared in accordance with all applicable International Financial Reporting Standards ("IFRSS"). The consolidated financial statements have been prepared under the historical cost convention, as modified by the revaluation of available-for-sale financial assets and derivative financial instruments, which are carried at fair value. 2.1 Basis of preparation The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES Notes to the Consolidated Financial Statements Business combinations Tencent Holdings Limited Acquisition-related costs are expensed as incurred. • (i) IFRS 9 "Financial instruments" (Cont'd) (b) New standards and amendments to standards that have been issued but not effective (Cont'd) 2.1 Basis of preparation (Cont'd) For the year ended 31 December 2017 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Cont'd) 2 Notes to the Consolidated Financial Statements Tencent Holdings Limited 132 The Group's investments in redeemable instruments of associates, certain available-for-sale financial assets and certain other financial assets of the Group will be reclassified to financial assets at fair value through profit or loss and cumulative fair values change of these available- for-sale financial assets as at 31 December 2017 currently recognised in other reserves will be reclassified to retained earnings on 1 January 2018. The remaining available-for-sale financial assets of the Group will be reclassified to financial assets at fair value through other comprehensive income and not recycling to income statement. . Classification and measurement of financial instruments The Group has reviewed its financial assets and liabilities and is expecting the following impact from the adoption of the new standard on 1 January 2018: 139 Annual Report 2017 Classification and measurement of financial instruments (Cont'd) The Group's investments in associates in the form of redeemable instruments are accounted for as compound financial instruments (Note 2.27). There will be no impact on the Group's accounting for financial liabilities, as the new requirements only affect the accounting for financial liabilities that are designated at fair value through profit or loss, while the Group does not have any such liabilities. Derivatives and hedging activities (ii) IFRS 15 "Revenue from contracts with customers" New standards and amendments to standards that have been issued but not effective (Cont'd) (b) 2.1 Basis of preparation (Cont'd) SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Cont'd) 2 For the year ended 31 December 2017 Notes to the Consolidated Financial Statements 133 Annual Report 2017 IFRS 9 must be applied for financial years commencing on or after 1 January 2018. Early adoption is permitted. The Group will apply the new rules retrospectively from 1 January 2018, with the practical expedients permitted under the standard. Comparatives for 2017 will not be restated. The new standard also introduces expanded disclosure requirements and changes in presentation. These are expected to change the nature and extent of the Group's disclosures about its financial instruments. The new impairment model requires the recognition of impairment provisions based on expected credit losses rather than only incurred credit losses as is the case under IAS 39. It applies to financial assets classified at amortised cost, debt instruments measured at fair value through other comprehensive income, contract assets under IFRS 15, lease receivables, loan commitments and certain financial guarantee contracts. Based on the assessments undertaken to date, the Group expects changes in the loss allowance for account receivables to be insignificant. Impairment of financial assets The new hedge accounting rules will align the accounting for hedging instruments more closely with the Group's established risk management practices. As a general rule, more hedge relationships might be eligible for hedge accounting, given the standard introduces a more principle-based approach. The Group has confirmed that its current hedge relationships will be qualified as continuing hedges upon the adoption of IFRS 9. • Gains or losses on dilution of equity interest in associates are recognised in the consolidated income statement. If the ownership interest in an associate is reduced but significant influence is retained, only a proportionate share of the amounts previously recognised in other comprehensive income is reclassified to consolidated income statement where appropriate. Unrealised gains on transactions between the Group and its associates are eliminated to the extent of the Group's interests in the associates. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. A full gain or loss is recognised when a transaction involves a business whereas a partial gain or loss is recognised when a transaction involves assets that do not constitute a business, even if those assets are held by a subsidiary. Accounting policies of associates have been changed where necessary to ensure consistency with the policies adopted by the Group. The Group determines at each reporting date whether there is any objective evidence that investments accounted for using the equity method, including associates and joint arrangements (Note 2.4), are impaired. If this is the case, the Group calculates the amount of impairment as the difference between the recoverable amount of the investment and its carrying value and recognises the amount in "Other gains/(losses), net" in the consolidated income statement. Transactions with non-controlling interests that do not result in a loss of control are accounted for as equity transactions that is, as transactions with the owners of the subsidiary in their capacity as owners. The difference between fair value of any consideration paid and the relevant share acquired of the carrying amount of net assets of the subsidiary is recorded in equity. Gains or losses on disposals to non-controlling interests are also recorded in equity. _ Changes in ownership interests in subsidiaries without change of control The excess of the consideration transferred, the amount of any non-controlling interest in the acquiree and the acquisition-date fair value of any previous equity interest in the acquiree over the fair value of the identifiable net assets acquired is recorded as goodwill. If the total of consideration transferred, non-controlling interest recognised and previously held interest measured is less than the fair value of the net assets of the subsidiary acquired in the case of a bargain purchase, the difference is recognised directly in the consolidated income statement. (ii) Business combinations (Cont'd) (i) (a) Consolidation (Cont'd) 2.2 Subsidiaries (Cont'd) SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Cont'd) Notes to the Consolidated Financial Statements For the year ended 31 December 2017 2 136 Any contingent consideration to be transferred by the Group is recognised at fair value at the acquisition date. Subsequent changes to the fair value of the contingent consideration that is deemed to be an asset or liability is recognised in accordance with IAS 39 in profit or loss. Contingent consideration that is classified as equity is not re-measured, and its subsequent settlement is accounted for within equity. If the business combination is achieved in stages, the acquisition date carrying value of the acquirer's previously held equity interest in the acquiree is re-measured to fair value at the acquisition date; any gains or losses arising from such re-measurement are recognised in profit or loss. (iii) Disposal of subsidiaries When the Group ceases to have control, any retained interest in the entity is re-measured to its fair value at the date when control is lost, with the change in carrying amount recognised in the consolidated income statement. The fair value is the initial carrying amount for the purposes of subsequently accounting for the retained interest as an associate, a joint venture or financial asset. In addition, any amounts previously recognised in other comprehensive income in respect of that entity are accounted for as if the Group had directly disposed of the related assets or liabilities. It means that amounts previously recognised in other comprehensive income are reclassified to the consolidated income statement or transferred to another category of equity as specified/permitted by applicable IFRSS. Annual Report 2017 137 The Group's share of its associates' post-acquisition profit or loss is recognised in the consolidated income statement, and its share of post-acquisition movements in other comprehensive income is recognised in other comprehensive income. The cumulative post-acquisition movements are adjusted against the carrying amount of the investment. When the Group's share of losses in an associate equals or exceeds its interests in the associate, including any other unsecured long-term receivables, the Group does not recognise further losses, unless it has incurred legal or constructive obligations or made payments on behalf of the associate. 2.3 Associates (Cont'd) SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Cont'd) 2 Notes to the Consolidated Financial Statements For the year ended 31 December 2017 Tencent Holdings Limited 138 The Group applies the acquisition method to account for business combinations. The consideration transferred for the acquisition of a subsidiary is the fair values of the assets transferred, the liabilities incurred to the former owners of the acquiree and the equity interests issued by the Group. The consideration transferred includes the fair value of any asset or liability resulting from a contingent consideration arrangement. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. The Group recognises any non-controlling interest in the acquiree on an acquisition-by-acquisition basis. Non-controlling interests in the acquiree that are present ownership interests and entitle their holders to a proportionate share of the entity's net assets in the event of liquidation are measured at either fair value or the present ownership interests' proportionate share in the recognised amounts of the acquiree's identifiable net assets. All other components of non-controlling interests are measured at their acquisition date fair value, unless another measurement basis is required by IFRSS. Associates are all entities over which the Group has significant influence but not control, generally but not necessarily accompanying a shareholding of between 20% and 50% of the voting rights. Investments in associates are accounted for using the equity method of accounting and are initially recognised at cost. The Group's investments in associates include goodwill identified on acquisition, net of any accumulated impairment loss. Upon the acquisition of the ownership interest in an associate, any difference between the cost of the associate and the Group's share of the net fair value of the associate's identifiable assets and liabilities is accounted for as goodwill. Impairment testing of the investments in subsidiaries is required upon receiving dividends from these investments if the dividends exceed the total comprehensive income of the subsidiaries in the period the dividends are declared or if the carrying amount of the investments in the separate financial statements exceeds the carrying amount in the consolidated financial statements of the investee's net assets including goodwill. Investments in subsidiaries are accounted for at cost less impairment. Cost includes direct attributable costs of investment. The results of subsidiaries are accounted for by the Company on the basis of dividends received and receivable. In addition, the contribution to the Company's Share Scheme Trust (as defined in Note 45(e)), a controlled structured entity, is stated at cost in "Contribution to Share Scheme Trust”, and will be transferred to the "Shares held for share award schemes" under equity when the contribution is used for the acquisition of the Company's shares. (b) Separate financial statements 2.2 Subsidiaries (Cont'd) 2 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Cont'd) For the year ended 31 December 2017 Notes to the Consolidated Financial Statements 2.3 Associates Notes to the Consolidated Financial Statements Other intangible assets are amortised over their estimated useful lives (generally three to ten years) using the straight-line method which reflects the pattern in which the intangible asset's future economic benefits are expected to be consumed. 149 Motor vehicles Furniture and office equipment Computer equipment Buildings Depreciation is calculated using the straight-line method to allocate their cost net of their residual values over their estimated useful lives, as follows: Subsequent costs are included in the asset's carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. The carrying amount of the replaced part is derecognised. All other repairs and maintenance are charged to the consolidated income statement during the financial period in which they are incurred. All property, plant and equipment are stated at historical costs less accumulated depreciation and accumulated impairment charges. Historical costs includes expenditure that are directly attributable to the acquisition of the items. 2.9 Property, plant and equipment SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Cont'd) 2 Notes to the Consolidated Financial Statements For the year ended 31 December 2017 Tencent Holdings Limited 142 liabilities of the foreign entity and translated at the closing rate. Currency translation differences arising are recognised in other comprehensive income. Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and Leasehold improvements On consolidation, exchange differences arising from the translation of the net investment in foreign operations, and of borrowings and other currency instruments designated as hedges of such investments, are taken to other comprehensive income. 20-50 years 2 - 5 years Investment properties' carrying amounts are written down immediately to their recoverable amounts if their carrying amounts are greater than their estimated recoverable amounts. Depreciation is calculated on the straight-line method to allocate their costs net of their residual values over their estimated useful lives of 20-50 years. Investment properties' residual values and useful lives are reviewed, and adjusted if appropriate, at the end of each reporting period. Investment properties are held for long-term rental yields and are not occupied by the Group. Investment properties are carried at historical costs less accumulated depreciation and accumulated impairment charges. Historical costs include expenditures that are directly attributable to the acquisition of the items. 2.10 Investment properties 2 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Cont'd) For the year ended 31 December 2017 Notes to the Consolidated Financial Statements 143 Annual Report 2017 Gains and losses on disposals are determined by comparing the proceeds with the carrying amount and are recognised in "Other gains/(losses), net" in the consolidated income statement. An asset's carrying amount is written down immediately to its recoverable amount if the asset's carrying amount is greater than its estimated recoverable amount (Note 2.14). Construction in progress represents buildings under construction, which is stated at actual construction cost less any impairment loss. Construction in progress is transferred to property, plant and equipment when completed and ready for use. The assets' residual values and useful lives are reviewed, and adjusted if appropriate, at the end of each reporting period. Shorter of their useful lives and the lease terms 5 years 2 - 5 years 2.11 Land use rights (iii) All resulting currency translation differences are recognised as a separate component of other comprehensive income. Assets and liabilities for each statement of financial position presented are translated at the closing rate at the date of that statement of financial position; 2.7 Segment reporting SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Cont'd) 2 Tencent Holdings Limited 140 When the Group loses significant influence over an associate, it measures any retained investment at fair value. A profit or loss is recognised at any difference between the fair value of any retained interest plus any proceeds from disposing part of the interests in the associate and the carrying amount of the investment at the date the equity method of accounting was discontinued. The amounts previously recognised in other comprehensive income by an associate should be reclassified to the consolidated income statement or transferred to another category of equity as specified and permitted by applicable IFRSS when the Group loses significant influence over the associate. 2.6 Partial disposal of associates to available-for-sale financial assets The cost of associates/joint ventures acquired in stages, except for the change from an associate to a joint venture, is measured as the sum of the fair value of the interests previously held plus the fair value of any additional consideration transferred as of the date when it becomes associate/joint venture. A gain or loss on re-measurement of the previously held interests is taken to the consolidated incomes statement. Any other comprehensive income recognised in prior periods in relation to the previously held interests is also taken to the consolidated income statement. Any acquisition-related costs are expensed in the period in which the costs are incurred. 2.5 Investments in associates/joint ventures achieved in stages Unrealised gains on transactions between the Group and its joint ventures are eliminated to the extent of the Group's interests in the joint ventures. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. A full gain or loss is recognised when a transaction involves a business whereas a partial gain or loss is recognised when a transaction involves assets that do not constitute a business, even if those assets are held by a subsidiary. Accounting policies of the joint ventures have been changed where necessary to ensure consistency with the policies adopted by the Group. Under IFRS 11 investments in joint arrangements are classified as either joint operations or joint ventures depending on the contractual rights and obligations of each investor. The Group has assessed the nature of its joint arrangements and determined them to be joint ventures. Joint ventures are accounted for using the equity method. Under the equity method of accounting, interests in joint ventures are initially recognised at cost and adjusted thereafter to recognise the Group's share of the post-acquisition profit or loss and movements in other comprehensive income. When the Group's share of losses in a joint venture equals or exceeds its interests in the joint venture (which includes any long-term receivables that, in substance, form part of the Group's net investment in the joint venture), the Group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the joint venture. 2.4 Joint arrangements 2 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Cont'd) For the year ended 31 December 2017 Notes to the Consolidated Financial Statements Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-makers, who are responsible for allocating resources and assessing performance of the operating segments and making strategic decisions. The chief operating decision-makers mainly include the executive directors. Income and expenses for each income statement are translated at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the rate on the dates of the transactions); and 2.8 Foreign currency translation Items included in the financial statements of each of the Group's entities are measured using the currency of the primary economic environment in which the entity operates (the “functional currency"). The functional currency of the Company and certain of its overseas subsidiaries is United States Dollars ("USD"). As the major operations of the Group are within the PRC, the Group presents its consolidated financial statements in Renminbi ("RMB"), unless otherwise stated. (ii) (i) The results and financial position of all the group entities (none of which has the currency of a hyper- inflationary economy) that have a functional currency different from the presentation currency of RMB are translated into the presentation currency as follows: (c) Group companies 2.8 Foreign currency translation (Cont'd) 2 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Cont'd) For the year ended 31 December 2017 Notes to the Consolidated Financial Statements 141 Annual Report 2017 Translation differences on non-monetary financial assets and liabilities such as equity instruments held at fair value through profit or loss are recognised in the consolidated income statement as part of the fair value gain or loss. Translation differences on non-monetary financial assets, such as equity instruments classified as available-for-sale financial assets, are included in other comprehensive income. Changes in the fair value of debt securities denominated in foreign currency classified as available-for-sale financial assets are analysed between translation differences resulting from changes in the amortised cost of the securities, and other changes in the carrying amount of the securities. Translation differences related to changes in the amortised cost and interest income are recognised in the consolidated income statement, and other changes in carrying amount are recognised in other comprehensive income. Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the consolidated income statement. Transactions and balances (b) (a) Functional and presentation currency Land use rights are up-front payments to acquire long-term interest in land. These payments are stated at cost and charged to the consolidated income statement on a straight-line basis over the remaining period of the lease. Notes to the Consolidated Financial Statements For the year ended 31 December 2017 (a) Goodwill The Group assesses at the end of each reporting period whether there is objective evidence that a financial asset or a group of financial assets is impaired. 2.17 Impairment of financial assets 2 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Cont'd) For the year ended 31 December 2017 Notes to the Consolidated Financial Statements 147 Annual Report 2017 Financial assets and liabilities are offset and the net amount is reported in the consolidated statement of financial position when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or realise the assets and settle the liabilities simultaneously. The legally enforceable right must not be contingent on future events and must be enforceable in the normal course of business and in the event of default, insolvency or bankruptcy of the company or the counterparty. 2.16 Offsetting financial instruments Interest on loans and receivables and available-for-sale financial assets calculated using the effective interest method is recognised in the consolidated income statement as part of interest income. Dividends on available-for-sale financial assets are recognised in the consolidated income statement when the Group's right to receive payments is established. Changes in the fair value of available-for-sale financial assets are recognised in other comprehensive income. Financial assets are derecognised when the rights to receive cash flows from the investments have expired or have been transferred and the Group has transferred substantially all risks and rewards of ownership. When available-for-sale financial assets are sold or impaired, the accumulated fair value adjustments recognised in other comprehensive income are included in the consolidated income statement as "Other gains/(losses), net". Regular way purchases and sales of investments are recognised on trade date - the date on which the Group commits to purchase or sell the asset. Investments are initially recognised at fair value plus transaction costs for all financial assets not carried at fair value through profit or loss. Financial assets carried at fair value through profit or loss are initially recognised at fair value, and transaction costs are expensed in the consolidated income statement. Available-for-sale financial assets and financial assets at fair value through profit or loss are subsequently carried at fair value. Loans and receivables are subsequently carried at amortised cost using the effective interest method. (b) Recognition and measurement 2.15 Financial assets (Cont'd) SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Cont'd) A financial asset or a group of financial assets is impaired and impairment losses are incurred only if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a "loss event") and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. Notes to the Consolidated Financial Statements For the year ended 31 December 2017 (a) Assets carried at amortised cost For loans and receivables category, the amount of the impairment loss is measured as the difference between the asset's carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset's original effective interest rate. The carrying amount of the asset is reduced and the amount of the impairment loss is recognised in the consolidated income statement. If a loan has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate determined under the contract. As a practical expedient, the Group may measure impairment on the basis of an instrument's fair value using an observable market price. 2.12 Intangible assets Annual Report 2017 The Group documents at the inception of the transaction the relationship between hedging instruments and hedged items, as well as its risk management objectives and strategy for undertaking various hedging transactions. The Group also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items. Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently re-measured at their fair value. The method of recognising the resulting gain or loss depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. The Group designates certain derivatives as either (i) hedges of the fair value of recognised assets or liabilities or a firm commitment (fair value hedges); (ii) hedges of a particular risk associated with the cash flows of a recognised asset or liability or a highly probable forecast transaction (cash flow hedges); or (iii) hedges of a net investment in a foreign operation (net investment hedges). 2.18 Derivative financial instruments and hedging activities For debt securities, if any such evidence exists, the cumulative loss - measured as the difference between the acquisition cost (net of any principal repayment and amortisation) and the current fair value, less any impairment loss on that financial asset previously recognised in the consolidated income statement - is reclassified from equity and recognised in the consolidated income statement. If, in a subsequent period, the fair value of a debt instrument classified as available for sale increases and the increase can be objectively related to an event occurring after the impairment loss was recognised in the consolidated income statement, the impairment loss is reversed through the consolidated income statement. statement. For equity investments, a significant or prolonged decline in the fair value of the security below its cost is also considered as an indication that the assets are impaired. If any such evidence of impairment exists, the cumulative loss - measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognised in the consolidated income statement - is removed from equity and recognised in the consolidated income statement. Impairment losses recognised in the consolidated income statement on equity instruments are not reversed through the consolidated income 2.17 Impairment of financial assets (Cont'd) SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Cont'd) 2 Notes to the Consolidated Financial Statements For the year ended 31 December 2017 Tencent Holdings Limited 148 If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised (such as an improvement in the debtor's credit rating), the reversal of the previously recognised impairment loss is recognised in the consolidated income statement. Evidence of impairment may include indications that the debtor or a group of debtors is experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganisation, and where observable data indicate that there is a measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults. 2 (b) Assets classified as available-for-sale financial assets 146 2.13 Shares held for share award schemes Other intangible assets mainly include game licences, copyrights, computer software and technology and non-compete agreements. They are initially recognised and measured at cost or estimated fair value of intangible assets acquired through business combinations. Other intangible assets (c) The licensed online contents mainly include video and music contents. They are initially recognised and measured at cost or estimated fair value as acquired through business combinations. Licensed online contents are amortised using a straight-line method or an accelerated method which reflects the estimated consumption patterns. (b) Licensed online contents 2.12 Intangible assets (Cont'd) SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Cont'd) 2 Tencent Holdings Limited 144 Goodwill impairment reviews are undertaken annually or more frequently if events or changes in circumstances indicate a potential impairment. The carrying value of goodwill is compared to the recoverable amount, which is the higher of value in use and the fair value less costs to sell. Any impairment is recognised immediately as an expense and is not subsequently reversed. For the purpose of impairment testing, goodwill acquired in a business combination is allocated to each of the cash-generating units ("CGUs”), or groups of CGUs, that is expected to benefit from the synergies of the combination. Each unit or group of units to which the goodwill is allocated represents the lowest level within the entity at which the goodwill is monitored for internal management purposes. Goodwill is monitored at the operating segment level. Tencent Holdings Limited Goodwill arising on the acquisition of subsidiaries represents the excess of the consideration transferred over the Group's interest in net fair value of the identifiable assets, liabilities and contingent liabilities of the acquiree and the fair value of the non-controlling interests in the acquiree. The consideration paid by the Share Scheme Trust (see Note 45(e)) for purchasing the Company's shares from the market, including any directly attributable incremental cost, is presented as "Shares held for share award schemes" and the amount is deducted from total equity. When the Share Scheme Trust transfers the Company's shares to the awardees upon vesting, the related costs of the awarded shares vested are credited to "Shares held for share award schemes", with a corresponding adjustment made to "Share premium". Notes to the Consolidated Financial Statements For the year ended 31 December 2017 Assets that have an indefinite useful life or are not yet available for use are not subject to amortisation and are tested annually for impairment. Assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset's carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset's fair value less costs to sell and value in use. For the purpose of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). Non-financial assets other than goodwill that suffered impairment are reviewed for possible reversal of the impairment at each reporting date. 2.14 Impairment of non-financial assets Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets, except for those with maturities greater than 12 months after the end of the reporting period which are classified as non-current assets. The Group's loans and receivables comprise "Accounts receivable”, “Deposits and other receivables", "Term deposits", "Restricted cash" and "Cash and cash equivalents" in the consolidated statement of financial position. Loans and receivables (ii) (i) Financial assets at fair value through profit or loss The Group classifies its financial assets in the following categories: financial assets at fair value through profit or loss, loans and receivables and available-for-sale financial assets. The classification depends on the purpose for which the financial assets were acquired, management's intentions and whether the assets are quoted in an active market. Management determines the classification of its financial assets at initial recognition. Investments are designated as available-for-sale financial assets if they do not have fixed maturities and fixed or determinable payments, and management intends to hold them for the medium to long- term. Financial assets that are not classified into any of the other categories are also included in the available-for-sale category. They are included in non-current assets unless management intends to dispose of the investment within 12 months after the end of the reporting period. (a) Classification Financial assets at fair value through profit or loss are financial assets held for trading. A financial asset is classified in this category if acquired principally for the purpose of selling in the short term. Derivatives are classified as held for trading unless they are designated as hedges. Assets in this category are classified as current assets if expected to be settled within 12 months, otherwise they are classified as non-current. 2 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Cont'd) Annual Report 2017 2.15 Financial assets 145 (iii) Available-for-sale financial assets Notes to the Consolidated Financial Statements For the year ended 31 December 2017 2 Tencent Holdings Limited Notes to the Consolidated Financial Statements For the year ended 31 December 2017 156 At each reporting period end, the Group revise their estimates of the number of options and awarded shares that are expected to ultimately vest. It recognises the impact of the revision to original estimates, if any, in the consolidated income statement of the Group, with a corresponding adjustment made to equity. From the perspective of the Company, the Company grants its equity instruments to employees of its subsidiaries to exchange for their services related to the subsidiaries. Accordingly, the share-based compensation expenses, which are recognised in the financial statement, are treated as part of the "Investments in subsidiaries" in the Company's statement of financial position. Non-market performance and services conditions are included in assumptions about the number of options that are expected to become vested. For grant of share options, the total amount to be expensed is determined by reference to the fair value of the options granted by using option-pricing model, “Enhanced FAS 123" binomial model (the "Binomial Model"), which includes the impact of market performance conditions (such as the Company's share price) but excludes the impact of service condition and non-market performance conditions. For grant of award shares, the total amount to be expensed is determined by reference to the market price of the Company's shares at the grant date. The Group also adopts valuation techniques to assess the fair value of other equity instruments of the Group granted under the share-based compensation plans as appropriate. (c) Share-based compensation benefits (Cont'd) 2.29 Employee benefits (Cont'd) 2 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Cont'd) For the year ended 31 December 2017 When the options are exercised, the proceeds received net of any directly attributable transaction costs are credited to share capital (nominal value) and share premium. The Group participates in various defined contribution retirement benefit plans which are available to all relevant employees. These plans are generally funded through payments to schemes established by governments or trustee-administered funds. A defined contribution plan is a pension plan under which the Group pays contributions on a mandatory, contractual or voluntary basis into a separate fund. The Group has no legal or constructive obligations to pay further contributions if the fund does not hold sufficient assets to pay all employees the benefits relating to employee services in the current and prior periods. The Group's contributions to the defined contribution plans are expensed as incurred and not reduced by contributions forfeited by those employees who leave the plan prior to vesting fully in the contributions. 155 Annual Report 2017 The Group operates a number of share-based compensation plans (including share option schemes and share award schemes), under which the Group receives services from employees and other qualifying participants as consideration for equity instruments (including share options and awarded shares) of the Group. The fair value of the employee services and other qualifying participants' services received in exchange for the grant of equity instruments of the Group is recognised as an expense over the vesting period, which is the period over which all of the specified vesting conditions are to be satisfied, and credited to share premium under equity. Share-based compensation benefits (c) Pension obligations (b) Employee entitlements to annual leave are recognised when they accrue to employees. A provision is made for the estimated liability for annual leave as a result of services rendered by employees up to the end of the reporting period. Employee entitlements to sick and maternity leave are not recognised until the time of leave. (a) Employee leave entitlements 2.29 Employee benefits SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Cont'd) SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Cont'd) Notes to the Consolidated Financial Statements For the year ended 31 December 2017 2 Notes to the Consolidated Financial Statements 2.29 Employee benefits (Cont'd) The VAS can be paid directly by end users by way of online payment channels or utilising the prepaid cards and tokens (representing a specific amount of payment unit) issued by the Group. In addition, certain VAS are paid through various third parties platforms. If the Group repurchases vested equity instruments, the payment made to the employee and other qualifying participants shall be accounted for as a deduction from equity, except to the extent that the payment exceeds the fair value of the equity instruments repurchased, measured at the repurchase date. Any such excess shall be recognised as an expense. Determining whether revenues of the Group should be reported gross or net is based on a continuing assessment of various factors. The primary factor is whether the Group acting as the principal in offering services to the customer or as an agent in the transaction. The Group has determined that it is acting as the principal in offering services wherever the Group (i) is the primary obligor in the arrangement; (ii) has latitude in establishing the selling price; (iii) has discretion in supplier selection; and (iv) has involvement in the determination of product or service specifications. The Group adopts different revenue recognition methods based on its specific responsibilities/obligations in different VAS offerings. The Group also opens its online platforms to third-party game/application developers under certain co- operation agreements, of which the Group pays to the third-party game/application developers a pre- determined percentage of the fees paid by and collected from the users of the Group's online platforms for the virtual products/items purchased. The Group recognises the related revenue on a gross or net basis depending on whether the Group is acting as a principal or an agent in the transaction. The Group also defers the related revenue, either on a gross or net basis, over the estimated lifespans of the respective virtual products/items, given there is an implicit obligation of the Group to maintain and allow access of the users to the games/applications operated by the developers through its online platforms. Tencent Holdings Limited In respect of the Group's VAS services directly delivered to the Group's customers and paid through various third parties platforms, these third party platforms collect the relevant service fees (the "Online Service Fees") on behalf of the Group and they are entitled to a pre-determined percentage of commission fees (as part of "Channel and distribution costs"). Such Channel and distribution costs are withheld and deducted from the gross Online Service Fees collected by these platforms from the users, with the net amounts remitted to the Group. The Group recognises the Online Service Fees as revenue on a gross basis, given it acts as the principal in these transactions, and recognises such Channel and distribution costs as cost of revenues. VAS (Cont'd) (a) 2.31 Revenue recognition (Cont'd) SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Cont'd) 2 Notes to the Consolidated Financial Statements For the year ended 31 December 2017 Tencent Holdings Limited 158 Revenue is recognised from the provision of VAS when the services are rendered. Revenue is recognised from the virtual products/items on the Group's online platforms over the estimated lifespans of the respective virtual products/items. The estimated lifespans of different virtual products/items are determined by the management based on either the expected user relationship periods or the stipulated period of validity of the relevant virtual products/items depending on the respective term of virtual products/items. (c) Share-based compensation benefits (Cont'd) The Group sells the prepaid credits through various channels such as sales agents appointed by the Group, telecommunication operators, third party platform providers, broadband service providers and Internet cafes, etc. The end users can register the prepaid credits to their user accounts on the Group's online platforms and then gain access to the Group's paid online products or services. Receipts from the sales of prepaid credits are deferred and recorded as "Deferred revenue" in the consolidated statement of financial position (see Note 37). (a) VAS The Group principally derives revenues from provision of VAS, online advertising services and other online related services in the PRC. 2.31 Revenue recognition 2 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Cont'd) For the year ended 31 December 2017 Notes to the Consolidated Financial Statements 157 Annual Report 2017 Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in the provision due to passage of time is recognised as interest expense. Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognised even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small. Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events; it is probable that an outflow of resources will be required to settle the obligation; and the amount has been reliably estimated. Provisions are not recognised for further operating losses. 2.30 Provisions If the terms of an equity-settled award are modified, at a minimum an expense is recognised as if the terms had not been modified. An additional expense is recognised for any modification that increases the total fair value of the share-based payment arrangement, or is otherwise beneficial to the employee and other qualifying participants, as measured at the date of modification. Revenues from VAS are derived principally from the provision of online games, community value-added services and applications across various online platforms. 154 The put option liabilities are current liabilities unless the put option can only be exercised 12 months after the end of the reporting period. Deferred income tax assets are recognised on deductible temporary differences arising from investments in subsidiaries, associates and joint arrangements only to the extent that it is probable the temporary difference will reverse in the future and there is sufficient taxable profit available against which the temporary difference can be utilised. 151 Annual Report 2017 Put option is the financial instrument granted by the Group that the counterparty may have the right to request the Group to purchase its own equity instruments for cash or other financial assets when certain conditions are met. If the Group does not have the unconditional right to avoid delivering cash or another financial asset under the put option, it has to recognise a financial liability at the present value of the estimated future cash outflows under the put option. The financial liability is initially recognised at fair value. Subsequently, if the Group revises its estimates of payments, the Group will adjust the carrying amount of the financial liability to reflect actual and revised estimated cash outflows. The Group will recalculate the carrying amount by computing the present value of revised estimated future cash outflows at the financial instrument's original effective interest rate and the adjustments will be recognised as "Other gains/(losses), net" in the consolidated income statement. If the put option expires without delivery, the carrying amount of the liability is reclassified as equity. 2.24 Put option liabilities Accounts payable are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method. Accounts payable are obligations to pay for services or goods that have been acquired in the ordinary course of business from suppliers. Accounts payable are classified as current liabilities if payment is due within one year or less. If not, they are presented as non-current liabilities. 2.23 Accounts payable Where any Group company purchases the Company's equity instruments, the consideration paid, including any directly attributable incremental costs, is deducted from equity attributable to the Company's equity holders as treasury shares until the shares are cancelled or reissued. Where such shares are subsequently reissued, any consideration received (net of any directly attributable incremental transaction costs) is included in equity attributable to the Company's equity holders. Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or share options are shown in equity as a deduction from the proceeds. 2.22 Share capital SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Cont'd) 2 Notes to the Consolidated Financial Statements For the year ended 31 December 2017 Notes to the Consolidated Financial Statements Tencent Holdings Limited The Group does not recognise cash amounts deposited with banks (which are received under its payment business) under users' entrustment in the consolidated statement of financial position as the Group holds these cash amounts as a custodian according to the relevant users' agreements. Cash and cash equivalents include cash in hand, deposits held at call with banks, money market funds and other short-term highly liquid investments with initial maturities of three months or less. 2.21 Cash and cash equivalents and restricted cash Accounts receivable are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less provision for impairment. Accounts receivable are amounts due from customers or agents for services performed or merchandise sold in the ordinary course of business. If collection of accounts receivable is expected in one year or less, they are classified as current assets. Otherwise, they are presented as non-current assets. 2.20 Accounts receivable Inventories, mainly consisting of merchandise for sale, are primarily accounted for using the weighted average method and are stated at the lower of cost and net realisable value. 2.19 Inventories Changes in the fair value of any derivative instruments that do not qualify for hedge accounting are recognised immediately in the consolidated income statement in "Other gains/(losses), net". Changes in the fair value of derivatives that are designated and qualified as fair value hedges are recorded in the consolidated income statement, together with any changes in the fair value of the hedged asset or liability that are attributable to the hedged risk. The effective portion of changes in the fair value of derivatives that are designated and qualified as cash flow hedges is recognised in other comprehensive income. The gain or loss relating to the ineffective portion is recognised immediately in the consolidated income statement within “Other gains/(losses), net". When the forecast transaction that is hedged results in the recognition of a non-financial asset, the gains and losses previously deferred in equity are transferred from equity and included in the cost of the asset. 2.18 Derivative financial instruments and hedging activities (Cont'd) Annual Report 2017 2 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Cont'd) 150 Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income tax assets and liabilities relate to income taxes levied by the same taxation authority on either the taxable entity or different taxable entities where there is an intention to settle the balances on a net basis. For the year ended 31 December 2017 2.25 Financial guarantee contracts Deferred income tax is provided on temporary differences arising from investments in subsidiaries and associates, except for deferred income tax liability where the timing of the reversal of the temporary difference is controlled by the Group and it is probable that the temporary difference will not reverse in the foreseeable future. Generally the Group is unable to control the reversal of the temporary difference for associates. Only when there is an agreement in place that gives the Group the ability to control the reversal of the temporary difference in the foreseeable future, deferred tax liability in relation to taxable temporary differences arising from the associate's undistributed profit is not recognised. Deferred income tax assets are recognised only to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. 2.28 Current and deferred income tax (Cont'd) 2 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Cont'd) For the year ended 31 December 2017 Notes to the Consolidated Financial Statements 153 Annual Report 2017 Deferred income tax is recognised, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. However, the deferred income tax is not accounted for if it arises from initial recognition of goodwill or the initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction neither accounting nor taxable profit or loss is affected. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantively enacted by the end of the reporting period and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled. The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the end of the reporting period in the countries where the Company's subsidiaries operate and generate taxable income. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. It establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities. The tax expense for the period comprises current and deferred tax. Tax is recognised in the consolidated income statement, except to the extent that it relates to items recognised in other comprehensive income or directly in equity. In this case, the tax is also recognised in other comprehensive income or in equity, respectively. 2.28 Current and deferred income tax The Group either (i) accounts for different components of the compound financial instruments separately or (ii) designates the entire financial instruments as financial assets/liabilities at fair value through profit or loss. The host component is recognised initially at the difference between the fair value of the compound financial instrument as a whole and the fair value of the embedded derivatives. The subsequent measurement of the host component and embedded derivatives follow the respective accounting policy of financial instruments as stated in Notes 2.15 and 2.18. 2 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Cont'd) Compound financial instruments held by the Group comprise instruments with redemption features of associates that can be converted to share capital at the option of the holder. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Cont'd) 2 Notes to the Consolidated Financial Statements For the year ended 31 December 2017 Tencent Holdings Limited 152 General and specific finance costs directly attributable to the acquisition and construction of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets, until such time as the assets are substantially ready for their intended use or sale. During the year ended 31 December 2017, finance cost capitalised was insignificant to the Group. Notes payable are classified as non-current liabilities unless the Group has an unconditional obligation to settle the liability within 12 months after the end of the reporting period. Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the end of the reporting period. Fees paid on the establishment of loan facilities are recognised as transaction costs of the loan facilities to the extent that it is probable that some or all of the facility will be drawn down. In this case, the fee is deferred until the draw-down occurs. To the extent there is no evidence that it is probable that some or all of the facility will be drawn down, the fee is capitalised as a prepayment for liquidity services and amortised over the term of the facility to which it relates. Borrowings and notes payable issued by the Group are recognised initially at fair value, net of transaction costs incurred. They are subsequently carried at amortised cost. Any difference between proceeds (net of transaction costs) and the redemption value is recognised in the consolidated income statement over their terms using the effective interest method. 2.26 Borrowings and notes payable The financial guarantee is initially recognised in the financial statements at fair value on the date the guarantee was given. Subsequent to initial recognition, the Company's liabilities under such guarantee are measured at the higher of the initial carrying amount less amortisation of fees recognised in accordance with IAS 18, and the best estimate of the amount required to settle the guarantee. The financial guarantee contract of the Group is a contract that represents guarantee provided by the Group in respect of a put arrangement granted by an investee to the employees of its subsidiary. 2.27 Compound financial instruments 159 For the year ended 31 December 2017 Notes to the Consolidated Financial Statements 10,127 prepayments received from and accruals (excluding Accounts payable, other payables 74,461 3,367 51,110 6,464 13,520 Borrowings 5,100 917 2,178 2,005 Long-term payables customers and others, staff costs and welfare accruals) 37,904 37,904 Capital refers to equity and external debts (including borrowings and notes payable). In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares, repurchase the Company's shares or raise/repay debts. The Group's objectives on managing capital are to safeguard the Group's ability to continue as a going concern and support the sustainable growth of the Group in order to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to enhance shareholders' value in the long term. 3.2 Capital risk management FINANCIAL RISK MANAGEMENT (Cont'd) 3 For the year ended 31 December 2017 46,009 Notes to the Consolidated Financial Statements Annual Report 2017 163,474 12,508 79,891 14,913 56,162 167 8,224 26,603 6,444 Notes to the Consolidated Financial Statements For the year ended 31 December 2017 2 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Cont'd) 2.31 Revenue recognition (Cont'd) (b) Online advertising 71,663 Online advertising revenues mainly comprise revenues derived from media advertisements and from social and others advertisements, depending on the placement of advertising properties and inventories. (c) Other revenues The Group's other revenues are primarily derived from provision of payment related services for individual and corporate users, cloud services and others. The Group recognises revenue when the service is rendered and the underlying transaction is completed. 2.32 Interest income Interest income is recognised on a time proportion basis, taking into account of the principal outstanding and the effective interest rate over the period to maturity, when it is determined that such income will accrue to the Group. 160 The Group recognises (i) revenue from performance-based advertising when relevant specific performance measures (such as delivery of pay-for-click, pay-for-download etc.) are fulfilled; and (ii) revenue from display- based advertising on number of display/impression basis or ratably over the respective contractual term with the advertisers or their advertising agencies, depending on the contractual measures, when the related advertisements are displayed. The Group monitors capital by regularly reviewing debts to adjusted earnings before interest, tax, depreciation and amortisation ("EBITDA") (Note) ratio, being the measure of the Group's ability to pay off all debts that reflects financial health and liquidity position. The total debts/adjusted EBITDA ratio calculated by dividing the total debts by adjusted EBITDA is as follows: 6,109 Accounts payable, other payables 4,738 Notes payable At 31 December 2016 213,697 14,335 83,325 106,089 26,304 65,651 65,651 staff costs and welfare accruals) from customers and others, prepayments received and accruals (excluding 89,733 Borrowings (Note 34) Notes payable (Note 35) Total debts Other financial liabilities 5,624 3,818 - 1,806 Other financial assets 127,218 2,154 73,313 53,574 Available-for-sale financial assets RMB'Million Total Level 3 RMB'Million RMB'Million 331 Level 2 2,154 Available-for-sale financial assets 169 Annual Report 2017 The fair value of financial instruments traded in active markets is determined based on quoted market prices at the end of the reporting period. A market is regarded as active if quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service, or regulatory agency, and those prices represent actual and regularly occurring market transactions on an arm's length basis. The quoted market price used for financial assets held by the Group is the current bid price. These instruments are included in level 1. 2,576 2,576 Other financial liabilities As at 31 December 2016 3,409 1,113 Other financial assets 83,806 63,303 508 19,995 2,296 Tencent Holdings Limited Level 1 RMB'Million Inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs) (level 3). 109,497 131,905 39,670 34,115 69,827 97,790 95,861 RMB'Million 2016 2017 As at 31 December Note: Total debts/Adjusted EBITDA ratio Adjusted EBITDA (Note) RMB'Million As at 31 December 2017 66,863 1.64 Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices) (level 2); and Quoted prices (unadjusted) in active markets for identical assets or liabilities (level 1); • The table below analyses the Group's financial instruments carried at fair value as at 31 December 2017 by level of the inputs to valuation techniques used to measure fair value. Such inputs are categorised into three levels within a fair value hierarchy as follows: 3.3 Fair value estimation For the year ended 31 December 2017 1.38 FINANCIAL RISK MANAGEMENT (Cont'd) Notes to the Consolidated Financial Statements Tencent Holdings Limited 168 The movement in the ratio is mainly caused by higher adjusted EBITDA compared to prior financial year. expenses. Adjusted EBITDA represents operating profit less interest income and other gains/ losses, net, and plus depreciation of property, plant and equipment and investment properties, amortisation of intangible assets and equity-settled share-based compensation 3 Notes to the Consolidated Financial Statements For the year ended 31 December 2017 2 Monetary liabilities, non-current (4,612) 4,965 (5,470) (276) (177) (3,365) During the year ended 31 December 2017, the Group reported exchange gains of approximately RMB152 million (2016: exchange gains of approximately RMB212 million) within "Finance costs, net" in the consolidated income statement. 1,035 Monetary liabilities, non-current Monetary liabilities, current Monetary assets, current As at 31 December 2016 (19,296) 10,524 8,606 (5,115) Annual Report 2017 For the year ended 31 December 2017 3 Notes to the Consolidated Financial Statements For the year ended 31 December 2017 Tencent Holdings Limited 164 The Group is exposed to price risk mainly arising from investments that are classified as available- for-sale financial assets held by the Group (Note 24). To manage its price risk arising from the investments, the Group diversifies its investment portfolio. The investments are made either for strategic purposes, or for the purpose of achieving investment yield and balancing the Group's liquidity level simultaneously. Each investment is managed by senior management on a case by case basis. Sensitivity analysis is performed by management to assess the exposure of the Group's financial results to equity price risk of available-for-sale financial assets at the end of each reporting period. If equity prices of the respective instruments held by the Group had been 5% (2016: 5%) higher/lower as at 31 December 2017, the other comprehensive income would have been approximately RMB4,069 million (2016: RMB3,879 million) higher/lower. Price risk 163 At 31 December 2017, management considers that any reasonable changes in foreign exchange rates of the above currencies against the two major functional currencies would not result in a significant change in the Group's results, as the net carrying amounts of financial assets and liabilities denominated in a currency other than the respective Group's subsidiaries' function currency are considered to be insignificant, given the exchange rate peg between HKD and USD. Accordingly, no sensitivity analysis is presented for foreign exchange risk (2016: Nil). Foreign exchange risk (Cont'd) (i) (a) Market risk (Cont'd) 3.1 Financial risk factors (Cont'd) FINANCIAL RISK MANAGEMENT (Cont'd) 3 (ii) (1,833) (15,744) (2,747) Notes to the Consolidated Financial Statements For the year ended 31 December 2017 Tencent Holdings Limited 162 The Group manages its foreign exchange risk by performing regular reviews of the Group's net foreign exchange exposures and tries to minimise these exposures through natural hedges, wherever possible, and may enter into forward foreign exchange contracts, when necessary. The Group operates internationally and is exposed to foreign exchange risk arising from various currency exposures, primarily with respect to RMB, Hong Kong Dollars ("HKD"), USD and Euro ("EUR"). Foreign exchange risk arises when future commercial transactions or recognised assets and liabilities are denominated in a currency that is not the respective functional currency of the Group's subsidiaries. The functional currency of the Company and majority of its overseas subsidiaries is USD whereas the functional currency of the subsidiaries which operate in the PRC is RMB. Foreign exchange risk 3 (i) 3 (a) The Group's activities expose it to a variety of financial risks: market risk (including foreign exchange risk, price risk and interest rate risk), credit risk and liquidity risk. The Group's overall risk management strategy seeks to minimise the potential adverse effects on the financial performance of the Group. Risk management is carried out by the senior management of the Group. 3.1 Financial risk factors FINANCIAL RISK MANAGEMENT SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Cont'd) Market risk FINANCIAL RISK MANAGEMENT (Cont'd) 3.1 Financial risk factors (Cont'd) (a) Market risk (Cont'd) Monetary liabilities, current 1,309 Monetary assets, non-current 1,563 13,795 Monetary assets, current As at 31 December 2017 RMB'Million RMB'Million Non-USD denominated denominated USD As at 31 December 2017, the Group's major monetary assets and liabilities that exposed to foreign exchange risk are listed below: Foreign exchange risk (Cont'd) (i) FINANCIAL RISK MANAGEMENT (Cont'd) 3.1 Notes to the Consolidated Financial Statements (a) Market risk (Cont'd) 734 905 2,345 Long-term payables 37,973 7,492 Financial risk factors (Cont'd) 10,757 5,892 Notes payable At 31 December 2017 RMB'Million RMB'Million Total 13,832 Borrowings 18,190 For the year ended 31 December 2017 2.33 Dividend income Dividends are recognised as income when the right to receive payment is established. This applies even if they are paid out of pre-acquisition profit. However, the investment may need to be tested for impairment as a consequence. 2.34 Government grants/subsidies Grants/Subsidies from government are recognised at their fair value where there is a reasonable assurance that the grants/subsidies will be received and the Group will comply with all attached conditions. Under these circumstances, the grants/subsidies are recognised as income or matched with the associated costs and expenses which the grants/subsidies are intended to compensate. 2.35 Leases Leases in which a significant portion of the risks and rewards of ownership are retained by lessors are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to the consolidated income statement on a straight-line basis over the period of the lease. 2.36 Dividends distribution Dividends distribution to the Company's shareholders is recognised as a liability in the Group's and Company's financial statements in the period in which the dividend is approved by the Company's shareholders or board of directors where appropriate. 2.37 Research and development expenses Research expenditure is recognised as an expense as incurred. Costs incurred on development projects (relating to the design and testing of new or improved products) are capitalised as intangible assets when recognition criteria are fulfilled and tests for impairment are performed annually. Other development expenditures that do not meet those criterias are recognised as expenses as incurred. Development costs previously recognised as expenses are not recognised as assets in subsequent periods. Annual Report 2017 161 Notes to the Consolidated Financial Statements Over 5 years Between 2 and 5 years RMB'Million 3,984 RMB'Million Credit risk (b) 3.1 Financial risk factors (Cont'd) FINANCIAL RISK MANAGEMENT (Cont'd) 3 Notes to the Consolidated Financial Statements The Group is exposed to credit risk in relation to its cash and deposits placed with banks and financial institutions, other debt investments, as well as accounts and other receivables. The carrying amount of each class of these financial assets represents the Group's maximum exposure to credit risk in relation to the corresponding class of financial assets. To manage this risk, deposits are mainly placed with state-owned financial institutions in the PRC and reputable international financial institutions outside of the PRC. There has been no recent history of default in relation to these financial institutions. 165 As at 31 December 2017 and 2016, management considers that any reasonable changes in the interest rates would not result in a significant change in the Group's results as the Group's exposure to cash flow interest-rate risk arising from its borrowings and notes payable carried at floating rates after considering the effect of hedging is considered to be insignificant. Accordingly, no sensitivity analysis is presented for interest rate risk. During the year ended 31 December 2017, the Group entered into certain interest rate swap contracts to hedge its exposure arising from its borrowings carried at floating rates. Under these interest rate swap contracts, the Group agreed with the counterparties to exchange, at specified interval, the difference between fixed contract rates and floating-rate interest amounts calculated by reference to the agreed notional amounts. These interest rate swap contracts have the economic effect of converting borrowings from floating rates to fixed rates and were qualified as hedging accounting. The Group's outstanding interest rate swap contracts as at 31 December 2017 have been detailed in Note 26. The Group regularly monitors its interest rate risk to identify if there are any undue exposures to significant interest rate movements and manages its cash flow interest rate risk by using interest rate swaps, whenever considered necessary. The Group's exposure to changes in interest rates is also attributable to its borrowings and notes payable, details of which have been disclosed in Notes 34 and 35, which representing a substantial portion of the Group's debts. Borrowings and notes payable carried at floating rates expose the Group to cash flow interest-rate risk whereas those carried at fixed rates expose the Group to fair value interest-rate risk. The Group's income and operating cash flows are substantially independent from changes in market interest rates and the Group has no significant interest-bearing assets except for loans to investees and investees' shareholders, term deposits with initial terms of over three months, restricted cash and cash and cash equivalents, details of which have been disclosed in Notes 25, 28 and 30. (iii) Interest rate risk Annual Report 2017 The Group has policies in place to ensure that revenues of on credit terms are made to counterparties with an appropriate credit history and the management performs ongoing credit evaluations of its counterparties. The Group's online advertising that are sales to/through advertising agencies or directly to the advertisers at term of full advances, partial advances or sales on credit according to the Group's credit policies. The credit period granted to the customers is usually not more than 90 days and the credit quality of these customers are assessed, which takes into account their financial position, past experience and other factors. Provisions are made for past due balances when management considers the loss from the customers is likely. The Group's historical experience in collection of receivables falls within the recorded allowances. For the year ended 31 December 2017 In view of the history of co-operation with these third party platform providers and telecommunication operators, and the sound financial position and collection history of receivables due from these counterparties, management believes that the credit risk inherent in the Group's outstanding accounts receivable balances from these counterparties is low (see Note 29 for details). The Group's revenues from VAS are generally paid by end users by way of online payment channels or utilising the prepaid cards and tokens issued and sold by the Group, whereas the revenue from VAS that delivered to its end users through third party platforms were collected by these third party platform providers and remitted to the Group under a credit period of 30 to 120 days. In addition, the Group also sold prepaid credits through various channels such as sales agents, telecommunication operators, third party platform providers and Internet cafes, etc. Apart from certain credit periods granted to the telecommunication operators and third party platform providers, full advances were required from other channels. 1 and 2 years 1 year Between Less than RMB'Million The Group aims to maintain sufficient cash and cash equivalents and marketable securities. Due to the dynamic nature of the underlying businesses, the Group maintains flexibility in funding by maintaining adequate cash and cash equivalents and marketable securities. (c) Liquidity risk The table below analyses the Group's financial liabilities by relevant maturity groupings based on the remaining period since the end of the reporting period to the contractual maturity date. FINANCIAL RISK MANAGEMENT (Cont'd) 3 Notes to the Consolidated Financial Statements For the year ended 31 December 2017 Tencent Holdings Limited 166 3.1 Financial risk factors (Cont'd) 77,131 65,599 Closing balance 20 (151) 2,478 (4,282) 5,651 (708) (581) Impairment provision (98) (271) 2,154 10,247 Currency translation differences 2,576 The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal to the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are addressed below: Notes to the Consolidated Financial Statements For the year ended 31 December 2017 Changes in fair value (a) The estimates of the lifespans of virtual products/items provided on the Group's online platforms Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS 4 For the year ended 31 December 2017 Notes to the Consolidated Financial Statements 171 Annual Report 2017 The components of the level 3 instruments mainly include investments in private investment funds and unlisted companies, convertible bonds and other financial instruments. As these instruments are not traded in an active market, their fair values have been determined using various applicable valuation techniques, including discounted cash flows approach, comparable transactions approach, and other option pricing models, etc. Major assumptions used in the valuation include historical financial results, assumptions about future growth rates, estimates of weighted average cost of capital (WACC), recent market transactions, discount for lack of marketability and other exposure etc. Other financial liabilities include guarantee provided by the Group on certain put arrangements of an associate and put options issued by the Group to certain investors of the associate, at a pre-determined pricing formula. The fair value of these instruments determined by the Group requires significant judgement, including the likelihood of non-performing by the investee company, financial performance of the investee company, market value of comparable companies as well as discount rate, etc. The Group has a team of personnel who performs valuation on these level 3 instruments for financial reporting purposes. The team performs valuation, or necessary updates, at least once every quarter, which coincides with the Group's quarterly reporting dates. On an annual basis, the team adopts various valuation techniques to determine the fair value of the Group's level 3 instruments. External valuation experts may also be involved and consulted when it is necessary. Valuation processes of the Group (Level 3) 3.3 Fair value estimation (Cont'd) FINANCIAL RISK MANAGEMENT (Cont'd) 3 Tencent Holdings Limited (491) 173 (25,647) 170 During the year ended 31 December 2017, there was no transfer between level 1 and 2 for recurring fair value measurements. For transfers in and out of level 3 measurements see the following table, which presents the changes of financial instruments in level 3 instruments for the years ended 31 December 2017 and 2016: instruments. Other techniques, such as discounted cash flow analysis, are used to determine fair value for financial The fair value of interest rate swaps is calculated as the present value of the estimated future cash flows based on observable yield curves; and Dealer quotes for similar instruments; • Financial assets • The fair value of financial instruments that are not traded in an active market is determined by using valuation techniques. These valuation techniques maximise the use of observable market data where it is available and rely as little as possible on entity specific estimates. If all significant inputs required for evaluating the fair value of a financial instrument are observable, the instrument is included in level 2. 3.3 Fair value estimation (Cont'd) FINANCIAL RISK MANAGEMENT (Cont'd) 3 For the year ended 31 December 2017 Notes to the Consolidated Financial Statements As mentioned in Note 2.31(a), the end users purchase certain virtual products/items provided on the Group's online platforms and the relevant revenue is recognised based on the estimated lifespans of the virtual products/ items. The estimated lifespans of different virtual products/items are determined by the management based on either the expected users' relationship periods or the stipulated period of validity of the relevant virtual products/ items depending on the respective terms of virtual products/items. If one or more of the significant inputs are not based on observable market data, the instrument is included in level 3. Specific valuation techniques used to value financial instruments include: (526) Financial liabilities 2016 Disposals and transfers/settlements 2,557 30,757 31,795 Additions 588 2,576 2017 27,947 Opening balance RMB'Million RMB'Million RMB'Million RMB'Million 2016 2017 65,599 Significant judgements are required in determining the expected users' relationship periods, including but not limited to historical users' consumption patterns, churn out rate and reactivity on marketing activities, games life- cycle, and the Group's marketing strategy. The Group has adopted a policy of assessing the estimated lifespans of virtual products/items on a regular basis whenever there is any indication of change in the expected users' relationship periods. Others 172 RMB'Million RMB'Million 222,714 175,642 60,159 56,152 158,474 108,715 52,392 22,310 34,276 21,645 26,407 11,322 250 113 554,672 395,899 As at 31 December 2017, the total non-current assets other than financial instruments and deferred tax assets located in Mainland China and other regions amounted to RMB159,563 million (2016: RMB117,415 million) and RMB42,421 million (2016: RMB19, 115 million), respectively. All the revenues derived from any single external customer were less than 10% of the Group's total revenues during the years ended 31 December 2017 and 2016. 6 2016 2017 As at 31 December - Others 2017 RMB'Million 2016 RMB'Million 229,767 7,993 144,371 7,567 237,760 151,938 Annual Report 2017 177 INTEREST INCOME Notes to the Consolidated Financial Statements 5 SEGMENT INFORMATION (Cont'd) The Group also conducts operations in the United States, Europe and other regions, and holds investments (including investments in associates, investments in redeemable instruments of associates, investments in joint ventures and available-for-sale financial assets) in various territories. The geographical information on the total assets is as follows: Operating assets - Mainland China - Others Investments Mainland China and Hong Kong - North America - Europe - Asia excluding Mainland China and Hong Kong For the year ended 31 December 2017 - Others Interest income mainly represents interest income from bank deposits, including bank balance and term deposits. Tencent Holdings Limited (820) (570) 254 406 20,140 3,594 Note: (a) (i) (b) The disposal and deemed disposal gains during the year ended 31 December 2017 mainly comprised the following: (ii) (iii) (iv) gains of approximately RMB5,736 million on dilution of the Group's equity interests in certain associates which are principally engaged in online insurance business, online game business and search engine business, as a result of new shares issued by these associates upon their respective initial public offerings (Note 20); a gain of approximately RMB3,663 million arising from deemed disposal of an investment in redeemable instruments of associates which is principally engaged in the provision of automobile financing transaction services and re-designation of it as investment in associates due to the conversion of the redeemable instruments of the associate into ordinary shares upon its initial public offering; net gains of approximately RMB493 million on dilution of the Group's equity interests in certain associates due to new equity interests being issued by these associates (Note 20). These associates are principally engaged in Internet-related business; and aggregate net gains of approximately RMB3,626 million on disposal, acquisition achieved in stages or partial disposal of various investments of the Group. There are no unfulfilled conditions or contingencies related to these subsidies and tax rebates. Annual Report 2017 179 563 1,713 (4,809) (2,794) 7 OTHER GAINS, NET Notes to the Consolidated Financial Statements For the year ended 31 December 2017 2017 2016 RMB'Million RMB'Million Gains on disposals and deemed disposals of investee companies (Note (a)) 13,518 178 6,966 Subsidies and tax rebates (Note (b)) Impairment provision for investee companies and intangible assets from acquisition (Note (c)) Dividend income 4,298 658 3,971 380 Donations to Tencent Charity Funds Others Fair value gains on other financial instruments (Note 26) The Group will continue to monitor the average lifespans of the virtual products/items. The results may differ from the historical period, and any change in the estimates may result in the revenue being recognised on a different basis from that in prior periods. - Mainland China The reconciliation of gross profit to profit before income tax is shown in the consolidated income statement. The Company is domiciled in the Cayman Islands while the Group mainly operates its businesses in Mainland China. During the years ended 31 December 2017 and 2016, the place of incorporation on the total revenues is as follows: Online advertising; and Others. "Others" primarily comprises payment related services for individual and corporate users, cloud services and other services. Annual Report 2017 175 Notes to the Consolidated Financial Statements For the year ended 31 December 2017 5 SEGMENT INFORMATION (Cont'd) The chief operating decision-makers assess the performance of the operating segments mainly based on segment revenue and gross profit of each operating segment. The selling and marketing expenses and general and administrative expenses are common costs incurred for these operating segments as a whole and therefore, they are not included in the measure of the segments' performance which is used by the chief operating decision-makers as a basis for the purpose of resource allocation and assessment of segment performance. Interest income, other gains/(losses), net, finance income/(costs), net, share of profit/(loss) of associates and joint ventures and income tax expense are also not allocated to individual operating segment. There were no material inter-segment sales during the years ended 31 December 2017 and 2016. The revenues from external customers reported to the chief operating decision-makers are measured in a manner consistent with that applied in the consolidated income statement. Other information, together with the segment information, provided to the chief operating decision-makers, is measured in a manner consistent with that applied in these consolidated financial statements. There were no segment assets and segment liabilities information provided to the chief operating decision-makers. The segment information provided to the chief operating decision-makers for the reportable segments for the years ended 31 December 2017 and 2016 is as follows: Year ended 31 December 2017 VAS RMB'Million Online advertising RMB'Million Others Total RMB'Million RMB'Million VAS; The Group has following reportable segments for the years ended 31 December 2017 and 2016: The chief operating decision-makers mainly include executive directors of the Company. They review the Group's internal reporting in order to assess performance, allocate resources, and determine the operating segments based on these reports. SEGMENT INFORMATION Tencent Holdings Limited Notes to the Consolidated Financial Statements For the year ended 31 December 2017 4 CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS (Cont'd) (b) Recoverability of non-financial assets and investments in redeemable instruments of associates The Group tests annually whether goodwill has suffered any impairment. Goodwill and other non-financial assets, mainly including property, plant and equipment, construction in progress, other intangible assets, investment properties, land use rights, and investments in associates and joint ventures, as well as investments in redeemable instruments of associates are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The recoverable amounts have been determined based on value-in- use calculations or fair value less costs to sell. These calculations require the use of judgements and estimates. Judgement is required to identify any impairment indicators existing for any of the Group's goodwill, other non- financial assets and investments in redeemable instruments of associates, to determine appropriate impairment approaches, i.e., fair value less costs of disposal or value in use, for impairment review purposes, and to select key assumptions applied in the adopted valuation models, including discounted cash flows and market approach. Changing the assumptions selected by management in assessing impairment could materially affect the result of the impairment test and in turn affect the Group's financial condition and results of operations. If there is a significant adverse change in the key assumptions applied, it may be necessary to take additional impairment charge to the consolidated income statement. (c) Fair value measurement of available-for-sale financial assets and other financial assets The fair value assessment of available-for-sale financial assets and other financial assets that are measured at level 3 fair value hierarchy requires significant estimates, which include estimating the future cash flows, determining appropriate discount rates and other assumptions. Changes in these assumptions and estimates could materially affect the respective fair value of these investments. The Group monitors its investments for impairment by considering factors including, but not limited to, current economic and market conditions, recent fund raising transactions undertaken by the investees, the operating performance of the investees including current earnings trends and other company-specific information. Annual Report 2017 Notes to the Consolidated Financial Statements For the year ended 31 December 2017 4 Segment revenues CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS (Cont'd) As mentioned in Note 2.29(c), the Group has granted share options to its employees and other qualifying participants. The directors have adopted the Binomial Model to determine the total fair value of the options granted, which is to be expensed over the respective vesting periods. Significant judgement on parameters, such as risk free rate, dividend yield and expected volatility, is required to be made by the directors in applying the Binomial Model (Note 33). The fair value of share options granted to employees and other qualifying participants determined using the Binomial Model was approximately HKD2,691 million (equivalent to approximately RMB2,373 million) in 2017 (2016: HKD668 million (equivalent to approximately RMB560 million)). The Group has to estimate the expected yearly percentage of grantees that will stay within the Group at the end of vesting periods of the options and awarded shares (the "Expected Retention Rate”) in order to determine the amount of share-based compensation expenses charged to the consolidated income statement. As at 31 December 2017, the Expected Retention Rate of the Group and its wholly-owned subsidiaries was assessed to be 88%-97% (2016: 88%-96%). (e) Income taxes The Group is subject to income taxes in numerous jurisdictions. Significant judgement is required in determining the worldwide provision for income taxes. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact current income tax and deferred income tax in the period in which such determination is made. 174 Tencent Holdings Limited Notes to the Consolidated Financial Statements For the year ended 31 December 2017 5 (d) Share-based compensation arrangements Revenues 153,983 43,338 VAS Online advertising Total RMB'Million RMB'Million RMB'Million RMB'Million 107,810 26,970 17,158 151,938 70,188 11,574 2,737 84,499 1,854 200 537 2,591 2,982 5,295 8,277 Year ended 31 December 2016 For the year ended 31 December 2017 Notes to the Consolidated Financial Statements Amortisation 237,760 Gross profit 92,594 14,853 9,478 116,925 Depreciation Amortisation 1,858 561 40,439 1,473 7,836 10,001 17,837 176 Tencent Holdings Limited 5 SEGMENT INFORMATION (Cont'd) Segment revenues Gross profit Depreciation 3,892 Annual Report 2017 189 Dividends distributed from certain jurisdictions that the Group's entities operate in are also subject to withholding tax at respective applicable tax rates. expenses bonuses pension plans Fees Name of director and benefits Salaries and Contributions to compensation Allowances Share-based During the year ended 31 December 2016: in kind (a) Directors' and the chief executive's emoluments (Cont'd) For the year ended 31 December 2017 Notes to the Consolidated Financial Statements 297,142 65 215,374 105 76,236 5,362 2,033 14 BENEFITS AND INTERESTS OF DIRECTORS (Cont'd) Total RMB'000 RMB'000 3,896 3,001 895 lain Ferguson Bruce 122,017 61 93,875 26,832 1,249 Lau Chi Ping Martin 38,821 19 94 37,459 1,249 Ma Huateng (CEO) (Note (i)) RMB'000 RMB'000 RMB'000 RMB'000 1,406 627 Tencent Holdings Limited 188 Ma Huateng (CEO) RMB'000 Total in kind RMB'000 (Note (i)) RMB'000 Allowances and benefits Salaries and Contributions to compensation bonuses pension plans expenses RMB'000 RMB'000 RMB'000 Fees Name of director Share-based 1 2|-- 1 1 | 21 || 2016 2017 Number of individuals The remuneration of every director and the CEO is set out below: During the year ended 31 December 2017: (a) Directors' and the chief executive's emoluments 1,176 lan Charles Stone 44,656 45,937 Yang Siu Shun Charles St Leger Searle Jacobus Petrus (Koos) Bekker 2,532 1,905 627 Li Dong Sheng 4,647 3,811 836 lan Charles Stone 4,731 3,811 920 lain Ferguson Bruce 237,262 65 204,441 31,580 1,176 Lau Chi Ping Martin 105 14 BENEFITS AND INTERESTS OF DIRECTORS 716 3,685 Income tax expense is recognised based on management's best knowledge of the income tax rates expected for the financial year. (i) Cayman Islands and British Virgin Islands corporate income tax The Group was not subject to any taxation in the Cayman Islands and the British Virgin Islands for the years ended 31 December 2017 and 2016. (ii) Hong Kong profit tax Hong Kong profit tax has been provided for at the rate of 16.5% on the estimated assessable profit for the years ended 31 December 2017 and 2016. Annual Report 2017 181 (a) Income tax expense Notes to the Consolidated Financial Statements 11 TAXATION (Cont'd) (a) Income tax expense (Cont'd) (iii) PRC corporate income tax PRC corporate income tax has been provided for at applicable tax rates under the relevant regulations of the PRC after considering the available preferential tax benefits from refunds and allowances, and on the estimated assessable profit of entities within the Group established in the PRC for the years ended 31 December 2017 and 2016. The general PRC corporate income tax rate is 25% in 2017. Certain subsidiaries of the Group in the PRC were approved as High and New Technology Enterprise, and accordingly, they were subject to a reduced preferential corporate income tax rate of 15% for the years ended 31 December 2017 and 2016. Moreover, according to announcement and circular issued by relevant government authorities, for the year of 2015 and beyond, a software enterprise that qualifies as a national key software enterprise shall file its status with tax authorities for review and record in accordance with the relevant requirements at the time of final tax settlement each year in order to enjoy the preferential tax rate of 10%. The PRC corporate income tax for the relevant subsidiaries of the Company filing for this preferential tax treatment has been provided for at their respective prevailing tax rates during the year. Upon receipt of notification, the relevant subsidiaries of the Company will be entitled to corporate income tax rate of 10% and corresponding tax adjustments will be accounted for. In addition, according to relevant tax circulars issued by the PRC tax authorities, certain subsidiaries of the Company are entitled to other tax concessions and they are exempt from corporate income tax for two years, followed by a 50% reduction in the applicable tax rates for the next three years, commencing from the first year of profitable operation, after offsetting tax losses generated in prior years. (iv) Corporate income tax in other countries (v) Income tax on profit arising from other jurisdictions, including the United States, Europe, East Asia and South America has been calculated on the estimated assessable profit for the year at the respective rates prevailing in the relevant jurisdictions, ranging from 12.5% to 36%. For the year ended 31 December 2017 11 TAXATION (2,522) (2,549) 27 Notes to the Consolidated Financial Statements For the year ended 31 December 2017 2017 2016 RMB'Million RMB'Million 3,060 2,167 (152) (212) 2,908 1,955 Interest and related expenses mainly arose from the borrowings and notes payable disclosed in Notes 34 and 35. 10 SHARE OF PROFIT/(LOSS) OF ASSOCIATES AND JOINT VENTURES Share of profit/(loss) of associates (Note 20) Share of profit of joint ventures (Note 23) 2017 2016 RMB'Million RMB'Million 730 91 Withholding tax According to applicable tax regulations prevailing in the PRC, dividends distributed by a company established in the PRC to a foreign investor with respect to profit derived after 1 January 2008 are generally subject to a 10% withholding tax. If a foreign investor is incorporated in Hong Kong, under the double taxation arrangement between the Mainland China and Hong Kong, the relevant withholding tax rate applicable to the Group will be reduced from 10% to 5% subject to the fulfilment of certain conditions. 182 Tencent Holdings Limited (iv) (iii) (ii) (i) Allowances and benefits in kind include leave pay, insurance premium and club membership. Note: 171,129 80 101,661 94 64,291 5,003 691 378 313 Yang Siu Shun (Note (iv)) Charles St Leger Searle Jacobus Petrus (Koos) Bekker 2,019 1,438 581 Li Dong Sheng During the year ended 31 December 2017, 5,250,000 options were granted to one executive director of the Company (2016: 3,750,000 options were granted to one executive director of the Company), and 60,000 awarded shares were granted to four independent non-executive directors of the Company (2016: 61,474 awarded shares were granted to four independent non-executive directors of the Company). 2,969 No director received any emolument from the Group as an inducement to join or leave the Group or compensation for loss of office. No director waived or has agreed to waive any emoluments during the years ended 31 December 2017 and 2016. Profit before income tax Notes to the Consolidated Financial Statements 11 TAXATION (Cont'd) (a) Income tax expense (Cont'd) The income tax expense of the Group are analysed as follows: Current income tax Deferred income tax (Note 27) For the year ended 31 December 2017 2017 2016 RMB'Million RMB'Million 15,154 590 10,791 (598) 15,744 10,193 The taxation on the Group's profit before income tax differs from the theoretical amount that would arise using the tax rate of 25% for the year (2016: 25%), being the tax rate of the major subsidiaries of the Group before enjoying preferential tax treatments, as follows: 2017 2016 RMB'Million RMB'Million Mr Yang Siu Shun was appointed as independent non-executive director with effect from 1 July 2016. Exchange gains HKD477,500,001 – HKD478,000,000 HKD310,500,001 – HKD311,000,000 Basic EPS (RMB per share) 9,376 9,411 Weighted average number of ordinary shares in issue (million shares) 41,095 71,510 Profit attributable to equity holders of the Company (RMB’Million) 2016 2017 7.598 Basic earnings per share ("EPS") is calculated by dividing the profit attributable to equity holders of the Company by the weighted average number of ordinary shares in issue during the year. 12 EARNINGS PER SHARE Net VAT payable amount 5% Share of (profit)/loss of associates and joint ventures 88,215 51,640 (821) 2,522 87,394 (a) Basic 4.383 (b) Diluted The share options and awarded shares granted by the Company have potential dilutive effect on the EPS. Diluted EPS is calculated by adjusting the weighted average number of ordinary shares outstanding by the assumption of the conversion of all potential dilutive ordinary shares arising from share options and awarded shares granted by the Company (collectively forming the denominator for computing the diluted EPS). No adjustment is made to earnings (numerator). 9,494 9,536 118 125 9,376 9,411 41,095 71,510 2016 2017 For the year ended 31 December 2017 13 EMPLOYEE BENEFITS EXPENSES Diluted EPS (RMB per share) Weighted average number of ordinary shares in issue (million shares) Adjustments for share options and awarded shares (million shares) Weighted average number of ordinary shares for the calculation of diluted EPS (million shares) Profit attributable to equity holders of the Company (RMB'Million) Notes to the Consolidated Financial Statements (b) Diluted (Cont'd) 12 EARNINGS PER SHARE (Cont'd) Tencent Holdings Limited 184 In addition, the share options and restricted shares granted by the Company's non-wholly owned subsidiaries and associates should also have potential dilutive effect on the EPS. During the years ended 31 December 2017 and 2016, these share options and restricted shares had either anti-dilutive effect or insignificant dilutive effect to the Group. 54,162 Tax calculated at a tax rate of 25% 21,848 13,540 Annual Report 2017 183 Notes to the Consolidated Financial Statements For the year ended 31 December 2017 11 TAXATION (Cont'd) (b) Value-added tax and other taxes The operations of the Group are also mainly subject to the following taxes in the PRC: Category Value-added tax ("VAT") Tax rate Basis of levy 6-17% Sales value of goods sold and services fee income, offsetting by VAT on purchases Construction fee for cultural undertakings 3% Taxable advertising income City construction tax 7% Net VAT payable amount Educational surcharge 10,193 7.499 15,744 (163) Effects of different tax rates applicable to different subsidiaries of the Group (10,442) (6,191) Effects of tax holiday on assessable profit of certain subsidiaries (715) (496) Income not subject to tax (25) (112) Expenses not deductible for tax purposes 1,087 1,157 Withholding tax on earnings expected to be remitted by subsidiaries (Note 27) Unrecognised deferred income tax assets Others Income tax expense 3,150 1,700 1,004 686 (91) HKD430,000,001 – HKD430,500,000 4.329 2016 Salaries and bonuses The five individuals whose emoluments were the highest in the Group include one director during the year 2017 (2016: one). All of these individuals including that one director (Note 14(a)) have not received any emolument from the Group as an inducement to join the Group during the years ended 31 December 2017 and 2016. The emoluments paid/payable to the remaining four (2016: four) individuals during the year were as follows: (b) Five highest paid individuals HKD215,000,001 – HKD615,000,000 125 22 114412 1 2016 2017 Contributions to pension plans Number of individuals HKD65,000,001 – HKD115,000,000 HKD40,000,001 – HKD65,000,000 HKD15,000,001 – HKD40,000,000 HKD800,000 - HKD15,000,000 Emolument bands The emoluments of the senior management fell within the following bands: (a) Senior management's emoluments (Cont'd) 13 EMPLOYEE BENEFITS EXPENSES (Cont'd) For the year ended 31 December 2017 HKD115,000,001 – HKD165,000,000 Share-based compensation expenses Allowances and benefits in kind 2017 RMB'000 HKD262,500,001 – HKD263,000,000 HKD231,000,001 – HKD231,500,000 HKD228,500,001 – HKD229,000,000 Emolument bands The emoluments of the above four individuals (2016: four) fell within the following bands: (b) Five highest paid individuals (Cont'd) 13 EMPLOYEE BENEFITS EXPENSES (Cont'd) For the year ended 31 December 2017 Notes to the Consolidated Financial Statements 187 Annual Report 2017 926,422 1,142,171 33 39 758 608,757 805,807 10,909 316,874 325,416 2016 RMB'000 Notes to the Consolidated Financial Statements 1,005,603 1,460,529 826 776,788 185 Annual Report 2017 23,433 34,866 85 85 Training expenses 1,841 2,400 Welfare, medical and other expenses (Note) 4,455 6,253 Share-based compensation expenses 1,426 1,934 Contributions to pension plans (Note) 15,626 24,194 Wages, salaries and bonuses RMB'Million RMB'Million Notes to the Consolidated Financial Statements 2017 For the year ended 31 December 2017 Note: 1,174,316 227,989 285,322 891 2016 RMB'000 2017 RMB'000 Tencent Holdings Limited 186 Share-based compensation expenses Contributions to pension plans Salaries, bonuses, allowances and benefits in kind Senior management includes directors, chief executive officer ("CEO"), president and other senior executives. The aggregate compensation paid/payable to senior management for employee services excluding the directors and the CEO, whose details have been reflected in Note 14(a), is as follows: 0.5-1.5% 10.0-12.0% 6.0 - 11.5% 12.0 - 20.0% Percentage (a) Senior management's emoluments Housing fund Unemployment insurance Medical insurance Pension insurance Majority of the Group's contributions to pension plans are related to the local employees in the PRC. All local employees of the subsidiaries in the PRC participate in employee social security plans established in the PRC, which cover pension, medical and other welfare benefits. The plans are organised and administered by the governmental authorities. Except for the contributions made to these social security plans, the Group has no other material commitments owing to the employees. According to the relevant regulations, the portion of premium and welfare benefit contributions that should be borne by the companies within the Group as required by the above social security plans are principally determined based on percentages of the basic salaries of employees, subject to certain ceilings imposed. These contributions are paid to the respective labour and social welfare authorities and are expensed as incurred. The applicable percentages used to provide for these social security plans for the years ended 31 December 2017 and 2016 are listed below: 13 EMPLOYEE BENEFITS EXPENSES (Cont'd) Interest and related expenses 821 9 1,298 671 1,028 239 366 2,794 4,809 607 2017 RMB'Million RMB'Million Employee benefits expenses (Note (a) and Note 13) 34,866 23,433 Content costs (excluding amortisation of intangible assets) 28,177 2016 17,734 2,117 RMB'Million FINANCE COSTS, NET Notes to the Consolidated Financial Statements 7 OTHER GAINS, NET (Cont'd) Note: (Cont'd) (c) The impairment provision for investee companies and intangible assets arising from acquisitions was mainly set up against the carrying amounts of the following items: 1,277 Investments in associates (Note 20) Available-for-sale financial assets (Note 24) Others (Note 19) 8 EXPENSES BY NATURE 2017 2016 RMB'Million Investments in redeemable instruments of associates (Note 22) Channel and distribution costs For the year ended 31 December 2017 13,133 - Audit services - Audit-related services - Non-audit services 76 46 13 21 16 Note: (a) (b) During the year ended 31 December 2017, the Group incurred expenses for the purpose of research and development of approximately RMB17,456 million (2016: RMB11,845 million), which comprised employee benefits expenses of RMB14,766 million (2016: RMB9,290 million). No significant development expenses had been capitalised for the years ended 31 December 2017 and 2016. Mainly included the amortisation charges of intangible assets in respect of media contents and game licences. 180 Tencent Holdings Limited 25,109 Auditor's remuneration 3,699 15 Depreciation of property, plant and equipment (Note 16) 11,203 7,876 4,850 Promotion and advertising expenses 13,661 9,219 Operating lease rentals in respect of office buildings 1,117 1,335 1,040 800 Amortisation of intangible assets (Note (b) and Note 19) 18,622 Bandwidth and server custody fees 8,930 Travelling and entertainment expenses Amount revenues % of total revenues Amount (RMB in millions, unless specified) 26,970 65% 107,810 71% 40,439 17% 43,338 % of total 18% 153,983 2016 352 Year ended 31 December 41,095 961 18% 72,471 41,447 Non-GAAP profit attributable to equity holders of the Company 65,126 2017 45,420 Tencent Holdings Limited Management Discussion and Analysis Revenues. Revenues increased by 56% to RMB237.8 billion for the year ended 31 December 2017 on a year-on-year basis. The following table sets forth our revenues by line of business for the years ended 31 December 2017 and 2016: VAS Online advertising Others Total revenues 12 17,158 Year ended 31 December 237,760 Amount revenues Amount revenues (RMB in millions, unless specified) 61,389 40% % of segment 37,622 25,586 63% 15,396 57% 71,510 78% 33,860 35% 11% % of segment 2017 100% 151,938 100% Revenues from our VAS business increased by 43% to RMB154.0 billion for the year ended 31 December 2017 on a year-on-year basis. Online games revenues grew by 38% to RMB97,883 million. The increase was primarily driven by revenue growth from our smart phone games, including existing titles such as Honour of Kings, and new titles such as the China version of Contra Return, Dragon Nest Mobile and Legacy TLBB Mobile. Revenues from our PC client games, such as DnF and LoL, also contributed to the increase. Social networks revenues increased by 52% to RMB56,100 million. The increase was mainly driven by digital content services such as live broadcast, subscription video streaming and subscription music streaming, as well as from in-game virtual item sales. Revenues from our online advertising business increased by 50% to RMB40,439 million for the year ended 31 December 2017 on a year-on-year basis. Media advertising revenues grew by 30% to RMB14,829 million. The increase mainly reflected higher traffic and revenues from our Tencent Video, video streaming services. Social and others advertising revenues increased by 65% to RMB25,610 million. The increase was primarily driven by growth in advertising revenues derived from Weixin, our other mobile apps, and our advertising network.2 Revenues from our other businesses increased by 153% to RMB43,338 million for the year ended 31 December 2017 on a year-on-year basis. The increase mainly reflected revenue growth from our payment related and cloud services. 2 2016 Since the first quarter of 2017, we have reclassified online advertising revenues. Without the reclassification, performance-based advertising revenues increased by 67% to RMB26,296 million and brand display advertising revenues increased by 26% to RMB14,143 million for the year ended 31 December 2017 on a year-on-year basis. 13 Management Discussion and Analysis Cost of revenues. Cost of revenues increased by 79% to RMB120.8 billion for the year ended 31 December 2017 on a year- on-year basis. The increase primarily reflected greater content costs, costs of payment related services, and channel costs. As a percentage of revenues, cost of revenues increased to 51% for the year ended 31 December 2017 from 44% for the year ended 31 December 2016, mainly due to business mix changes and greater channel costs for our smart phone games. The following table sets forth our cost of revenues by line of business for the years ended 31 December 2017 and 2016: VAS Online advertising Others Total cost of revenues Annual Report 2017 41,447 General and administrative expenses (10,193) Expanding our cloud infrastructure and recruiting more talent to better serve our clients; Investing in Al technologies for applications such as advertisement targeting, recommendation algorithms, and healthcare; Deploying our smart retail strategy to empower offline retailers by leveraging our technology services. The Board has recommended the payment of a final dividend of HKD0.88 per share (2016: HKD0.61 per share) for the year ended 31 December 2017, subject to the approval of the shareholders at the 2018 AGM. Such proposed dividend will be payable on 1 June 2018 to the shareholders whose names appear on the register of members of the Company on 24 May 2018. APPRECIATION On behalf of the Board, I would like to express our gratitude to all our staff and the management team for their commitment for excellence, strong teamwork and valuable contribution. I would also like to thank all our shareholders and stakeholders for their complete confidence in and support to our Group. Looking ahead, we will continue to enhance people's quality of life through our innovative products and services and to develop a healthy and balanced Internet ecosystem. Ma Huateng Increasing use case scenarios for payment related services to accelerate merchant and user adoption, and cooperating with partners in developing Internet financial services; Chairman Annual Report 2017 11 Management Discussion and Analysis YEAR ENDED 31 DECEMBER 2017 COMPARED TO YEAR ENDED 31 DECEMBER 2016 The following table sets forth the comparative figures for the years ended 31 December 2017 and 2016: Revenues Cost of revenues Hong Kong, 21 March 2018 Gross profit Investing in digital content, including long form and short form video content, in order to further grow our subscriber base; - Chairman's Statement Online Advertising Our online advertising business achieved 49% year-on-year growth in revenues. For media advertising, video revenues continued to demonstrate strong growth due to popular video content such as the self-commissioned HoK-themed variety show "", and selected drama series. News revenues decreased year- on-year as we were still revamping the advertising system during the quarter. We have launched a unified advertisement placement platform for all news feed products. For social and others advertising, our advertising revenues year-on-year increase was primarily driven by higher advertising demand due to the enhanced targeting capability of our platforms and an expanded advertiser base leveraging our partner platforms. The sequential increase was mainly due to positive eCommerce seasonality. Advertising impressions also increased in Weixin Moments and Official Accounts, and on our mobile advertising network. We are now testing CPC-based advertising links in Official Accounts which connect users to advertisers' Mini Programs. Others We recorded 121% year-on-year revenue growth for other businesses, which was primarily driven by the strong growth of payment related and cloud services. Commercial transaction volume of Weixin Pay continued to grow at a fast pace, driven by offline transaction volumes, which more than doubled year-on-year. DIVIDEND Tencent Cloud's global infrastructure covered 21 regions and operated 36 availability zones in the world as of end of 2017. While we maintained our leading position in verticals such as online games and video, we achieved rapid growth in the financial services industry through strategic partnerships with major banks and insurance clients. In addition, we offered smart retail solutions targeting supermarkets, department stores and fast moving consumer goods companies. Company Outlook and Strategies for 2018 Looking forward, we will more aggressively invest to strengthen our long-term competitive positions in areas including online video, payment services, cloud services, Al technologies and smart retail. Our development initiatives include: Strengthening our social platforms to encourage user sharing, enhance connections with users' daily lives and facilitate interactions with ecosystem partners; Enhancing the popularity of our games through upgrading the content of our existing titles and adding innovative new titles; 10 Tencent Holdings Limited Chairman's Statement 4. Interest income Other gains, net Selling and marketing expenses 2,619 20,140 3,594 (17,652) (12,136) (33,051) (22,459) 3,940 90,302 (2,908) (1,955) 821 (2,522) 88,215 51,640 (15,744) 56,117 84,499 116,925 (67,439) 14,421 Operating profit Finance costs, net Share of profit/(loss) of associates and joint ventures Profit before income tax Income tax expense Profit for the year Attributable to: Equity holders of the Company Non-controlling interests Year ended 31 December 2017 2016 (RMB in millions) 237,760 151,938 (120,835) 72,471 84% Annual Report 2017 67,439 6,385 15% 120,835 100% 43,864 100% Revenues from our VAS business increased by 37% to RMB39,947 million for the fourth quarter of 2017 on a year-on- year basis. Online games revenues increased by 32% to RMB24,367 million. The increase primarily reflected growth in revenues from our existing smart phone games such as Honour of Kings, and new smart phone games such as Kings of Chaos and Legacy TLBB Mobile. The increase also reflected higher revenues from our PC client games such as DnF and LoL. Social networks revenues grew by 45% to RMB15,580 million. The increase was mainly due to higher revenues from digital content services such as subscription video streaming and live broadcast, as well as from in-game virtual item sales. Revenues from our online advertising business increased by 49% to RMB12,361 million for the fourth quarter of 2017 on a year-on-year basis. Media advertising revenues grew by 22% to RMB4, 121 million, mainly benefiting from revenue growth from our Tencent Video, video streaming services, partly offset by the reduced advertising inventory of our news apps due to revamping their advertising systems. Social and others advertising revenues increased by 68% to RMB8,240 million, primarily due to growth in advertising revenues derived from Weixin (mainly from Weixin Moments and Weixin Official Accounts) and our advertising network.3 Revenues from our other businesses increased by 121% to RMB14,084 million for the fourth quarter of 2017 on a year- on-year basis. The increase was mainly driven by growth in revenues from our payment related and cloud services. 3 Since the first quarter of 2017, we have reclassified online advertising revenues. Without the reclassification, performance-based advertising revenues increased by 59% to RMB8,204 million and brand display advertising revenues increased by 33% to RMB4,157 million for the fourth quarter of 2017 on a year-on-year basis. Annual Report 2017 17 Management Discussion and Analysis Cost of revenues. Cost of revenues increased by 72% to RMB34,897 million for the fourth quarter of 2017 on a year-on-year basis. The increase mainly reflected greater content costs, costs of payment related services, as well as channel costs. As a percentage of revenues, cost of revenues increased to 53% for the fourth quarter of 2017 from 46% for the fourth quarter of 2016, primarily reflecting business mix changes, and higher channel costs for our smart phone games. The following table sets forth our cost of revenues by line of business for the fourth quarter of 2017 and the fourth quarter of 2016: 21% 14,084 19% 8,288 Unaudited Three months ended 31 December 2017 31 December 2016 % of total % of total Amount revenues VAS Amount (RMB in millions, unless specified) 39,947 60% 29,191 66% 12,361 19% revenues Online advertising Others Total cost of revenues 80% 34,897 20,238 Cost of revenues for our VAS business increased by 52% to RMB16,268 million for the fourth quarter of 2017 on a year- on-year basis. The increase mainly reflected greater content costs (including content costs for our live broadcast and subscription video streaming services), and higher channel costs for our smart phone games as a result of extended cooperation with third-party app stores. Cost of revenues for our online advertising business increased by 75% to RMB7,759 million for the fourth quarter of 2017 on a year-on-year basis. The increase was primarily driven by greater investments in, and amortisation of, video content, and higher traffic acquisition costs due to the rapid growth of our advertising network business. Cost of revenues for our other businesses increased by 114% to RMB10,870 million for the fourth quarter of 2017 on a year-on-year basis. The increase was mainly due to the increased scale of our payment related and cloud services. 18 5,080 Tencent Holdings Limited Other gains, net. We recorded net other gains totalling RMB7,906 million for the fourth quarter of 2017, which mainly consisted of net deemed disposal gains relating to the capital activities of certain investee companies including the IPOs of Yixin, Sea and Sogou, subsidies and tax rebates, and dividend income arising from certain investee companies. Selling and marketing expenses. Selling and marketing expenses increased by 35% to RMB6,022 million for the fourth quarter of 2017 on a year-on-year basis. The increase primarily reflected greater marketing spending on products and platforms such as online games, online media and payment related services. As a percentage of revenues, selling and marketing expenses decreased to 9% for the fourth quarter of 2017 from 10% for the fourth quarter of 2016. General and administrative expenses. General and administrative expenses increased by 28% to RMB8,811 million for the fourth quarter of 2017 on a year-on-year basis. The increase was primarily driven by greater R&D expenses and staff costs. As a percentage of revenues, general and administrative expenses decreased to 13% for the fourth quarter of 2017 from 16% for the fourth quarter of 2016. Finance costs, net. Net finance costs increased by 78% to RMB859 million for the fourth quarter of 2017 on a year-on-year basis. The increase mainly reflected greater interest expenses driven by higher amount of indebtedness. Income tax expense. Income tax expense increased by 30% to RMB3, 123 million for the fourth quarter of 2017 on a year-on- year basis. The increase was mainly driven by greater profit before income tax. Profit attributable to equity holders of the Company. Profit attributable to equity holders of the Company increased by 98% to RMB20,797 million for the fourth quarter of 2017 on a year-on-year basis. Non-GAAP profit attributable to equity holders of the Company increased by 42% to RMB17,454 million. Annual Report 2017 19 Management Discussion and Analysis Total revenues 77% 53% Unaudited Three months ended 31 December 2017 % of segment 31 December 2016 % of segment Amount revenues Amount 10,870 revenues 16,268 41% 10,734 37% 7,759 63% 4,424 (RMB in millions, unless specified) Online advertising Others 66,392 Revenues. Revenues increased by 51% to RMB66,392 million for the fourth quarter of 2017 on a year-on-year basis. The following table sets forth our revenues by line of business for the fourth quarter of 2017 and the fourth quarter of 2016: 2016 (RMB in millions) Revenues Cost of revenues Gross profit Interest income 66,392 2017 43,864 (20,238) 31,495 23,626 1,156 653 Other gains, net 7,906 (34,897) 1,022 31 December 31 December The following table sets forth the comparative figures for the fourth quarter of 2017 and the fourth quarter of 2016: Cost of revenues for our VAS business increased by 63% to RMB61,389 million for the year ended 31 December 2017 on a year-on-year basis. The increase mainly reflected greater content costs (including content costs for our subscription video streaming and live broadcast services), and channel costs for our smart phone games, in turn due to extended cooperation with third-party app stores. Cost of revenues for our online advertising business increased by 66% to RMB25,586 million for the year ended 31 December 2017 on a year-on-year basis. The increase primarily reflected greater investments in, and amortisation of, video content. Traffic acquisition costs as well as bandwidth and server custody fees also increased. Cost of revenues for our other businesses increased by 135% to RMB33,860 million for the year ended 31 December 2017 on a year-on-year basis. The increase was mainly driven by the increased scale of our payment related and cloud services. 14 Tencent Holdings Limited Management Discussion and Analysis Other gains, net. We recorded net other gains totalling RMB20, 140 million for the year ended 31 December 2017, which primarily consisted of net deemed disposal gains arising from the capital activities of certain investee companies (such as the IPOs of Yixin, Netmarble, Sea, ZhongAn Insurance and Sogou), fair value gains as a result of increases in valuations of certain investments (in verticals such as bike sharing, healthcare and fintech), as well as subsidies and tax rebates. Unaudited Three months ended Selling and marketing expenses. Selling and marketing expenses increased by 45% to RMB17,652 million for the year ended 31 December 2017 on a year-on-year basis. The increase mainly reflected greater marketing spending on products and platforms such as online games, online media and payment related services, as well as higher staff costs. As a percentage of revenues, selling and marketing expenses decreased to 7% for the year ended 31 December 2017 from 8% for the year ended 31 December 2016. Finance costs, net. Net finance costs increased by 49% to RMB2,908 million for the year ended 31 December 2017 on a year-on-year basis. The increase was mainly driven by greater interest expenses due to higher amount of indebtedness. Share of profit/(loss) of associates and joint ventures. We recorded share of profit of associates and joint ventures of RMB821 million for the year ended 31 December 2017, compared to share of losses of RMB2,522 million for the year ended 31 December 2016. Some of our investee companies registered profit as a result of improved performance and one-off gains in 2017, compared to losses in 2016. Income tax expense. Income tax expense increased by 54% to RMB15,744 million for the year ended 31 December 2017 on a year-on-year basis. The increase primarily reflected greater profit before income tax and higher withholding tax. Profit attributable to equity holders of the Company. Profit attributable to equity holders of the Company increased by 74% to RMB71,510 million for the year ended 31 December 2017 on a year-on-year basis. Non-GAAP profit attributable to equity holders of the Company increased by 43% to RMB65, 126 million for the year ended 31 December 2017. VAS Management Discussion and Analysis FOURTH QUARTER OF 2017 COMPARED TO FOURTH QUARTER OF 2016 General and administrative expenses. General and administrative expenses increased by 47% to RMB33,051 million for the year ended 31 December 2017 on a year-on-year basis. The increase primarily reflected greater R&D expenses and staff costs due to our business expansion. As a percentage of revenues, general and administrative expenses decreased to 14% for the year ended 31 December 2017 from 15% for the year ended 31 December 2016. Selling and marketing expenses 15 (4,462) 10,523 Attributable to: Equity holders of the Company Non-controlling interests 20,797 10,529 825 21,622 (6) Non-GAAP profit attributable to equity holders of the Company 17,454 12,332 16 Tencent Holdings Limited Management Discussion and Analysis (6,022) 21,622 Profit for the period 10,523 (3,123) General and administrative expenses (2,402) (8,811) (6,909) 25,724 13,930 Finance costs, net (859) Operating profit Share of losses of associates and joint ventures (120) (522) Profit before income tax 24,745 (483) 12,925 Income tax expense For the year ended 31 December 2017 continuing of listed companies Total com- Fair value Profit/ (loss) from The Group's share of the results, the revenues, the aggregated assets (including goodwill) and liabilities of its associates, as well as the fair value of the associates which are listed entities, are shown in aggregate as follows: 20 INVESTMENTS IN ASSOCIATES (Cont'd) prehensive Other com- prehensive income Assets Liabilities Revenues RMB'Million RMB'Million RMB'Million operation RMB'Million income/(loss) 31 December RMB'Million RMB'Million Notes to the Consolidated Financial Statements as at Tencent Holdings Limited Notes to the Consolidated Financial Statements The associates of the Group have been accounted for by using equity method based on the financial information of the associates prepared under the accounting policies generally consistent with the Group. 3,540 RMB'Million 113,779 70,042 Annual Report 2017 197 For the year ended 31 December 2017 20 INVESTMENTS IN ASSOCIATES (Cont'd) Note: (i) 198 (ii) (iv) (v) (vi) (vii) During the year ended 31 December 2017, the Group entered into a share purchase agreement with an associate which is engaged in eCommerce business, to subscribe for approximately 7% of its equity interests, on an outstanding basis, at a cash consideration equivalent to approximately RMB3,993 million. During the year ended 31 December 2017, the Group entered into a share purchase agreement with an associate which operates an online ride-hailing platform in Asia other than China, to subscribe for approximately 10% of its equity interests, on an outstanding basis, at a cash consideration equivalent to approximately RMB2,646 million. During the year ended 31 December 2017, the Group entered into share purchase agreements with an associate which is mainly engaged in online movie ticketing business to subscribe for 11.23% of its equity interests, on an outstanding basis, at a total consideration equivalent to approximately RMB1,897 million. The Group also acquired certain other associates and made additional investments in existing associates, with an aggregate amount of RMB10,586 million during the year ended 31 December 2017. These associates are principally engaged in online game business and other Internet-related businesses. Transfers mainly comprised re-designation of several investments from available-for-sale financial assets and investments in redeemable instruments of associates to investments in associates as a result of change in nature of these investments. Out of these investments, certain contractual rights attached to an investment consortium previously classified as available-for-sale financial assets and other financial assets have been changed, thus resulting in re-designation of such investment to an associate of the Group. The management of the Group considered that the impact to the Group is not material had this investment been classified as an investment in an associate since 1 January 2017. During the year ended 31 December 2017, the Group made an aggregate impairment provision of RMB1,277 million (2016: RMB2,117 million) against the carrying amounts of a number of associates. The impairment losses mainly resulted from revisions of long-term financial outlook and changes in business models of the affected associates. (iii) 2017 Notes to the Consolidated Financial Statements 103,999 52,576 (1,141) 484 (657) 68,565 Non-listed entities 56,371 24,846 11,455 (1,408) 33,378 379 128,265 58,224 64,031 (2,549) 863 (1,686) Management has assessed the level of influence that the Group exercises on certain associates with the respective shareholding below 20%, with a total carrying amount of RMB56,768 million as at 31 December 2017 (2016: RMB37,131 million). Management determined that it has significant influence thereon through the board representation or other arrangements made. Consequently, these investments have been classified as associates. Annual Report 2017 199 (5,897) (1,029) Listed entities 71,894 2016 43,064 84,022 505 945 845 Non-listed entities 128,028 75,184 25,659 225 Listed entities 25 232,027 118,248 109,681 730 30 1,350 156,968 62 907 1,637 62 (2,117) 287 (614) At 31 December 2016 13,900 1,048 13 377 8,768 3,694 Closing net book amount 102 43 50 Currency translation differences (140) (1) (139) Cost 4,501 20,374 902 Net book amount 91 68 19 4 Currency translation differences (13,786) Transfer to investment properties (807) (544) (11,610) (807) Accumulated depreciation and impairment 27,595 1,787 31 (18) Impairment (3,699) (277) Business combinations 9,973 1,027 9 384 5,959 2,594 54 Opening net book amount 9,973 1,027 9 384 5,959 2,594 Net book amount Year ended 31 December 2016 3,694 6 93 (134) (3,150) (133) Depreciation (51) (22) (8) 33 (20) 7,624 245 10 120 5,877 1,372 Additions Disposals 8,768 377 13 Computer 19 INTANGIBLE ASSETS For the year ended 31 December 2017 Notes to the Consolidated Financial Statements 193 Annual Report 2017 The land use rights represent prepaid operating lease payments in respect of land in the PRC with remaining lease period of 38 to 49 years. During the year ended 31 December 2017, all of the amortisation was charged to general and administrative expenses. Licensed 5,174 (95) (109) 2,976 46 2,293 5,174 RMB'Million 5,111 RMB'Million software and Goodwill 20,880 3,515 2,643 23,157 Cost At 1 January 2017 RMB'Million Game RMB'Million Others Copyrights online contents RMB'Million RMB'Million RMB'Million RMB'Million RMB'Million licences technology Total (11) 2016 Closing net book amount 2017 Closing net book amount Currency translation differences Transfer to investment properties Transfer to property, plant and equipment Additions Opening net book amount 2016 For the year ended 31 December 2017 17 CONSTRUCTION IN PROGRESS Tencent Holdings Limited 192 million (2016: RMB132 million) and RMB824 million (2016: RMB976 million) were charged to cost of revenues, selling and marketing expenses and general and administrative expenses, respectively. During the year ended 31 December 2017, depreciation of RMB3,892 million (2016: RMB2,591 million), RMB134 13,900 1,048 Notes to the Consolidated Financial Statements 2017 RMB'Million 4,674 Amortisation Additions Opening net book amount 18 LAND USE RIGHTS As at 31 December 2017, construction in progress mainly comprised office buildings and data centres under construction located in the PRC. 4,674 3,163 (1,277) 17 (440) (31) (1,710) (4,682) 2,559 3,204 4,248 (2) 869 25 (46) Opening net book amount Year ended 31 December 2017 13,900 1,048 13 377 8,768 3,694 40 Net book amount 91 68 19 4 Currency translation differences 3,694 8,768 377 13 (32) (7) Disposals 14,643 323 10 260 (13,786) 9,678 Additions 4 2 2 Business combinations 13,900 1,048 4,372 (807) (18) (544) Notes to the Consolidated Financial Statements Tencent Holdings Limited 190 A final dividend in respect of the year ended 31 December 2017 of HKD0.88 per share (2016: HKD0.61 per share) was proposed pursuant to a resolution passed by the Board on 21 March 2018 and subject to the approval of the shareholders at the annual general meeting of the Company to be held on 16 May 2018 or any adjournment thereof. This proposed dividend is not reflected as dividend payable in the consolidated financial statements. The dividends amounted to RMB5,052 million (2016: RMB3,699 million) were paid during the year ended 31 December 2017. 15 DIVIDENDS No significant transactions, arrangements and contracts in relation to the Group's business to which the Company was a party and in which a director of the Company had a material interest, whether directly or indirectly, subsisted at the end of the year or at any time during the year. For the year ended 31 December 2017 (e) Directors' material interests in transactions, arrangements or contracts (d) Information about loans, quasi-loans and other dealings in favour of directors, their controlled bodies corporate and connected entities No consideration provided to or receivable by third parties for making available directors' services subsisted at the end of the year or at any time during the year. (c) Consideration provided to third parties for making available directors' services No director's termination benefit subsisted at the end of the year or at any time during the year. (b) Directors' termination benefits 14 BENEFITS AND INTERESTS OF DIRECTORS (Cont'd) For the year ended 31 December 2017 No loans, quasi-loans and other dealings in favour of directors, their controlled bodies corporate and connected entities subsisted at the end of the year or at any time during the year. (5) 16 PROPERTY, PLANT AND EQUIPMENT Buildings RMB'Million (11,610) (807) Accumulated depreciation and impairment 27,595 1,787 31 902 Furniture 20,374 Cost At 1 January 2017 RMB'Million Total Motor Leasehold vehicles improvements RMB'Million RMB'Million and office equipment Computer equipment RMB'Million RMB'Million 4,501 (47) Depreciation (228) RMB'Million RMB'Million equipment equipment Buildings Furniture and office Computer RMB'Million 16 PROPERTY, PLANT AND EQUIPMENT (Cont'd) Notes to the Consolidated Financial Statements 191 Annual Report 2017 23,597 1,115 17 493 For the year ended 31 December 2017 14,141 Motor Leasehold vehicles improvements RMB'Million RMB'Million RMB'Million Currency translation differences (11,001) (694) (16) (432) (9,160) (699) Total Accumulated depreciation and impairment 1,696 25 806 15,165 3,293 Cost At 1 January 2016 20,985 10 7,831 38 1,115 17 493 14,141 7,831 Closing net book amount (53) 23,597 (20) (30) Currency translation differences (4,850) (235) 161 (138) (4,243) (3) Net book amount At 31 December 2017 8,852 48 16 (26) Currency translation differences (17,064) (1,023) (24) Cost (659) (1,021) Accumulated depreciation and impairment 40,623 2,090 41 1,136 28,504 (14,337) 3,147 RMB'Million 1,535 Year ended 31 December 2016 13,439 444 259 3,665 697 1,219 7,155 Net book amount 9 2 Opening net book amount 11 (8,347) (387) (495) (4,935) (1,508) (860) (162) Accumulated amortisation and impairment 21,777 836 754 Currency translation differences 7,155 1,219 567 (261) Amortisation (97) (38) (45) Disposals 13,247 148 125 11,074 1,331 569 Additions 18,923 2,204 794 1 28 15,896 Business combinations 13,439 444 259 3,665 697 8,598 2,196 2,087 7,306 Net book amount 4 (25) 8 (18) 16 (6) 29 Currency translation differences (27,427) (1,277) (747) (21,961) (1,441) (1,437) (564) Accumulated amortisation and impairment 67,689 3,225 1,066 33,549 2,759 2,947 24,143 Cost 23,608 (396) 1,334 327 Cost At 1 January 2016 RMB'Million RMB'Million RMB'Million Total Others Copyrights contents RMB'Million RMB'Million RMB'Million RMB'Million licences technology Goodwill online Game software and Licensed Computer For the year ended 31 December 2017 Notes to the Consolidated Financial Statements 19 INTANGIBLE ASSETS (Cont'd) Tencent Holdings Limited 194 40,266 1,923 11,570 At 31 December 2017 (7,772) (362) As at 31 December At end of the year Currency translation differences Impairment provision (Note (vi)) Disposals Transfers (Note (v)) Dividends Share of other comprehensive income of associates Share of profit/(loss) of associates (Note 10) Deemed disposal gains (Note 7(a)) Additions (Note (i), (ii), (iii) and (iv)) 2017 For the year ended 31 December 2017 At beginning of the year - Unlisted entities - Listed entities Investments in associates 20 INVESTMENTS IN ASSOCIATES Tencent Holdings Limited 196 For online literature business and online music business, management calculates value-in-use based on discounted cash flows calculations. The discounted cash flows calculations use cash flow projections developed based on financial budgets approved by management of the Group covering a five-year period. Cash flows beyond the five-year period are extrapolated using an estimated annual growth of not more than 5%. Pre-tax discount rates of 20% to 25% adopted for the online music business and the online literature business, respectively, which reflects market assessments of time value and the specific risks relating to the industry that the Group operates. The financial projections were determined by the management based on past performance and its expectation for market development. For online game business, management calculates the fair value less costs to sell based on ratios of EV (enterprise value) divided by EBITDA (earnings before interest, tax, depreciation and amortisation) of several comparable public companies (ranging within 16-23x) multiplied by the EBITDA of the related CGU and discounted for the lack of marketability at a range of 10% to 20%. The comparable public companies are chosen based on factors such as industry similarity, company size, profitability and financial risks. Goodwill is allocated to the Group's CGUS and most of the goodwill is related to the VAS. The recoverable amount of a CGU is the higher of its value-in-use and fair value less costs to sell. The key assumptions used for the calculations of the recoverable amounts of major CGUS are as follows: Impairment tests for goodwill Notes to the Consolidated Financial Statements RMB'Million 2016 RMB'Million (253) (1,092) 20,825 (151) (312) 863 907 (2,549) 730 2,091 9,892 9,900 19,122 60,171 70,042 RMB'Million RMB'Million 2016 2017 70,042 113,779 31,526 52,844 38,516 60,935 During the year ended 31 December 2017, amortisation of RMB17,837 million (2016: RMB8,277 million) and RMB785 million (2016: RMB653 million) were charged to cost of revenues and general and administrative expenses, respectively. During the year ended 31 December 2017, goodwill and other identifiable intangible assets of certain acquired business have been impaired to the extent of RMB239 million (2016: RMB366 million) (Note 7) as a result of significant decline in revenues and unsatisfactory operating performance of these business. 19 INTANGIBLE ASSETS (Cont'd) For the year ended 31 December 2017 Notes to the Consolidated Financial Statements 3,515 2,643 23,157 Cost At 31 December 2016 36,467 2,352 242 7,776 1,635 22,927 Closing net book amount 251 6 3 15 18 198 Currency translation differences (366) (87) (2) (277) Impairment provision (8,930) 20,880 (139) 869 54,211 195 Annual Report 2017 36,467 2,352 242 7,776 1,635 1,535 22,927 Net book amount 260 3 17 20 10 209 Currency translation differences (18,004) (796) (630) (13,121) (1,900) (1,118) (439) Accumulated amortisation and impairment 3,147 40,266 1,504 327 242 242 2,352 36,467 Year ended 31 December 2017 Opening net book amount 22,927 7,776 1,535 7,776 242 442 2,352 36,467 Business combinations 998 1,635 1,635 1,535 22,927 1,923 54,211 Accumulated amortisation and impairment (439) (1,118) (1,900) (13,121) (630) (796) (18,004) Currency translation differences 209 10 20 17 3 Net book amount 45 38 260 Additions (124) (115) (239) Currency translation differences (180) (16) (4) Impairment provision 5 (256) Closing net book amount 23,608 1,504 1,334 1,081 11,570 (26) (18,622) (35) (124) 170 (497) 21,017 207 172 21,886 (13) (19) Disposals 320 (3) (51) Amortisation (332) (448) (12) (17,221) Currency translation differences 3,851 1,794 367 (27) Other additions 7 1,604 2,057 2,343 2,541 78 At 31 December 2016 642 189 3,661 7,033 Note: 399 2,522 The Group only recognises deferred income tax assets for cumulative tax losses if it is probable that future taxable amounts will be available to utilise those tax losses. Management will continue to assess the recognition of deferred income tax assets in future reporting periods. As at 31 December 2017, the Group did not recognise deferred income tax assets of RMB1,129 million (2016: RMB957 million) in respect of cumulative tax losses amounting to RMB4,997 million (2016: RMB4,064 million). These tax losses will expire from 2018 to 2022. 71 Credited/(charged) to consolidated income statement (82) 4 (275) 2,311 2,796 Credited to consolidated statement of changes in equity 46 46 Currency translation differences (82) At 31 December 2017 1,902 4 243 gg 96 96 5,565 2,230 9,793 At 1 January 2016 305 757 Business combinations 209 Others As at 31 December 220 Loans to investees and investees' shareholders (Note) 3,942 7,031 Prepayments for media contents and game licences Included in non-current assets: RMB'Million 2016 RMB'Million 2017 1,904 2,058 25 PREPAYMENTS, DEPOSITS AND OTHER ASSETS Notes to the Consolidated Financial Statements 205 Annual Report 2017 (viii) Management has assessed the level of influence that the Group exercises on certain available-for-sale financial assets with shareholding exceeding 20%. Management determined that it has no significant influence on certain of these investees as the Group has neither board seats nor power to participate in decision making in these investees. Consequently, these investments have been classified as available-for-sale financial assets. During the year ended 31 December 2017, the Group made a large number of individual investments recognised as available- for-sale financial assets, but none of them was significant enough to trigger the disclosure requirements pursuant to Chapter 14 of the Listing Rules at the time when the Group made such investments. The Group made an aggregate impairment provision of RMB671 million (2016: RMB1,028 million) against the carrying amounts of certain available-for-sale financial assets during the year ended 31 December 2017, with reference to their assessed fair values as at 31 December 2017. During the year ended 31 December 2017, the Group re-designated several investments to associates with an aggregate amount of RMB18,684 million as a result of change in nature of these investments (Note 20(v)). During the year ended 31 December 2017, the Group also made certain new investments and additional investments with an aggregate amount of approximately RMB10,623 million in listed and unlisted entities mainly operated in the United States, the PRC and other Asian countries. These companies are principally engaged in games, entertainment, technology, and other Internet-related services. During the year ended 31 December 2017, the Group made additional investments in an existing investee that was classified as available-for-sale financial assets, which is principally engaged in local life services online to offline operations in the PRC, at a total consideration of USD1,597 million (equivalent to approximately RMB 10,645 million). During the year ended 31 December 2017, the Group entered into a share purchase agreement with a company, which is principally engaged in provision of global music streaming subscription services, to acquire approximately 8% of its equity interests at a consideration of USD1,742 million (equivalent to approximately RMB11,428 million), settled in cash of USD600 million (equivalent to approximately RMB3,936 million) and certain new shares of a non-wholly owned subsidiary at fair value of USD1,142 million (equivalent to approximately RMB7,492 million). For the year ended 31 December 2017 1,113 Running royalty fees for online games 149 Rental deposits and other deposits 1,679 521 Loans to investees and investees' shareholders (Note) 260 579 Refundable value-added tax 2,293 2,703 Interest receivables 2,506 4,095 Running royalty fees for online games 4,659 6,681 Prepayments and prepaid expenses Included in current assets: 7,363 11,173 1,623 1,935 Others 685 199 (93) Business combinations 7,033 Deferred income tax liabilities: - to be recovered after more than 12 months - to be recovered within 12 months The movements of the deferred income tax assets/liabilities account were as follows: As at 31 December 2017 2016 RMB'Million RMB'Million 4,510 - to be recovered within 12 months 3,272 3,761 9,793 7,033 (5,583) (4,777) (392) (376) (5,975) (5,153) 2017 5,283 2016 - to be recovered after more than 12 months There was no offsetting of deferred income tax assets and liabilities in 2017 and 2016. During the year ended 31 December 2017, the Group made additional investments of approximately USD3,609 million (equivalent to approximately RMB24,312 million) in certain existing investees classified as available-for-sale financial assets. These investees are listed in the United States and principally engaged in the development and sales of electric vehicles, sustainable energy generation and storage equipment and social networking businesses. 28,283 21,481 Note: As at 31 December 2017, the balances of loans to investees and investees' shareholders are repayable within a period of two to eight years (included in non-current assets), or within one year (included in current assets), and are interest-bearing at rates of not higher than 8.0% per annum (2016: not higher than 8.0% per annum). As at 31 December 2017, the carrying amounts of deposits and other assets (excludes prepayments and refundable value-added tax), were approximate to their fair values. Deposits and other assets were neither past due nor impaired. Their recoverability was assessed with reference to the credit status of the counterparties and credit history. 206 Tencent Holdings Limited Notes to the Consolidated Financial Statements For the year ended 31 December 2017 Deferred income tax assets: 26 OTHER FINANCIAL ASSETS As at 31 December 2017, the Group's non-current other financial assets represented the embedded derivatives bifurcated from their host contracts which mainly comprise the conversion options bifurcated from their corresponding host components that were classified as available-for-sale financial assets and investments in redeemable instruments of associates, and interest rate swap contracts, of RMB3,818 million (2016: RMB1, 176 million) and RMB1,300 million (2016: RMB584 million), respectively. As at 31 December 2017, the aggregate notional principal amounts of the Group's outstanding interest rate swap contracts, which swap the floating interest rates into fixed interest rates, were USD10,741 million (equivalent to approximately RMB70,184 million) (2016: USD4,001 million (equivalent to approximately RMB27,755 million)). These interest rate swap contracts were qualified for hedge accounting. Included in current assets: As at 31 December 2017, the Group's current other financial assets represent call option rights held by the Group which entitle it to acquire additional equity interests in an investee company of the Group. Annual Report 2017 207 Notes to the Consolidated Financial Statements For the year ended 31 December 2017 27 DEFERRED INCOME TAXES Deferred income taxes are calculated in full on temporary differences under the liability method using the tax rates which are expected to apply at the time of reversal of the temporary differences. Included in non-current assets: RMB'Million RMB'Million At beginning of the year 27 DEFERRED INCOME TAXES (Cont'd) The movements of deferred income tax assets were as follows: Deferred income tax assets on temporary differences arising from Accelerated amortisation Share-based of intangible Accrued assets RMB'Million Tax losses RMB'Million For the year ended 31 December 2017 expenses RMB'Million Total RMB'Million RMB'Million (Note) At 1 January 2017 Credited/(charged) to consolidated income statement 642 189 3,661 2,541 payments and others 17,110 Notes to the Consolidated Financial Statements Tencent Holdings Limited 1,880 (2,911) 14,118 (Charged)/credited to consolidated income statement (Note 11) (590) 598 Withholding tax paid 2,451 300 Credited to consolidated statement of changes in equity 164 362 Other additions Currency translation differences At end of the year (21) (381) 3,851 (66) 61 3,818 1,880 208 1,260 (vii) Cash and cash equivalents (Note 30(a)) (v) 201 Notes to the Consolidated Financial Statements For the year ended 31 December 2017 21 FINANCIAL INSTRUMENTS BY CATEGORY As at 31 December 2017, the financial instruments of the Group is analysed as follows: As at 31 December 2017 2016 RMB'Million RMB'Million Annual Report 2017 Financial assets classified as loans and receivables: 22,976 9,627 Accounts receivable (Note 29) 16,549 10,152 Currency translation differences Impairment provision (Note (vi)) Changes in fair value Disposals and transfers (Note (v)) Additions (Note (i), (ii), (iii) and (iv)) Investments in redeemable instruments of associates (Note 22) At beginning of the year The Group placed certain deposits in an associate in the ordinary course of business. During the year ended and as at 31 December 2017, the balances of these deposits and interest income thereon were considered to be insignificant. (ii) Year ended 31 December 2017 RMB'Million There are no material contingent liabilities relating to the Group's interests in the associates. 200 Tencent Holdings Limited 2016 RMB'Million 362,332 260,186 Other transactions (835) 121 (3,294) (12) (3,474) Notes to the Consolidated Financial Statements For the year ended 31 December 2017 20 INVESTMENTS IN ASSOCIATES (Cont'd) Transactions with associates (i) Transactions related to online services During the year ended 31 December 2017, the Group had undertaken transactions relating to provision of online traffic, online advertising and other online services to certain associates (including JD.com), under but not limited to certain co-operation arrangements. The revenues recorded by the Group from the aforesaid co-operation arrangements during the years ended 31 December 2017 and 2016 were considered to be insignificant. (2,081) 34,258 Movement of available-for-sale financial assets is analysed as follows: Equity investments in unlisted entities As at 31 December 2017, financial assets classified as available-for-sale were RMB127,218 million (2016: RMB83,806 million) (Note 24). 152,336 201,418 69,827 97,790 10,491 15,566 Other payables and accruals (excluding prepayments received from customers and others, staff costs and welfare accruals) (Note 39) Borrowings (Note 34) 27,413 50,085 As at 31 December 2017, financial assets and liabilities measured at fair value included other financial assets (Note 26) and other financial liabilities of RMB5,624 million (2016: RMB3,409 million) and RMB2, 154 million (2016: RMB2,576 million), respectively. Accounts payable (Note 38) 3,862 Long-term payables (Note 36) 39,670 34,115 Notes payable (Note 35) Financial liabilities at amortised cost: 157,433 198,403 71,902 105,697 4,935 Others 202 Notes to the Consolidated Financial Statements For the year ended 31 December 2017 - Japan - South Korea - Sweden - United Kingdom - United States of America – Hong Kong Mainland China Equity investments in listed entities 24 AVAILABLE-FOR-SALE FINANCIAL ASSETS For the year ended 31 December 2017 Tencent Holdings Limited Notes to the Consolidated Financial Statements Annual Report 2017 During the year ended 31 December 2017, no impairment provision was made (2016: Nil) against the carrying amounts of the investments in joint ventures, based on the results of impairment assessment performed on the carrying amounts against the respective recoverable amount. Share of profit amounting to RMB91 million was recognised during the year ended 31 December 2017 (2016: RMB27 million) (Note 10). As at 31 December 2017, the Group's investments in joint ventures of RMB7,826 million (2016: RMB630 million) mainly comprised investee companies that are principally a special purpose vehicle of which we have a majority stake therein for the investment in one of the telecommunication carriers in the PRC and other joint venture initiatives in other entertainment-related business. 23 INVESTMENTS IN JOINT VENTURES During the year ended 31 December 2017, the Group also made an aggregate impairment provision of approximately RMB607 million (2016: RMB1,298 million) against the carrying amounts of certain investments in redeemable instruments of associates based on the impairment assessment performed with reference to the business performances and recoverable amounts of these investee companies. During the year ended 31 December 2017, the Group re-designated several investments from investments in redeemable instruments of associates to investments in associates (Note 20 (v)). During the year ended 31 December 2017, the Group made aggregate investments in redeemable instruments of associates, including additional investments in existing investees of the Group, of RMB18,487 million (2016: RMB3,628 million). As at 31 December 2017, the Group's investments in redeemable instruments of associates of RMB22,976 million (2016: RMB9,627 million) were stated at amortised cost less impairment provision. These investments mainly comprised investee companies that are principally engaged in online community services, online financing business, bike sharing service, online games development, electric vehicle business and other Internet-related businesses. The redemption prices of the relevant instruments are agreed at not less than their respective original subscription prices. 22 INVESTMENTS IN REDEEMABLE INSTRUMENTS OF ASSOCIATES 203 52,388 7,057 14,665 127,218 749 2,376 62,580 70,962 20,477 53,880 1,899 131 163 83,806 204 2,066 3,065 13,552 45,364 615 305 3,909 2,694 RMB'Million 2016 390 RMB'Million 2017 RMB'Million (iv) (iii) (ii) (i) Note: 24 AVAILABLE-FOR-SALE FINANCIAL ASSETS (Cont'd) Notes to the Consolidated Financial Statements For the year ended 31 December 2017 83,806 127,218 3,364 2016 (6,147) (671) 2,567 16,764 (2,755) (23,542) 37,319 57,008 44,339 83,806 RMB'Million (1,028) 2017 As at 31 December Tencent Holdings Limited Non-current assets Current liabilities Non-current liabilities Redeemable non-controlling interests Shareholders' equity Summarised consolidated statements of operations Net revenues Loss from operations Profit/(loss) before tax Net loss Current assets As at 31 December 2016 RMB'Million RMB'Million 115,029 106,932 69,026 53,891 118,251 104,843 13,416 2017 Summarised consolidated balance sheet Set out below are the summarised financial information of JD.com extracted from its financial statements prepared under generally accepted accounting principles in the United States. Online direct sales and online marketplace businesses/the PRC 204 At end of the year Annual Report 2017 750 9,267 Term deposits (Note 28) 42,089 55,735 Restricted cash (Note 30(b)) 1,606 Notes to the Consolidated Financial Statements For the year ended 31 December 2017 20 INVESTMENTS IN ASSOCIATES (Cont'd) Particulars of a material associate of the Group, as determined by the directors, are set out below: Name of entity Place of incorporation JD.com Cayman Islands Interest held Principal activities/ indirectly place of operation 18.13% (vi) 209 Deposits and other receivables (Note 25) 9,486 121 39,804 57,419 32,098 105,697 71,902 The effective interest rate of the term deposits of the Group with initial terms within three months during the year ended 31 December 2017 was 2.42% (2016: 2.47%). Approximately RMB54,894 million (2016: RMB28,154 million) and RMB11,740 million (2016: RMB1,856 million) of the total balance of the Group's cash and cash equivalents was denominated in RMB and placed with banks in Mainland China and Hong Kong, respectively. (b) Restricted cash As at 31 December 2017, restricted deposits held at bank of RMB1,606 million (2016: RMB750 million) were mainly denominated in RMB. Annual Report 2017 213 Notes to the Consolidated Financial Statements For the year ended 31 December 2017 31 SHARE CAPITAL, SHARE PREMIUM AND SHARES HELD FOR SHARE AWARD SCHEMES As at 31 December 2017 and 2016, the authorised share capital of the Company comprises 50,000,000,000 ordinary shares with par value of HKD0.00002 per share. At 1 January 2017 Employee share option schemes: - value of employee services - shares issued (Note (a)) Employee share award schemes: Number of issued and Shares held for share fully paid Share Share 48,278 RMB'Million RMB'Million 2016 8,076 4,679 Third party platform providers 3,140 2,252 Telecommunications operators Others 564 928 4,769 2,293 16,549 10,152 Some online advertising customers and agencies are usually granted with a credit period of 90 days after full execution of the contracted advertisement orders. Third party platform providers and telecommunication operators usually settle the amounts due by them within 60 days and a period of 30 to 120 days, respectively. As at 31 December 2017, insignificant amounts of accounts receivable were past due and related impairment provision was recognised after assessment of the financial condition and credit quality with reference to the past history. As at 31 December 2017, the carrying amounts of accounts receivable approximated their fair values. 212 Tencent Holdings Limited 30 BANK BALANCES AND CASH (a) Cash and cash equivalents Notes to the Consolidated Financial Statements For the year ended 31 December 2017 Bank balances and cash Term deposits and highly liquid investments with initial terms within three months As at 31 December 2017 ordinary shares* capital RMB'Million premium RMB'Million 18,234 At 1 January 2016 9,403,923,992 12,167 (1,817) 10,350 Employee share option schemes: - value of employee services - shares issued (Note (a)) 311 8,718,788 225 311 225 Employee share award schemes: - shares withheld for share award schemes (Note (b)) - shares allotted for share award schemes (Note (c)) - shares vested from share award schemes and transferred to the grantees (Note (d)) Acquisition of additional equity interests in non-wholly owned subsidiaries (Note 32(d)) At 31 December 2016 214 Tencent Holdings Limited 64,440,700 3,453 3,453 (3,970) Online advertising customers and agencies 22,204 728 award schemes RMB'Million Total RMB'Million 9,477,083,480 17,324 (3,136) 14,188 1,125 4,102,812 171 - value of employee services - shares withheld for share award schemes (Note (b)) - shares allotted for share award schemes (Note (c)) 17,870,595 - shares vested from share award schemes and transferred to the grantees (Note (d)) Acquisition of additional equity interests in non-wholly owned subsidiaries (Note 32(d)) At 31 December 2017 1,125 171 4,254 4,254 (2,232) (2,232) -- (1,398) 1,398 728 9,499,056,887 (1,936) RMB'Million 2016 94 (1,700) Withholding tax paid 300 (227) 88 (1,745) 300 Credited to consolidated statement of changes in equity Currency translation differences At 31 December 2016 362 362 (16) 1 (17) (607) (3,391) (269) (425) (461) (5,153) As at 31 December 2017, the Group recognised the relevant deferred income tax liabilities of RMB4,075 million (2016: RMB3,391 million) on earnings anticipated to be remitted by certain subsidiaries in the foreseeable future. No withholding tax had been provided for the earnings of approximately RMB32,213 million (2016: RMB41,220 million) expected to be retained by the PRC subsidiaries and not to be remitted to a foreign investor in the foreseeable future based on several factors, including management's estimation of overseas funding requirements. 210 Tencent Holdings Limited 28 TERM DEPOSITS income statement Notes to the Consolidated Financial Statements Credited/(charged) to consolidated (385) 2,451 (354) (3) (3,386) 2,451 Credited to consolidated statement of changes in equity Currency translation differences 118 15 118 16 At 31 December 2017 (506) (4,075) (151) (779) (464) (5,975) At 1 January 2016 (314) (1,975) (631) (198) (550) (3,668) Business combinations (385) RMB'Million For the year ended 31 December 2017 Included in non-current assets: Notes to the Consolidated Financial Statements For the year ended 31 December 2017 29 ACCOUNTS RECEIVABLE Accounts receivable and their ageing analysis, based on recognition date, are as follows: 0-30 days 31 - 60 days 61-90 days Over 90 days As at 31 December 2017 2016 RMB'Million RMB'Million 4,399 3,260 6,394 4,019 2,259 1,294 3,497 1,579 16,549 10,152 Majority of the Group's accounts receivable were denominated in RMB. The carrying amounts of accounts receivable of the Group's major agents/customers are as follows: As at 31 December 2017 211 An analysis of the Group's term deposits by currencies are as follows: Annual Report 2017 The effective interest rate for the term deposits of the Group with initial terms of over three months during the year ended 31 December 2017 was 3.86% (2016: 3.41%). RMB term deposits Other currencies Included in current assets: RMB term deposits USD term deposits Other currencies As at 31 December 2017 RMB'Million 2016 RMB'Million 5,358 5,409 7 6 5,365 5,415 30,701 46,118 4,187 2,708 1,836 1,494 36,724 50,320 42,089 55,735 Term deposits with initial terms of over three months were neither past due nor impaired. As at 31 December 2017, the carrying amounts of the term deposits with initial terms of over three months approximated their fair values. (1,936) (617) 617 1,089 2,015 736 9,673 Value of employee services: - Employee share option schemes - Employee share award schemes Tax benefit from share-based payments of a subsidiary Acquisition of additional equity interests in 57 57 394 394 897 897 non-wholly owned subsidiaries (Note (d)) (2,523) Transfer of equity interests of subsidiaries to non-controlling interests (927) Termination of the put option granted to non-controlling interests 516 Partial disposal of equity interests in subsidiaries and businesses 7,842 Profit appropriations to PRC statutory reserves 1,607 (2,523) 458 (11,338) Currency PRC based Capital financial Investments translation statutory compensation reserve assets in associates differences reserve reserve Others Total RMB'Million RMB'Million RMB'Million RMB'Million RMB'Million RMB'Million RMB'Million RMB'Million (Note (a)) (Note (b)) (Note (c)) Balance at 1 January 2016 15,106 for-sale (927) 7,842 For the year ended 31 December 2017 32 OTHER RESERVES (Cont'd) Note: 218 (a) The capital reserve mainly arises from transactions undertaken with non-controlling interests. (b) (c) (d) (e) In accordance with the Companies Laws of the PRC and the stipulated provisions of the articles of association of subsidiaries with limited liabilities in the PRC, appropriation of net profit (after offsetting accumulated losses from prior years) should be made by these companies to their respective Statutory Surplus Reserve Funds and the Discretionary Reserve Funds before distributions are made to the owners. The percentage of appropriation to Statutory Surplus Reserve Fund is 10%. The amount to be transferred to the Discretionary Reserve Fund is determined by the equity owners of these companies. When the balance of the Statutory Surplus Reserve Fund reaches 50% of the registered capital, such transfer needs not to be made. Both the Statutory Surplus Reserve Fund and Discretionary Reserves Fund can be capitalised as capital of an enterprise, provided that the remaining Statutory Surplus Reserve Fund shall not be less than 25% of the registered capital. In addition, in accordance with the Law of the PRC on Enterprises with Foreign Investments and the stipulated provisions of the articles of association of wholly owned foreign subsidiaries in the PRC, appropriation from net profit (after offsetting accumulated losses brought forward from prior years) should be made by these companies to their respective Reserve Fund. The percentage of net profit to be appropriated to the Reserve Fund is not less than 10% of the net profit. When the balance of the Reserve Fund reaches 50% of the registered capital, such transfer needs not be made. With approvals obtained from respective boards of directors of these companies, the Reserve Fund can be used to offset accumulated deficit or to increase capital. Share-based compensation reserve arises from share option schemes and share award schemes adopted by the subsidiaries of the Group (Note 33(d)). During the year ended 31 December 2017, the Group has acquired non-controlling interests in certain non-wholly owned subsidiaries and the aggregate net excess of considerations over the carrying amounts of acquired non-controlling interests of RMB952 million (2016: RMB2,523 million) was recognised directly in equity. Out of which includes an agreement to entire non- controlling interests (including the outstanding equity-settled and cash-settled share options and restricted shares under the relevant employees' investment plans) in a non-wholly owned subsidiary entered into by the Group in 2015. The considerations were settled in cash and awarded shares of the Company. This acquisition was partially completed in 2017. During the year ended 31 December 2017, a non-wholly owned subsidiary of the Group, China Literature Limited ("China Literature"), have undergone initial public offering by listing of certain of its new shares and sale shares on the Stock Exchange and thus the Group's equity interest in China Literature was diluted. Given China Literature remains a subsidiary of the Group following the said initial public offering, this transaction was accounted for as transaction with non-controlling interest with a gain of RMB2,495 million directly recognised in equity. During the year ended 31 December 2017, another non-wholly owned subsidiary of the Group issued certain new shares in exchange for non-controlling interest of an investee, which accounted for as available-for-sale financial assets, and the Group's equity interest in such non-wholly owned subsidiary was diluted accordingly. This transaction was accounted for as transaction with non-controlling interest with a gain of RMB4,088 million directly recognised in equity. Tencent Holdings Limited Notes to the Consolidated Financial Statements For the year ended 31 December 2017 33 SHARE-BASED PAYMENTS (a) Share option schemes The Company has adopted five share option schemes, namely, the Pre-IPO Option Scheme, the Post-IPO Option Scheme I, the Post-IPO Option Scheme II, the Post-IPO Option Scheme III and the Post-IPO Option Scheme IV. The Pre-IPO Option Scheme, the Post-IPO Option Scheme I and the Post-IPO Option Scheme II expired on 31 December 2011, 23 March 2014 and 16 May 2017, respectively. Upon the expiry of these schemes, no further options would be granted under these schemes, but the options granted prior to such expiry continued to be valid and exercisable in accordance with provisions of the schemes. In respect of the Post-IPO Option Scheme III which continues to be in force, the Board may, at its discretion, grant options to any qualifying participants to subscribe for shares in the Company, subject to the terms and conditions stipulated therein. The exercise price must be in compliance with the requirement under the Rules Governing the Listing of Securities on the Stock Exchange. In addition, the option vesting period is determined by the Board provided that it is not later than the last day of a 10-year period. On 17 May 2017, a new share option scheme ("Post-IPO Option Scheme IV") had been approved by the shareholders of the Company. The maximum number of shares in respect of which options may be granted under the Post-IPO Option Scheme IV shall not exceed 379,099,339 shares, representing 4% of the issued shares of the Company as at the date of shareholders' approval of the Post-IPO Option Scheme IV (the “Scheme Mandate Limit"). Options lapsed in accordance with the terms of the Post-IPO Option Scheme IV shall not be counted for the purpose of calculating the 4% limit. The Company may refresh the Scheme Mandate Limit by an ordinary resolution of the shareholders passed in a general meeting, provided that the Scheme Mandate Limit so refreshed shall not exceed 4% of the issued shares as at the date the shareholders approve the refreshing of such Scheme Mandate Limit. Options previously granted under any existing schemes (including options outstanding, cancelled, or lapsed in accordance with the relevant scheme rules or exercised options) shall not be counted for the purpose of calculating the limit as refreshed. Options granted under the Post-IPO Option Scheme IV will expire no later than the last day of the 7-year period after the date of grant of options (subject to early termination as set out in the terms of the Post-IPO Option Scheme IV). Annual Report 2017 219 Notes to the Consolidated Financial Statements 516 217 23,693 665 665 Net gains from changes in fair value of available-for-sale financial assets 2,929 2.929 Transfer to profit or loss upon disposal of available-for-sale financial assets (1,176) Share of other comprehensive income of associates 863 Currency translation differences 4,127 Other fair value gains, net Balance at 31 December 2016 (1,176) 863 4,127 356 356 (6,430) 16,859 1,321 5,734 1,754 3,363 1,092 Annual Report 2017 Share- Available- For the year ended 31 December 2017 based Capital financial reserve assets RMB'Million RMB'Million in associates RMB'Million Investments translation differences statutory compensation reserve reserve Others Total RMB'Million RMB'Million RMB'Million RMB'Million RMB'Million (Note (a)) (Note (b)) (Note (c)) Balance at 1 January 2017 (6,430) 16,859 1,321 5,734 PRC 1,754 Currency Share- 1,785 1,785 9,477,083,480 17,324 (3,136) 14,188 Notes to the Consolidated Financial Statements For the year ended 31 December 2017 31 SHARE CAPITAL, SHARE PREMIUM AND SHARES HELD FOR SHARE AWARD SCHEMES (Cont'd) Note: (a) (b) (c) (d) As at 31 December 2017, the total number of issued ordinary shares of the Company included 70,675,181 shares (2016: 82,075,537 shares) held under the Share Award Schemes. During the year ended 31 December 2017, 4,102,812 Post-IPO options (2016: 8,718,788 Post-IPO options) with exercise prices ranging from HKD26.08 to HKD174.86 (2016: HKD18.06 to HKD148.90) were exercised. During the year ended 31 December 2017, the Share Scheme Trust withheld 9,303,028 ordinary shares (2016: 13,242,861 ordinary shares) of the Company for an amount of approximately HKD2,606 million (equivalent to approximately RMB2,232 million) (2016: HKD2,267 million (equivalent to approximately RMB1,936 million)), which had been deducted from the equity. During the year ended 31 December 2017, the Company allotted 17,870,595 ordinary shares (2016: 64,440,700 ordinary shares) to the Share Scheme Trust for the purpose of granting awarded shares to the participants under the Share Award Schemes. During the year ended 31 December 2017, the Share Scheme Trust transferred 38,573,979 ordinary shares of the Company (2016: 53,989,266 ordinary shares) to the share awardees upon vesting of the awarded shares (Note 33(b)). Annual Report 2017 215 216 Notes to the Consolidated Financial Statements For the year ended 31 December 2017 32 OTHER RESERVES Available- for-sale 3,363 1,092 23,693 244 244 (952) I (2,045) 50 6,378 519 519 706 90 16,854 (2,561) 907 (9,198) 706 (2,999) 31,152 2,228 (3,464) 2,273 4,170 1,798 35,158 32 OTHER RESERVES (Cont'd) Notes to the Consolidated Financial Statements 407 407 156 156 Value of employee services: - Employee share option schemes - Employee share award schemes Tax benefit from share-based payments of a subsidiary Acquisition of additional equity interests in non-wholly owned subsidiaries (Note (d)) (952) Transfer of equity interests of subsidiaries to non-controlling interests (2,045) Lapse of put option granted to non-controlling interests 50 Dilution of interests in subsidiaries (Note (e)) Withholding tax paid 6,378 Net gains from changes in fair value of available-for-sale financial assets 16,854 Transfer to profit or loss upon disposal of available-for-sale financial assets (2,561) Share of other comprehensive income of associates 907 Currency translation differences (9,198) Other fair value gains, net Balance at 31 December 2017 Tencent Holdings Limited Profit appropriations to PRC statutory reserves (3,150) - value of employee services income statement disposals of financial in business be remitted by Deemed for-sale available- earnings anticipated to acquired fair value of tax on the Changes in Withholding Deferred income tax liabilities on temporary differences arising from The movements of deferred income tax liabilities were as follows: 27 DEFERRED INCOME TAXES (Cont'd) For the year ended 31 December 2017 Notes to the Consolidated Financial Statements combinations subsidiaries Intangible assets RMB'Million assets Credited/(charged) to consolidated (21) (21) Business combinations (461) (425) (269) (3,391) (5,153) At 1 January 2017 RMB'Million RMB'Million Total Others investees RMB'Million RMB'Million (607) RMB'Million 221 Notes to the Consolidated Financial Statements For the year ended 31 December 2017 33 SHARE-BASED PAYMENTS (Cont'd) (a) Share option schemes (Cont'd) Other than the exercise price mentioned above, significant judgement on parameters, such as risk free rate, dividend yield and expected volatility, are required to be made by the directors in applying the Binomial Model, which are summarised as below. The directors of the Company have used the Binomial Model to determine the fair value of the options as at the respective grant dates, which is to be expensed over the relevant vesting period. The weighted average fair value of options granted during the year ended 31 December 2017 was HKD71.30 per share (equivalent to approximately RMB62.86 per share) (2016: HKD56.41 per share (equivalent to approximately RMB47.33 per share)). Weighted average share price at the grant date Annual Report 2017 Risk free rate (iii) Fair value of options The outstanding share options as of 31 December 2017 were divided into two to five tranches on an equal basis as at their grant dates. The first tranche can be exercised after a specified period ranging from one to five years from the grant date, and then the remaining tranches will become exercisable in each subsequent year. 64,666,108 67,166,108 2,500,000 2,500,000 HKD31.70 (Post-IPO Option Scheme III) grant of options 10 years commencing from the date of 31,247,436 89,565 HKD419.60 Dividend yield 33,747,436 Expected volatility (Note) Vested but not transferred as at the end of the year 2017 91,786,907 86,365,812 2016 2017 Number of awarded shares Tencent Holdings Limited Post-IPO Option Scheme IV) At end of the year Vested and transferred Lapsed Granted At beginning of the year 222 Movements in the number of awarded shares for the years ended 31 December 2017 and 2016 are as follows: The Company has adopted two share award schemes (the "Share Award Schemes") as of 31 December 2017, which are administered by an independent trustee appointed by the Group. The vesting period of the awarded shares is determined by the Board. (b) Share award schemes The expected volatility, measured as the standard deviation of expected share price returns, is determined based on the average daily trading price volatility of the shares of the Company. 35.00% 30.00% 0.32%-0.33% 0.26%-0.34% HKD160.04 0.69%-1.08% 1.39%-1.68% HKD236.88 2016 Note: 37,556,725 Notes to the Consolidated Financial Statements For the year ended 31 December 2017 26,242,111 (74,151) (74,151) (8,718,788) (2,500,000) HKD29.69 (6,218,788) HKD31.70 HKD42.72 11,843,070 30,697,305 HKD80.59 25,697,305 HKD31.70 5,000,000 HKD160.11 11,843,070 Granted Exercised Lapsed At 1 January 2016 14,402,006 At 31 December 2016 1,250,000 31 December 2017 Exercisable as at 9,155,860 67,166,108 HKD273.80 2,500,000 HKD179.90 55,510,248 HKD31.70 At 31 December 2017 (63,175) (223,766) HKD272.36 (160,591) HKD142.65 HKD118.70 13,152,006 HKD31.70 HKD120.95 31,247,436 HKD31.70 2,500,000 33,747,436 Exercisable as at 25,386,768 HKD112.30-HKD174.86 5,005,325 1,633,050 HKD26.08-HKD49.76 2016 31 December Number of share options 31 December 2017 Range of exercise price (Post-IPO Option Scheme II and 7 years commencing from the date of Expiry Date grant of options Details of the expiry dates, exercise prices and the respective numbers of share options which remained outstanding as at 31 December 2017 and 2016 are as follows: (ii) Outstanding share options (a) Share option schemes (Cont'd) 33 SHARE-BASED PAYMENTS (Cont'd) 19,071,975 Tencent Holdings Limited As a result of the options exercised during the year ended 31 December 2017, 4,102,812 ordinary shares (2016: 8,718,788 ordinary shares) were issued by the Company (Note 31). The weighted average price of the shares at the time these options were exercised was HKD286.46 per share (equivalent to approximately RMB248.41 per share) (2016: HKD173.65 per share (equivalent to approximately RMB148.82 per share)). During the year ended 31 December 2017, 5,250,000 options were granted to one director of the Company (2016: 3,750,000 options were granted to one director of the Company). 9,617,778 9,617,778 HKD86.69 31 December 2016 HKD225.44-HKD272.36 52,371,430 Annual Report 2017 (3,803,259) 9,947 139 96 RMB'Million RMB'Million 2016 2017 As at 31 December More than 5 years Between 1 and 2 years Between 2 and 5 years Within 1 year 5,376 The long-term bank borrowings were repayable as follows: (a) Note: 34 BORROWINGS (Cont'd) Notes to the Consolidated Financial Statements For the year ended 31 December 2017 69,827 97,790 12,278 15,696 Tencent Holdings Limited 224 30 The aggregate principal amounts of long-term USD bank borrowings, long-term RMB bank borrowings and long-term HKD bank borrowings were USD11,691 million (2016: USD8,316 million), RMB4,964 million (2016: Nil) and HKD1,000 million (2016: Nil), respectively. Applicable interest rates are at LIBOR/HIBOR plus 0.70% to 1.51% or a fixed interest rate of 1.875% for non-RMB bank borrowings and interest rates of 4.18% to 4.275% for RMB bank borrowings (31 December 2016: LIBOR plus 0.85% to 1.51% or a fixed interest rate of 1.875% for non-RMB bank borrowings) per annum. 66,201 48,947 5,946 36,204 29,363 3,743 2,666 32,461 26,697 Non-current portion of long-term USD notes payable Non-current portion of long-term HKD notes payable RMB'Million RMB'Million 2016 2017 As at 31 December Included in non-current liabilities: 35 NOTES PAYABLE For the year ended 31 December 2017 Notes to the Consolidated Financial Statements 225 Annual Report 2017 As at 31 December 2017, the carrying amounts of borrowings approximated their fair values. During the year ended 31 December 2017, the Group entered into certain interest rate swap contracts to hedge its exposure arising from its long-term bank borrowings carried at floating rates. The Group's outstanding interest rate swap contracts as at 31 December 2017 have been detailed in Note 26. The aggregate principal amounts of short-term USD bank borrowings and short-term HKD bank borrowings were USD200 million (2016: USD1,750 million) and HKD17, 133 million (2016: Nil), respectively. These short-term bank borrowings were carried at LIBOR/HIBOR plus 0.50% to 0.55% (2016: LIBOR plus 0.70% to 0.75%) per annum. (b) 57,688 82,190 3,226 unsecured (Note (a)) Current portion of long-term RMB bank borrowings, 139 66 The Group has to estimate the expected yearly percentage of grantees that will stay within the Group at the end of vesting periods of the options and awarded shares (the "Expected Retention Rate”) in order to determine the amount of share-based compensation expenses charged to the consolidated income statement. As at 31 December 2017, the Expected Retention Rate of the Group's wholly-owned subsidiaries was assessed to be 88%- 97% (2016: 88%-96%). (e) Expected retention rate of grantees 33 SHARE-BASED PAYMENTS (Cont'd) For the year ended 31 December 2017 Notes to the Consolidated Financial Statements 223 Lapsed Certain subsidiaries of the Group operate their own share-based compensation plans (share option and/or share award schemes). Their exercise prices of the share options, as well as the vesting periods of the share options and awarded shares are determined by the board of directors of these subsidiaries at their sole discretion. Similar to the share option/award schemes adopted by the Company, the share options or restricted shares of the subsidiaries granted are normally vested by several tranches. Participants of some subsidiaries have the right to request the Group to repurchase their vested equity interests of the respective subsidiaries ("Repurchase Transaction"). The Group has discretion to settle the Repurchase Transaction by using either equity instruments of the Company or by cash. For the Repurchase Transaction which the Group has settlement options, the directors of the Company are currently of the view that they would be settled by equity instruments of the Company. As a result, they are accounted for using the equity-settled share-based payment method. (d) Share options and share award schemes adopted by subsidiaries The related share-based compensation expenses incurred for the years ended 31 December 2017 and 2016 were insignificant to the Group. For aligning the interests of key employees with the Group, the Group established six employees' investment plans in the form of limited liability partnerships in 2011, 2014, 2015, 2016 and 2017 (the "EIS") respectively. According to the term of the EISS, the Board may, at its absolute discretion, invite any qualifying participants of the Group, excluding any director of the Company, to participate in the EISS by subscribing for the partnership interest at cash consideration. The participating employees are entitled to all the economic benefits generated by the EISS, if any, after a specified vesting period under the respective EISS, ranging from four to seven years. Wholly-owned subsidiaries of the Company acting as general partner of these EISS administer and in essence, control the EISS. These EISS are therefore consolidated by the Company as structured entities. (c) Employee investment schemes The outstanding awarded shares as of 31 December 2017 were divided into two to five tranches on an equal basis as at their grant dates. The first tranche can be exercised immediately or after a specified period ranging from four months to four years from the grant date, and the remaining tranches will become exercisable in each subsequent year. The weighted average fair value of awarded shares granted during the year ended 31 December 2017 was HKD274.02 per share (equivalent to approximately RMB238.37 per share) (2016: HKD165.25 per share (equivalent to approximately RMB141.89 per share)). The fair value of the awarded shares was calculated based on the market price of the Company's shares at the respective grant date. The expected dividends during the vesting period have been taken into account when assessing the fair value of these awarded shares. During the year ended 31 December 2017, 60,000 awarded shares were granted to four independent non- executive directors of the Company (2016: 61,474 awarded shares were granted to four independent non- executive directors of the Company). (b) Share award schemes (Cont'd) For the year ended 31 December 2017 Notes to the Consolidated Financial Statements 33 SHARE-BASED PAYMENTS (Cont'd) 277,291 159,893 86,365,812 63,636,254 (38,573,979) (53,989,266) 34 BORROWINGS (3,227,554) Included in non-current liabilities: As at 31 December unsecured (Note (a)) Current portion of long-term USD bank borrowings, 12,139 1,307 USD bank borrowings, unsecured (Note (b)) 14,293 HKD bank borrowings, unsecured (Note (b)) Included in current liabilities: 57,549 82,094 475 secured (Note (a)) Non-current portion of long-term RMB bank borrowings, 834 unsecured (Note (a)) Non-current portion of long-term HKD bank borrowings, 4,459 unsecured (Note (a)) Non-current portion of long-term RMB bank borrowings, 57,549 76,326 RMB'Million RMB'Million 2016 2017 Non-current portion of long-term USD bank borrowings, unsecured (Note (a)) (4,102,812) Average exercise price 9,219,035 20,873 Note: Others primary consist of deposits from third parties, reserve for platform services, sundry payables and other accruals. 228 Tencent Holdings Limited Notes to the Consolidated Financial Statements 40 CONSOLIDATED CASH FLOW STATEMENT (a) Reconciliation of net profit to cash inflow from operating activities: Profit for the year For the year ended 31 December 2017 2017 29,433 2016 RMB'Million 72,471 41,447 Adjustments for: Income tax expense 15,744 10,193 Gains on disposals and deemed disposals of investees and businesses (13,518) (6,966) Dividend income RMB'Million 5,147 7,085 Others (Note) 2017 2016 RMB'Million RMB'Million Staff costs and welfare accruals 13,451 8,965 Selling and marketing expense accruals 4,414 2,530 Purchase of land use rights and construction related costs 1,463 857 General and administrative expenses accruals 1,149 1,160 Purchase consideration payables for investee companies 1,045 394 Prepayments received from customers and others 416 1,417 Interests payable 410 403 (1,713) As at 31 December (563) 4,880 (2,930) Inventories (39) (38) Prepayments, deposits and other receivables (3,760) (4,108) Accounts payable 16,134 7,060 Other payables and accruals (6,400) 8,422 Other tax liabilities 189 49 Deferred revenue 9,117 8,428 Cash generated from operating activities 120,002 76,034 Annual Report 2017 229 2,506 Accounts receivable Changes in working capital: (212) 3,716 18,731 9,025 Share of (profit)/loss of associates and joint ventures 24 60 (3,940) (2,619) 6,137 4,313 (821) 2,522 Impairment provision for available-for-sale financial assets, investments in associates, joint ventures and redeemable instruments of associates 2,555 4,443 Fair value gains on other financial assets (4,298) (658) Impairment of intangible assets 239 366 Exchange gains (152) Depreciation of property, plant and equipment and investment properties Amortisation of intangible assets and land use right Net losses on disposals of intangible assets, property, plant and equipment and construction in progress Interest income 27,413 50,085 2,363 Notes to the Consolidated Financial Statements 3,919 3,466 833 4,752 3,466 34,115 39,670 The aggregate principal amounts of USD notes payable and HKD notes payable were USD4,700 million (2016: USD5,200 million) and HKD4,200 million (2016: HKD4,200 million), respectively. The interest rate range of the notes payable is from 2.30% to 4.70% (2016: 2.00% to 4.70%) per annum. The notes payable were repayable as follows: Within 1 year For the year ended 31 December 2017 Between 1 and 2 years More than 5 years 226 Tencent Holdings Limited As at 31 December 2017 2016 RMB'Million RMB'Million 4,752 3,466 13,044 Between 2 and 5 years 33 SHARE-BASED PAYMENTS (Cont'd) (a) Share option schemes (Cont'd) 220 HKD273.79 33,747,436 2,500,000 HKD31.70 HKD120.95 31,247,436 HKD225.44 28,526,215 HKD49.05 (4,102,812) Exercised At 1 January 2017 Granted options options No. of No. of Average exercise price options No. of Average exercise price options No. of Current portion of long-term USD notes payable Current portion of long-term HKD notes payable Total Post-IPO Option Scheme IV Post-IPO Option Scheme III Post-IPO Option Scheme II Movements in the number of share options outstanding and their related weighted average exercise prices are as follows: Movements in share options (i) 5,043 9,833 24,281 6,486 37 DEFERRED REVENUE Deferred revenue mainly represents service fees prepaid by customers for certain VAS in the form of pre-paid tokens or cards, virtual items and subscriptions, for which the related services had not been rendered as at 31 December 2017. It also includes customer loyalty incentives offered by the Group to its customers which were valued at their respective fair values at the inception date. As at 31 December 2017, deferred revenue also included fair value of internet traffic and other support to be offered to JD.com and other investee companies in the future periods measured at their respective inception dates, as mentioned in Note 20. Annual Report 2017 227 Notes to the Consolidated Financial Statements For the year ended 31 December 2017 38 ACCOUNTS PAYABLE Accounts payable and their ageing analysis, based on recognition date, are as follows: 0-30 days 31 - 60 days 61-90 days Over 90 days 39 OTHER PAYABLES AND ACCRUALS As at 31 December 2017 2016 RMB'Million RMB'Million 38,420 20,815 3,030 2,740 2,050 1,495 6,585 4,935 37,745,250 3,862 751 6,880 34,115 39,670 Notes to the Consolidated Financial Statements For the year ended 31 December 2017 35 NOTES PAYABLE (Cont'd) All of these notes payable issued by the Group were unsecured. In May 2017, the notes payable with an aggregate principal amount of USD500 million issued in April 2014 reached their maturity and were repaid in full by the Group. As at 31 December 2017, the fair value of the notes payable amounted to RMB34,691 million (2016: RMB40,379 million). The respective fair values are assessed based on the active market price of these notes on the reporting date or by making reference to similar instruments traded in the observable market. 36 LONG-TERM PAYABLES As at 31 December 2017 2016 RMB'Million RMB'Million Payables relating to licensed online contents and running royalty fee for online games Purchase consideration payables for business combinations 2,597 3,859 289 Present value of liabilities in relation to the put options granted to non-controlling shareholders of a subsidiary 225 203 Others 873 Included in current liabilities: Equity-settled share-based compensation expenses RMB'Million At 31 December 2017 8,371 (531) At 1 January 2016 472 (448) Profit for the year 7,258 Dividends paid relating to 2015 (3,699) Currency translation differences 574 At 31 December 2016 4,031 126 Annual Report 2017 235 Notes to the Consolidated Financial Statements For the year ended 31 December 2017 45 SUBSIDIARIES AND CONTROLLED STRUCTURED ENTITIES The following is a list of principal subsidiaries of the Company as at 31 December 2017: Place of establishment Name and nature of legal entity Particulars of issued/paid-in capital Proportion of equity interest held by the Group (%) Principal activities and place of operation Tencent Computer Established in the PRC, (657) RMB65,000,000 Currency translation differences Dividends paid relating to 2016 Other payables and accruals 333 363 Notes payable 4,752 3,466 14,493 11,294 Total liabilities 45,924 49,423 Total equity and liabilities 71,998 67,768 Tencent Holdings Limited Notes to the Consolidated Financial Statements For the year ended 31 December 2017 44 FINANCIAL POSITION AND RESERVE MOVEMENT OF THE COMPANY (Cont'd) (b) Reserve movement of the Company Retained earnings Other reserves Later than five years RMB'Million At 1 January 2017 4,031 126 Profit for the year 9,392 (5,052) 7,465 limited liability company Provision of value-added services and Internet advertisement services in the PRC RMB10,290,000 limited liability company 100% (Note (a)) Provision of value-added services in the PRC Beijing BIZCOM Technology Company Limited Established in the PRC, RMB216,500,000 limited liability company 100% (Note (a)) Provision of value-added services in the PRC Beijing Starsinhand Technology Company Limited Established in the PRC, RMB10,000,000 limited liability company 100% (Note (a)) Provision of value-added services in the PRC Tencent Cyber (Shenzhen) Company Limited Established in the PRC, USD30,000,000 100% Development of softwares in the PRC wholly foreign owned enterprise 236 Tencent Holdings Limited Notes to the Consolidated Financial Statements For the year ended 31 December 2017 45 SUBSIDIARIES AND CONTROLLED STRUCTURED ENTITIES (Cont'd) Particulars of Name Established in the PRC, 100% (Note (a)) Nanjing Wang Dian Technology Company Limited Development and sale of softwares and Tencent Technology Established in the PRC, USD2,000,000 100% Development of softwares and provision of wholly foreign owned enterprise information technology services in the PRC Shenzhen Shiji Kaixuan Technology Company Limited Established in the PRC, RMB11,000,000 limited liability company 100% (Note (a)) Provision of Internet advertisement services in the PRC Tencent Cyber (Tianjin) Company Limited Tencent Asset Management Limited Established in the PRC, wholly foreign owned enterprise USD90,000,000 100% Development of softwares and provision of information technology services in the PRC Established in BVI, limited liability company USD100 100% Asset management in Hong Kong Tencent Technology (Beijing) Company Limited Established in the PRC, wholly foreign owned enterprise USD1,000,000 100% provision of information technology services in the PRC Place of establishment and nature of legal entity 9,408 Current liabilities 5,000 The net proceeds from the issue of these four tranches of senior notes amounted to approximately USD4.981 billion after deduction of underwriting fees, discounts and commissions but not other expenses payable in connection with the issuance. All of the Notes are listed on the Stock Exchange. (b) Investments in Wanda Commercial In January 2018, the Group entered into a strategy investment agreement with Dalian Wanda Commercial Properties Co., Ltd. ("Wanda Commercial"), a commercial property company located in the PRC, to commit to acquire its approximately 4.12% equity interest at a consideration of approximately RMB10 billion. 232 Tencent Holdings Limited Notes to the Consolidated Financial Statements For the year ended 31 December 2017 44 FINANCIAL POSITION AND RESERVE MOVEMENT OF THE COMPANY (a) Financial position of the Company ASSETS Non-current assets Intangible assets Investments in subsidiaries Investments in associates Prepayments, deposits and other receivables Contribution to Share Scheme Trust As at 31 December 2017 2016 RMB'Million RMB'Million 41 42 55,253 54,097 1,346 464 43 2038 67 3.925% 3.595% 2,237 1,540 18,702 9,025 Annual Report 2017 231 Notes to the Consolidated Financial Statements For the year ended 31 December 2017 42 RELATED PARTIES TRANSACTIONS Except as disclosed in Note 13(a) (Senior management's emoluments), Note 13(b) (Five highest paid individuals), Note 14 (Benefits and interests of directors), Note 20 (Transactions with associates), Note 25 (Loans to investees and investees' shareholders) and Note 33 (Share-based payments) to the consolidated financial statements, the Group had no other material transactions with related parties during the years ended 31 December 2017 and 2016, and no other material balances with related parties as at 31 December 2017 and 2016. 43 SUBSEQUENT EVENTS (a) Completion of USD5 billion Issue of Notes under the Programme On 19 January 2018, the Company issued four tranches of senior notes under the Global Medium Term Note Programme (the "Programme”) with an aggregate principal amount of USD5 billion set out below. 2023 Notes 2023 Floating Rate Notes 2028 Notes 2038 Notes Amount (USD'Million) Interest Rate (per annum) Due 1,000 2.985% 2023 500 3-month USD 2023 LIBOR +0.605% 2,500 1,000 2028 Amounts due to subsidiaries 55,337 Current assets (3,136) (531) 126 8,371 4,031 26,074 18,345 Annual Report 2017 233 Notes to the Consolidated Financial Statements For the year ended 31 December 2017 44 FINANCIAL POSITION AND RESERVE MOVEMENT OF THE COMPANY (Cont'd) (a) Financial position of the Company (Cont'd) 234 LIABILITIES As at 31 December 2017 RMB'Million 2016 RMB'Million Non-current liabilities Notes payable 29,363 36,204 Other financial liabilities 2,068 1,925 31,431 38,129 (3,970) 56,016 17,324 Total equity Amounts due from subsidiaries 8,725 10,108 10,376 Later than one year and not later than five years 3,404 6,089 Not later than one year RMB'Million RMB'Million 2016 Prepayments, deposits and other receivables 17 15 Cash and cash equivalents 7,919 1,629 16,661 11,752 Total assets 71,998 67,768 EQUITY Equity attributable to equity holders of the Company Share capital Share premium Shares held for share award schemes Other reserves (b) Retained earnings (b) 22,204 issued/paid-in 4,081 capital 105,697 Net cash as at 31 December 2017 (47) 4,920 (4,967) 488 (488) Other non-cash movements 4,084 1,921 231 3,731 768 (16) (2,551) Exchange impacts Notes to the Consolidated Financial Statements For the year ended 31 December 2017 40 CONSOLIDATED CASH FLOW STATEMENT (Cont'd) (b) Major non-cash transactions Other than the transaction with non-controlling interests described in Note 32(d) and (e), there were no material non-cash transactions during the year ended 31 December 2017. (c) Net cash reconciliation This section sets out an analysis of net cash and the movements in net cash for each of the years presented. Net cash 230 As at 31 December 2017 2016 RMB'Million 42,540 RMB'Million (15,696) (29,363) 2016 2017 As at 31 December Contracted: The future aggregate minimum lease payments under non-cancellable operating leases in respect of buildings are as follows: (b) Operating lease commitments 4,821 3,453 2,866 3,027 Capital investment in investees 44 153 Purchase of other property, plant and equipment 1,911 273 Construction/Purchase of buildings and purchase of land use rights Contracted: RMB'Million RMB'Million 2016 2017 As at 31 December Capital commitments as at 31 December 2017 and 2016 are analysed as follows: (a) Capital commitments 41 COMMITMENTS Notes to the Consolidated Financial Statements For the year ended 31 December 2017 Tencent Holdings Limited 16,332 (4,752) RMB'Million Cash and cash equivalents Borrowings - repayable within one year Borrowings Borrowings cash equivalents deposits and others Proportion of equity interest held RMB'Million RMB'Million due within 1 year RMB'Million due after 1 year RMB'Million Notes payable due within 1 year Notes RMB'Million payable due after 1 year RMB'Million Total RMB'Million Net cash as at 31 December 2016 71,902 Cash flows 36,346 55,735 (13,179) (12,278) (3,698) (57,549) (3,466) (36,204) 18,140 (28,764) 3,450 (5,845) Term Term deposits and others Cash and 16,332 Borrowings repayable after one year 105,697 71,902 42,540 55,735 (15,696) (12,278) (82,094) (57,549) Notes payable - repayable within one year Notes payable - repayable after one year Net cash (4,752) (3,466) (29,363) (36,204) 16,332 18,140 Cash and cash equivalents, term deposits and others 148,237 127,637 Gross debt-fixed interest rates (39,257) (40,364) Gross debt-floating interest rates (92,648) (69,133) Net cash 18,140 RMB'Million (82,094) 217 100% Company Limited limited liability company Design and production of advertisement in the PRC Riot Games, Inc. Established in the United States, limited liability company USD1,306 100% Development and operation of online games in the United States China Literature Established in the Cayman Islands, limited liability company USD906,417 54.74%* Provision of online literature services in the PRC Tencent Music Entertainment Group Established in the Cayman Islands, limited liability company USD246,558 53.76%* Provision of online music entertainment services in the PRC on an outstanding basis Annual Report 2017 237 Notes to the Consolidated Financial Statements For the year ended 31 December 2017 45 SUBSIDIARIES AND CONTROLLED STRUCTURED ENTITIES (Cont'd) Note: (a) RMB5,000,000 Established in the PRC, Not later than one year Investment holding and provision of online advertisement services in Hong Kong Tencent Technology (Shanghai) Company Limited Established in the PRC, USD5,000,000 100% wholly foreign owned enterprise by the Group (%) Principal activities and place of operation Development of softwares and provision of information technology services in the PRC Tencent Technology (Chengdu) Company Limited Established in the PRC, wholly foreign owned enterprise USD170,000,000 100% Development of softwares and provision of information technology services in the PRC Tencent Technology (Wuhan) Company Limited (b) Established in the PRC, wholly foreign owned enterprise 100% Development of softwares and provision of information technology services in the PRC Tencent Cloud Computing (Beijing) Company Limited Morespark Limited Established in the PRC, RMB120,000,000 limited liability company 100% (Note (a)) Provision of information system integration services in the PRC Established in Hong Kong, HKD1,000 100% limited liability company USD30,000,000 (c) Beijing Tencent Culture Media As described in Note 1, the Company does not have legal ownership in equity of these structured entities or their subsidiaries. Nevertheless, under certain contractual agreements entered into with the registered owners of these structured entities, the Company and its other legally owned subsidiaries control these companies by way of controlling the voting rights, governing their financial and operating policies, appointing or removing the majority of the members of their controlling authorities, and casting the majority of votes at meetings of such authorities. In addition, such contractual agreements also transfer the risks and rewards of these companies to the Company and/or its other legally owned subsidiaries. As a result, they are presented as controlled structured entities of the Company. the share award scheme adopted by the Company on Adoption Date II, as amended the annual general meeting of the Company to be held on 16 May 2018 or any adjournment thereof Product/Service provided to business customers the bank account opened in the name of the Company to be operated solely for the purposes of operating the 2007 Share Award Scheme and the funds thereof to be held on trust by the Company for the Selected Participants the bank account opened in the name of the trust pursuant to Trust Deed II, managed by the Trustee, and operated solely for the purposes of operating the 2013 Share Award Scheme, which is held on trust for the benefit of Selected Participants and can be funded by the Company or any of its subsidiaries 13 December 2007, being the date on which the Company adopted the 2007 Share Award Scheme 13 November 2013, being the date on which the Company adopted the 2013 Share Award Scheme artificial intelligence average revenue per user the amended and restated articles of association of the Company adopted by special resolution passed on 14 May 2014 the audit committee of the Company the share(s) of the Company awarded under the Share Award Schemes Annual Report 2017 239 2017 As at 31 December Contracted: The future aggregate minimum payments under non-cancellable bandwidth and server custody leases, online game and online content licensing agreements are as follows: (c) Other commitments (d) 302 Later than one year and not later than five years 502 632 Later than five years 969 1,156 1,688 2,090 the share award scheme adopted by the Company on Adoption Date I, as amended Definition PricewaterhouseCoopers, the auditor of the Company 238 Share Scheme Trust Structured entity "Awarded Share(s)" As mentioned in Note (a) above and Note 33(c), the Company has consolidated the operating entities within the Group without any legal interests and the EISS out of which wholly-owned subsidiaries of the Company act as general partner. In addition, due to the implementation of the share award schemes of the Group mentioned in Note 33(b), the Company has also set up a structured entity ("Share Scheme Trust”), and its particulars are as follows: Consolidation of structured entities (e) As at 31 December 2017, cash and cash equivalents, term deposits and restricted cash of the Group, amounting to RMB98,144 million were held in Mainland China and they are subject to local exchange control and other financial and treasury regulations. The local exchange control, and other financial and treasury regulations provide for restrictions, on payment of dividends, share repurchase and offshore investments, other than through normal activities. All subsidiaries' undertakings are included in the consolidation. The proportion of the voting rights in the subsidiary's undertakings held directly by the parent company do not differ from its proportion of ordinary shares held. The parent company further does not have any shareholdings in the preference shares of subsidiary's undertakings included in the Group. Significant restrictions The directors of the Company considered that the non-wholly owned subsidiaries with non-controlling interests are not significant to the Group, therefore, no summarised financial information of these non-wholly owned subsidiaries is presented separately. As the Company has the power to govern the financial and operating policies of the Share Scheme Trust and can derive benefits from the contributions of the eligible persons who are awarded with the shares by the schemes, the directors of the Company consider that it is appropriate to consolidate the Share Scheme Trust. During the year ended 31 December 2017, the Company contributed approximately RMB2,232 million (2016: RMB1,936 million) to the Share Scheme Trust for financing its acquisition of the Company's shares. Tencent Holdings Limited Definition Principal activities In this annual report, unless the context otherwise requires, the following expressions shall have the following meanings: "2007 Share Award Scheme" "Auditor" "Audit Committee" "Articles of Association" "ARPU" "AI" "Adoption Date II” "Adoption Date I" "Account II" "Account |" "2B" "2018 AGM" "2013 Share Award Scheme" Term Administering and holding the Company's shares acquired for share award schemes which are set up for the benefits of eligible persons of the Schemes the environmental, social and governance reporting guide as set out in Appendix 27 to the Listing Rules 240 Tencent Holdings Limited "LOL" earnings before interest, tax, depreciation and amortisation Definition Dungeon and Fighter any person(s) eligible to participate in the respective Share Award Schemes earnings per share Term "IC" "Grant Date" daily active user accounts "Listing Rules" "Korea' "IPO" "IP" "Investment Committee" "IM" "GAAP" "IFRS" "IA" “Hong Kong” "Hok" "HKD" "Hainan Network" "Guangzhou Tencent Technology" "Group" "IAS" Tencent Cyber (Tianjin) Company Limited "Company Website' cost per click "CRM" "CPC" "COSO Framework" "Corporate Governance Committee" "Company" "CIT" "Chongqing Tencent Information" "Cyber Tianjin" "China Literature" "CFM" "Board" "Beijing Starsinhand" "Beijing BIZCOM" Term Definition "M&A" "CG Code" customer relationship management "DAU" "EBITDA" the Internal Control Integrated Framework issued by the Committee of Sponsoring Organisations the corporate governance committee of the Company the website of the Company at www.tencent.com Tencent Holdings Limited, a limited liability company organised and existing under the laws of the Cayman Islands and the shares of which are listed on the Stock Exchange corporate income tax Chongqing Tencent Information Technology Company Limited China Literature Limited, a company incorporated in the Cayman Islands with limited liability and the shares of which are listed on the Stock Exchange "DnF" the corporate governance code as set out in Appendix 14 to the Listing Rules the board of directors of the Company Beijing Starsinhand Technology Company Limited Beijing BIZCOM Technology Company Limited Definition "ESG Reporting Guide" "EPS" "Eligible Person(s)" Cross Fire Mobile "MAU" Sogou Inc., a company incorporated in the Cayman Islands and listed on the New York Stock Exchange Generally Accepted Accounting Principles Annual Report 2017 243 Definition Term "Tencent Charity Funds" "Tencent Chengdu" Tencent Technology (Beijing) Company Limited "Tencent Computer" "Tencent Shanghai" "Tencent Technology" "Tencent Wuhan" "Trust Deed II" "Trustee❞ "United States" "Tencent Music" the co-operation committee established under the TCS CFC the co-operation framework contract dated 28 February 2004 entered into between Tencent Technology and Tencent Computer The Stock Exchange of Hong Kong Limited "TCS Co-operation Committee" "Tencent Beijing" Definition role playing game Sea Limited, a company headquartered in Singapore and listed on the New York Stock Exchange any Eligible Person(s) selected by the Board to participate in the Share Award Schemes the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong) as amended, supplemented or otherwise modified from time to time Shanghai Tencent Information Technology Company Limited the 2007 Share Award Scheme and the 2013 Share Award Scheme with effect from 15 May 2014, each existing issued and unissued share of HKD0.0001 each in the share capital of the Company was subdivided into five subdivided shares of HKD0.00002 each, after passing of an ordinary resolution at the annual general meeting of the Company held on 14 May 2014 and granting by the Stock Exchange of the listing of, and permission to deal in, the subdivided shares Shenzhen Tencent Information Technology Company Limited Shenzhen Shiji Kaixuan Technology Company Limited the Republic of Singapore the co-operation framework contract dated 28 February 2004 entered into between Cyber Tianjin and Shiji Kaixuan the co-operation committee established under the SKT CFC "USD" "TCS CFC" "VAS" "Wang Dian" 244 Tencent Holdings Limited Tencent 腾讯 Website: www.tencent.com Tencent Group Head Office Tencent Building, Kejizhongyi Avenue, Hi-tech Park Nanshan District, Shenzhen, the PRC ZhongAn Online P & C Insurance Co., Ltd., a joint stock limited company incorporated in the PRC with limited liability whose H shares are listed on the Stock Exchange Zipcode : 518057 Facsimile 86-755-86013399 Tencent Holdings Limited Hong Kong Office 29/F., Three Pacific Place No.1 Queen's Road East Wanchai, Hong Kong Telephone: 852-21795122 Facsimile: 852-25201148 Telephone: 86-755-86013388 Tencent Technology, Cyber Tianjin, Tencent Beijing, Shenzhen Tencent Information, Tencent Chengdu, Chongqing Tencent Information, Shanghai Tencent Information, Tencent Shanghai, Tencent Wuhan, Hainan Network and Guangzhou Tencent Technology Nanjing Wang Dian Technology Company Limited Yixin Group Limited, a company incorporated in the Cayman Islands with limited liability, the shares of which are listed on the Stock Exchange "WFOES" "ZhongAn Insurance" Definition charity funds established by the Group Tencent Technology (Chengdu) Company Limited Shenzhen Tencent Computer Systems Company Limited Tencent Music Entertainment Group, a limited liability company incorporated under the laws of the Cayman Islands Tencent Technology (Shanghai) Company Limited Tencent Technology (Shenzhen) Company Limited Tencent Technology (Wuhan) Company Limited a trust deed entered into between the Company and the Trustee (as restated, supplemented and amended from time to time) in respect of the appointment of the Trustee for the administration of the 2013 Share Award Scheme an independent trustee appointed by the Company for managing the Share Award Schemes the United States of America the lawful currency of the United States value-added services "Yixin" Definition "Stock Exchange" "SKT CFC" monthly active user accounts Annual Report 2017 241 Definition Term "MOBA" mergers and acquisitions "Model Code" "Netmarble" "Nomination Committee" "PC" "PCU" "Post-IPO Option Scheme I" "Post-IPO Option Scheme II" "Post-IPO Option Scheme III" "Post-IPO Option Scheme IV" "PRC" or "China" "NASDAQ" League of Legends the Rules Governing the Listing of Securities on the Stock Exchange the Republic of Korea in relation to any Awarded Share, the date on which the Awarded Share is, was or is to be granted the Company and its subsidiaries Guangzhou Tencent Technology Company Limited Hainan Tencent Network Information Technology Company Limited the lawful currency of Hong Kong Honour of Kings the Hong Kong Special Administrative Region, the PRC internal audit department of the Company International Accounting Standards internal control department of the Company International Financial Reporting Standards Instant messaging the investment committee of the Company intellectual property initial public offering "Pre-IPO Option Scheme" "SKT Co-operation Committee” “Sogou” "PUBG" "Reference Date" 242 Tencent Holdings Limited Definition Term "RPG" "Sea" return on investment "Selected Participant(s)" "Shanghai Tencent Information" "Share Award Schemes" "Share Subdivision" "Shenzhen Tencent Information" "Shiji Kaixuan" "Singapore" "SFO" the lawful currency of the PRC the remuneration committee of the Company in respect to a Selected Participant, the date of final approval by the Board of the total number of shares of the Company to be awarded to the relevant Selected Participant on a single occasion pursuant to the 2007 Share Award Scheme "Remuneration Committee" "RMB" "ROI" Definition MIH TC Holdings Limited Multiplayer Online Battle Arena the Model Code for Securities Transactions by Directors of Listed Issuers set out in Appendix 10 to the Listing Rules NASDAQ Global Select Market Netmarble Games Corporation, a company incorporated under the laws of Korea and the shares of which are listed on the Korea Exchange the nomination committee of the Company personal computer peak concurrent user accounts the Post-IPO Share Option Scheme adopted by the Company on 24 March 2004 the Post-IPO Share Option Scheme adopted by the Company on 16 May 2007 the Post-IPO Share Option Scheme adopted by the Company on 13 May 2009 the Post-IPO Share Option Scheme adopted by the Company on 17 May 2017 the People's Republic of China the Pre-IPO Share Option Scheme adopted by the Company on 27 July 2001 PlayerUnknown's Battlegrounds research and development "R&D" "MIH TC" Revenues from our online advertising business increased by 12% to RMB12,361 million for the fourth quarter of 2017. Media advertising revenues were RMB4,121 million, broadly stable compared to last quarter. Social and others advertising revenues grew by 19% to RMB8,240 million, mainly driven by higher advertising revenues derived from Weixin and from our advertising network, in turn benefiting from the positive seasonality of eCommerce promotional activities in the fourth quarter. 4 FOURTH QUARTER OF 2017 COMPARED TO THIRD QUARTER OF 2017 Share-based (gains)/losses Adjustments Net Unaudited three months ended 31 December 2016 Management Discussion and Analysis 25 Annual Report 2017 26% 33% 1.790 1.812 28% Net margin 35% from investee Operating margin - diluted 1.912 - basic EPS (RMB per share) 17,070 356 367 (3,475) 1,816 18,006 Profit attributable to equity holders 17,174 356 395 1.888 (3,475) Amortisation of As reported 810 493 (1,440) 1,940 10,529 Profit attributable to equity holders 12,432 828 541 14,946 602 162 ༄€ (1,440) Impairment 1,980 Profit for the period (1,502) 1,754 13,930 Operating profit (RMB in millions, unless specified) (d) (c) (b) (a) Non-GAAP provision companies intangible assets compensation 10,523 1,851 18,047 Profit for the period 17,454 320 Management Discussion and Analysis 31 December 30 September 2017 2017 (RMB in millions) 105,697 87,343 42,540 63,454 148,237 150,797 EPS (RMB per share) (97,790) (34,115) (34,645) 16,332 18,862 As at 31 December 2017, the Group had net cash of RMB16,332 million. The sequential decline primarily reflected payments for M&A initiatives, partly offset by free cash flow generation. Fair value of our stakes in listed investee companies (including both associates and available-for-sale financial assets, but excluding our stakes in subsidiaries such as China Literature) totalled RMB210.8 billion as at 31 December 2017, compared to RMB171.1 billion as at 30 September 2017. As at 31 December 2017, RMB45,530 million of our financial resources (cash and cash equivalents, as well as term deposits and others, such as treasury investments with high liquidity) were denominated in non-RMB currencies. For the fourth quarter of 2017, the Group had free cash flow of RMB24,170 million. This was a result of net cash flow generated from operating activities of RMB28,594 million, offset by payments for capital expenditure of RMB4,424 million. 28 Tencent Holdings Limited Directors' Report The directors have pleasure in presenting their report together with the audited financial statements for the year ended 31 December 2017. PRINCIPAL ACTIVITIES The principal activity of the Company is investment holding. The activities of the principal subsidiaries are set out in Note 45 to the consolidated financial statements. The analysis of the Group's revenues and contribution to results by business segments and the Group's revenues by geographical area of operations are set out in Note 5 to the consolidated financial statements. (97,290) - basic 2.206 - diluted 21,614 295 110 (3,169) 1,632 22,746 Operating profit (d) Non-GAAP provision Impairment Amortisation of (RMB in millions, unless specified) companies intangible assets (b) (a) As reported compensation 2.177 Operating margin 39% Net margin 33% Unaudited three months ended 30 September 2017 12,332 1.852 33% 28% Adjustments Net (gains)/losses Share-based from investee 1.827 EPS (RMB per share) - basic 1.121 (7,770) 5,123 41,095 Profit attributable to equity holders 45,991 5,452 1,651 (7,786) 5,227 41,447 Profit for the year 58,154 4,809 397 1,547 (7,624) 56,117 Operating profit (RMB in millions, unless specified) (d) (c) (b) (a) Non-GAAP provision companies intangible assets compensation As reported Impairment Amortisation of 4,455 5,425 45,420 EPS (RMB per share) Notes payable Borrowings Term deposits and others Cash and cash equivalents Our net cash positions as at 31 December 2017 and 30 September 2017 are as follows: LIQUIDITY AND FINANCIAL RESOURCES Management Discussion and Analysis 27 27 Annual Report 2017 Impairment provision for associates, available-for-sale financial assets, and intangible assets arising from acquisitions (d) (c) Amortisation of intangible assets resulting from acquisitions, net of related deferred tax Including net (gains)/losses on deemed disposals, disposals of investee companies and businesses, and fair value changes arising from investments Including put options granted to employees of investee companies on their shares and shares to be issued under investee companies' share-based incentive plans which can be acquired by the Group, and other incentives (b) (a) - basic - diluted Operating margin Net margin 4.383 4.329 from investee 37% 4.844 4.784 38% Unaudited 30% Note: 27% RESULTS AND APPROPRIATIONS Share-based Adjustments Net 6,253 90,302 Operating profit (RMB in millions, unless specified) (d) (c) (b) (a) Non-GAAP provision companies intangible assets compensation As reported Impairment (17,816) Amortisation of Share-based (gains)/losses Adjustments Net Year ended 31 December 2017 28% 34% 1.298 1.313 24% Net margin 32% Operating margin 1.108 - diluted from investee 490 2,794 82,023 Year ended 31 December 2016 Management Discussion and Analysis Tencent Holdings Limited 26 28% 34% 6.830 6.920 30% Net margin 38% Operating margin 7.499 - diluted 7.598 - basic EPS (RMB per share) Profit for the year 72,471 7,080 (18,112) 1,841 3,124 (gains)/losses 66,404 71,510 6,875 (18,051) 1,706 3,086 65,126 Profit attributable to equity holders The results of the Group for the year are set out in the consolidated statement of comprehensive income on page 122 of this annual report. The directors have recommended the payment of a final dividend of HKD0.88 per share for the year ended 31 December 2017. The dividend is expected to be payable on 1 June 2018 to the shareholders whose names appear on the register of members of the Company on 24 May 2018. The total dividend for the year under review is HKD0.88 per share. RESERVES 23,278 EBITDA (a) (RMB in millions, unless specified) 2016 2017 2016 2017 2017 31 December Year ended 31 December 30 September 31 December Three months ended Unaudited Management Discussion and Analysis OTHER FINANCIAL INFORMATION Tencent Holdings Limited 22 22 Profit attributable to equity holders of the Company. Profit attributable to equity holders of the Company increased by 16% to RMB20,797 million for the fourth quarter of 2017 on a quarter-on-quarter basis. Non-GAAP profit attributable to equity holders of the Company increased by 2% to RMB17,454 million. Income tax expense. Income tax expense decreased by 37% to RMB3, 123 million for the fourth quarter of 2017 on a quarter- on-quarter basis. The decrease primarily reflected a reversal of income tax expense for our certain subsidiaries in China which were qualified in the fourth quarter of 2017 to enjoy a lower CIT rate. Share of (loss)/profit of associates and joint ventures. We recorded share of losses of associates and joint ventures of RMB120 million for the fourth quarter of 2017, compared to share of profit of RMB818 million for the third quarter of 2017. The change mainly reflected the absence of one-off gains which certain investee companies booked in the third quarter of 2017. General and administrative expenses. General and administrative expenses decreased by 3% to RMB8,811 million for the fourth quarter of 2017 on a quarter-on-quarter basis, primarily reflecting the true-up of our bonus forecast at year end. Selling and marketing expenses. Selling and marketing expenses increased by 25% to RMB6,022 million for the fourth quarter of 2017 on a quarter-on-quarter basis. The increase was mainly driven by higher marketing spending on products and platforms such as payment related services and online media, as well as seasonal marketing and promotion activities for our online games. Cost of revenues for our other businesses increased by 13% to RMB10,870 million for the fourth quarter of 2017. The growth was mainly due to the increased scale of our payment related and cloud services. Cost of revenues for our online advertising business increased by 10% to RMB7,759 million for the fourth quarter of 2017. The increase was mainly driven by greater traffic acquisition costs due to the rapid growth of our advertising network business. Management Discussion and Analysis 21 Annual Report 2017 Since the first quarter of 2017, we have reclassified online advertising revenues. Without the reclassification, performance-based advertising revenues increased by 17% to RMB8,204 million and brand display advertising revenues increased by 3% to RMB4,157 million for the fourth quarter of 2017 on a quarter-on-quarter basis. 24,024 16,775 89,724 62,550 12,100 Net cash 2,839 3,492 4,975 Capital expenditures (d) 18,140 16,332 18,140 18,862 16,332 Net cash (c) 2,167 3,060 4 611 839 Interest expense 44% 40% 42% 39% 38% Adjusted EBITDA margin (b) 66,863 95,861 18,495 25,632 25,127 Adjusted EBITDA (a) 794 Note: Cost of revenues for our VAS business decreased by 4% to RMB16,268 million for the fourth quarter of 2017. The decrease mainly reflected lower content and channel costs, reflecting the timing of new content for our subscription video streaming services and fluctuation in licensed game revenues. Revenues from our other businesses increased by 17% to RMB14,084 million for the fourth quarter of 2017, primarily due to our payment related and cloud services. 25,724 Operating profit (9,058) (8,811) General and administrative expenses (4,812) (6,022) Selling and marketing expenses 3,918 7,906 Other gains, net 1,017 1,156 31,681 31,495 (33,529) (34,897) 65,210 66,392 Interest income Gross profit Cost of revenues Revenues (RMB in millions) 2017 2017 31 December 30 September Unaudited Three months ended The following table sets forth the comparative figures for the fourth quarter of 2017 and the third quarter of 2017: 22,746 Finance costs, net (859) (524) Revenues from our VAS business decreased by 5% to RMB39,947 million for the fourth quarter of 2017. Online games revenues decreased by 9% to RMB24,367 million. The decrease mainly reflected a high base for PC games driven by item-sales promotion activities in the third quarter of 2017, decreased revenues from RPG and shooter genre smart phone games, as well as the timing of new RPG smart phone game releases and of new content for certain other smart phone games. Social networks revenues increased by 2% to RMB15,580 million. The increase was primarily driven by revenue growth from our digital content services such as subscription video streaming and live broadcast, partially offset by reduced in-game virtual item sales. Revenues. Revenues increased by 2% to RMB66,392 million for the fourth quarter of 2017 on a quarter-on-quarter basis. Management Discussion and Analysis Tencent Holdings Limited 20 20 17,070 17,454 Non-GAAP profit attributable to equity holders of the Company 18,047 21,622 41 825 18,006 Cost of revenues. Cost of revenues increased by 4% to RMB34,897 million for the fourth quarter of 2017 on a quarter-on- quarter basis. The increase primarily reflected greater costs of payment related services, higher traffic acquisition costs, as well as higher bandwidth and server custody fees. As a percentage of revenues, cost of revenues increased to 53% for the fourth quarter of 2017 from 51% for the third quarter of 2017. 20,797 Equity holders of the Company Attributable to: 18,047 21,622 Profit for the period (4,993) (3,123) Income tax expense 23,040 24,745 Profit before income tax 818 (120) Share of (loss)/profit of associates and joint ventures Non-controlling interests (a) 13,585 (b) compensation As reported Impairment Amortisation of from investee Share-based (gains)/losses Adjustments Net Unaudited three months ended 31 December 2017 The following tables set forth the reconciliations of the Group's non-GAAP financial measures for the fourth quarter of 2017 and 2016, the third quarter of 2017, and the years ended 31 December 2017 and 2016 to the nearest measures prepared in accordance with IFRS: Management Discussion and Analysis Tencent Holdings Limited 24 companies intangible assets 24 To supplement the consolidated results of the Group prepared in accordance with IFRS, certain additional non-GAAP financial measures (in terms of, operating profit, operating margin, profit for the period, net margin, profit attributable to equity holders of the Company, basic EPS and diluted EPS), have been presented in this annual report. These unaudited non-GAAP financial measures should be considered in addition to, not as a substitute for, measures of the Group's financial performance prepared in accordance with IFRS. In addition, these non-GAAP financial measures may be defined differently from similar terms used by other companies. NON-GAAP FINANCIAL MEASURES 66,863 95,861 18,495 25,632 25,127 EBITDA consists of operating profit less interest income and other gains/losses, net, and plus depreciation of property, plant and equipment as well as investment properties, and amortisation of intangible assets. Adjusted EBITDA consists of EBITDA plus equity- settled share-based compensation expenses. 4,313 6,137 1,720 1,608 1,849 The Company's management believes that the non-GAAP financial measures provide investors with useful supplementary information to assess the performance of the Group's core operations by excluding certain non-cash items and certain impact of M&A transactions. In addition, non-GAAP adjustments include relevant non-GAAP adjustments for the Group's material associates based on available published financials of the relevant material associates, or estimates made by the Company's management based on available information, certain expectations, assumptions and premises. Equity-settled share-based compensation provision (a) The Company may pay dividends out of share premium, retained earnings and any other reserves provided that immediately following the payment of such dividends the Company will be in a position to pay off its debts as they fall due in the ordinary course of business. As at 31 December 2017, the Company had distributable reserves amounting to RMB26,074 million (2016: RMB18,345 million). Details of the movements in the reserves of the Group and the Company during the year are set out in the consolidated statement of changes in equity on pages 126 to 127, Note 31, Note 32 and Note 44 to the consolidated financial statements respectively. Annual Report 2017 29 29 442 (6,189) 2,084 20,797 Profit attributable to equity holders 18,371 358 Non-GAAP 474 2,146 21,622 Profit for the period 21,853 424 112 (6,281) 1,874 25,724 Operating profit (RMB in millions, unless specified) (c) (b) (6,229) 62,550 Adjusted EBITDA 16,775 13,930 22,746 25,724 89,724 (RMB in millions, unless specified) Interest income Operating profit Adjustments: 2016 31 December 2017 Year ended 2016 2017 90,302 2017 Three months ended Unaudited The following table reconciles our operating profit to our EBITDA and Adjusted EBITDA for the periods presented: Management Discussion and Analysis 23 23 Annual Report 2017 Capital expenditures consist of additions (excluding business combinations) to property, plant and equipment, construction in progress, investment properties, land use rights and intangible assets (excluding media contents, game licences and other contents). (d) Net cash represents period end balance and is calculated as cash and cash equivalents, term deposits and others, minus borrowings and notes payable. (c) Adjusted EBITDA margin is calculated by dividing Adjusted EBITDA by revenues. 31 December 30 September 31 December 56,117 Audited (1,156) 24,024 23,278 EBITDA 8,930 18,622 3,513 4,950 5,240 Other gains, net 3,716 4,880 1,007 1,263 1,376 equipment and investment properties Amortisation of intangible assets (3,594) Depreciation of property, plant and (2,619) (653) (7,906) (3,940) (3,918) (1,022) (20,140) (1,017) 31 May 2026 (Note 3) 49,500 340,500 0.29 600,000 30 Jun 2016 1 Jun 2017 to 1 Jun 2016 6,521,513 6,521,513 31 May 2026 (Note 2) 1 Jun 2017 to 0.000083 800,000 800,000 31 Mar 2017 to 1 Jun 2016 390,000 0.29 30 Mar 2026 (Note 1) 4,332,270 96,704,847 27,349,736 39,262,654 388,350 8,055,153 31 Aug 2017 15 Jun 2027 (Note 4) 31 Mar 2018 to 2.53 9,565,716 9,565,716 16 Jun 2017 15 Jun 2027 (Note 4) 5 Jul 2017 to 2.53 7,666,803 2,468,764 16 Jun 2017 29 Jun 2026 (Note 1) 30 Jun 2017 to 0.29 10,863,902 1,566,950 12,430,852 30 Jun 2016 29 Jun 2026 (Note 1) 30 Jun 2017 to 0.000083 31 Mar 2016 2,468,764 600,000 0.29 20 Dec 2017 Total: 4,978,099 4,978,099 Sub-total: 0.29 2,630,000 1 Mar 2016 to 0.000083 2,348,099 19 Dec 2027 (Note 4) 2,630,000 1 Mar 2015 31 Aug 2018 to 2,348,099 consultants External 75,481,560 4,332,270 27,349,736 39,262,654 91,726,748 Sub-total: 20 Dec 2018 to 2.53 7,260,103 30 Aug 2027 (Note 1) 7,260,103 1 Mar 2015 USD 875,000 price As at Directors' Report 33 Annual Report 2017 21 May 2021 (Note 5) 22 May 2015 to 112.30 62,500 62,500 22 May 2014 24 Mar 2021 (Note 2) 25 Mar 2015 to 114.52 3,570,000 155,000 3,725,000 25 Mar 2014 24 Mar 2021 (Note 5) 25 Mar 2015 to 114.52 2,562,500 12 Sep 2019 (Note 2) 2,562,500 25 Mar 2014 13 Sep 2013 to Granted 49.76 Number of share options Lapsed 80,650 12 Dec 2014 9 Jul 2021 (Note 6) 10 Jul 2015 to 124.30 1,138,005 46,851 355,272 1,540,128 10 July 2014 HKD Exercise period price 2017 Exercise during 31 December the year the year (Note 13) the year 2017 Date of grant 80,459,659 during during 1 January As at Exercised 80,650 560,875 135,000 24 Mar 2011 23 Mar 2018 (Note 3) 24 Mar 2014 to 38.88 646,250 152,500 798,750 24 Mar 2011 4 Jul 2017 (Note 3) 5 Jul 2013 to 26.08 11,250 1,352,550 1,363,800 5 Jul 2010 4 Jul 2017 (Note 1) -26.08 5 Jul 2012 to 4 Jul 2017 (Note 2) 1,057,575 1,057,575 5 Jul 2010 5 Jul 2011 to -- 26.08 56,750 56,750 250,000 9,375 250,000 24 Mar 2015 to 705,250 13 Sep 2012 14 Aug 2018 (Note 3) 15 Aug 2014 to 37.80 25,000 25,000 50,000 15 Aug 2011 14 Aug 2018 (Note 1) 15 Aug 2013 to 37.80 342,125 6,750 271,825 620,700 15 Aug 2011 14 Aug 2018 (Note 2) 15 Aug 2012 to 37.80 58,800 18,700 77,500 15 Aug 2011 23 Mar 2018 (Note 4) 38.88 5 Jul 2010 116.40 11 Dec 2021 (Note 7) Directors' Report 22 Nov 2024 (Notes 5 and 12) Tencent Holdings Limited 34 223,766 50,666,108 22,497,436 32,495,250 4,102,812 Total: 23 Nov 2018 to 419.60 -- 89,565 89,565 23 Nov 2017 9 Jul 2024 (Notes 9 and 11) 10 Jul 2020 to 272.36 - 7,455 7,455 10 Jul 2017 9 Jul 2024 (Notes 7 and 11) 10 Jul 2019 to 272.36 25,340 9 Jul 2024 (Notes 6 and 11) 25,340 10 Jul 2017 Note: 10 Jul 2018 to 1. 3. Annual Report 2017 The weighted average closing price immediately before the date on which the options were exercised was HKD285.5. The closing price immediately before the date on which the options were granted on 23 November 2017 was HKD426.8. 13. 12. The closing price immediately before the date on which the options were granted on 10 July 2017 was HKD269. 11. The closing price immediately before the date on which the options were granted on 24 March 2017 was HKD223. For options granted with exercisable date determined based on the grant date of options, the first 25% of the total options can be exercised 3 years after the grant date, and each 25% of the total options will become exercisable in each subsequent year. For options granted with exercisable date determined based on the grant date of options, the first 50% of the total options can be exercised 1 year after the grant date, and the remaining 50% of the total options will become exercisable in the subsequent year. For options granted with exercisable date determined based on the grant date of options, the first 25% of the total options can be exercised 2 years after the grant date, and each 25% of the total options will become exercisable in each subsequent year. For options granted with exercisable date determined based on the grant date of options, the first 25% of the total options can be exercised 1 year after the grant date, and each 25% of the total options will become exercisable in each subsequent year. For options granted with exercisable date determined based on the grant date of options, the first 33.33% (one-third) of the total options can be exercised 1 year after the grant date, and each 33.33% of the total options will become exercisable in each subsequent year. For options granted with exercisable date determined based on the grant date of options, the first 33.33% (one-third) of the total options can be exercised 4 years after the grant date, and each 33.33% of the total options will become exercisable in each subsequent year. For options granted with exercisable date determined based on the grant date of options, the first 20% of the total options can be exercised 3 years after the grant date, and each 20% of the total options will become exercisable in each subsequent year. For options granted with exercisable date determined based on the grant date of options, the first 20% of the total options can be exercised 1 year after the grant date, and each 20% of the total options will become exercisable in each subsequent year. For options granted with exercisable date determined based on the grant date of options, the first 20% of the total options can be exercised 2 years after the grant date, and each 20% of the total options will become exercisable in each subsequent year. 10 10. 9. 8. 7. 6. 5. 4. 2. 12 Dec 2016 to 272.36 63,175 116,641 20 Mar 2023 (Note 6) 1,417,930 24 Mar 2017 1,418,070 6 Jul 2016 21 Mar 2017 to 158.10 6,675,000 6,675,000 21 Mar 2016 9 Jul 2022 (Note 6) 10 Jul 2016 to 148.90 739,804 32,460 130,999 903,263 10 Jul 2015 1 Apr 2022 (Note 6) 2 Apr 2016 to 149.80 525,000 525,000 2 Apr 2015 18,120 9,020,095 1,283,309 6 Jul 2017 to 9,083,270 10 Jul 2017 9 Jul 2024 (Notes 5 and 11) 10 Jul 2018 to 272.36 13,405 23 Mar 2024 (Notes 7 and 10) 24 Mar 2019 to 225.44 23 Mar 2024 (Notes 6 and 10) 13,405 10 Jul 2017 26,845 26,845 24 Mar 2017 24 Mar 2018 to 225.44 8,940 21,822,500 21,831,440 24 Mar 2017 23 Mar 2024 (Notes 8 and 10) 24 Mar 2018 to 225.44 1,417,930 5 Jul 2023 (Note 6) 174.86 Exercise period 23 Mar 2017 (Note 1) - 31.70 3,600,000 508,200 11,924,136 0.000083 1 Mar 2016 to 28 Feb 2025 (Note 1) 502,760 9,939,200 0.29 1 Mar 2016 to 28 Feb 2025 (Note 1) 0.29 1 Mar 2016 to 28 Feb 2025 (Note 2) 0.35 1 Mar 2016 to 28 Feb 2025 (Note 2) 425,800 3,444,042 0.29 30 Mar 2016 to 29 Mar 2025 (Note 1) 200,000 0.29 1 Jul 2016 to 3,600,000 30 Jun 2025 (Note 1) 1 Jul 2015 1 Jul 2015 during during 31 December Exercise Date of grant 2017 the year the year the year 2017 price USD Exercise period Employees 1 Mar 2015 12,432,336 1 Mar 2015 10,441,960 1 Mar 2015 26,880,000 26,880,000 1 Mar 2015 7,482,654 7,482,654 30 Mar 2015 3,869,842 200,000 during 0.29 30 Jun 2025 (Note 2) 0.29 1 Mar 2017 to 28 Feb 2026 (Note 1) 0.29 1 Mar 2017 to 28 Feb 2026 (Note 2) Number of share options Directors' Report As at Granted Exercised Lapsed As at 1 January during during during 31 December Exercise Date of grant 2017 the year the year the year 2017 761,000 1 Jul 2016 to 114,000 Tencent Holdings Limited 1 Oct 2015 908,800 128,200 780,600 0.29 1 Oct 2016 to 30 Sep 2025 (Note 1) 31 Dec 2015 3,448,491 515,210 2,933,281 0.29 31 Dec 2016 to 30 Dec 2025 (Note 1) 31 Dec 2015 345,300 133,300 212,000 0.000083 31 Dec 2016 to 1 Mar 2016 1 Mar 2016 500,000 500,000 36 30 Dec 2025 (Note 1) 24 Mar 2012 to 1 January Lapsed 4. For options granted with exercisable date determined based on the grant date of options, the first 25% of the total options can be exercised 1 year after the grant date, and each 25% of the total options will become exercisable in each subsequent year. For options granted with exercisable date determined based on the grant date of options, the first 20% of the total options can be exercised 1 year after the grant date, and each 20% of the total options will become exercisable in each subsequent year. For options granted with exercisable date determined based on the grant date of options, the first 25% of the total options can be exercised 5 years after the grant date, and each 25% of the total options will become exercisable in each subsequent year. 3. 2. 1. Note: Directors' Report 31 Annual Report 2017 16,500,000 5,250,000 11,250,000 Total: (Note 3) 23 March 2024 24 March 2018 to 225.44 5,250,000 5,250,000 (Note 4) 24 March 2017 (Note 3) 20 March 2023 21 March 2017 to The closing price immediately before the date on which the options were granted on 24 March 2017 was HKD223. 158.10 5. 32 25,000 25,000 24 Mar 2010 HKD Exercise period price 2017 the year the year (Note 13) the year 2017 Date of grant Exercise during 31 December during As at Lapsed Exercised Granted during 1 January As at Number of share options Details of movements of share options granted to employees of the Group (apart from a director of the Company) during the year ended 31 December 2017 are as follows: Directors' Report Tencent Holdings Limited No options were cancelled or lapsed during the year. As at 3,750,000 21 March 2016 Tencent Holdings Limited 30 Neither the Company nor any of its subsidiaries has purchased, sold or redeemed any of the Company's shares during the year ended 31 December 2017. PURCHASE, SALE OR REDEMPTION OF THE COMPANY'S LISTED SECURITIES A summary of the condensed consolidated results and financial positions of the Group is set out on page 3 of this annual report. FINANCIAL SUMMARY The donation made by the Group to Tencent Charity Funds in the year was RMB820 million. DONATION Particulars of the Group's borrowings and notes payable are set out in Note 34 and Note 35 to the consolidated financial statements respectively. BORROWINGS Particulars of the Company's principal subsidiaries as at 31 December 2017 are set out in Note 45 to the consolidated financial statements. SUBSIDIARIES Details of the movements in the share capital of the Company during the year are set out in Note 31 to the consolidated financial statements. SHARE CAPITAL Details of the business review of the Group and the proposed dividend for the year ended 31 December 2017 are set out under the "Chairman's Statement". BUSINESS REVIEW AND DIVIDEND Details of the movements in property, plant and equipment of the Group during the year are set out in Note 16 to the consolidated financial statements. PROPERTY, PLANT AND EQUIPMENT Directors' Report Directors' Report Details of movements of share options granted to employees and certain external consultants under the share option schemes adopted by Tencent Music, a subsidiary of the Group, during the year ended 31 December 2017 are as follows: Number of share options As at Granted Exercised Directors' Report 3,750,000 SHARE OPTION SCHEMES As at 31 December 2017, there were a total of 16,500,000 outstanding share options granted to a director of the Company, details of which are as follows: 24 March 2021 (Note 2) 25 March 2015 to 5,000,000 114.52 5,000,000 25 March 2014 23 March 2020 (Note 1) 24 March 2015 to 31.70 2,500,000 2,500,000 24 March 2010 Lau Chi Ping Martin Exercise period price HKD Exercise during the 31 December year 2017 year As at Exercised Granted during the 1 January 2017 Date of grant Name of director As at Number of share options The Company has adopted five share option schemes, namely, the Pre-IPO Option Scheme, the Post-IPO Option Scheme I, the Post-IPO Option Scheme II, the Post-IPO Option Scheme III and the Post-IPO Option Scheme IV. The Pre-IPO Option Scheme, the Post-IPO Option Scheme I and the Post-IPO Option Scheme II expired on 31 December 2011, 23 March 2014 and 16 May 2017 respectively. 28 Feb 2025 (Note 1) 35 28 Feb 2025 (Note 1) Any senior executive or senior officer, director (including executive, non-executive and independent non- executive directors) of any member of the Group or any invested entity and any consultant, adviser or agent of any member of the Board, who have contributed or will contribute to the growth and development of the Group or any invested entity Any employee (whether full time or part time), executive or officer, director (including executive, non-executive and independent non- executive directors) of any member of the Group or any invested entity and any consultant, adviser or agent of any member of the Board, who have contributed or will contribute to the growth and development of the Group or any invested entity Details 3. Maximum number of shares Directors' Report Pre-IPO Option Scheme As at 7 June 2004, options to subscribe for an aggregate of 72,386,370 shares were outstanding. No further option could be granted under the Pre-IPO Option Scheme. Post-IPO Option Scheme I As at 16 May 2007, options to subscribe for an aggregate of 60,413,683 shares were outstanding. No further option could be granted under the Post- IPO Option Scheme l. Post-IPO Option Scheme II 35 1 Mar 2016 to 39 Annual Report 2017 (Note). in issue as at 17 May 2017. The maximum number of shares which may be issued upon exercise of all outstanding options granted and yet to be exercised under the Post-IPO Option Scheme IV and any other share option schemes, including the Pre-IPO Option Scheme, the Post- IPO Option Scheme I, the Post-IPO Option Scheme Il and the Post-IPO Option Scheme III, must not in aggregate exceed 30% of the issued shares of the Company from time to time entity Option Scheme IV shares in respect of which options may be granted under the Post-IPO Option Scheme III shall be 180,093,330 shares (after the effect of the Share Subdivision), 2% of the relevant class of securities of the Company in issue as at 13 May 2009. The maximum number of shares which may be issued upon exercise of all outstanding options granted and yet to be exercised under the Post- IPO Option Scheme III and any other share option schemes, including the Pre-IPO Option Scheme, the Post-IPO Option Scheme I, the Post-IPO Option Scheme II and the Post-IPO Option Scheme IV, must not in aggregate exceed 30% of the issued shares of the Company from time to time (Note). The maximum number of Option Scheme III Post-IPO shares in respect of which options may be granted under the Post-IPO Option Scheme II shall be 444,518,270 shares (after the effect of the Share Subdivision), 5% of the relevant class of securities of the Company in issue as at 16 May 2007. The maximum number of shares which may be issued upon exercise of all outstanding options granted and yet to be exercised under the Post- IPO Option Scheme II and any other share option schemes, including the Pre-IPO Option Scheme, the Post-IPO Option Scheme I, the Post-IPO Option Scheme III and the Post-IPO Option Scheme IV, must not in aggregate exceed 30% of the issued shares of the Company from time to time (Note). The maximum number of Post-IPO and development of the Group or any invested The maximum number of shares in respect of which options may be granted under the Post- IPO Option Scheme IV shall be 379,099,339 shares, 4% of the relevant class of securities of the Company Tencent Holdings Limited Any employee (whether full time or part time), executive or officer, director (including executive, non-executive and independent non- executive directors) of any member of the Group or any invested entity, which is any entity in which the Group holds an equity interest, and any consultant, adviser or agent of any member of the Board, who have contributed or will contribute to the growth Annual Report 2017 Directors' Report 1. The first 25% of the total options can be exercised 1 year after the commencement dates as specified in the relevant grant letters, and each 12.5% of the total options will become exercisable in each subsequent six months. 2. 3. 4. The first 25% of the total options can be exercised 1 year after the commencement date as specified in the grant letter, and each 6.25% of the total options will become exercisable in each subsequent quarter. Subject to the satisfaction of a certain condition, the entire vesting schedule for the remaining options will be accelerated by 1 year or the remaining options will become immediately vested. All the options can be exercised 1 year after the commencement date as specified in the relevant grant letter if a certain condition is satisfied. Subject to the satisfaction of certain conditions, the first 25% of the total options can be exercised on the dates as specified in the relevant grant letters, and each 25% of the total options will become exercisable in each subsequent year. SUMMARY OF THE SHARE OPTION SCHEMES Details Pre-IPO Option Scheme 1. Note: Post-IPO Option Scheme I 38 or director of any company within the Group Purposes Any employee, consultant Any eligible employee, including executive directors of the Company Qualifying participants 2. 37 Post-IPO To recognise the contribution that certain individuals have made to the Group, to attract the best available personnel and to promote the success of the Group's business Post-IPO Option Scheme II Post-IPO Option Scheme III Option Scheme IV 10,000 30,000 24 March 2014 lain Ferguson Bruce Date of grant 2017 31 December during the year the year 2017 20,000 Vesting period During the year, a total of 19,071,975 Awarded Shares were granted under the 2013 Share Award Scheme and out of which, 60,000 Awarded Shares were granted to the independent non-executive directors of the Company. Details of the movements in the Share Award Schemes during the year are set out in Note 33 to the consolidated financial statements. As at Vested Granted during 1 January Number of Awarded Shares As at 31 December 2017, there were a total of 193,606 outstanding Awarded Shares granted to the directors of the Company, details of which are as follows: Directors' Report 45 Annual Report 2017 During the year, a total of 21,973,407 shares were issued to option holders who exercised their share options granted under the Post-IPO Option Scheme II, the Post-IPO Option Scheme III and the Post-IPO Option Scheme IV, and pursuant to the Share Award Schemes. 24 March 2015 to Name of director As at 20,000 2 April 2015 The Company shall comply with the relevant Listing Rules when granting the Awarded Shares. If awards are made to the directors or substantial shareholders of the Group, such awards shall constitute connected transaction under Chapter 14A of the Listing Rules and the Company shall comply with the relevant requirements under the Listing Rules. 20,000 10,000 30,000 24 March 2014 lan Charles Stone 70,000 22,500 20,000 72,500 Total: 24 March 2021 24 March 2019 24 March 2018 to 24 March 2017 21 March 2020 21 March 2017 to 15,000 5,000 20,000 21 March 2016 2 April 2019 2 April 2016 to 15,000 7,500 22,500 20,000 The Trustee does not exercise any voting rights in respect of any shares held pursuant to the Trustee Deed II or as nominee. 5. The vesting of the Awarded Shares is subject to the Selected Participant remaining at all times after the Grant Date and on the date of vesting, an Eligible Person, subject to the rules of the 2013 Share Award Scheme. 24 March 2015 to of each participant Maximum entitlement 4. that can be awarded 3. Maximum number of shares It shall be valid and effective for a period of 15 years from the Adoption Date I. Duration and Termination 2. To recognise the contributions and to attract, motivate and retain eligible participants (including any director) of the Group 2013 Share Award Scheme 2007 Share Award Scheme Purpose 1. The Company adopted the following two Share Award Schemes with major terms and details set out below: SHARE AWARD SCHEMES Directors' Report Tencent Holdings Limited 42 Details of the valuation of share options during the year are set out in Note 33 to the consolidated financial statements. VALUATION OF SHARE OPTIONS Details of the movements in the share options during the year are set out in Note 33 to the consolidated financial statements. MOVEMENTS IN THE SHARE OPTIONS The total number of shares available for issue under the Post-IPO Option Scheme II, the Post-IPO Option Scheme III and the Post-IPO Option Scheme IV are 200,551,970, 175,093,330 and 369,880,304 respectively, which represent approximately 2.11%, 1.84% and 3.89% respectively of the issued shares of the Company as at the date of the annual report. Operation Subject to the satisfaction of all vesting conditions as prescribed in the 2013 Share Award Scheme, the Selected Participants will be entitled to receive the Awarded Shares. 2% of the issued shares of the Company as at the Adoption Date | (i.e. 178,776,160 shares (after the effect of the Share Subdivision)) The Board shall select the Eligible Person(s) and determine the number of shares to be awarded. 2013 Share Award Scheme The Trustee shall not exercise the voting rights in respect of any shares held by it pursuant to the Trustee Deed I (including but not limited to the Awarded Shares and any bonus shares and scrip shares derived therefrom). Awarded Shares and the related income derived therefrom are subject to a vesting scale to be determined by the Board at the date of grant of the award. Vesting of the shares will be conditional on the Selected Participant satisfying all vesting conditions specified by the Board at the time of making the award until and on each of the relevant vesting dates and his/her execution of the relevant documents to effect the transfer from the Trustee. 2007 Share Award Scheme Voting Rights 8. Vesting and Lapse 7. Directors' Report Tencent Holdings Limited 44 No award may be made by the Board to any Selected Participant: (i) where the Company has information that must be disclosed under Rule 13.09 of the Listing Rules or where the Company reasonably believes there is inside information which must be disclosed under part XIVA of the SFO, until such inside information has been published on the websites of the Stock Exchange and the Company; (ii) after any inside information in relation to the securities of the Company has occurred or has become the subject of a decision, until such inside information has been published; (iii) within the period commencing 60 days (in the case of yearly results), or 30 days (in the case of results for half-year, quarterly or other interim period) immediately preceding the earlier of (1) the date of a meeting of the Board (as such date is first notified to the Stock Exchange) for the approval of the Company's results for any year, half- year, quarterly or other interim period (whether or not required under the Listing Rules); and (2) the deadline for the Company to publish its quarterly, interim or annual results announcement for any such period, and ending on the date of such announcement; or (iv) in any other circumstances where dealings by Selected Participant (including directors) are prohibited under the Listing Rules, the SFO or any other applicable law or regulation or where the requisite approval from any applicable regulatory authorities has not been granted. 2013 Share Award Scheme No award shall be made by the Board and no instructions to acquire shares and allot new shares shall be given by the Board or the Trustee under the 2007 Share Award Scheme where any director is in possession of unpublished price- sensitive information in relation to the Group or where dealings by directors are prohibited under any code or requirement of the Listing Rules and all applicable laws from time to time. 2007 Share Award Scheme 6. Restrictions Directors' Report 43 Annual Report 2017 The Board may at any time at its discretion, in respect of each Selected Participant, cause to be paid the relevant amount from the Company's resources or any subsidiary's resources into the Account II for the purchase and/or subscription of Awarded Shares as soon as practicable after the Grant Date. The Board may, from time to time, at its absolute discretion select any Eligible Person to be a Selected Participant and grant to such Selected Participant Awarded Shares. 1% of the issued shares of the Company as at the Adoption Date II (i.e. 92,979,085 shares (after the effect of the Share Subdivision)) 3% of the issued shares of the Company as at the Adoption Date II (i.e. 278,937,260 shares (after the effect of the Share Subdivision)) It shall be valid and effective unless and until being terminated on the earlier of: (i) the 15th anniversary date of the Adoption Date II; and (ii) such date of early termination as determined by the Board provided that such termination does not affect any subsisting rights of any Selected Participant. The Board shall, in respect of each Selected Participant, cause to be paid the relevant amount from the Company's resources into the Account I or to the Trustee to be held on trust for the relevant Selected Participant for the purchase and/or subscription of the Awarded Shares as soon as practicable after the Reference Date. 1% of the issued shares of the Company as at the Adoption Date | (i.e. 89,388,080 shares (after the effect of the Share Subdivision)) 24 March 2019 31 December 22,500 Grand Total: 18,606 2,868 10,000 11,474 Total: 24 March 2021 24 March 2018 to 10,000 6 July 2020 6 July 2017 to 8,606 2,868 10,000 24 March 2017 11,474 6 July 2016 Yang Siu Shun 35,000 11,250 10,000 36,250 Total: 24 March 2021 24 March 2018 to 192,724 60,000 59,118 193,606 49 49 Annual Report 2017 Ma Huateng, age 46, is an executive director, Chairman of the Board and Chief Executive Officer of the Company. Mr Ma has overall responsibilities for strategic planning and positioning and management of the Group. Mr Ma is one of the core founders and has been employed by the Group since 1999. Prior to his current employment, Mr Ma was in charge of research and development for Internet paging system development at China Motion Telecom Development Limited, a supplier of telecommunications services and products in China. Mr Ma is a deputy to the 13th National People's Congress. Mr Ma has a Bachelor of Science degree specialising in Computer and its Application obtained in 1993 from Shenzhen University and more than 24 years of experience in the telecommunications and Internet industries. He is a director of Advance Data Services Limited, which has an interest in the shares of the Company which would fall to be disclosed to the Company under the provisions of Divisions 2 and 3 of Part XV of the SFO. Mr Ma also serves as a director of certain subsidiaries of the Company. Lau Chi Ping Martin, age 44, is an executive director and President of the Company. Mr Lau joined the Company in 2005 as the Chief Strategy and Investment Officer and was responsible for corporate strategies, investments, merger and acquisitions and investor relations. In 2006, Mr Lau was promoted as President of the Company to manage the day-to-day operation of the Company. In 2007, he was appointed as an executive director of the Company. Prior to joining the Company, Mr Lau was an executive director at Goldman Sachs (Asia) L.L.C.'s investment banking division and the Chief Operating Officer of its Telecom, Media and Technology Group. Prior to that, he worked at McKinsey & Company, Inc. as a management consultant. Mr Lau received a Bachelor of Science degree in Electrical Engineering from the University of Michigan, a Master of Science degree in Electrical Engineering from Stanford University and an MBA degree from Kellogg Graduate School of Management, Northwestern University. On 28 July 2011, Mr Lau was appointed as a non-executive director of Kingsoft Corporation Limited, an Internet based software developer, distributor and software service provider listed in Hong Kong. On 10 March 2014, Mr Lau was appointed as a director of JD.com, Inc., an online direct sales company in China, which has been listed on NASDAQ since May 2014. On 31 March 2014, Mr Lau was appointed as a director of Leju Holdings Limited, an online-to-offline real estate services provider in China, which has been listed on New York Stock Exchange since April 2014. On 29 December 2017, Mr Lau was appointed as a director of Vipshop Holdings Limited, an online discount retailer company listed on the New York Stock Exchange. Mr Lau also serves as a director/corporate representative of certain subsidiaries of the Company. Jacobus Petrus (Koos) Bekker, age 65, has been a non-executive director since November 2012. Koos led the founding team of the M-Net/MultiChoice pay-television business in 1985. He was also a founder director of MTN in cellular telephony. Koos headed the MIH group in its international and Internet expansions until 1997, when he became chief executive of Naspers. He serves on the boards of other companies within the group and associates, as well as other bodies. In April 2015, he became non-executive chair. Academic qualifications include BA Hons and honorary doctorate in commerce (Stellenbosch University), LLB (University of the Witwatersrand) and MBA (Columbia University, New York). BIOGRAPHICAL DETAILS AND OTHER INFORMATION OF DIRECTORS Directors' Report Tencent Holdings Limited 48 The Company has received from each independent non-executive director an annual confirmation of his independence pursuant to Rule 3.13 of the Listing Rules and the Board considers them independent. In accordance with Article 87 of the Articles of Association, Mr Li Dong Sheng and Mr lain Ferguson Bruce will retire at the 2018 AGM and, being eligible, will offer themselves for re-election. Yang Siu Shun lan Charles Stone 10,000 lain Ferguson Bruce Independent Non-Executive Directors Charles St Leger Searle Jacobus Petrus (Koos) Bekker Non-Executive Directors Lau Chi Ping Martin Ma Huateng (Chairman) Executive Directors The directors and senior management of the Company during the year and up to the date of this annual report were: DIRECTORS AND SENIOR MANAGEMENT Directors' Report 47 Annual Report 2017 Li Dong Sheng 10,000 24 March 2017 21 March 2020 1 January As at Directors' Report Number of Awarded Shares 70,000 22,500 20,000 72,500 Tencent Holdings Limited 46 Total: 24 March 2021 Granted during 24 March 2018 to 20,000 24 March 2017 21 March 2020 21 March 2017 to 15,000 5,000 20,000 21 March 2016 2 April 2019 2 April 2016 to 15,000 7,500 20,000 2 April 2015 Vested during 21 March 2017 to 7,500 2,500 10,000 21 March 2016 2 April 2019 2 April 2016 to 7,500 3,750 11,250 2 April 2015 24 March 2019 As at 24 March 2015 to 5,000 15,000 24 March 2014 Li Dong Sheng Vesting period 2017 the year the year 2017 Date of grant Name of director Note: 10,000 2017. quotations sheet on the date of grant, which must It shall be valid and effective for a period of ten years The option period is determined by the Board provided that it is not later than the last day of the 7-year period after the date of grant of option. There is no minimum period for which an option must be held before it can be exercised. The option period is determined by the Board provided that the period during which the option may be exercised shall not be less than one year from the date of grant of the options. The option period is determined by the Board provided that it is not later than the last day of the 7-year period after the date of grant of option. There is no minimum The option period is determined by the Board provided that it is not later than the last day of the 10-year period after the date of grant of option. There is no minimum period for which an option period for which an option must be held before it can be exercised. must be held before it can be exercised. All the options are exercisable in installments from the commencement of the relevant vesting period until 31 December 2011, but on the condition that the Company has been listed in a sizeable securities market. The Board may at their 40 discretion determine exercise periods. Tencent Holdings Limited Directors' Report Pre-IPO Post-IPO Details Option Scheme Option Scheme I Post-IPO the specific vesting and 40 Option period 5. commencing on 17 May Directors' Report Post-IPO Option Scheme II 1% of the issued shares of the Company from time to time within any 12-month period up to the date of the latest grant Post-IPO Option Scheme III 1% of the issued shares of the Company from time to time within any 12-month period up to the date of the latest grant Post-IPO Option Scheme IV 1% of the issued shares of the Company from time to time within any 12-month period up to the date of the latest grant Details Pre-IPO Option Scheme Post-IPO Option Scheme I 4. Maximum entitlement of each participant The number of ordinary shares in respect of which options may be granted shall not exceed 10% of the number of ordinary shares issued and issuable 1% of the issued shares of the Company from time to time within any 12-month period up to the date of the latest grant under the scheme. Option Scheme II 6. 7. of offer Annual Report 2017 41 Directors' Report Details Pre-IPO Option Scheme Post-IPO Post-IPO Option Scheme I Option Scheme II 8. Remaining life of the scheme It expired on 31 December 2011. It expired on 16 May 2017. It shall be valid and effective for a period of ten years commencing on 13 May 2009. Post-IPO Option Scheme III Post-IPO Acceptance Option Scheme IV date of grant, which must be a business day; (ii) the average closing price of the securities as stated in the Stock Exchange's daily quotations sheets for the five business days immediately preceding the date of grant; and (iii) the nominal value of the share. The exercise price must be at least the higher of: (i) the closing price of the securities as stated in the Stock Exchange's daily quotations sheet on the It expired on 23 March 2014. Post-IPO Option Scheme IV of the date of grant, upon payment of RMB1 per grant. Options granted must be accepted within 15 days Options granted must be accepted within 28 days of the date of grant, upon payment of HKD1 per grant. Options granted must be accepted within 28 days of the date of grant, upon payment of HKD1 per grant. Options granted must be accepted within 28 days of the date of grant, upon payment of HKD1 per grant. Price shall be determined by the Board. The exercise price must be at least the higher of: (i) the closing price of the securities as stated in the The exercise price must be at least the higher of: (i) the closing price of the securities as stated in the Stock Exchange's daily quotations sheet on the date of grant, which must be a business day; (ii) the average closing price of the securities as stated in the Stock Exchange's daily quotations sheets for the five business days immediately preceding the date of grant; and (iii) the nominal value of the share. Stock Exchange's daily quotations sheet on the Exercise price be a business day; (ii) the average closing price of the securities as stated in the Stock Exchange's daily quotations sheets for the five business days immediately preceding the date of grant; and (iii) the nominal value of the share. Post-IPO average closing price of the securities as stated in the Stock Exchange's daily quotations sheets for the five business days immediately preceding the date of grant; and (iii) the nominal value of the share. Option Scheme III Options granted must be accepted within 28 days of the date of grant, upon payment of HKD1 per grant. date of grant, which must be a business day; (ii) the The exercise price must be at least the higher of: (i) the closing price of the securities as stated in the Stock Exchange's daily DIRECTORS' INTERESTS IN SECURITIES Directors' Report Tencent Holdings Limited 56 Save as disclosed in this annual report, neither the Company nor any of its subsidiaries was a party to any arrangements to enable directors of the Company to acquire benefits by means of the acquisition of shares in, or debentures of, the Company or any other body corporate at any time during the year or at the end of the year. Save as disclosed in this annual report, no transaction, arrangement or contract of significance in relation to the Group's business to which the Company or any of its subsidiaries was a party and in which a director of the Company or an entity connected with a director of the Company had a material interest, whether directly or indirectly, subsisted at the end of the year or at any time during the year. A permitted indemnity provision for the benefit of the directors of the Company is currently in force and was in force throughout the financial year. The Company has taken out and maintained directors and officers liability insurance which provides appropriate cover for, among others, directors of the Company. PERMITTED INDEMNITY PROVISION DIRECTORS' INTERESTS IN TRANSACTIONS, ARRANGEMENTS OR CONTRACTS Mr Lau Chi Ping Martin has entered into a service contract with the Company for a term of three years ending 31 December 2018. Mr Lau is entitled to an annual bonus based on the performance of the Company in an amount to be determined by the Remuneration Committee. Mr Lau is entitled to participate in all employee benefit plans, programmes and arrangements of the Company. Mr Ma Huateng has entered into a service contract with the Company for a term of three years from 1 January 2016 to 31 December 2018. The term of the service contract can be extended by agreement between the Company and Mr Ma. The Company may terminate the service contract by three months' written notice at any time, subject to paying his salary for the shorter of six months and a portion of his annual bonus for the year in which termination occurred pro rata to the portion of the year before the termination becomes effective. As at 31 December 2017, the interests and short positions of the directors and the chief executive of the Company in the shares, underlying shares and debentures of the Company or its associated corporations (within the meaning of Part XV of the SFO) which (a) were required to be notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests and short positions which they have taken, or are deemed to have taken, under such provisions of the SFO); or (b) were required, pursuant to section 352 of the SFO, to be recorded in the register required to be kept by the Company; or (c) were required, pursuant to the Model Code, to be notified to the Company and the Stock Exchange were as follows: DIRECTORS' SERVICE CONTRACTS DIRECTORS' RIGHTS TO ACQUIRE SHARES OR DEBENTURES (A) Long position in the shares and underlying shares of the Company Personal shares/ underlying Directors' Report For a summary of the major terms of the Structure Contracts, please refer to the sections headed “Our History and Structure” and "Structure Contracts" in the IPO prospectus. During the year ended 31 December 2017, there was no material change in the Structure Contracts and/or the circumstances under which they were adopted, and none of the Structure Contracts has been unwound as none of the restrictions that led to the adoption of Structure Contracts has been removed. Annual Report 2017 59 59 819,507,500 Corporate (Note 1) * Lau Chi Ping Martin Ma Huateng of shareholding shares held Nature of interest Name of director Approximate % Number of 55 Xu Chenye, age 46, Chief Information Officer, oversees the strategic planning and development for the website properties and communities, customer relations and public relations of the Company. Mr Xu is one of the core founders and has been employed by the Group since 1999. Prior to that, Mr Xu had experiences in software system design, network administration as well as marketing and sales management in his previous position at Shenzhen Data Telecommunications Bureau. Mr Xu received a Bachelor of Science degree in Computer Science from Shenzhen University in 1993 and a Master of Science degree in Computer Science from Nanjing University in 1996. Mr Xu currently serves as a director or officer of certain subsidiaries of the Company. Xi Dan, age 42, Senior Vice President, joined the Company in 2002 and has been responsible for overseeing the Company's talent development and functional management since May 2008. Prior to joining the Company, Mr Xi was responsible for HR management in ZTE Corporation and has more than 22 years of experience in IT and Internet industries. Mr Xi received a Bachelor of Science degree in Applied Computer Science from Shenzhen University in 1996 and an MBA degree from Tsinghua University in 2005. Mr Xi currently serves as a director or officer of certain subsidiaries of the Company. Current PRC laws and regulations limit foreign investment in businesses providing value-added telecommunications services in China. As foreign-invested enterprises, the WFOEs do not have licences to provide Internet content or information services and other telecommunications value-added services. Accordingly, the value-added telecommunications business of the Group has been conducted through Tencent Computer, Shiji Kaixuan and the new operating companies (the "New OPCOS") (collectively, the "OPCOS") by itself or through their subsidiaries under the Structure Contracts (as defined in the section "Our History and Structure Structure Contracts" of the IPO prospectus of the Company). As a result of the Structure Contracts, the Group is able to recognise and receive the economic benefit of the business and operations of the OPCOs. The Structure Contracts are also designed to provide the Company with effective control over and (to the extent permitted by PRC law) the right to acquire the equity interests in and/or assets of the OPCOS. BIOGRAPHICAL DETAILS OF SENIOR MANAGEMENT Directors' Report 51 Annual Report 2017 Yang Siu Shun, age 62, has been an independent non-executive director since July 2016. Mr Yang is currently serving as a Member of the 13th National Committee of the Chinese People's Political Consultative Conference, a Justice of the Peace in Hong Kong, a Member of the Exchange Fund Advisory Committee of the Hong Kong Monetary Authority, a Steward of the Hong Kong Jockey Club, the Deputy Chairman of the Council of the Open University of Hong Kong, a Board Member and the Audit Committee Chairman of the Hang Seng Management College and an independent non-executive director of Industrial and Commercial Bank of China Limited which is publicly listed on the Stock Exchange and the Shanghai Stock Exchange. Mr Yang retired from PricewaterhouseCoopers ("PwC") on 30 June 2015. Before his retirement, he served as the Chairman and Senior Partner of PwC Hong Kong, the Executive Chairman and Senior Partner of PwC China and Hong Kong, one of the five members of the Global Network Leadership Team of PwC and the PwC Asia Pacific Chairman. Mr Yang graduated from the London School of Economics and Political Science in 1978. Mr Yang is a Fellow Member of the Institute of Chartered Accountants in England and Wales, the Hong Kong Institute of Certified Public Accountants and the Chartered Institute of Management Accountants. Ren Yuxin, age 42, Chief Operating Officer and President of Interactive Entertainment Group, Mobile Internet Group and Online Media Group, joined the Company in 2000 and had served as General Manager for the Value-Added Services Development Division and General Manager for Interactive Entertainment Business Division. Since September 2005, Mr Ren has been responsible for the research and development, operations, marketing and sales of gaming products for the Interactive Entertainment Business. Since May 2012, Mr Ren has been appointed as Chief Operating Officer and is now in charge of the overall operation of the Interactive Entertainment Group, Mobile Internet Group and Social Network Group. He is also in charge of the operation of Online Media Group starting from 24 March 2017. Prior to joining the Company, Mr Ren has worked in Huawei Technologies Co., Ltd. Mr Ren received a Bachelor of Science degree in Computer Science and Engineering from the University of Electronic Science and Technology of China in 1998 and an EMBA degree from China Europe International Business School (CEIBS) in 2008. Mr Ren currently serves as a director or officer of certain subsidiaries of the Company. James Gordon Mitchell, age 44, Chief Strategy Officer and Senior Executive Vice President, joined the Company in 2011. He is responsible for various functions, including the Company's strategic planning and implementation, investor relationships, and mergers, acquisitions and investment activity. Prior to joining the Company, Mr Mitchell had worked in investment banking for 16 years. Most recently, Mr Mitchell was a managing director at Goldman Sachs in New York, leading the bank's Communications, Media and Entertainment research team, which analysed Internet, entertainment and media companies globally. Mr Mitchell received a degree from Oxford University and holds a Chartered Financial Analyst Certification. Mr Mitchell currently serves as a director of certain subsidiaries of the Company. lan Charles Stone, age 67, has been an independent non-executive director since April 2004. Mr Stone is currently an independent advisor on Technology, Media and Telecoms after retiring from PCCW in Hong Kong in 2011. His career in the last 28 years has been primarily in leading mobile telecoms businesses, and new wireless and Internet technology, during which time he held senior roles in PCCW, SmarTone, First Pacific, Hong Kong Telecom and CSL, as Chief Executive or at Director level, primarily in Hong Kong, and also in London and Manila. Since 2011, Mr Stone has provided telecoms advisory services to telecom companies and investors in Hong Kong, China, South East Asia and the Middle East. Mr Stone has more than 47 years of experience in the telecom and mobile industries. Mr Stone is a fellow member of The Hong Kong Institute of Directors. Mr Stone also serves as an independent non-executive director of a subsidiary of the Company. Tencent Holdings Limited 50 lain Ferguson Bruce, age 77, has been an independent non-executive director since April 2004. Mr Bruce joined KPMG in Hong Kong in 1964 and was elected to its partnership in 1971. He was the Senior Partner of KPMG from 1991 until his retirement in 1996 and served as Chairman of KPMG Asia Pacific from 1993 to 1997. Since 1964, Mr Bruce has been a member of the Institute of Chartered Accountants of Scotland, and is a fellow of the Hong Kong Institute of Certified Public Accountants, with over 53 years of international experience in accounting and consulting. He is also a fellow of The Hong Kong Institute of Directors and the Hong Kong Securities and Investment Institute (formerly known as Hong Kong Securities Institute). Mr Bruce is an independent non-executive director of MSIG Insurance (Hong Kong) Limited. Mr Bruce is currently an independent non-executive director of Goodbaby International Holdings Limited, a manufacturer of durable juvenile products, The 13 Holdings Limited (formerly known as Louis XIII Holdings Limited), a construction, engineering services and hotel development company, and Wing On Company International Limited, a department store operating and real property investment company; all of these companies are publicly listed on the Stock Exchange. Mr Bruce is also an independent non- executive director of Yingli Green Energy Holding Company Limited, a China-based vertically integrated photovoltaic product manufacturer that is listed on the New York Stock Exchange. Mr Bruce was an independent non-executive director of Vitasoy International Holdings Limited, a beverage manufacturing company, up to 4 September 2014, and of Sands China Ltd., an operator of integrated resorts and casinos, up to 11 March 2016, both of these companies are publicly listed on the Stock Exchange. Mr Bruce was also a non-executive director of Noble Group Limited, a commodity trading company that is publicly listed on The Singapore Exchange Securities Trading Limited, up to 11 May 2017, and was also an independent non-executive director of Citibank (Hong Kong) Limited, up to 2 August 2017. Li Dong Sheng, age 60, has been an independent non-executive director since April 2004. Mr Li is the Chairman and Chief Executive Officer of TCL Corporation, which produces consumer electronic products. Mr Li is a non-executive director of Fantasia Holdings Group Co., Limited, a leading property developer and property related service provider in China that is listed on the Stock Exchange. Mr Li is also an independent director of Legrand, the global specialist in electrical and digital building infrastructures, shares of which are listed on the New York Stock Exchange Euronext. Mr Li graduated from South China University of Technology in 1982 with a Bachelor degree in radio technology and has more than 23 years of experience in the information technology field. Mr Li is the Chairman of TCL Communication Technology Holdings Limited, which was delisted for privatisation from the Stock Exchange on 30 September 2016. Mr Li was the Chairman and executive director of the Hong Kong listed TCL Multimedia Technology Holdings Limited up to 22 September 2017. Charles St Leger Searle, age 54, has been a non-executive director since June 2001. Mr Searle is currently the Chief Executive Officer of Naspers Internet Listed Assets. He serves on the board of a number of companies associated with the Naspers Group, including Mail.ru Group Limited that is listed on the London Stock Exchange and MakeMyTrip Limited that is listed on NASDAQ. Prior to joining the Naspers Group, he held positions at Cable & Wireless plc and at Deloitte & Touche in London and Sydney. Mr Searle is a graduate of the University of Cape Town and a member of the Institute of Chartered Accountants in Australia and New Zealand. Mr Searle has more than 24 years of international experience in the telecommunications and Internet industries. Mr Searle also serves as a director of certain subsidiaries of the Company. Directors' Report Directors' Report 52 Tencent Holdings Limited Directors' Report Guo Kaitian, age 45, Senior Vice President, joined the Company in 2002 and has been responsible for overseeing the Company's functional divisions of legal affairs, administration, infrastructure, procurement, public strategy, safety management and corporate social responsibility. Mr Guo received a Bachelor of Law degree from Zhongnan University of Economics and Law in 1996. Mr Guo currently serves as a director of a subsidiary of the Company. Directors' Report Tencent Holdings Limited 54 John Shek Hon Lo, age 49, Chief Financial Officer and Senior Vice President, joined the Company in 2004 and served as the Company's Financial Controller from 2004 to 2008. Mr Lo was appointed as the Company's Vice President and Deputy Chief Financial Officer in 2008 and was appointed as Chief Financial Officer in May 2012. Prior to joining the Company, Mr Lo worked in PricewaterhouseCoopers as Senior Manager (audit services). He is a Fellow of the CPA Australia, a Fellow of the Hong Kong Institute of Certified Public Accountants and a Fellow of the Chartered Institute of Management Accountants. Mr Lo received a Bachelor of Business in Accounting from Curtin University and an EMBA degree from Kellogg Graduate School of Management, Northwestern University and HKUST. Mr Lo currently serves as a director of certain subsidiaries of the Company. Ma Xiaoyi, age 44, Senior Vice President, joined the Company in 2007 and has been responsible for international publishing of Tencent Games, establishing and maintaining long-term business partnerships and cooperation for the Company since November 2008. Prior to joining the Company, Mr Ma served as a General Manager of Games Division of OPTIC Communication Co., Ltd. Prior to that, Mr Ma worked as a General Manager in Shanghai EasyService Technology Development Ltd. Mr Ma graduated from Shanghai Jiaotong University in 1997, and received an EMBA degree from Fudan University in 2008. Mr Ma currently serves as a director of certain subsidiaries of the Company. David A M Wallerstein, age 43, Chief exploration Officer and Senior Executive Vice President, joined the Company in 2001. He drives the Company's active participation in emerging technologies, business areas, and ideas, with a passion for contributing to a more resilient planet. Prior to joining the Company, Mr Wallerstein worked with Naspers in China. Mr Wallerstein currently serves as a director of a subsidiary of the Company. Lu Shan, age 43, Senior Executive Vice President and President of Technology and Engineering Group, joined the Company in 2000 and had served as General Manager for IM Product Divisions, Vice President for Platform Research and Development System and Senior Vice President for Operations Platform System. Since March 2008, Mr Lu has been in charge of management of the Operations Platform System of the Company. Since May 2012, Mr Lu has been in charge of management of Technical Engineering Group. Prior to joining the Company, he worked for Shenzhen Liming Network Systems Limited. Mr Lu received a Bachelor of Science degree in Computer Science and Technology from University of Science and Technology of China (USTC) in 1998. Mr Lu currently serves as a director or officer of certain subsidiaries of the Company. Directors' Report 53 53 Annual Report 2017 Zhang Xiaolong, age 48, Senior Executive Vice President and President of Weixin Group, joined the Company in March 2005 and served as the General Manager for the Guangzhou R&D Division and led the QQ Mail team to be the top mail service provider in China. Later he was promoted to Corporate Vice President and since September 2012, Mr Zhang has been appointed as Senior Vice President in charge of the product and team management of Weixin/WeChat and QQ Mail. He is also responsible for the management and review of major innovation projects. In May 2014, Mr Zhang was promoted to Senior Executive Vice President, in charge of the Weixin Group. Prior to joining the Company, Mr Zhang developed Foxmail independently in 1997 as the first generation of Internet software developer in China. He joined Boda China as Corporate Vice President in 2000, responsible for corporate mail developing. Mr Zhang received his Master's degree in Telecommunications from Huazhong University of Science and Technology in 1994. Tong Tao Sang, age 44, Senior Executive Vice President, President of Social Network Group and Chairman of Tencent Music, joined the Company in 2005. Mr Tong started as a technical architect, and led the product development of the social network platform, Qzone. He drove the open platform initiative of Qzone, which led to the development of the performance advertising business and the cloud services. Since May 2012, Mr Tong has been responsible for the QQ messaging and Qzone social networking platforms, the VIP subscriptions business, QQ Music and the Tencent Cloud services. Prior to joining the Company, Mr Tong worked for Sendmail, Inc. on managing the product development of operator-scale messaging systems. Mr Tong also worked for Oracle on the development and testing of Oracle Server and Oracle Applications. Mr Tong received a Bachelor of Science degree in Computer Engineering from University of Michigan, Ann Arbor in 1994 and a Master of Science degree in Electrical Engineering from Stanford University in 1997. Mr Tong currently serves as a director of certain subsidiaries of the Company. Lau Seng Yee, age 51, Senior Executive Vice President and Chairman of Tencent Advertising, Group Marketing and Global Branding, joined the Company in 2006. Mr Lau serves as Chairman of Tencent Advertising, Group Marketing and Global Branding starting from 24 March 2017 and is responsible for overseeing the Company's Advertising, Group Marketing and Global Branding businesses as well as developing international strategic partnership relationship. Before that, he was in charge of Online Media Group. Mr Lau is a seasoned professional in the media industry with a rare 23 years of on-ground China market experience. In 2007, Mr Lau sat in the advisory board for ad:tech, the globally renowned organisation for Online Marketing. Mr Lau held the post of Vice President of China Advertising Association since 2007. Mr Lau was appointed as the Adjunct Professor of School of Journalism and Communication by Xiamen University in 2010 and also by Fudan University in 2014. Prior to joining the Company, Mr Lau was the Managing Partner of Publicis China and Chief Executive Officer for BBDO China, as well as a few management positions in other multinationals. Mr Lau received an EMBA degree from Rutgers State University of New Jersey, USA. He also completed the Advanced Marketing Management program, and the Advanced Management Program (AMP) in Harvard Business School. In 2011, Mr Lau was honoured by New York based AdAge publication as one of "The World's 21 Most Influential People in Marketing and Media Industry, 2009-2010". In 2015, he was named as Global Media Person of the year award by Cannes Lions International Festival of Creativity. Mr Lau currently sits as a board member in the Asia Pacific Advisory Board of Harvard Business School. Annual Report 2017 The reasons for using Structure Contracts Family + CONNECTED TRANSACTIONS Name of associated corporation Name of director (B) Long position in the shares of associated corporations of the Company Interests of spouse or child under 18 as beneficial owner Interests of beneficial owner * Nature of interest The interest comprises 350,000 shares and 70,000 underlying shares in respect of the awarded shares granted pursuant to the 2007 Share Award Scheme and the 2013 Share Award Scheme. Details of the awarded shares granted to this director are set out above under "Share Award Schemes". The interest comprises 11,300 shares and 35,000 underlying shares in respect of the awarded shares granted pursuant to the 2007 Share Award Scheme and the 2013 Share Award Scheme. Details of the awarded shares granted to this director are set out above under "Share Award Schemes". The interest comprises 30,468,000 shares and 16,500,000 underlying shares in respect of the share options granted pursuant to the Post-IPO Option Scheme II and the Post-IPO Option Scheme III. Details of the share options granted to this director are set out above under "Share Option Schemes". 6. 5. 4. 3. The interest comprises 400,000 shares and 70,000 underlying shares in respect of the awarded shares granted pursuant to the 2007 Share Award Scheme and the 2013 Share Award Scheme. Details of the awarded shares granted to this director are set out above under "Share Award Schemes". Ma Huateng Tencent Computer Personal Directors' Report Tencent Holdings Limited 58 Save as disclosed above, none of the directors or chief executive of the Company and their associates, had interests or short positions in any shares, underlying shares or debentures of the Company and its associated corporations as at 31 December 2017. (registered capital) 54.29% RMB5,971,427 (registered capital) RMB35,285,705 54.29% Approximate % of shareholding and class of shares held Number of shares Personal Shiji Kaixuan 2. Reference is made to the waiver granted by the Stock Exchange regarding the compliance with the applicable disclosure, reporting and shareholders' approval requirements under Chapter 14A of the Listing Rules when the Company was listed in June 2004. 1. Advance Data Services Limited, a British Virgin Islands company wholly-owned by Ma Huateng, holds 723,507,500 shares directly and 96,000,000 shares indirectly through its wholly-owned subsidiary, Ma Huateng Global Foundation. Directors' Report 470,000 * Personal lain Ferguson Bruce (Note 3) 0.0005% 0.005% 46,300 Personal Li Dong Sheng (Note 2) 0.49% 8.63% 46,968,000 * (Note 4) lan Charles Stone ↓ 57 57 Annual Report 2017 (Note 6) 0.0002% 21,474 * Personal Yang Siu Shun (Note 5) 420,000 240,000 0.004% 180,000 Personal Note: The interest comprises 2,868 shares and 18,606 underlying shares in respect of the awarded shares granted pursuant to the 2013 Share Award Scheme. Details of the awarded shares granted to this director are set out above under "Share Award Schemes". Save as disclosed above, none of the directors who are proposed for re-election at the 2018 AGM has a service contract with the Company which is not determinable by the Company within one year without payment of compensation, other than statutory compensation. Pursuant to the trademark licence agreement dated 28 February 2004 entered into between Tencent Technology, as licensor, and Shiji Kaixuan, as licensee, Tencent Technology shall grant to Shiji Kaixuan a non-exclusive licence to use specified trademarks against payment of annual royalties determined as a percentage of Shiji Kaixuan's annual revenues (which may be adjusted pursuant to the agreement or the SKT CFC). During the year, no grant of trademark licence was transacted under such arrangements, save as disclosed elsewhere in this section. The risks associated with Structure Contracts and the actions taken by the Company to mitigate the risks Directors' Report 99 66 65 Annual Report 2017 Pursuant to the co-operation framework agreement entered into between each of the New OPCOS and one of the WFOES, the parties shall cooperate in the provision of communications services. For each agreement, the WFOES shall allow the New OPCOS to use its and its affiliates' assets and provide services to the New OPCOs. The New OPCOS shall transfer all of its Surplus Cash to the WFOEs and its affiliates as consideration. Co-operation committees have also been established according to these agreements. During the year, revenue sharing amounting to approximately RMB4,000,000, RMB5,000,000, and RMB151,000,000 was paid or payable by Wang Dian to Tencent Technology, Cyber Tianjin and Tencent Beijing respectively. Revenue sharing amounting to approximately RMB8,000,000, RMB58,000,000, and RMB32,486 was paid or payable by Beijing BIZCOM to Tencent Technology, Cyber Tianjin and Tencent Beijing respectively. Revenue sharing amounting to approximately RMB2, RMB4,000,000, and RMB2,000,000 was paid or payable by Beijing Starsinhand to Tencent Technology, Cyber Tianjin, and Tencent Beijing respectively. Pursuant to the technical consultancy services agreement dated 28 February 2004 entered into between Tencent Technology, as consultant, and Shiji Kaixuan, Tencent Technology shall provide specified technical consultancy services to Shiji Kaixuan against payment of an annual consultancy service fee determined by the SKT Co-operation Committee within a range of percentages of Shiji Kaixuan's annual revenues. During the year, no consultancy service was transacted under such arrangements, save as disclosed elsewhere in this section. Pursuant to the information consultancy services agreement dated 28 February 2004 entered into between Tencent Technology, as consultant, and Tencent Computer, Tencent Technology shall provide specified information consultancy services to Tencent Computer against payment of an annual consultancy service fee determined by the TCS Co-operation Committee within a range of percentages of Tencent Computer's annual revenues. During the year, no consultancy service was transacted under such arrangements, save as disclosed elsewhere in this section. 11. 10. 9. Directors' Report Tencent Holdings Limited 64 42 Pursuant to the trademark licence agreement dated 28 February 2004 entered into between Tencent Technology, as licensor, and Tencent Computer, as licensee, Tencent Technology shall grant to Tencent Computer a non-exclusive licence to use specified trademarks against payment of annual royalties determined as a percentage of Tencent Computer's annual revenues (which may be adjusted pursuant to the agreement or the TCS CFC). During the year, no grant of trademark licence was transacted under such arrangements, save as disclosed elsewhere in this section. Pursuant to the domain name licence agreement dated 28 February 2004 entered into between Tencent Technology, as licensor, and Shiji Kaixuan, as licensee, Tencent Technology shall grant to Shiji Kaixuan a non-exclusive licence to use specified domain names against payment of annual royalties determined as a percentage of Shiji Kaixuan's annual revenues (which may be adjusted pursuant to the agreement or the SKT CFC). During the year, no grant of domain name licence was transacted under such arrangements, save as disclosed elsewhere in this section. Pursuant to the domain name licence agreement dated 28 February 2004 entered into between Tencent Technology, as licensor, and Tencent Computer, as licensee, Tencent Technology shall grant to Tencent Computer a non-exclusive licence to use specified domain names against payment of annual royalties determined by the TCS Co-operation Committee within a range of percentages of Tencent Computer's annual revenues. During the year, no grant of domain name licence was transacted under such arrangements, save as disclosed elsewhere in this section. Pursuant to the intellectual property transfer agreement dated 28 February 2004 entered into between Cyber Tianjin and Shiji Kaixuan, Shiji Kaixuan shall assign to Cyber Tianjin its principal present and future intellectual property rights, free from encumbrance (except for licences granted in the ordinary course of Shiji Kaixuan's business) in consideration of Cyber Tianjin's undertaking to provide certain technology and information services to Shiji Kaixuan. During the year, no intellectual property transfer was transacted under such arrangements, save as disclosed elsewhere in this section. 8. 7. 6. 5. 4. Due to regulatory limitations restricting foreign investment in businesses providing value-added telecommunications services in China, the Company conducts some of its business in the PRC through the OPCOs. These contractual arrangements may not be as effective in providing control as direct ownership. Pursuant to the Structure Contracts, the arbitration tribunal is entitled to decide compensation for the equity interests or property ownership of OPCOS, decide to implement enforceable remedy (including mandatorily requiring OPCOS to transfer the equity interests of OPCOS to the WFOES, etc.) or order the bankruptcy of OPCOS. Prior to the formation of the arbitration tribunal, the courts of the places where the major assets of OPCOS are situated are entitled to implement interim remedies to ensure the enforcement of the future decisions of the arbitration tribunals. Directors' Report The WFOES have been structured and located in order to benefit from preferential tax treatments offered to companies located in designated economic zones and/or operating software-related businesses. Although the relevant governmental authority has granted such preferential tax treatment to certain WFOES and OPCOS, there can be no assurance that the conditions under which these treatments are provided will always be present. The relevant WFOES and OPCOS would use their reasonable endeavours to take all necessary actions, including but not limited to maintaining or acquiring their status as "High and New Technology Enterprise" or "National Key Software Enterprise", in order to continue to enjoy the reduced income tax rate and the other tax concessions. For details of the risks associated with the Structure Contracts, please refer to the section headed "Risk factors - Risks relating to our structure" in the IPO prospectus. Beneficial owner Long position JPMorgan Chase & Co. 8.63% 819,507,500 Advance Data Services Limited Long position 33.17% 3,151,201,900 Corporate (Note 1) Long position MIH TC of shareholding shares held Approximate % Number of shares/ underlying Nature of interest/capacity Long/ short position Name of shareholder Long/ short position in the shares of the Company As at 31 December 2017, the following persons, other than the directors or chief executive of the Company, had interests or short positions in the shares or underlying shares of the Company which would fall to be disclosed to the Company under the provisions of Divisions 2 and 3 of Part XV of the SFO as recorded in the register required to be kept by the Company under section 336 of the SFO, or who was, directly or indirectly, interested in 5% or more of the shares of the Company: INTERESTS OF SUBSTANTIAL SHAREHOLDERS Directors' Report Tencent Holdings Limited Save as the related parties transaction disclosed in Note 13(a) (Senior management's emoluments), Note 13(b) (Five highest paid individuals), Note 14 (Benefits and interests of directors), Note 20 (Transactions with associates), Note 25 (Loans to investees and investees' shareholders) and Note 33 (Share-based payments) to the consolidated financial statements, no related parties transactions disclosed in the consolidated financial statements constitutes a discloseable connected transaction as defined under the Listing Rules. The Company has complied with the disclosure requirements set out in Chapter 14A of the Listing Rules. Other connected transactions Due to the legal constraints in relation to foreign investment in the telecommunications value-added services industry in the PRC, a number of agreements have been entered into between members of the Group whereby the Company and the WFOEs derive substantially all their revenues from transactions with the OPCOs. The recognition of revenues outlined in these intragroup contracts could be challenged by tax authorities and any adjustment in tax treatment could have a material and adverse impact on the taxable profitability of the Group. As advised by the Company's PRC legal advisers, it is unlikely that the tax treatment of revenues will be challenged by the PRC tax authorities, provided that the transactions under these intra-group contracts represent bona fide transactions conducted on an arm's length basis. The Company will take all necessary actions to ensure and monitor that relevant transactions are to be conducted on an arm's length basis to minimise the risks of adjustment in tax treatment. 345,329,671 63 Annual Report 2017 54.29% by Ma Huateng 22.85% by Zhang Zhidong 11.43% by Xu Chenye 11.43% by Chen Yidan Shiji Kaixuan 11.43% by Chen Yidan Provision of value-added services and Internet advertisement services in the PRC 11.43% by Xu Chenye 22.85% by Zhang Zhidong 54.29% by Ma Huateng Tencent Computer Business activities as at 31 December 2017 Name of the operating companies Registered owners Set out below is the registered owners and business activities of the OPCOS which had entered into transactions with the Group during the year ended 31 December 2017: Particulars of the OPCOS Directors' Report Tencent Holdings Limited 60 60 However, the Company's PRC legal advisers also advised that there are substantial uncertainties regarding the interpretation and application of the currently applicable PRC laws, rules and regulations. Accordingly, the PRC regulatory authorities and PRC courts may in the future take a view that is contrary to the position of the Company's PRC legal advisers concerning the Structure Contracts. In the view of the Company's PRC legal advisers, the arrangement of the Structure Contracts does not violate applicable existing PRC laws and regulations as the Company indirectly operates the value-added telecommunication service business, online games, online advertising and other Internet and wireless portals in the PRC through affiliated OPCOS that hold the necessary licences for the existing lines of businesses. However, Circular 13 does not provide any interpretation of the term “foreign investors" or make a distinction between foreign online game companies and companies under a corporate structure similar to the Group. Thus, it is unclear whether the State General Administration of Press, Publication, Radio, Film and Television will deem the Group's structure and operations to be in violation of these provisions. Requirements related to Structure Contracts (other than relevant foreign ownership restrictions) include the Notice on Further Strengthening the Administration of Pre-examination and Approval of Online Games and the Examination and Approval of Imported Online Games (關於貫徹落實國務院《“三定”規定》和中央編辦有關解釋,進一步加強網絡遊戲前置審批和進口 (the “Circular 13") jointly issued by PRC General Administration of Press and Publication, the National Copyright Administration and the National Office of Combating Pornography and Illegal Publications in September 2009 provides that foreign investors are not permitted to invest in online game-operating businesses in the PRC via wholly owned, equity joint venture or co-operative joint venture investments and further expressly prohibits foreign investors from gaining control over or participating in domestic online game operators through indirect ways such as establishing other joint venture companies or entering into contractual or technical arrangements with the Chinese licence holders. 2017 Requirements related to Structure Contracts (other than relevant foreign ownership restrictions) as at 31 December Directors' Report Provision of Internet advertisement services in the 63 PRC Beijing BIZCOM Pursuant to the amended and restated intellectual property transfer agreement dated 28 February 2004 entered into between Tencent Technology and Tencent Computer, Tencent Computer shall assign to Tencent Technology its principal present and future intellectual property rights, free from encumbrances (except for licences granted in the ordinary course of Tencent Computer's business) in consideration of Tencent Technology's undertaking to provide certain technology and information services to Tencent Computer. During the year, no intellectual property transfer was transacted under such arrangements, save as disclosed elsewhere in this section. Pursuant to the SKT CFC, the parties shall co-operate in the provision of communications services. Cyber Tianjin and its affiliates shall allow Shiji Kaixuan to use its and its affiliates' assets and to provide services to Shiji Kaixuan. Shiji Kaixuan shall transfer all of its Surplus Cash to Cyber Tianjin and its affiliates as consideration. The parties also established the SKT Co-operation Committee according to this agreement. During the year, no service was transacted under such arrangements, save as disclosed elsewhere in this section. Pursuant to the TCS CFC, the parties shall co-operate in the provision of communications services. Tencent Technology and its affiliates shall allow Tencent Computer to use its and its affiliates' assets and to provide services to Tencent Computer. Tencent Computer shall transfer all of its Surplus Cash to Tencent Technology and its affiliates as consideration. The parties also established the TCS Co-operation Committee according to this agreement. During the year, revenue sharing amounting to approximately RMB53,832,000,000, RMB2,933,000,000, RMB 16,895,000,000, RMB13,417,000,000, RMB6,940,000,000, RMB1,587,000,000, RMB951,000,000, RMB228,000,000, RMB7,414,000,000, RMB873,000,000 and RMB69,000,000 were paid or payable by Tencent Computer to Tencent Technology, Cyber Tianjin, Tencent Beijing, Tencent Chengdu, Tencent Shanghai, Tencent Wuhan, Chongqing Tencent Information, Shanghai Tencent Information, Shenzhen Tencent Information, Hainan Network, and Guangzhou Tencent Technology respectively. In addition, during the year, Internet data center service fees amounting to approximately RMB674,000,000 and RMB149,000,000 were paid or payable by Tencent Computer to Cyber Tianjin and Shanghai Tencent Information, and IOS account usage fees amounting to RMB50,000, RMB50,000, RMB50,000 and RMB50,000 were paid or payable to Tencent Technology, Cyber Tianjin, Tencent Beijing and Tencent Shanghai respectively. 3. 2. 1. Transactions carried out during the year ended 31 December 2017, which have been eliminated in the consolidated financial statements of the Group, are set out as follows: Directors' Report Tencent Holdings Limited 62 62 The Auditor had carried out procedures on the transactions pursuant to the Structure Contracts and had provided a letter to the Board confirming that such transactions had been approved by the Board and had been entered into, in all material respects, in accordance with the relevant Structure Contracts and had been operated so as to transfer the Surplus Cash of the OPCOS as at 31 December 2017 to the WFOES and that no dividends or other distributions had been made by the OPCOS to the holders of their equity interests. The Company's independent non-executive directors had reviewed the Structure Contracts (as defined in the section "Our History and Structure - Structure Contracts" of the IPO prospectus of the Company) and confirmed that the transactions carried out during the financial year had been entered into in accordance with the relevant provisions of the Structure Contracts and, had been operated so as to transfer by the date of this annual report Tencent Computer's and Shiji Kaixuan's Surplus Cash (as defined in the section “Our History and Structure - Structure Contracts" of the IPO prospectus of the Company) as at 31 December 2017 to Tencent Technology, Cyber Tianjin (formerly known as Shidai Zhaoyang Technology (Shenzhen) Company Limited in the IPO prospectus of the Company), Tencent Beijing, Shenzhen Tencent Information, Tencent Chengdu, Chongqing Tencent Information, Shanghai Tencent Information, Tencent Shanghai, Tencent Wuhan, Hainan Network and Guangzhou Tencent Technology. The Company's independent non-executive directors had also confirmed that no dividends or other distributions had been made by the OPCOS to the holders of their equity interests and the terms of any new Structure Contracts entered into, renewed and/or cloned during the relevant financial period are fair and reasonable so far as the Group was concerned and in the interests of the Company's shareholders as a whole. To this extent, similar Structure Contracts were entered into relating to the New OPCOS. Review of the transactions carried out under the Structure Contracts during the financial year Directors' Report 61 Annual Report 2017 The above OPCOS are significant to the Group as they hold relevant licences to provide Internet information services and other value-added telecommunications services. The aggregate gross revenue and net asset value of the above OPCOS that are subject to the Structure Contracts amounted to approximately RMB139 billion for the year ended 31 December 2017 and approximately RMB25 billion as at 31 December 2017 respectively. Provision of value-added services in the PRC 50% by Chen Guangyu 50% by Tang Yibin Provision of value-added services in the PRC Tencent Computer Provision of value-added services in the PRC Shiji Kaixuan Beijing Starsinhand Wang Dian Investment manager Corporate (Note 2) Trustee No contracts concerning the management and administration of the whole or any substantial part of the business of the Company were entered into or existed during the year. MAJOR CUSTOMERS AND SUPPLIERS For the year ended 31 December 2017, the five largest customers of the Group accounted for approximately 2.66% of the Group's total revenues while the largest customer of the Group accounted for approximately 0.80% of the Group's total revenues. In addition, for the year ended 31 December 2017, the five largest suppliers of the Group accounted for approximately 16.40% of the Group's total purchases while the largest supplier of the Group accounted for approximately 5.20% of the Group's total purchases. None of the directors, their close associates or any shareholder (which to the knowledge of the directors owns more than 5% of the number of issued shares of the Company) had an interest in any of the major customers or suppliers noted above. 880 68 Tencent Holdings Limited Directors' Report AUDIT COMMITTEE The Audit Committee, together with the Auditor, has reviewed the Group's audited consolidated financial statements for the year ended 31 December 2017. The Audit Committee has also reviewed the accounting principles and practices adopted by the Group and discussed auditing, risk management, internal control and financial reporting matters. MANAGEMENT CONTRACTS COMPLIANCE WITH THE CORPORATE GOVERNANCE CODE As to the deviation from code provisions A.2.1 and A.4.2 of the CG Code, the Board will continue to review the current structure from time to time and shall make necessary changes when appropriate and inform the shareholders accordingly. ENVIRONMENT AND COMPLIANCE WITH LAWS The Group is committed to minimising the impact on the environment from our business activities and the details of such efforts are set out in the section headed “Environment” in the Environmental, Social and Governance Report in this annual report. As far as the Board is aware, the Group has complied with the relevant laws and regulations that have a significant impact on the Group in all material respects. The Company has adopted a code of conduct regarding directors' securities transactions on terms no less exacting than the required standard set out in the Model Code. The directors of the Company have complied with such code of conduct throughout the accounting year covered by this annual report. PRE-EMPTIVE RIGHTS There is no provision for pre-emptive rights under the Articles of Association, or the laws of Cayman Islands, which would oblige the Company to offer new shares on a pro rata basis to existing shareholders. Annual Report 2017 69 69 90,650,033 Save as disclosed in the 2017 interim report and the corporate governance report in the 2016 annual report of the Company, none of the directors of the Company is aware of any information which would reasonably indicate that the Company has not, for any part of the year ended 31 December 2017, complied with the code provisions as set out in the CG Code. Save as disclosed above, the Company had not been notified of any other persons (other than the directors or chief executive of the Company) who, as at 31 December 2017, had interests or short positions in the shares and underlying shares of the Company as recorded in the register required to be kept under section 336 of the SFO. ADOPTION OF CODE OF CONDUCT REGARDING DIRECTORS' SECURITIES TRANSACTIONS Such long position includes derivative interests in 170,400,394 underlying shares of the Company of which 11,434,756 underlying shares are derived from listed and physically settled derivatives, 6,366,100 underlying shares are derived from listed and cash settled derivatives, 37,773,991 underlying shares are derived from unlisted and physically settled derivatives and 114,825,547 underlying shares are derived from unlisted and cash settled derivatives. It also includes 252,244,988 shares in lending pool. 55,297 Such short position includes derivative interests in 172,159,686 underlying shares of the Company of which 9,198,803 underlying shares are derived from listed and physically settled derivatives, 13,810,660 underlying shares are derived from listed and cash settled derivatives, 26,774,810 underlying shares are derived from unlisted and physically settled derivatives and 122,375,413 underlying shares are derived from unlisted and cash settled derivatives. Approved lending agent 252,244,988 Total (Note 3(i)): 7.25% Short position Beneficial owner 199,724,405 2.10% (Note 3(ii)) 688,279,989 67 Annual Report 2017 Advance Data Services Limited holds 723,507,500 shares directly and 96,000,000 shares indirectly through its wholly-owned subsidiary, Ma Huateng Global Foundation. As Advance Data Services Limited is wholly-owned by Ma Huateng, Mr Ma has an interest in these shares as disclosed under the section of "Directors' Interests in Securities". MIH TC is controlled by Naspers Limited through its wholly-owned intermediary companies, MIH Services FZ LLC (formerly known as MIH (Mauritius) Limited), MIH Ming He Holdings Limited and MIH Holdings Proprietary Limited. As such, Naspers Limited, MIH Services FZ LLC, MIH Ming He Holdings Limited and MIH Holdings Proprietary Limited are deemed to be interested in the same block of 3,151,201,900 shares under Part XV of the SFO. 3. (ii) (i) 1. Note: Directors' Report 2. Corporate Governance Committee reviews the Company's compliance with the CG Code and disclosure in the Corporate Governance Report. Corporate Governance Report reviews and monitors the training and continuous professional development of the directors and senior management team; reviews and monitors the Company's policies and practices on its compliance with legal and regulatory requirements; develops, reviews and monitors the code of conduct and compliance manual (if any) applicable to employees and directors; reviews the shareholders communication policy and makes recommendations to the Board where appropriate to enhance effective communications between the Company and its shareholders; and reviews the Company's corporate governance and makes recommendations to the Board; Nomination Committee • identifies, considers and makes recommendations on mergers, acquisitions and disposals; and ensures compliance with the Listing Rules and any other relevant laws and regulations on any mergers, acquisitions and disposals. reviews and monitors the structure, size, composition and diversity of the Board in light of the Company's strategy; identifies suitable and qualified individuals and makes recommendations to the Board as to new Board members, by taking into account the individual's experience, knowledge, skills and background, as well as the Listing Rules requirements; reviews and makes recommendations to the Board on individuals nominated to be directors by shareholders; assesses the independence of independent non-executive directors; and 73 reviews and monitors the implementation of the board diversity policy of the Company. Remuneration Committee Investment Committee Annual Report 2017 Tencent Holdings Limited reviews the work done by the Company's management with respect to risk management and internal control systems; and reviews and approves proposals about the policy and structure of remuneration of directors and senior management team; Further, in compliance with Rule 3.10 of the Listing Rules, two of our independent non-executive directors have the appropriate professional qualifications of accounting or related financial management expertise, and provide valuable advice from time to time to the Board. The Company has also received from each independent non-executive director a confirmation annually of his independence and the Nomination Committee has conducted an annual review and considers that all independent non-executive directors are independent, taking into account of the independence guidelines set out in Rule 3.13 of the Listing Rules in the context of the length of service of each independent non-executive director. The Board values the importance of professional judgment and advice provided by non-executive directors to safeguard the interests of the shareholders. The non-executive directors contribute diversified qualifications and experience to the Group by expressing their views in professional, constructive and informed manner, and actively participate in Board and committee meetings and to bring professional judgment and advice on issues relating to the Group's strategies, policies, performance, accountability, resources, key appointments, standards of conduct, conflicts of interests and management process, with the shareholders' interests being the utmost important factor. The non-executive directors also exercise their professional judgment and utilise their expertise to scrutinise the Company's performance in achieving agreed corporate goals, and monitor performance reporting. In order to take advantage of the skills, experiences and diversity of perspectives of the directors and in order to ensure that the directors give sufficient time and attention to the Group's affairs, we request each of the directors to disclose to the Company, on a quarterly basis, the number and the nature of offices held in public companies or organisations and other significant commitments. The Board's composition is in compliance with the requirement under Rule 3.10A of the Listing Rules that the number of independent non-executive directors must represent at least one-third of the Board. The Board believes that the balance between the executive directors and the non-executive directors is reasonable and adequate to provide sufficient checks and balances that safeguard the interests of the shareholders and the Group. A list of directors and their respective biographies are set out on pages 48 to 51 of this annual report. As at the date of this annual report, the Board is comprised of eight directors, with two executive directors, two non-executive directors and four independent non-executive directors. During the year ended 31 December 2017 and up to the date of this annual report, there is no change to the composition of the Board. Composition oversees the risks undertaken by the Company including determining the level of risk the Company expects to and is able to take. Corporate Governance Report The Board is therefore of the view that there is an adequate balance of power and that appropriate safeguards are in place. Nevertheless, the Board will continue to regularly monitor and review the Company's current structure and to make necessary changes when appropriate. Besides, all major decisions have been made in consultation with members of the Board and appropriate committees, as well as the senior management team. Chief officers and senior executives are invited to attend Board meetings from time to time to make presentations and answer Board's enquiries. In addition, directors are encouraged to participate actively in all Board and committee meetings of which they are members, and the Chairman ensures that all issues raised are properly briefed at the Board meetings, and he works with the senior management team to provide adequate, accurate, clear, complete and reliable information to members of the Board in a timely manner. Further, the Chairman ensures that adequate time is available for discussion for all items at the Board meetings. During the year ended 31 December 2017, the Chairman held a meeting with the non-executive directors (including the independent non-executive directors) without the presence of the executive directors as required by the Listing Rules. In view of the ever-changing business environment in which our Group operates, the Chairman and Chief Executive Officer must be technically sophisticated and sensitive to fast and rapid market changes, including changes in users' preferences, in order to promote the different businesses of the Group. The Board thus considers that a segregation of the roles of the Chairman and Chief Executive Officer may create unnecessary costs for the daily operation of the Group. handles the relationship with the Company's external auditor; • reviews the Company's financial information; exercises oversight of the Company's financial reporting system; 76 ensures that these remuneration proposals are aligned to corporate goals and objectives; and √ 74 V V V Maintaining a high level of corporate governance and integrity cannot depend solely on the Board's efforts; each of the Group's employees is also required to contribute to such cause. A code of conduct policy with an emphasis on integrity and respect is distributed by the Company to all employees and forms part of their employment agreements. Annual Report 2017 75 Corporate Governance Report In addition, the Board has adopted various practices to bring the Group to a high level of corporate governance and compliance with the CG Code. V To stay abreast of the high level of corporate governance and maintain transparency of our corporate governance practices, we have continued to adopt and foster the following corporate governance practices: review of the shareholders communication policy has been and will be conducted on a regular basis; training has been and will continue to be provided to directors on a timely basis, including briefing the directors on any updates to the Listing Rules and relevant laws; the company secretary attends training in compliance with the Listing Rules requirements; and informal updates from time to time and structured monthly updates on the Company's performance, position and prospects are provided to the directors. Chairman and Chief Executive Officer Mr Ma Huateng serves as the Chairman and Chief Executive Officer of the Company. This is at variance with code provision A.2.1 of the CG Code, which provides that the roles of chairman and chief executive should be separate and should not be performed by the same individual. The division of responsibilities between the chairman and chief executive should be clearly established and set out in writing. As part of our corporate governance practice to provide transparency to the investor community and in compliance with the Listing Rules and the CG Code, independent non-executive directors are identified as such in all corporate communications containing the names of the directors. In addition, an updated list of directors identifying the independent non-executive directors and the roles and functions of the directors is maintained on the Company Website and the Stock Exchange's website. • 1 Attended training/ seminar/ conference arranged by the Company or other external parties or read relevant materials. Yang Siu Shun lan Charles Stone Tencent Holdings Limited Corporate Governance Report The major work of the committees during the year 2017 is set out on pages 80 to 83. All directors have full and timely access to all relevant information as well as the advice and services of the Company's general counsel and the company secretary, with a view to ensuring that Board procedures and all applicable rules and regulations are followed. All directors may also obtain independent professional advice at the Company's expense for carrying out their functions. We believe education and training are important for maintaining an effective Board. New directors undergo an orientation programme designed to provide a thorough understanding of the Group's operations and businesses, and also receive a handbook outlining their responsibilities under the Listing Rules and applicable laws. Existing directors are provided with tailored training programmes covering topics such as best practices in corporate governance, legal and regulatory trends and, given the nature of our business, emerging technologies and products. Directors also regularly meet with the senior management team to understand the Group's businesses, governance policies and regulatory environment. During the year ended 31 December 2017, the Company arranged training on topics relating to corporate governance, legal and regulatory updates and product trends which are relevant to the Group's businesses. The chart below summarises the participation of each of the directors in continuous professional development during the year ended 31 December 2017: Name of director Participated in continuous professional development¹ Executive directors Ma Huateng Lau Chi Ping Martin Non-executive directors Jacobus Petrus (Koos) Bekker Charles St Leger Searle Independent non-executive directors Li Dong Sheng lain Ferguson Bruce ensures that no director or any of his associates is involved in deciding his own remuneration. Annual Report 2017 CORPORATE GOVERNANCE PRACTICES 72 2/4 Li Dong Sheng Independent non-executive directors == 1/1 1/1 1/1 0/1 1/1 3/3 22 2/2 8/8 4/4 Charles St Leger Searle 4/4 1/1 33 3/3 0/1 1/1 1/1 33 3/3 1/1 2/2 8/8 4/4 lan Charles Stone 1/1 1/1 1/1 2/2 8/8 4/4 lain Ferguson Bruce 0/1 Jacobus Petrus (Koos) Bekker 77 Non-executive directors 1/1 Governance Audit • Extraordinary Annual Corporate The Board met four times in 2017. The attendance of each director at Board, committee meetings, annual general meeting and extraordinary general meeting, whether in person or by means of electronic communication, is detailed in the table below: Attendance/ No. of Board, Committee Meetings, Annual General Meeting and Extraordinary General Meeting Nomination Board Activity Tencent Holdings Limited 78 The Chairman, in accordance with the Articles of Association, whilst holding such office is not subject to retirement by rotation nor taken into account in determining the number of directors to retire in each year. Therefore, there is a deviation from code provision A.4.2 of the CG Code. The Chairman is one of the founders of the Group and he plays a key role in the growth and development of the Group and his continuing presence in the Board is vital to the sustainable development of the Group. Given the importance of the Chairman's role in the development of the Group, the Board considers that the deviation from code provision A.4.2 of the CG Code has no material impact on the operation of the Group as a whole. Code provision A.4.2 of the CG Code provides that all directors appointed to fill a casual vacancy should be subject to election by shareholders at the first general meeting after appointment. Every director, including those appointed for a specific term, should be subject to retirement by rotation at least once every three years. The Board is the core of the Group's success, and with the appropriate composition of the Board, we can benefit from the right set of skills, experience and diversity of perspectives to take the Company forward. Therefore, it is essential for the Company to maintain a formal, considered and transparent procedure for the appointment of new directors to the Board. It is our corporate governance practice and in accordance with the Articles of Association that all directors (except for the Chairman) should be subject to re-election at regular intervals and the resignation and removal of any director should be explained with reasons. In the 2017 annual general meeting, Messrs Lau Chi Ping Martin and Charles St Leger Searle retired and were re-elected, and Mr Yang Siu Shun was re-elected in accordance with Article 86(3) of the Articles of Association. Appointments, Re-election and Removal Corporate Governance Report Corporate Governance Report Remuneration General General 1/1 1/1 1/1 1/1 4/4 4/4 Lau Chi Ping Martin Ma Huateng Executive directors Meeting Meeting Committee Committee Committee Committee Board Name of director == Audit Committee 4/4 To better serve the long term interests of our stakeholders, the Board delegates certain matters requiring particular time, attention and expertise to its committees. The Board has determined that these matters are better dealt with by the committees as they require independent oversight and specialist input. As such, the Board has established five committees to assist the Board: Audit Committee, Corporate Governance Committee, Investment Committee, Nomination Committee and Remuneration Committee. Each of the committees has its terms of reference which clearly specify its powers and authorities. All committees report back to the Board and make recommendations to the Board if necessary. Ma Huateng On behalf of the Board The financial statements have been audited by PricewaterhouseCoopers who will retire and, being eligible, offer themselves for re-appointment at the 2018 AGM. Directors' Report AUDITOR Tencent Holdings Limited 70 70 The register of members will be closed from Wednesday, 23 May 2018 to Thursday, 24 May 2018, both days inclusive, during which period no transfer of shares will be registered. In order to qualify for the proposed final dividend, all duly completed transfer forms accompanied by the relevant share certificates must be lodged with the Company's branch share registrar, Computershare Hong Kong Investor Services Limited, at Shops 1712-1716, 17th Floor, Hopewell Centre, 183 Queen's Road East, Wan Chai, Hong Kong for registration not later than 4:30 p.m. on Monday, 21 May 2018. (B) Entitlement to the Proposed Final Dividend The register of members will be closed from Friday, 11 May 2018 to Wednesday, 16 May 2018, both days inclusive, during which period no transfer of shares will be registered. In order to be entitled to attend and vote at the 2018 AGM, all duly completed transfer forms accompanied by the relevant share certificates must be lodged with the Company's branch share registrar, Computershare Hong Kong Investor Services Limited, at Shops 1712-1716, 17th Floor, Hopewell Centre, 183 Queen's Road East, Wan Chai, Hong Kong for registration not later than 4:30 p.m. on Thursday, 10 May 2018. (A) Entitlement to Attend and Vote at the 2018 AGM CLOSURE OF REGISTER OF MEMBERS Chairman Based on information that is publicly available to the Company and within the knowledge of its directors, the directors confirm that the Company has maintained during the year the amount of public float as required under the Listing Rules. The total remuneration cost incurred by the Group for the year ended 31 December 2017 was RMB34,866 million (2016: RMB23,433 million). The remuneration policy and package of the Group's employees are periodically reviewed. Apart from pension funds and in- house training programmes, discretionary bonuses, share awards and share options may be awarded to employees according to the assessment of individual performance. As at 31 December 2017, the Group had 44,796 employees (2016: 38,775). The number of employees employed by the Group varies from time to time depending on needs and employees are remunerated based on industry practice. EMPLOYEE AND REMUNERATION POLICIES Directors' Report 2/2 1/1 At the Board meetings, the Board discussed a wide range of matters, including the Group's overall strategies, financial and operational performances, approved the annual, interim and quarterly results of the Group, the appointment of directors, business prospects, regulatory compliance and corporate governance, and other significant matters. The company secretary, in consultation with the Chairman and the senior management team, prepares the agenda for each meeting and all directors are given the opportunity to include matters for discussion in the agenda. The company secretary also ensures that all applicable rules and regulations in relation to the Board meetings are followed. The company secretary sends notice of the Board meeting to each of the directors at least 14 days in advance of each regular Board meeting. The company secretary also sends the agenda, board papers and relevant information relating to the Group to each of the directors at least 3 days in advance of each regular Board meeting and committee meeting, and keeps the directors updated on the Group's financial performance and latest developments. If any director raises any queries, steps will be taken to respond to such queries as promptly and fully as possible. If there is potential or actual conflict of interests involving a substantial shareholder or a director, such director will declare his interest and will abstain from voting on such matters. The directors may approach the Company's senior management team when necessary. The directors may also seek independent professional advice at the Company's expense in appropriate circumstances. Annual Report 2017 79 19 The Company's governance structure of these committees can be summarised as follows: Yang Siu Shun SUFFICIENCY OF PUBLIC FLOAT Hong Kong, 21 March 2018 1/1 71 The Board delegates the responsibility of day-to-day business and operations to the Company's senior management team, which includes its chief officers, the president and executive vice-presidents. The senior management team meets once every two weeks or as frequent as necessary to formulate policies and make recommendations to the Board. The senior management team administers, enforces, interprets and supervises compliance with the internal rules and operational procedures of the Company as well as its subsidiaries and conducts regular reviews, recommends and advises on appropriate amendments to such rules and procedures. The senior management team reports to the Board on a regular basis and communicates with the Board whenever required. regularly evaluates its own performance and effectiveness. Annual Report 2017 considers and, if appropriate, declares the payment of dividends to shareholders; and monitors non-financial aspects pertaining to the businesses of the Group; establishes Board committees with clear terms of reference and responsibilities as appropriate; ensures that the Group has appropriate risk management, internal control, internal audit and regulatory compliance procedures in place and that it communicates adequately with shareholders and stakeholders; • Corporate Governance Report Tencent Holdings Limited determines director selection, orientation and evaluation; determines the Group's communication policy; approves the Company's financial statements and interim and annual reports; appoints the Chief Executive Officer, who reports to the Board, and ensures that succession is planned; defines levels of delegation in respect of specific matters, with required authority to Board committees and management; 72 retains full and effective control over the Group and monitors management with regard to the implementation of the approved annual business plan and budget; Maintaining the highest standards of corporate governance and ethical business practices are core values of the Group. The Board views effective corporate governance practices as a priority of the Group, with the aim of providing our investors with a thorough understanding of the Group's management and how such management oversees and manages different businesses of the Group. Our belief is that investors will realise significant long-term value when the Group's businesses are conducted in an open and responsible manner. Ethical business practices go hand in hand with strong corporate governance, and we believe that running our businesses in an ethical manner will lead to public trust and will ultimately create shareholder value for the Group. The Company's corporate governance practices are based on the code provisions as set out in the CG Code. The Board believes that throughout the year ended 31 December 2017, the Company complied with the applicable code provisions set out in the CG Code, except for the deviation from code provisions A.2.1 regarding the segregation of the roles of the chairman and chief executive and A.4.2 regarding the retirement and re-election of directors. Corporate Governance Report BOARD OF DIRECTORS Responsibilities The Board continues to monitor and review the Company's corporate governance practices and makes necessary changes when appropriate. The Board's fundamental responsibility is to exercise its best judgment and to act in the best interests of the Company and its shareholders. The Board oversees management's efforts to promote the Company's success while operating in an effective and responsible manner. The Board also formulates the Company's overall business strategy and monitors management's execution of such strategy. The Board has defined the business and governance issues for which it needs to be responsible for, and these matters are reviewed periodically to ensure that the Company maintains effective and up-to-date corporate governance practices. In this regard, the Board: • determines the Group's mission, provides its strategic direction and is responsible for the approval of strategic plans; • approves the annual business plan and budget proposed by management; 8/8 The Third Line of Defence mainly consists of the functions of internal audit and anti-fraud investigation under the IA. Corporate Governance Report Tencent Holdings Limited 84 The Board and management have always attached significance to the Company's risk management and internal control systems. In 2017, the Company has invested even more resources in the continuous improvement of the risk management and internal control systems, which have also increased the awareness of risk management among the employees. The internal control function has continuously worked closely with and provided proactive supports to the business groups in their business development and risk management. Furthermore, the IA has also continued to promote the deployment of continuous audits to provide more effective and timely independent evaluations. The connection and interaction among the three lines of defence have been further strengthened to have more positive supports to the Company. These systems are designed to manage rather than eliminate the risk of failure to achieve business objectives, and can only provide reasonable but not absolute assurance against material misstatement or loss. The anti-fraud investigation function is responsible for receiving whistleblower reports through various channels and for following up and investigating alleged fraudulent activities. It also assists management in promoting the "Tencent Sunshine Code of Conduct" (the “Sunshine Code") and the value of integrity to all employees of the Company. The IA has direct reporting lines to the Audit Committee. The IA holds a high degree of independence and is responsible for providing an independent evaluation on the effectiveness of the Company's risk management and internal control systems, and monitoring management's continuous improvement over the risk management and internal control areas. Risk Management The First Line of Defence is mainly formed by the business and functional departments of each business group of the Company who are responsible for the day-to-day operation and management. It is responsible for designing and implementing controls to address the risks. The Second Line of Defence is mainly the IC. This line of defence is responsible for formulating policies related to the risk management and internal control of the Company and for planning and implementing the establishment of integrated risk control systems. For ensuring effective implementation of such systems, this line of defence also assists and supervises the first line of defence in the establishment and improvement of risk management and internal control systems. Risk Management -- The Second Line of Defence The First Line of Defence -- Operation and Management To ensure that the risk management and internal control systems are effective, the Company, under the supervision and guidance of the Board and factoring the actual needs of the Company, has adopted the "Three Lines of Defence" internal monitoring model as an official organisational structure for risk management and internal control. Corporate Governance Report 83 Annual Report 2017 The Company is committed to continuously improving the risk management system, including structure, process and culture, through the enhancement of risk management ability, to ensure long-term growth and sustainable development of the Company's business. The Board acknowledges that it is the Board's responsibility to ensure that the Company has established and maintained adequate and effective risk management and internal control systems. The Board delegates its responsibility to the Audit Committee to review the practices of management with respect to risk management and internal control, including the design, implementation and supervision of the risk management and internal control systems. This review formally takes place on a quarterly basis. The Audit Committee also reviews the effectiveness of the risk management and internal control systems on an annual basis. The Board is responsible for overseeing the risk appetite of the Company including determining the risk level the Company expects and is able to take, and proactively considering, analysing and formulating strategies to manage the key risks that the Company is exposed to. The Third Line of Defence -- Independent Assurance The Company has established a risk management system (including the "Three Lines of Defence" internal monitoring model as detailed above) which sets out the roles and responsibilities of each relevant party as well as the relevant risk management policies and processes. Each business group of the Company, on a regular basis, identifies and assesses risk factors that may negatively impact the achievement of its objectives, and formulates appropriate response measures. The Company's staff also attends training in relation to risk management and internal controls on a regular basis. Below is a summary of the significant risks of the Company along with the applicable response strategies. The Company's risk profile may change and the list below is not intended to be exhaustive. Being an Internet company with a wide variety of rapidly-changing businesses, the Company has adopted the following dynamic risk management process in response to the ever-changing risk landscape: Adequate and effective risk management and internal control systems are key to safeguarding the achievement of the Company's business strategies. The risk management and internal control systems shall also ensure the achievement of the Company's objectives in operational effectiveness and efficiency, reliable financial reporting, and compliance with applicable laws, regulations and policies. Tencent Holdings Limited The Company is accumulating and solidifying its experience in the 2B business. The Company has been proactively responding to the challenges by optimising its organisational structure and resource allocation, recruiting more 2B business professional talents and setting up appropriate mechanisms to ensure the effective operation of 2B business for rapid and sustained development. With the rapid development of the 2B business of the Company, if the Company fails to optimise its organisational structure with support from professional talents to quickly explore new business operating and management models, and improve its cooperation mechanisms with various business partners, it may affect the continuous healthy development of the 2B business. 2B business risk The Company stays on top of the industry trends, keeps track of the development of new technologies and stays relevant through innovation. The Company focuses on changes in user experience, and continuously recruits more talents, enhances its technical capabilities and innovation environment to develop products that meet the expectations of the market. The Company leverages the strength of the existing platforms to seek better business partners for exploration of new business opportunities and better responding to the market needs. The Company has established a number of open platforms with the aim to promote "mutual benefit and win-win” concept, and to strengthen the cooperation with its business partners. For example, "Double Hundred Plan" of Tencent Westart Space, which incubates potential startup companies, has enhanced its collaboration with business partners and its competitiveness in the market. The Internet industry is highly competitive, innovative and ever-changing. The cross-sectoral expansion of non-internet companies adds more new participants to the market. The users' desire for innovative products and service is also increasing. Therefore, to attract new users while maintaining its existing market share is still one of the challenges of the Company. The lack of innovation or slow innovation in technology and product would impair the core competitiveness of the Company. 86 2. Market competition and innovation risk 1. On behalf of the Board, the Audit Committee assists the Board in supervising the overall risk status of the Company and evaluating the change in the nature and severity of the Company's major risks. The Audit Committee considers that management has taken appropriate measures to address and manage the significant risks that they are responsible for at a level acceptable to the Board. Corporate Governance Report Corporate Governance Report Annual Report 2017 In 2017, management has identified and determined eight significant risks of the Company through the risk management process detailed above. Comparing with 2016, "2B business risk" and "Crisis management and reputation risk" are the two additional risks identified and disclosed as significant risks of the Company in 2017. As the Company's business scale, scope and complexity have evolved, so does its external environment, management considers that the Company is still facing the six significant risks disclosed in 2016 - the business continuity risk stays at the similar level as last year while the other risks increased in different degrees. Significant Risks of the Company The Audit Committee, on behalf of the Board, assesses and determines the nature and level of the risks that the Company is willing to take in order to achieve its business objectives and formulates appropriate response strategies which include designating responsible departments for handling each significant risk. The Audit Committee provides guidance to the Company's management to implement effective risk management system with supports from the IC. The IC reviews and evaluates the responses to significant risks from time to time, and reports to the Audit Committee at least once a year; and The IC collects, analyses and consolidates a list of significant risks at the company level, and provides input on risk response strategies and control measures for such risks. These significant risks as well as the corresponding risk responses and control measures will be reviewed by senior management and subsequently by the Audit Committee before reporting to the Board; Business and functional departments of each business group identify, assess and respond to risks in the course of operation in a systematic manner, escalating concerns and communicating results to the IC; Risk Management Process As part of the Board's responsibility, the Board ensures that a balanced and clear assessment of the Group's performance and prospects is presented. The directors acknowledge that it is their responsibility to prepare the accounts that give a true and fair view of the Group's financial position on a going-concern basis and other announcements and financial disclosures. To assist the Board in discharging its responsibilities, the senior management team provides updates to the Board from time to time, including the Group's business and financial position in sufficient detail, to give the directors a balanced, understandable and clear assessment of the performance, position and prospects of the Group. The senior management team also provides all necessary and relevant information to the Board, giving the directors sufficient explanation and information they need to discharge their responsibilities and make an informed assessment of financial and other information put before them for approval. The Company auditor's statement in respect of their reporting responsibilities is set out in the "Independent Auditor's Report". The Corporate Governance Committee's major work during the year 2017 includes the following: In respect of non-executive directors, the Remuneration Committee has reviewed the fees payable to them taking into account the particular nature of their duties, relevant guidance available and the requirements of the Listing Rules. reviewed the Company's compliance with the ESG Reporting Guide and disclosure in the Environmental, Social and Governance Report; discussed on the arrangements made for directors and senior management team to attend training sessions for continuous professional development; The Corporate Governance Committee met twice in 2017. Individual attendance of each Corporate Governance Committee member is set out on page 79. The Corporate Governance Committee comprises only non-executive directors. Its members are Mr Charles St Leger Searle (non-executive director), Mr lain Ferguson Bruce, Mr Ian Charles Stone and Mr Yang Siu Shun (all of them are independent non-executive directors). The Corporate Governance Committee is chaired by Mr Charles St Leger Searle. Corporate Governance Committee PricewaterhouseCoopers ("PwC") is the Group's external auditor. The Audit Committee annually reviews the relationship of the Company with PwC. Having also reviewed the effectiveness of the external audit process as well as the independence and objectivity of PwC, the Audit Committee is satisfied with this relationship. As such, the Audit Committee has recommended their re-appointment at the 2018 AGM. the effectiveness of the Company's financial reporting system, the system of internal controls in operation, risk management system and associated procedures within the Group. the adequacy of resources, qualifications and training of the Group's finance department; and the plans (including those for 2017), resources and work of the Company's internal auditors; Corporate Governance Report • Tencent Holdings Limited 80 80 in relation to the external auditor, their plans, reports and management letter, fees, involvement in non-audit services, and their terms of engagement; compliance with the CG Code, the Listing Rules and relevant laws; the 2017 first and third quarters results announcements; the 2017 interim report and interim results announcement; the 2016 annual report, including the Corporate Governance Report, the Environmental, Social and Governance Report, Directors' Report and the financial statements, as well as the related results announcement; • The Audit Committee's major work during the year 2017 includes reviewing: reviewed the Company's policies and practices on corporate governance; and reviewed legal and regulatory compliance, including the insider dealing policy, the disclosure of inside information policy and the shareholders communication policy. Investment Committee The Investment Committee comprises a majority of executive directors. Its members are Mr Lau Chi Ping Martin, Mr Ma Huateng and Mr Charles St Leger Searle. The Investment Committee is chaired by Mr Lau Chi Ping Martin. In conducting its work in relation to the remuneration of directors and senior management team, the Remuneration Committee ensured that no individual or any of his associates was involved in determining his own remuneration. It also ensured that remuneration awards were determined by reference to the performance of the individual and the Company and were aligned to the market practice and conditions, the Company's goals and strategies. They are designed to attract, retain and motivate high performing individuals, and reflect the specifics of individual roles. reviewing and endorsing the proposed adoption of the new share option schemes. reviewing and approving compensation awards granted to senior management team, to recognise their contributions to the Company and to provide incentives for future performances; and Corporate Governance Report Tencent Holdings Limited 82 assessing performance and, reviewing and approving amendments to the remuneration packages for the members of the senior management team; reviewing and recommending to the Board on the remuneration packages for the directors; The stability of servers and network infrastructure for products and platforms of the Company is of vital importance for the successful operation of the Company's business as well as the provision of high quality user experience. Any material functional defect, interruption, breakdown or other issue in connection is likely to materially adversely impact the Company's businesses. reviewing and recommending to the Board in respect of the remuneration policies and structure of the Company by benchmarking peer companies with a similar scale to ensure that the Company's remuneration packages are competitive to recruit the best talents in the industry and to retain key staff; ACCOUNTS, RISK MANAGEMENT AND INTERNAL CONTROL The Remuneration Committee has the delegated responsibility to determine the remuneration packages of each member of the senior management team and make recommendations to the Board on the remuneration packages of each director. The Remuneration Committee's major work during the year 2017 includes the following: The Remuneration Committee comprises only non-executive directors. Its members are Mr lan Charles Stone, Mr Li Dong Sheng (both are independent non-executive directors) and Mr Jacobus Petrus (Koos) Bekker (non-executive director). The Remuneration Committee is chaired by Mr Ian Charles Stone. Remuneration Committee During 2017, the Nomination Committee reviewed board composition and director succession, and the board diversity policy, and also considered and made recommendations to the Board on the re-appointment of the retiring directors at the 2017 annual general meeting. The Nomination Committee has also assessed the independence of the independent non-executive directors and considers all of them to be independent, taking into account of the independence guidelines set out in Rule 3.13 of the Listing Rules in the context of the length of service of each independent non-executive director. The Company recognises the benefits of having a diverse Board, and views diversity at Board level as a business imperative that will help the Company achieve its strategic objectives and maintain a competitive advantage. As such, the Board has set measurable objectives for the implementation of the board diversity policy to ensure that the Board has the appropriate balance of skills, experience and diversity of perspectives that are required to support the execution of its business strategy and maintain the effectiveness of the Board. The Nomination Committee is satisfied that the board diversity policy is successfully implemented with reference to the measurable objectives. The Nomination Committee will continue to monitor the implementation of the board diversity policy and will review the board diversity policy periodically to ensure its continued effectiveness. The Nomination Committee met once in 2017. Individual attendance of each Nomination Committee member is set out on page 79. The Nomination Committee comprises a majority of independent non-executive directors. Its members are Mr Ma Huateng, Mr Li Dong Sheng, Mr lain Ferguson Bruce, Mr Ian Charles Stone (all three are independent non-executive directors) and Mr Charles St Leger Searle (non-executive director). The Nomination Committee is chaired by Mr Ma Huateng. Nomination Committee Corporate Governance Report 81 Annual Report 2017 In 2017, the Investment Committee had considered and passed various resolutions on its decisions on the Group's acquisitions and disposals. The Remuneration Committee met three times in 2017. Individual attendance of each Remuneration Committee member is set out on page 79. reviewed the Company's compliance with the CG Code and disclosure in the Corporate Governance Report; 85 The Audit Committee meets not less than four times a year; in 2017 the Audit Committee met eight times. Individual attendance of each Audit Committee member is set out on page 79. In addition to the members of the Audit Committee, meetings were attended by the Chief Financial Officer, the Head of IA and the Head of IC, and the external auditor at the invitation of the Audit Committee. 88 With the diverse products and platforms of the Company and its expanding user base, the products and platforms of the Company have gained considerable influence in wider society. The Company's products and platforms are subject to increased scrutiny from a social responsibility perspective. The Company has long been endeavoring to promote the healthy development of the Internet industry, and efforts are being made to make the products and platforms of the Company exert a positive community influence. The Company pays close attention to content quality, product design and operation of the platform. The Company actively provides more assurance to the society by using advanced technology to prohibit any illegal and unhealthy information and content access the Company's platform and products. For examples, the "Tencent Game Guardian Platform" is an time management tool used to control the time juveniles spend on games; "Shepherd Plan" is a non-profit platform used for preventing the telecom fraud and internet frauds; and "QQ City Power" is another platform used to find missing children in China. At the same time, the Company has established a sound monitoring and reporting mechanism to deal with illegal and vicious information. Tencent Holdings Limited 8. Crisis management and reputation risk Corporate Governance Report As one of the China's largest technology companies with a diverse portfolio of businesses, products and investments, the Company always attracts very high attention from the public and media. The media is diverse and information spreads rapidly. If the Company does not pay sufficient attention to public opinion, public relations to the crisis are not dealt with in a timely manner, and failure to disclose comprehensive and proper information to the public, it will damage the Company's reputation, brand and image, and adversely affect the business and prospects the Company. The Company has set up professional public relations department and teams for crisis management, with public relations management mechanism established. The teams have maintained close interaction with management and business groups. The teams gather public opinions, analyse and identify relevant information and reports their analysis to management to more promptly and appropriately respond to the public according to the Company's policies and procedures. Internal Control The Company has always valued the importance of the internal control systems, and has been implementing the COSO Framework. Management of the Company is responsible for the design, implementation and maintenance of the effectiveness of internal control systems. The Board and the Audit Committee are responsible for monitoring and overseeing the performance of management over the internal control systems to ensure it is appropriate and effective. The Company's internal control systems clearly define roles and responsibilities of each party as well as authorisations and approvals required for key actions of the Company. Policies and procedures are put in place for the key business processes. This information is also clearly conveyed to employees in practice and plays an important role in internal control systems. All employees must strictly follow the policies which cover, amongst other things, financial, legal and operational issues that set the control standards for the management of each business process. In order to further strengthen the accountability of the management team in the internal control systems of the Company and to assist in determining the effectiveness of such internal control systems, the management team of each business group conducts self-assessment and confirms the internal control status of the business group for which it is responsible. The IC assists the management in preparing a self-assessment questionnaire according to the COSO Framework, and guides the management of each business group to carry out the self-assessment. The IC is also responsible for collecting and summarising the results of self-assessment. The Chief Executive Officer of the Company reviews this summarised self- assessment of each business group, assesses the general effectiveness of the internal control systems of the Company, and submits the written confirmation thereof on behalf of the senior management team of the Company to the Audit Committee and the Board. In addition, the IC supervises the establishment of the risk management and internal control systems set up by management, ensure that management has implemented appropriate measures and report the general situation of risk management and internal control of the Company to the Audit Committee on a quarterly basis. The IA, serving as the independent third line of defence, conducts objective evaluation on the effectiveness of the Company's risk management and internal control systems and reports the results to the Audit Committee. Annual Report 2017 89 3. Social responsibility risk 7. Business continuity risk Although the Internet and technology industry is still evolving, regulatory authorities in numerous jurisdictions have been, in an attempt to keep up with such evolution, developing more comprehensive and stringent regulations to regulate the industry. As the Company is continuously expanding its businesses in the PRC and overseas, it is required to comply with the new applicable laws and regulations in different jurisdictions that are specifically relevant to the Company's businesses, such as laws relating to data protection, Internet information security, IP, gaming and Internet finance. The Audit Committee comprises only non-executive directors. Its members are Mr lain Ferguson Bruce, Mr lan Charles Stone, Mr Yang Siu Shun (all of them are independent non-executive directors) and Mr Charles St Leger Searle (non-executive director). Mr lain Ferguson Bruce, who chairs the Audit Committee, and Mr Charles St Leger Searle and Mr Yang Siu Shun have appropriate professional qualifications and experiences in financial matters. The Company has set up several professional departments and teams that work closely with management of business groups to monitor and identify changes in any relevant laws and regulations, so as to take appropriate actions or measures to ensure the Company is in compliance with applicable laws and regulations. In addition, the Company also actively exchanges view and information with relevant regulatory authorities on the trend and development of Internet industry. Audit Committee THE COMMITTEES The company secretary ensures that there is a good and timely flow of information to the Board. The company secretary is responsible for taking minutes of all Board and committee meetings and ensuring that sufficient details of the matters considered and decisions reached have been recorded. Draft and final version of the minutes of meetings are sent to the directors for comments and records respectively within a reasonable time after each meeting, and final minutes with the relevant board papers and related materials are kept by the company secretary and are available for review and inspection by the directors at any time. Corporate Governance Report The Company has been continuously investing in the infrastructure for products and platforms of the Company to enhance its disaster recovery capability in order to provide stable support to the business development. Various business departments are also engaged in emergency procedures to ensure the smooth operation of the Company's businesses. In addition, the Company has established dedicated teams to develop business contingency plans and perform periodic drills on the plans to ensure their effectiveness. 4. Acquisition and investment management risk As described above, the Board has established five committees, each of which has been delegated responsibilities and reports back to the Board: Audit Committee, Corporate Governance Committee, Investment Committee, Nomination Committee and Remuneration Committee. The roles and functions of these committees are set out in their respective terms of reference. The terms of reference of each of these committees will be revised from time to time to ensure that they continue to meet the needs of the Company and to ensure compliance with the CG Code. The terms of reference of the Audit Committee, the Nomination Committee and the Remuneration Committee are available on the Company Website and the Stock Exchange's website. The Company takes the management of investment risks seriously, and has, amongst other things, established an Investment Committee under the Board, dedicated an investment team to identify investment opportunities, appointed finance, legal and other relevant professional teams to manage relevant risks and put in place the investment risk evaluation and approval process. There is also a designated professional team that regularly reviews the Company's cash position and, continuously expands its financing channels and capabilities to meet the needs from the Company's business operations as well as acquisitions. The Company has also designated finance, legal and other relevant professional teams to support and monitor the performance of the investee companies. These teams periodically analyse and review relevant operating and financial information of the investee companies to ensure that they continue to satisfy the Company's investment strategies. Furthermore, the Company has strengthened its IT system development to enhance the transparency of the management process, analyse key information of investment companies in a timely manner, and make/take more timely and effective management decisions and actions. In addition, the Company has invested resources in internal audit and internal control to support the management of its controlling subsidiaries in establishing more sound risk management and internal control systems. 5. Information security risk Protecting user data is the top priority of the Company, and the Company is fully aware that any loss or leakage of sensitive user information could have a significant negative impact on affected users and the Company's reputation, even lead to potential legal action against the Company. Annual Report 2017 87 Corporate Governance Report 6. Governance policies and regulations risk With the Company's increased investment activities, it is important for the Company to adopt robust procedures in the formulation of investment strategies and strong treasury management, both at the investment evaluation stage as well as the post-investment stage. Failure to promptly manage investment risks could hinder the realization of investment strategies. The Company is obliged to protect sensitive user information and as such, the Company strives to provide the highest level of protection to such data. In this regard, the Company has formulated policies and control measures to protect user data. Information security is ensured through effective management systems, encryption, access restrictions and process protocols. In addition, the Company performs review periodically and engages independent specialists to review the Company's data protection practices and provides training programmes to employees to enhance their awareness of information security. AUDIT COMMITTEE Yang Siu Shun lan Charles Stone lain Ferguson Bruce Li Dong Sheng Non-Executive Directors Charles St Leger Searle Jacobus Petrus (Koos) Bekker Lau Chi Ping Martin Ma Huateng (Chairman) Executive Directors Yang Siu Shun (Chairman) Independent Non-Executive Directors lain Ferguson Bruce Lau Chi Ping Martin (Chairman) Ma Huateng Charles St Leger Searle CORPORATE GOVERNANCE COMMITTEE Charles St Leger Searle (Chairman) lain Ferguson Bruce lan Charles Stone Yang Siu Shun INVESTMENT COMMITTEE DIRECTORS Charles St Leger Searle NOMINATION COMMITTEE Ma Huateng (Chairman) Li Dong Sheng lain Ferguson Bruce lan Charles Stone lan Charles Stone Corporate Information CORPORATE GOVERNANCE REPORT 143 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Tencent 腾讯 Tencent Holdings Limited Incorporated in the Cayman Islands with limited liability 騰訊控股有限公司 於開曼群島註冊成立的有限公司 (Stock Code 股份代號:700) 20th Smart communication inspires 2018 智慧溝通 靈感無限 Annual Report 2 CORPORATE INFORMATION 3 FINANCIAL SUMMARY 4 CHAIRMAN'S STATEMENT 14 MANAGEMENT DISCUSSION AND ANALYSIS 31 DIRECTORS' REPORT 76 100 ENVIRONMENTAL, SOCIAL AND GOVERNANCE REPORT 123 INDEPENDENT AUDITOR'S REPORT 132 CONSOLIDATED INCOME STATEMENT 133 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME 134 CONSOLIDATED STATEMENT OF FINANCIAL POSITION 137 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY 140 CONSOLIDATED STATEMENT OF CASH FLOWS 265 DEFINITION CONTENTS Charles St Leger Searle 21,019 2017 2016 RMB'Million RMB'Million RMB'Million 2015 As at 31 December RMB'Million 2014 CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION 77,469 65,126 45,420 32,410 24,737 66,339 78,218 48,194 44,416 21,891 REGISTERED OFFICE equity holders of the Company* Non-GAAP profit attributable to to equity holders of the Company Total comprehensive income attributable 67,760 79,061 48,617 44,723 21,975 Total comprehensive income for the year 78,719 2018 RMB'Million 71,510 Assets Current assets 277,093 122,100 82,124 Total equity 32,697 11,623 2,065 2,111 323,510 256,074 174,624 120,035 80,013 Equity attributable to equity holders of the Company Non-controlling interests Equity and liabilities 723,521 554,672 395,899 306,818 171,166 217,080 178,446 149,154 506,441 376,226 246,745 151,440 155,378 95,845 75,321 Total assets Non-current assets 356,207 41,095 23,810 Tencent Holdings Limited Financial Summary CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Year ended 31 December 2014 2015 2016 2017 2018 RMB'Million RMB'Million RMB'Million RMB'Million RMB'Million Revenues 78,932 102,863 151,938 237,760 312,694 Gross profit 48,059 61,232 84,499 116,925 142,120 Profit before income tax 29,013 36,216 51,640 88,215 2 28,806 700 www.tencent.com Profit attributable to equity holders of the Company 79,984 72,471 41,447 29,108 23,888 Profit for the year 94,466 Cricket Square Hutchins Drive, P.O. Box 2681 Grand Cayman KY1-1111 Cayman Islands TENCENT GROUP HEAD OFFICE Tencent Binhai Towers No. 33 Haitian 2nd Road Nanshan District Shenzhen, 518054 The PRC PRINCIPAL PLACE OF BUSINESS IN HONG KONG 29/F., Three Pacific Place No. 1 Queen's Road East Wanchai Hong Kong CAYMAN ISLANDS PRINCIPAL SHARE REGISTRAR AND TRANSFER OFFICE SMP Partners (Cayman) Limited Royal Bank House - 3rd Floor 24 Shedden Road P.O. Box 1586 Grand Cayman, KY1-1110 Cayman Islands HONG KONG BRANCH SHARE REGISTRAR AND TRANSFER OFFICE Computershare Hong Kong Investor Services Limited Shops 1712-1716, 17th Floor Hopewell Centre 183 Queen's Road East Wan Chai, Hong Kong COMPANY WEBSITE STOCK CODE Non-current liabilities 186,247 60,312 Smart device MAU of QQ lan Charles Stone (Chairman) Li Dong Sheng Jacobus Petrus (Koos) Bekker AUDITOR PricewaterhouseCoopers Certified Public Accountants PRINCIPAL BANKERS Bank of China Limited The Hongkong and Shanghai Banking Corporation Limited 0.6% 802.6 3.0% 783.4 807.1 MAU of QQ (in millions, unless specified) change 2018 quarter 30 September year change 2017 2018 31 December 31 December Quarter-on- As at Year-on- 39,007 699.8 683.0 2.5% 697.9 REMUNERATION COMMITTEE 9 Annual Report 2018 For 2018, our smart phone games business achieved RMB77.8 billion revenues (including smart phone games revenues attributable to our social networks business), up 24% year-on-year; for the fourth quarter, it achieved RMB19.0 billion revenues, up 12% year-on-year. We released 9 licensed games in the fourth quarter, most of which were role playing games. The industry regulator re-started issuing game monetisation license ("banhao") approvals in December 2018, after a nine-month suspension. A total of 8 Tencent games (including 7 smart phone games and 1 PC game) have received approval so far, including role playing games, strategy, casual and functional genres. Since there is a sizeable backlog for the banhao applications in the industry, our scheduled game releases will initially be slower than in some prior years. We have implemented our upgraded Healthy Gameplay System in 39 smart phone games, including our most popular titles such as Honour of Kings, QQ Speed Mobile, Cross Fire Mobile, Naruto OL Mobile and MT4. The system has resulted in minors spending significantly less time in the affected games, but immaterial impact on time spent by adult players. Online Games QQ: Smart device MAU was 699.8 million, up by 2.5% year-on-year. Smart device MAU for users aged 21 years or below increased by 13% year-on-year. We further increased young user stickiness by enhancing the video recording functions and news feed features. We launched Al-powered filters and stickers for video chat, increasing the number of short and mini videos shared by young users by over 50% year-on-year. For QQ KanDian, we added a bullet chatting function within video and enhanced video feed recommendation algorithms, boosting the click- through volume and increasing user time spent. QQ KanDian daily video views rose over 300% year-on-year. Weixin and WeChat: Combined MAU was 1,098 million, up by 11.0% year-on-year. Hundreds of millions of social videos are uploaded and shared on the Weixin platform every day. We enriched our user experience via a new video function that allows users to share 15-second mini video clips with Al-recommended background music with friends. WeChat Work, an enterprise application integrated with Weixin, allows companies to deepen engagement with customers, digitalise user profiles for data analytics, facilitate office administration and enhance internal communication. It is seeing particularly rapid adoption by large enterprises, providing a showcase for SMEs. Approximately 80% of the top 500 enterprises in China are now registered as WeChat Work corporate users. Communication and Social Chairman's Statement Tencent Holdings Limited 8 4.0% 154.1 19.1% As at 134.6 Fee-based VAS registered subscriptions 0.2% 531.1 -3.9% 554.0 532.4 Smart device MAU of Qzone 1.4% 1,082.5 11.0% 988.6 1,097.6 Combined MAU of Weixin and WeChat 0.3% 160.3 Operating Information As at 3. The Group's non-GAAP profit attributable to equity holders of the Company for the year ended 31 December 2018 was RMB77,469 million, an increase of 19% compared with the results for the previous year. Non-GAAP basic and diluted EPS for the year ended 31 December 2018 were RMB8.203 and RMB8.097, respectively. Company Business Highlights RESULTS I am pleased to present our annual report for the year ended 31 December 2018 to the shareholders. Chairman's Statement 3 Annual Report 2018 Comparative figures have been restated retrospectively to conform with the presentation adopted in 2015, whereas, among others, we have extended the definition of non-GAAP adjustments to cover that of our material associates. We adopted the new presentation in order to more clearly illustrate our non-GAAP financial measures, and to be more consistent with what we believe to be industry practice. 723,521 554,672 395,899 306,818 171,166 367,314 277,579 209,652 184,718 89,042 Total equity and liabilities Total liabilities 202,435 151,740 101,197 124,406 50,035 Current liabilities 164,879 125,839 108,455 BUSINESS REVIEW AND OUTLOOK 1. The Group's audited profit attributable to equity holders of the Company for the year ended 31 December 2018 was RMB78,719 million, an increase of 10% compared with the results for the previous year. Basic and diluted EPS for the year ended 31 December 2018 were RMB8.336 and RMB8.228, respectively. 2018 marked the 20th anniversary of the founding of the Group. Throughout our history, we have constantly been embracing changes in users' needs, technologies and market conditions to stay at the forefront of our industry. In October, we initiated a strategic organisational upgrade to extend our strengths in the Consumer Internet and to capture the opportunities of the Industrial Internet. This strategic upgrade is intended to enable us to drive the convergence of social, content and technology trends, and to better serve enterprises, as well as consumers. Profit attributable to equity holders of the Company increased by 10% year-on-year. Non-GAAP profit attributable to equity holders of the Company increased by 19%. Operating profit increased by 8% year-on-year. Non-GAAP operating profit increased by 13% year-on-year. Revenues increased by 32% year-on-year, primarily driven by FinTech services, social and video advertising, and digital content subscriptions and sales. In fiscal year 2018 Company Financial Performance 2. Chairman's Statement 7 Annual Report 2018 In addition to growing our core businesses organically, we make strategic investments in best-in-class companies so we can focus our management attention and company resources on our own core platforms, while capturing emerging opportunities in adjacent verticals through investee companies. We have invested in more than 700 companies. More than 100 investee companies were valued at over USD1 billion each. Among which, over 60 went public. We enrich our IP portfolio including games, video, music and literature via upstream investments, and broaden user reach and engagement via investments in vertical platforms. We work with businesses that can expand our offerings to meet evolving user needs, and accelerate the adoption of our enterprise services and products, such as 020 and smart retail companies, which has helped our payment service penetration and advertiser base expansion. And, we use investments as a tool for better understanding frontier technologies which will become important to our future, such as connected cars, Internet-facilitated healthcare, and quantum computing. Our investments have created value for our investee companies by offering them access to our large user base, and providing them infrastructure, technology and capital support to bolster their growth. Company Strategic Highlights Building on our payment user base, we offer FinTech services to under-served consumers, conveniently and at low cost. LiCai Tong, our wealth management platform, helped manage over RMB600 billion of customer assets as of the end of 2018. WeBank, our associate with an online banking business, achieved rapid growth in the outstanding loan balance of its micro-loan product for consumers, Wei LiDai. WeBank also expanded its loan services to enterprises, serving the financing needs for small and micro businesses customers through Wei YeDai. Chairman's Statement Tencent Holdings Limited Tencent Cloud is the foundation for our smart industry solutions. We integrate our cloud computing technology with Al and data analytics capabilities, to assist the digital transformation of various industries. Our online security capabilities enhance the stability and reliability of our cloud solutions. During 2018, Tencent Cloud maintained market leadership in verticals such as online games and streaming video leveraging our industry know-how and solid infrastructure. We now serve over half of the China-based games companies and are expanding overseas. We expanded our customer base rapidly for Internet services via strategic partnership in verticals. Key categories include eCommerce, social media and community, handset manufacturer app stores and smart transportation. We have further expanded our presence in other key industries such as financial and retail sectors. We are the partner of choice for top banks including BOC, CCB and CMB. Majority of top online finance companies and insurance firms are our clients. Our retail cloud solutions build on our unique properties such as Official Accounts and Mini Programs to increase retailers' consumer engagement, enhance their marketing ROI via our consumer targeting and anti-fraud technologies, and upgrade internal operations using AI, LBS and big data technologies. During 2018, we enhanced the monetisation potential of our platforms through connecting more advertisers, across more platforms, with more accurate user targeting capabilities. For social advertising, we increased our advertising inventory through adding the second ad unit in Weixin Moments, and we started to insert ad units into Mini Programs. For media advertising, we completed the system revamp of our news advertising in early 2018. Leveraging our enhanced recommendation algorithms, steady traffic growth and rising fill rates, our news feed business significantly grew its advertising revenues. Our video advertising outpaced the industry in terms of its revenue amount and revenue growth rate, due to the popularity of our content, especially self-commissioned content, and the strong growth in sponsorship advertising revenue. As part of the Company's strategic reorganisation, we merged our advertising sales teams to provide better marketing solutions, data analytics, and ad placement processes for our advertisers, thus enhancing their ROIs. Payment is one of the key infrastructure platforms of the Company, enabling us and our merchant partners to complete transactions for online and offline services. We extended our market leadership as the leading mobile payment platform by active users and number of transactions in China. Our total daily payment transaction volume exceeded 1 billion for 2018, driven by rapid growth in commercial payments, which represented more than half of the number of transactions. Our commercial payment revenue more than doubled year-on-year in 2018. Our payment platform connects with tens of millions of merchants and monthly active merchants increased over 80% year-on-year in the fourth quarter of 2018. We boosted our payment penetration in the food and retail industries thanks to features such as our Mini Programs and Scan-to-Pay solution. In Hong Kong, we launched the first-of-its-kind cross-border mobile payment service in October 2018, which enables WeChat Pay Hong Kong users to conduct RMB-denominated transactions funded by Hong Kong dollars. This cross-border mobile payment service now covers approximately 1 million merchants in Mainland China, including taxi-hailing, food ordering, and high-speed railway ticketing services. The transaction volume of WeChat Pay Hong Kong increased more than 10 times year-on-year. We launched WeChat Pay Malaysia services in August, offering online transactions such as mobile credit top-ups, flight and bus ticket purchases, and offline transactions at retail outlets, such as supermarkets, fashion and beauty stores. Globally, we are expanding our footprint by supporting China outbound travelers to make cross-border payments in overseas destinations, and we now offer real-time tax refund services for Weixin Pay users in over 80 airports. Weixin Pay is now available in 49 markets outside Mainland China, supporting cross-border payment transactions in 16 currencies. During the year, we stepped up our investment in innovation and technologies to stay competitive in the evolving Internet industry. We enriched our social platforms with a broader portfolio of digital content, as well as online and offline services, thus deepening our connection with our users, advertisers, merchants and enterprise partners. Through these initiatives, we strengthened our market leadership in social, games, digital content, and payment, contributing to continuing growth across our core business segments. 4 Tencent Holdings Limited 6 We made the following key achievements in our core businesses: Our social communications platforms, Weixin and QQ, represent the largest social communities in China in terms of MAU. The combined MAU of Weixin and WeChat increased to approximately 1,098 million by the end of 2018. Weixin further penetrated lower tier cities and covered a wider age group of users. On average, over 750 million Weixin users read friends' posts on Moments per day. Chairman's Statement Overall MAU of QQ increased to 807 million by the end of 2018. We stayed engaged with young users as QQ introduced innovative and Al-empowered features to make its chat experience more fun and interactive. We offer entertainment- oriented content in verticals including eSports, comics and live streaming services to cater to the entertainment needs of millennial users. In particular, we further increased the user engagement of QQ Kan Dian, a popular news feed service among young users, through enriching its content with video feeds. We have built up a content ecosystem covering online games, literature, video, music, news and comics. For online games, we are the leading platform globally by revenue and users. Our technical strength supports the operation of multiple PC and mobile blockbuster game titles, serving hundreds of millions of active users every day. Internationally, our subsidiary Riot Games operates the highest-MAU PC game, League of Legends, and we operate the highest-MAU smart phone game, PUBG MOBILE. Through our partnerships with and investments in global leaders such as Epic Games (creator of Fortnite) and Supercell (creator of Clash of Clans), we support the innovation and growth of the global game industry. In China, our popular smart phone games expanded our user base and increased time spent. We have taken the lead in introducing the Healthy Gameplay System to assist parents in managing the amount of time their children spend playing games. We upgraded the system last September by introducing measures to strengthen real- name verification, and implementing game time limits for children players, as well as spending alerts to their parents. Our Tencent Game Guardian Platform enables parents to engage with their children and track their in-game activities online. We recently provided teachers access to this platform to enhance their engagement with their students who play games. These initiatives built a pilot case for the China game industry and, we believe, help position it for sustainable and healthy growth in the long run. Annual Report 2018 5 Chairman's Statement Leveraging our rich IP portfolio, we provide digital content to our users across online media platforms. Our total digital content subscription counts exceeded 100 million by the end of 2018, up 50% year-on-year. High quality content, better IP protection, enhanced streaming capabilities and convenience of mobile payment were the growth drivers for our digital content subscription business. Tencent Video is the leading online video streaming platform in China in terms of mobile DAU and subscriptions, generating the highest revenues in the online video market in China through subscriptions and advertising. TME is the leading online music entertainment platform in China, operating the country's most popular and innovative music apps QQ Music, Kugou Music, Kuwo Music and WeSing. In December 2018, we listed TME on the New York Stock Exchange. News feeds, short videos and mini videos contributed substantially to traffic on our media and distribution platforms including Tencent News, QQ KanDian, Mobile QQ Browser and Weishi. Mini Programs are now widely adopted by users and enterprises setting the industry trends for connecting online users to offline scenarios. DAU grew rapidly and daily visits per user increased by 54% year-on-year. Mini Programs cover more than 200 service sectors and connect with our users via multiple channels, including shortcuts in the chat interface, our in-app search function and offline Mini Programs QR Codes. In addition to connecting with online users, Mini Programs enable developers to achieve cross-platform development and instantaneous deployment for their products and services. We empower developers with cloud-based development kits, enhancing the development efficiency, particularly for long- tail developers. Daily visits to long-tail Mini Programs increased significantly, accounting for 43% of the total daily visits to Mini Programs. Model Code for Securities Transactions by Directors of Listed Issuers External Auditor and Auditor's Remuneration The Company has adopted the Model Code. The Company has also adopted an insider dealing policy for employees for securities transactions by employees who are likely to be in possession of inside information relating to the Company, the terms of which are no less exacting than those of the Model Code. The Company has made specific enquiries with the directors and the directors have confirmed they have complied with the Model Code throughout 2018. Appointment Terms of Non-Executive Directors Each non-executive director, whether independent or not, is appointed for a term of one year and is subject to retirement by rotation at least once every three years. A director appointed to fill a casual vacancy or as an addition to the Board will be subject to re-election by shareholders at the first general meeting after his appointment. Directors and Officers Liability Insurance The Company has arranged appropriate directors and officers liability insurance in respect of legal action against the directors and officers. The statement of the external auditor of the Company about their reporting responsibilities for the financial statements is set out in the "Independent Auditor's Report" on pages 123 to 131. During the year ended 31 December 2018, the remuneration paid/payable to the Company's external auditor, PwC, was disclosed in Note 8 to the consolidated financial statements. The audit and audit-related services conducted by the external auditor mainly comprise of statutory audits and reviews for the Group and its certain subsidiaries. The amounts of audit and audit-related services for the year ended 31 December 2018 also included the services fees in connection with the initial public offering of a subsidiary of the Company and other M&A transactions. The non-audit services conducted by the external auditor mainly include professional services on risk management and internal control review, M&A advisory service and tax advisory service. Being an Internet company with a wide variety of rapidly-changing businesses, the Company has adopted the following dynamic risk management process in response to the ever-changing risk landscape: Tencent Holdings Limited Corporate Governance Report Framework for Disclosure of Inside Information The Company has in place a framework for the handling and disclosure of inside information in compliance with the SFO. The framework sets out the procedures and internal controls for the handling and dissemination of inside information in a timely manner so as to allow all the shareholders and stakeholders to assess the latest position of the Group. Under the framework, if an employee is aware of any project, transaction, information or situation which he thinks could potentially be inside information, he should contact the Head of Compliance, the General Counsel and the Company Secretary as soon as possible. Legal analysis and consultations with the Company's directors and senior executives will be made so as to identify whether any such information constitutes inside information and is required to be disclosed to the public pursuant to the SFO. The framework and its effectiveness are subject to review on a regular basis according to established procedures. 99 Annual Report 2018 99 The Company is required to disclose certain information pursuant to the Listing Rules and the CG Code. We set out this information below which has not been covered above. 98 Corporate Governance Report DISCLOSURE OF OTHER INFORMATION 91 4. Information security risk Protecting user data is the top priority of the Company, and the Company is fully aware that any loss or leakage of sensitive user information could have a significant negative impact on the affected users and the Company's reputation, even lead to potential legal action against the Company. The Company is obliged to protect sensitive user information and as such, the Company strives to provide the highest level of protection on such data. In this regard, the Company has formulated policies and control measures to protect user data. Information security is ensured through effective management systems, encryption, access restrictions and process protocols. In addition, the Company performs review periodically and engages independent specialists to review the Company's data protection practices and provides training programmes to employees to enhance their awareness of information security. 2B business risk The Company has actively developed various 2B businesses related to Industrial Internet. With the rapid development of the 2B business of the Company, if the Company fails to optimise its organisational structure with support from professional talents to quickly explore new business operating and management models, or improve its cooperation mechanisms with various business partners, it may affect the continuous healthy development of the 2B business. The Company is accumulating and solidifying its experience in the 2B business. The Company has been proactively responding to the challenges by having optimised its organisational structure and resource allocation, continuously improving the business process, and recruiting more 2B business professional talents and setting up appropriate mechanisms to ensure the effective operation of the 2B business for rapid and sustained development. 92 Tencent Holdings Limited 6. Social responsibility risk Corporate Governance Report With the diverse products and platforms of the Company and its expanding user base, the products and platforms of the Company have gained considerable influence in wider society. The Company's products and platforms are subject to increased scrutiny from a social responsibility perspective. The Company has long been endeavoring to promote the healthy development of the Internet industry, and efforts are being made to make the products and platforms of the Company exert a positive community influence. The Company pays close attention to content quality, product design and operation of the platform. The Company actively provides more assurance to the society by using advanced technology to prohibit any illegal and unhealthy information and content access the Company's platform and products. The Company encourages the study of key technologies and basic science, and actively propagates and enriches Chinese traditional culture. For example, the "Tencent Game Guardian Platform" is a time management tool used to control the time juveniles spend on games; "Shepherd Plan" is a non-profit platform used for preventing fraud; the "Xplore Prize" has been initiated by the Company in cooperation with many well- known scientists; and the Company has been cooperating with Forbidden City Museum to propagate excellent traditional culture by creative technologies. At the same time, the Company has established a sound monitoring and reporting mechanism to deal with illegal and vicious contents. 7. Crisis management and reputation risk As one of the China's largest technology companies with a diverse portfolio of businesses, products and investments, the Company always attracts very high attention from the public and media. The media is diverse and information spreads rapidly. If the Company does not pay sufficient attention to public opinion, public relations to the crisis are not dealt with in a timely manner, and failure to disclose comprehensive and proper information to the public, it will damage the Company's reputation, brand and image, and adversely affect the business and prospects of the Company. The Company has set up professional public relations department and teams for crisis management, with public relations management mechanism established. The teams have maintained close interaction with management and business groups. The teams gather public opinions, analyse and identify relevant information and report their analysis to management to more promptly and appropriately respond to the public according to the Company's policies and procedures. Annual Report 2018 93 18 Corporate Governance Report 8. Acquisition and investment management risk The Company has a certain scale of investment activities in diverse fields. It is important for the Company to adopt robust procedures in the formulation of investment strategies and strong treasury management, both at the investment evaluation stage as well as the post-investment stage. Failure to promptly manage investment risks could hinder the realization of investment strategies. The Company takes the management of investment risks seriously, and has, amongst other things, established an Investment Committee under the Board, dedicated an investment team to identify investment opportunities, appointed finance, legal and other relevant professional teams to manage relevant risks and put in place the investment risk evaluation and approval process. There is also a designated professional team that regularly reviews the Company's cash position and, continuously expands its financing channels and capabilities to meet the needs from the Company's business operations as well as acquisitions. The Company has also designated finance, legal and other relevant professional teams to support and monitor the performance of the investee companies. These teams periodically analyse and review relevant operating and financial information of the investee companies to ensure that they continue to satisfy the Company's investment strategies. In addition, the Company has invested resources in internal audit and internal control to empower investee companies, and to continuously support the management of its controlling subsidiaries in establishing more sound risk management and internal control systems. 9. Fraud risk The Company has been continuously investing in the infrastructure for products and platforms of the Company to enhance its disaster recovery capability in order to provide stable support to the business development. Various business departments are also engaged in emergency procedures to ensure the smooth operation of the Company's businesses. In addition, the Company has established dedicated teams to develop business contingency plans and perform periodic drills on the plans to ensure their effectiveness. In recent years, fraudulent activities have occurred frequently in the technology, media and telecom industry and therefore integrity has become an industrial concern. With the business development of the Company, the business scale and complexity have been evolved, and consequently the fraud risk inevitably increased in a certain degree. For example, fraudulent activities caused by collusion between suppliers/business partners and employees can have a negative impact on reputation and finance of the Company. The stability of servers and network infrastructure for products and platforms of the Company is of vital importance for the successful operation of the Company's business as well as the provision of high-quality user experience. Any material functional defect, interruption, breakdown or other issue in connection is likely to materially adversely impact the Company's businesses. 3. 97 Business and functional departments of each business group identify, assess and respond to risks in the course of operation in a systematic manner, escalating concerns and communicating results to the IC; The IC collects, analyses and consolidates a list of significant risks at the company level, and provides input on risk response strategies and control measures for such risks. These significant risks as well as the corresponding risk responses and control measures will be reviewed by senior management and subsequently by the Audit Committee before reporting to the Board; The IC reviews and evaluates the responses to significant risks from time to time, and reports to the Audit Committee at least once a year; and The Audit Committee, on behalf of the Board, assesses and determines the nature and level of the risks that the Company is willing to take in order to achieve its business objectives and formulates appropriate response strategies which include designating responsible departments for handling each significant risk. The Audit Committee provides guidance to the Company's management to implement effective risk management system with supports from the IC. Significant Risks of the Company In 2018, management has identified and determined nine significant risks of the Company through the risk management process detailed above. Comparing with 2017, "Fraud risk" is the one additional risk identified and disclosed as one of the significant risks of the Company in 2018. As the Company's business scale, scope and complexity have evolved, so does its external environment, management considers that the Company is still facing the eight significant risks disclosed in 2017 - both the “Regulatory and compliance risk” and “Social responsibility risk” have been elevated in different degrees while the other risks stay at the similar level as last year. On behalf of the Board, the Audit Committee assists the Board in supervising the overall risk status of the Company and evaluating the change in the nature and severity of the Company's major risks. The Audit Committee considers that management has taken appropriate measures to address and manage the significant risks that they are responsible for at a level acceptable to the Board. 90 Corporate Governance Report Tencent Holdings Limited Corporate Governance Report Below is a summary of the significant risks of the Company along with the applicable response strategies. The Company's risk profile may change and the list below is not intended to be exhaustive. 1. Regulatory and compliance risk Although the Internet and technology industry is still evolving, regulatory authorities in numerous jurisdictions have been, in an attempt to keep up with such evolution, developing more comprehensive and stringent regulations to regulate the industry. As the Company is continuously expanding its businesses in the PRC and overseas, it is required to comply with the new applicable laws and regulations in different jurisdictions that are specifically relevant to the Company's businesses, such as laws relating to data protection, Internet information security, IP, gaming and Internet finance. In addition, the uncertainty of policy direction may have an impact on the development of different industries in different regions. The Company has set up several professional departments and teams that work closely with management of business groups to monitor and identify changes in any relevant laws and regulations, so as to take appropriate actions or measures to ensure the Company is in compliance with applicable laws and regulations. We have invested abundant resources in many aspects to ensure the compliance of regulatory requirements. In addition, the Company also actively exchanges view and information with relevant regulatory authorities on the trend and development of Internet industry. 2. Market competition and innovation risk The Internet industry is highly competitive, innovative and ever-changing. The cross-sectoral expansion of non-Internet companies adds more new participants to the market. The users' desire for innovative products and service is also increasing. Therefore, to attract new users while maintaining its existing market share is still one of the challenges of the Company. The lack of innovation or slow innovation in technology and product would impair the core competitiveness of the Company. The Company stays on top of the industry trends, keeps up with the technological trend through innovation. The Company focuses on changes in user experience, and continuously recruits more talents; optimises its organisational structure; enhances the innovation capabilities by improving talent quality and cultivating young talents; enhances its technical capabilities and innovation environment to develop products that meet the expectations of the market. The Company leverages the strength of the existing platforms to seek better business partners for exploring new business opportunities and better responding to the market needs. The Company has established a number of open platforms with the aim to promote "mutual benefit and win-win” concept, and to strengthen the cooperation with its business partners. For example, "Double Hundred Plan” of Tencent Westart Space, which incubates potential startup companies, has enhanced its collaboration with business partners and its competitiveness in the market. Annual Report 2018 18 5. Corporate Governance Report Business continuity risk 94 Risk Management Process Corporate Governance Report Corporate Governance Report In order to further strengthen the accountability of the management team in the internal control systems of the Company and to assist in determining the effectiveness of such internal control systems, the management team of each business group conducts self-assessment and confirms the internal control status of the business group for which it is responsible. The IC assists the management in preparing a self-assessment questionnaire according to the COSO Framework and guides the management of each business group to carry out the self-assessment. The IC is also responsible for collecting and summarising the results of self-assessment. The Chief Executive Officer of the Company reviews this summarised self- assessment of each business group, assesses the general effectiveness of the internal control systems of the Company and submits the written confirmation thereof on behalf of the senior management team of the Company to the Audit Committee and the Board. In addition, the IC supervises the establishment of the risk management and internal control systems set up by management, ensures that management has implemented appropriate measures and reports the general situation of risk management and internal control of the Company to the Audit Committee on a quarterly basis. The IA, serving as the independent third line of defence, conducts objective evaluation on the effectiveness of the Company's risk management and internal control systems and reports the results to the Audit Committee. Effectiveness of Risk Management and Internal Control The Audit Committee, on behalf of the Board, continuously reviews the risk management and internal control systems. The review process comprises, among other things, of meetings with management of business groups, IA, IC, legal team, and the external auditor, reviewing the relevant work reports and information of key performance indicators, the management self- assessment on internal control as detailed above and discussing the major risks with the senior management of the Company. The Board is of the view that throughout the year ended 31 December 2018, the risk management and internal control systems of the Company are effective and adequate. In addition, the Board believes that the Company's accounting and financial reporting functions have been performed by staff of the appropriate qualifications and experience and that such staff receives appropriate and sufficient training and development. Based on the audit report of the Audit Committee, the Board also believes that sufficient resources have been obtained for the Company's internal audit function and that its staff qualifications and experience, training programmes and budgets are sufficient. 96 Tencent Holdings Limited Corporate Governance Report SHAREHOLDERS The Company strives to provide ready, equal, regular and timely disclosure of information that is material to the investor community. Therefore, the Company works to maintain effective and on-going communication with shareholders so that they, along with prospective investors, can exercise their rights in an informed manner based on a good understanding of the Group's operations, businesses and financial information. The Company also encourages shareholders' active participation in annual general meetings and other general meetings or other proper means. As such, the Company sends notices to shareholders for annual general meetings at least 20 clear business days before the meeting and at least 10 clear business days for all other general meetings. In addition, the Company has developed and maintains the shareholders communication policy, which is available on the Company Website. The Company's general meetings provide a transparent and open platform for the Company's shareholders to communicate with the Board and the senior management team. The Chairman, other members of the Board and relevant members of the senior management team, under normal circumstances, attend to answer questions raised and discuss matters in relation to the Company in an open manner. Save as Mr Li Dong Sheng, all directors attended the 2018 annual general meeting held on 16 May 2018, with a view to understanding the views of the Company's shareholders. The company secretary provided the minutes of 2018 annual general meeting to all directors to have a thorough understanding of the views of the Company's shareholders. The Company's external auditor will also attend the annual general meeting to answer questions relating to the conduct of the audit, the auditor's report and auditor independence. The Company's shareholders may also propose candidates for election as a director of the Company according to the following procedures, details of which are also set out on the Company Website. Pursuant to the Articles of Association, any one or more shareholder(s) of the Company holding at the date of deposit of the requisition not less than one-tenth of the paid up capital of the Company carrying the right of voting at general meetings of the Company shall at all times have the right, by written requisition to the Board or the company secretary, to require an extraordinary general meeting to be called by the Board for the transaction of any business specified in such requisition; and such meeting shall be held within two months after the deposit of such requisition. In order to ensure that shareholders' interests and rights are adequately protected, a separate resolution will be proposed for each substantially separate issue at the general meetings, and all resolutions will be voted by poll pursuant to the Articles of Association and the Listing Rules. To ensure that the shareholders are familiar with the detailed procedures for conducting a poll, detailed procedures for conducting a poll are explained at the commencement of the general meetings, and all questions from shareholders on the voting procedures will be answered before the poll voting starts. An external scrutineer will be appointed to monitor and count the votes cast by poll. Poll results will be posted on the Company Website and the Stock Exchange's website after each general meeting. Apart from participating in the Company's general meetings, the Company's shareholders are provided with contact details of the Company such as telephone number and email address which are available on the Company Website, in order to enable them to make any query that they may have. Shareholders may send their enquiries to the Board directly through these means. Shareholders may also contact the Company's Hong Kong branch share registrar, Computershare Hong Kong Investor Services Limited, if they have any enquiries about their shareholdings and entitlements to dividends. Annual Report 2018 95 The Company's internal control systems clearly define roles and responsibilities of each party as well as authorisations and approvals required for key actions of the Company. Policies and procedures are in place for the key business processes. This information is also clearly conveyed to employees in practice and plays an important role in internal control systems. All employees must strictly follow the policies which cover, amongst other things, financial, legal and operational issues that set the control standards for the management of each business process. The Company, with its belief in the value of integrity, has zero tolerance for fraud, and is determined to fight against any fraudulent activities. The Company has established effective internal control systems and is continuously improving it. These systems have been strengthened by systematic, transparent control methods. To enhance the awareness of integrity, the Company continuously conducts various training and propaganda for its employees and suppliers/business partners. For employees, the Company has established the Sunshine Code that the employees shall strictly follow during their employment and in the course of business dealing with suppliers/business partners. For suppliers/business partners, the Company cooperates with them to create an ecosystem with integrity. To build up a healthy and transparent business environment, the suppliers/business partners are required to sign the Anti-commercial Bribery Declaration. Furthermore, the Company has set up the anti-fraud investigation department for years to collect whistleblowing cases from multiple channels, and to follow up and investigate alleged fraudulent cases on a timely basis. The Company will terminate the employment immediately with any employee who has been found involved in any fraudulent activities. The Company may also pass the relevant case for juridical process according to the relevant laws under more serious circumstances. Any supplier/business partner found to be involved in any fraudulent activities will be blacklisted and deprived of the opportunity to work with the Company permanently. Internal Control The Company has always valued the importance of the internal control systems, and has been implementing the COSO Framework. Tencent Holdings Limited Management of the Company is responsible for the design, implementation and maintenance of the effectiveness of internal control systems. The Board and the Audit Committee are responsible for monitoring and overseeing the performance of management over the internal control systems to ensure their appropriateness and effectiveness. Annual Report 2018 Total GHG emissions in the office buildings per employee (tonnes per employee) 47.83 191.00 2,591.07 715,352.89 Non-hazardous waste (tonnes) Hazardous waste per employee (tonnes per employee) Hazardous waste (tonnes) Diesel (tonnes) Natural gas (tonnes) Indirect GHG emissions (Scope 2) (tonnes) Total GHG emissions in the office buildings per floor area (tonnes per square metre) Non-hazardous waste per employee (tonnes per employee) Including: Electricity (tonnes) Total GHG emissions (Scopes 1 and 2) (tonnes) Direct GHG emissions (Scope 1) (tonnes) Intellectual property rights Charitable donation Volunteering service Our ESG Direction Our ESG strategy requires the participation of all of our product lines and platforms, and participation from across the wider Internet industry. We will continue to place more emphasis on ESG, and encourage every individual, enterprise and organisation to take part in the implementation of our ESG strategy. "Internet+" has significant implications for our ESG initiatives. Important changes can be achieved through connecting millions of Internet users as well as developing their modes of communication and living, and creating more exciting opportunities for society. In addition, through the "smart living" system in QQ and Weixin/WeChat, people and public services can be digitally connected, which in effect facilitate developments in transport, healthcare, environmental protection, public safety and other social arenas. This is important for optimising the distribution of societal resources, driving innovation in public services, improving service quality, breaking down communication barriers and ultimately benefiting the wider community. We will leverage our core capability in the Internet, technology and communication spheres to develop innovative approaches to resolving social issues, promoting social development and protecting the interests of the public. We also aim to drive ESG awareness in society, through collaborating with our stakeholders and other industry players. Going forward, we will continue to enhance our corporate management system and integrate ESG considerations into our operations. We will closely cooperate with our stakeholders with the aim of creating a better future. Annual Report 2018 103 Environmental, Social and Governance Report ENVIRONMENT We recognise the importance of environmental protection and conservation of natural resources in our business operations. Starting from our office buildings in Shenzhen, we have implemented a number of energy-saving measures and we plan to adopt the same in our office spaces in other locations. We have also strived to build our data centres with environmental considerations as one of our key priorities. Energy Saving Measures taken in our New Office Building We have taken environmental protection as one of our priorities when designing our new office building, Tencent Binhai Building, in Shenzhen. The construction has been certified as attaining LEED-NC Gold Standard and the building has been under operation in accordance with LEED-EB standards. The property management company of the Shenzhen headquarters has obtained ISO 14001 (environmental management) certification, ISO 9001 (quality management) certification and GB/ T 23331 (energy management system) certification. We have also implemented various measures to enhance efficiency of energy use and reduce water consumption and emissions. We have optimised the air conditioning system and the integrated building management system in order to automate the energy saving and monitoring process. The air conditioning system uses pumps controlled by frequency-conversion technology for the enhancement of energy efficiency. We have also reduced energy consumption of the air conditioning system by partially deploying natural ventilation in autumn and winter. We have also adopted a smart lighting system which allows remote automatic control over the lighting in the office area for the purpose of energy conservation. Our new office building has adopted a centralised system to collect, purify and recycle condensed water from the air conditioning system, and water from drinking water system, showers and cooling towers, for the purposes of flushing, watering plants and cleaning the parking lot. In addition, we have installed a direct drinking water system in replacement of bottled water. It reduces the use of plastic packaging materials and indirectly reduces the CO2 emissions generated from the delivery of bottled water. We monitor the levels of air pollutants such as PM2.5, PM10, carbon dioxide, carbon monoxide, sulfur dioxide, nitro dioxide inside and outside Tencent Building with an online monitoring system and display the data on a real-time basis. To ensure the air quality in the building, we have installed induced ventilation system (which regulates the ventilation automatically in response to the level of carbon monoxide) in the underground parking garage and fresh air ventilation system (which regulates the ventilation automatically in response to the level of carbon dioxide) in the office area. We have upgraded the kitchen ventilation units in the kitchens in our office building. The units comprise fire-resistant environmental friendly exhaust hoods to remove oil and purify air with photolysis purification function and the activated carbon filter and air ioniser to neutralise odors. The emission of cooking fumes is in compliance with the PRC national standards GB18483-2001. 104 2,352.24 KPIs 1. Emissions Below are the environmental key performance indicators ("KPIs”) of the Group for the year ended 31 December 2018. Unless otherwise specified, the following data covers the Group's operation, including office buildings and data centres, in Mainland China. For data of GHG emissions as well as energy and resources consumption, only the major office buildings and the main data centres (where were built in the past four years) are within the scope. In 2018, two new office buildings (namely Tencent Binhai Building and Wuhan R&D Centre) were added to the reporting scope. Please refer to the notes for the detailed scope of the data collected. Table of Environmental Key Performance Indicators Environmental, Social and Governance Report Including: Gasoline (tonnes) 105 We have shared our experience and technology in building green data centres with other industry players so that HVDC, micro module and indirect evaporative cooling technologies have been widely adopted in the PRC data centre business. We have also helped to establish the industry standards for HVDC and micro module technologies in order to enhance energy saving efforts among the industry players. In the future, we will further promote T-block technology. We will strive to enhance the power usage effectiveness while improving the efficiency of the data centre construction process. T-block technology (comprising (i) photovoltaic + High Voltage Direct Current ("HVDC") technology for electrical design; (ii) indirect evaporative cooling units; (iii) Tnebula smart control system; and (iv) fully commercialised project delivery solution) has been used in the fourth generation of our data centres, including the new data centre in Shenzhen, Gui'an and Chongqing. We have adopted the T-base large-scale data centre campus construction model which has placed us at the leading position in terms of the efficient use of space and the standardisation of the construction process. It does not only shorten the construction cycle but also minimise the impact on the environment and increase the power usage effectiveness ("PUE") of our data centres. The annual average PUE of our data centres which are located in a low-altitude climate zone (including the one in Shenzhen) is below 1.25. Our new data centre in Gui'an is an advanced data centre with a high level of privacy, defence and security. It completed the test run during which the PUE was 1.12. We expect that it will serve as a highly reliable and environmentally friendly data centre for our Group and our business partners. We have achieved standardised application of the T-block technology in this project. We endeavour to fulfil our responsibility to protect the environment by applying innovative technology to our data centres and be the exemplar of green data centres in the PRC industry. Energy Saving Measures taken in our Data Centres Environmental, Social and Governance Report Tencent Holdings Limited Annual Report 2018 712,761.82 The Group's GHG inventory includes carbon dioxide, methane and nitrous oxide. GHG emissions data is presented in carbon dioxide equivalent and is based on the "2015 Baseline Emission Factors for Regional Power Grids in China" issued by the National Development and Reform Commission of China, and the "2006 IPCC Guidelines for National Greenhouse Gas Inventories" issued by the Intergovernmental Panel on Climate Change (IPCC). The scope of GHG emission data covers the Group's office buildings located in Shenzhen, Guangzhou, Shanghai, Beijing, Chengdu and Wuhan, and the main data centres which were built over the past four years in Mainland China. 2.01 Total energy consumption per floor area (MWh per square metre) 3.28 Total energy consumption per employee (MWh per employee) 154,636.44 154,636.44 12,029.70 42.10 780.24 12,852.04 167,488.48 0.14 Including: Electricity (MWh) Natural gas (MWh) Diesel (MWh) Including: Gasoline (MWh) Direct energy consumption (MWh) Total energy consumption (MWh) KPIs 2.1 Office Buildings Energy and resources consumption Environmental, Social and Governance Report 2. Indirect energy consumption (MWh) 712,761.82 Running water consumption (tonnes) Running water consumption per employee (tonnes per employee) 0.09 2.51 0.00005 5,917.28 0.12 Note: 1 Due to its business nature, the significant air emissions of the Group are GHG emissions, arising mainly from fuels and electricity derived from fossil fuels. 2 3 Diesel was consumed for backup generators. 973,413.06 4 Hazardous waste produced by the Group's operation mainly includes waste toner cartridge and waste ink cartridge from printing equipment at office buildings, as well as waste lead-acid accumulators at data centres. Waste toner cartridge and waste ink cartridge are collected and disposed of by printing suppliers, whereas lead-acid accumulators are disposed of by qualified waste recycling vendors. In 2018, there were no waste lead-acid accumulators. 5 Non-hazardous waste produced by the Group's operation mainly includes domestic waste and non-hazardous office waste. Domestic waste is disposed of by the property management company and kitchen waste recycling vendors, and its data is not available for statistics, so we made estimation of domestic waste produced at the Group's office buildings located in Shenzhen, Guangzhou, Shanghai, Beijing, Chengdu and Wuhan with reference to "Handbook on Domestic Discharge Coefficiencies for Towns in the First Nationwide Census on Contaminant Discharge" published by the State Council. Non-hazardous office waste is recycled by waste recycling vendors. 106 Tencent Holdings Limited Total energy consumption (MWh) KPIs 2.2 Data Centres 5,461 Recycled water consumption (tonnes) IP 19.07 LO 938,988.70 Career development Healthy work environment User privacy Prioritise users' interests in business decision-making Business partners (including suppliers and investee companies) • • • Ensure our partners receive fair treatment and benefit from their collaboration with us Allow investee companies to maintain autonomy for their business development and meet them on a regular basis for exchange of industry knowledge and know-how Hold regular meetings with our partners to review their performance and explore possible collaboration opportunities Combat behaviours which are harmful to the interest of our partners by setting up an independent steering group on business ethics and anti-bribery practice Encourage our partners to reflect the ethics and values of our business practice Community Establish a platform for charity donations Promote innovation and the establishment of a legal framework to protect IP rights • Contribute to the industry and continue to provide an open platform 5. Environment Make protection of the environment one of our priorities • Adopt a sustainable investment strategy • Remain committed to environmental sustainability Be honest to users and protect their interests Consistently listen to the voices of our users, concurrently enhancing product and service quality • Users Environmental, Social and Governance Report OVERVIEW This report provides information on the Group's environmental, social and governance ("ESG") performance for the year of 2018. It should be read in conjunction with this annual report, in particular the Corporate Governance Report contained in this annual report, as well as the sections headed "Corporate Governance" and "Culture" on the Company Website. SCOPE OF THIS REPORT This report aims to provide a balanced representation of the Group's ESG performance in terms of environment, workplace, community, supply chain management and product responsibility. We will focus on each of these areas in turn in this report, in particular those economic, environmental and social issues that could have a material impact on the sustainability of our operations and that are of interest to stakeholders. ESG STRATEGY, MANAGEMENT APPROACH, PRIORITIES AND OBJECTIVES We believe that it is important to formulate effective strategies to balance the economic, environmental and social benefits of our activities with our other business targets. We have fully integrated ESG considerations into our operations as part of our corporate development strategy, with a particular focus on fostering closer connections with our stakeholders, listening to the voices of our users, working openly with partners to overcome challenges, caring for and growing with employees, and taking on more responsibilities within society. The core of our ESG strategy is our vision to become the most respected Internet company. In pursuit of this vision, we embrace the principle of sustainability, uphold integrity and promote shared growth and development within the industry, and put environmental protection, staff development and community welfare at the forefront. We conduct and review our ESG strategy in five dimensions as detailed below. Five Dimensions of our ESG Strategy 1. Business operations Through this approach we are able to create a favourable environment that will enable us to provide quality services to Internet users and promote the positive development of the wider society. Operate in compliance with applicable laws and regulations Operate with integrity and protect shareholders' interests • Care for employees and provide them with training and development opportunities • Establish a diverse corporate culture 100 Tencent Holdings Limited Environmental, Social and Governance Report 2. 3. 4. . Materiality to Tencent's ESG management Annual Report 2018 101 Stakeholder analysis Product and service quality Privacy protection User experience research, customer service hotline, online customer service, Weixin/WeChat and face-to-face customer support 102 Tencent Holdings Limited Environmental, Social and Governance Report Assessment on the materiality of the ESG topics In 2018, we had not only discussed the materiality of the ESG topics with our stakeholders through the abovementioned communication channels but also conducted an online survey to understand the topics that our stakeholders believe to be material to the Group's business. The results of the survey are as follows: Materiality to Stakeholders Response to climate change 1221 Energy management Pollution reduction Waste management Supply chain management Anti-corruption Product innovation Customer satisfaction Healthy environment for users Data security Water resources Diversity Talent attraction & retention Users Regular meetings, supplier assessment, site visit Corporate announcements, investor conference, official website, regular meetings Fair cooperation Integrity We understand the importance of the feedback from our stakeholders (including our users, investors, employees and business partners) on our ESG performance. Therefore, we have established effective communication channels with our stakeholders (in alphabetical order) as follows: Stakeholders Community and public Employees Key topics Charity Key communication channels Tencent Foundation, fundraising platform Volunteering Environmental protection Employee benefits Environmental, Social and Governance Report Employee satisfaction survey, employee training, annual employee rally, face-to-face discussion forum, featured magazines, social media platform Non-government organisations and media Compliance Corporate governance Product and service quality Environmental protection Compliance Charity Meetings, policy consultation, incident reporting, official visit, information disclosure Social media platform, industry events, press conference Shareholders and investors Investment return Business strategy Suppliers Information transparency Government and regulatory bodies Direct energy consumption (MWh) Employee health & safety Employee benefits Employee training & development Including: Diesel (MWh) The Group's water resources come from municipal water supply. Recycled water consumption is the recycled domestic water treated by the waste water treatment system equipped at Tencent Tower A and Tower B in Chengdu. Fees for diesel in some data centres are borne by the operators and therefore such diesel data is not available. Data of diesel consumed by our data centres reported here only covers the data centres whose diesel fees are borne by the Group. Average PUE (Power Usage Effectiveness) is yearly average data of PUE of the Group's data centres. PUE, an indicator of the power efficiency of a data centre, is the ratio of total amount of energy used by a data centre to the energy delivered to the computing equipment. Water fees in some data centres are borne by the operators and therefore such running water consumption data is not available. Data of running water consumed in our data centres reported here only covers the data centres whose water fees are borne by the Group. 8 Data of packaging materials is not applicable to the Group. 108 Tencent Holdings Limited Total energy consumption is worked out by the data of electricity and fuel with reference to the coefficients in the National Standards of the PRC "General Principles for Calculation of the Comprehensive Energy Consumption (GB/T 2589-2008)". Environmental, Social and Governance Report Employee Development and Training As our staff is one of our most important assets, we invest heavily in employee development and training. We encourage employees to attend external and internal trainings. We have adopted relevant policies to ensure that employee trainings are provided and managed in a systematic manner. For example, supervisors are required to assist in designing the professional development plans for the employees and evaluate the effectiveness of the trainings received by the employees. To ensure the quality of the trainings, we have also developed policies which set out requirements for the qualifications and experience of the instructors and the objectives of the programmes and worked with external educational institutions from time to time to jointly develop training programmes. In 2007, we founded our own corporate university, Tencent Academy. It offers different training programmes for each stage of an employee's career, including an induction, on-the-job training and leadership training. It has also set up an online learning platform and a mobile learning system in order to allow employees to learn anytime and anywhere. In 2017, one of our training programmes won the ATD Excellence in Practice Award by the Association for Talent Development. As at 31 December 2018, there were approximately 700 face-to-face courses, 7,400 online courses and over 1,000 internal part-time instructors. Over the past decade, we ran face-to-face courses over 8,000 times per year and over 1,500 courses were livestreamed per year. The aggregate number of training hours of our employees in the past 10 years exceeds 5 million. Throughout 2018, the number of the average in-house training hours per employee was 37.1 and the percentage of employees who received training is 99%. We also intend to open up our training resources to our business partners and industry players in order to enhance the market standard. Annual Report 2018 109 139.82 WORKPLACE The scope of energy and resources consumption data relating to office buildings covers those located in Shenzhen, Guangzhou, Shanghai, Beijing, Chengdu and Wuhan, whereas that of data centres covers the main data centres which were built over the past four years in Mainland China. We have a well-established performance management system. A performance assessment for each employee is conducted by that employee's supervisor every six months and employees are required to work with their supervisors to set a performance target after each assessment. Supervisors are encouraged to provide constructive feedback from time to time to assist the personal growth of each employee. 6 7 139.82 Indirect energy consumption (MWh) 938,848.88 Including: Electricity (MWh) Average PUE 1.27~1.47 Running water consumption (tonnes) 933,813 938,848.88 107 Environmental, Social and Governance Report Note: 1 2 3 4 LO Annual Report 2018 5 Rural development Environmental, Social and Governance Report Tencent Holdings Limited 112 In response to the recent natural disasters in the PRC as well as globally, the Tencent Foundation has created a multifaceted disaster relief model by combining our various products including online platforms, instant messengers, online payment and Internet search to help the public follow the latest news, participate in rescue efforts and make donations. In addition, the Tencent Foundation has made donations to support the rescue missions and post-disaster reconstructions. In 2018, it donated an aggregate of approximately RMB4.5 million to the China Foundation for Poverty Alleviation, the China Children and Teenagers' Fund and other charitable organisations in response to the earthquake in Xinjiang and the landslides in Sichuan and for the post-disaster child care programme following the earthquake in Ya'an city. The Tencent Foundation has also applied technology to various charitable initiatives such as WeCountry for rural development and Tencent Three-dimensional Disaster Relief Programme in response to recent natural disasters in China via the online platform. In 2018, the total number of donations made by the Internet users was approximately 69 million and the total amount of the funds raised was over RMB1.7 billion. In addition to promoting philanthropy through the online charity platform, the Tencent Foundation makes direct donation in the following areas: (i) disaster relief; (ii) rural development; (iii) education; (iv) ecological conservation and cultural preservation; (v) community development; and (vi) poverty relief. The highlight of the Tencent Foundation's charity efforts is the annual “99 Charity Day" campaign where it matches the donations made by the Internet users between 7 September and 9 September via its online platform. In 2018, the Tencent Foundation donated RMB300 million for the campaign, of which 35.2% was for education initiatives, 34.5% for medical care, 26.1% for poverty relief and the remaining 4.2% was for environmental protection initiatives and others. The Tencent Foundation believes that everyone can participate in charity work anytime and anywhere through technology. In June 2007, the Tencent Foundation leveraged on our Internet technical capabilities and online platforms to build the first online public fundraising platform. It is designed, developed and operated by the Tencent Foundation while we provide server, broadband and other technical support for free. The platform is open for eligible charitable organisations free of charge. It allows charitable works to be performed more conveniently, smoothly and transparently. This is a good example of the application of the concept of "Internet+". As of 31 December 2018, there had been over 6,000 active charitable organisations and close to 16,000 charity projects in different locations with different focuses. In 2015, WeCountry, our open platform built on the “Internet + Village" model, was launched to offer villagers access to digital technology which would benefit their communities. As of 31 December 2018, 28 provincial administrative areas with approximately 10,000 villages (or communities) joined WeCountry platform. The number of verified villagers was approximately 2.34 million as of 31 December 2018. We set up the Tencent Charity Foundation (the "Tencent Foundation") on 26 June 2007. It is a non-public fundraising foundation incorporated in the PRC and a separate legal entity. We commit to donating certain portion of our profits to the Tencent Foundation every year for the purpose of supporting charitable works. As of 31 December 2018, our Group and our employees donated approximately RMB3.5 billion and RMB68 million in total to the Tencent Foundation respectively since its establishment. During the year 2018, our Group and our employees donated RMB730 million and RMB840,000 to the Tencent Foundation respectively. Disaster relief Education 113 Ecological conservation and cultural preservation The Tencent Foundation is keen on environmental protection and cultural preservation. In 2018, the Tencent Foundation donated approximately RMB5.8 million to the China Foundation For Cultural Heritage Conservation, the Paradise International Foundation and other ecological conservation organisations to continue to preserve and repair the Great Wall and for the ecological conservation project in the PRC. Community development In 2018, the Tencent Foundation raised approximately RMB120 million on the "99 Charity Day" to promote philanthropy and innovation in charity work. Poverty relief In 2018, the Tencent Foundation donated approximately RMB125 million to support poverty relief initiatives through various charitable organisations, in addition to the matching donation made by the Tencent Foundation on the "99 Charity Day" on the same area. Annual Report 2018 Environmental, Social and Governance Report Volunteering Over the last decade, the Tencent Volunteer's Association has been involved and contributed in the areas of online charity, promotion of unhindered Internet access, information technology popularisation, cybersecurity, emergency support, poverty relief, scholarship, environmental protection, care for elderly and children with special needs and animal protection. It has launched more than 200 volunteering activities. In 2016, it was awarded a spot in the list of Top 10 Best Volunteer Organisations in Guangdong Province. Community Investment The Tencent Foundation has set up scholarships to promote education in the PRC and other countries throughout the years. There are also specific donations for different education initiatives. In 2018, the Tencent Foundation donated approximately RMB119 million in education related projects. For example, it had cooperations with the funds set up by universities (including Peking University, Shenzhen University and Nanjing University) on higher education and with UNICEF on cybersecurity education. It also sponsored the projects led by Beijing Hefeng Art Foundation in relation to online art education. COMMUNITY We were awarded by zhaopin.com as the best employer in the PRC in 2018. We have also been voted as one of the best employers in the PRC for 13 consecutive years since 2006 in a survey jointly conducted by zhaopin.com and the Institute of Social Science Survey, Peking University. Annual Report 2018 111 We had 54,309 employees as at 31 December 2018. Our employment practice is in compliance with applicable laws and regulations (including but not limited to those which prohibit child and forced labour) and does not discriminate on the grounds of gender, ethnicity, race, disability, age, religious belief, sexual orientation or family status. Diversity is well supported in our corporate culture. The recruitment process strictly abides by the guidelines of the Group's Human Resources Department. Every job applicant is required to provide information on his/her education background, qualification and job experience in a recruitment questionnaire, which is reviewed by Human Resources Department and verified by professional background check agency. This allows the Group to hire suitable candidate in accordance with the job requirements and, to the extent possible, avoid child and forced labour. Compensation and Benefits Compensation We offer competitive pay and employee benefits to attract and retain talent. The remuneration and bonus system is performance-based and designed to reward employees with high performance and great potential. Benefits The basic benefits system was built and is maintained in accordance with relevant laws, regulations and market practice. In addition, certain special benefits are created to motivate employees and implement our strategy. The Tencent Volunteers' Association combines its expertise in technology to help the community. For example, it has been broadcasting information on missing persons via Weixin/WeChat and QQ and with the latest facial recognition and blockchain technologies, the number of successful cases increased year by year. We care for the growth of our employees and provide benefits with Tencent characteristics to our employees. For example, we celebrate special occasions of our employees (e.g. work anniversary, wedding and festivities). We strive to create work- life balance and a safe and comfortable work environment for employees. Employees have the flexibility to choose the most suitable insurance plans and benefits for themselves and their families. Promotion Employees may apply for promotion during their interim and year-end performance reviews, provided that they satisfy the requirements with regard to the length of service and performance. Depending on the practice area, the promotion will be reviewed and considered by different internal committees. The promotion review process is fair and open – there is a formal channel for our employees to provide and receive feedback. The promotion review is conducted in compliance with applicable laws and regulations. 110 Environmental, Social and Governance Report Tencent Holdings Limited Employee Departure All of our employees enter into written employment contracts which detail, among other things, the grounds for termination of the employment. We value our relationship with our employees and handle employee departure (whether by resignation or dismissal) strictly in accordance with applicable laws and regulations. We arrange an exit interview with each of the departing employees to understand the reasons for his/her departure and welcome any suggestions for improvement. Work-Life Balance We have implemented various initiatives such as flexi-time arrangements and volunteer service leave to help employees strike a good work-life balance. The leave scheme allows employees to enjoy annual leave, fully-paid sick leave, half-paid leave of absence and fully-paid special Chinese New Year leave which are above the statutory standard. Also, female employees are entitled to take fully-paid maternity leave, while male employees are also entitled to take fully-paid paternity leave. Employees can also apply for one day of fully-paid volunteer service leave per year. We also organise a wide variety of recreational and leisure activities (e.g. running, photography, music, dance, language classes) for employees. Occupational Health and Safety We strive to provide a safe and comfortable work environment for our employees. There are well-established security and fire service systems and food safety monitoring system. We have a designated team in charge of the physical and mental health of employees. We arrange annual medical checkups for employees and organise health seminars, fitness sessions, on-site medical consultations as well as face-to-face and telephone counselling from time to time. Our contribution to social insurance in the PRC is in compliance with applicable laws and regulations and we offer various supplemental insurance benefits to employees and their families (including medical insurance, critical illness insurance, accident insurance and life insurance). Communication We strive to create casual yet sophisticated communication channels with customised contents for our employees. There are annual rallies for employees and management, face-to-face discussion forums, featured magazines and social media platforms. The corporate strategy and culture are communicated and reinforced through these products and communication channels. Environmental, Social and Governance Report The Tencent Volunteers' Association also established the China IT-Philanthropy Union which promotes the “Internet + Charity" model by holding summits and publishing white papers on the successful examples of how the information technology has changed the landscape of charity work. Environmental, Social and Governance Report Anti-Corruption Investigating and subsequently reporting suspicious activities to the applicable regulatory bodies; Conducting regular independent testing on our AML system and providing regular AML trainings to our employees and counterparties; and Prohibiting the onboarding of any anonymous users or users using an obviously fictitious name for our services. Annual Report 2018 117 Environmental, Social and Governance Report SUPPLY CHAIN MANAGEMENT Our supply chain management programme attaches supreme importance to managing the ethics risk associated with the relationship between our procurement employees and our business partners. It also focuses on teaching those employees who are involved in procurement to recognise and mitigate the inherent risks. To enhance the social responsibility awareness of our employees, we have formulated a code of conduct which those employees engaging in procurement activities must adhere to. To minimise the ethics risks, such employees are also required to declare any relationship they may have with our suppliers in writing. In the course of supplier engagement, potential suppliers are required to conduct self-assessment on their commitment, amongst other things, to environmental protection, social responsibility, and health and safety at work (the "Self-Assessment”). Suppliers which are formally engaged by us are also required to agree to the terms of a declaration and undertaking in relation to anti-commercial bribery in doing business with our Group (the "Anti-commercial Bribery Declaration"). During the year ended 31 December 2018, all suppliers which were formally engaged had completed the Self-Assessment and signed the Anti-commercial Bribery Declaration. We were not aware of any material commercial bribery engaged by our suppliers. The procurement department looks for qualified suppliers in the market and conducts standard or simplified verification on the suppliers depending on the duration of the cooperation, the order volume and the nature of the request. We have maintained a database of qualified suppliers which are ready to take orders from us. Establishing processes and systems which are designed to monitor customer transactions for the purpose of identifying suspicious activities; We have an internal policy which sets out the procedures for supplier onboarding. Before engaging a supplier, we will form a supplier assessment team to conduct the background check (including site visit) on the supplier. The team will consist of members from the procurement department, the requesting department, the technology department (if applicable) and the risk management department. The assessment results will be reported to the procurement department for a final determination. We normally ask for price quotations from at least three vendors. Other factors including delivery time and technical capabilities of the vendors will be taken into consideration when selecting vendors. If there is only one vendor available for selection as it dominates the relevant market or it is the only vendor with access to the required goods/services, the exclusive procurement arrangement with such vendor will require special approval with a satisfactory justification provided by the technology department or the requesting department. 118 Tencent Holdings Limited Environmental, Social and Governance Report PRODUCT RESPONSIBILITY We strive to provide the best user experience and pay high attention to the quality of our products and services. We conduct strict reviews of our product and service offerings and related sales, marketing and advertising strategies and materials to ensure their compliance with applicable laws and regulations. We also build in safeguards on user privacy, product safety and IP rights as described below. User Privacy To uphold our dedication to value creation for our users, amongst other user specific aims, one of our important missions is to protect the privacy of user data and other sensitive information. We comply with all applicable laws on privacy protection, and incorporate applicable legal and regulatory requirements on privacy protection into our internal compliance policies taking into account the specific features of our products and services. We have also devised specific procedures to collect and process user data to ensure that our products and services are in compliance with applicable legal requirements. We have a dedicated privacy team within the Legal Department which is responsible for handling data protection matters. We evaluate specific products from the perspective of privacy protection on a regular basis and perform privacy risk assessments before the launch of new products to ensure that our products are not exposed to the risk of privacy infringement or leakage of user data. We provide training to our employees to enhance their privacy protection awareness and build up the cultural awareness of the importance of privacy protection. To ensure that our users understand how we protect their personal information and enhance the transparency of how we collect and process the data, we promote the concept of "Data for Social Good". We have published the Tencent Privacy Protection Whitepaper and launched the Tencent Privacy Platform (https://www.qq.com/privacy.htm) to give our users a comprehensive understanding of the privacy protection measures taken by Tencent. We also make our privacy protection policies available on our product websites and in-app products, and provide communication channels for our users to file complaints and raise enquiries whenever they are in doubt. The privacy policies of our various applications have been considered top-ranked in the joint review by the Cyberspace Administration of China, the Ministry of Industry and Information Technology of the PRC, the Ministry of Public Security of the PRC and the Standardisation Administration of the PRC and in the review by China Consumers Association among 100 selected applications. Furthermore, we actively participate in shaping the development of the industry framework on privacy protection. For example, we are a member of the International Association of Privacy Professionals. Many of our products have been accredited with privacy certifications from TrustArc. Our network and data security managements have been recognised in the PRC and internationally and ISO certified. Annual Report 2018 119 We evaluate the performance of our suppliers from time to time and take appropriate steps to address any issues with the quality of the suppliers as part of our supply chain management. For suppliers with unsatisfactory performance, subject to applicable contractual arrangements, we may (i) discuss with them on the remedial steps to be taken by them; (ii) suspend the cooperation; (iii) reduce the order volume; (iv) impose penalties; or (v) suspend payment. The procurement department may disqualify a supplier for the following events: (i) we suffer from material economic losses as a result of the delayed delivery, quality issue or breach of contract by the supplier; (ii) the supplier has received the lowest rating in the rating scale for two consecutive quarters; and (iii) the supplier has in serious breach of business ethics. • • Establishing a comprehensive Customer Due Diligence Programme; Tencent embraces the value of integrity, proactivity, collaboration and innovation. To promote integrity, we have developed robust systems and measures to prevent, detect and deter corruption or any other fraudulent activities. Internal audit is conducted and risk management and risk control have been further strengthened to ensure the Group's compliance with ethical standards which we promote and strive to uphold. 114 Tencent Holdings Limited Environmental, Social and Governance Report Risk Management and Internal Control Policy In 2016, we updated the Risk Management and Internal Control Policy (the "Policy") with a system comprising three lines of defence. The first line is business and functional departments. The risk management and internal control departments serve as the second line while the internal audit department and anti-fraud investigation department act as the third line of defence. The Policy sets out the roles and responsibilities of different stakeholders in risk management and control (including those in relation to frauds). It is emphasised in the Policy that the management of each business group is primarily responsible for the risk management and internal controls of its department. If any fraudulent activity is detected, the management of the relevant department shall improve the control procedures promptly to prevent recurrence of similar incidents. The risk management and internal control departments have dedicated a team to each business group to provide internal control and risk management support. We also apply continuous auditing to key businesses in order to detect irregularities and identify risks in a timely and systematic manner and to improve the effectiveness of fraud risk management and control. Tencent Sunshine Code of Conduct All employees of the entire Group are required to follow and to strictly comply with the Tencent Sunshine Code of Conduct (the "Sunshine Code"). It expressly prohibits all kinds of fraudulent activities, bribery, embezzlement, misappropriation, extortion, falsification of information and any other activities which are not in compliance with applicable laws and regulations. The Sunshine Code shall be reviewed annually against the changing needs of the Group and revised when appropriate, in order to ensure that it caters for our business development, reflects the positions under applicable laws and regulations and captures all kinds of fraudulent activities. In 2018, we have revised the Sunshine Code to include more specific stipulations in relation to each category of fraudulent activities so that our employees can understand better our expectations under the Sunshine Code. The revised Sunshine Code emphasises the responsibilities of the management. The immediate supervisor will be demoted if an employee under his management has committed a fraudulent act as a result of deficiency in the management process, unclear delineation of responsibilities or loopholes in the business operation. The immediate supervisor will also be required to come up with a remedial plan with the risk management and internal control departments and implement such plan within three months. The Internal Audit Committee has the discretion to make the final decision on whether such immediate supervisor can be resumed to his original role after the implementation of the remedial plan. In 2018, in order to ensure our employees comply with the requirements and ethical standards stipulated in the Sunshine Code, we have requested all employees to complete the e-learning programme with a view to understanding the updated rules and standards of the Sunshine Code. For positions with high risk of fraud, they are required to attend face-to-face training course at least once a year. We also promote job rotation for these employees on a regular basis in order to minimise the risk of fraud. Annual Report 2018 115 Environmental, Social and Governance Report Anti-fraud and Whistleblowing Policy We have published an Anti-fraud and Whistleblowing Policy (the "Whistleblowing Policy"), which clearly conveys the message of zero tolerance in relation to fraudulent activity to all the employees and suppliers/business partners. All employees and suppliers/business partners are encouraged to report genuine concerns about any existing or potential fraudulent activities and non-compliance. The Whistleblowing Policy expressly outlines the multiple whistleblowing channels and how the Group should deal with such concerns, so that employees and suppliers/business partners can report their good faith concerns without fear of reprisal or potential retaliation. Since 2016, we have maintained an Official Account under the name of "Sunshine Tencent" on Weixin to promote our anti-fraud policy and whistleblowing channels with a function to allow our business partners to report directly to us. Fraud Detection and Corruption Prevention When a report of suspected fraudulent activities is received, the anti-fraud investigation department, which consists of professionals who used to be part of the anti-corruption function at a governmental authority or private enterprise and have profound knowledge in fraud risk management and solid fraud investigation experiences, is assigned to handle the investigation independently. After an investigation has been completed, the employee found and proven to have committed such fraud shall be subject to immediate dismissal. At the same time, the department in question must, with the assistance of the risk management and internal control departments, take corrective actions in response to the business risk or loophole identified during the investigation. If we find any supplier or business partner engaging in corruption or any other fraudulent activities, we will terminate the contracts with them immediately and never work with them again. In the event that any fraudulent activity violates any relevant laws or regulations, such cases shall be reported to government authorities in accordance with applicable laws and regulations. In order to convey a message regarding our determination to fight against fraud and to introduce our whistleblowing system externally, we send a letter to our suppliers and business partners and request them to complete a questionnaire annually. The questionnaire sets out our corporate values, the Whistleblowing Policy and the various reporting channels. We will understand from each of our suppliers and our business partners whether our employees have requested for any gift, cash or benefit during the course of business and whether it has been treated unfairly. Upon receipt of the feedback, we will ensure that the questions or concerns raised by our suppliers and our business partners will be addressed promptly. If necessary, the anti-fraud investigation department will commence an investigation formally. Our risk management and internal control departments have established a procurement management control unit to optimise the Group's supplier management system. A new supplier synergy system has been launched for the online management of the entire procurement life cycle, from sourcing, selection and onboarding of suppliers, performance assessment to retiring suppliers. The system serves as an open platform where the suppliers can provide its corporate information to us and we can manage the entire bidding process online. Through a centralised system, the bidding process can be standardised and become more transparent. The supplier management system also provides the suppliers with a communication channel so that we can collect their feedback or complaints. Complaints in relation to fraudulent activities will be passed to the anti- fraud investigation department directly for follow-up and those non-fraud related complaints (such as unfair treatment) will be handled by the procurement risk management unit. The goal is to ensure that the complaints and concerns of our suppliers can be addressed promptly and the risk of fraud can be minimised. 116 Tencent Holdings Limited Equal Opportunities and Diversity Anti-Money Laundering The Group is subject to and strictly abides by applicable laws and regulations in relation to cross-border and domestic money transmission, anti-money laundering ("AML") as well as counter-terrorist financing ("CFT") in the PRC and other countries where we provide payment processing services. We have fulfilled not only our legal obligations but also our social responsibilities. As a result of the complexity of legal and regulatory compliance in multiple jurisdictions, we have dedicated more resources (including but not limited to human resources and system capabilities) to the compliance work in the following areas: (i) recruiting more AML/CFT professionals for the know-your-customer process, suspicious transaction review and analysis, and system infrastructure enhancement in order to enhance the effectiveness and professionalism of AML/CFT measures; (ii) strengthening the implementation of internal control measures in relation to sanctions compliance in order to minimise the relevant risks; (iii) enhancing the cooperation with regulators and law enforcement bodies on AML investigations; (iv) actively participating in the combats against money laundering, terrorism, tax evasion and corruption activities internationally, in order to prevent money laundering and upstream criminal activities; and (v) carrying out various forms of training, education, and public relation activities on AML for our executives, employees and users. In 2018, Tencent has established an Anti-Money Laundering Programme (the "AML Programme") to ensure that money laundering risks identified by Tencent are appropriately mitigated and to protect Tencent, its employees, shareholders and users from money laundering risks. The AML Programme provides guidance to all Tencent employees, requiring them to conduct business in accordance with applicable AML laws, rules and regulations. The key aspects of the AML Programme include but are not limited to the following: Appointing AML specialists at global and country levels; • In order to encourage employees to participate in volunteer service, employees, since April 2012, have been granted one day of fully-paid volunteer service leave per year. Environmental, Social and Governance Report In 2006, some of our employees founded the Tencent Volunteers' Association on their own initiative in response to our corporate vision of being "the most respected Internet company". Since then, the Tencent Volunteers' Association has contributed more than 120,000 hours of voluntary services and the total number of participants is more than 60,000. There are more than 20 sub-divisions at the city level (such as Beijing, Shanghai, Chengdu, Shenzhen, Wuhan, Guangzhou and Hefei) and at the regional level (such as Hebei, Guangdong, Guizhou, Gansu and Yunnan). We assessed, on a sample basis, the expected users' Independent Auditor's Report Tencent Holdings Limited 126 In respect of the impairment assessments of cash generating units that contain goodwill, investments in associates and investments in joint ventures using discounted cash flows, we assessed the key assumptions adopted including revenue growth rates, profit margins, discount rates and other assumptions by examining the approved financial/business forecast models, and comparing actual results for the year against the previous period's forecasts and the applicable industry/business data external to the Group. We assessed certain of these key assumptions with the involvement of our internal valuation experts. We considered that the key assumptions adopted by management are in line with our expectation and evidence obtained. Management adopted different valuation models, on a case by case basis, in carrying out the impairment assessments, mainly including discounted cash flows and market approach. We assessed, on a sample basis, the basis management used to identify separate groups of cash generating units that contain goodwill, the impairment approaches and the valuation models used in management's impairment assessments, which we found them to be appropriate. We also tested, on a sample basis, key controls in respect of the impairment assessments, including the determination of appropriate impairment approaches, valuation models and assumptions and the calculation of impairment provisions, which we found no material exceptions. We tested management's assessment including periodic impairment indications evaluation as to whether indicators of impairment exist by corroborating with management and market information. How our audit addressed the Key Audit Matter amounts of these assets and the fact that significant judgment were required by management (i) to identify whether any impairment indicators existed for any of these assets during the year; (ii) to determine the appropriate impairment approaches, i.e. fair value less costs of disposal or value in use; and (iii) to select key assumptions to be adopted in the valuation models, including discounted cash flows and market approach, for the impairment assessments. As at 31 December 2018, the Group held significant amounts of goodwill, investments in associates and joint ventures amounting to RMB32,605 million, RMB219,215 million and RMB8,575 million, respectively. Impairment provision of RMB784 million, RMB14,069 million and RMB2,328 million had been recognised during the year ended 31 December 2018 against the carrying amounts, respectively. Refer to Notes 2.13(a), 2.15, 4(b), 19, 20 and 21 to the consolidated financial statements Impairment assessments of goodwill, investments in associates and joint ventures Key Audit Matter Independent Auditor's Report Key Audit Matter Annual Report 2018 125 the data integrity of historical users' consumption patterns and calculation of the churn rates. We also evaluated the consideration made by management in determining the underlying assumptions for expected users' relationship periods with reference to historical operating and marketing data of the relevant games. We also assessed, on a sample basis, the historical accuracy of the management's estimation process by comparing the actual users' relationship periods for the year against the original estimation for selected virtual products/items. items. These judgment included (i) the determination of key assumptions applied in the expected users' relationship periods, including but not limited to historical users' consumption patterns, churn rates and reactivity on marketing activities, games life-cycle, and the Group's marketing strategy; and (ii) the identification of events that may trigger changes in the expected users' relationship periods. Environmental, Social and Governance Report Customer Service The Tencent Customer Service Centre consists of more than 2,500 staff members and is responsible for handling complaints and responding to enquiries from customers for our businesses. We commit to providing solutions to our customers in a timely manner through different means including customer service hotline, online customer support, intelligent customer service, Weixin/WeChat and face-to-face meeting. We have established the following management system to handle complaints from our customers effectively: 1. 2. 3. 4. There is a designated team within the customer service department to handle complaints and deal with compensation requests. The team is responsible for conducting investigation based on the information provided by the complainant, explaining the relevant procedures to the complainant and notifying the complainant of the investigation results with the aim of providing him with a satisfactory solution. For better user experience, we have established a set of complaint handling procedures which set out clearly the responsibilities within the customer service department and the timeframe within which a complaint needs to be resolved. We have strengthened our system infrastructure which allows classification of complaints by urgency and risk level so that the customer service staff can better prioritise the cases and deal with the complaints in a timely manner. We have a designated team of staff who is responsible for handling complaints from customers who visit our offices and for better risk control, we have designed a set of protocols for different types of incidents. We found that the results of our procedures performed to be materially consistent with management's supporting documentation. Impairment assessments of goodwill, investments in associates and joint ventures (Cont'd) 129 Annual Report 2018 users' relationship periods for certain virtual products/ relationship periods adopted by management by testing How our audit addressed the Key Audit Matter In respect of the impairment assessments of cash generating units that contain goodwill, investments in associates and investments in joint ventures using market approach, we assessed the valuation assumptions including the selection of comparable companies, recent market transactions, and liquidity discount for lack of marketability, etc. We assessed these key assumptions adopted by management with the involvement of our internal valuation experts based on our industry knowledge and independent research performed by us. We considered that the key assumptions adopted by management are in line with our expectation and evidence obtained. We independently tested, on a sample basis, the accuracy of mathematical calculation applied in the valuation models and the calculation of impairment charges. We did not identify any material exceptions from our testing. Annual Report 2018 127 Independent Auditor's Report Key Audit Matter Fair value measurement of financial instruments, including financial assets at fair value through profit or loss, financial assets at fair value through other comprehensive income and other financial liabilities Refer to Notes 3.3, 4(c), 23, 24, 37 to the consolidated financial statements As at 31 December 2018, the Group's financial assets and financial liabilities which were carried at fair value comprised financial assets at fair value through profit or loss, financial assets at fair value through other comprehensive income and other financial liabilities of approximately RMB97,877 million, RMB43,519 million and RMB4,506 million, respectively, of which approximately RMB83,934 million of these financial assets and approximately RMB4,466 million of these financial liabilities were measured based on significant unobservable inputs and classified as “Level 3 financial instruments". We focused on this area due to the high degree of judgment required in determining the respective fair values of Level 3 financial instruments, which do not have direct open market quoted values, with respect to the adoption of applicable How our audit addressed the Key Audit Matter In respect of the fair value measurement of Level 3 financial instruments, we tested the key controls, on a sample basis, in relation to the valuation process including the adoption of applicable valuation methodology and the application of appropriate assumptions in different circumstances, by inspection of the evidence of management's review, which we found no material exceptions. We involved our internal valuation experts to discuss with management and assess the appropriateness of valuation methodology and assumptions used. We tested, on a sample basis, valuation of Level 3 financial instruments as at 31 December 2018 by evaluating the underlying assumptions and inputs including risk-free rates, expected volatility, relevant underlying financial projections, and market information of recent transactions (such as recent fund raising transactions undertaken by the investees) as well as underlying supporting documentation. We also tested, on a sample basis, the arithmetical accuracy of the valuation valuation methodology and the application of appropriate computation. We found that the valuation methodology Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion. We report our opinion solely to you, as a body, and for no other purpose. We do not assume responsibility towards or accept liability to any other person for the contents of this report. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements. AUDITOR'S RESPONSIBILITIES FOR THE AUDIT OF THE CONSOLIDATED FINANCIAL STATEMENTS In preparing the consolidated financial statements, the directors are responsible for assessing the Group's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or to cease operations, or have no realistic alternative but to do so. Those charged with governance are responsible for overseeing the Group's financial reporting process. The directors of the Company are responsible for the preparation of the consolidated financial statements that give a true and fair view in accordance with IFRSS and the disclosure requirements of the Hong Kong Companies Ordinance, and for such internal control as the directors determine is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. RESPONSIBILITIES OF DIRECTORS AND THOSE CHARGED WITH GOVERNANCE FOR THE CONSOLIDATED FINANCIAL STATEMENTS If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Healthy Environment for our Users In connection with our audit of the consolidated financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. The directors of the Company are responsible for the other information. The other information comprises all of the information included in the annual report other than the consolidated financial statements and our auditor's report thereon. OTHER INFORMATION Independent Auditor's Report 128 Tencent Holdings Limited of Level 3 financial instruments is acceptable and the assumptions made by management are supported by available evidence. assumptions in the valuation. Our opinion on the consolidated financial statements does not cover the other information and we do not express any form of assurance conclusion thereon. One of our important businesses is our online gaming business. We need to comply with the laws, regulations and policy requirements in relation to online gaming in the PRC. We focused on this area due to the magnitude of the carrying The laws, regulations and policies relating to online gaming mainly include: (i) "The Regulation on Internet Information Service of the People's Republic of China" promulgated by the State Council; (ii) "The Provisions on the Administration of Online Publishing Services” promulgated by the former State Administration of Press, Publication, Radio, Film and Television and the Ministry of Industry and Information Technology; and (iii) "The Interim Provisions on the Administration of Internet Culture", "The Interim Measures for the Administration of Online Games" and "The Notice on Regulating Online Game Operation and Strengthening Concurrent and Ex-Post Supervisions" promulgated by the former Ministry of Culture. The aims of such laws include the regulation of the qualifications of operating entities of online games, the regulation of the operation of online games, the protection for the physical and mental health of online game users and adolescents and the privacy protection of the personal data of users. • the notes to the consolidated financial statements, which include a summary of significant accounting policies. Our opinion In our opinion, the consolidated financial statements give a true and fair view of the consolidated financial position of the Group as at 31 December 2018, and of its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards ("IFRSS") and have been properly prepared in compliance with the disclosure requirements of the Hong Kong Companies Ordinance. The authorities in the PRC which regulate online gaming mainly include: (i) the State Administration of Press and Publication; (ii) the Ministry of Culture and Tourism; (iii) the Ministry of Industry and Information Technology; and (iv) the State Administration for Market Regulation. 123 Independent Auditor's Report BASIS FOR OPINION We conducted our audit in accordance with International Standards on Auditing ("ISAs"). Our responsibilities under those standards are further described in the Auditor's Responsibilities for the Audit of the Consolidated Financial Statements section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Independence We are independent of the Group in accordance with the International Ethics Standards Board for Accountants' Code of Ethics for Professional Accountants ("IESBA Code”), and we have fulfilled our other ethical responsibilities in accordance with the IESBA Code. KEY AUDIT MATTERS Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated financial statements of the current period. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Key audit matters identified in our audit are summarised as follows: Revenue recognition on provision of online games value-added services - estimates of the lifespans of virtual products/ items • Impairment assessments of goodwill, investments in associates and joint ventures We tested, on a sample basis, key controls in respect of the recognition of revenue from sales of virtual products/ items, including management's review and approval of (i) determination of the estimated lifespans of new virtual products/items prior to their launches; and (ii) changes in the estimated lifespans of existing virtual products/items based on periodic reassessment on any indications triggering such changes. We also assessed the data generated from the Group's information system supporting the management's review, including tested the information system logic for generation of reports, and checked, on a sample basis, the monthly computation of revenue recognised on selected virtual products/items generated directly from the Group's information system. We discussed with management and evaluated their judgment on key assumptions in determining the estimated lifespans of the virtual products/items that were based on the expected users' relationship periods. How our audit addressed the Key Audit Matter We focused on this area due to the fact that management applied significant judgment in determining the expected During the year ended 31 December 2018, a majority of the Group's revenue from value-added services was contributed from online games and was predominately derived from the sales of virtual products/items. The Group has recognised revenue from sales of virtual products/items to the users in respect of value-added services rendered on the Group's online platforms. The relevant revenue is recognised over the lifespans of respective virtual products/items which was determined by the management, on an item by item basis, with reference to the expected users' relationship periods or the stipulated period of validity of the relevant virtual products/items, depending on the terms of the virtual products/items. the consolidated statement of cash flows for the year then ended; and Refer to Note 2.30(a), 4(a) and 5(b) to the consolidated financial statements Key Audit Matter Independent Auditor's Report Tencent Holdings Limited 124 Fair value measurement of financial instruments, including financial assets at fair value through profit or loss, financial assets at fair value through other comprehensive income and other financial liabilities • Revenue recognition on provision of online games value-added services - estimates of the lifespans of virtual products/items the consolidated statement of changes in equity for the year then ended; Annual Report 2018 We are a technology-oriented company and we stress the importance of the observation and protection of intellectual property ("IP") rights. We have established a dedicated IP team with approximately 80 employees as of 31 December 2018 that is responsible for the day-to-day management of legal matters involving trademark, patent, copyright, domain names and other IP rights. the consolidated statement of financial position as at 31 December 2018; • The consolidated financial statements of Tencent Holdings Limited (the "Company") and its subsidiaries (the "Group") set out on pages 132 to 264, which comprise: What we have audited OPINION (incorporated in the Cayman Islands with limited liability) Environmental, Social and Governance Report TO THE SHAREHOLDERS OF TENCENT HOLDINGS LIMITED 羅兵咸永道 Independent Auditor's Report pwc Tencent Holdings Limited 122 Looking forward, we will continue to devote great efforts and resources to observe and protect IP rights. Within the past decade, we had several times been awarded “China Patent Gold Awards" by the State Intellectual Property Office of the PRC, "China Trademark Gold Awards" jointly by World Intellectual Property Organisation and the State Administration for Industry & Commerce of the PRC and "China Copyright Gold Awards" by the National Copyright Administration of the PRC and the World Intellectual Property Organisation, signifying our contribution to the development of independent innovation of the PRC. We have also several times been awarded "National Copyright Demonstration Unit", recognising our outstanding performance in management and protection of copyright. In December 2018, two of our patents were awarded "China Patent Silver Award" by the State Intellectual Property Office of the PRC and this is the first time where an Internet security service provider in China won such title in the category of "file scanning method and system, client and server". In 2018, we have also entered into a patent cross licence agreement with Google. • the consolidated income statement for the year then ended; • • Tencent Holdings Limited Environmental, Social and Governance Report We actively participate in public affairs and strive to promote the awareness of IP protection in the Internet industry. As members of the China National Information Technology Standardisation Committee, the China Intellectual Property Society, the Patent Protection Association of China, the World Wide Web Consortium, the International Trademark Association and the China Trademark Association, we have participated in the consultations on legislative amendments to the PRC laws and regulations relating to patents, trademarks and anti-competition and have made recommendations in the development of industry standards. To safeguard the physical and mental health of online game users and adolescents, we have implemented the real name system and anti-addiction system in accordance with the regulatory requirements of the PRC and strengthened the promotion of healthy gaming and anti-addiction through various channels. In February 2017, we launched a series of services on "Tencent Game Guardian Platform" (http://jiazhang.qq.com) which assists parents to monitor the gaming habits of their underage children. This is the platform dedicated to healthy gaming of underage children in the online game industry. In July 2017, we implemented the Healthy Gameplay System on Honour of Kings, which sends reminders to players or forces logout from the game if players spend too much time on the game in one day. In 2018, we have upgraded the Healthy Gameplay System, tightened the requirements for identity verification and made the system available for more games. We have also launched a customer service which sends reminders when a game player may have engaged in overspending and provides subsequent counselling. In addition, we have worked with School of Brain and Cognitive Science of Beijing Normal University and Data Centre of the China Internet (DCCI) to publish "Guide on Healthy Use of the Internet for Teenagers" and "Research on Online Gaming Behaviours of and Online Protections for Teenagers". Parents, education institutions and industry players can download these documents free of charge for their reference. We have been actively implementing various measures to ensure compliance with the relevant laws, regulations and policies. For instance, we have already obtained the relevant credentials for operating online games, such as the Telecommunication Business Operation Permit, the Online Publishing Service Licence and the Internet Culture Business Permit. Each of Weixin/WeChat and QQ provides a mechanism for users to report any fake or inappropriate content circulated on its platform. To protect the original user-generated content, Weixin/WeChat has launched a new feature in December 2017 for the Weixin/WeChat official account holders to declare the originality of the content generated by them on Weixin/WeChat so as to help identify and deter copyright infringement more effectively. Intellectual Property Rights the consolidated statement of comprehensive income for the year then ended; 120 Annual Report 2018 121 Monitoring of and Protection for Original User-generated Content We began a comprehensive programme for the management of IP at an early stage. We have consistently applied for the registration of IP rights since the early stages of its establishment. With the successful development of our business, we have expanded our global IP portfolio to cover more than 100 countries and regions. As of 31 December 2018, we had obtained over 19,000 officially registered trademarks and over 9,000 issued patents. Coupled with our creation of a vast amount of copyrighted content, we have accumulated IP assets of considerable value. Our IP team has developed a comprehensive database for our patents, trademarks and copyrights and our strong data analytical skills enable us to manage and monitor our IP rights in a meticulous and efficient manner. To combat infringement of IP rights, our IP team has also established a comprehensive and efficient monitoring and maintenance system, and has devised various civil, criminal and administrative enforcement measures to protect our IP rights. Please see further details on the Company Website (https://www.tencent.com/ legal/html/en-us/property.html). 7.598 8.336 12(a) - basic (in RMB per share) - diluted 12(b) Year ended 31 December Items that will not be subsequently reclassified to profit or loss Other fair value gains Net gains from changes in fair value of available-for-sale financial assets Transfer to profit or loss upon disposal of available-for-sale financial assets Currency translation differences Share of other comprehensive income of associates and joint ventures Items that may be subsequently reclassified to profit or loss Earnings per share for profit attributable to equity holders of the Company For the year ended 31 December 2018 Other comprehensive income, net of tax: Profit for the year 132 Tencent Holdings Limited The notes on pages 143 to 264 are an integral part of these consolidated financial statements. 7.499 8.228 Consolidated Statement of Comprehensive Income 72,471 19 961 (4,669) (2,908) 1,487 821 Profit before income tax 94,466 88,215 Income tax expense 11 (14,482) 79,984 (15,744) Profit for the year 79,984 72,471 Attributable to: 2018 Equity holders of the Company Non-controlling interests 78,719 71,510 1,265 Attributable to equity holders of the Company 2017 35,091 RMB'Million 5,111 7,106 18 800 725 3,163 4,879 19 17 10 16 Intangible assets Land use rights Investment properties Construction in progress Property, plant and equipment 23,597 56,650 40,266 Investments in associates Available-for-sale financial assets 43,519 2.2(a), 24 Financial assets at fair value through other comprehensive income 91,702 2.2(a), 23 Financial assets at fair value through profit or loss 7,826 8,575 21 Investments in joint ventures 22,976 2.2(a) Investments in redeemable instruments of associates 113,779 219,215 20 Non-current assets ASSETS RMB'Million 2017 6,590 (12,224) (50) (170) Other fair value losses (16,391) Net losses from changes in fair value of financial assets at fair value through other comprehensive income 756 181 (9,316) 4,133 (2,561) 16,854 907 23 72,471 79,984 Total comprehensive income for the year RMB'Million 67,760 Attributable to: RMB'Million Note 2018 As at 31 December As at 31 December 2018 Consolidated Statement of Financial Position 133 Annual Report 2018 79,061 67,760 843 1,421 78,218 66,339 The notes on pages 143 to 264 are an integral part of these consolidated financial statements. Non-controlling interests Equity holders of the Company 79,061 Share of profit of associates and joint ventures 176,646 90,302 (2,187) - shares withheld for share award schemes 5,765 277 5,488 466 5,022 525 525 2,103 57 2,046 - 63 - 1,983 525 440 140 140 RMB'Million Total equity interests RMB'Million RMB'Million Total earnings RMB'Million controlling Retained Other reserves RMB'Million premium award schemes RMB'Million RMB'Million capital RMB'Million for share (2,187) (2,187) -vesting of awarded shares (1,984) 1,114 1,664 (550) (877) 327 27 Dilution of interests in subsidiaries Partial disposal of subsidiaries non-wholly owned subsidiaries Acquisition of additional equity interests in Non-controlling interests arising from business combinations 148 (783) 1,003 Share 1,003 (618) (6,995) (6,995) (517) 517 148 148 (783) Dividends (Note 15) Profit appropriations to statutory reserves Tax benefit from share-based payments of a subsidiary (783) Repurchase and cancellation of shares 1,984 (7,613) Share Independent Auditor's Report As part of an audit in accordance with ISAs, we exercise professional judgment and maintain professional scepticism throughout the audit. We also: 77,969 43,338 Cost of revenues Gross profit Interest income 5000 312,694 237,760 8 (170,574) (120,835) 142,120 116,925 Other gains, net 40,439 Selling and marketing expenses 6∞ ∞ 4,569 3,940 7 16,714 20,140 8 (24,233) (17,652) 8 (41,522) (33,051) Operating profit 97,648 General and administrative expenses Finance costs, net 58,079 2.2(a) Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group's internal control. Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the directors. Conclude on the appropriateness of the directors' use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group's ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor's report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor's report. However, future events or conditions may cause the Group to cease to continue as a going concern. Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation. Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion. We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. 130 Tencent Holdings Limited Independent Auditor's Report We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor's report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. The engagement partner on the audit resulting in this independent auditor's report is Tong Yu Keung. PricewaterhouseCoopers 153,983 Certified Public Accountants Annual Report 2018 131 Consolidated Income Statement For the year ended 31 December 2018 Year ended 31 December 2018 Note RMB'Million 2017 RMB'Million Revenues Value-added services Online advertising Others Hong Kong, 21 March 2019 127,218 Share premium 25 Other financial liabilities 37 3,306 2,154 Deferred income tax liabilities 27 10,964 5,975 Deferred revenue 5(c) (i) 7,077 2,391 164,879 125,839 Annual Report 2018 135 Consolidated Statement of Financial Position As at 31 December 2018 As at 31 December 2018 2017 Note RMB'Million RMB'Million Current liabilities Accounts payable 38 73,735 50,085 3,862 4,797 36 Long-term payables (3,970) 22,204 16,210 (16,210) 277,093 21,019 256,074 202,682 35,158 (3,970) 22,204 (31) RMB'Million Total equity Other payables and accruals interests RMB'Million 32,697 21,019 356,207 277,093 LIABILITIES Non-current liabilities Borrowings 34 87,437 82,094 Notes payable 35 51,298 29,363 Total 18,948 39 29,433 Director Director 136 Tencent Holdings Limited Balance at 31 December 2017, as previously reported Adjustment on adoption of IFRS 9 (Note 2.2(a)) Balance at 1 January 2018 Comprehensive income Profit for the year Other comprehensive income, net of tax: -share of other comprehensive income of associates and joint ventures - net losses from changes in fair value of financial assets Consolidated Statement of Changes in Equity For the year ended 31 December 2018 Attributable to equity holders of the Company Shares held for Non- Share Share capital premium RMB'Million RMB'Million share award schemes RMB'Million Other Retained controlling reserves RMB'Million earnings RMB'Million RMB'Million Lau Chi Ping Martin Ma Huateng The consolidated financial statements on pages 132 to 264 were approved by the Board of Directors on 21 March 2019 and were signed on its behalf: The notes on pages 143 to 264 are an integral part of these consolidated financial statements. Borrowings 34 26,834 15,696 Notes payable 35 13,720 4,752 Current income tax liabilities 10,210 8,708 Other financial liabilities 37 BB 33,312 1,200 1,049 934 Deferred revenue 5(c) (i) 42,375 42,132 202,435 151,740 Total liabilities Total equity and liabilities 367,314 277,579 723,521 554,672 Other tax liabilities 218,892 256,074 21,019 Term deposits 28 62,918 36,724 Restricted cash 30 2,590 1,606 Cash and cash equivalents 30 97,814 105,697 217,080 178,446 Total assets 723,521 554,672 134 Tencent Holdings Limited EQUITY Consolidated Statement of Financial Position As at 31 December 2018 As at 31 December 2018 Note RMB'Million 2017 RMB'Million Equity attributable to equity holders of the Company 6,175 2.2(a), 23 Financial assets at fair value through profit or loss 465 21,531 11,173 Other financial assets 2.2(a), 26 1,693 5,159 Deferred income tax assets 27 15,755 9,793 Term deposits 28 5,365 506,441 Share capital 376,226 Inventories 324 295 Accounts receivable 29 28,427 16,549 Prepayments, deposits and other assets 25 18,493 17,110 Other financial assets 2.2(a), 26 339 Current assets 31 31 27,294 Transfer of gains on disposal of financial assets at fair value 67,760 1,421 66,339 78,719 (12,380) Total comprehensive income for the year 11 11 11 4,133 452 3,681 3,681 through other comprehensive income to retained earnings (296) (16,391) (16,095) - other fair value gains, net -currency translation differences at fair value through other comprehensive income 23 23 23 79,984 1,265 78,719 78,719 23 23 277,093 (16,095) Prepayments, deposits and other assets (9,561) Share of other changes in net assets of associates 22,204 Shares held for share award schemes Other reserves Retained earnings 31 (4,173) (3,970) 2.2(a), 32 729 35,158 2.2(a) 299,660 202,682 323,510 9,561 256,074 Total equity -value of employee services – proceeds from shares issued Employee share award schemes: - value of employee services Employee share option schemes: Capital injection Transactions with equity holders For the year ended 31 December 2018 Consolidated Statement of Changes in Equity 137 Annual Report 2018 2,861 2,861 2,861 Non-controlling interests (31) (133) 2,836 (2,232) -vesting of awarded shares (1,398) 1,398 1 Tax benefit from share-based payments of a subsidiary 244 'ཟླ 244 244 Profit appropriations to statutory reserves 519 (519) Dividends (Note 15) (5,052) (5,052) (943) (5,995) Acquisition of additional equity interests in 4,767 171 1,379 16 - value of employee services - proceeds from shares issued Employee share award schemes: 1,125 156 56 171 - value of employee services 4,254 non-wholly owned subsidiaries 407 (2,232) I 1,281 98 171 4,661 106 (2,232) 801 - shares withheld for share award schemes 728 28 (952) Total transactions with equity holders at their capacity as equity holders for the year 4,880 (834) 4,757 (5,571) 3,232 8,553 11,785 76 Balance at 31 December 2017 (3,970) 35,158 202,682 256,074 21,019 277,093 The notes on pages 143 to 264 are an integral part of these consolidated financial statements. Annual Report 2018 139 2,836 Shares held 22,204 60 ཝཱ་ལྕམ། 26 Disposal of subsidiaries (224) (69) (293) (133) 6,378 7,363 13,741 6691 4 | Dilution of interests in subsidiaries Transfer of equity interests of subsidiaries to non-controlling interests Lapse of put option granted to non-controlling interests (2,045) 50 I (2,045) 50 2,045 6,378 60 Non- I 729 20 299,660 323,510 32,697 356,207 138 Tencent Holdings Limited Balance at 1 January 2017 (4,173) Comprehensive income Other comprehensive income, net of tax: -share of other comprehensive income of associates and joint ventures Consolidated Statement of Changes in Equity For the year ended 31 December 2018 Attributable to equity holders of the Company Shares held Non- Share Profit for the year capital RMB'Million 27,294 8,493 8,715 60 5,879 Transfer of equity interests of subsidiaries to non-controlling interests (1,886) 1,886 Recognition of financial liabilities in respect of the put option from business combination Balance at 31 December 2018 (406) (406) Total transactions with equity holders at their capacity as equity holders for the year 5,090 (203) 861 (7,512) (1,764) 10,257 (406) Share for share premium award schemes RMB'Million RMB'Million (1,886) controlling Transactions with equity holders Capital injection Employee share option schemes: 907 16,854 (2,561) (2,561) (2,561) (9,198) Total comprehensive income for the year (9,198) (9,316) 706 706 706 6,708 843 79,061 78,218 Other Retained reserves earnings RMB'Million RMB'Million (118) - other fair value gains, net 71,510 available-for-sale financial assets -currency translation differences Total interests equity RMB'Million RMB'Million RMB'Million (3,136) 23,693 136,743 174,624 11,623 186,247 907 17,324 71,510 - transfer to profit or loss upon disposal of 16,854 71,510 16,854 available-for-sale financial assets Total - net gains from changes in fair value of 907 72,471 961 Net (decrease)/increase in cash and cash equivalents Cash and cash equivalents at beginning of the year (10,090) 36,346 105,697 71,902 Exchange gains/(losses) on cash and cash equivalents 2,207 (2,551) Cash and cash equivalents at end of the year 97,814 The notes on pages 143 to 264 are an integral part of these consolidated financial statements. 142 Tencent Holdings Limited Notes to the Consolidated Financial Statements RMB'Million For the year ended 31 December 2018 1 105,697 35,380 2017 non-wholly owned subsidiaries Dividends paid to the Company's shareholders Dividends paid to non-controlling interests Net cash flows generated from financing activities (236) (927) (6,776) (5,052) (620) (946) 26,598 Annual Report 2018 141 Consolidated Statement of Cash Flows For the year ended 31 December 2018 Year ended 31 December 2018 RMB'Million GENERAL INFORMATION Tencent Holdings Limited The Company is an investment holding company. The Company and its subsidiaries (collectively, the "Group") are principally engaged in the provision of value-added services ("VAS") and online advertising services to users in the People's Republic of China (the "PRC"). 2.1 Basis of preparation (Cont'd) (a) New and amended standards adopted by the Group For the year ended 31 December 2018 The following standards and amendments have been adopted by the Group for the first time for the financial year beginning on 1 January 2018: IFRS 9 IFRS 15 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Cont'd) IFRS 2 (amendment) IFRIC 22 Financial instruments Revenue from contracts with customers Classification and measurement of share-based payment transactions Transfers of investment property Foreign currency transactions and advance consideration The Group has changed its accounting policies following the adoption of IFRS 9 and IFRS 15. Except IFRS 9, the adoption of these new and amended standards does not have significant impact on the consolidated financial statements of the Group, details of which are disclosed in Note 2.2. (b) Payments for acquisition of non-controlling interests in IAS 40 (amendment) Tencent Holdings Limited (the "Company") was incorporated in the Cayman Islands with limited liability. The address of its registered office is Cricket Square, Hutchins Drive, P.O. Box 2681, Grand Cayman KY1-1111, Cayman Islands. The shares of the Company have been listed on the Main Board of the Stock Exchange of Hong Kong Limited (the "Stock Exchange") since 16 June 2004. 2 144 The operations of the Group were initially conducted through Shenzhen Tencent Computer Systems Company Limited ("Tencent Computer"), a limited liability company established in the PRC by certain shareholders of the Company on 11 November 1998. Tencent Computer is legally owned by the core founders of the Company who are PRC citizens (the "Registered Shareholders"). The PRC regulations restrict foreign ownership of companies that provide value-added telecommunications services, which include activities and services operated by Tencent Computer. In order to enable certain foreign companies to make investments into the business of the Group, the Company established a subsidiary, Tencent Technology (Shenzhen) Company Limited ("Tencent Technology"), which is a wholly foreign owned enterprise incorporated in the PRC, on 24 February 2000. The foreign investors of the Company then subscribed to additional equity interests in the Company. Under a series of contractual arrangements (collectively, "Structure Contracts") entered into among the Company, Tencent Technology, Tencent Computer and the Registered Shareholders, the Company is able to effectively control, recognise and receive substantially all the economic benefit of the business and operations of Tencent Computer. In summary, the Structure Contracts provide the Company through Tencent Technology with, among other things: the right to receive the cash received by Tencent Computer from its operations which is surplus to its requirements, having regard to its forecast working capital needs, capital expenditure, and other short-term anticipated expenditure through various commercial arrangements; the right to ensure that Tencent Technology owns the valuable assets of the business through the assignment to Tencent Technology of the principal present and future intellectual property rights of Tencent Computer; and the right to control the management, financial and operating policies of Tencent Computer. Annual Report 2018 143 Notes to the Consolidated Financial Statements For the year ended 31 December 2018 Notes to the Consolidated Financial Statements 1 As a result, Tencent Computer is accounted for as a controlled structured entity (see also Note 2.3(a) and Note 46) and the formation of the Group in 2000 was accounted for as a business combination between entities under common control under a method similar to the uniting of interests method for recording all assets and liabilities at predecessor carrying amounts. This approach was adopted because in management's belief it best reflected the substance of the formation. Similar Structure Contracts were also executed for other PRC operating companies established by the Group similar to Tencent Computer subsequent to 2000. All these PRC operating companies are treated as controlled structured entities of the Company and their financial statements have also been consolidated by the Company. See details in Note 46. 2 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. 2.1 Basis of preparation The consolidated financial statements of the Group have been prepared in accordance with all applicable International Financial Reporting Standards ("IFRSS"). The consolidated financial statements have been prepared under the historical cost convention, as modified by the revaluation of financial assets at fair value through profit or loss, financial assets at fair value through other comprehensive income, other financial liabilities and derivative financial instruments, which are carried at fair value. The preparation of financial statements in conformity with IFRSS requires the use of certain critical accounting estimates. It also requires management to exercise its judgment in the process of applying the Group's accounting policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in Note 4. GENERAL INFORMATION (Cont'd) 106 Consolidated Statement of Cash Flows in non-wholly owned subsidiaries (72,520) (67,055) Placement of term deposits with initial terms of over three months 86,166 46,227 over three months Receipt from maturity of term deposits with initial terms of Proceeds from settlement of other financial assets Interest received 995 1,533 745 (2,219) (2,523) RMB'Million RMB'Million 2017 2018 (995) Year ended 31 December 4,435 Dividends received (5,281) (194) Repayments of long-term borrowings 33,517 7,237 Proceeds from long-term borrowings (12,450) (23,545) 3,529 Repayments of short-term borrowings 26,463 Proceeds from short-term borrowings Cash flows from financing activities (96,392) (151,913) Net cash flows used in investing activities 2,009 1,724 16,676 For the year ended 31 December 2018 New standards and interpretations issued but not yet effective Payments for other financial assets Net proceeds from issuance of notes payable 32,547 Repayments of notes payable (4,666) (3,450) Proceeds from issuance of ordinary shares 525 171 Payments for acquisition of investments in joint ventures Proceeds from disposals of investments in joint ventures Payments for acquisition of financial assets Shares withheld for share award schemes (2,232) Payments for repurchase of shares (783) Proceeds from issuance of additional equity of non-wholly owned subsidiaries 7,238 6,466 Proceeds from disposals of non-controlling interests (1,967) (2,352) (7,091) 9 Loans repayments from investees and others Payments for loans to investees and others Tencent Holdings Limited 140 (47,716) 4,705 Proceeds from disposals of available-for-sale financial assets related derivative financial instruments Payments for available-for-sale financial assets and 11,254 at fair value through profit or loss Proceeds from disposals of financial assets (54,141) at fair value through profit or loss Payments for acquisition of financial assets 22,224 at fair value through other comprehensive income Proceeds from disposals of financial assets (17,669) at fair value through other comprehensive income 157 A number of new standards and interpretations have not come into effect for the financial year beginning 1 January 2018, and have not been early adopted by the Group in preparing the consolidated financial statements. None of these is expected to have a significant effect on the consolidated financial statements of the Group, except IFRS 16 "Lease" as set out below: Year ended 31 December IFRS 16 was issued in January 2016. It will result in almost all leases being recognised on the statement of financial position by lessees, as the distinction between operating and finance leases is removed. Under the new standard, an asset (the right to use the leased item) and a financial liability to pay rentals are recognised. The only exceptions are short-term and low-value leases. 95,497 58,515 155,818 Annual Report 2018 147 Notes to the Consolidated Financial Statements For the year ended 31 December 2018 2 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Cont'd) 2.2 Changes in accounting policies (Cont'd) (a) IFRS 9 Financial Instruments (Cont'd) Classification and measurement (Cont'd) The main effects resulting from this reclassification on the Group's equity are as follows: Effect on Effect on Effect on At 1 January 2018 AFS reserves FVOCI reserves 1,806 3,818 (3,818) Opening balance - IFRS 9 Opening balance - IAS 39 22,976 5,624 155,818 Reclassification of available-for-sale financial assets ("AFS") to financial assets at fair value through profit or loss ("FVPL") (68,703) 68,703 retained earnings Reclassification of AFS to financial assets at fair value through other comprehensive income ("FVOCI") 58,515 Reclassification of investments in redeemable instruments of associates ("RCPS") to FVPL (22,976) 22,976 Reclassification of other financial assets ("OFA") to FVPL (58,515) RMB'Million RMB'Million RMB'Million (a) IFRS 9 Financial Instruments (Cont'd) For the year ended 31 December 2018 Classification and measurement (Cont'd) There was no impact on the Group's accounting for financial liabilities, as the new requirements only affect the accounting for financial liabilities that are designated at fair value through profit or loss, while the Group did not have any such liabilities. Derivative and hedging activities In prior years, the Group entered into certain interest rate swap contracts to hedge its exposure arising from its borrowings carried at floating rates, which were qualified as hedge accounting. The interest rate swaps in place as at 31 December 2017 qualified as cash flow hedges under IFRS 9 and have been thus treated as continuing hedges upon the adoption of the standard. Impairment of financial assets The Group has the following types of financial assets subject to the new expected credit loss model under IFRS 9: 2.2 Changes in accounting policies (Cont'd) • Accounts receivable; and Deposits and other receivables. For accounts receivable, the Group applies the simplified approach for expected credit losses prescribed by IFRS 9. Based on the assessments performed by management, the changes in the loss allowance for accounts receivable were not significant. Impairment on deposits and other receivables is measured as either 12-month expected credit losses or lifetime expected credit loss, depending on whether there has been a significant increase in credit risk since the initial recognition. Based on the assessments performed by management, the changes in the loss allowance for deposits and other receivables were insignificant. (b) IFRS 15 Revenue from Contracts with Customers The Group has adopted IFRS 15 from 1 January 2018 which resulted in changes in accounting policies and adjustments to the amounts recognised in the consolidated financial statements. IFRS 15 establishes a comprehensive framework for determining when to recognise revenue and how much revenue to recognise through a five-step approach, provides specific guidance on contract costs and license arrangements, and also includes a cohesive set of disclosure requirements about revenue and cash flows arising from the contracts with customers of which details are disclosed in Note 5. In accordance with the transition provisions in IFRS 15, the Group has adopted the new rules retrospectively, and since the impact is not material to the consolidated financial statements of the Group, comparative figures have not been restated. Annual Report 2018 149 • Total RMB'Million SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Cont'd) Notes to the Consolidated Financial Statements Opening balance – IAS 39 31,152 - 202,682 Reclassification of AFS to FVPL (16,210) 16,210 Reclassification of AFS to FVOCI (14,942) 2 14,942 (31,152) 14,942 16,210 Opening balance - IFRS 9 14,942 218,892 Certain equity investments and debt instruments previously classified as AFS at an aggregated amount of RMB68,703 million were reclassified from AFS to FVPL on 1 January 2018, and accumulated fair value gains of RMB16,210 million were transferred from the AFS reserves to retained earnings on 1 January 2018. Certain equity investments of RMB58,515 million were reclassified from AFS to FVOCI on 1 January 2018, because these investments are not held for trading and meet the definition of equity instruments from the perspective of the issuer. The Group elected to classify them as FVOCI. As a result, accumulated fair value gains of RMB14,942 million were transferred from the AFS reserves to FVOCI reserves on 1 January 2018. Investments in RCPS of RMB22,976 million with embedded derivatives of RMB3,818 million previously recorded in OFA were considered in their entirety as a single instrument and were reclassified to FVPL as at 1 January 2018. They do not meet the definition of equity instruments from the perspective of the issuer and they are not eligible to be classified as at amortised cost in accordance with IFRS 9, because their cash flows do not represent solely payments of principal and interest. There was no impact on the amounts previously recognised in profit or loss in relation to these assets from the adoption of IFRS 9. 148 Tencent Holdings Limited Total impact FVOCI RMB'Million RMB'Million RMB'Million (12,108) 28 33 Proceeds from disposals of property, plant and equipment (19,743) in progress and investment properties Purchase of property, plant and equipment, construction (201) (21) Purchase of/prepayment for intangible assets (3,206) 106,443 (13,862) (14,521) 120,002 120,964 41(a) RMB'Million 2017 106,140 RMB'Million (31,877) Purchase of/prepayment for land use rights Payments for acquisition of investments in associates Impact The Group has set up a project team which has reviewed all of the Group's leasing arrangements effective as of the year of ended 31 December 2018 in light of the new lease accounting rules in IFRS 16. The standard will affect primarily the accounting for the Group's operating leases. As at the reporting date, the Group has non-cancellable operating lease commitments of RMB12,294 million, see Note 42. Of these commitments, approximately RMB189 million relate to short-term leases which will be recognised on a straight-line basis as expense in profit or loss. Annual Report 2018 145 Notes to the Consolidated Financial Statements Proceeds from disposals of investments in redeemable instruments of associates 507 (19,850) (16,384) Payments for acquisition of investments in redeemable 608 429 Proceeds from disposals of investments in associates (17,528) (37,776) (46) (2,441) instruments of associates Nature of change Note deemed disposals of subsidiaries The Group's adoption of IFRS 9 from 1 January 2018 resulted in changes in accounting policies and adjustments to the amounts recognised in the consolidated financial statements. The new accounting policies are set out in Note 2.16 and 2.17 below. In accordance with the transitional provisions in IFRS 9, comparative figures have not been restated. As a result, any adjustments to carrying amounts of financial assets or financial liabilities were recognised at the beginning of the current year, with the difference recognised in opening retained earnings. 146 Tencent Holdings Limited Notes to the Consolidated Financial Statements 2 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Cont'd) 2.2 Changes in accounting policies (Cont'd) (a) IFRS 9 Financial Instruments (Cont'd) IFRS 9 replaces the provisions of IAS 39 that relate to the recognition, classification and measurement of financial assets and financial liabilities, derecognition of financial instruments, impairment of financial assets and hedge accounting. For the year ended 31 December 2018 Management has assessed the business model and the terms relating to the collection of contractual cash flows applicable to the financial assets held by the Group at the date of initial application of IFRS 9 (1 January 2018) and has classified its financial instruments into the appropriate IFRS 9 categories, which are those to be measured subsequently at fair value (either through other comprehensive income or through profit or loss), and those to be measured at amortised cost. The main effects resulting from this reclassification are as follows: At 1 January 2018 AFS RCPS OFA FVPL RMB'Million RMB'Million Classification and measurement 2018 IFRS 9 Financial Instruments This note explains the impact of the adoption of IFRS 9 "Financial Instruments" and IFRS 15 "Revenue from Contracts with Customers" on the Group's consolidated financial statements. Net outflow of cash in respect of disposals and Payments for business combinations, net of cash acquired Cash flows from investing activities Net cash flows generated from operating activities Income tax paid Cash generated from operations Cash flows from operating activities For the year ended 31 December 2018 (a) Consolidated Statement of Cash Flows 2.1 Basis of preparation (Cont'd) (b) New standards and interpretations issued but not yet effective (Cont'd) For the remaining lease commitments, based on management's preliminary assessment, the Group expects to recognise right-of-use assets of approximately RMB10 billion and lease liabilities of approximately RMB10 billion on 1 January 2019. The Group expects that net profit will not be materially changed as a result of adopting the new rules. It will result in reclassification of operating cash flows and financing cash flows relating to the payments of lease liabilities. The Group's activities as a lessor are not material and hence the Group does not expect any significant impact on the consolidated financial statements. However, some additional disclosures will be required from the financial year beginning on 1 January 2019. Date of adoption by Group The Group will apply the standard from its mandatory adoption date of 1 January 2019. The Group intends to apply the simplified transition approach and will not restate comparative amounts for the year prior to first adoption. All right-of-use assets will be measured at the amount of the lease liabilities on adoption (adjusted for any prepaid or accrued lease expenses). 2.2 Changes in accounting policies SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Cont'd) 127,218 2 For the year ended 31 December 2018 Depreciation is calculated on the straight-line method to allocate their costs net of their residual values over their estimated useful lives of 20-50 years. Investment properties' residual values and useful lives are reviewed, and adjusted if appropriate, at the end of each reporting period. Notes to the Consolidated Financial Statements For the year ended 31 December 2018 2 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Cont'd) 2.13 Intangible assets (Cont'd) (b) Licensed online contents Licensed online contents mainly include video and music contents. They are initially recognised and measured at cost or estimated fair value as acquired through business combinations. Licensed online contents are amortised using a straight-line method or an accelerated method which reflects the estimated consumption patterns. (c) Other intangible assets Other intangible assets are amortised over their estimated useful lives (generally one to ten years) using the straight-line method which reflects the pattern in which the intangible asset's future economic benefits are expected to be consumed. 2.14 Shares held for share award schemes Investment properties' carrying amounts are written down immediately to their recoverable amounts if their carrying amounts are greater than their estimated recoverable amounts. The consideration paid by the Share Scheme Trust (see Note 46(e)) for purchasing the Company's shares from the market, including any directly attributable incremental cost, is presented as “Shares held for share award schemes" and the amount is deducted from total equity. When the Share Scheme Trust transfers the Company's shares to the awardees upon vesting, the related costs of the awarded shares vested are credited to "Shares held for share award schemes", with a corresponding adjustment made to "Share premium". 2.15 Impairment of non-financial assets Assets that have an indefinite useful life or are not yet available for use are not subject to amortisation and are tested annually for impairment, or more frequently if events or changes in circumstances indicate that they might be impaired. Other assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset's carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset's fair value less costs to sell and value in use. For the purpose of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). Non-financial assets other than goodwill that suffered impairment are reviewed for possible reversal of the impairment at each reporting date. Other intangible assets mainly include game licences, copyrights, computer software and technology and non-compete agreements. They are initially recognised and measured at cost or estimated fair value of intangible assets acquired through business combinations. 18 Annual Report 2018 157 Goodwill impairment reviews are undertaken annually or more frequently if events or changes in circumstances indicate a potential impairment. The carrying value of goodwill is compared to the recoverable amount, which is the higher of value in use and the fair value less costs to sell. Any impairment is recognised immediately under "Other gains/(losses), net" and is not subsequently reversed. (iii) All resulting currency translation differences are recognised as a separate component of other comprehensive income. On consolidation, exchange differences arising from the translation of the net investment in foreign operations, and of borrowings and other financial instruments designated as hedges of such investments, are taken to other comprehensive income. Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate. Currency translation differences arising are recognised in other comprehensive income. Annual Report 2018 155 Notes to the Consolidated Financial Statements For the year ended 31 December 2018 2 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Cont'd) 2.10 Property, plant and equipment All property, plant and equipment are stated at historical costs less accumulated depreciation and accumulated impairment charges. Historical costs include expenditures that are directly attributable to the acquisition of the items. Subsequent costs are included in the asset's carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. The carrying amount of the replaced part is derecognised. All other repairs and maintenance are charged to the consolidated income statement during the reporting period in which they are incurred. 2.12 Land use rights Land use rights are up-front payments to acquire long-term interest in land. These payments are stated at cost and charged to the consolidated income statement on a straight-line basis over the remaining period of the lease. 2.13 Intangible assets (a) Goodwill Goodwill arising on the acquisition of subsidiaries represents the excess of the consideration transferred plus acquisition-date fair value of the equity interests previously held by the Group and the non-controlling interests in the acquired entity over the fair value of the net identifiable assets of the acquiree. For the purpose of impairment testing, goodwill acquired in a business combination is allocated to each of the cash-generating units ("CGUs”), or groups of CGUs, that is expected to benefit from the synergies of the combination. Each unit or group of units to which the goodwill is allocated represents the lowest level within the entity at which the goodwill is monitored for internal management purposes. 158 Tencent Holdings Limited Notes to the Consolidated Financial Statements 2 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Cont'd) Notes to the Consolidated Financial Statements Tencent Holdings Limited 156 Gains and losses on disposals are determined by comparing the proceeds with the carrying amount and are recognised in "Other gains/(losses), net" in the consolidated income statement. An asset's carrying amount is written down immediately to its recoverable amount if the asset's carrying amount is greater than its estimated recoverable amount (Note 2.15). Construction in progress represents buildings under construction, which is stated at actual construction costs less any impairment loss. Construction in progress is transferred to property, plant and equipment when completed and ready for use. The assets' residual values and useful lives are reviewed, and adjusted if appropriate, at the end of each reporting period. 2 Shorter of their useful lives and the lease term 5 years Motor vehicles Furniture and office equipment 2-5 years 2-5 years Depreciation is calculated using the straight-line method to allocate their cost net of their residual values over their estimated useful lives, as follows: Buildings Leasehold improvements SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Cont'd) For the year ended 31 December 2018 2.11 Investment properties For the year ended 31 December 2018 2.16 Investments and other financial assets (a) Classification and measurement From 1 January 2018, the Group classifies its financial assets in the following measurement categories: • • those to be measured subsequently at fair value (either through other comprehensive income, or through profit or loss), and those to be measured at amortised cost. The classification depends on the entity's business model for managing the financial assets and the contractual terms of the cash flows. At initial recognition, the Group measures a financial asset at its fair value plus, in the case of a financial asset not at fair value through profit or loss, transaction costs that are directly attributable to the acquisition of the financial asset. Transaction costs of financial assets carried at fair value through profit or loss are expensed in profit or loss. Financial assets with embedded derivatives are considered in their entirety when determining whether their cash flows are solely payments of principal and interest. Debt instruments Initial recognition and subsequent measurement of debt instruments depend on the Group's business model for managing the asset and the contractual cash flow characteristics of the asset. There are three categories into which the Group classifies its debt instruments: • Amortised cost: Financial assets that are held for collection of contractual cash flows where those cash flows represent solely payments of principal and interest are classified as and measured at amortised cost. A gain or loss on a debt investment measured at amortised cost which is not part of a hedging relationship is recognised in profit or loss when the asset is derecognised or impaired. Interest income from these financial assets is recognised using the effective interest rate method. Annual Report 2018 159 Investment properties are held for long-term rental yields and are not occupied by the Group. Investment properties are carried at historical costs less accumulated depreciation and accumulated impairment charges. Historical costs include expenditures that are directly attributable to the acquisition of the items. Income and expenses for each income statement are translated at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the rate on the dates of the transactions); and Assets and liabilities for each statement of financial position presented are translated at the closing rate at the date of that statement of financial position; (ii) (i) The excess of the consideration transferred, the amount of any non-controlling interest in the acquiree and the acquisition-date fair value of any previous equity interest in the acquiree over the fair value of the identifiable net assets acquired is recorded as goodwill. If the total of consideration transferred, non-controlling interest recognised and previously held interest measured is less than the fair value of the net assets of the subsidiary acquired in the case of a bargain purchase, the difference is recognised directly in the consolidated income statement. (ii) Changes in ownership interests in subsidiaries without change of control Transactions with non-controlling interests that do not result in a loss of control are accounted for as equity transactions – that is, as transactions with the owners of the subsidiary in their capacity as owners. The difference between fair value of any consideration paid and the relevant share acquired of the carrying amount of net assets of the subsidiary is recorded in equity. Gains or losses on disposals to non-controlling interests are also recorded in equity. (iii) Disposal of subsidiaries When the Group ceases to have control, any retained interest in the entity is re-measured to its fair value at the date when control is lost, with the change in carrying amount recognised in the consolidated income statement. The fair value is the initial carrying amount for the purposes of subsequently accounting for the retained interest as an associate, a joint venture or financial asset. In addition, any amounts previously recognised in other comprehensive income in respect of that entity are accounted for as if the Group had directly disposed of the related assets or liabilities. It means that amounts previously recognised in other comprehensive income are reclassified to the consolidated income statement or transferred to another category of equity as specified/permitted by applicable IFRSS. Annual Report 2018 151 18 Any contingent consideration to be transferred by the Group is recognised at fair value at the acquisition date. Subsequent changes to the fair value of the contingent consideration that is deemed to be an asset or liability is recognised in profit or loss. Contingent consideration that is classified as equity is not re-measured, and its subsequent settlement is accounted for within equity. Notes to the Consolidated Financial Statements 2 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Cont'd) 2.3 Subsidiaries (Cont'd) (b) Separate financial statements Investments in subsidiaries are accounted for at cost less impairment. Cost includes direct attributable costs of investment. The results of subsidiaries are accounted for by the Company on the basis of dividends received and receivable. In addition, the contribution to the Company's Share Scheme Trust (as defined in Note 46(e)), a controlled structured entity, is stated at cost in "Contribution to Share Scheme Trust”, and will be transferred to the "Shares held for share award schemes" under equity when the contribution is used for the acquisition of the Company's shares. Impairment testing of the investments in subsidiaries is required upon receiving dividends from these investments if the dividends exceed the total comprehensive income of the subsidiaries in the period the dividends are declared or if the carrying amount of the investments in the separate financial statements exceeds the carrying amount in the consolidated financial statements of the investee's net assets including goodwill. 2.4 Associates Associates are all entities over which the Group has significant influence but not control or joint control, generally but not necessarily accompanying a shareholding of between 20% and 50% of the voting rights. Investments in associates are accounted for using the equity method of accounting and are initially recognised at cost. The Group's investments in associates include underlying goodwill identified on acquisition, net of any accumulated impairment loss. For the year ended 31 December 2018 (i) Business combinations (Cont'd) (a) Consolidation (Cont'd) 2.3 Subsidiaries (Cont'd) For the year ended 31 December 2018 2 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Cont'd) 2.3 Subsidiaries (a) Consolidation Subsidiaries are all entities (including structured entities) over which the Group has control. The Group controls an entity when the Group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. Subsidiaries are consolidated from the date on which control is transferred to the Group. They are deconsolidated from the date that control ceases. Intra-group transactions, balances and unrealised gains on transactions between group companies are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the transferred asset. When necessary, amounts reported by subsidiaries have been adjusted to conform with the Group's accounting policies. (i) Business combinations The Group applies the acquisition method to account for business combinations. The consideration transferred for the acquisition of a subsidiary is the fair values of the assets transferred, the liabilities incurred to the former owners of the acquiree and the equity interests issued by the Group. The consideration transferred also includes the fair value of any asset or liability resulting from a contingent consideration arrangement. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. The Group recognises any non-controlling interest in the acquiree on an acquisition-by-acquisition basis. Non-controlling interests in the acquiree that are present ownership interests and entitle their holders to a proportionate share of the entity's net assets in the event of liquidation are measured at either fair value or the present ownership interests' proportionate share in the recognised amounts of the acquiree's identifiable net assets. Acquisition-related costs are expensed as incurred. If the business combination is achieved in stages, the acquisition date carrying value of the acquirer's previously held equity interest in the acquiree is re-measured to fair value at the acquisition date; any gains or losses arising from such re-measurement are recognised in profit or loss. 150 Tencent Holdings Limited 2 Notes to the Consolidated Financial Statements For the year ended 31 December 2018 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Cont'd) The Group's share of its associates' post-acquisition profit or loss is recognised in the consolidated income statement, and its share of post-acquisition movements in other comprehensive income is recognised in other comprehensive income. Dividends received or receivable from associates are recognised as a reduction in the carrying amount of the investment. When the Group's share of losses in an associate equals or exceeds its interests in the associate, including any other unsecured long-term receivables, the Group does not recognise further losses, unless it has incurred legal or constructive obligations or made payments on behalf of the associate. The Group determines at each reporting date whether there is any objective evidence that investments accounted for using the equity method, including investments in associates and joint arrangements (Note 2.5), are impaired. If this is the case, the Group calculates the amount of impairment as the difference between the recoverable amount of the investment and its carrying value and recognises the amount in "Other gains/(losses), net” in the consolidated income statement. 152 Tencent Holdings Limited Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-makers, who are responsible for allocating resources and assessing performance of the operating segments and making strategic decisions. The chief operating decision-makers mainly include the executive directors. 2.9 Foreign currency translation (a) Functional and presentation currency Items included in the financial statements of each of the Group's entities are measured using the currency of the primary economic environment in which the entity operates (the "functional currency"). The functional currency of the Company and certain of its overseas subsidiaries is United States Dollars ("USD"). As the major operations of the Group are within the PRC, the Group presents its consolidated financial statements in Renminbi ("RMB"), unless otherwise stated. 154 Tencent Holdings Limited Notes to the Consolidated Financial Statements 2 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Cont'd) For the year ended 31 December 2018 2.9 Foreign currency translation (Cont'd) (b) Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the consolidated income statement. Non-monetary items that are measured at fair value in foreign currency are translated using the exchange rates at the date when the fair value was determined. Translation differences on assets and liabilities carried at fair value are reported as part of the fair value gain or loss. For example, translation differences on non- monetary financial assets and liabilities such as equity instruments held at fair value through profit or loss are recognised in the consolidated income statement as part of the fair value gain or loss and translation differences on non-monetary financial assets, such as equity instruments classified as FVOCI, are included in other comprehensive income. (c) Group companies The results and financial position of all the group entities (none of which has the currency of a hyper- inflationary economy) that have a functional currency different from the presentation currency of RMB are translated into the presentation currency as follows: 2.8 Segment reporting Computer equipment When the Group loses significant influence over an associate, it measures any retained investment at fair value. A gain or loss is recognised at any difference between the fair value of any retained interest plus any proceeds from disposing part of the interests in the associate and the carrying amount of the investment at the date the equity method of accounting was discontinued. The amounts previously recognised in other comprehensive income by an associate should be reclassified to the consolidated income statement or transferred to another category of equity as specified and permitted by applicable IFRSS when the Group loses significant influence over the associate. The cost of associates/joint ventures acquired in stages, except for the change from an associate to a joint venture, is measured as the sum of the fair value of the interests previously held plus the fair value of any additional consideration transferred as of the date when it becomes associate/joint venture. A gain or loss on re-measurement of the previously held interests is taken to the consolidated income statement. Any other comprehensive income recognised in prior periods in relation to the previously held interests is also taken to the consolidated income statement. Any acquisition-related costs are expensed in the period in which the costs are incurred. Notes to the Consolidated Financial Statements 2 Notes to the Consolidated Financial Statements For the year ended 31 December 2018 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Cont'd) 2.4 Associates (Cont'd) Unrealised gains on transactions between the Group and its associates are eliminated to the extent of the Group's interests in the associates. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of associates have been changed where necessary to ensure consistency with the policies adopted by the Group. Gains or losses on dilution of equity interest in associates are recognised in the consolidated income statement. If the ownership interest in an associate is reduced but significant influence is retained, only a proportionate share of the amounts previously recognised in other comprehensive income is reclassified to consolidated income statement where appropriate. 2.5 Joint arrangements Under IFRS 11 investments in joint arrangements are classified as either joint operations or joint ventures depending on the contractual rights and obligations of each investor. The Group has assessed the nature of its joint arrangements and determined them to be joint ventures. Joint ventures are accounted for using the equity method. Under the equity method of accounting, interests in joint ventures are initially recognised at cost and adjusted thereafter to recognise the Group's share of the post-acquisition profit or loss and movements in other comprehensive income. When the Group's share of losses in a joint venture equals or exceeds its interests in the joint venture (which includes any long-term receivables that, in substance, form part of the Group's net investment in the joint venture), the Group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the joint venture. Unrealised gains on transactions between the Group and its joint ventures are eliminated to the extent of the Group's interests in the joint ventures. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of the joint ventures have been changed where necessary to ensure consistency with the policies adopted by the Group. Annual Report 2018 153 Notes to the Consolidated Financial Statements For the year ended 31 December 2018 2 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Cont'd) 2.6 Investments in associates/joint ventures achieved in stages 2.7 Disposal of associates 20-50 years Equity instruments For the year ended 31 December 2018 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Cont'd) 2.16 Investments and other financial assets (Cont'd) (c) Accounting policies applied until 31 December 2017 (Cont'd) Classification (Cont'd) (ii) Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets, except for those with maturities greater than 12 months after the end of the reporting period which are classified as non-current assets. The Group's loans and receivables comprise "Accounts receivable”, “Deposits and other receivables", "Term deposits", "Restricted cash" and "Cash and cash equivalents” in the consolidated statement of financial position. (iii) AFS Investments are designated as AFS if they do not have fixed maturities and fixed or determinable payments, and management intends to hold them for the medium to long-term. Financial assets that are not classified into any of the other categories are also included in the available-for-sale category. They are included in non-current assets unless management intends to dispose of the investment within 12 months after the end of the reporting period. The measurement at initial recognition did not change on adoption of IFRS 9, see description above. Subsequent to the initial recognition, AFS and FVPL are subsequently carried at fair value. Loans and receivables are subsequently carried at amortised cost using the effective interest method. Changes in the fair value of AFS are recognised in other comprehensive income. Financial assets are derecognised when the rights to receive cash flows from the investments have expired or have been transferred and the Group has transferred substantially all risks and rewards of ownership. When AFS are sold or impaired, the accumulated fair value adjustments recognised in other comprehensive income are included in the consolidated income statement as "Other gains/(losses), net”. Interest on loans and receivables calculated using the effective interest method is recognised in the consolidated income statement as part of interest income. Dividends on AFS equity instruments are recognised in the consolidated income statement when the Group's right to receive payments is established. 162 Tencent Holdings Limited Notes to the Consolidated Financial Statements 2 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Cont'd) For the year ended 31 December 2018 2.16 Investments and other financial assets (Cont'd) (c) Accounting policies applied until 31 December 2017 (Cont'd) Impairment The Group assesses at the end of each reporting period whether there is objective evidence that a financial asset or a group of financial assets is impaired. A financial asset or a group of financial assets is impaired and impairment losses are incurred only if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a "loss event") and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. • Assets carried at amortised cost Evidence of impairment may include indications that the debtor or a group of debtors is experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganisation, and where observable data indicate that there is a measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults. For loans and receivables category, the amount of the impairment loss is measured as the difference between the asset's carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset's original effective interest rate. The carrying amount of the asset is reduced and the amount of the impairment loss is recognised in the consolidated income statement. If a loan has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate determined under the contract. As a practical expedient, the Group may measure impairment on the basis of an instrument's fair value using an observable market price. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised (such as an improvement in the debtor's credit rating), the reversal of the previously recognised impairment loss is recognised in the consolidated income statement. Annual Report 2018 163 2 For the year ended 31 December 2018 Notes to the Consolidated Financial Statements Annual Report 2018 161 2 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Cont'd) 2.16 Investments and other financial assets (Cont'd) (a) Classification and measurement (Cont'd) • FVOCI: Financial assets that are held for collection of contractual cash flows and for selling the financial assets, where the assets' cash flows represent solely payments of principal and interest, are classified as and measured at FVOCI. Movements in the carrying amount of these financial assets are taken through other comprehensive income, except for the recognition of impairment losses or reversals, interest income and foreign exchange gains and losses which are recognised in profit or loss. When the financial asset is derecognised, the cumulative gain or loss previously recognised in other comprehensive income is reclassified from equity to profit or loss and recognised in "Other gains/ (losses), net" in the consolidated income statement. Interest income from these financial assets is recognised using the effective interest rate method. Foreign exchange gains and losses are presented in "finance costs, net" and impairment losses or reversals for "Other gains/(losses), net". FVPL: Financial assets that do not meet the criteria for amortised cost or FVOCI are classified as and measured at fair value through profit or loss. A gain or loss on a debt investment measured at fair value through profit or loss which is not part of a hedging relationship is recognised in profit or loss and presented in "Other gains/(losses), net" for the period in which it arises. The Group reclassifies debt investments when and only when its business model for managing those assets changes. 2 The Group initially recognises and subsequently measures all equity investments at fair value. Upon initial recognition, the Group's management can elect to classify irrevocably its equity investments as financial assets at FVOCI when they meet the definition of equity instrument under IAS 32 and are not held for trading. The classification is determined on an instrument-by-instrument basis. Where the Group has made an irrevocable election to present fair value gains and losses on equity investments in other comprehensive income, there is no subsequent reclassification of fair value gains and losses to profit or loss following the derecognition of the investments. Dividends from such investments continue to be recognised in profit or loss as "Other gains/(losses), net" when the Group's right to receive payments is established. Equity instruments designated as FVOCI are not subject to impairment assessment. FVPL include financial assets designated upon initial recognition at fair value through profit or loss and financial assets that do not meet the criteria for amortised cost or FVOCI. Changes in the fair value of FVPL are recognised in "Other gains/(losses), net" in the consolidated income statement. 160 Tencent Holdings Limited Notes to the Consolidated Financial Statements Notes to the Consolidated Financial Statements 2 For the year ended 31 December 2018 2.16 Investments and other financial assets (Cont'd) (b) Impairment From 1 January 2018, the Group assesses on a forward-looking basis the expected credit losses associated with its debt instruments carried at amortised cost and FVOCI. The impairment methodology applied depends on whether there has been a significant increase in credit risk. For accounts receivable and contract assets, the Group applies the simplified approach permitted by IFRS 9, which requires expected lifetime losses to be recognised since initial recognition. Impairment on deposits and other receivables is measured as either 12-month expected credit losses or lifetime expected credit losses, depending on whether there has been a significant increase in credit risk since initial recognition. If a significant increase in credit risk of a deposit or receivable has occurred since initial recognition, the impairment is measured as lifetime expected credit losses. (c) Accounting policies applied until 31 December 2017 The Group has applied IFRS 9 retrospectively, but has elected not to restate comparative information. As a result, the comparative information provided continues to be accounted for in accordance with the Group's previous accounting policy. Classification Until 31 December 2017, the Group classified its financial assets in the following categories: FVPL, loans and receivables and AFS. The classification depended on the purpose for which the financial assets were acquired, management's intentions and whether the assets are quoted in an active market. Management determined the classification of its financial assets at initial recognition. (i) FVPL FVPL are financial assets held for trading. A financial asset is classified in this category if acquired principally for the purpose of selling in the short term. Derivatives are classified as held for trading unless they are designated as hedges. Assets in this category are classified as current assets if expected to be settled within 12 months, otherwise they are classified as non-current. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Cont'd) Subsequent measurement • 2.16 Investments and other financial assets (Cont'd) For the year ended 31 December 2018 Notes to the Consolidated Financial Statements Annual Report 2018 167 the amount initially recognised less, where appropriate, the cumulative amount of income recognised in accordance with the principles of IFRS 15. • the amount determined in accordance with the expected credit loss model under IFRS 9 and • The financial guarantee contracts are initially recognised as a financial liability at fair value on the date the guarantee is given. The liability is subsequently measured at the higher of: 2 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Cont'd) The Group has a financial guarantee contract that represents guarantee provided by the Group in respect of a put arrangement granted by an investee to the employees of its subsidiary. The put option liabilities are current liabilities unless the put option first becomes exercisable 12 months after the end of the reporting period. Put options are financial instruments granted by the Group which permit the holders to put back to the Group their shares in certain subsidiaries for cash or other financial assets when certain conditions are met. If the Group does not have the unconditional right to avoid delivering cash or other financial assets under the put option, a financial liability is initially recognised at the present value of the estimated future cash outflows on exercise under the put option. Subsequently, if the Group revises its estimates of payments, the Group will adjust the carrying amount of the financial liability to reflect actual and revised estimated cash outflows. The Group will recalculate the carrying amount based on the present value of revised estimated future cash outflows at the financial instrument's original effective interest rate and the adjustment will be recognised as "Other gains/(losses), net" in the consolidated income statement. In the event that the put option expires unexercised, the liability is derecognised with a corresponding adjustment to equity. 2.24 Put option arrangements Accounts payable are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method. Accounts payable are obligations to pay for services or goods that have been acquired in the ordinary course of business from suppliers. Accounts payable are classified as current liabilities if payment is due within one year or less. If not, they are presented as non-current liabilities. 2.23 Accounts payable For the year ended 31 December 2018 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Cont'd) 2.25 Financial guarantee contracts 2.25 Financial guarantee contracts (Cont'd) The fair value of financial guarantees is determined based on the present value of the difference in cash flows between the contractual payments required under the debt instrument and the payments that would be required without the guarantee, or the estimated amount that would be payable to a third party for assuming the obligations. Where guarantees in relation to loans or other payables of the investees are provided for no compensation, the fair value is accounted for as contributions and recognised as part of the cost of the investment. 2.26 Borrowings, notes payable and borrowing costs 169 Annual Report 2018 Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred tax assets and liabilities relate to income taxes levied by the same taxation authority on either the taxable entity or different taxable entities where there is an intention to settle the balances on a net basis. Deferred income tax assets are recognised on deductible temporary differences arising from investments in subsidiaries, associates and joint arrangements only to the extent that it is probable the temporary difference will reverse in the future and there is sufficient taxable profit available against which the temporary difference can be utilised. Deferred income tax is provided on temporary differences arising from investments in subsidiaries and associates, except for deferred tax liability where the timing of the reversal of the temporary differences is controlled by the Group and it is probable that the temporary difference will not reverse in the foreseeable future. Generally, the Group is unable to control the reversal of the temporary difference for associates. Only when there is an agreement in place that gives the Group the ability to control the reversal of the temporary difference in the foreseeable future, deferred tax liability in relation to taxable temporary differences arising from the associate's undistributed profit is not recognised. Deferred tax assets are recognised only to the extent that it is probable that future taxable profit will be available to utilise those temporary differences and tax losses. Deferred income tax is recognised, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, deferred income tax is not accounted for if it arises from initial recognition of goodwill or of an asset or liability in a transaction other than a business combination that at the time of the transaction neither accounting nor taxable profit or loss is affected. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantively enacted by the end of the reporting period and are expected to apply when the related deferred tax asset is realised or the deferred tax liability is settled. The income tax expense for the year comprises current and deferred tax, which is recognised in the consolidated income statement, except to the extent that it relates to items recognised in other comprehensive income or directly in equity. In this case, the income tax is also recognised in other comprehensive income or in equity, respectively. The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the end of the reporting period in the countries where the Company's subsidiaries operate and generate taxable income. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. It establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities. 2.27 Current and deferred income tax SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Cont'd) For the year ended 31 December 2018 Notes to the Consolidated Financial Statements 2 168 Tencent Holdings Limited General and specific finance costs directly attributable to the acquisition and construction of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets, until such time as the assets are substantially ready for their intended use or sale. During the year ended 31 December 2018, finance cost capitalised was insignificant to the Group. Notes payable are classified as non-current liabilities unless the Group has an unconditional obligation to settle the liability within 12 months after the end of the reporting period. Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the end of the reporting period. Fees paid on the establishment of loan facilities are recognised as transaction costs of the loan facilities to the extent that it is probable that some or all of the facility will be drawn down. In this case, the fee is deferred until the draw-down occurs. To the extent there is no evidence that it is probable that some or all of the facility will be drawn down, the fee is capitalised as a prepayment for liquidity services and amortised over the term of the facility to which it relates. Borrowings and notes payable issued by the Group are recognised initially at fair value, net of transaction costs incurred. They are subsequently carried at amortised cost. Any difference between proceeds (net of transaction costs) and the redemption value is recognised in the consolidated income statement over their terms using the effective interest method. 2 Notes to the Consolidated Financial Statements 166 Tencent Holdings Limited Where any Group company purchases the Company's equity instruments, the consideration paid, including any directly attributable incremental costs, is deducted from equity attributable to the Company's equity holders as treasury shares until the shares are cancelled or reissued. Where such shares are subsequently reissued, any consideration received (net of any directly attributable incremental transaction costs) is included in equity attributable to the Company's equity holders. Gains or losses relating to the effective portion of the change in intrinsic value of the options are recognised in the cash flow hedge reserve within equity. The changes in the time value of the options that relate to the hedged item ('aligned time value') are recognised within other comprehensive income in the costs of hedging reserve within equity. A hedging relationship qualifies for hedge accounting if it meets all of the hedge effectiveness requirements under IFRS 9. The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognised through other comprehensive income within equity, while any ineffective portion is recognised immediately in profit or loss, within “Other gains/(losses), net". The Group designates certain derivatives as hedges of a particular risk associated with the cash flows of a recognised asset or liability or a highly probable forecast transaction (cash flow hedges). The Group documents at the inception of the hedging relationship the economic relationship between hedging instruments and hedged items including whether the hedging instrument is expected to offset changes in cash flows of hedged items. The Group documents its risk management objective and strategy for undertaking various hedge transactions at the inception of each hedge relationship. Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently re-measured at fair value. Derivatives are carried as financial assets when the fair value is positive and as financial liabilities when the fair value is negative. The method of recognising the resulting gain or loss depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. 2.17 Derivative and hedging activities SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Cont'd) For the year ended 31 December 2018 Notes to the Consolidated Financial Statements 2 Tencent Holdings Limited 164 The Group either (i) accounts for different components of the hybrid financial instruments separately or (ii) designates the entire financial instruments as financial assets/liabilities at fair value through profit or loss. The host component is recognised initially at the difference between the fair value of the hybrid financial instrument as a whole and the fair value of the embedded derivatives. The subsequent measurement of the host component and embedded derivatives follow the respective accounting policy of financial instruments as stated in Notes 2.16(c) above and 2.17. Hybrid financial instruments held by the Group comprise instruments with redemption features of associates that can be converted to ordinary shares at the option of the holder. Hybrid financial instruments For debt securities, if any such evidence exists, the cumulative loss - measured as the difference between the acquisition cost (net of any principal repayment and amortisation) and the current fair value, less any impairment loss on that financial asset previously recognised in the consolidated income statement - is reclassified from equity and recognised in the consolidated income statement. If, in a subsequent period, the fair value of a debt instrument classified as available for sale increases and the increase can be objectively related to an event occurring after the impairment loss was recognised in the consolidated income statement, the impairment loss is reversed through the consolidated income statement. For equity investments, a significant or prolonged decline in the fair value of the security below its cost is also considered as an indication that the assets are impaired. If any such evidence of impairment exists, the cumulative loss - measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognised in the consolidated income statement - is removed from equity and recognised in the consolidated income statement. Impairment losses recognised in the consolidated income statement on equity instruments are not reversed through the consolidated income statement. Assets classified as AFS Impairment (Cont'd) (c) Accounting policies applied until 31 December 2017 (Cont'd) Amounts accumulated in equity are accounted for, depending on the nature of the underlying hedged transaction, as follows: SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Cont'd) Notes to the Consolidated Financial Statements Where the hedged item subsequently results in the recognition of a non-financial asset, the amounts accumulated in equity are removed from other reserves and included within the initial cost of the asset. These deferred amounts are ultimately recognised in profit or loss as the hedged item affects profit or loss. Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or share options are shown in equity as a deduction from the proceeds. 2.22 Share capital The Group does not recognise cash amounts deposited with banks (which are received under its payment business) under users' entrustment in the consolidated statement of financial position as the Group holds these cash amounts as a custodian according to the relevant users' agreements. Cash and cash equivalents include cash in hand, deposits held at call with banks, money market funds and other short-term highly liquid investments with initial maturities of three months or less. 2.21 Cash and cash equivalents and restricted cash Accounts receivable are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less provision for impairment. Accounts receivable are amounts due from customers or agents for services performed or merchandise sold in the ordinary course of business. If collection of accounts receivable is expected in one year or less, they are classified as current assets. Otherwise, they are presented as non-current assets. 2.20 Accounts receivable Inventories, mainly consisting of merchandise for sale, are primarily accounted for using the weighted average method and are stated at the lower of cost and net realisable value. 2.19 Inventories Financial assets and liabilities are offset and the net amount is reported in the consolidated statement of financial position when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or realise the assets and settle the liabilities simultaneously. The legally enforceable right must not be contingent on future events and must be enforceable in the normal course of business and in certain circumstances, such as default, insolvency, bankruptcy or the termination of a contract. 2.18 Offsetting financial instruments 2 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Cont'd) For the year ended 31 December 2018 Notes to the Consolidated Financial Statements 165 Annual Report 2018 When a hedging instrument expires, or is sold or terminated, or when a hedge no longer meets the criteria for hedge accounting, any cumulative deferred gain or loss and deferred costs of hedging in equity at that time remain in equity until the forecast transaction occurs. When the forecast transaction is no longer expected to occur, the cumulative gain or loss and deferred costs of hedging included in equity are immediately reclassified to profit or loss. For any other cash flow hedges, the gain or loss relating to the effective portion of the derivatives is reclassified to profit or loss at the same time when the hedged cash flows affects profit or loss. • For the year ended 31 December 2018 Other revenues (c) denominated USD As at 31 December 2018, the Group's major monetary assets and liabilities exposed to foreign exchange risk are listed below: Foreign exchange risk (Cont'd) (i) (a) Market risk (Cont'd) 3.1 Financial risk factors (Cont'd) FINANCIAL RISK MANAGEMENT (Cont'd) 3 For the year ended 31 December 2018 Notes to the Consolidated Financial Statements 177 Annual Report 2018 The changes in the forward element of the foreign currency forwards that relate to hedged items are deferred in the costs of hedging reserve. The effects of the foreign currency related hedging instruments are not material to the Group's consolidated financial statements. The Group only designates the spot component of foreign currency forwards in hedge relationships. The spot component is determined with reference to relevant spot market exchange rates. The differential between the contracted forward rate and the spot market exchange rate is defined as the forward points. It is discounted, where material. During the year ended 31 December 2018, the Group entered into foreign currency forward contracts in relation to projected purchases that qualify as "high probable" forecast transactions and hence satisfy the requirements for hedge accounting. Under the Group's policy the critical terms of the forwards must align with the hedged items. The Group manages its foreign exchange risk by performing regular reviews of the Group's net foreign exchange exposures and tries to minimise these exposures by using foreign currency forwards. The Group operates internationally and is exposed to foreign exchange risk arising from various currency exposures, primarily with respect to Hong Kong Dollars ("HKD"), USD and Euro ("EUR"). Foreign exchange risk arises when future commercial transactions or recognised assets and liabilities are denominated in a currency that is not the respective functional currency of the Group's subsidiaries. The functional currency of the Company and majority of its overseas subsidiaries is USD whereas the functional currency of the subsidiaries which operate in the PRC is RMB. Foreign exchange risk Non-USD denominated (i) RMB'Million As at 31 December 2018 1,563 13,795 Monetary liabilities, non-current Monetary liabilities, current Monetary assets, non-current Monetary assets, current As at 31 December 2017 (12,023) 13,516 (3,733) Monetary liabilities, non-current (4,587) (3,434) Monetary liabilities, current 2,642 Monetary assets, non-current 1,994 18,041 Monetary assets, current RMB'Million 1,309 Market risk The Group's activities expose it to a variety of financial risks: market risk (including foreign exchange risk, price risk and interest rate risk), credit risk and liquidity risk. The Group's overall risk management strategy seeks to minimise the potential adverse effects on the financial performance of the Group. Risk management is carried out by the senior management of the Group. Interest income is recognised on a time proportion basis, taking into account of the principal outstanding and the effective interest rate over the period to maturity, when it is determined that such income will accrue to the Group. Accounting policies applied until 31 December 2017 Interest income is calculated by applying the effective interest rate to the gross carrying amount of a financial asset except for financial assets that subsequently become credit-impaired. For credit-impaired financial assets the effective interest rate is applied to the net carrying amount of the financial asset (after deduction of the loss allowance). Interest income is presented as “Interest income" where it is mainly earned from financial assets that are held for cash management purposes. 2.31 Interest income The transaction price allocated to the performance obligations that are unsatisfied, or partially unsatisfied, has not been disclosed, as substantially all of the Group's contracts have a duration of one year or less. The unsatisfied performance obligation related to cooperation arrangements with certain investees have been included in deferred revenue. Practical expedients and exemptions (f) Contract costs include incremental costs of obtaining a contract and costs to fulfil a contract with the customers. The contract costs are amortised using a method which is consistent with the pattern of recognition of the respective revenues. A contract liability is the Group's obligation to transfer goods or services to a customer for which the Group has received consideration (or an amount of consideration is due) from the customer. The Group's contract liabilities mainly comprise of unamortised pre-paid tokens or cards, virtual items, Internet traffic and other support to be offered to certain investee companies in the future periods measured at their fair value on the inception dates (Note 5(c)), and customer loyalty incentives offered to the customers. (e) Contract liabilities and contract costs 2.30 Revenue recognition (Cont'd) SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Cont'd) For the year ended 31 December 2018 Notes to the Consolidated Financial Statements 2 174 Tencent Holdings Limited The Group reports revenue on a gross or net basis depending on whether the Group is acting as a principal or an agent in a transaction. The Group is a principal if it controls the specified product or service before that product or service is transferred to a customer or it has a right to direct others to provide the product or service to the customer on the Group's behalf. Indicators that the Group is a principal include but not limited to whether the Group (i) is the primary obligor in the arrangement; (ii) has latitude in establishing the selling price; (iii) has discretion in supplier selection; (iv) changes the product or performs part of the service, and (v) has involvement in the determination of product or service specifications. (d) Principal agent consideration The Group's other revenues are primarily derived from provision of FinTech services, cloud services, television series and film production services and other businesses. The Group recognises other revenues when the respective services are rendered, or when the control of the products are transferred to customers. Annual Report 2018 (a) 175 For the year ended 31 December 2018 3.1 Financial risk factors For the year ended 31 December 2018 Notes to the Consolidated Financial Statements FINANCIAL RISK MANAGEMENT 3 176 Tencent Holdings Limited Costs incurred on development projects (relating to the design and testing of new or improved products) are capitalised as intangible assets when recognition criteria are fulfilled and tests for impairment are performed annually. Other development expenditures that do not meet those criteria are recognised as expenses as incurred. Development costs previously recognised as expenses are not recognised as assets in subsequent periods. Research expenditure is recognised as an expense as incurred. 2.36 Research and development expenses Dividends distribution to the Company's shareholders is recognised as a liability in the Group's and Company's financial statements in the period in which the dividend is approved by the Company's shareholders or board of directors where appropriate. 2.35 Dividends distribution Leases in which a significant portion of the risks and rewards of ownership are retained by lessors are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to the consolidated income statement on a straight-line basis over the period of the lease. 2.34 Leases Under these circumstances, the grants/subsidies are recognised as income or matched with the associated costs and expenses which the grants/subsidies are intended to compensate. Grants/Subsidies from government are recognised at their fair value where there is a reasonable assurance that the grants/subsidies will be received and the Group will comply with all attached conditions. 2.33 Government grants/subsidies Dividends are received from FVPL and FVOCI (2017: from AFS). Dividends are recognised in "Other gains/(losses), net" in the consolidated income statement when the right to receive payment is established. This applies even if they are paid out of pre-acquisition profits, unless the dividend clearly represents a recovery of part of the cost of an investment. In this case, the dividend is recognised in other comprehensive income if it relates to an investment measured at FVOCI. However, the investment may need to be tested for impairment as a consequence. 2.32 Dividend income 2 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Cont'd) Notes to the Consolidated Financial Statements (2,747) (9,430) (1,833) At each reporting period end, the Group revises the estimates of the number of options and awarded shares that are expected to ultimately vest. It recognises the impact of the revision to original estimates, if any, in the consolidated income statement of the Group, with a corresponding adjustment to equity. When the options are exercised, the proceeds received net of any directly attributable transaction costs are credited to share capital (nominal value) and share premium. If the Group repurchases vested equity instruments, the payments made to the employees and other qualifying participants shall be accounted for as a deduction from equity, except to the extent that the payment exceeds the fair value of the equity instruments repurchased, measured at the repurchase date. Any such excess shall be recognised as an expense. If the terms of an equity-settled award are modified, at a minimum an expense is recognised as if the terms had not been modified. An additional expense is recognised for any modification that increases the total fair value of the share-based payment arrangement, or is otherwise beneficial to the employees and other qualifying participants, as measured at the date of modification. 2.29 Provisions Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events; it is probable that an outflow of resources will be required to settle the obligation; and the amount can be reliably estimated. Provisions are not recognised for future operating losses. Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognised even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small. Annual Report 2018 171 Notes to the Consolidated Financial Statements (15,744) 2 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Cont'd) 2.29 Provisions (Cont'd) Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in the provision due to passage of time is recognised as interest expense. 2.30 Revenue recognition The Group generates revenues primarily from provision of VAS, online advertising services and other online related services in the PRC. Revenue is recognised when the control of the goods or services is transferred to a customer. Depending on the terms of the contract and the laws that apply to the contract, control of the goods and services may be transferred over time or at a point in time. (a) VAS Revenues from VAS primarily include revenues from the provision of online games and social networks services. Online games revenues are mainly derived from sales of in-game virtual items, and social networks revenues are mainly derived from sales of virtual products such as VAS subscriptions across various online platforms, and games revenues attributable to social networks business. The Group offers virtual products/ items to users on the Group's online platforms. The VAS fees are paid directly by end users mainly via online payment channels. Revenue from VAS is recognised when the Group satisfies its performance obligations by rendering services. Giving there is an explicit or implicit obligation of the Group to maintain the virtual products/items operated on the Group's platforms and allow users to gain access to them, revenue is recognised over the estimated lifespans of the respective virtual products/items. The estimated lifespans of different virtual products/items are determined by the management based on either the expected user relationship periods or the stipulated period of validity of the relevant virtual products/items depending on the respective term of virtual products/ items. From the perspective of the Company, the grants of its equity instruments to employees of its subsidiaries are made in exchange for their services related to the subsidiaries. Accordingly, the share-based compensation expenses are treated as part of the "Investments in subsidiaries" in the Company's statement of financial position. Where the contracts include multiple performance obligations, the Group allocates the transaction price to each performance obligation on a relative stand-alone selling price basis, which is determined based on the prices charged to or expected to recover from customers. Non-market performance and service conditions are included in assumptions about the number of options that are expected to become vested. Share-based compensation benefits (Cont'd) Notes to the Consolidated Financial Statements For the year ended 31 December 2018 2 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Cont'd) 2.28 Employee benefits (a) Employee leave entitlements Employee entitlements to annual leave are recognised when they accrue to employees. A provision is made for the estimated liability for annual leave as a result of services rendered by employees up to the end of the reporting period. Employee entitlements to sick and maternity leave are not recognised until the time of leave. (b) Pension obligations The Group participates in various defined contribution retirement benefit plans which are available to all relevant employees. These plans are generally funded through payments to schemes established by governments or trustee-administered funds. A defined contribution plan is a pension plan under which the Group pays contributions on a mandatory, contractual or voluntary basis into a separate fund. The Group has no legal or constructive obligations to pay further contributions if the fund does not hold sufficient assets to pay all employees the benefits relating to employee services in the current and prior years. The Group's contributions to the defined contribution plans are expensed as incurred and not reduced by contributions forfeited by those employees who leave the plans prior to vesting fully in the contributions. (c) Share-based compensation benefits The Group operates a number of share-based compensation plans (including share option schemes and share award schemes), under which the Group receives services from employees and other qualifying participants as consideration for equity instruments (including share options and awarded shares) of the Group. The fair value of the employee services and other qualifying participants' services received in exchange for the grant of equity instruments of the Group is recognised as an expense over the vesting period, i.e. the period over which all of the specified vesting conditions are to be satisfied, and credited to equity. For grant of share options, the total amount to be expensed is determined by reference to the fair value of the options granted by using option-pricing model, “Enhanced FAS 123" binomial model (the "Binomial Model"), which includes the impact of market performance conditions (such as the Company's share price) but excludes the impact of service condition and non-market performance conditions. For grant of award shares, the total amount to be expensed is determined by reference to the market price of the Company's shares at the grant date. The Group also adopts valuation techniques to assess the fair value of other equity instruments of the Group granted under the share-based compensation plans as appropriate. 170 Tencent Holdings Limited Notes to the Consolidated Financial Statements 2 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Cont'd) 2.28 Employee benefits (Cont'd) (c) For the year ended 31 December 2018 172 Tencent Holdings Limited For the year ended 31 December 2018 2 The Group's exposure to changes in interest rates is also attributable to its borrowings and notes payable, details of which have been disclosed in Notes 34 and 35, representing a substantial portion of the Group's debts. Borrowings and notes payable carried at floating rates expose the Group to cash flow interest-rate risk whereas those carried at fixed rates expose the Group to fair value interest-rate risk. The Group's income and operating cash flows are substantially independent from changes in market interest rates and the Group has no significant interest-bearing assets except for loans to investees and investees' shareholders, term deposits with initial terms of over three months, restricted cash and cash and cash equivalents, details of which have been disclosed in Notes 25, 28 and 30. Interest rate risk The Group is exposed to equity price risk mainly arising from investments held by the Group that are classified either as FVPL (Note 23) or FVOCI (Note 24). To manage its price risk arising from the investments, the Group diversifies its investment portfolio. The investments are made either for strategic purposes, or for the purpose of achieving investment yield and balancing the Group's liquidity level simultaneously. Each investment is managed by senior management on a case by case basis. Sensitivity analysis is performed by management to assess the exposure of the Group's financial results to equity price risk of FVPL and FVOCI (2017: AFS) at the end of each reporting period. If prices of the respective instruments held by the Group had been 5% (31 December 2017: 5%) higher/lower as at 31 December 2018, profit for the year would have been approximately RMB4,794 million higher/lower as a result of gains/losses on financial instruments classified as at FVPL, other comprehensive income would have been approximately RMB2, 147 million higher/lower as a result of gains/losses on financial instruments classified as at FVOCI (2017: RMB4,069 million). (iii) For the year ended 31 December 2018 Price risk (ii) (a) Market risk (Cont'd) Notes to the Consolidated Financial Statements FINANCIAL RISK MANAGEMENT (Cont'd) 3 Notes to the Consolidated Financial Statements 178 Tencent Holdings Limited As at 31 December 2018, management considers that any reasonable changes in foreign exchange rates of the above currencies against the two major functional currencies would not result in a significant change in the Group's results, as the net carrying amounts of financial assets and liabilities denominated in a currency other than the respective subsidiaries' functional currency are considered to be not significant, given the exchange rate peg between HKD and USD. Accordingly, no sensitivity analysis is presented for foreign exchange risk. During the year ended 31 December 2018, the Group reported exchange gains of approximately RMB229 million (2017: RMB152 million) within "Finance costs, net" in the consolidated income statement. (19,296) 10,524 (5,115) The Group regularly monitors its interest rate risk to identify if there are any undue exposures to significant interest rate movements and manages its cash flow interest rate risk by using interest rate swaps, whenever considered necessary. Annual Report 2018 179 3.1 Financial risk factors (Cont'd) Online advertising (Cont'd) Revenue from display-based advertising are recognised on number of display/impression basis or ratably over the respective contractual term with the advertisers or their advertising agencies depending on the contractual measures. Revenue from performance-based advertising are recognised when relevant specific performance measures are fulfilled. Where the contracts include multiple performance obligations, the Group allocates the transaction price to each performance obligation on a relative stand-alone selling price basis, which is determined based on the prices charged to or expected to recover from customers. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Cont'd) For the year ended 31 December 2018 2.30 Revenue recognition (Cont'd) (a) VAS (Cont'd) The Group also opens its online platforms to third-party game/application developers under certain co- operation agreements, of which the Group pays to the third-party game/application developers a pre- determined percentage of the fees paid by and collected from the users of the Group's online platforms for the virtual products/items purchased. The Group recognises the related revenue on a gross or net basis depending on whether the Group is acting as a principal or an agent in the transaction. The Group adopts different revenue recognition methods based on its specific responsibilities/obligations in different VAS offerings. (b) In respect of the Group's VAS services directly delivered to the Group's customers and paid through various third parties platforms, these third party platforms collect the relevant service fees (the "Online Service Fees") on behalf of the Group and they are entitled to a pre-determined percentage of platform provider fees (as part of "Channel and distribution costs"). Such Channel and distribution costs are withheld and deducted from the gross Online Service Fees collected by these platforms from the users, with the net amounts remitted to the Group. The Group recognises the Online Service Fees as revenue on a gross basis, given it acts as the principal in these transactions based on the assessment according to the criteria stated in (d) below, and recognises such Channel and distribution costs as cost of revenues. 2.30 Revenue recognition (Cont'd) Online advertising revenues mainly comprise revenues derived from media advertisements and from social and others advertisements, depending on the placement of advertising properties and inventories. Advertising contracts are signed to establish the prices and advertising services to be provided based on different arrangements, including display-based advertising that are display of ads for an agreed period of time, and performance-based advertising. Annual Report 2018 173 Notes to the Consolidated Financial Statements For the year ended 31 December 2018 2 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Cont'd) Online advertising (b) Maturity date Hedge ratio Change in fair value of outstanding hedging instruments since 1 January 2018 determine hedge effectiveness Weighted average hedged rate for the year Notional amount Change in value of hedged item used to Interest rate swaps Carrying amount 189 (iii) Interest rate risk (Cont'd) (a) Market risk (Cont'd) 3.1 Financial risk factors (Cont'd) FINANCIAL RISK MANAGEMENT (Cont'd) 3 For the year ended 31 December 2018 Notes to the Consolidated Financial Statements The Group will continue to monitor the average lifespans of the virtual products/items. The results may differ from the historical period, and any change in the estimates may result in the revenue being recognised on a different basis from that in prior periods. Annual Report 2018 2017 During the year ended 31 December 2018, the Group entered into certain interest rate swap contracts to hedge its exposure arising from borrowings carried at floating rates. Under these interest rate swap contracts, the Group agreed with the counterparties to exchange, at specified interval, the difference between fixed contract rates and floating-rate interest amounts calculated by reference to the agreed notional amounts. These interest rate swap contracts had the economic effect of converting borrowings from floating rates to fixed rates and were qualified for hedge accounting. Details of the Group's outstanding interest rate swap contracts as at 31 December 2018 have been disclosed in Note 26. The effects of the interest rate swaps on the Group's financial position and performance are as follows: RMB'Million 37,374 1,663 77,630 2019/6/28~ Other financial liabilities 2,154 2,154 The fair value of financial instruments traded in active markets is determined with reference to quoted market prices at the end of the reporting period. A market is regarded as active if quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service, or regulatory agency, and those prices represent actual and regularly occurring market transactions on an arm's length basis. These instruments are included in level 1. The fair value of financial instruments that are not traded in an active market is determined by using valuation techniques. These valuation techniques maximise the use of observable market data where it is available and rely as little as possible on entity specific estimates. If all significant inputs required for evaluating the fair value of a financial instrument are observable, the instrument is included in level 2. If one or more of the significant inputs are not based on observable market data, the instrument is included in level 3. 186 Tencent Holdings Limited Notes to the Consolidated Financial Statements 3 FINANCIAL RISK MANAGEMENT (Cont'd) For the year ended 31 December 2018 3.3 Fair value estimation (Cont'd) Specific valuation techniques used to value financial instruments mainly include: • Dealer quotes for similar instruments; • The fair value of interest rate swaps is calculated as the present value of the estimated future cash flows based on observable yield curves; and Other techniques, such as discounted cash flow analysis, are used to determine fair value for financial instruments. During the year ended 31 December 2018, there was no transfer between level 1 and 2 for recurring fair value measurements. For transfers in and out of level 3 measurements see the following table, which presents the changes of financial instruments in level 3 instruments for the years ended 31 December 2018 and 2017: 5,624 Financial assets 127,218 1,806 FVOCI OFA Other financial liabilities 10,875 41,578 5,009 81,993 97,877 1,941 43,519 2,032 2,032 40 4,466 4,506 As at 31 December 2017 AFS 53,574 331 OFA 73,313 3,818 FVPL Financial liabilities 2017 (7,006) Transfers (93,151) (18,641) Changes in fair value recognised in other comprehensive income 261 6,220 Changes in fair value recognised in profit or loss * 30,485 4,027 (1,063) (271) Impairment provision (581) Currency translation differences 4,946 (4,282) (9,899) 2018 Disposals/Settlement 31,795 2018 2017 RMB'Million RMB'Million RMB'Million RMB'Million Opening balance - IAS 39 77,131 65,599 2,154 2,576 Adjustment on adoption of IFRS 9 (Note 2.2(a)) 22,976 Opening balance - IFRS 9 100,107 2,154 Additions 51,185 3,301 As at 31 December 2018 RMB'Million Total 2,068 2,068 Accounts payable, other payables and accruals (excluding prepayments received from customers and others, staff costs and welfare accruals) 65,651 65,651 Derivatives: Other financial liabilities 86 86 89,733 26,304 85,479 14,335 215,851 184 Tencent Holdings Limited Notes to the Consolidated Financial Statements Other financial liabilities 3 106,089 71,663 89,919 38,648 303,633 At 31 December 2017 Non-derivatives: Notes payable 5,892 13,832 10,757 7,492 37,973 Long-term payables 2,345 905 734 3,984 Borrowings 18,190 10,127 6,109 FINANCIAL RISK MANAGEMENT (Cont'd) For the year ended 31 December 2018 3.2 Capital risk management Adjusted EBITDA represents operating profit less interest income and other gains/(losses), net, and plus depreciation of property, plant and equipment and investment properties, amortisation of intangible assets and equity-settled share-based compensation expenses. Annual Report 2018 185 Notes to the Consolidated Financial Statements For the year ended 31 December 2018 3 FINANCIAL RISK MANAGEMENT (Cont'd) 3.3 Fair value estimation The table below analyses the Group's financial instruments carried at fair value as at 31 December 2018 by level of the inputs to valuation techniques used to measure fair value. Such inputs are categorised into three levels within a fair value hierarchy as follows: • Quoted prices (unadjusted) in active markets for identical assets or liabilities (level 1); Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices) (level 2); and Inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs) (level 3). Level 1 Level 2 RMB'Million RMB'Million Level 3 RMB'Million 1.38 1.52 95,861 118,273 The Group's objectives on managing capital are to safeguard the Group's ability to continue as a going concern and support the sustainable growth of the Group in order to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to enhance shareholders' value in the long term. Capital refers to equity and external debts (including borrowings and notes payable). In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares, repurchase the Company's shares or raise/repay debts. The Group monitors capital by regularly reviewing debts to adjusted earnings before interest, tax, depreciation and amortisation ("EBITDA") (Note) ratio, being the measure of the Group's ability to pay off all debts that reflects financial health and liquidity position. The total debts/adjusted EBITDA ratio calculated by dividing the total debts by adjusted EBITDA is as follows: Borrowings (Note 34) Notes payable (Note 35) Total debts Adjusted EBITDA (Note) Total debts/Adjusted EBITDA ratio Note: 74 As at 31 December 2017 RMB'Million RMB'Million 114,271 97,790 65,018 34,115 179,289 131,905 2018 RMB'Million (151) 83,934 FINANCIAL RISK MANAGEMENT (Cont'd) 3 For the year ended 31 December 2018 18 183 Annual Report 2018 The Group aims to maintain sufficient cash and cash equivalents and marketable securities. Due to the dynamic nature of the underlying businesses, the Group maintains flexibility in funding by maintaining adequate cash and cash equivalents and marketable securities. Liquidity risk (c) Previous accounting policy for impairment of accounts receivable and other receivables is described in note 2.16(c). Management considers the credit risk of other receivables is insignificant when they have a low risk of default and the issuer has a strong capacity to meet its contractual cash flow obligations in the near term, and the loss allowance recognised is therefore limited to 12 months expected losses. In view of insignificant risk of default and credit risk since initial recognition, management believes that the expected credit loss under the 12 months expected losses method is immaterial. (iii) Credit risk of other receivables (Cont'd) (b) Credit risk (Cont'd) 3.1 Financial risk factors (Cont'd) FINANCIAL RISK MANAGEMENT (Cont'd) 3 For the year ended 31 December 2018 Notes to the Consolidated Financial Statements 182 Tencent Holdings Limited 3.1 Financial risk factors (Cont'd) significant changes in the expected performance and behavior of the debtor, including changes in the payment status of the debtor. (c) Liquidity risk (Cont'd) Less than 14,629 12,010 15,780 Other financial liabilities Borrowings Long-term payables Notes payable Non-derivatives: At 31 December 2018 RMB'Million RMB'Million 137,692 RMB'Million RMB'Million Total Over 5 years Between 2 and 5 years Between 1 and 2 years 1 year The table below analyses the Group's financial liabilities by relevant maturity groupings based on the remaining period since the end of the reporting period to the contractual maturity date (or the earliest date a financial liability may become payable in the absence of a fixed maturity date). The amounts disclosed in the table are the contractual undiscounted cash flows. 38,305 actual or expected significant changes in the operating results of the debtor; Other receivables at the end of each of the years are mainly comprised of loans to investees and investees' shareholders, rental deposits and other receivables. The Group considers the probability of default upon initial recognition of asset and whether there has been significant increase in credit risk on an ongoing basis throughout each of the years. To assess whether there is a significant increase in credit risk, the Group compares risk of default occurring on the assets as at the reporting date with the risk of default as at the date of initial recognition. Especially the following indicators are incorporated: 3.1 Financial risk factors (Cont'd) For the year ended 31 December 2018 FINANCIAL RISK MANAGEMENT (Cont'd) 3 Notes to the Consolidated Financial Statements 180 Tencent Holdings Limited As at 31 December 2018 and 2017, management considered that any reasonable changes in the interest rates would not result in a significant change in the Group's results as the Group's exposure to cash flow interest-rate risk arising from its borrowings and notes payable carried at floating rates after considering the effect of hedging is considered to be insignificant. Accordingly, no sensitivity analysis is presented for interest rate risk. Swaps currently in place cover majority of the floating-rate borrowing and notes payable principal outstanding. 1.52% 756 1.60% 181 756 181 1:1 1:1 2023/12/8 2023/12/8 1,300 70,184 2019/6/28~ (b) Credit risk actual or expected significant adverse changes in business, financial or economic conditions that are expected to cause a significant change to the debtor's ability to meet its obligations; The Group is exposed to credit risk in relation to its cash and deposits placed with banks and financial institutions, accounts receivable, other receivables, as well as short-term investments measured at amortised cost and at FVPL. The carrying amount of each class of these financial assets represents the Group's maximum exposure to credit risk in relation to the corresponding class of financial assets. Credit risk of cash and deposits and short-term investments Credit risk of other receivables The Group applies the simplified approach to provide for expected credit losses prescribed by IFRS 9, which permits the use of the lifetime expected loss provision for all accounts receivable. In view of the sound financial position and collection history of receivables due from these counterparties and insignificant risk of default, to measure the expected credit losses, accounts receivable have been grouped based on shared credit risk characteristics and the days past due. A default on accounts receivable is when the counterparty fails to make contractual payments within 90 days of when they fall due. Accounts receivable are written off, in whole or in part, when it has exhausted all practical recovery efforts and has concluded that there is no reasonable expectation of recovery. Indicators that there is no reasonable expectation of recovery include, amongst others, the failure of a debtor to engage in a repayment plan within the Group, and its failure to make contractual payments for a period of greater than 3 years past due. Impairment losses on accounts receivables are presented as net impairment losses within operating profit. Subsequent recoveries of amounts previously written off are credited against the same item. Management believes that the expected credit loss is immaterial and the credit risk inherent in the Group's outstanding accounts receivable balances due from these counterparties is not significant. (iii) Credit risk of accounts receivable (Cont'd) (ii) Credit risk (Cont'd) (b) 3.1 Financial risk factors (Cont'd) FINANCIAL RISK MANAGEMENT (Cont'd) 3 For the year ended 31 December 2018 Notes to the Consolidated Financial Statements Annual Report 2018 181 The Group's revenues from VAS are generally paid by end users mainly via online payment channels, whereas the revenues from VAS delivered to its end users through third party platforms are collected by these third party platform providers and remitted to the Group under a credit period within 60 days. In addition, the Group also sells prepaid credits through various channels such as sales agents, telecommunication operators, third party platform providers and Internet cafes, etc. Apart from certain credit periods granted to the telecommunication operators and third party platform providers, full advances are required from other channels. The Group's online advertising that are sales to/through advertising agencies or directly to the advertisers are at term of full advances, partial advances or sales on credit according to the Group's credit policies. The credit period granted to the customers is usually not more than 90 days and the credit quality of these customers are assessed, which takes into account their financial position, past experience and other factors. To manage this risk, the Group has policies in place to ensure that revenues of credit terms are made to counterparties with an appropriate credit history and the management performs ongoing credit evaluations of its counterparties. In addition, the Group has a large number of customers and there is no concentration of credit risk. Credit risk of accounts receivable To manage this risk, the Group only makes transactions with state-owned banks and financial institutions in the PRC and reputable international banks and financial institutions outside of the PRC. There has been no recent history of default in relation to these banks and financial institutions. The expected credit loss is close to zero. (ii) (i) 80,724 3,113 1,018 Significant unobservable inputs Range of inputs at 31 December Relationship of unobservable inputs to fair value 2018 2017 2018 2017 RMB'Million RMB'Million Investments in unlisted companies Contingent consideration 83,934 77,131 Expected volatility 28% 76% 31% -59% The higher the expected volatility, the lower the fair value 3,145 related to business combination Fair value as at 31 December Growth rate of net profit Description The components of the level 3 instruments mainly include investments in unlisted companies classified as FVPL or FVOCI, and other financial liabilities. Other financial liabilities mainly include: (i) contingent consideration payable related to business combination of the Group; and (ii) guarantee provided by the Group on certain put arrangements of an associate and put options issued by the Group to certain investors of the associate, at a pre- determined pricing formula. As these investments and instruments are not traded in an active market, majority of their fair values have been determined using applicable valuation techniques including comparable transactions approach and other option pricing approach. These valuation approaches require significant judgment, assumptions and inputs, including risk-free rates, expected volatility, relevant underlying financial projections, and market information of recent transactions (such as recent fund raising transactions undertaken by the investees) and other exposure, etc. 77,131 4,466 2,154 *Includes unrealised gains or (losses) recognised in profit or loss attributable to balances held at the end of the reporting period 6,861 3,954 (1,063) (271) Annual Report 2018 187 Notes to the Consolidated Financial Statements For the year ended 31 December 2018 3 FINANCIAL RISK MANAGEMENT (Cont'd) 3.3 Fair value estimation (Cont'd) Valuation processes inputs and relationships to fair value (Level 3) The Group has a team of personnel who performs valuation on these level 3 instruments for financial reporting purposes. The team performs valuation, or necessary updates, at least once every quarter, which coincides with the Group's quarterly reporting dates. On an annual basis, the team adopts various valuation techniques to determine the fair value of the Group's level 3 instruments. External valuation experts may also be involved and consulted when it is necessary. The following table summarises the quantitative information about the significant unobservable inputs used in level 3 fair value measurements. 50% N/A The higher the growth rate, 31 9 90,310 Other financial liabilities Derivatives: staff costs and welfare accruals) received from customers and others, accruals (excluding prepayments Accounts payable, other payables and 3,748 1,615 942 1,191 124,337 72,626 21,309 30,402 4,474 343 90,310 40 Significant judgments are required in determining the expected users' relationship periods, including but not limited to historical users' consumption patterns, churn out rate and reactivity on marketing activities, games life- cycle, and the Group's marketing strategy. The Group has adopted a policy of assessing the estimated lifespans of virtual products/items on a regular basis whenever there is any indication of change in the expected users' relationship periods. As mentioned in Note 2.30(a), the end users purchase certain virtual products/items provided on the Group's online platforms and the relevant revenue is recognised based on the estimated lifespans of the virtual products/ items. The estimated lifespans of different virtual products/items are determined by the management based on either the expected users' relationship periods or the stipulated period of validity of the relevant virtual products/ items depending on the respective terms of virtual products/items. the higher the fair value Expected volatility 15% N/A The higher the expected 188 Tencent Holdings Limited volatility, the lower the fair value Notes to the Consolidated Financial Statements Closing balance 3 4 For the year ended 31 December 2018 3.3 Fair value estimation (Cont'd) For the fair value of the Group's investments in unlisted companies, the sensitivity analysis is performed by management, see Note 3.1 (a) (ii) for details. For the fair value of contingent consideration related to business combination, if growth rate of net profit had been 5% higher or lower as at 31 December 2018, the fair value would have increased approximately RMB150 million or decreased approximately RMB171 million. If the expected volatility had been 5% higher or lower as at 31 December 2018, the fair value would have decreased approximately RMB90 million or increased approximately RMB92 million. CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS Estimates and judgments are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal to the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are addressed below: (a) The estimates of the lifespans of virtual products/items provided on the Group's online platforms FINANCIAL RISK MANAGEMENT (Cont'd) RMB'Million Notes to the Consolidated Financial Statements 31 December 2018 73,961 (RMB in millions, unless specified) revenues Amount revenues Amount % of segment % of segment 2017 42% 2018 Total cost of revenues Others Online advertising VAS Cost of revenues. Cost of revenues increased by 41% to RMB170.6 billion for the year ended 31 December 2018 on a year- on-year basis. The increase primarily reflected greater content costs, costs of FinTech services, and channel costs. As a percentage of revenues, cost of revenues increased to 55% for the year ended 31 December 2018 from 51% for the year ended 31 December 2017. The following table sets forth our cost of revenues by line of business for the years ended 31 December 2018 and 2017: Management Discussion and Analysis 15 Annual Report 2018 Revenues from our other businesses increased by 80% to RMB77,969 million for the year ended 31 December 2018 on a year-on-year basis. The increase was mainly due to revenue growth from our FinTech and cloud services. Year ended 31 December Revenues from our VAS business increased by 15% to RMB176.6 billion for the year ended 31 December 2018 on a year-on-year basis. Online games revenues grew by 6% to RMB104.0 billion. The increase primarily reflected growth in revenues from our existing smart phone games such as Honour of Kings and QQ Speed Mobile, and new titles such as MU Awakening and QQ Dancers Mobile. Revenues from our PC client games decreased mainly due to users' time shift to smart phone games although some individual PC games performed robustly. Social networks revenues increased by 30% to RMB72,654 million. The increase was mainly due to higher contributions from our digital content services such as live broadcast services and video streaming subscriptions, as well as from in-game virtual item sales. Revenues from our online advertising business increased by 44% to RMB58,079 million for the year ended 31 December 2018 on a year-on-year basis. Social and others advertising revenues increased by 55% to RMB39,773 million. The increase mainly reflected higher advertising revenues derived from Weixin Moments, Mini Programs and our mobile advertising network. Media advertising revenues grew by 23% to RMB18,306 million. The increase was primarily driven by greater advertising revenues from Tencent Video. 61,389 37,273 Annual Report 2018 17 Profit attributable to equity holders of the Company. Profit attributable to equity holders of the Company increased by 10% to RMB78,719 million for the year ended 31 December 2018 on a year-on-year basis. Non-GAAP profit attributable to equity holders of the Company increased by 19% to RMB77,469 million for the year ended 31 December 2018. Income tax expense. Income tax expense decreased by 8% to RMB14,482 million for the year ended 31 December 2018 on a year-on-year basis. The decrease was mainly due to the entitlements of preferential tax treatments and benefits. Finance costs, net. Net finance costs increased by 61% to RMB4,669 million for the year ended 31 December 2018 on a year-on-year basis. The increase primarily reflected greater interest expenses driven by higher amount of indebtedness. Selling and marketing expenses. Selling and marketing expenses increased by 37% to RMB24,233 million for the year ended 31 December 2018 on a year-on-year basis. The increase was mainly driven by greater marketing spending on services and products such as digital content services, FinTech services and smart phone games. As a percentage of revenues, selling and marketing expenses increased to 8% for the year ended 31 December 2018 from 7% for the year ended 31 December 2017. General and administrative expenses. General and administrative expenses increased by 26% to RMB41,522 million for the year ended 31 December 2018 on a year-on-year basis. The increase mainly reflected greater R&D expenses and staff costs as a result of our expanded business volume. As a percentage of revenues, general and administrative expenses decreased to 13% for the year ended 31 December 2018 from 14% for the year ended 31 December 2017. Other gains, net. We recorded net other gains totalling RMB16,714 million for the year ended 31 December 2018. There were increases in valuations for certain investee companies, including a fair value gain from Meituan Dianping upon its IPO, partly offset by impairment provisions for certain other investee companies. Management Discussion and Analysis Tencent Holdings Limited 16 40% Cost of revenues for our other businesses increased by 75% to RMB59,340 million for the year ended 31 December 2018 on a year-on-year basis, mainly reflecting the increased scale of our FinTech and cloud services. 120,835 170,574 78% 33,860 76% 59,340 63% 25,586 64% Cost of revenues for our VAS business increased by 20% to RMB73,961 million for the year ended 31 December 2018 on a year-on-year basis. The increase was mainly due to greater content costs for services and products including live broadcast, video streaming subscriptions and online games, as well as higher channel costs for our smart phone games. Cost of revenues for our online advertising business increased by 46% to RMB37,273 million for the year ended 31 December 2018 on a year-on-year basis. The increase was primarily driven by greater content costs, traffic acquisition costs and advertising commissions. 100% 237,760 100% Online advertising VAS Revenues. Revenues increased by 32% to RMB312.7 billion for the year ended 31 December 2018 on a year-on-year basis. The following table sets forth our revenues by line of business for the years ended 31 December 2018 and 2017: Management Discussion and Analysis 65,126 77,469 72,471 79,984 961 Others 1,265 78,719 Tencent Holdings Limited 14 Non-GAAP profit attributable to equity holders of the Company Non-controlling interests Equity holders of the Company Attributable to: 72,471 79,984 71,510 Total revenues Year ended 31 December 2018 312,694 18% 43,338 25% 77,969 17% 40,439 19% 58,079 65% 153,983 56% 176,646 (RMB in millions, unless specified) revenues Amount revenues Amount % of total % of total 2017 Management Discussion and Analysis Profit for the year FOURTH QUARTER OF 2018 COMPARED TO FOURTH QUARTER OF 2017 Unaudited Amount revenues Amount % of total 31 December 2017 Three months ended Total revenues Online advertising Others VAS (RMB in millions, unless specified) Unaudited Management Discussion and Analysis Tencent Holdings Limited 18 17,454 19,730 Non-GAAP profit attributable to equity holders of the Company 21,622 14,026 825 Revenues. Revenues increased by 28% to RMB84,896 million for the fourth quarter of 2018 on a year-on-year basis. The following table sets forth our revenues by line of business for the fourth quarter of 2018 and the fourth quarter of 2017: (203) % of total 43,651 19 Annual Report 2018 Revenues from our other businesses increased by 72% to RMB24,212 million for the fourth quarter of 2018 on a year- on-year basis. The increase mainly reflected higher revenues from our FinTech and cloud services, as well as film and television production business. Revenues from our online advertising business increased by 38% to RMB17,033 million for the fourth quarter of 2018 on a year-on-year basis. Social and others advertising revenues increased by 44% to RMB11,846 million, primarily contributed by an increase in advertising revenues derived from Weixin Moments, Mini Programs and QQ KanDian. Media advertising revenues grew by 26% to RMB5, 187 million, mainly reflecting contributions from our media platforms such as Tencent Video and Tencent News. Revenues from our VAS business increased by 9% to RMB43,651 million for the fourth quarter of 2018 on a year-on- year basis. Online games revenues were RMB24,199 million, broadly stable compared to the fourth quarter of 2017. Social networks revenues grew by 25% to RMB19,452 million. The increase mainly reflected growth in revenues from digital content services such as live broadcast services and video streaming subscriptions. 100% 66,392 100% 84,896 revenues 21% 29% 24,212 19% 12,361 20% 17,033 60% 39,947 51% 14,084 Non-controlling interests 14,229 Equity holders of the Company 7,906 (2,139) Other (losses)/gains, net 1,156 1,350 31,495 35,152 (34,897) (49,744) Selling and marketing expenses 66,392 Interest income Gross profit Cost of revenues Revenues (RMB in millions) 2017 2018 31 December 31 December Three months ended 84,896 (5,730) (6,022) General and administrative expenses Attributable to: 21,622 14,026 Profit for the period (3,123) (1,906) Income tax expense 24,745 15,932 Profit before income tax (120) 16 Share of profit/(loss) of associates and joint ventures (859) (1,372) Finance costs, net 25,724 17,288 Operating profit (8,811) (11,345) The following table sets forth the comparative figures for the fourth quarter of 2018 and the fourth quarter of 2017: (15,744) 20,797 Income tax expense Looking ahead, we will invest in core infrastructure and frontier technologies to embrace the trend of the Industrial Internet, while continuing to drive the evolution of the Consumer Internet. We will enable our enterprise partners to better connect with our users via an expanding, open and connected ecosystem. Utilising our innovation and technology capabilities, we seek to assist a range of industries in undergoing digital upgrades and transformation. For our social communications platforms, we will strengthen connections between our users with digital content, as well as online and offline services. We will also enhance connections with enterprises leveraging Mini Programs, Weixin Pay and WeChat Work. For online games, we will strengthen our game portfolio through enhancing our internal R&D capability and external partnerships. We will further expand our overseas business through exploring new game genres and strengthening our overseas publishing capability. For digital content, we will continue to invest and grow our subscription business. For advertising, we will strengthen our user targeting capabilities to further increase our ROIs to advertisers and relevance to consumers. For FinTech, we will drive innovation in our payment product development and add new payment use cases. We will also expand our FinTech solutions and product portfolio to cater to the wealth management and financial needs of our users. For cloud, we will integrate our advanced cloud computing capability, data analytics, Al and security solutions, to develop customised solutions for various industries such as retail, financial, transportation, healthcare and education. We will assist enterprises in upgrading and innovating for the digital age. DIVIDEND The Board has recommended the payment of a final dividend of HKD1.00 per share (2017: HKD0.88 per share) for the year ended 31 December 2018, subject to the approval of the shareholders at the 2019 AGM. Such proposed dividend will be payable on 31 May 2019 to the shareholders whose names appear on the register of members of the Company on 22 May 2019. 12 Tencent Holdings Limited Chairman's Statement APPRECIATION On behalf of the Board, I would like to thank our staff and management team for their efforts, dedication and devotion to the Group. I would also like to express our sincere gratitude to our shareholders and stakeholders for their unwavering support to the Group. We are confident that our commitment to build an ecosystem to enhance our user experience, and the strategic upgrade to step into the Industrial Internet era will create value for our shareholders. Ma Huateng Chairman Hong Kong, 21 March 2019 Annual Report 2018 13 18 Management Discussion and Analysis Company Outlook and Strategies for 2019 YEAR ENDED 31 DECEMBER 2018 COMPARED TO YEAR ENDED 31 DECEMBER 2017 4. 11 (14,482) Chairman's Statement In China, we increased our market share in smart phone games in terms of active users. We enhanced user engagement across multiple genres. For action titles, QQ Speed Mobile's anniversary promotions increased its DAU sequentially. Cross Fire Mobile introduced a season pass to encourage in-game engagement. For role playing games, we launched several IP-based games that attracted fans of popular anime and comic franchises such as Battle through the Heavens, Naruto OL Mobile and Samurai Spirits. For MOBA, Honour of Kings organised its flagship eSports event KPL Fall Final in December, attracting over 75 million unique viewers for the live broadcast. In international markets, PUBG MOBILE achieved breakout success, becoming the most popular game globally by MAU, and was named the Best Game of 2018 by Google Play. Our investee companies' success added to our proven track record of working with category leaders in the games industry. For example, Supercell's new MOBA game Brawl Stars was the most downloaded game in 50 markets after its global launch in December 2018. And, Epic Games' Fortnite continued its phenomenal success, topping US iOS Grossing Chart in the fourth quarter. Sea's first self-developed game, Free Fire, was the fourth most downloaded game globally in 2018, according to App Annie. Our PC client games business achieved approximately RMB50.6 billion revenues, down 8% year-on-year, for 2018, and approximately RMB11.2 billion revenues for the fourth quarter, down 13% year-on-year as users continue to shift time to mobile. League of Legends introduced its first season pass and increased average user time spent, with active users growing sequentially after a China team won the World Championship in November 2018. We released a sequel to NBA2K in China, significantly expanding the total user base of this popular basketball franchise. We launched two new internally developed PC games, Iris Fall and Bladed Fury, to better serve niche audience interests. Digital Content Our fee-based VAS subscriptions were up by 19.1% year-on-year to 160.3 million, mainly attributable to growth in video and music subscriptions. Tencent Video expanded its subscription counts to 89 million, up 58% year-on-year, driven by premium content and cross-promotions. We released sequels to popular self-commissioned IPs, extending the longevity and monetisation opportunities of these IPs. These included Candle in the Tomb Season 3 in the drama category, the Land of Warriors Season 2 in Chinese anime, and Once Upon A Bite in documentary (whose related IP program, Flavorful Origins, we licensed to Netflix for distribution outside China). We upgraded our VIP loyalty program to offer subscribers different tiers of privileges. We maintained healthy engagement trends with video views per DAU up over 40% year-on-year, as consumers watched more short form videos. We are the leading streaming platform for sports fans in China, featuring 40 top global sports IPs, including the 4 major sports leagues in the US. We distribute sports content in live programs, news feeds and short videos formats across Tencent Sports, Tencent News, Tencent Video, Mobile QQ Browser and WeiShi. Since we began licensing NBA live streaming rights in 2015, we have expanded the total audience size for NBA games in China. Over the period, average daily unique visitors per live-streamed NBA game in China have tripled. 10 Tencent Holdings Limited Chairman's Statement Online Advertising Our online advertising business achieved RMB58.1 billion revenues, up 44% year-on-year, for 2018, and RMB17.0 billion revenues, up 38% year-on-year, for the fourth quarter. Social and others advertising grew to RMB39.8 billion, up 55% year-on-year for the full year, and RMB11.8 billion, up 44% year-on-year for the fourth quarter, driven by Weixin Moments, Mini Programs, QQ KanDian and our mobile advertising network. We received positive feedback from advertisers after the launch of the second daily ad unit for Moments, and the overall ad fill rates remained high. About 50% of Moments DAU were shown the second ad unit, and Moments ad click-through rates remained at healthy levels. Media advertising revenues amounted to RMB18.3 billion, up 23% for the full year, and RMB5.2 billion, up 26% for the fourth quarter. Among which, video advertising revenues increased by 34% year-on-year for 2018 and 21% year-on-year for the fourth quarter. The increase in the fourth quarter was driven by more video views and sponsorship advertising for our popular self-commissioned variety shows. Our news advertising revenues picked up year-on-year in the latter half of the year, recovering from our system revamp. Media feed advertising revenues grew by over 10 times year-on-year. Others Our other businesses grew revenues by 80% year-on-year for the year 2018, primarily contributed by FinTech and cloud services. The increase in FinTech revenues was driven by our take-rate on commercial transactions collected from merchants, cash withdrawal fees and credit card repayment charges collected from users, and the service fees from financial institutions for the distribution of FinTech products such as Wei LiDai and the wealth management products on our LiCaiTong platform. In January 2019, we completed the transition to the centralised clearing and settlement system and moved all custodian cash to the accounts of the People's Bank of China. Our cloud revenues increased by over 100% to RMB9.1 billion for the year 2018. Paying customers more than doubled year-on-year in the fourth quarter of 2018. Tencent Cloud's global infrastructure covered 25 regions and operated 53 availability zones as of the end of 2018. We developed and launched new laaS and PaaS products in the fourth quarter. In addition to strengthening our leadership in games and video verticals, we further promoted our presence in financial and retail cloud services, leveraging our Al and security capabilities. Annual Report 2018 Chairman's Statement The following table sets forth the comparative figures for the years ended 31 December 2018 and 2017: As we added more use cases online and offline for our payment services, our payment active users increased robustly year-on-year. Users' transaction frequency and value per transaction also increased. Weixin Pay launched a new user interface enabling easier access to new features including virtual subsidiary cards for parents and children. We enhanced account management tools for merchants, including cash register, book-keeping and revenue sharing settlement functions. LiCaiTong enlarged its user base, reaching 100 million accumulated users by end of 2018. We expanded our FinTech services by rolling out LingQian Tong, which enables users to invest the unused cash balance in their Weixin Pay accounts in funds. 2018 General and administrative expenses (41,522) (33,051) Operating profit 97,648 90,302 Finance costs, net (2,908) Share of profit of associates and joint ventures 1,487 821 Profit before income tax 94,466 Year ended 31 December 88,215 (17,652) (24,233) (4,669) 20,140 2017 (RMB in millions) Selling and marketing expenses Revenues Cost of revenues Gross profit Other gains, net 312,694 Interest income (170,574) (120,835) 16,714 142,120 116,925 3,940 237,760 4,569 (d) 7 OTHER GAINS, NET (Cont'd) Note: (Cont'd) For the year ended 31 December 2018 (c) The disposal and deemed disposal gains during the year ended 31 December 2018 mainly comprised the following: 2,794 Notes to the Consolidated Financial Statements 17,577 14,069 607 239 1,180 2,328 1,277 RMB'Million RMB'Million 2017 net gains of approximately RMB1,661 million (2017: RMB6,229 million) on dilution of the Group's equity interests in certain associates due to new equity interests being issued by these associates (Note 20). These investee companies are principally engaged in Internet-related business; 2018 671 aggregate net gains of approximately RMB1,271 million (2017: RMB3,626 million) on disposals, acquisition achieved in stages or partial disposals of various investments of the Group. 15,818 8 Tencent Holdings Limited 1,614 Operating lease rentals in respect of office buildings 13,661 19,806 Promotion and advertising expenses 11,203 Bandwidth and server custody fees 25,109 32,821 Included one-off expenses of RMB1,519 million recognised by a non-wholly owned subsidiary of the Group arising from the issuance of ordinary shares to strategic partners. Channel and distribution costs 39,061 Content costs (excluding amortisation of intangible assets) 34,866 42,153 Employee benefits expenses (Note (a) and Note 13) RMB'Million RMB'Million 2017 2018 EXPENSES BY NATURE 28,177 196 2017 Intangible assets arising from acquisitions RCPS (2,794) (17,577) arising from acquisitions (Note (b)) Impairment provision for investee companies and intangible assets 28,738 RMB'Million RMB'Million 1,335 2018 Net fair value gains on FVPL (Note (a)) OTHER GAINS, NET 7 Interest income mainly represents interest income from bank deposits, including bank balance and term deposits. INTEREST INCOME 6 For the year ended 31 December 2018 Notes to the Consolidated Financial Statements Annual Report 2018 195 As at 31 December 2018, total capitalised costs to obtain or fulfill a contract with customer were immaterial. 22,184 37,273 Subsidies and tax rebates 3,456 3,971 Net gains on disposals and deemed disposals of investee companies (Note (a), (c)) Net fair value gains on other financial instruments (Note 26, 37) Investments in joint ventures (Note 21) Investments in associates (Note 20) The impairment provision for investee companies and intangible assets arising from acquisitions mainly comprised the following: Net fair value gains on FVPL included aggregate gains of approximately RMB22,215 million, arising from reclassification of several investments principally engaged in Internet-related business from FVPL to investments in associates due to the conversion of redeemable instruments or preferred shares into ordinary shares with board representative upon their respective initial public offering ("IPO”). In 2017, aggregate gains of approximately RMB3,663 million arising from the similar transactions were recognised in net gains on disposals and deemed disposals of investee companies. (b) (a) Note: 20,140 16,714 254 AFS (1,810) 686 (820) (730) Others (Note (d)) Dividend income Donations to Tencent Charity Funds 4,298 1,019 13,518 2,932 1,713 Travelling and entertainment expenses 3,060 1,040 (v) Income tax on profit arising from other jurisdictions, including the United States, Europe, East Asia and South America, has been calculated on the estimated assessable profit for the year at the respective rates prevailing in the relevant jurisdictions, ranging from 12.5% to 35%. (iv) Corporate income tax in other countries In addition, according to relevant tax circulars issued by the PRC tax authorities, certain subsidiaries of the Company are entitled to other tax concessions and they are exempt from corporate income tax for two years, followed by a 50% reduction in the applicable tax rates for the next three years, commencing from the first year of profitable operation, after offsetting tax losses generated in prior years. Certain subsidiaries of the Group in the PRC were approved as High and New Technology Enterprise, and accordingly, they were subject to a preferential corporate income tax rate of 15% for the years ended 31 December 2018 and 2017. Moreover, according to the announcement and circular issued by relevant government authorities, for the year of 2015 and beyond, a software enterprise that qualifies as a national key software enterprise is subject to a preferential corporate income tax rate of 10%. PRC corporate income tax has been provided for at the applicable tax rates under the relevant regulations of the PRC after considering the available preferential tax benefits from refunds and allowances, and on the estimated assessable profit of entities within the Group established in the PRC for the years ended 31 December 2018 and 2017. The general PRC corporate income tax rate is 25% in 2018 and 2017. (iii) PRC corporate income tax For the year ended 31 December 2018 Notes to the Consolidated Financial Statements (a) Income tax expense (Cont'd) Withholding tax 11 TAXATION (Cont'd) Hong Kong profit tax has been provided for at the rate of 16.5% on the estimated assessable profit for the years ended 31 December 2018 and 2017. Hong Kong profit tax (ii) The Group was not subject to any taxation in the Cayman Islands and the British Virgin Islands for the years ended 31 December 2018 and 2017. Cayman Islands and British Virgin Islands corporate income tax (i) Income tax expense is recognised based on management's best knowledge of the income tax rates expected for the financial year. (a) Income tax expense 11 TAXATION 821 198 Tencent Holdings Limited 1,487 According to applicable tax regulations prevailing in the PRC, dividends distributed by a company established in the PRC to a foreign investor with respect to profit derived after 1 January 2008 are generally subject to a 10% withholding tax. If a foreign investor is incorporated in Hong Kong, under the double taxation arrangement between Mainland China and Hong Kong, the relevant withholding tax rate applicable to the Group will be reduced from 10% to 5% subject to the fulfilment of certain conditions. Annual Report 2018 199 - Asia excluding Mainland China and Hong Kong 34,515 37,451 - Europe 52,542 44,835 - North America 161,903 254,992 Mainland China and Hong Kong Dividends distributed from certain jurisdictions that the Group's entities operate in are also subject to withholding tax at respective applicable tax rates. Investments 83,962 219,285 270,373 RMB'Million RMB'Million 2017 2018 Others 1,760 250 59,770 1,450 91 730 Mainly included the amortisation charges of intangible assets in respect of media contents and game licences. (b) No significant development expenses had been capitalised for the years ended 31 December 2018 and 2017. During the year ended 31 December 2018, the Group incurred expenses for the purpose of research and development of approximately RMB22,936 million (2017: RMB17,456 million), which comprised employee benefits expenses of RMB19,088 million (2017: RMB14,766 million). (a) Note: 21 26 15 27 Annual Report 2018 197 76 - Non-audit services - Audit-related services - Audit services Auditor's remuneration 4,850 8,396 Depreciation of property, plant and equipment (Note 16) 18,622 25,616 Amortisation of intangible assets (Note (b) and Note 19) 83 186 Notes to the Consolidated Financial Statements 9 1,301 RMB'Million RMB'Million 2017 2018 Share of profit of joint ventures (Note 21) Share of profit of associates (Note 20) 10 SHARE OF PROFIT OF ASSOCIATES AND JOINT VENTURES Interest and related expenses mainly arose from the borrowings and notes payable disclosed in Notes 34 and 35. 2,908 For the year ended 31 December 2018 4,669 (229) 143 4,898 RMB'Million RMB'Million 2017 2018 Exchange gains Interest and related expenses FINANCE COSTS, NET (152) 232 SEGMENT INFORMATION AND REVENUES (Cont'd) 20,444 RMB'Million 30,148 RMB'Million Segment revenues 176,646 58,079 77,969 312,694 Gross profit 102,685 20,806 18,629 142,120 Depreciation Amortisation 1,996 11,663 1,376 12,462 3,658 7,030 573 24,698 RMB'Million RMB'Million Total Others The Group is subject to income taxes in numerous jurisdictions. Significant judgment is required in determining the worldwide provision for income taxes. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact current income tax and deferred income tax in the period in which such determination is made. 5 SEGMENT INFORMATION AND REVENUES (a) Description of segments and principal activities The chief operating decision-makers mainly include executive directors of the Company. They review the Group's internal reporting in order to assess performance, allocate resources, and determine the operating segments based on these reports. The Group has following reportable segments for the years ended 31 December 2018 and 2017: VAS; Online advertising; and Others. "Others" segment primarily comprises FinTech services, cloud services, television series and film production services and other services. Year ended 31 December 2017 The chief operating decision-makers assess the performance of the operating segments mainly based on segment revenue and gross profit of each operating segment. The selling and marketing expenses and general and administrative expenses are common costs incurred for these operating segments as a whole and therefore, they are not included in the measure of the segments' performance which is used by the chief operating decision- makers as a basis for the purpose of resource allocation and assessment of segment performance. Interest income, other gains/(losses), net, finance income/(costs), net, share of profit/(loss) of associates and joint ventures and income tax expense are also not allocated to individual operating segment. Notes to the Consolidated Financial Statements For the year ended 31 December 2018 5 SEGMENT INFORMATION AND REVENUES (a) Description of segments and principal activities (Cont'd) There were no material inter-segment sales during the years ended 31 December 2018 and 2017. The revenues from external customers reported to the chief operating decision-makers are measured in a manner consistent with that applied in the consolidated income statement. Other information, together with the segment information, provided to the chief operating decision-makers, is measured in a manner consistent with that applied in these consolidated financial statements. There were no segment assets and segment liabilities information provided to the chief operating decision-makers. The segment information provided to the chief operating decision-makers for the reportable segments for the years ended 31 December 2018 and 2017 is as follows: Year ended 31 December 2018 VAS Online advertising Annual Report 2018 191 Online VAS RMB'Million 5 SEGMENT INFORMATION AND REVENUES (Cont'd) (a) Description of segments and principal activities (Cont'd) The reconciliation of gross profit to profit before income tax is shown in the consolidated income statement. The Company is domiciled in the Cayman Islands while the Group mainly operates its businesses in Mainland China. During the years ended 31 December 2018 and 2017, the place of incorporation on the total revenues is as follows: Revenues Mainland China - Others 2018 2017 RMB'Million For the year ended 31 December 2018 RMB'Million 229,767 9,037 7,993 312,694 237,760 The Group also conducts operations in the United States of America ("United States"), Europe and other regions, and holds investments (including investments in associates, investments in joint ventures, FVPL, FVOCI (31 December 2017: investments in associates, RCPs together with embedded deriatives recorded in OFA, investments in joint ventures, and AFS)) in various territories. The geographical information on the total assets is as follows: Operating assets - Mainland China - Others As at 31 December 303,657 (e) Income taxes Notes to the Consolidated Financial Statements 17,837 advertising RMB'Million Others Total RMB'Million RMB'Million Segment revenues 153,983 40,439 43,338 237,760 192 Tencent Holdings Limited Gross profit 14,853 9,478 116,925 Depreciation Amortisation 1,858 561 1,473 3,892 7,836 10,001 92,594 1,597 The Group has to estimate the expected yearly percentage of grantees that will stay within the Group at the end of vesting periods of the options and awarded shares (the "Expected Retention Rate”) in order to determine the amount of share-based compensation expenses charged to the consolidated income statement. As at 31 December 2018, the Expected Retention Rate of the Group and its wholly-owned subsidiaries was assessed to be 88%-97% (31 December 2017: 88%-97%). 4 CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS (Cont'd) VAS Contract liabilities: RMB'Million RMB'Million 2017 2018 As at 31 December The Group has recognised the following liabilities related to contracts with customers under "Deferred revenue": (c) Assets and liabilities related to contracts with customers 5 Online advertising For the year ended 31 December 2018 Tencent Holdings Limited 194 237,760 312,694 43,338 77,969 - Others 25,610 39,773 Social and others advertising Notes to the Consolidated Financial Statements 14,829 Others 31,787 34,360 2,681 Others Online advertising VAS balance at the beginning of the year: Revenue recognised that was included in the contract liability RMB'Million RMB'Million 2017 2018 Note: The following table shows how much of the revenue recognised in the current reporting period relates to carried-forward contract liabilities: (ii) Contract liabilities mainly comprises of unamortised pre-paid tokens or cards, virtual items, Internet traffic and other support to be offered to certain investee companies in the future periods measured at their fair value on the inception dates (Note 20), and customer loyalty incentives offered to the customers. (i) Contract liabilities 39,830 42,037 232 1,105 5,238 9,145 34,360 Revenue recognised in relation to contract liabilities (d) Share-based compensation arrangements (Cont'd) 18,306 40,439 Media advertising Social networks 72,654 56,100 Notes to the Consolidated Financial Statements For the year ended 31 December 2018 4 CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS (Cont'd) (b) Recoverability of non-financial assets The Group tests annually whether goodwill has suffered any impairment. Goodwill and other non-financial assets, mainly including property, plant and equipment, construction in progress, other intangible assets, investment properties, land use rights, as well as investments in associates and joint ventures are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The recoverable amounts have been determined based on value-in-use calculations or fair value less costs to sell. These calculations require the use of judgments and estimates. Judgment is required to identify any impairment indicators existing for any of the Group's goodwill, other non- financial assets to determine appropriate impairment approaches, i.e., fair value less costs of disposal or value in use, for impairment review purposes, and to select key assumptions applied in the adopted valuation models, including discounted cash flows and market approach. Changing the assumptions selected by management in assessing impairment could materially affect the result of the impairment test and in turn affect the Group's financial condition and results of operations. If there is a significant adverse change in the key assumptions applied, it may be necessary to take additional impairment charge to the consolidated income statement. (c) Fair value measurement of FVPL, FVOCI and other financial liabilities The fair value assessment of FVPL, FVOCI and other financial liabilities that are measured at level 3 fair value hierarchy requires significant estimates, which include risk-free rates, expected volatility, relevant underlying financial projections, market information of recent transactions (such as recent fund raising transactions undertaken by the investees) and other assumptions. Changes in these assumptions and estimates could materially affect the respective fair value of these investments. (d) Share-based compensation arrangements As mentioned in Note 2.28(c), the Group has granted share options to its employees and other qualifying participants. The directors have adopted the Binomial Model to determine the total fair value of the options granted, which is to be expensed over the respective vesting periods. Significant judgment on parameters, such as risk free rate, dividend yield and expected volatility, is required to be made by the directors in applying the Binomial Model (Note 33). The fair value of share options granted to employees and other qualifying participants determined using the Binomial Model was approximately HKD3,533 million (equivalent to approximately RMB2,868 million) in 2018 (2017: HKD2,691 million (equivalent to approximately RMB2,373 million)). 190 Tencent Holdings Limited Notes to the Consolidated Financial Statements For the year ended 31 December 2018 103,992 153,983 97,883 Online games 58,079 – Online advertising 723,521 554,672 Annual Report 2018 193 Notes to the Consolidated Financial Statements For the year ended 31 December 2018 5 SEGMENT INFORMATION AND REVENUES (Cont'd) (a) Description of segments and principal activities (Cont'd) As at 31 December 2018, the total non-current assets other than financial instruments and deferred tax assets located in Mainland China and other regions amounted to RMB282,774 million (31 December 2017: RMB159,563 million) and RMB65,057 million (31 December 2017: RMB42,421 million), respectively. 176,646 All the revenues derived from any single external customer were less than 10% of the Group's total revenues during the years ended 31 December 2018 and 2017. In the following table, revenue of the Group from contracts with customers is disaggregated by revenue source. The table also includes a reconciliation to the segment information (Note 5(a)). 2018 2017 RMB'Million RMB'Million Revenue from contracts with customers - VAS (b) Disaggregation of revenue from contracts with customers 26,407 2,832 Jacobus Petrus (Koos) Bekker Charles St Leger Searle Yang Siu Shun 876 65 3,201 and benefits Name of director Fees bonuses plans expenses to pension compensation in kind RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 2,131 Total 2,325 Salaries and Share-based 5,975 65,683 118 296,509 145 368,430 Allowances 206 Notes to the Consolidated Financial Statements For the year ended 31 December 2018 14 BENEFITS AND INTERESTS OF DIRECTORS (Cont'd) (a) Directors' and the chief executive's emoluments (Cont'd) During the year ended 31 December 2017: Contributions Tencent Holdings Limited 701 Diluted EPS (RMB per share) 5,226 The share options and awarded shares granted by the Company have potential dilutive effect on the EPS. Diluted EPS is calculated by adjusting the weighted average number of ordinary shares outstanding by the assumption of the conversion of all potential dilutive ordinary shares arising from share options and awarded shares granted (b) Diluted 7.598 8.336 Basic EPS (RMB per share) 9,411 9,444 Weighted average number of ordinary shares in issue (million shares) 71,510 78,719 Profit attributable to equity holders of the Company (RMB'Million) 2017 2018 Basic earnings per share ("EPS") is calculated by dividing the profit attributable to equity holders of the Company by the weighted average number of ordinary shares in issue during the year. (a) Basic 12 EARNINGS PER SHARE Effective from 1 May 2018, the 17% and 11% VAT rates applicable to certain goods and services have been reduced to 16% and 10%, respectively. 6-17% Sales value of goods sold and services (Note) fee income, offsetting by VAT on purchases Construction fee for cultural undertakings 3% by the Company (collectively forming the denominator for computing the diluted EPS). No adjustment is made to earnings (numerator). Taxable advertising income 7% Net VAT payable amount Educational surcharge 5% Net VAT payable amount Note: City construction tax Basis of levy Annual Report 2018 201 For the year ended 31 December 2018 Share-based compensation expenses 1,934 2,553 Contributions to pension plans (Note) 24,194 28,236 Wages, salaries and bonuses RMB'Million RMB'Million 2017 2018 7.499 8.228 9,536 9,568 125 124 12 EARNINGS PER SHARE (Cont'd) (b) Diluted (Cont'd) In addition, the share options and restricted shares granted by the Company's non-wholly owned subsidiaries and associates should also have potential dilutive effect on the EPS. During the years ended 31 December 2018 and 2017, these share options and restricted shares had either anti-dilutive effect or insignificant dilutive effect to the Group's diluted EPS. Profit attributable to equity holders of the Company (RMB'Million) Weighted average number of ordinary shares in issue (million shares) Adjustments for share options and awarded shares (million shares) Weighted average number of ordinary shares for the calculation of diluted EPS (million shares) Notes to the Consolidated Financial Statements RMB'000 2018 2017 78,719 71,510 9,444 9,411 13 EMPLOYEE BENEFITS EXPENSES 7,900 Tax rate Category 23,245 87,394 92,979 (821) (1,487) 88,215 94,466 RMB'Million RMB'Million 2017 2018 Share of profit of associates and joint ventures Profit before income tax The taxation on the Group's profit before income tax differs from the theoretical amount that would arise using the tax rate of 25% for the year (2017: 25%), being the tax rate of the major subsidiaries of the Group before enjoying preferential tax treatments, as follows: 15,744 14,482 590 Notes to the Consolidated Financial Statements For the year ended 31 December 2018 11 TAXATION (Cont'd) (a) Income tax expense (Cont'd) The income tax expense of the Group is analysed as follows: Current income tax 21,848 Deferred income tax (Note 27) 2017 RMB'Million RMB'Million 15,091 15,154 (609) 2018 Value-added tax ("VAT") Tax calculated at a tax rate of 25% subsidiaries of the Group The operations of the Group are also mainly subject to the following taxes in the PRC: (b) Value-added tax and other taxes 11 TAXATION (Cont'd) For the year ended 31 December 2018 Notes to the Consolidated Financial Statements Tencent Holdings Limited 200 15,744 14,482 Income tax expense (163) (266) Others 1,004 2,378 Unrecognised deferred income tax assets 3,150 (14,668) (10,442) Effects of tax holiday on assessable profit of certain subsidiaries (958) (715) Income not subject to tax Effects of different tax rates applicable to different (43) Expenses not deductible for tax purposes 1,434 1,087 Withholding tax on earnings expected to be remitted by subsidiaries (Note 27) 3,360 (25) 6,253 Welfare, medical and other expenses (Note) 3,355 Salaries and Allowances Share-based Contributions During the year ended 31 December 2018: The remuneration of every director and the CEO is set out below: (a) Directors' and the chief executive's emoluments 14 BENEFITS AND INTERESTS OF DIRECTORS For the year ended 31 December 2018 Notes to the Consolidated Financial Statements 205 Annual Report 2018 1 1 2 | |-- | 21 | | 1 39 1,373,669 1,142,171 Notes to the Consolidated Financial Statements For the year ended 31 December 2018 13 EMPLOYEE BENEFITS EXPENSES (Cont'd) to pension compensation (b) Five highest paid individuals (Cont'd) Emolument bands HKD196,500,001 ~ HKD197,000,000 HKD228,500,001 ~ HKD229,000,000 HKD430,000,001 ~ HKD430,500,000 HKD477,500,001 ~ HKD478,000,000 HKD545,500,001 ~ HKD546,000,000 HKD628,000,001 ~ HKD628,500,000 Number of individuals 2018 2017 The emoluments of the above four individuals (2017: four) fell within the following bands: 84 and benefits Fees 4,262 964 lan Charles Stone 4,856 -- 3,892 964 lain Ferguson Bruce 313,473 125 283,899 28,214 1,235 Lau Chi Ping Martin 38,842 20 118 37,469 bonuses plans expenses in kind Total RMB'000 Name of director RMB'000 RMB'000 RMB'000 RMB'000 (Note (i)) Ma Huateng (CEO) 1,235 RMB'000 805,807 968,642 10,909 891 874 285,322 329,721 2017 RMB'000 2018 RMB'000 Share-based compensation expenses Contributions to pension plans Salaries, bonuses, allowances and benefits in kind Senior management includes directors, chief executive officer ("CEO"), president and other senior executives. The aggregate compensation paid/payable to senior management for employee services excluding the directors and the CEO, whose details have been reflected in Note 14(a), is as follows: 5.2 11.5% 0.5-1.5% 10.0 12.0% 12.0 - 20.0% Percentage (a) Senior management's emoluments Housing fund Unemployment insurance Medical insurance 2,400 Training expenses 109 85 42,153 34,866 1,555,671 202 Notes to the Consolidated Financial Statements 13 EMPLOYEE BENEFITS EXPENSES (Cont'd) Note: For the year ended 31 December 2018 Majority of the Group's contributions to pension plans are related to the local employees in the PRC. All local employees of the subsidiaries in the PRC participate in employee social security plans established in the PRC, which cover pension, medical and other welfare benefits. The plans are organised and administered by the governmental authorities. Except for the contributions made to these social security plans, the Group has no other material commitments owing to the employees. According to the relevant regulations, the portion of premium and welfare benefit contributions that should be borne by the companies within the Group as required by the above social security plans are principally determined based on percentages of the basic salaries of employees, subject to certain ceilings imposed. These contributions are paid to the respective labour and social welfare authorities and are expensed as incurred. The applicable percentages used to provide for these social security plans for the years ended 31 December 2018 and 2017 are listed below: Pension insurance Tencent Holdings Limited 1,174,316 1,886,266 1,460,529 2 2017 125 22 (b) Five highest paid individuals The five individuals whose emoluments were the highest in the Group include one director during the year 2018 (2017: one). All of these individuals including that one director (Note 14(a)) have not received any emolument from the Group as an inducement to join the Group during the years ended 31 December 2018 and 2017. The emoluments paid/payable to the remaining four (2017: four) individuals during the year were as follows: Salaries and bonuses 4 Contributions to pension plans 204 Tencent Holdings Limited 2018 RMB'000 2017 RMB'000 393,071 325,416 11,872 Share-based compensation expenses Allowances and benefits in kind Li Dong Sheng 4 1 Annual Report 2018 203 Notes to the Consolidated Financial Statements For the year ended 31 December 2018 13 EMPLOYEE BENEFITS EXPENSES (Cont'd) (a) Senior management's emoluments (Cont'd) The emoluments of the senior management fell within the following bands: 1 Emolument bands HKD40,000,001 ~ HKD65,000,000 HKD65,000,001 ~ HKD115,000,000 HKD115,000,001 ~ HKD165,000,000 HKD215,000,001 ~ HKD815,000,000 Number of individuals 2018 HKD800,000 - HKD15,000,000 (Note (i)) 76,236 1,176 Additions 457 18,716 255 3 383 19,814 Disposals 9 (25) (2) (30) Depreciation (650) (7,322) (172) 33 (249) (1) (8,396) 3 3 38 Net book amount 7,831 14,141 493 17 1,115 23,597 1 Year ended 31 December 2018 7,831 14,141 493 17 1,115 23,597 Business combinations 2 Opening net book amount 48 Currency translation differences 69 (26) (1,241) (23,049) Currency translation differences (1) 43 13 80 (808) 135 7,635 25,581 18 1,282 35,091 Annual Report 2018 209 Ma Huateng (CEO) Net book amount (1) (19,297) Accumulated depreciation and impairment (3) 32 97 Closing net book amount 7,635 25,581 575 18 (1,677) 1,282 At 31 December 2018 Cost 9,313 44,835 1,370 44 2,443 58,005 35,091 16 575 Currency translation differences Yang Siu Shun 627 1,406 2,033 5,362 105 215,374 65 297,142 Note: (i) Allowances and benefits in kind include leave pay, insurance premium and club membership. (ii) During the year ended 31 December 2018, 3,215,800 options were granted to one executive director of the Company (2017: 5,250,000 options were granted to one executive director of the Company), and 39,500 awarded shares were granted to four independent non-executive directors of the Company (2017: 60,000 awarded shares were granted to four independent non-executive directors of the Company). (iii) No director received any emolument from the Group as an inducement to join or leave the Group or compensation for loss of office. No director waived or has agreed to waive any emoluments during the years ended 31 December 2018 and 2017. Annual Report 2018 207 Notes to the Consolidated Financial Statements For the year ended 31 December 2018 Charles St Leger Searle Jacobus Petrus (Koos) Bekker 2,532 1,905 (26) 44,656 105 45,937 1,176 31,580 204,441 237,262 14 BENEFITS AND INTERESTS OF DIRECTORS (Cont'd) lain Ferguson Bruce 3,811 4,731 lan Charles Stone 836 3,811 4,647 Li Dong Sheng 627 920 (b) Directors' termination benefits Lau Chi Ping Martin (c) Consideration provided to third parties for making available directors' services RMB'Million Motor Leasehold vehicles improvements RMB'Million RMB'Million Total RMB'Million At 1 January 2018 Cost 8,852 28,504 equipment 1,136 2,090 40,623 Accumulated depreciation and impairment (1,021) (14,337) (24) No director's termination benefit subsisted at the end of the year or at any time during the year. (1,023) 41 equipment RMB'Million (659) Buildings No consideration provided to or receivable by third parties for making available directors' services subsisted at the end of the year or at any time during the year. (d) Information about loans, quasi-loans and other dealings in favour of directors, their controlled bodies corporate and connected entities RMB'Million No loans, quasi-loans and other dealings in favour of directors, their controlled bodies corporate and connected entities subsisted at the end of the year or at any time during the year. (e) Directors' material interests in transactions, arrangements or contracts No significant transactions, arrangements and contracts in relation to the Group's business to which the Company was a party and in which a director of the Company had a material interest, whether directly or indirectly, subsisted at the end of the year or at any time during the year. 15 DIVIDENDS The dividends amounting to RMB6,776 million (2017: RMB5,052 million) were paid during the year ended 31 December 2018. A special dividend of approximately HKD250 million (equivalent to approximately RMB219 million) was declared in December 2018 to the shareholders of the Company by way of a distribution in respect of the separate listing of a non- wholly owned subsidiary on the New York Stock Exchange. Such dividend was subsequently paid by the Group in February 2019. (17,064) 208 A final dividend in respect of the year ended 31 December 2018 of HKD1.00 per share (2017: HKD0.88 per share) was proposed pursuant to a resolution passed by the Board on 21 March 2019 and subject to the approval of the shareholders at the annual general meeting of the Company to be held on 15 May 2019 or any adjournment thereof. This proposed dividend is not reflected as dividend payable in the consolidated financial statements. Furniture and office 16 PROPERTY, PLANT AND EQUIPMENT Computer Tencent Holdings Limited For the year ended 31 December 2018 Notes to the Consolidated Financial Statements Notes to the Consolidated Financial Statements During the year ended 31 December 2018, amortisation of RMB24,698 million (2017: RMB17,837 million) and RMB918 million (2017: RMB785 million) were charged to cost of revenues and general and administrative expenses, respectively. During the year ended 31 December 2018, impairment losses of RMB1,181 million (2017: RMB239 million) on goodwill and other intangible assets were charged to the consolidated income statement under "Other gains/(losses), net", resulting from revisions of financial/business outlook and changes in the market environment of the underlying business. Impairment tests for goodwill Goodwill was allocated to VAS segment with RMB25,672 million (31 December 2017: RMB23,608 million) and Others segment with RMB6,933 million (31 December 2017: Nil). The Group carries out its impairment testing on goodwill by comparing the recoverable amounts of CGUS or groups of CGUS to their carrying amounts. For the purpose of goodwill impairment review, the recoverable amount of a CGU (group of CGUS) is the higher of its value in use and fair value less costs of disposal. The key assumptions used for the calculation of the recoverable amounts of the CGUs under impairment testing were as follows: For goodwill attributable to the Group's online music business, online literature business and television series and film production business, value in use was determined using discounted cash flows calculations which derived from the five- year financial projections plus a terminal value related to cash flows beyond the projection period extrapolated using an estimated terminal growth rate of not more than 5% (2017: not more than 5%). Management leveraged their experiences in the industries and provided forecast based on past performance and their anticipation of future business and market developments. Pre-tax discount rates ranging from 15% to 25% (2017: 20% to 25%) were applied in the discounted cash flows calculations, which reflected assessments of time value and the specific risks relating to the respective industries. For goodwill attributable to the Group's online game business, fair value less costs of disposal was determined based on ratios of EV (enterprise value) divided by EBITDA (earnings before interest, tax, depreciation and amortization) of several comparable public companies (ranging with 11-21x) (2017: ranging with 16-23x) multiplied by the EBITDA of the related CGU (group of CGUs) and discounted for the lack of marketability at a range of 10% to 20% (2017: 10% to 20%). The comparable public companies were chosen based on factors such as industry similarity, company size, profitability and financial risks. When determining the recoverable amounts, management has not identified reasonably possible change in key assumptions that could cause the CGU's (group of CGUS') carrying amount to exceed the recoverable amount. As at 31 December 19 INTANGIBLE ASSETS (Cont'd) 20 INVESTMENTS IN ASSOCIATES Investments in associates - Listed entities - Unlisted entities For the year ended 31 December 2018 214 Tencent Holdings Limited 40,266 Notes to the Consolidated Financial Statements (1,277) (747) (27,427) 2018 Currency translation differences 29 16 (18) For the year ended 31 December 2018 8 4 Net book amount 23,608 1,334 11,570 327 1,923 Annual Report 2018 213 (25) 1,504 19,122 2017 9,892 Share of profit of associates (Note 10) 1,301 730 Share of other comprehensive income of associates 24 907 1,661 Share of other changes in net assets of associates Impairment provision (Note (c)) (14,069) (1,277) Dividends (21,961) Disposals Currency translation differences 2,861 Deemed disposal gains (Note 7(c)) 20,825 71,593 RMB'Million 130,633 60,935 88,582 52,844 219,215 113,779 2018 2017 RMB'Million RMB'Million At beginning of the year Additions (Note (a)) 113,779 70,042 40,918 Transfers (Note (b)) RMB'Million (1,441) (19) (564) 7,776 242 2,352 36,467 Business combinations 998 45 1,635 38 Additions 320 170 21,017 207 172 21,886 1,081 1,535 22,927 Opening net book amount Currency translation differences At end of the year 209 10 20 17 3 260 Net book amount 22,927 1,535 1,635 7,776 242 2,352 36,467 Year ended 31 December 2017 Disposals (1,437) (13) (51) 1,504 1,334 11,570 327 1,923 40,266 At 31 December 2017 23,608 Cost 2,947 2,759 33,549 1,066 3,225 67,689 Accumulated amortisation and impairment 24,143 Closing net book amount (256) (26) Amortisation (332) (448) (17,221) (124) (497) (18,622) Impairment provision (124) (115) (239) Currency translation differences (180) (16) (4) (35) 5 (12) (908) Non-listed entities (725) 84,022 505 845 45 128,028 75,184 25,659 43,064 225 118,248 109,681 730 907 1,637 Management has assessed the level of influence that the Group exercises on certain associates with the respective shareholding below 20% and associates with shareholding over 50%, with total carrying amounts of RMB149,175 million and RMB24,948 million as at 31 December 2018, respectively (31 December 2017: RMB56,768 million and RMB18,836 million, respectively). Management determined that it has significant influence thereon through the board representation or other arrangements made, and it has no control or joint control over such investees as the Group has no power to direct relevant activities due to other arrangements made. Consequently, these investments have been classified as associates. 218 232,027 103,999 287 156,968 (18,004) 225,799 137,217 47,081 4,638 (1) 4,637 436,110 216,895 173,108 1,301 24 1,325 2017 Listed entities Non-listed entities 1,350 Tencent Holdings Limited Notes to the Consolidated Financial Statements For the year ended 31 December 2018 20 INVESTMENTS IN ASSOCIATES (Cont'd) Non-current liabilities 2,327 Total equity 86,510 Reconciliation to carrying amounts: Net assets 86,510 Group's share in % 19.06% Group's share in RMB 16,489 Goodwill and others Carrying amount 33,756 50,245 Annual Report 2018 219 31,825 187,339 Current liabilities Non-current assets Particulars of a material associate of the Group, as determined by the directors, are set out below: Name of entity Meituan Dianping Place of incorporation PRC Interest held indirectly Principal activities/place of operation 19.06% eCommerce platform for services/the PRC Except Meituan Dianping, the directors of the Company considered that there is no other individual investment which was determined as a material associate. Set out below are the summarised financial information of Meituan Dianping extracted from its financial statements prepared under IFRS. Summarised consolidated balance sheet As at 31 December 2018 RMB'Million Current assets 73,150 47,512 (312) (3,312) (3,337) an additional investment in a media and entertainment company in the PRC of approximately RMB3,998 million. As at 31 December 2018, the Group's equity interests in this investee company are approximately 43% on an outstanding basis; an new investment in an online game company in the PRC of approximately RMB2,985 million to subscribe for approximately 12% of its equity interests on an outstanding basis; subscription of certain additional shares of a leading eCommerce platform for services in the PRC upon its IPO of approximately RMB2,757 million. Immediately before its IPO, the Group's investment in this investee company of approximately RMB48,173 million was classified as FVPL (Note 20(b)), and subsequently transferred to investment in an associate due to the conversion of preferred shares held by the Group to ordinary shares with board representation upon its IPO. As at 31 December 2018, the Group's equity interests in this investee company are approximately 19% on an outstanding basis; an investment in an investment bank in the PRC of approximately RMB2,316 million to subscribe for approximately 5% of its equity interests on an outstanding basis; and new investments in other associates and additional investments in existing associates, with an aggregate amount of approximately RMB16,606 million. These associates are principally engaged in online games, smart retails, technology and other Internet-related business. 216 Tencent Holdings Limited Notes to the Consolidated Financial Statements an additional investment in a media and entertainment company in the PRC of approximately RMB4,800 million which was previously recognised as FVPL. Subsequently, such investment of approximately RMB3,461 million was transferred to investment in a subsidiary through an acquisition made by a non-wholly owned subsidiary (Note 40(a)); For the year ended 31 December 2018 Note: (Cont'd) (b) (c) (d) During the year ended 31 December 2018, transfers comprised of associates achieved in stages of an aggregate amount of approximately RMB75,931 million, and associates transferred to financial instruments or subsidiaries of an aggregate amount of approximately RMB4,338 million. In addition to the transfer described in Note 20(a) (v) and Note 23(a) (iii), the transfers in relation to associates achieved in stages mainly include: (i) (ii) 20 INVESTMENTS IN ASSOCIATES (Cont'd) (vii) (vi) (v) (253) 2,780 (5,897) 219,215 113,779 Annual Report 2018 215 Notes to the Consolidated Financial Statements For the year ended 31 December 2018 20 INVESTMENTS IN ASSOCIATES (Cont'd) Note: (a) During the year ended 31 December 2018, the Group's additions to investments in associates mainly comprised the following: (i) an additional investment in an eCommerce company in the PRC of approximately RMB7,456 million. As at 31 December 2018, the Group's equity interests in this investee company are approximately 17% on an outstanding basis; (ii) (iii) (iv) (iii) (iv) an acquisition of approximately 4% in a commercial property company in the PRC at a consideration of approximately RMB10,266 million was carried out in certain tranches and completed in September 2018. The board representation was effective upon the completion of final tranche and the investment was transferred from FVPL accordingly; an investment in an Indian eCommerce company of approximately RMB5,386 million was transferred from FVPL, due to certain contractual rights attached to this investment having been changed; Liabilities Revenues operation income income/(loss) 31 December RMB'Million RMB'Million RMB'Million RMB'Million RMB'Million RMB'Million RMB'Million 2018 Listed entities 210,311 79,678 126,027 Assets 25 listed associates as at prehensive the Group transferred several investments from FVPL to investments in associates at an aggregate amount of approximately RMB5,426 million upon the conversion of the redeemable instruments or preferred shares into ordinary shares upon their IPOs, mainly comprising investee companies that are principally engaged in automotive industry; and the Group also transferred several other investments from FVPL to investments in associates at an aggregate amount of approximately RMB2,009 million as a result of obtaining board representation. Both external and internal sources of information of associates are considered in assessing whether there is any indication that the investment may be impaired, including but not limited to financial position, business performance and market capitalisation. The Group carries out impairment assessment on those investments with impairment indications, and the respective recoverable amounts of investments are determined with reference to the higher of fair value less costs of disposal and value in use. In respect of the recoverable amount using value in use, the discounted cash flows calculations were based on cash flow projections estimated by management and the key assumptions adopted in these cash flow projections include revenue growth rate, profit margins and discount rate. The pre-tax discount rates adopted range from 15% to 20%. In respect of the recoverable amount based on fair value less costs of disposal, except for those listed associates using their respective market prices, the fair value less costs of disposal was calculated using certain key valuation assumptions including the selection of comparable companies, recent market transactions and liquidity discount for lack of marketability. As a result, the Group made an aggregate impairment provision of RMB14,069 million (2017: RMB1,277 million) against the carrying amounts of certain investments in associates during the year ended 31 December 2018, which includes impairment loss of approximately RMB15,684 million recognised and approximately RMB1,615 million reversed. The impairment losses mainly resulted from revisions of financial/business outlook of the associates and changes in the market environment of the underlying business. The associates of the Group have been accounted for by using equity method based on the financial information of the associates prepared under the accounting policies generally consistent with the Group. Annual Report 2018 217 Notes to the Consolidated Financial Statements For the year ended 31 December 2018 20 INVESTMENTS IN ASSOCIATES (Cont'd) The Group's share of the results, the revenues, the aggregated assets (including goodwill) and liabilities of its associates, as well as the fair value of our stakes in the associates which are listed entities, are shown in aggregate as follows: Fair value of stakes in Profit/ (loss) from Other com- Total com- continuing prehensive (796) Notes to the Consolidated Financial Statements (13,121) 7,831 14,141 493 17 (630) 23,597 During the year ended 31 December 2018, depreciation of RMB7,030 million (2017: RMB3,892 million), RMB153 million (2017: RMB134 million) and RMB1,213 million (2017: RMB824 million) were charged to cost of revenues, selling and marketing expenses and general and administrative expenses, respectively. Net book amount 210 17 CONSTRUCTION IN PROGRESS Notes to the Consolidated Financial Statements For the year ended 31 December 2018 Opening net book amount Additions Transfer to property, plant and equipment Transfer to investment properties Tencent Holdings Limited 38 48 16 23,597 At 31 December 2017 Cost 8,852 28,504 1,136 41 2,090 40,623 Accumulated depreciation and impairment Currency translation differences (1,021) (14,337) (659) (24) (1,023) (17,064) (26) Currency translation differences 1,115 Closing net book amount 2017 RMB'Million 5,111 5,174 2,348 46 (353) (109) RMB'Million 7,106 The land use rights represent prepaid operating lease payments in respect of land in the PRC with remaining lease period of 37 to 50 years. Annual Report 2018 211 Notes to the Consolidated Financial Statements For the year ended 31 December 2018 19 INTANGIBLE ASSETS Computer Licensed 5,111 2017 2018 Closing net book amount RMB'Million RMB'Million 3,163 4,674 2,809 3,204 (1,094) (4,682) (31) 1 4,879 3,163 As at 31 December 2018, construction in progress mainly comprised office buildings and data centres under construction located in the PRC. 18 LAND USE RIGHTS Opening net book amount Additions Amortisation 2018 software and 17 14,141 27,595 Accumulated depreciation and impairment (807) (11,610) (544) (18) (807) 1,787 (13,786) 4 19 68 91 Net book amount 3,694 8,768 Currency translation differences 31 902 20,374 Notes to the Consolidated Financial Statements For the year ended 31 December 2018 16 PROPERTY, PLANT AND EQUIPMENT (Cont'd) Furniture Computer and office Motor Leasehold Buildings equipment RMB'Million equipment RMB'Million RMB'Million vehicles improvements Total RMB'Million RMB'Million RMB'Million At 1 January 2017 Cost 4,501 377 493 13 1,048 (32) (47) Depreciation (228) (4,243) (138) 61 Disposals (235) Currency translation differences (30) (3) (20) (53) Closing net book amount 7,831 (4,850) 14,643 323 10 13,900 Year ended 31 December 2017 Opening net book amount 3,694 8,768 377 13 1,048 13,900 Business combinations 2 2 4 Additions 4,372 9,678 260 13 Game 1,115 Goodwill RMB'Million 96,723 Accumulated amortisation and impairment (1,348) (2,060) (459) (33,706) (883) 4,971 (1,919) Currency translation differences 223 8 17 56 10 (12) (40,375) 1,370 51,254 1,496 14 74 2 13 298 Closing net book amount 32,605 1,850 1,054 17,604 497 3,040 56,650 At 31 December 2018 Cost 33,730 3,902 302 194 Net book amount 1,850 Others Total RMB'Million At 1 January 2017 Cost 23,157 2,643 Copyrights RMB'Million RMB'Million 3,515 869 3,147 54,211 Accumulated amortisation and impairment (439) (1,118) (1,900) 20,880 RMB'Million RMB'Million RMB'Million RMB'Million contents 1,054 17,604 497 3,040 56,650 212 Tencent Holdings Limited 19 INTANGIBLE ASSETS (Cont'd) For the year ended 31 December 2018 Computer Licensed online Game online Goodwill technology licences 32,605 Currency translation differences software and (209) (747) (1,277) (27,427) Currency translation differences 29 (6) 16 (21,961) (18) (25) 4 Net book amount 23,608 1,504 1,334 11,570 8 (1,441) (1,437) (564) (1,181) technology licences RMB'Million RMB'Million contents Copyrights RMB'Million RMB'Million RMB'Million Others Total RMB'Million At 1 January 2018 Cost 24,143 2,947 2,759 1,066 3,225 67,689 Accumulated amortisation and impairment 327 1,923 33,549 Year ended 31 December 2018 Disposals (44) (1,156) (21) (29) (1,250) Amortisation (457) (402) (155) (490) (25,616) Impairment provision (784) (187) 40,266 (1) 32,232 392 (24,112) 30,808 Opening net book amount 23,608 345 1,504 1,334 11,570 1,923 40,266 Business combinations 327 454 420 165 1,440 11,901 522 9,587 Additions For the year ended 31 December 2018 2,154 279,168 203,572 Annual Report 2018 221 Notes to the Consolidated Financial Statements 23 FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS 4,506 The Group's exposure to various risks associated with the financial instruments is discussed in Note 3. The maximum exposure to credit risk at the end of the reporting period is the carrying amount of each class of financial assets mentioned above. Other financial liabilities 3,862 16,841 and others, staff costs and welfare accruals) (Note 39) Other payables and accruals (excluding prepayments received from customers 50,085 73,735 Accounts payable (Note 38) 4,797 Long-term payables (Note 36) 34,115 65,018 FVPL include the following: 97,790 15,566 Included in non-current assets: Investments in unlisted entities - Japan 114,271 222 Tencent Holdings Limited Treasury investments and others Included in current assets: 91,702 4,345 Others 78,234 9,123 234 398 Investments in listed entities 537 1,442 2,613 3,360 RMB'Million As at 31 December 2018 - South Korea – Hong Kong - Mainland China - Sweden - United States - United Kingdom 539 Notes payable (Note 35) For the year ended 31 December 2018 Financial liabilities at amortised cost: RMB'Million RMB'Million 2017 2018 As at 31 December Financial assets at amortised cost: Financial assets As at 31 December 2018, the financial instruments of the Group is analysed as follows: 22 FINANCIAL INSTRUMENTS BY CATEGORY Notes to the Consolidated Financial Statements Tencent Holdings Limited Deposits and other receivables (Note 25) 220 Share of profit amounting to RMB186 million was recognised during the year ended 31 December 2018 (2017: RMB91 million) (Note 10). As at 31 December 2018, the Group's investments in joint ventures of RMB8,575 million (31 December 2017: RMB7,826 million) mainly comprised a special purpose vehicle of which we have a majority stake therein for the investment in one of the telecommunication carriers in the PRC and other joint venture initiatives in new retail and entertainment-related businesses. 21 INVESTMENTS IN JOINT VENTURES During the year ended 31 December 2018, the Group had undertaken transactions relating to provision of FinTech services, online traffic, online advertising and other online services to certain associates (including Meituan Dianping), under but not limited to certain co-operation arrangements. The revenues recorded by the Group from the aforesaid co- operation arrangements during the years ended 31 December 2018 and 2017 were considered to be insignificant. Transactions with associates There were no material contingent liabilities relating to the Group's interests in the associates. As at 31 December 2018, the fair value of the investment in Meituan Dianping which is a listed entity was RMB40,261 million. 20 INVESTMENTS IN ASSOCIATES (Cont'd) For the year ended 31 December 2018 Notes to the Consolidated Financial Statements 6,175 During the year ended 31 December 2018, the Group made an aggregate impairment provision of RMB2,328 million (2017: Nil) against the carrying amounts of the investments in joint ventures, based on the respective assessed recoverable amount. Borrowings (Note 34) 10,757 Term deposits (Note 28) Financial liabilities 331,245 345,934 127,218 5,624 2,032 AFS OFA (Note 26) 43,519 FVOCI (Note 24) 97,877 9,486 FVPL (Note 23) RCPS 2,590 Restricted cash (Note 30(b)) 105,697 97,814 Cash and cash equivalents (Note 30(a)) 16,549 28,427 Accounts receivable (Note 29) 42,089 62,918 22,976 97,877 1,606 For the year ended 31 December 2018 226 During the year ended 31 December 2018, the Group partially disposed of certain listed investments, with total gains of approximately RMB9,561 million on disposals of FVOCI transferred from other reserves to retained earnings. certain new investments and additional investments with an aggregate amount of approximately RMB2,162 million, most of which are principally engaged in technology services and operate in the PRC. an additional investment in a media and entertainment company in the PRC of approximately RMB2, 191 million, to acquire approximately 7% of its equity interests on an outstanding basis; and an additional investment in a media and entertainment company listed on the New York Stock Exchange of approximately RMB2,508 million, to further acquire certain equity interests; Notes to the Consolidated Financial Statements an additional investment in an Internet-related company in the United States of approximately RMB3,712 million to further acquire approximately 3% of its equity interests on an outstanding basis; (vi) (v) (iv) Tencent Holdings Limited (iii) (b) (i) a new investment in a retail company in the PRC of approximately RMB4,216 million to acquire approximately 5% of its equity interests on an outstanding basis; During the year ended 31 December 2018, the Group's additions to FVOCI mainly comprised the following: (a) Note: 24 FINANCIAL ASSETS AT FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME (Cont'd) For the year ended 31 December 2018 Notes to the Consolidated Financial Statements 43,519 (ii) 2,516 Notes to the Consolidated Financial Statements 25 PREPAYMENTS, DEPOSITS AND OTHER ASSETS 1,901 3,297 34 619 149 99 2,058 3,864 7,031 13,652 For the year ended 31 December 2018 RMB'Million 2017 2018 As at 31 December Included in current assets: Others Prepayments for capital investments in investees Running royalty fees for online games (Note (b)) Loans to investees and investees' shareholders (Note (a)) Prepayments for media contents and game licences Included in non-current assets: RMB'Million 21,531 (22,200) 3,577 United States Equity investments in listed entities FVOCI include the following: 24 FINANCIAL ASSETS AT FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME For the year ended 31 December 2018 Notes to the Consolidated Financial Statements Tencent Holdings Limited 224 Management has assessed the level of influence that the Group exercises on certain FVPL with shareholding exceeding 20%. Since these investments are either held in form of redeemable instruments or interests in limited life partnership without significant influence, these investments have been classified as FVPL. During the year ended 31 December 2018, the Group made a large number of individual investments recognised as FVPL, but none of them was significant enough to trigger the disclosure requirements pursuant to Chapter 14 of the Listing Rules at the time when the Group made such investments. - Mainland China During the year ended 31 December 2018, the Group disposed of certain investments with an aggregate amount of RMB14,805 million, which are mainly engaged in the provision of Internet-related services. the Group designated certain investments with an aggregate amount of approximately RMB3,577 million as FVOCI upon their IPOs, and these investments were previously recorded as FVPL due to the form of redeemable instruments or preferred shares; and (ii) (i) During the year ended 31 December 2018, in addition to the transfers of FVPL to investments in associates with an aggregate amount of approximately RMB75,931 million described in Note 20(b) above, the transfers mainly include: new investments and additional investments with an aggregate amounts of approximately RMB36,263 million in listed and unlisted entities mainly operated in the United States, the PRC and other Asian countries. These companies are principally engaged in online games, entertainment, technology and other Internet-related business. an additional investment in a media and entertainment company of approximately RMB2,536 million. As at 31 December 2018, the Group's equity interests in this investee company are approximately 14% on an outstanding basis; and an additional investment in an Asian online game company of approximately RMB2,799 million. Subsequent to the additional investment, the Group obtained the board representation and the investment was transferred to investment in an associate accordingly; (vii) (vi) (e) the Group also transferred certain investments with an aggregate amount of approximately RMB692 million from investments in associates to FVPL as a result of changes in nature of these investments. (16,578) - France Movement of FVOCI is analysed as follows: 58,515 17,689 RMB'Million 2018 43,519 1,941 41,578 3,093 5,365 33,120 RMB'Million Others 2018 Annual Report 2018 As at 31 December At end of the year Currency translation differences Disposals (Note (b)) Changes in fair value Transfers (Note 23(b)) Additions (Note (a)) Adjustment on adoption of IFRS 9 (Note 2.2(a)) At beginning of the year 225 (d) 11,173 7,532 RMB'Million 2017 2018 (5,975) (10,964) (392) (1,130) (5,583) (9,834) 9,793 RMB'Million 15,755 8,539 4,510 7,216 RMB'Million RMB'Million 2017 2018 As at 31 December The movements of the deferred income tax assets/liabilities account were as follows: - to be recovered within 12 months 5,283 - to be recovered after more than 12 months At beginning of the year 1,880 229 Annual Report 2018 3,818 4,791 (66) (109) (986) (21) (501) At end of the year 3,818 Currency translation differences Business combinations 164 187 Credited to consolidated statement of changes in equity 2,451 1,773 Withholding tax paid (590) 609 Credited/(charged) to consolidated income statement (Note 11) Other additions Prepayments and prepaid expenses Deferred income tax liabilities: - to be recovered after more than 12 months 2,089 1,863 Others 222 338 Dividend and other investment-related receivables 220 693 Rental deposits and other deposits 521 18,493 225 579 915 Refundable value-added tax 2,703 1,697 Interest receivables 4,095 5,230 Running royalty fees for online games (Note (b)) 6,681 Loans to investees and investees' shareholders (Note (a)) - to be recovered within 12 months 17,110 28,283 Deferred income tax assets: There was no offsetting of deferred income tax assets and liabilities in 2018 and 2017. Deferred income taxes are calculated in full on temporary differences under the liability method using the tax rates which are expected to apply at the time of reversal of the temporary differences. 27 DEFERRED INCOME TAXES For the year ended 31 December 2018 Notes to the Consolidated Financial Statements 228 Tencent Holdings Limited As at 31 December 2018, the Group's current other financial assets mainly comprised call option rights held by the Group to acquire additional equity interests in an investee company of the Group, amounting to RMB312 million (31 December 2017: RMB465 million). Included in current assets: As at 31 December 2018, the Group's non-current other financial assets comprised interest rate swap contracts of RMB1,693 million for interest rate hedging purpose, which swap the floating interest rates into fixed interest rates. The aggregate notional principal amounts of the Group's outstanding interest rate swap contracts were USD11,311 million (equivalent to approximately RMB77,630 million) (31 December 2017: USD10,741 million (equivalent to approximately RMB70,184 million)). These interest rate swap contracts were qualified for hedge accounting. (31 December 2017: the Group's non-current other financial assets also included the embedded derivatives bifurcated from their host contracts which mainly comprised the conversion options bifurcated from their corresponding host components that were classified as AFS and investments in redeemable instruments of associates of RMB3,818 million.) 40,024 Included in non-current assets: 26 OTHER FINANCIAL ASSETS For the year ended 31 December 2018 Notes to the Consolidated Financial Statements Annual Report 2018 227 As at 31 December 2018, the carrying amounts of deposits and other assets (excludes prepayments and refundable value-added tax), were approximate to their fair values. Deposits and other assets were neither past due nor impaired. Running royalty fees for online games comprises of prepaid royalty fees, unamortised running royalty fees and deferred Online Service Fees. As at 31 December 2018, the balances of loans to investees and investees' shareholders are mainly repayable within a period of one to five years (included in non-current assets), or within one year (included in current assets), and are interest-bearing at rates of not higher than 12.0% per annum (31 December 2017: not higher than 8.0% per annum). (b) (a) Note: Other financial assets were measured at their fair values. (c) a new investment in an online game company in France of approximately RMB2,900 million, to acquire approximately 5% of its equity interests on an outstanding basis; Notes to the Consolidated Financial Statements During the year ended 31 December 2018, the Group's additions to FVPL mainly comprised the following: (i) an investment in a commercial property company in the PRC which was carried out in certain tranches and completed in September 2018 as detailed in Note 20(b) (i); (ii) an additional investment in a real estate 020 platform of approximately RMB3,478 million. As at 31 December 2018, the Group's equity interests in this investee company are approximately 7% on an outstanding basis; (iii) (iv) (a) an investment in a media and entertainment company of approximately RMB2,922 million to subscribe for approximately 35% of its equity interests in form of preferred shares, on an outstanding basis. Immediately before its IPO, the Group's investment in this investee company of approximately RMB4,671 million was classified as FVPL and subsequently transferred to investment in an associate due to the conversion of preferred shares held by the Group to ordinary shares upon its IPO. As at 31 December 2018, the Group's equity interests in this investee company are approximately 32% on an outstanding basis; For the year ended 31 December 2018 23 FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS (Cont'd) Note: (Cont'd) (a) (Cont'd) (v) (b) Annual Report 2018 223 97,877 additional equity interests obtained in a disposal of the equity interests in an investee company, to another investee company of the Group at a total consideration of approximately USD551 million (equivalent to approximately RMB3,481 million) comprised of cash and its equity interests. The acquirer is principally engaged in the provision of Internet-related services, and the investment in this acquirer was reclassified to investment in an associate due to the conversion of preferred shares held by the Group to ordinary shares with board representation upon its IPO as described in Note 20(a) (v) above; (14,805) 6,456 23 FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS (Cont'd) Movement of FVPL is analysed as follows: At beginning of the year Adjustment on adoption of IFRS 9 (Note 2.2(a)) Transfers (Note (b)) Changes in fair value (Note 7(a)) Disposals (Note (c)) Additions (Note (a)) At end of the year Note: 2018 RMB'Million 95,497 60,807 (78,816) Currency translation differences 28,738 62,918 30,701 6,349 4,187 36,724 1,836 62,918 55,180 1,389 5,365 Included in non-current assets: - 5,358 Other currencies USD term deposits RMB term deposits Included in current assets: Other currencies RMB term deposits RMB'Million 42,089 7 The effective interest rate for the term deposits of the Group with initial terms of over three months during the year ended 31 December 2018 was 4.08% (2017: 3.86%). Accounts receivable and their ageing analysis, based on recognition date, are as follows: 232 2017 2018 As at 31 December 2017 16,549 28,427 (880) (1,357) 17,429 29,784 RMB'Million RMB'Million 2017 2018 As at 31 December For the year ended 31 December 2018 Notes to the Consolidated Financial Statements Loss allowance Accounts receivable 29 ACCOUNTS RECEIVABLE Tencent Holdings Limited Term deposits with initial terms of over three months were neither past due nor impaired. As at 31 December 2018, the carrying amounts of the term deposits with initial terms of over three months approximated their fair values. RMB'Million 118 As at 31 December (3,150) 121 Credited/(charged) to consolidated income statement (21) (21) Business combinations (5,153) (461) (425) (269) (3,391) (607) At 1 January 2017 (10,964) (552) (1,634) (919) (1,299) (5,668) (892) At 31 December 2018 (354) 2018 (3) Withholding tax paid An analysis of the Group's term deposits by currencies are as follows: 28 TERM DEPOSITS For the year ended 31 December 2018 Notes to the Consolidated Financial Statements Annual Report 2018 231 As at 31 December 2018, the Group recognised the relevant deferred income tax liabilities of RMB5,668 million (31 December 2017: RMB4,075 million) on earnings anticipated to be remitted by certain subsidiaries in the foreseeable future. No withholding tax had been provided for the earnings of approximately RMB13,685 million (31 December 2017: RMB32,213 million) expected to be retained by the PRC subsidiaries and not to be remitted to a foreign investor in the foreseeable future based on several factors, including management's estimation of overseas funding requirements. (5,975) (464) (779) (151) (4,075) (506) At 31 December 2017 16 15 Currency translation differences 118 RMB'Million Credited to consolidated statement of changes in equity 2,451 2,451 (3,386) RMB'Million 2018 ~ 30 days At 1 January 2018 As at 31 December 2018 and 2017, the authorised share capital of the Company comprises 50,000,000,000 ordinary shares with par value of HKD0.00002 per share. 31 SHARE CAPITAL, SHARE PREMIUM AND SHARES HELD FOR SHARE AWARD SCHEMES For the year ended 31 December 2018 Notes to the Consolidated Financial Statements 234 Tencent Holdings Limited As at 31 December 2018, restricted deposits held at bank of RMB2,590 million (31 December 2017: RMB1,606 million) were mainly denominated in RMB. (b) Restricted cash Approximately RMB31,015 million (31 December 2017: RMB54,894 million) and RMB3,349 million (31 December 2017: RMB11,740 million) of the total balance of the Group's cash and cash equivalents was denominated in RMB and placed with banks in Mainland China and Hong Kong, respectively. Employee share option schemes: The effective interest rate of the term deposits of the Group with initial terms within three months during the year ended 31 December 2018 was 3.59% (2017: 2.42%). 97,814 57,419 59,118 48,278 38,696 RMB'Million RMB'Million 2017 2018 105,697 - value of employee services - shares issued (Note (a)) Number of issued and fully 5,022 - shares withheld for share award schemes (Note (b)) - value of employee services Employee share award schemes: 525 1,983 525 6,891,249 1,983 18,234 (3,970) 22,204 9,499,056,887 Total RMB'Million RMB'Million for share award schemes Share premium RMB'Million RMB'Million Share capital paid ordinary shares* Shares held As at 31 December terms within three months Term deposits and highly liquid investments with initial Bank balances and cash Online advertising customers and agencies RMB'Million RMB'Million 2017 (126) As at 31 December The carrying amounts of accounts receivable of the Group's major agents/customers are as follows: Majority of the Group's accounts receivable were denominated in RMB. 16,549 28,427 3,497 5,331 2,259 4,201 6,394 7,695 4,399 11,200 Over 90 days 61 - 90 days 31 - 60 days 11,944 0~ 8,076 FinTech and cloud customers (a) Cash and cash equivalents 30 BANK BALANCES AND CASH As at 31 December 2018, the carrying amounts of accounts receivable approximated their fair values. As of 31 December 2017, impairment provision was recognised after assessment of the financial condition and credit quality with reference to the past history. Beginning from 1 January 2018, the Group applies the simplified approach permitted by IFRS 9, which requires expected lifetime losses to be recognised from initial recognition of the assets. The provision matrix is determined based on historical observed default rates over the expected life of the receivables with similar credit risk characteristics and is adjusted for forward-looking estimates. The historical observed default rates are updated and changes in the forward-looking estimates are analysed at year end. For the year ended 31 December 2018 and 2017, loss allowance made against the gross amounts of accounts receivable were not significant, and provision matrix is not presented. Some online advertising customers and agencies are usually granted with a credit period within 90 days after full execution of the contracted advertisement orders. Third party platform providers usually settle the amounts due by them within 60 days. Other customers, mainly including content production related customers and FinTech and cloud customers, are usually granted with a credit period within 90 days. 29 ACCOUNTS RECEIVABLE (Cont'd) For the year ended 31 December 2018 Notes to the Consolidated Financial Statements Annual Report 2018 233 16,549 28,427 1,455 2,946 3,140 3,877 1,716 4,260 2,162 5,400 Others Third party platform providers Content production related customers 143 Credited/(charged) to consolidated income statement (6) Notes to the Consolidated Financial Statements 156 407 407 244 244 non-wholly owned subsidiaries (952) Transfer of equity interests of subsidiaries to For the year ended 31 December 2018 non-controlling interests Lapse of put option granted to non-controlling interests 50 Dilution of interests in subsidiaries 6,378 Profit appropriations to PRC statutory reserves Net gains from changes in fair value of AFS Transfer to profit or loss upon disposal of AFS Share of other comprehensive income of associates and joint ventures (2,045) 27 DEFERRED INCOME TAXES (Cont'd) The movements of deferred income tax assets were as follows: Deferred income tax assets on temporary differences arising from 62 9,793 2,230 5,565 96 1,902 (Note) RMB'Million Total payments and others RMB'Million RMB'Million RMB'Million RMB'Million expenses Tax losses Accrued amortisation of intangible assets Share-based Accelerated Business combinations At 1 January 2018 Currency translation differences Other fair value gains, net 16,854 (2,561) 32 OTHER RESERVES (Cont'd) Note: (a) Notes to the Consolidated Financial Statements For the year ended 31 December 2018 (b) (c) (d) (e) The capital reserve mainly arises from transactions undertaken with non-controlling interests. In accordance with the Companies Laws of the PRC and the stipulated provisions of the articles of association of subsidiaries with limited liabilities in the PRC, appropriation of net profit (after offsetting accumulated losses from prior years) should be made by these companies to their respective Statutory Surplus Reserve Funds and the Discretionary Reserve Funds before distributions are made to the owners. The percentage of appropriation to Statutory Surplus Reserve Fund is 10%. The amount to be transferred to the Discretionary Reserve Fund is determined by the equity owners of these companies. When the balance of the Statutory Surplus Reserve Fund reaches 50% of the registered capital, such transfer needs not to be made. Both the Statutory Surplus Reserve Fund and Discretionary Reserves Fund can be capitalised as capital of an enterprise, provided that the remaining Statutory Surplus Reserve Fund shall not be less than 25% of the registered capital. In addition, in accordance with the Law of the PRC on Enterprises with Foreign Investments and the stipulated provisions of the articles of association of wholly owned foreign subsidiaries in the PRC, appropriation from net profit (after offsetting accumulated losses brought forward from prior years) should be made by these companies to their respective Reserve Fund. The percentage of net profit to be appropriated to the Reserve Fund is not less than 10% of the net profit. When the balance of the Reserve Fund reaches 50% of the registered capital, such transfer needs not be made. With approvals obtained from respective boards of directors of these companies, the Reserve Fund can be used to offset accumulated deficit or to increase capital. Share-based compensation reserve arises from share option schemes and share award schemes adopted by the subsidiaries of the Group (Note 33(d)). The Group has elected to recognise changes in the fair value of certain investment in equity instruments in other comprehensive income, as explained in Note 2.16. These changes are accumulated with FVOCI reserve with equity. The Group transfers amounts from this reserve to retained earnings when the relevant equity instruments are derecognised. During the year ended 31 December 2018, the dilution of interests in subsidiaries mainly comprised the following: (i) (ii) a non-wholly owned subsidiary of the Group, Tencent Music Entertainment Group ("TME"), have undergone initial public offering by listing of certain of its new shares on the New York Stock Exchange with proceeds of approximately RMB3,520 million, and thus the Group's equity interest in TME was diluted. Given TME remains a subsidiary of the Group following the said initial public offering, this transaction was accounted for as transaction with non-controlling interest with a gain of RMB1,312 million directly recognised in equity; and an equity transaction of a non-wholly owned subsidiary described in Note 7(d), which results in the transaction with non- controlling interests of approximately RMB1,121 million. Annual Report 2018 239 35,158 62 1,798 706 907 (9,198) (952) (2,045) 50 6,378 519 519 16,854 (2,561) Balance at 31 December 2017 (2,999) 31,152 2,228 (3,464) 2,273 4,170 238 Tencent Holdings Limited 907 (9,198) 706 *། | Credited/(charged) to consolidated income statement 2,502 (4,075) (506) At 1 January 2018 Total RMB'Million Others RMB'Million RMB'Million RMB'Million RMB'Million RMB'Million RMB'Million investees tax depreciation (2017: AFS) Accelerated Deemed disposals of Change in fair value of FVPL and FVOCI earnings anticipated to be remitted by subsidiaries in business combinations tax on the Deferred income tax liabilities on temporary differences arising from Withholding Intangible assets acquired The movements of deferred income tax liabilities were as follows: (151) 27 DEFERRED INCOME TAXES (Cont'd) (779) (5,975) Currency translation differences (986) (986) Other additions 17 17 Credited to consolidated statement of changes in equity 1,773 1,773 Withholding tax paid (5,104) (74) (1,634) (139) (75) (3,360) 178 5,022 (563) (563) Business combinations (464) (104) For the year ended 31 December 2018 Tencent Holdings Limited 4,404 Note: At 31 December 2017 Currency translation differences changes in equity Credited to consolidated statement of income statement Credited/(charged) to consolidated At 1 January 2017 At 31 December 2018 17 17 170 170 Currency translation differences changes in equity Credited to consolidated statement of 5,713 703 2,513 (5) 91 Notes to the Consolidated Financial Statements 8,078 15,755 230 The Group only recognises deferred income tax assets for cumulative tax losses if it is probable that future taxable amounts will be available to utilise those tax losses. Management will continue to assess the recognition of deferred income tax assets in future reporting periods. As at 31 December 2018, the Group did not recognise deferred income tax assets of RMB1,351 million (31 December 2017: RMB1,129 million) in respect of cumulative tax losses amounting to RMB6,277 million (31 December 2017: RMB4,997 million). These tax losses will expire from 2019 to 2023. 9,793 2,230 5,565 96 1,902 (82) (82) 46 46 2,796 (275) 1,904 (93) 1,260 7,033 2,541 3,661 189 642 3,182 (2,187) (14) - shares allotted for share award schemes (Note (c)) associates and joint ventures 2,861 2,861 63 63 466 466 48 148 148 49 (877) (1,886) (406) 2,836 --517 517 517 (16,095) (16,095) 23 3,681 Currency translation differences Other fair value gains, net 11 Share of other comprehensive income of Balance at 31 December 2018 fair value of FVOCI statutory reserves Transfer of gains on disposal of FVOCI to retained earnings (Note (d)) (9,561) (9,561) Share of other changes in net assets of associates Value of employee services: - Employee share option schemes - Employee share award schemes Tax benefit from share-based payments of a subsidiary Acquisition of additional equity interests in non-wholly owned subsidiaries (877) Transfer of equity interests of subsidiaries to non-controlling interests (1,886) Recognition of the financial liabilities in respect of the put option from business combination (406) Dilution of interests in subsidiaries (Note (e)) 2,836 Profit appropriations to PRC Net losses from changes in 18,948 (3,332) 5,112 reserves Others RMB'Million RMB'Million Total RMB'Million (Note (a)) (Note (b)) (Note (c)) Balance at 1 January 2017 (6,430) 16,859 1,321 5,734 1,754 3,363 1,092 23,693 Value of employee services: - Employee share option schemes - Employee share award schemes Tax benefit from share-based payments of a subsidiary Acquisition of additional equity interests in 156 (2,187) reserves RMB'Million (10,714) RMB'Million ventures RMB'Million 217 2,790 4,847 1,809 Annual Report 2018 237 23 3,681 བྷཌ། ༄། 729 Notes to the Consolidated Financial Statements For the year ended 31 December 2018 OTHER RESERVES (Cont'd) Investments in associates Currency PRC Share-based Capital and joint translation statutory compensation reserves AFS RMB'Million RMB'Million differences 1,798 32 2,273 171 Employee share award schemes: - value of employee services - shares withheld for share award schemes (Note (b)) - shares allotted for share award schemes (Note (c)) 17,870,595 - shares vested from share award schemes and transferred to the grantees (Note (d)) Acquisition of additional equity interests in non-wholly owned subsidiaries At 31 December 2017 4,254 4,254 (2,232) (2,232) (1,398) 1,398 728 728 9,499,056,887 22,204 (3,970) 18,234 Annual Report 2018 235 Notes to the Consolidated Financial Statements For the year ended 31 December 2018 31 SHARE CAPITAL, SHARE PREMIUM AND SHARES HELD FOR SHARE AWARD SCHEMES (Cont'd) 1,125 Note: 171 1,125 17,206,955 4,170 - shares vested from share award schemes and transferred to the grantees (Note (d)) Repurchase and cancellation of shares (Note (e)) (1,984) 1,984 (2,848,000) (783) (783) Acquisition of additional equity interests in non-wholly owned subsidiaries 327 327 At 31 December 2018 9,520,307,091 27,294 (4,173) 23,121 At 1 January 2017 9,477,083,480 17,324 (3,136) 14,188 Employee share option schemes: - shares issued (Note (a)) 4,102,812 (a) - value of employee services (c) reserves Others (Note (a)) (Note (b)) RMB'Million RMB'Million (Note (c)) RMB'Million Total RMB'Million Balance at 31 December 2017, as previously reported (2,999) 31,152 2,228 reserves (3,464) 1,798 35,158 Adjustment on adoption of IFRS 9 (Note 2.2(a)) (31,152) 14,942 (16,210) Balance at 1 January 2018 (2,999) 14,942 (b) 2,228 4,170 differences RMB'Million 2,273 translation (d) (e) PRC Share-based statutory compensation As at 31 December 2018, the total number of issued ordinary shares of the Company included 63,275,620 shares (31 December 2017: 70,675,181 shares) held under the Share Award Schemes. During the year ended 31 December 2018, 6,891,249 Post-IPO options (2017: 4,102,812 Post-IPO options) with exercise prices ranging from HKD31.70 to HKD272.36 (2017: HKD26.08 to HKD174.86) were exercised. During the year ended 31 December 2018, the Share Scheme Trust withheld 6,839,643 ordinary shares (2017: 9,303,028 ordinary shares) of the Company for an amount of approximately HKD2,550 million (equivalent to approximately RMB2,187 million) (2017: HKD2,606 million (equivalent to approximately RMB2,232 million)), which had been deducted from the equity. During the year ended 31 December 2018, the Company allotted 17,206,955 ordinary shares (2017: 17,870,595 ordinary shares) to the Share Scheme Trust for the purpose of granting awarded shares to the participants under the Share Award Schemes. During the year ended 31 December 2018, the Share Scheme Trust transferred 31,446,159 ordinary shares of the Company (2017: 38,573,979 ordinary shares) to the share awardees upon vesting of the awarded shares (Note 33(b)). During the year ended 31 December 2018, the Company repurchased 2,848,000 of its own shares from the market which were subsequently cancelled. The shares were acquired at prices ranging from HKD265.20 to HKD333.40, with an average price of HKD311.38 per share. 236 Tencent Holdings Limited 32 OTHER RESERVES Notes to the Consolidated Financial Statements For the year ended 31 December 2018 (3,464) and joint ventures RMB'Million RMB'Million FVOCI AFS reserves RMB'Million Currency in associates Investments Capital RMB'Million 7 years commencing from the date of grant of options 31 December 31 December Expiry Date Range of exercise price 2018 2017 2,500,000 22,875 Number of share options HKD112.30~HKD174.86 23,504,535 25,386,768 (Post-IPO Option Scheme II and HKD37.80-HKD49.76 1,633,050 33 SHARE-BASED PAYMENTS (Cont'd) Outstanding share options HKD273.80 9,155,860 67,166,108 Exercisable as at 31 December 2017 HKD118.70 13,152,006 HKD31.70 14,402,006 Details of the expiry dates, exercise prices and the respective numbers of share options which remained outstanding as at 31 December 2018 and 2017 are as follows: During the year ended 31 December 2018, 3,215,800 options were granted to an executive director of the Company (2017: 5,250,000 options were granted to an executive director of the Company). Annual Report 2018 241 Notes to the Consolidated Financial Statements For the year ended 31 December 2018 HKD225.44~HKD272.36 (a) Share option schemes (Cont'd) (ii) As a result of the options exercised during the year ended 31 December 2018, 6,891,249 ordinary shares (2017: 4,102,812 ordinary shares) were issued by the Company (Note 31). The weighted average price of the shares at the time these options were exercised was HKD399.37 per share (equivalent to approximately RMB325.67 per share) (2017: HKD286.46 per share (equivalent to approximately RMB248.41 per share)). 1,250,000 (a) Share option schemes (Cont'd) 37,556,725 Other than the exercise price mentioned above, significant judgment on parameters, such as risk free rate, dividend yield and expected volatility, are required to be made by the directors in applying the Binomial Model, which are summarised as below. 242 Tencent Holdings Limited Notes to the Consolidated Financial Statements 33 SHARE-BASED PAYMENTS (Cont'd) (iii) Fair value of options (Cont'd) The directors of the Company have used the Binomial Model to determine the fair value of the options as at the respective grant dates, which is to be expensed over the relevant vesting period. The weighted average fair value of options granted during the year ended 31 December 2018 was HKD127.43 per share (equivalent to approximately RMB103.46 per share) (2017: HKD71.30 per share (equivalent to approximately RMB62.86 per share)). For the year ended 31 December 2018 2017 Weighted average share price at the grant date HKD405.00 HKD179.90 55,510,248 HKD31.70 Risk free rate 1.77%~2.27% 2018 Fair value of options (iii) The outstanding share options as of 31 December 2018 were divided into two to five tranches on an equal basis as at their grant dates. The first tranche can be exercised after a specified period ranging from ten months to three years from the grant date, and then the remaining tranches will become exercisable in each subsequent year. Post-IPO Option Scheme IV) HKD354.00~HKD386.60 5,191,480 HKD403.16~HKD444.20 22,581,405 89,565 87,776,244 64,666,108 10 years commencing from the date of grant of options (Post-IPO Option Scheme III) HKD31.70 87,776,244 2,500,000 67,166,108 36,475,949 At 31 December 2017 Total (63,175) No. of options Average exercise price No. of options Average exercise price exercise price No. of options options At 1 January 2018 HKD179.90 55,510,248 HKD31.70 No. of Average Post-IPO Option Scheme IV Post-IPO Option Scheme III HKD236.88 1.39%-1.68% 33 SHARE-BASED PAYMENTS (a) Share option schemes The Company has adopted five share option schemes, namely, the Pre-IPO Option Scheme, the Post-IPO Option Scheme I, the Post-IPO Option Scheme II, the Post-IPO Option Scheme III and the Post-IPO Option Scheme IV. The Pre-IPO Option Scheme, the Post-IPO Option Scheme I and the Post-IPO Option Scheme II expired on 31 December 2011, 23 March 2014 and 16 May 2017, respectively. Upon the expiry of these schemes, no further options would be granted under these schemes, but the options granted prior to such expiry continued to be valid and exercisable in accordance with provisions of the schemes. In respect of the Post-IPO Option Scheme III and the Post-IPO Option Scheme IV which continue to be in force, the Board may, at its discretion, grant options to any qualifying participants to subscribe for shares in the Company, subject to the terms and conditions stipulated therein. The exercise price must be in compliance with the requirement under the Rules Governing the Listing of Securities on the Stock Exchange. In addition, the option vesting period is determined by the Board provided that it is not later than the last day of a 10-year period for the Post-IPO Option Scheme III and a 7-year period for the Post-IPO Option Scheme IV after the date of grant of option. 240 Tencent Holdings Limited 33 SHARE-BASED PAYMENTS (Cont'd) (a) Share option schemes (Cont'd) Notes to the Consolidated Financial Statements For the year ended 31 December 2018 (i) Movements in share options Movements in the number of share options outstanding and their related weighted average exercise prices are as follows: Post-IPO Option Scheme || Granted 2,500,000 HKD273.80 HKD405.73 Exercised Lapsed/forfeited Granted HKD225.44 31,247,436 28,526,215 HKD31.70 2,500,000 33,747,436 HKD273.79 9,219,035 37,745,250 Exercised HKD49.05 (4,102,812) (4,102,812) Lapsed/forfeited HKD142.65 (160,591) HKD272.36 HKD120.95 (223,766) At 1 January 2017 HKD274.86 HKD110.85 HKD136.67 (3,966,835) (44,403) HKD31.70 (2,500,000) HKD272.36 HKD298.36 9,155,860 27,723,850 27,723,850 (424,414) (6,891,249) (178,062) (222,465) 67,166,108 At 31 December 2018 HKD185.25 51,499,010 HKD374.52 36,277,234 87,776,244 Exercisable as at 31 December 2018 HKD160.50 22,419,156 1,760,025 24,179,181 Dividend yield 9,947 30.00% 34 BORROWINGS (Cont'd) Notes to the Consolidated Financial Statements For the year ended 31 December 2018 Note: (a) The aggregate principal amounts of long-term USD bank borrowings, long-term RMB bank borrowings and long-term HKD bank borrowings were USD11,156 million (31 December 2017: USD11,691 million), RMB11,996 million (31 December 2017: RMB4,964 million) and HKD6,070 million (31 December 2017: HKD1,000 million), respectively. Applicable interest rates are at LIBOR/HIBOR + 0.70% ~ 1.51% or a fixed interest rate of 1.875% for non-RMB bank borrowings, and interest rates of 4.18% ~ 9.00% for RMB bank borrowings (31 December 2017: LIBOR/HIBOR + 0.70% ~ 1.51% or a fixed interest rate of 1.875% for non-RMB bank borrowings and interest rates of 4.18% ~ 4.275% for RMB bank borrowings) per annum. 97,790 The long-term bank borrowings were repayable as follows: Between 1 and 2 years Between 2 and 5 years More than 5 years As at 31 December 2018 2017 RMB'Million Within 1 year 114,271 15,696 26,834 HKD bank borrowings, unsecured (Note (b)) 3,368 14,293 RMB bank borrowings, unsecured (Note (b)) 628 Current portion of long-term USD bank borrowings, unsecured (Note (a)) 5,628 66 Current portion of long-term RMB bank borrowings, - unsecured (Note (a)) - secured (Note (a)) 332 30 475 246 Tencent Holdings Limited RMB'Million 6,435 96 18,640 RMB'Million Non-current portion of long-term USD notes payable Non-current portion of long-term HKD notes payable 48,501 26,697 2,797 2,666 51,298 29,363 Included in current liabilities: Current portion of long-term USD notes payable 13,720 3,919 Current portion of long-term HKD notes payable 833 13,720 RMB'Million 1,307 2017 As at 31 December For the year ended 31 December 2018 68,797 66,201 5,946 93,872 82,190 (b) The aggregate principal amounts of short-term USD bank borrowings, short-term RMB bank borrowings and short-term HKD bank borrowings were USD2,390 million (31 December 2017: USD200 million), RMB628 million (31 December 2017: Nil) and HKD3,850 million (31 December 2017: HKD17, 133 million), respectively. These short-term bank borrowings were carried at LIBOR/HIBOR + 0.50% ~0.55% or a fixed interest rate of 5.22% ~ 5.44% (31 December 2017: LIBOR/HIBOR + 0.50% ~ 0.55%) per annum. During the year ended 31 December 2018, the Group entered into certain interest rate swap contracts to hedge its exposure arising from its long-term bank borrowings carried at floating rates. The Group's outstanding interest rate swap contracts as at 31 December 2018 have been detailed in Note 26. As at 31 December 2018, the carrying amounts of borrowings approximated their fair values. Annual Report 2018 247 Notes to the Consolidated Financial Statements For the year ended 31 December 2018 35 NOTES PAYABLE Included in non-current liabilities: 2018 0.24%~0.25% 16,403 Included in current liabilities: (2,882,349) (3,227,554) (31,446,159) (38,573,979) 50,247,895 63,636,254 Vested but not transferred as at the end of the year 19,071,975 45,432 Annual Report 2018 243 Notes to the Consolidated Financial Statements For the year ended 31 December 2018 33 SHARE-BASED PAYMENTS (Cont'd) (b) Share award schemes (Cont'd) During the year ended 31 December 2018, 39,500 awarded shares were granted to four independent non- executive directors of the Company (2017: 60,000 awarded shares were granted to four independent non- executive directors of the Company). 159,893 20,940,149 86,365,812 63,636,254 0.26% 0.34% 30.00% Expected volatility (Note) Note: The expected volatility, measured as the standard deviation of expected share price returns, is determined based on the average daily trading price volatility of the shares of the Company. (b) Share award schemes The Company has adopted two share award schemes (the “Share Award Schemes") as of 31 December 2018, which are administered by an independent trustee appointed by the Group. The vesting period of the awarded shares is determined by the Board. Movements in the number of awarded shares for the years ended 31 December 2018 and 2017 are as follows: At beginning of the year Granted Lapsed/forfeited Vested and transferred At end of the year Number of awarded shares 2018 2017 The fair value of the awarded shares was calculated based on the market price of the Company's shares at the respective grant date. The expected dividends during the vesting period have been taken into account when assessing the fair value of these awarded shares. The weighted average fair value of awarded shares granted during the year ended 31 December 2018 was HKD374.32 per share (equivalent to approximately RMB316.30 per share) (2017: HKD274.02 per share (equivalent to approximately RMB238.37 per share)). The outstanding awarded shares as of 31 December 2018 were divided into one to five tranches on an equal basis as at their grant dates. The first tranche can be exercised immediately or after a specified period ranging from four months to three years from the grant date, and the remaining tranches will become exercisable in each subsequent year. (c) Employee investment schemes RMB'Million RMB'Million Non-current portion of long-term USD bank borrowings, unsecured (Note (a)) Non-current portion of long-term RMB bank borrowings, 70,938 76,326 ― unsecured (Note (a)) 11,189 4,459 - secured (Note (a)) 475 Non-current portion of long-term HKD bank borrowings, unsecured (Note (a)) 5,310 834 87,437 82,094 2017 USD bank borrowings, unsecured (Note (b)) 2018 Included in non-current liabilities: For aligning the interests of key employees with the Group, the Group established six employees' investment plans in the form of limited liability partnerships in 2011, 2014, 2015, 2016 and 2017 (the “EIS") respectively. According to the term of the EISS, the Board may, at its absolute discretion, invite any qualifying participants of the Group, excluding any director of the Company, to participate in the EISS by subscribing for the partnership interest at cash consideration. The participating employees are entitled to all the economic benefits generated by the EISS, if any, after a specified vesting period under the respective EISS, ranging from four to seven years. Wholly-owned subsidiaries of the Company acting as general partner of these EISS administer and in essence, control the EISs. These EISS are therefore consolidated by the Company as structured entities. The related share-based compensation expenses incurred for the years ended 31 December 2018 and 2017 were insignificant to the Group. 244 Tencent Holdings Limited Notes to the Consolidated Financial Statements For the year ended 31 December 2018 33 SHARE-BASED PAYMENTS (Cont'd) (d) Share options and share award schemes adopted by subsidiaries Certain subsidiaries of the Group operate their own share-based compensation plans (share option and/or share award schemes). Their exercise prices of the share options, as well as the vesting periods of the share options and awarded shares are determined by the respective board of directors of these subsidiaries at their sole discretion. The share options or restricted shares of the subsidiaries granted are normally vested by several tranches. Participants of some subsidiaries have the right to request the Group to repurchase their vested equity interests of the respective subsidiaries ("Repurchase Transaction"). The Group has discretion to settle the Repurchase Transaction by using either equity instruments of the Company or by cash. For the Repurchase Transaction which the Group has settlement options, the directors of the Company are currently of the view that they would be settled by equity instruments of the Company. As a result, they are accounted for using the equity-settled share-based payment method. (e) Expected retention rate of grantees The Group has to estimate the expected yearly percentage of grantees that will stay within the Group at the end of vesting periods of the options and awarded shares (the "Expected Retention Rate”) in order to determine the amount of share-based compensation expenses charged to the consolidated income statement. As at 31 December 2018, the Expected Retention Rate of the Group's wholly-owned subsidiaries was assessed to be 88% 97% (31 December 2017: 88%~97%). Annual Report 2018 245 Notes to the Consolidated Financial Statements For the year ended 31 December 2018 34 BORROWINGS As at 31 December Notes to the Consolidated Financial Statements 2018 2038 Notes All of these notes payable issued by the Group were unsecured. For the year ended 31 December 2018 Notes to the Consolidated Financial Statements 35 NOTES PAYABLE (Cont'd) 34,115 65,018 6,486 30,705 9,833 10,258 13,044 On 19 January 2018, the Company issued four tranches of senior notes under the Global Medium Term Note Programme with aggregate principal amounts of USD5 billion as set out below: 10,335 13,720 RMB'Million RMB'Million 2017 As at 31 December 248 Tencent Holdings Limited More than 5 years Between 2 and 5 years Between 1 and 2 years Within 1 year The notes payable were repayable as follows: 4,752 annum. Amount (USD'Million) 4,752 249 Annual Report 2018 As at 31 December 2018, the fair value of the notes payable amounted to RMB62,820 million (31 December 2017: RMB34,691 million). The respective fair values are assessed based on the active market price of these notes on the reporting date or by making reference to similar instruments traded in the observable market. In September 2018, the notes payable with an aggregate principal amount of HKD1,000 million issued in September 2015 reached their maturity and were repaid in full by the Group. In March 2018, the notes payable with an aggregate principal amount of USD600 million issued in September 2012 reached their maturity and were repaid in full by the Group. 5,000 2038 3.925% 1,000 2028 Interest Rate 3.595% 2028 Notes 2023 3-month USD LIBOR + 0.605% 500 2023 Floating Rate Notes 2023 2.985% 1,000 2023 Notes Due (per annum) 2,500 The aggregate principal amounts of USD notes payable and HKD notes payable were USD9, 100 million (31 December 2017: USD4,700 million) and HKD3,200 million (31 December 2017: HKD4,200 million), respectively. Applicable interest rates are at 2.875% ~ 4.70% and 3-month USD LIBOR + 0.605% (31 December 2017: 2.30% ~ 4.70%) per 65,018 34,115 7,869 Non-controlling interests Total identifiable net assets Deferred income tax liabilities Other liabilities Borrowings (2,173) Deferred revenue and other payables and accruals 608 2,449 Intangible assets and prepayments (mainly include television series and film rights) Other assets 741 Intangible assets arising from acquisition 1,527 Accounts receivable 1,006 Cash and cash equivalents Recognised amounts of identifiable assets acquired and liabilities assumed: 5,139 Total consideration attributable to the Company's equity holders (4,070) Non-controlling interests 9,209 2,945 Fair value of the Previously Held Interests (Note 20(a) (ii)) 3,301 Contingent consideration (Note) Goodwill 1,431 (1,363) (231) 37 OTHER FINANCIAL LIABILITIES As at 31 December 2018, it mainly comprised of the contingent consideration in relation to the acquisition of equity interests from shareholders of an associate of the Group (Note 40). 250 Tencent Holdings Limited Notes to the Consolidated Financial Statements For the year ended 31 December 2018 38 ACCOUNTS PAYABLE Accounts payable and their ageing analysis, based on recognition date, are as follows: 0 ~ 30 days 31 - 60 days 61 - 90 days Over 90 days 39 OTHER PAYABLES AND ACCRUALS As at 31 December 2018 2017 RMB'Million RMB'Million 56,506 38,420 6,264 3,030 1,557 2,050 5,139 6,933 (4,068) 2,274 (290) 3,862 Ordinary shares issued by China Literature Cash paid 951 Interests payable 1,463 1,065 Purchase of construction related costs 1,045 1,277 Purchase consideration payables for investee companies 1,149 1,650 General and administrative expenses accruals 4,414 3,038 Selling and marketing expense accruals 13,451 15,929 Staff costs and welfare accruals RMB'Million RMB'Million 2017 2018 As at 31 December 50,085 73,735 6,585 9,408 This section sets out an analysis of net cash/(debt) and the movements in net cash/(debt) for each of the years presented. 410 1,532 Prepayments received from customers and others 416 Total consideration: RMB'Million 2018 As at 31 October For the year ended 31 December 2018 (a) Step-up acquisition of New Classics Media (Cont'd) 40 BUSINESS COMBINATION (Cont'd) Notes to the Consolidated Financial Statements 252 Tencent Holdings Limited The following table summarises the purchase consideration, fair value of assets acquired, liabilities assumed and the non-controlling interest recognised as at the Acquisition Date. Goodwill of approximately RMB6,933 million was recognised as a result of the Step-up Acquisition. It was mainly attributable to the operating synergies and economies of scale expected to be derived from combining the operations. None of the goodwill is expected to be deductible for income tax purpose. The Group chose to record the non-controlling equity interests in New Classics Media at fair value on Acquisition Date. On 31 October 2018 (the "Acquisition Date"), the Group's non-wholly owned subsidiary, China Literature Limited ("China Literature"), acquired entire equity interests in New Classic Media Holdings Limited ("New Classics Media"), an existing associate of the Group, which is engaged in the production and distribution of television series, web series and films in the PRC (the "Step-up Acquisition"). The investment in New Classics Media was initially accounted for as FVPL, and subsequently reclassified as an associate of the Group due to additional investments and board representation. Immediately before the Step-up Acquisition, the Group held 44.08% equity interests in New Classics Media (the "Previously Held Interests"). Upon completion of the Step-up Acquisition, the Group indirectly held approximately 56% equity interests in New Classics Media through China Literature and accounted for it as a subsidiary of the Group. The Group expects the acquisition of New Classics Media to further increase its market share in entertainment industry. (a) Step-up acquisition of New Classics Media 40 BUSINESS COMBINATION For the year ended 31 December 2018 Notes to the Consolidated Financial Statements Annual Report 2018 251 Others primary consist of deposits from third parties, reserve for platform services, sundry payables and other accruals. Note: 29,433 33,312 7,085 8,101 759 Others (Note) non-controlling shareholders of subsidiaries Liabilities in relation to the put options granted to 542 4,797 704 971 (a) Reconciliation of net profit to cash inflow from operating activities: 41 CONSOLIDATED CASH FLOW STATEMENT Notes to the Consolidated Financial Statements Tencent Holdings Limited 254 The related transaction costs of these business combinations were not material to the Group's consolidated financial statements. The revenue and the results contributed by these acquired subsidiaries for the period since respective acquisition date were insignificant to the Group. The Group's revenue and results for the year would not be materially different if these acquisitions had occurred on 1 January 2018. During the year ended 31 December 2018, the Group also acquired certain insignificant subsidiaries. The aggregate considerations for these acquisitions was approximately RMB3,077 million, fair value of net assets acquired (including identifiable intangible assets), non-controlling interests and goodwill recognised were approximately RMB1,426 million, RMB1,003 million and RMB2,654 million, respectively. The related transaction costs of the Step-up Acquisition are not material to the Group's consolidated financial statements. Other business combination The financial impacts recorded as "Other gains, net" during the year ended 31 December 2018 for the difference between the fair value of the Previously Held Interests and the existing carrying amount of investment in an associate at the Acquisition Date were insignificant. The revenue and the results contributed by New Classics Media to the Group for the period since the Acquisition Date were insignificant. The Group's revenue and results for the year would not be materially different should the Step-up Acquisition have otherwise occured on 1 January 2018. Pursuant to the share purchase agreement, the consideration will be settled by a combination of cash and new shares paid and issued by China Literature and will be subject to the earn-out mechanism set forth in the share purchase agreement. "Monte Carlo Simulation Method" was used in this exercise to measure the value of the contingent consideration. The future net profit of New Classics Media was simulated in numerous scenarios based on the assumptions of growth rate and volatility of net profit of New Classics Media. For each scenario, the consideration to be paid in the form of cash and shares would be determined in accordance with the earn-out mechanism set out in the share purchase agreement. Such consideration was then discounted at a rate that reflects the associated risk of the payment to arrive the present value of consideration in a scenario. The value of contingent consideration was obtained by the average of the present value of considerations in these scenarios. As at 31 October 2018, other financial liabilities of approximately RMB3,301 million in relation to this arrangement was recognised in the Group's consolidated statement of financial position based on the earn-out mechanism. Note: (b) (a) Step-up acquisition of New Classics Media (Cont'd) 40 BUSINESS COMBINATION (Cont'd) For the year ended 31 December 2018 Notes to the Consolidated Financial Statements 253 Annual Report 2018 1,519 Share of profit of associates and joint ventures (1,487) (821) Impairment provision for investments in associates, joint ventures (2017: investments in associates, joint ventures, AFS and RCPS) 16,397 Profit for the year 2,555 Adjustments for: 2018 Equity-settled share-based compensation expenses (3,940) (4,569) Interest income 24 47 equipment Net losses on disposals of intangible assets and property, plant and 18,731 25,825 4,880 8,423 Other expenses in relation to equity transactions of an investee company Depreciation of property, plant and equipment and investment properties Amortisation of intangible assets and land use rights (1,713) (686) (13,518) (2,932) Net gains on disposals and deemed disposals of investee companies Dividend income 15,744 14,482 Income tax expense 72,471 79,984 RMB'Million RMB'Million 2017 For the year ended 31 December 2018 6,137 Net fair value gains on FVPL and other financial instruments (4,298) Other than the transaction with non-controlling interests described in Note 32(e) and 40(a), there were no material non-cash transactions during the year ended 31 December 2018. Annual Report 2018 255 Notes to the Consolidated Financial Statements For the year ended 31 December 2018 41 CONSOLIDATED CASH FLOW STATEMENT (Cont'd) (b) Major non-cash transactions 2018 As at 31 December Net (debt)/cash Notes to the Consolidated Financial Statements For the year ended 31 December 2018 36 LONG-TERM PAYABLES As at 31 December 2018 2017 RMB'Million RMB'Million Purchase consideration payables for investee companies 2,018 336 Payables relating to media contents and running royalty fee for online games Present value of liabilities in relation to the put options granted to non-controlling shareholders of subsidiaries 1,415 2,597 393 225 Others 120,002 (29,757) 120,964 9,117 Impairment of intangible assets 1,181 239 Exchange gains (228) (152) Changes in working capital: Accounts receivable (10,302) (6,400) Inventories (29) (39) Prepayments, deposits and other receivables (4,050) (3,760) Accounts payable 22,955 16,134 Other payables and accruals (3,154) 8,422 Other tax liabilities (19) 189 Deferred revenue (505) Cash generated from operating activities (c) Net (debt)/cash reconciliation (23,121) Cash and cash equivalents 11,339 3,453 Annual Report 2018 257 Notes to the Consolidated Financial Statements For the year ended 31 December 2018 42 COMMITMENTS (b) Operating lease commitments The future aggregate minimum lease payments under non-cancellable operating leases in respect of buildings and server custody leases, are as follows: Contracted: As at 31 December 2018 3,027 2017 RMB'Million Not later than one year 2,632 1,027 Later than one year and not later than five years 7,398 1,056 Later than five years 2,264 970 12,294 3,053 RMB'Million 8,763 153 357 (4,967) 4,920 (47) Net cash as at 31 December 2017 105,697 42,540 (15,696) (82,094) (4,752) (29,363) 16,332 42 COMMITMENTS (a) Capital commitments Capital commitments as at 31 December 2018 and 2017 are analysed as follows: Contracted: Construction/purchase of buildings and purchase of land use rights Purchase of other property, plant and equipment Capital investment in investees As at 31 December 2018 2017 RMB'Million RMB'Million 2,219 RMB'Million (c) Other commitments The future aggregate minimum payments under non-cancellable bandwidth, online game licensing and media contents agreements are as follows: As at 31 December 2018 42 Intangible assets Investments in subsidiaries 60,770 41 55,253 Contribution to Share Scheme Trust 95 43 60,907 55,337 Current assets Amounts due from subsidiaries 52,078 8,725 Prepayments, deposits and other receivables 6 17 Cash and cash equivalents 63 7,919 52,147 16,661 Total assets 113,054 71,998 Annual Report 2018 259 Non-current assets 488 RMB'Million 2017 2017 RMB'Million RMB'Million Contracted: Not later than one year 7,260 5,279 Later than one year and not later than five years 8,332 9,822 Later than five years 2,279 2,236 17,871 17,337 258 Tencent Holdings Limited Notes to the Consolidated Financial Statements For the year ended 31 December 2018 43 RELATED PARTIES TRANSACTIONS Except as disclosed in Note 13(a) (Senior management's emoluments), Note 13(b) (Five highest paid individuals), Note 14 (Benefits and interests of directors), Note 20 (Transactions with associates), Note 25 (Loans to investees and investees' shareholders) and Note 33 (Share-based payments) to the consolidated financial statements, the Group had no other material transactions with related parties during the years ended 31 December 2018 and 2017, and no other material balances with related parties as at 31 December 2018 and 2017. 44 SUBSEQUENT EVENTS There were no material subsequent events during the period from 31 December 2018 to the approval date of these financial statements by the Board of Directors on 21 March 2019. 45 FINANCIAL POSITION AND RESERVE MOVEMENT OF THE COMPANY (a) Financial position of the Company ASSETS As at 31 December 2018 RMB'Million (488) 273 4,084 Other non-cash movements 16,332 256 Tencent Holdings Limited Notes to the Consolidated Financial Statements For the year ended 31 December 2018 41 CONSOLIDATED CASH FLOW STATEMENT (Cont'd) (c) Net (debt)/cash reconciliation (Cont'd) Cash and cash Term deposits Borrowings Borrowings equivalents and others due within 1 year due after 1 year Notes payable due within 1 year Notes payable due after 1 year Total RMB'Million RMB'Million RMB'Million RMB'Million RMB'Million RMB'Million Net (debt)/cash RMB'Million (92,648) Gross debt-floating interest rates Term deposits and others Borrowings repayable within one year Borrowings - repayable after one year 97,814 105,697 69,305 42,540 (26,834) (15,696) (87,437) (82,094) Notes payable repayable within one year (13,720) (4,752) Notes payable repayable after one year (51,298) (29,363) Net (debt)/cash (12,170) 16,332 Cash and cash equivalents, term deposits and others 167,119 148,237 Gross debt-fixed interest rates (74,910) (39,257) (104,379) Net cash as at 1 January 2018 (12,170) 42,540 (26,834) (87,437) (13,720) (51,298) (12,170) Net cash as at 1 January 2017 71,902 55,735 (12,278) (57,549) (3,466) (36,204) 18,140 Cash flows 36,346 (13,179) (3,698) (28,764) 3,450 (5,845) Exchange impacts (2,551) (16) 768 3,731 231 105,697 69,305 97,814 1,921 Net debt as at 31 December 2018 (15,696) (82,094) (4,752) (29,363) 16,332 Cash flows (10,090) 24,811 (2,724) (7,237) 4,666 (32,547) 2017 RMB'Million 2,207 Exchange impacts (1,417) 12,623 (12,677) 5,492 Other non-cash movements (6,855) (2,011) (957) (3,598) (1,559) 1,954 (3,964) 4,031 (179) At 1 January 2017 126 (657) 9,392 Dividends paid relating to 2016 (5,052) Currency translation differences Profit for the year 5,443 4,067 352 Currency translation differences (6,995) Dividends paid relating to 2017 8,371 Profit for the year (531) 8,371 At 1 January 2018 RMB'Million RMB'Million reserves Other At 31 December 2018 (531) Particulars of 261 limited liability company RMB11,000,000 Established in the PRC, Shenzhen Shiji Kaixuan Technology Company Limited Development of softwares and provision of information technology services in the PRC wholly foreign owned enterprise 100% USD2,000,000 Established in the PRC, Tencent Technology Provision of value-added services and Internet advertisement services in the PRC 100% (Note (a)) Annual Report 2018 limited liability company Established in the PRC, by the Group (%) Principal activities and place of operation capital and nature of legal entity Name Proportion of equity interest held issued/paid-in Place of establishment The following is a list of principal subsidiaries of the Company as at 31 December 2018: 46 SUBSIDIARIES AND CONTROLLED STRUCTURED ENTITIES For the year ended 31 December 2018 Notes to the Consolidated Financial Statements RMB65,000,000 Tencent Computer "GAAP" Retained earnings (a) Note: 46 SUBSIDIARIES AND CONTROLLED STRUCTURED ENTITIES (Cont'd) For the year ended 31 December 2018 Notes to the Consolidated Financial Statements Annual Report 2018 263 on an outstanding basis * Provision of online music entertainment services in the PRC limited liability company 50.08%* USD269,025 Established in the Cayman Islands, TME (Note (b)) Provision of online literature services in the PRC (b) 55.59%* (c) As described in Note 1, the Company does not have legal ownership in equity of these structured entities or their subsidiaries. Nevertheless, under certain contractual agreements entered into with the registered owners of these structured entities, the Company and its other legally owned subsidiaries control these companies by way of controlling the voting rights, governing their financial and operating policies, appointing or removing the majority of the members of their controlling authorities, and casting the majority of votes at meetings of such authorities. In addition, such contractual agreements also transfer the risks and rewards of these companies to the Company and/or its other legally owned subsidiaries. As a result, they are presented as controlled structured entities of the Company. In this annual report, unless the context otherwise requires, the following expressions shall have the following meanings: Definition 264 Tencent Holdings Limited During the year ended 31 December 2018, the Company contributed approximately RMB2, 187 million (2017: RMB2,232 million) to the Share Scheme Trust for financing its acquisition of the Company's shares. As the Company has the power to govern the financial and operating policies of the Share Scheme Trust and can derive benefits from the contributions of the eligible persons who are awarded with the shares by the schemes, the directors of the Company consider that it is appropriate to consolidate the Share Scheme Trust. Administering and holding the Company's shares acquired for share award schemes which are set up for the benefits of eligible persons of the Schemes Principal activities Share Scheme Trust Structured entity As mentioned in Note (a) above and Note 33(c), the Company has consolidated the operating entities within the Group without any legal interests and the EISS out of which wholly-owned subsidiaries of the Company act as general partner. In addition, due to the implementation of the share award schemes of the Group mentioned in Note 33(b), the Company has also set up a structured entity ("Share Scheme Trust”), and its particulars are as follows: Consolidation of structured entities (e) As at 31 December 2018, cash and cash equivalents, term deposits and restricted cash of the Group, amounting to RMB86,468 million were held in Mainland China and they are subject to local exchange control and other financial and treasury regulations. The local exchange control, and other financial and treasury regulations provide for restrictions, on payment of dividends, share repurchase and offshore investments, other than through normal activities. All subsidiaries' undertakings are included in the consolidation. The proportion of the voting rights in the subsidiary's undertakings held directly by the parent company do not differ from its proportion of ordinary shares held. The parent company further does not have any shareholdings in the preference shares of subsidiary's undertakings included in the Group. Significant restrictions The directors of the Company considered that the non-wholly owned subsidiaries with non-controlling interests are not significant to the Group, therefore, no summarised financial information of these non-wholly owned subsidiaries is presented separately. (d) Term USD102,255 Development and operation of online games RMB142,500,000 Established in the PRC, Tencent Cloud Computing (Beijing) Company Limited Morespark Limited Development of softwares and provision of information technology services in the PRC 100% USD30,000,000 Established in the PRC, wholly foreign owned enterprise Tencent Technology (Wuhan) Company Limited Development of softwares and provision of information technology services in the PRC 100% USD220,000,000 Established in the PRC, wholly foreign owned enterprise Tencent Technology (Chengdu) Company Limited Development of softwares and provision of information technology services in the PRC 100% limited liability company in the United States 100% (Note (a)) Established in Hong Kong, 100% USD1,306 Established in the United States, limited liability company Established in the Cayman Islands, limited liability company China Literature Riot Games, Inc. Design and production of advertisement in the PRC limited liability company 100% RMB5,000,000 Established in the PRC, Beijing Tencent Culture Media Company Limited Investment holding and provision of online advertisement services in Hong Kong limited liability company 100% HKD1,000 Provision of information system integration services in the PRC USD5,000,000 "2007 Share Award Scheme" "2019 AGM" China Construction Bank Corporation Bank of China Limited the board of directors of the Company Beijing Starsinhand Technology Company Limited Beijing BIZCOM Technology Company Limited Definition "Eligible Person(s)" "EBITDA" "DnF" "DAU" "Cyber Tianjin❞ "COSO Framework" "Corporate Governance Committee" "Company Website' "Company" the corporate governance code as set out in Appendix 14 to the Listing Rules China Literature Limited, a non-wholly owned subsidiary of the Company, which is incorporated in the Cayman Islands with limited liability and the shares of which are listed on the Stock Exchange "CMB" Chongqing Tencent Information Technology Company Limited Tencent Holdings Limited, a limited liability company organised and existing under the laws of the Cayman Islands and the shares of which are listed on the Stock Exchange "FinTech" "ESG Reporting Guide" "EPS" "Epic Games" Term Definition 266 Tencent Holdings Limited any person(s) eligible to participate in the respective Share Award Schemes earnings before interest, tax, depreciation and amortisation Dungeon and Fighter daily active user accounts Tencent Cyber (Tianjin) Company Limited the Internal Control Integrated Framework issued by the Committee of Sponsoring Organisations the corporate governance committee of the Company the website of the Company at www.tencent.com China Merchants Bank Co., Ltd. "2013 Share Award Scheme" "Chongqing Tencent Information" "CG Code" the annual general meeting of the Company to be held on 15 May 2019 or any adjournment thereof the share award scheme adopted by the Company on Adoption Date II, as amended the share award scheme adopted by the Company on Adoption Date I, as amended Definition "Awarded Share(s)" "Auditor" "Audit Committee" "Articles of Association" "AI" "AFS" "Adoption Date II” "Adoption Date I" "Account II" "Account |" "2B" Product/Service provided to business customers "China Literature" the bank account opened in the name of the Company to be operated solely for the purposes of operating the 2007 Share Award Scheme and the funds thereof to be held on trust by the Company for the Selected Participants 13 December 2007, being the date on which the Company adopted the 2007 Share Award Scheme "CCB" "BOC" "Board" "Beijing Starsinhand" "Beijing BIZCOM" Term Definition Annual Report 2018 265 the share(s) of the Company awarded under the Share Award Schemes PricewaterhouseCoopers, the auditor of the Company the audit committee of the Company the amended and restated articles of association of the Company adopted by special resolution passed on 14 May 2014 artificial intelligence available-for-sale financial assets 13 November 2013, being the date on which the Company adopted the 2013 Share Award Scheme the bank account opened in the name of the trust pursuant to Trust Deed II, managed by the Trustee, and operated solely for the purposes of operating the 2013 Share Award Scheme, which is held on trust for the benefit of Selected Participants and can be funded by the Company or any of its subsidiaries "Grant Date' Established in the PRC, wholly foreign owned enterprise wholly foreign owned enterprise "MOBA" "Model Code" "NASDAQ" "Nomination Committee" Definition Instant messaging the investment committee of the Company intellectual property initial public offering King Pro League Location Based Service the Rules Governing the Listing of Securities on the Stock Exchange mergers and acquisitions monthly active user accounts Meituan Dianping, a limited liability company incorporated in the Cayman Islands and the shares of which are listed on the Stock Exchange "MIH TC" MIH TC Holdings Limited "Meituan Dianping" 100% (Note (a)) Infrastructure-as-a-Service International Accounting Standards internal control department of the Company International Financial Reporting Standards Annual Report 2018 267 Definition Term "IM" "Investment Committee" "IP" "IPO" "KPL" "LBS" "Listing Rules' "M&A" "MAU" internal audit department of the Company Multiplayer Online Battle Arena NASDAQ Global Select Market online-to-offline, or offline-to-online Platform-as-a-Service personal computer the Post-IPO Share Option Scheme adopted by the Company on 24 March 2004 the Post-IPO Share Option Scheme adopted by the Company on 16 May 2007 the Post-IPO Share Option Scheme adopted by the Company on 13 May 2009 the Post-IPO Share Option Scheme adopted by the Company on 17 May 2017 the People's Republic of China the Pre-IPO Share Option Scheme adopted by the Company on 27 July 2001 PlayerUnknown's Battlegrounds Quick Response Codes research and development in respect to a Selected Participant, the date of final approval by the Board of the total number of shares of the Company to be awarded to the relevant Selected Participant on a single occasion pursuant to the 2007 Share Award Scheme the remuneration committee of the Company Riot Games, Inc., a Company established in US the lawful currency of the PRC return on investment Sea Limited, a company headquartered in Singapore and listed on the New York Stock Exchange Annual Report 2018 269 Definition the Model Code for Securities Transactions by Directors of Listed Issuers set out in Appendix 10 to the Listing Rules "Sea" "RMB" the nomination committee of the Company 268 Tencent Holdings Limited Definition Term "020" "PaaS" "PC" "Post-IPO Option Scheme I" "Post-IPO Option Scheme II" "Post-IPO Option Scheme III" "Post-IPO Option Scheme IV" "PRC" or "China" "Pre-IPO Option Scheme" "PUBG" "QR Codes" "R&D" "Reference Date" "Remuneration Committee" "Riot Games" "ROI" Tencent Technology (Shanghai) Company Limited "IFRS" "IAS" Established in the PRC, limited liability company Company Limited Beijing Starsinhand Technology Provision of value-added services in the PRC 100% (Note (a)) RMB1,216,500,000 Established in the PRC, limited liability company Beijing BIZCOM Technology Company Limited Provision of value-added services in the PRC 100% (Note (a)) RMB10,290,000 Established in the PRC, limited liability company Nanjing Wang Dian Technology Company Limited provision of information technology services in the PRC Development and sale of softwares and RMB10,000,000 100% 100% Provision of value-added services in the PRC (Note (a)) Notes to the Consolidated Financial Statements Development of softwares in the PRC 100% USD30,000,000 Established in the PRC, Tencent Cyber (Shenzhen) Company Limited by the Group (%) Principal activities and place of operation capital and nature of legal entity Name Proportion of equity interest held issued/paid-in Place of establishment Particulars of 46 SUBSIDIARIES AND CONTROLLED STRUCTURED ENTITIES (Cont'd) For the year ended 31 December 2018 262 Tencent Holdings Limited "IC" USD1,000,000 Tencent Technology (Beijing) Company Limited State of Maryland, US earnings per share the environmental, social and governance reporting guide as set out in Appendix 27 to the Listing Rules financial technology Generally Accepted Accounting Principles in relation to any Awarded Share, the date on which the Awarded Share is, was or is to be granted the Company and its subsidiaries Guangzhou Tencent Technology Company Limited Guian New Area Tencent Cyber Company Limited Hainan Tencent Network Information Technology Company Limited the lawful currency of Hong Kong “Hong Kong” the Hong Kong Special Administrative Region, the PRC "IA" "laas" Epic Games, Inc., a Maryland corporation organized under the general laws of the Established in the PRC, wholly foreign owned enterprise Definition "Hainan Network" Established in BVI, limited liability company Asset management in Hong Kong 100% USD100 information technology services in the PRC Development of softwares and provision of 100% USD90,000,000 Established in the PRC, wholly foreign owned enterprise Tencent Asset Management Limited Tencent Cyber (Tianjin) Company Limited Provision of Internet advertisement services in the PRC "Group" "Guangzhou Tencent Technology" "Guian New Area Tencent Cyber" "HKD" (b) Reserve movement of the Company At 31 December 2017 For the year ended 31 December 2018 26,074 28,385 8,371 5,443 (531) (179) (3,970) (4,173) 22,204 27,294 Total equity Retained earnings (b) Other reserves (b) Shares held for share award schemes Share premium Share capital RMB'Million RMB'Million 2018 As at 31 December Equity attributable to equity holders of the Company EQUITY (a) Financial position of the Company (Cont'd) 45 FINANCIAL POSITION AND RESERVE MOVEMENT OF THE COMPANY (Cont'd) For the year ended 31 December 2018 Notes to the Consolidated Financial Statements 45 FINANCIAL POSITION AND RESERVE MOVEMENT OF THE COMPANY (Cont'd) LIABILITIES Non-current liabilities 2017 51,298 Notes to the Consolidated Financial Statements Notes payable Tencent Holdings Limited 260 71,998 113,054 Total equity and liabilities 84,669 Total liabilities 14,493 32,207 4,752 13,720 Notes payable 45,924 1,033 29,363 333 Other financial liabilities 1,164 52,462 31,431 2,068 Current liabilities Amounts due to subsidiaries 17,454 9,408 Other payables and accruals "Wang Dian" the United States of America Tencent Music Entertainment Group, a limited liability company incorporated under the laws of the Cayman Islands and listed on the New York Stock Exchange a trust deed entered into between the Company and the Trustee (as restated, supplemented and amended from time to time) in respect of the appointment of the Trustee for the administration of the 2013 Share Award Scheme Tencent Technology (Shanghai) Company Limited Tencent Technology (Shenzhen) Company Limited Tencent Technology (Wuhan) Company Limited Shenzhen Tencent Computer Systems Company Limited Tencent Technology (Chengdu) Company Limited an independent trustee appointed by the Company for managing the Share Award Schemes "Yixin" "Trust Deed II" "USD" "Tencent Shanghai" "United States" or "US" "Trustee" "TME" "Tencent Wuhan" the lawful currency of the United States "Tencent Technology" "VAS" value-added services Zipcode : 518054 Nanjing Wang Dian Technology Company Limited Telephone: 852-21795122 Facsimile 852-25201148 "Tencent Computer" No.1 Queen's Road East Wanchai, Hong Kong 29/F., Three Pacific Place Tencent Holdings Limited Hong Kong Office Facsimile: 86-755-86013399 Telephone: 86-755-86013388 Tencent Binhai Towers, No. 33 Haitian 2nd Road Nanshan District, Shenzhen, the PRC Yixin Group Limited, a company incorporated in the Cayman Islands with limited liability and the shares of which are listed on the Stock Exchange Tencent Group Head Office Tencent 腾讯 272 Tencent Holdings Limited Tencent Technology, Cyber Tianjin, Tencent Beijing, Shenzhen Tencent Information, Tencent Chengdu, Chongqing Tencent Information, Shanghai Tencent Information, Tencent Shanghai, Tencent Wuhan, Hainan Network, Guangzhou Tencent Technology, Shenzhen Tencent Network and Guian New Area Tencent Cyber Definition "WFOES" Term Definition Annual Report 2018 271 Website: www.tencent.com "Tencent Chengdu❞ "Stock Exchange" charity funds established by the Group the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong) as amended, supplemented or otherwise modified from time to time any Eligible Person(s) selected by the Board to participate in the Share Award Schemes Definition "TCS CFC" "Supercell" “Sogou” "SME" "SKT Co-operation Committee” Shanghai Tencent Information Technology Company Limited "SKT CFC" "Shiji Kaixuan" "Shenzhen Tencent Network" "Shenzhen Tencent Information" "Share Subdivision" "Share Award Schemes" "Shanghai Tencent Information" "SFO" "Selected Participant(s)" "Singapore" Definition the 2007 Share Award Scheme and the 2013 Share Award Scheme Shenzhen Tencent Information Technology Company Limited Tencent Technology (Beijing) Company Limited Definition "Tencent Charity Funds" "Tencent Beijing" Term 270 Tencent Holdings Limited the co-operation committee established under the TCS CFC "TCS Co-operation Committee” with effect from 15 May 2014, each existing issued and unissued share of HKD0.0001 each in the share capital of the Company was subdivided into five subdivided shares of HKD0.00002 each, after passing of an ordinary resolution at the annual general meeting of the Company held on 14 May 2014 and granting by the Stock Exchange of the listing of, and permission to deal in, the subdivided shares the co-operation framework contract dated 28 February 2004 entered into between Tencent Technology and Tencent Computer The Stock Exchange of Hong Kong Limited Sogou Inc., a company incorporated in the Cayman Islands and listed on the New York Stock Exchange small and medium enterprise the co-operation committee established under the SKT CFC the co-operation framework contract dated 28 February 2004 entered into between Cyber Tianjin and Shiji Kaixuan the Republic of Singapore Shenzhen Shiji Kaixuan Technology Company Limited Shenzhen Tencent Network Information Technology Company Limited Supercell Oy, a private company incorporated in Finland Term Definition Income tax expense provision Impairment investee Amortisation of companies intangible assets compensation As reported Share-based losses from Net (gains)/ Adjustments Year ended 31 December 2017 Management Discussion and Analysis 27 Annual Report 2018 26% 30% 8.097 8.203 Profit before income tax Net margin 31% Operating margin 8.228 - diluted 8.336 - basic EPS (RMB per share) 77,469 17,157 3,964 Non-GAAP (a) (b) (c) 7.499 7.598 Net margin Operating margin - diluted - basic EPS (RMB per share) 65,126 3,086 1,706 (18,051) 6,875 71,510 Profit attributable to equity holders (32,696) 66,404 1,841 (18,112) 7,080 72,471 Profit for the year 82,023 2,794 490 (17,816) 6,253 90,302 Operating profit (RMB in millions, unless specified) (d) 3,124 10,325 78,719 Profit attributable to equity holders Net margin 39% Operating margin 2.177 - diluted 2.206 - basic EPS (RMB per share) 17,454 320 442 (6,189) 2,084 20,797 33% Profit attributable to equity holders 358 474 (6,229) 2,146 21,622 Profit for the period 21,853 424 112 (6,281) 1,874 25,724 Operating profit (RMB in millions, unless specified) 18,371 38% 1.852 33% 80,292 17,633 4,142 (32,121) 10,654 79,984 Profit for the year 92,481 17,577 524 (31,168) 7,900 97,648 Operating profit 1.827 (RMB in millions, unless specified) (c) (b) (a) Non-GAAP provision Impairment investee Amortisation of companies intangible assets Share-based compensation As reported losses from Net (gains)/ Adjustments Year ended 31 December 2018 28% (d) (d) 30% 6.830 20 20 Tencent Holdings Limited Management Discussion and Analysis Other (losses)/gains, net. We recorded net other losses of RMB2, 139 million for the fourth quarter of 2018, which primarily consisted of one-off expenses in respect of the issuance of ordinary shares to strategic partners recognised by TME, as well as impairment provisions for certain investee companies, reflecting revisions of their financial outlook and changes in the market environment. Selling and marketing expenses. Selling and marketing expenses decreased by 5% to RMB5,730 million for the fourth quarter of 2018 on a year-on-year basis. The decrease was primarily driven by the reduction of advertising and promotion expenses due to internal initiatives to reduce less effective marketing campaigns. As a percentage of revenues, selling and marketing expenses decreased to 7% for the fourth quarter of 2018 from 9% for the fourth quarter of 2017. General and administrative expenses. General and administrative expenses increased by 29% to RMB11,345 million for the fourth quarter of 2018 on a year-on-year basis. The increase mainly reflected greater R&D expenses and staff costs. As a percentage of revenues, general and administrative expenses were 13% for the fourth quarter of 2018, broadly stable compared to the fourth quarter of 2017. Finance costs, net. Net finance costs increased by 60% to RMB1,372 million for the fourth quarter of 2018 on a year-on-year basis. The increase was primarily due to greater interest expenses as a result of higher amount of indebtedness. Income tax expense. Income tax expense decreased by 39% to RMB1,906 million for the fourth quarter of 2018 on a year-on- year basis. The decrease mainly reflected the entitlements of preferential tax treatments and benefits. Profit attributable to equity holders of the Company. Profit attributable to equity holders of the Company decreased by 32% to RMB14,229 million for the fourth quarter of 2018 on a year-on-year basis. The decrease was greatly affected by non-cash expenses related to capital raising at a subsidiary in the fourth quarter of 2018, coupled with substantial deemed disposal gains relating to the capital activities of certain investee companies (such as the IPOs of Yixin, Sea and Sogou) in the fourth quarter of 2017. Non-GAAP profit attributable to equity holders of the Company increased by 13% to RMB19,730 million. Annual Report 2018 21 Management Discussion and Analysis FOURTH QUARTER OF 2018 COMPARED TO THIRD QUARTER OF 2018 The following table sets forth the comparative figures for the fourth quarter of 2018 and the third quarter of 2018: Unaudited Three months ended 31 December 30 September 2018 2018 (RMB in millions) Revenues Cost of revenues Gross profit Interest income 84,896 80,595 (49,744) (45,115) 35,152 Cost of revenues for our other businesses increased by 71% to RMB18,614 million for the fourth quarter of 2018 on a year-on-year basis. The increase was primarily driven by the scale expansion of our FinTech and cloud services, as well as film and television production business. Cost of revenues for our online advertising business increased by 39% to RMB10,800 million for the fourth quarter of 2018 on a year-on-year basis. The increase was mainly due to greater content costs and advertising commissions. Cost of revenues for our VAS business increased by 25% to RMB20,330 million for the fourth quarter of 2018 on a year- on-year basis. The increase was primarily due to greater content costs for video streaming subscriptions, live broadcast services and online games. Channel costs for our smart phone games also increased. 34,897 Management Discussion and Analysis Cost of revenues. Cost of revenues increased by 43% to RMB49,744 million for the fourth quarter of 2018 on a year-on-year basis. The increase mainly reflected greater content costs, costs of FinTech services, as well as channel costs. As a percentage of revenues, cost of revenues increased to 59% for the fourth quarter of 2018 from 53% for the fourth quarter of 2017. The following table sets forth our cost of revenues by line of business for the fourth quarter of 2018 and the fourth quarter of 2017: Unaudited VAS Online advertising Others Total cost of revenues Three months ended 31 December 2018 31 December 2017 % of segment % of segment Amount revenues 35,480 Amount (RMB in millions, unless specified) 20,330 47% 16,268 41% 10,800 63% 7,759 63% 18,614 77% 10,870 77% 49,744 revenues 1,350 1,082 Other (losses)/gains, net RMB'Million 2018 2017 (Classified by nature of income) Income of Principal Investment We recorded return from our investment portfolio amounted to RMB17,285 million for the year ended 31 December 2018, with a decrease of 2% compared to last year. Details of our return from investment portfolio are as follows: The fair value of our stakes in listed investee companies (excluding subsidiaries) amounted to RMB238,040 million as at 31 December 2018 (31 December 2017: RMB210,848 million). Other than Meituan Dianping as disclosed in Note 20 to the consolidated financial statements, none of the carrying amount of any of our investments (including listed investee companies) constitutes 5% or more of our total assets as at 31 December 2018. We manage our investment portfolio with a primary objective to strengthen our leading position in core businesses and complement our "Connection" strategy in various industries, particularly in social and digital content, 020 and smart retail sectors. We also invest in transportation, FinTech, cloud and other sectors. Changes in respective items in the consolidated statement of financial position have been disclosed in the notes to the consolidated financial statements in this annual report. other financial assets (2017). investments in redeemable instruments of associates (2017); and financial assets at fair value through profit or loss and through other comprehensive income; available-for-sale financial assets (2017); investments in associates and joint ventures which are accounted for by using equity method; RMB'Million As at 31 December 2018, our investment portfolio amounted to approximately RMB369,186 million (31 December 2017: RMB275,617 million) as recorded in the consolidated statement of financial position under various categories including: Management Discussion and Analysis Tencent Holdings Limited 28 Impairment provisions for associates, joint ventures, AFS (2017) and intangible assets arising from acquisitions (d) Amortisation of intangible assets resulting from acquisitions, net of related deferred tax (c) Including net (gains)/losses on deemed disposals/disposals of investee companies, fair value changes arising from investee companies, and other expenses in relation to equity transactions of investee companies Including put options granted to employees of investee companies on their shares and shares to be issued under investee companies' share-based incentive plans which can be acquired by the Group, and other incentives (b) (a) Note: 28% 34% INVESTMENTS HELD 6.920 Dividend income 1,713 (2,139) 8,762 Selling and marketing expenses (5,730) (6,573) General and administrative expenses (11,345) (10,890) Operating profit 17,288 27,861 Finance costs, net (1,372) (1,492) 686 Share of profit of associates and joint ventures 264 Annual Report 2018 29 We continue to closely monitor the performance of our investment portfolio and strategically make investments, M&A, and explore opportunities in monetising some of the existing investments if appropriate opportunities in the market arise. 821 1,487 (2,794) (17,577) Impairment provision for investee companies and intangible assets from acquisitions Share of profit of associates and joint ventures 4,298 29,757 Net fair value gains 13,518 2,932 Net gains on disposals and deemed disposals of investee companies 16 (c) (b) (a) 2018 31 December 30 September 31 December Three months ended Unaudited Interest income Operating profit Adjustments: The following table reconciles our operating profit to our EBITDA and adjusted EBITDA for the periods presented: Management Discussion and Analysis Tencent Holdings Limited 24 Capital expenditures consist of additions (excluding business combinations) to property, plant and equipment, construction in progress, investment properties, land use rights and intangible assets (excluding media contents, game licenses and other contents). Net (debt)/cash represents period end balance and is calculated as cash and cash equivalents, plus term deposits and others, minus borrowings and notes payable. (d) (c) Adjusted EBITDA margin is calculated by dividing Adjusted EBITDA by revenues. (b) EBITDA consists of operating profit less interest income and other gains/losses, net, and plus depreciation of property, plant and equipment as well as investment properties, and amortisation of intangible assets. Adjusted EBITDA consists of EBITDA plus equity- settled share-based compensation expenses. (a) Note: 13,585 23,941 4,975 5,974 4,564 Capital expenditures (d) 16,332 (12,170) 16,332 (29,227) 2018 2017 (RMB in millions, unless specified) 17,288 25,616 5,240 7,230 6,583 Amortisation of intangible assets 4,880 8,423 1,376 2,321 2,520 equipment and investment properties Depreciation of property, plant and (20,140) (16,714) (12,170) (7,906) 2,139 (3,940) (4,569) (1,156) (1,082) (1,350) Other losses/(gains), net 90,302 97,648 2017 31 December 2018 Year ended 25,724 27,861 (8,762) Net (debt)/cash (c) 3,060 4,898 Income tax expense. Income tax expense decreased by 41% to RMB1,906 million for the fourth quarter of 2018 on a quarter- on-quarter basis. The decrease was primarily driven by reversals of income tax provisions resulting from the entitlements of preferential tax treatments and benefits, partly offset by greater withholding tax. General and administrative expenses. General and administrative expenses increased by 4% to RMB11,345 million for the fourth quarter of 2018 on a quarter-on-quarter basis. The increase mainly reflected greater spending on staff fringe benefits and conference fees. Management Discussion and Analysis Annual Report 2018 23 Selling and marketing expenses. Selling and marketing expenses decreased by 13% to RMB5,730 million for the fourth quarter of 2018 on a quarter-on-quarter basis. The decrease mainly reflected lower advertising and promotion expenses, resulting from internal initiatives to reduce less effective marketing campaigns. Other (losses)/gains, net. We recorded net other losses of RMB2, 139 million for the fourth quarter of 2018, which primarily consisted of one-off expenses in respect of the issuance of ordinary shares to strategic partners recognised by TME, as well as impairment provisions for certain investee companies, reflecting revisions of their financial outlook and changes in the market environment. Cost of revenues for our other businesses increased by 19% to RMB18,614 million for the fourth quarter of 2018. The growth primarily derived from our FinTech services, film and television production business and cloud services. Cost of revenues for our online advertising business increased by 5% to RMB10,800 million for the fourth quarter of 2018. The increase was mainly due to greater advertising commissions and traffic acquisition costs, partly offset by lower content costs. Cost of revenues for our VAS business increased by 6% to RMB20,330 million for the fourth quarter of 2018. The increase was primarily driven by greater content costs for our live broadcast services, music services and smart phone games. Revenues from our online advertising business increased by 5% to RMB17,033 million for the fourth quarter of 2018. Social and others advertising revenues grew by 6% to RMB11,846 million. The increase mainly reflected higher advertising revenues derived from Weixin. Media advertising revenues increased by 2% to RMB5,187 million. Revenues from our other businesses increased by 19% to RMB24,212 million for the fourth quarter of 2018. The increase was mainly due to growth in revenues from film and television production business, FinTech and cloud services. Cost of revenues. Cost of revenues increased by 10% to RMB49,744 million for the fourth quarter of 2018 on a quarter- on-quarter basis. The increase primarily reflected greater content costs, costs of FinTech services and channel costs. As a percentage of revenues, cost of revenues increased to 59% for the fourth quarter of 2018 from 56% for the third quarter of 2018. Revenues. Revenues increased by 5% to RMB84,896 million for the fourth quarter of 2018 on a quarter-on-quarter basis. Revenues from our VAS business were RMB43,651 million for the fourth quarter of 2018, broadly stable compared to the previous quarter. Online games revenues decreased by 6% to RMB24,199 million. The decrease mainly reflected lower revenues from our PC client games such as DnF. Social networks revenues increased by 7% to RMB19,452 million. The increase was primarily driven by revenue growth from our digital content services such as live broadcast services and video streaming subscriptions. Management Discussion and Analysis 22 Tencent Holdings Limited 19,710 Profit attributable to equity holders of the Company. Profit attributable to equity holders of the Company decreased by 39% to RMB14,229 million for the fourth quarter of 2018 on a quarter-on-quarter basis. The decrease was greatly affected by non- cash expenses related to capital raising at a subsidiary in the fourth quarter of 2018 versus higher fair value gains from certain investee companies (including a fair value gain from Meituan Dianping upon its IPO) in the third quarter of 2018. Non-GAAP profit attributable to equity holders of the Company was RMB19,730 million, essentially flat quarter-on-quarter. 19,730 23,405 14,026 72 (203) 23,333 14,229 Non-controlling interests Equity holders of the Company Attributable to: 23,405 14,026 Profit for the period (3,228) (1,906) Non-GAAP profit attributable to equity holders of the Company 18,622 OTHER FINANCIAL INFORMATION Three months ended 839 1,298 1,345 Interest and related expenses 40% 38% 38% 37% 35% Adjusted EBITDA margin (b) 95,861 118,273 25,127 29,577 Unaudited 29,701 89,724 110,404 23,278 27,568 27,180 EBITDA (a) 2017 31 December 2018 Year ended (RMB in millions, unless specified) 2017 2018 2018 31 December 30 September 31 December Adjusted EBITDA (a) EBITDA 27,180 27,568 20,423 13,411 916 (20,840) 3,531 23,405 Profit for the period 22,563 13,513 127 (20,949) 2,011 27,861 Operating profit Profit attributable to equity holders (RMB in millions, unless specified) Non-GAAP Impairment provision investee Amortisation of companies intangible assets As reported compensation Share-based losses from Net (gains)/ 24% 26% 2.065 2.087 Adjustments Unaudited three months ended 30 September 2018 17% (a) Net margin 23,333 (20,819) Non-GAAP provision Impairment investee Amortisation of companies intangible assets compensation As reported Share-based losses from Net (gains)/ Adjustments Unaudited three months ended 31 December 2017 Management Discussion and Analysis 25% 28% 3,458 2.061 29% 35% 2.440 2.469 Tencent Holdings Limited 26 Net margin Operating margin - diluted - basic EPS (RMB per share) 19,710 12,862 876 2.085 26,633 20% 1.489 Impairment Amortisation of investee Share-based losses from Net (gains)/ Adjustments Unaudited three months ended 31 December 2018 The following tables set forth the reconciliations of the Group's non-GAAP financial measures for the fourth quarter of 2018 and 2017, the third quarter of 2018, and the years ended 31 December 2018 and 2017 to the nearest measures prepared in accordance with IFRS: Management Discussion and Analysis 25 Annual Report 2018 The Company's management believes that the non-GAAP financial measures provide investors with useful supplementary information to assess the performance of the Group's core operations by excluding certain non-cash items and certain impacts of M&A transactions. In addition, non-GAAP adjustments include relevant non-GAAP adjustments for the Group's material associates based on available published financials of the relevant material associates, or estimates made by the Company's management based on available information, certain expectations, assumptions and premises. To supplement the consolidated results of the Group prepared in accordance with IFRS, certain additional non-GAAP financial measures (in terms of, operating profit, operating margin, profit for the period, net margin, profit attributable to equity holders of the Company, basic EPS and diluted EPS), have been presented in this annual report. These unaudited non-GAAP financial measures should be considered in addition to, not as a substitute for, measures of the Group's financial performance prepared in accordance with IFRS. In addition, these non-GAAP financial measures may be defined differently from similar terms used by other companies. As reported NON-GAAP FINANCIAL MEASURES 118,273 25,127 29,577 29,701 Adjusted EBITDA 6,137 7,869 1,849 2,009 2,521 Equity-settled share-based compensation 89,724 110,404 23,278 95,861 Operating margin compensation (b) - diluted 1.505 - basic 15,932 19,730 1,008 1,814 (125) 2,804 14,229 Profit attributable to equity holders 20,240 936 1,882 (a) 517 14,026 Profit for the period 22,388 864 198 1,579 2,459 17,288 Operating profit (c) Non-GAAP provision (RMB in millions, unless specified) companies intangible assets 2,879 EPS (RMB per share) 26% 39 225.44 24 March 2018 to 23 March 2024 (Note 3) 3,215,800 (Note 5) 3,215,800 410.00 9 April 2019 to 8 April 2025 (Note 3) 16,500,000 3,215,800 2,500,000 17,215,800 Annual Report 2018 35 Directors' Report Note: 1. 2. 3. For options granted with exercisable date determined based on the grant date of options, the first 25% of the total options can be exercised 5 years after the grant date, and each 25% of the total options will become exercisable in each subsequent year. For options granted with exercisable date determined based on the grant date of options, the first 20% of the total options can be exercised 1 year after the grant date, and each 20% of the total options will become exercisable in each subsequent year. For options granted with exercisable date determined based on the grant date of options, the first 25% of the total options can be exercised 1 year after the grant date, and each 25% of the total options will become exercisable in each subsequent year. The closing price immediately before the date on which the options were exercised on 28 March 2018 was HKD432.2. 4. 5. The closing price immediately before the date on which the options were granted on 9 April 2018 was HKD405.8. 6. No options were cancelled or lapsed during the year. Details of movements of share options granted to employees of the Group (apart from a director of the Company) during the year ended 31 December 2018 are as follows: 5,250,000 Number of share options (Note 3) Total: the year the year 2018 price HKD Exercise period Lau Chi Ping Martin 24 March 2010 2,500,000 2,500,000 (Note 4) 31.70 24 March 2015 to 23 March 2020 (Note 1) 25 March 2014 5,000,000 5,000,000 114.52 25 March 2015 to 24 March 2021 (Note 2) 21 March 2016 3,750,000 3,750,000 158.10 21 March 2017 to 24 March 2017 5,250,000 9 April 2018 20 March 2023 Lapsed/ As at 1 January 15 Aug 2013 to 14 Aug 2018 (Note 3) 15 Aug 2011 25,000 25,000 37.80 15 Aug 2014 to 14 Aug 2018 (Note 1) 13 Sep 2012 560,875 538,000 22,875 49.76 13 Sep 2013 to 12 Sep 2019 (Note 2) 25 Mar 2014 2,562,500 20,000 2,542,500 114.52 25 Mar 2015 to 24 Mar 2021 (Note 4) 25 Mar 2014 3,570,000 425,000 3,145,000 114.52 37.80 342,125 342,125 15 Aug 2011 Granted during Exercised forfeited As at during during 31 December Exercise Date of grant 2018 the year the year the year 2018 2018 price HKD 24 Mar 2011 646,250 646,250 38.88 24 Mar 2014 to 23 Mar 2018 (Note 1) 15 Aug 2011 58,800 58,800 37.80 15 Aug 2012 to 14 Aug 2018 (Note 2) Exercise period Date of grant Name of director Exercise For the fourth quarter of 2018, the Group had free cash flow of RMB28,623 million. This was a result of net cash flow generated from operating activities of RMB33,221 million, offset by payments for capital expenditure of RMB4,598 million. 30 Tencent Holdings Limited Directors' Report The directors have pleasure in presenting their report together with the audited financial statements for the year ended 31 December 2018. PRINCIPAL ACTIVITIES The principal activity of the Company is investment holding. The activities of the principal subsidiaries are set out in Note 46 to the consolidated financial statements. The analysis of the Group's revenues and contribution to results by business segments and the Group's revenues by geographical area of operations are set out in Note 5 to the consolidated financial statements. RESULTS AND APPROPRIATIONS The results of the Group for the year are set out in the consolidated statement of comprehensive income on page 133 of this annual report. The directors have recommended the payment of a final dividend of HKD1.00 per share for the year ended 31 December 2018. The dividend is expected to be payable on 31 May 2019 to the shareholders whose names appear on the register of members of the Company on 22 May 2019. The total dividend for the year under review is HKD1.00 per share. RESERVES The Company may pay dividends out of share premium, retained earnings and any other reserves provided that immediately following the payment of such dividends the Company will be in a position to pay off its debts as they fall due in the ordinary course of business. As at 31 December 2018, the Company had distributable reserves amounting to RMB28,385 million (2017: RMB26,074 million). Details of the movements in the reserves of the Group and the Company during the year are set out in the consolidated statement of changes in equity on pages 137 to 139, Note 31, Note 32 and Note 45 to the consolidated financial statements respectively. PROPERTY, PLANT AND EQUIPMENT Details of the movements in property, plant and equipment of the Group during the year are set out in Note 16 to the consolidated financial statements. Annual Report 2018 31 Directors' Report BUSINESS REVIEW AND DIVIDEND A fair review of the business of the Group, comprising a discussion and analysis of the Group's performance during the year, particulars of important events affecting the Group that have occurred since the end of the financial year 2018 and an indication of likely future development in the business of the Group as well as the proposed dividend for the year ended 31 December 2018 are set out in the "Chairman's Statement" on pages 4 to 13 of this annual report. An analysis using financial key performance indicators is set out in the "Management Discussion and Analysis" on pages 14 to 30 of this annual report. Discussions on the Group's environmental policies and performance, and an account of the Group's key relationships with its stakeholders are set out in the "Environmental, Social and Governance Report" on pages 100 to 122 of this annual report. Details regarding the Group's compliance with the relevant laws and regulations which have a significant impact on the Group are also set out in the "Environmental, Social and Governance Report" on pages 100 to 122 and the "Corporate Governance Report" on pages 76 to 99 as well as on page 73 of this annual report. A description of the principal risks and uncertainties facing the Group is set out in "Corporate Governance Report" on pages 76 to 99 of this annual report. All such discussions form part of this report. SHARE CAPITAL Details of the movements in the share capital of the Company during the year are set out in Note 31 to the consolidated financial statements. SUBSIDIARIES Particulars of the Company's principal subsidiaries as at 31 December 2018 are set out in Note 46 to the consolidated financial statements. BORROWINGS Particulars of the Group's borrowings and notes payable are set out in Note 34 and Note 35 to the consolidated financial statements respectively. As at 31 December 2018, the Group had net debt of RMB12,170 million, compared to net debt of RMB29,227 million as of 30 September 2018. The sequential decrease in indebtedness was mainly due to free cash flow generation, proceeds from TME's capital raising activities and disposals of our stakes in certain investee companies, partially offset by payments for M&A initiatives and media content. 273,104 238,040 (29,227) Annual Report 2018 Management Discussion and Analysis LIQUIDITY AND FINANCIAL RESOURCES Our cash positions as at 31 December 2018 and 30 September 2018 are as follows: Cash and cash equivalents Term deposits and others Borrowings Notes payable Net debt Fair value of our stakes in listed investee companies (excluding subsidiaries) 31 December Audited Unaudited DONATION 30 September 2018 (RMB in millions) 97,814 105,394 69,305 39,079 167,119 144,473 (114,271) (108,543) (65,018) (65,157) (12,170) 2018 25 Mar 2015 to The donation made by the Group to Tencent Charity Funds in the year was RMB730 million. Tencent Holdings Limited Annual Report 2018 33 Directors' Report USE OF PROCEEDS FROM IPO OF NON-WHOLLY OWNED SUBSIDIARY The use of proceeds of TME and China Literature, our non-wholly owned subsidiaries, are set out below: TME The American depository shares of TME were listed on the New York Stock Exchange on 12 December 2018 and the net proceeds raised by TME during its IPO were approximately USD509 million (equivalent to approximately RMB3,500 million). As at 31 December 2018, TME has not yet used any of the proceeds received from the IPO. TME will apply the net proceeds in the manner as set out in its IPO prospectus. China Literature The shares of China Literature, were listed on the Stock Exchange on 8 November 2017 and the net proceeds raised by China Literature during its IPO were approximately HKD7,235 million (equivalent to approximately RMB6, 145 million). As at 31 December 2018, China Literature had used: approximately RMB345.4 million for expanding its online reading business and sales and marketing activities; approximately RMB200.9 million for expanding its involvement in the development of derivative entertainment products adapted from its online literary titles; and approximately RMB1,734.9 million for funding its potential investments, acquisitions and strategic alliances. The remaining balance of the net proceeds was placed with banks. China Literature will apply the remaining net proceeds in the manner as set out in its IPO prospectus. 34 Tencent Holdings Limited Directors' Report SHARE OPTION SCHEMES The Company has adopted five share option schemes, namely, the Pre-IPO Option Scheme, the Post-IPO Option Scheme I, the Post-IPO Option Scheme II, the Post-IPO Option Scheme III and the Post-IPO Option Scheme IV. The Pre-IPO Option Scheme, the Post-IPO Option Scheme I and the Post-IPO Option Scheme II expired on 31 December 2011, 23 March 2014 and 16 May 2017 respectively. As at 31 December 2018, there were a total of 17,215,800 outstanding share options granted to a director of the Company, details of which are as follows: Number of share options As at 1 January Granted during Exercised As at during 31 December On 19 January 2018, the Company issued four tranches of senior notes under the Global Medium Term Note Programme for the Company's general corporate purposes. Details of the issuance of debt securities are set out in Note 35 to the consolidated financial statements. ISSUANCE OF DEBT SECURITIES Save as disclosed above and in Note 31 to the consolidated financial statements, neither the Company nor any of its subsidiaries has purchased, sold or redeemed any of the Company's shares during the year ended 31 December 2018. 886,802,793 Directors' Report FINANCIAL SUMMARY A summary of the condensed consolidated results and financial positions of the Group is set out on page 3 of this annual report. PURCHASE, SALE OR REDEMPTION OF THE COMPANY'S LISTED SECURITIES During the year ended 31 December 2018, the Company repurchased 2,848,000 shares on the Stock Exchange for an aggregate consideration of approximately HKD886.8 million before expenses. The repurchased shares were subsequently cancelled. The repurchase was effected by the Board for the enhancement of shareholder value in the long term. Details of the shares repurchased are as follows: Purchase consideration per share Aggregate No. of shares Month of purchase in 2018 purchased Highest price paid Lowest price paid consideration 32 paid HKD HKD September 1,668,500 333.40 October 1,179,500 322.80 306.00 265.20 535,627,842 351,174,951 Total: 2,848,000 HKD 24 Mar 2021 (Note 2) (Note 16) 36 -- 16,692,585 410.00 9 Apr 2019 to 24 May 2018 26,390 22 Jun 2018 13,055 8 Apr 2025 (Notes 5 and 10) 26,390 407.00 24 May 2019 to 18 23 May 2025 (Notes 4 and 11) 403.16 22 Jun 2019 to 21 Jun 2025 (Notes 7 and 12) 22 Jun 2018 70,525 -- 70,525 403.16 22 Jun 2019 to 6 Jul 2018 5,159,630 6 Jul 2018 - 8,050 6 Jul 2018 43,890 21 Jun 2025 (Notes 4 and 12) 16,692,585 9 Apr 2018 8 Apr 2025 (Notes 4 and 10) 9 Apr 2019 to during 31 December the year 2018 Exercise price Exercise period (Note 16) HKD 23 Nov 2017 89,565 89,565 419.60 23 Nov 2018 to 16 Jan 2018 155,050 30,870 5,128,760 22 Nov 2024 (Note 4) 444.20 16 Jan 2019 to 15 Jan 2025 (Notes 4 and 9) 9 Apr 2018 2,082,920 - 2,082,920 410.00 9 Apr 2019 to 8 Apr 2025 (Notes 7 and 10) 9 Apr 2018 235,515 -- 235,515 410.00 -- 155,050 the year 386.60 5 Jul 2025 (Notes 5 and 13) 6. 7. 8. For options granted with exercisable date determined based on the grant date of options, the first 20% of the total options can be exercised 3 years after the grant date, and each 20% of the total options will become exercisable in each subsequent year. For options granted with exercisable date determined based on the grant date of options, the first 20% of the total options can be exercised 1 year after the grant date, and each 20% of the total options will become exercisable in each subsequent year. For options granted with exercisable date determined based on the grant date of options, the first 20% of the total options can be exercised 2 years after the grant date, and each 20% of the total options will become exercisable in each subsequent year. For options granted with exercisable date determined based on the grant date of options, the first 33.33% (one-third) of the total options can be exercised 1 year after the grant date, and each 33.33% of the total options will become exercisable in each subsequent year. For options granted with exercisable date determined based on the grant date of options, the first 25% of the total options can be exercised 1 year after the grant date, and each 25% of the total options will become exercisable in each subsequent year. For options granted with exercisable date determined based on the grant date of options, the first 25% of the total options can be exercised 2 years after the grant date, and each 25% of the total options will become exercisable in each subsequent year. For options granted with exercisable date determined based on the grant date of options, the first 50% of the total options can be exercised 1 year after the grant date, and the remaining 50% of the total options will become exercisable in the subsequent year. For options granted with exercisable date determined based on the grant date of options, the first 25% of the total options can be exercised 3 years after the grant date, and each 25% of the total options will become exercisable in each subsequent year. The closing price immediately before the date on which the options were granted on 16 January 2018 was HKD433.2. 9. 10. The closing price immediately before the date on which the options were granted on 9 April 2018 was HKD405.8. 11. The closing price immediately before the date on which the options were granted on 24 May 2018 was HKD407. 12. The closing price immediately before the date on which the options were granted on 22 June 2018 was HKD396.8. 13. The closing price immediately before the date on which the options were granted on 6 July 2018 was HKD385.6. 14. The closing price immediately before the date on which the options were granted on 24 August 2018 was HKD359. 15. Subject to the satisfaction of certain conditions, the first 25% of the total options can be exercised on the dates as specified in the relevant grant letters, and each 25% of the total options will become exercisable in each subsequent year. 16. The weighted average closing price immediately before the date on which the options were exercised was HKD398.8. 5. 4. 3. 2. 8,050 386.60 6 Jul 2020 to 5 Jul 2025 (Notes 6 and 13) 9,660 34,230 386.60 6 Jul 2021 to 5 Jul 2025 (Notes 8 and 13) 24 Aug 2018 17,780 -- 17,780 354.00 6 Jul 2019 to 24 Aug 2019 to 2,660 23 Aug 2025 (Notes 4 and 14) -- 2,660 354.00 6 Jul 2019 to Total: 50,666,108 24,508,050 4,391,249 222,465 70,560,444 38 Tencent Holdings Limited 5 Jul 2025 (Notes 14 and 15) Directors' Report Note: 1. 24 Aug 2018 the year --13,055 Date of grant 26,313 642,339 124.30 10 Jul 2015 to 9 Jul 2021 (Note 5) 12 Dec 2014 80,650 40,300 40,350 116.40 12 Dec 2016 to 11 Dec 2021 (Note 6) 2 Apr 2015 525,000 -- - 525,000 149.80 2 Apr 2016 to 1 Apr 2022 (Note 5) 10 Jul 2015 739,804 170,705 14,070 555,029 148.90 10 Jul 2016 to 9 Jul 2022 (Note 5) 21 Mar 2016 6,675,000 469,353 550,000 1,138,005 21 May 2021 (Note 4) Tencent Holdings Limited Number of share options Directors' Report Lapsed/ As at Granted Exercised forfeited As at 1 January during during Date of grant 2018 the year 2018 during 31 December the year Exercise 2018 price Exercise period HKD 22 May 2014 62,500 62,500 112.30 22 May 2015 to 10 Jul 2014 6,125,000 the year (Note 16) 21 Mar 2017 to 137,532 8,458,149 272.36 10 Jul 2018 to 10 Jul 2017 25,340 10 Jul 2017 7,455 9 Jul 2024 (Note 5) 25,340 272.36 10 Jul 2019 to 9 Jul 2024 (Note 6) 424,414 7,455 10 Jul 2020 to 9 Jul 2024 (Note 8) Annual Report 2018 37 Number of share options Lapsed/ As at 1 January Granted during Exercised during forfeited As at 158.10 272.36 9,020,095 Directors' Report 9 Jul 2024 (Note 4) 20 Mar 2023 (Note 5) 10 Jul 2017 6 Jul 2016 1,283,309 162,472 4,020 174.86 6 Jul 2017 to 5 Jul 2023 (Note 5) 24 Mar 2017 1,417,930 125,080 1,292,850 225.44 1,116,817 10 Jul 2017 23 Mar 2024 (Note 7) 24 Mar 2017 21,822,500 393,750 21,428,750 225.44 24 Mar 2018 to 23 Mar 2024 (Note 5) 272.36 13,405 13,405 10 Jul 2018 to 24 Mar 2018 to Option Scheme Details Post-IPO It shall be valid and effective for a period of ten years commencing on 13 May 2009. Pre-IPO Directors' Report Tencent Holdings Limited Post-IPO Option Scheme I 8. Post-IPO Option Scheme III Post-IPO Option Scheme IV Remaining life of the scheme It expired on 31 December 2011. It expired on 23 March 2014. 46 It expired on 16 May 2017. Option Scheme II share. Post-IPO The exercise price must be at least the higher of: (i) the closing price of the securities as stated in the Stock Exchange's daily quotations sheet on the The exercise price must be at least the higher of: (i) the closing price of the securities as stated in the It shall be valid and effective for a period of ten The exercise price must be at least the higher of: (i) the closing price of the securities as stated in the Stock Exchange's daily quotations sheet on the date of grant, which must be a business day; (ii) the average closing price of the securities as stated in the Stock Exchange's daily quotations sheets for the five business days immediately preceding the date of grant; and (iii) the nominal value of the share. Stock Exchange's daily quotations sheet on the date of grant, which must be a business day; (ii) the average closing price of the securities as stated in the Stock Exchange's daily quotations sheets for the five business days immediately preceding the date of grant; and (iii) the nominal value of the share. date of grant, which must be a business day; (ii) the average closing price of the securities as stated in the Stock Exchange's daily quotations sheets for the five business days immediately preceding the date of grant; and (iii) the nominal value of the Option Scheme III The exercise price must be at least the higher of: (i) the closing price of the securities as stated in the Stock Exchange's daily quotations sheet on the date of grant, which must be a business day; (ii) the average closing price of the securities as stated in the Stock Exchange's daily quotations sheets for the five business days immediately preceding the date of grant; and (iii) the nominal value of the share. Post-IPO Option Scheme IV Options granted must be accepted within 28 days of the date of grant, upon payment of HKD1 per grant. Options granted must be accepted within 28 days of the date of grant, upon payment of HKD1 per grant. years commencing on 17 May 2017. It shall be valid and effective unless and until being terminated on the earlier of: (i) the 15th anniversary date of the Adoption Date II; and (ii) such date of early termination as determined by the Board provided that such termination does not affect any subsisting rights of any Selected Participant. The total number of shares available for issue under the Post-IPO Option Scheme II, the Post-IPO Option Scheme III and Post-IPO Option Scheme IV are 200,551,970, 175,093,330 and 342,156,454 respectively, which represent approximately 2.11%, 1.84% and 3.59% respectively of the issued shares of the Company as at the date of this annual report. 2% of the issued shares of the Company as at the Adoption Date | (i.e. 178,776,160 shares (after the effect of the Share Subdivision)) 1% of the issued shares of the Company as at the Adoption Date | (i.e. 89,388,080 shares (after the effect of the Share Subdivision)) The Board shall select the Eligible Person(s) and determine the number of shares to be awarded. The Board shall, in respect of each Selected Participant, cause to be paid the relevant amount from the Company's resources into the Account I or to the Trustee to be held on trust for the relevant Selected Participant for the purchase and/or subscription of the Awarded Shares as soon as practicable after the Reference Date. 3% of the issued shares of the Company as at the Adoption Date II (i.e. 278,937,260 shares (after the effect of the Share Subdivision)) 1% of the issued shares of the Company as at the Adoption Date II (i.e. 92,979,085 shares (after the effect of the Share Subdivision)) The Board may, from time to time, at its absolute discretion select any Eligible Person to be a Selected Participant and grant to such Selected Participant Awarded Shares. The Board may at any time at its discretion, in respect of each Selected Participant, cause to be paid the relevant amount from the Company's resources or any subsidiary's resources into the Account II for the purchase and/or subscription of Awarded Shares as soon as practicable after the Grant Date. 48 Operation Tencent Holdings Limited Restrictions Directors' Report 2007 Share Award Scheme No award shall be made by the Board and no instructions to acquire shares and allot new shares shall be given by the Board or the Trustee under the 2007 Share Award Scheme where any director is in possession of unpublished price- sensitive information in relation to the Group or where dealings by directors are prohibited under any code or requirement of the Listing Rules and all applicable laws from time to time. 2013 Share Award Scheme No award may be made by the Board to any Selected Participant: (i) where the Company has information that must be disclosed under Rule 13.09 of the Listing Rules or where the Company reasonably believes there is inside information which must be disclosed under Part XIVA of the SFO, until such inside information has been published on the websites of the Stock Exchange and the Company; (ii) after any inside information in relation to the securities of the Company has occurred or has become the subject of a decision, until such inside information has been published; (iii) within the period commencing 60 days (in the case of yearly results), or 30 days (in the case of results for half-year, quarterly or other interim period) immediately preceding the earlier of (1) the date of a meeting of the Board (as such date is first notified to the Stock Exchange) for the approval of the Company's results for any year, half-year, quarterly or other interim period (whether or not required under the Listing Rules); and (2) the deadline for the Company to publish its quarterly, interim or annual results announcement for any such period, and ending on the date of such announcement; or (iv) in any other circumstances where dealings by Selected Participant (including directors) are prohibited under the Listing Rules, SFO or any other applicable law or regulation or where the requisite approval from any applicable regulatory authorities has not been granted. Annual Report 2018 49 Price shall be determined by the Board. 6. Note: 5. 4. MOVEMENTS IN THE SHARE OPTIONS Details of the movements in the share options during the year are set out in Note 33 to the consolidated financial statements. VALUATION OF SHARE OPTIONS Details of the valuation of share options during the year are set out in Note 33 to the consolidated financial statements. Annual Report 2018 47 Directors' Report SHARE AWARD SCHEMES The Company adopted the following two Share Award Schemes with major terms and details set out below: Maximum entitlement of each participant 1. 2007 Share Award Scheme 2013 Share Award Scheme To recognise the contributions and to attract, motivate and retain eligible participants (including any director) of the Group 2. Duration and Termination It shall be valid and effective for a period of 15 years from the Adoption Date I. 3. Maximum number of shares that can be awarded Purpose 7. Exercise price 2,933,281 2018 the year the year the year the year 2018 price Exercise period (Note 4) Exercise USD 600,000 53,070 653,070 0.000076 30 Jun 2017 to 29 Jun 2026 (Note 1) 30 Jun 2016 10,863,902 30 Jun 2016 during 31 December during during 6,521,513 576,827 7,098,340 0.27 1 Jun 2017 to 31 May 2026 (Note 2) 40 Tencent Holdings Limited Date of grant Number of share options Directors' Report Anti-dilution Lapsed/ As at adjustments 1 January Granted Exercised forfeited As at during 961,076 1 Jun 2016 624,943 11,200,035 30 Jun 2017 to 20 Dec 2017 7,260,103 642,177 7,902,280 2.32 20 Dec 2018 to 19 Dec 2027 (Note 3) 16 Apr 2018 30 Aug 2027 (Note 1) 1,300,000 4.04 16 Apr 2019 to 15 Apr 2028 (Note 3) 3 Sep 2018 460,724 460,724 2.69 3 Sep 2019 to 2 Sep 2028 (Note 3) 1,300,000 31 Aug 2018 to 0.27 7,768,593 29 Jun 2026 (Note 1) 16 Jun 2017 2,468,764 218,362 2,687,126 2.32 5 Jul 2017 to 15 Jun 2027 (Note 3) 16 Jun 2017 9,565,716 846,088 10,411,804 2.32 31 Mar 2018 to 15 Jun 2027 (Note 3) 31 Aug 2017 7,666,803 678,087 -576,297 0.27 30 Mar 2026 (Note 1) 31 Mar 2017 to 0.27 Exercise period Employees 1 Mar 2015 11,924,136 1,054,796 33,587 12,945,345 0.000076 1 Mar 2016 to price (Note 4) USD 28 Feb 2025 (Note 1) 9,939,200 879,143 41,712 10,776,631 0.27 1 Mar 2016 to 28 Feb 2025 (Note 1) 30 Mar 2015 3,444,042 1 Mar 2015 (Note 4) 2018 Exercise Directors' Report Details of movements of share options granted to employees and certain external consultants under the share option schemes adopted by TME, a subsidiary of the Group, during the year ended 31 December 2018 are as follows: Number of share options Anti-dilution Lapsed/ As at adjustments Granted Exercised forfeited As at 1 January during during during Date of grant 2018 the year the year the year during 31 December the year 304,608 3,748,650 0.27 30 Mar 2016 to 31 Dec 2015 212,000 18,750 230,750 0.000076 31 Dec 2016 to 30 Dec 2025 (Note 1) 1 Mar 2016 761,000 67,270 81,627 746,643 0.27 1 Mar 2017 to 28 Feb 2026 (Note 1) 31 Mar 2016 340,500 30,115 575 370,040 30 Dec 2025 (Note 1) 17 Oct 2018 31 Dec 2016 to -- 155,837 3,036,686 29 Mar 2025 (Note 1) 1 Jul 2015 200,000 17,690 - - 142,590 75,100 0.27 1 Jul 2016 to 30 Jun 2025 (Note 1) 1 Oct 2015 780,600 69,000 57,720 791,880 0.27 1 Oct 2016 to 30 Sep 2025 (Note 1) 31 Dec 2015 Options granted must be accepted within 28 days of the date of grant, upon payment of HKD1 per grant. 259,242 0.27 2,319,000 (Note 4) 7.14 Option Scheme As at 7 June 2004, options to subscribe for an aggregate of 72,386,370 shares were outstanding. No further option could be granted under the Pre-IPO Option Scheme. Post-IPO Option Scheme I As at 16 May 2007, options to subscribe for an aggregate of 60,413,683 shares were outstanding. No further option could be granted under the Post- IPO Option Scheme l. Post-IPO Option Scheme II The maximum number of Pre-IPO shares in respect of which options may be granted under the Post-IPO Option Scheme II shall be 444,518,270 shares (after the effect of the Share Subdivision), 5% of the relevant class of securities of the Company in issue as at 16 May 2007. The maximum number of shares which may be issued upon exercise of all outstanding options granted and yet to be exercised under the Post- IPO Option Scheme II and any other share option schemes, including the Pre-IPO Option Scheme, the Post-IPO Option Scheme I, the Post-IPO Option Scheme III and the Post-IPO Option Scheme IV, must not in aggregate exceed 30% of the issued shares of the Company from time to time (Note). Option Scheme III The maximum number of shares in respect of which options may be granted under the Post-IPO Option Scheme III shall be 180,093,330 shares (after the effect of the Share Subdivision), 2% of the relevant class of securities of the Company in issue as at 13 May 2009. The maximum number of shares which may be issued upon exercise of all outstanding options granted and yet to be exercised under the Post- IPO Option Scheme III and any other share option schemes, including the Pre-IPO Option Scheme, the Post-IPO Option Scheme I, the Post-IPO Option Scheme II and the Post-IPO Option Scheme IV, must not in aggregate exceed 30% of the issued shares of the Company from time to time (Note). Post-IPO Option Scheme IV The maximum number of shares in respect of which options may be granted under the Post- IPO Option Scheme IV shall be 379,099,339 shares, 4% of the relevant class of securities of the Company in issue as at 17 May 2017. The maximum number of shares which may be issued upon exercise of all outstanding options granted and yet to be exercised under the Post-IPO Option Scheme IV and any other share option schemes, including the Pre-IPO Option Scheme, the Post-IPO Option Scheme I, the Post- IPO Option Scheme II and Post-IPO Option Scheme III, must not in aggregate exceed 30% of the issued shares of the Company from time to time (Note). 44 Tencent Holdings Limited Post-IPO shares number of Maximum Post-IPO Option Scheme IV To recognise the contribution that certain individuals have made to the Group, to attract the best available personnel and to promote the success of نه the Group's business Qualifying participants Any eligible employee, including executive directors of the Company Any employee, consultant or director of any company within the Group Any employee (whether full time or part time), executive or officer, director (including executive, non-executive and independent non- executive directors) of any member of the Group or any invested entity, which is any entity in which the Group holds an equity interest, and any consultant, adviser or agent of any member of the Board, who have contributed or will contribute to the growth and development of the Group or any invested entity Any senior executive or senior officer, director (including executive, non-executive and independent non- executive directors) of any member of the Group or any invested entity and any consultant, adviser or agent of any member of the Board, who have contributed or will contribute to the growth and development of the Group or any invested entity Any employee (whether full time or part time), executive or officer, director (including executive, non-executive and independent non- executive directors) of any member of the Group or any invested entity, and any consultant, adviser or agent of any member of the Board, who have contributed or will contribute to the growth and development of the Group or any invested entity Annual Report 2018 43 Directors' Report Details 3. Details Pre-IPO Option Scheme Post-IPO The option period is determined by the Board provided that it is not later than the last day of the 10-year period after the date of grant of option. There is no minimum period for which an option period for which an option must be held before it can be exercised. must be held before it can be exercised. Annual Report 2018 The option period is determined by the Board provided that it is not later than the last day of the 7-year period after the date of grant of option. There is no minimum period for which an option must be held before it can be exercised. 45 Directors' Report Pre-IPO Post-IPO Post-IPO Option Scheme II Details Option Scheme Option Scheme I 6. Acceptance of offer Options granted must be accepted within 15 days of the date of grant, upon payment of RMB1 per grant. Options granted must be accepted within 28 days of the date of grant, upon payment of HKD1 per grant. The option period is determined by the Board provided that it is not later than the last day of the 7-year period after the date of grant of option. There is no minimum Option Scheme III The option period is determined by the Board provided that the period during which the option may be exercised shall not be less than one year from the date of grant of the options. Option Scheme IV Option Scheme I 4. Maximum entitlement of each participant The number of ordinary shares in respect of which options may be granted shall not exceed 10% of the number of ordinary shares issued and issuable 1% of the issued shares of the Company from time to time within any 12-month period up to the date of the latest grant under the scheme. 5. Option period All the options are exercisable in installments from the commencement of the relevant vesting period until 31 December 2011, but on the condition that the Company has been listed in a sizeable securities market. The Board may at their discretion determine 2,319,000 exercise periods. Directors' Report Post-IPO Option Scheme II 1% of the issued shares of the Company from time to time within any 12-month period up to the date of the latest grant Post-IPO Option Scheme III 1% of the issued shares of the Company from time to time within any 12-month period up to the date of the latest grant Post-IPO 1% of the issued shares of the Company from time to time within any 12-month period up to the date of the latest grant Option Scheme II the specific vesting and Post-IPO during during Date of grant 2018 the year the year the year during 31 December the year during Exercise (Note 4) price Exercise period (Note 4) External consultants USD 1 Mar 2015 2,348,099 2018 1 January As at forfeited Post-IPO 12 Jul 2019 to 17 Oct 2018 3,697,500 16 Oct 2028 (Note 3) 3,697,500 7.14 12 Jul 2020 to Sub-total: 75,481,560 6,676,301 7,777,224 2,175,612 87,759,473 16 Oct 2028 (Note 5) Annual Report 2018 41 Directors' Report Anti-dilution Number of share options As at adjustments Granted Exercised 207,701 207,701 Lapsed/ 0.000076 4. 5. The first 25% of the total options can be exercised 1 year after the commencement dates as specified in the relevant grant letters, and each 12.5% of the total options will become exercisable in each subsequent six months. All the options can be exercised 1 year after the commencement date as specified in the relevant grant letter if a certain condition is satisfied. Subject to the satisfaction of certain conditions, the first 25% of the total options can be exercised on the dates as specified in the relevant grant letters, and each 25% of the total options will become exercisable in each subsequent year. In May 2018, in order to offset the dilution effect resulting from the share dividend distributed in December 2017, TME made certain adjustments pursuant to the anti-dilution clause under the share option schemes, to the number of share options outstanding, the applicable exercise price and the number of shares available for issuance for future share options under its share option schemes. The first 25% of the total options can be exercised 2 years after the commencement dates as specified in the relevant grant letters, and each 25% of the total options will become exercisable in each subsequent year. 42 3. Tencent Holdings Limited Pre-IPO Details Option Scheme 1. Purposes Post-IPO 2,348,099 Option Scheme I Directors' Report 2. SUMMARY OF THE SHARE OPTION SCHEMES Note: 1 Mar 2016 to 28 Feb 2025 (Note 1) 1. 1 Mar 2015 2,630,000 232,650 147,710 0.27 1 Mar 2016 to 28 Feb 2025 (Note 1) 2,714,940 Sub-total: 4,978,099 2,531,023 92,822,512 440,351 355,411 5,063,039 Total: 7,116,652 7,777,224 80,459,659 35,000 2,868 8,606 6 July 2016 13,750 27,750 Total: 9 April 2022 6,500 5,738 Yang Siu Shun 6 July 2017 to 9 April 2018 24 March 2017 10,000 2,500 7,500 24 March 2018 to 24 March 2021 10,000 10,000 9 April 2019 to 9 April 2019 to Annual Report 2018 59 9 April 2022 6 July 2020 6,500 2 April 2015 9 April 2018 Li Dong Sheng John Shek Hon Lo, age 50, Chief Financial Officer and Senior Vice President, joined the Company in 2004 and served as the Company's Financial Controller from 2004 to 2008. Mr Lo was promoted to the Company's Vice President and Deputy Chief Financial Officer in 2008 and was appointed as Chief Financial Officer in May 2012. Prior to joining the Company, Mr Lo worked in PricewaterhouseCoopers as Senior Manager (audit services). He is a Fellow of the CPA Australia, a Fellow of the Hong Kong Institute of Certified Public Accountants, a Fellow of the Chartered Institute of Management Accountants and a Member of the Association of Chartered Certified Accountants. Mr Lo received a Bachelor of Business degree in Accounting from Curtin University and an EMBA degree from Kellogg Graduate School of Management, Northwestern University and HKUST. Mr Lo currently serves as a director of certain subsidiaries of the Company. Vesting period 24 March 2014 10,000 5,000 5,000 24 March 2015 to 24 March 2019 7,500 3,750 3,750 6,500 2 April 2016 to 21 March 2016 7,500 2,500 5,000 21 March 2017 to 21 March 2020 24 March 2017 10,000 2,500 7,500 24 March 2018 to 24 March 2021 2 April 2019 Ma Xiaoyi, age 45, Senior Vice President, joined the Company in 2007 and has been responsible for international publishing of Tencent Games, establishing and maintaining long-term business partnerships and cooperation for the Company since November 2008. Prior to joining the Company, Mr Ma served as a General Manager of Games Division of OPTIC Communication Co., Ltd. Prior to that, Mr Ma worked as a General Manager in Shanghai EasyService Technology Development Ltd. Mr Ma graduated from Shanghai Jiaotong University in 1997, and received an EMBA degree from Fudan University in 2008. Mr Ma currently serves as a director of certain subsidiaries of the Company. Lau Chi Ping Martin Lu Shan, age 44, Senior Executive Vice President and President of Technology and Engineering Group, joined the Company in 2000 and had served as General Manager for IM Product Divisions, Vice President for Platform Research and Development System and Senior Vice President for Operations Platform System. Since March 2008, Mr Lu has been in charge of management of the Operations Platform System of the Company. Since May 2012, Mr Lu has been in charge of management of Technical Engineering Group. Prior to joining the Company, he worked for Shenzhen Liming Network Systems Limited. Mr Lu received a Bachelor of Science degree in Computer Science and Technology from University of Science and Technology of China (USTC) in 1998. Mr Lu currently serves as a director or officer of certain subsidiaries of the Company. Annual Report 2018 The Company has received from each independent non-executive director an annual confirmation of his independence pursuant to Rule 3.13 of the Listing Rules and the Board considers them independent. In accordance with Article 87 of the Articles of Association, Mr Jacobus Petrus (Koos) Bekker and Mr lan Charles Stone will retire at the 2019 AGM and, being eligible, will offer themselves for re-election. Yang Siu Shun lan Charles Stone lain Ferguson Bruce Li Dong Sheng Independent Non-Executive Directors Charles St Leger Searle Jacobus Petrus (Koos) Bekker Non-Executive Directors Ma Huateng (Chairman) 53 Executive Directors DIRECTORS AND SENIOR MANAGEMENT Directors' Report 52 Tencent Holdings Limited 158,988 74,118 39,500 193,606 Grand Total: 23,238 5,368 2018 10,000 The directors and senior management of the Company during the year and up to the date of this annual report were: David A M Wallerstein, age 44, Chief exploration Officer and Senior Executive Vice President, joined the Company in 2001. He drives the Company's active participation in emerging technologies, business areas, and ideas, with a passion for contributing to a more resilient planet. Prior to joining the Company, Mr Wallerstein worked with Naspers in China. Mr Wallerstein currently serves as a director of a subsidiary of the Company. Directors' Report Ma Huateng, age 47, is an executive director, Chairman of the Board and Chief Executive Officer of the Company. Mr Ma has overall responsibilities for strategic planning and positioning and management of the Group. Mr Ma is one of the core founders and has been employed by the Group since 1999. Prior to his current employment, Mr Ma was in charge of research and development for Internet paging system development at China Motion Telecom Development Limited, a supplier of telecommunications services and products in China. Mr Ma is a deputy to the 13th National People's Congress. Mr Ma has a Bachelor of Science degree specialising in Computer and its Application obtained in 1993 from Shenzhen University and more than 25 years of experience in the telecommunications and Internet industries. He is a director of Advance Data Services Limited, which has an interest in the shares of the Company which would fall to be disclosed to the Company under the provisions of Divisions 2 and 3 of Part XV of the SFO. Mr Ma also serves as a director of certain subsidiaries of the Company. Lau Chi Ping Martin, age 45, is an executive director and President of the Company. Mr Lau joined the Company in 2005 as the Chief Strategy and Investment Officer and was responsible for corporate strategies, investments, merger and acquisitions and investor relations. In 2006, Mr Lau was promoted to President of the Company to manage the day-to-day operation of the Company. In 2007, he was appointed as an executive director of the Company. Prior to joining the Company, Mr Lau was an executive director at Goldman Sachs (Asia) L.L.C.'s investment banking division and the Chief Operating Officer of its Telecom, Media and Technology Group. Prior to that, he worked at McKinsey & Company, Inc. as a management consultant. Mr Lau received a Bachelor of Science degree in Electrical Engineering from University of Michigan, a Master of Science degree in Electrical Engineering from Stanford University and an MBA degree from Kellogg Graduate School of Management, Northwestern University. Mr Lau is currently a non-executive director of Kingsoft Corporation Limited, an Internet based software developer, distributor and software service provider, and Meituan Dianping, a China's leading eCommerce platform for services; both of these companies are publicly listed on the Stock Exchange. Mr Lau is also a director of Leju Holdings Limited, an online-to-offline real estate services provider in China, Vipshop Holdings Limited, an online discount retailer company, and TME, an online music entertainment platform in China; all of these companies are listed on the New York Stock Exchange. Mr Lau is also a director of JD.com, Inc., an online direct sales company in China, that is listed on NASDAQ. Mr Lau also serves as a director/corporate representative of certain subsidiaries of the Company. Directors' Report Tencent Holdings Limited 58 Zhang Xiaolong, age 49, Senior Executive Vice President and President of Weixin Group, joined the Company in March 2005 and served as the General Manager for the Guangzhou R&D Division and led the QQ Mail team to be the top mail service provider in China. Later he was promoted to Corporate Vice President and since September 2012, Mr Zhang has been appointed as Senior Vice President in charge of the product and team management of Weixin/WeChat and QQ Mail. He is also responsible for the management and review of major innovation projects. In May 2014, Mr Zhang was promoted to Senior Executive Vice President, in charge of the Weixin Group. Prior to joining the Company, Mr Zhang developed Foxmail independently in 1997 as the first generation of Internet software developer in China. He joined Boda China as Corporate Vice President in 2000, responsible for corporate mail developing. Mr Zhang received his Master's degree in Telecommunications from Huazhong University of Science and Technology in 1994. Lau Seng Yee, age 52, Senior Executive Vice President and Chairman of Tencent Advertising and of Group Marketing and Global Branding and has been affiliated with Tencent Group as a member of their top management steering committee since 2006. He served for 11 years as the President of Online Media Group before assuming his current dual chairmanship corporate roles in 2017. As Chairman of Advertising and of Group Marketing and Global Branding, he plays a key leadership role in enhancing synergies of Tencent's advertising properties across different business groups and in managing Tencent's international strategic partnerships on behalf of Tencent's leadership team. Mr Lau represents the Company as a champion for the cause of using technology for universal good, particularly for how technology could be better utilised for a sustainable development of human society. Professionally, Mr Lau was recognised as the "Global Media Person of the Year" by the Cannes Lions in 2015. In 2018, he became one of the founding members of the Global CMO Growth Council, a board featuring 25 top marketing leaders who share the vision and passion to transform the professional practices of marketing. He has agreed to serve as a global board member for the United Nation's World Food Program, an initiative targeting the global eradication of hunger by 2030. Mr Lau is a graduate of University of Kebangsaan in Malaysia and received an EMBA degree from Rutgers University in New Jersey, which in 2017 named him as a Distinguished Alumnus. He completed the Advanced Management Program at the Harvard Business School and serves as a board member of that school's Asia-Pacific Advisory Board. Tong Tao Sang, age 45, Senior Executive Vice President, President of Cloud and Smart Industries Group and Chairman of TME, is leading the Industrial Internet strategy and the enterprise businesses for Tencent. Mr Tong manages the security labs, the multi-media lab, and Youtu Al lab, and he is one of the co-chairs of Tencent's technology council. Mr Tong joined the Company as a technical architect in 2005, and had previously led QQ, Qzone, QQshow, and their advertising and value added services. Prior to joining the Company, Mr Tong worked for Sendmail, Inc. on managing the product development of operator- scale messaging systems. Mr Tong also worked for Oracle on the development and testing of Oracle Server and Oracle Applications. Mr Tong received a Bachelor of Science degree in Computer Engineering from University of Michigan, Ann Arbor in 1994 and a Master of Science degree in Electrical Engineering from Stanford University in 1997. Mr Tong currently serves as a director of certain subsidiaries of the Company. Directors' Report 40 57 Annual Report 2018 James Gordon Mitchell, age 45, Chief Strategy Officer and Senior Executive Vice President, joined the Company in 2011. He is responsible for various functions, including the Company's strategic planning and implementation, investor relationships, and mergers, acquisitions and investment activity. Prior to joining the Company, Mr Mitchell had worked in investment banking for 16 years. Most recently, Mr Mitchell was a managing director at Goldman Sachs in New York, leading the bank's Communications, Media and Entertainment research team, which analysed Internet, entertainment and media companies globally. Mr Mitchell received a degree from Oxford University and holds a Chartered Financial Analyst Certification. Mr Mitchell currently serves as a director of certain subsidiaries of the Company. Ren Yuxin, age 43, Chief Operating Officer and President of Platform & Content Group and Interactive Entertainment Group, joined the Company in 2000 and had served as General Manager for the Value-Added Services Development Division and General Manager for Interactive Entertainment Business Division. Since September 2005, Mr Ren has been responsible for the research and development, operations, marketing and sales of gaming products for the Interactive Entertainment Business. Since May 2012, Mr Ren has been appointed as Chief Operating Officer and is now in charge of the overall operation of the Platform & Content Group and Interactive Entertainment Group. Prior to joining the Company, Mr Ren has worked in Huawei Technologies Co., Ltd. Mr Ren received a Bachelor of Science degree in Computer Science and Engineering from University of Electronic Science and Technology of China in 1998 and an EMBA degree from China Europe International Business School (CEIBS) in 2008. Mr Ren currently serves as a director or officer of certain subsidiaries of the Company. Xu Chenye, age 47, Chief Information Officer, oversees the strategic planning and development for the website properties and communities, customer relations and public relations of the Company. Mr Xu is one of the core founders and has been employed by the Group since 1999. Prior to that, Mr Xu had experiences in software system design, network administration as well as marketing and sales management in his previous position at Shenzhen Data Telecommunications Bureau. Mr Xu received a Bachelor of Science degree in Computer Science from Shenzhen University in 1993 and a Master of Science degree in Computer Science from Nanjing University in 1996. Mr Xu currently serves as a director or officer of certain subsidiaries of the Company. BIOGRAPHICAL DETAILS AND OTHER INFORMATION OF DIRECTORS BIOGRAPHICAL DETAILS OF SENIOR MANAGEMENT 56 Tencent Holdings Limited Yang Siu Shun, age 63, has been an independent non-executive director since July 2016. Mr Yang is currently serving as a Member of the 13th National Committee of the Chinese People's Political Consultative Conference, a Justice of the Peace in Hong Kong, a Member of the Exchange Fund Advisory Committee of the Hong Kong Monetary Authority, a Steward of the Hong Kong Jockey Club, the Deputy Chairman of the Council of the Open University of Hong Kong, and an independent non- executive director of Industrial and Commercial Bank of China Limited which is publicly listed on the Stock Exchange and the Shanghai Stock Exchange. Mr Yang retired from PricewaterhouseCoopers ("PwC") on 30 June 2015. Before his retirement, he served as the Chairman and Senior Partner of PwC Hong Kong, the Executive Chairman and Senior Partner of PwC China and Hong Kong, one of the five members of the Global Network Leadership Team of PwC and the PwC Asia Pacific Chairman. Mr Yang also served as a Board Member and the Audit Committee Chairman of the Hang Seng Management College, up to 30 September 2018, Mr Yang graduated from the London School of Economics and Political Science in 1978. Mr Yang is a Fellow Member of the Institute of Chartered Accountants in England and Wales, the Hong Kong Institute of Certified Public Accountants and the Chartered Institute of Management Accountants. lan Charles Stone, age 68, has been an independent non-executive director since April 2004. Mr Stone is currently an independent advisor on Technology, Media and Telecoms after retiring from PCCW in Hong Kong in 2011. His career in the last 29 years has been primarily in leading mobile telecoms businesses, and new wireless and Internet technology, during which time he held senior roles in PCCW, SmarTone, First Pacific, Hong Kong Telecom and CSL, as Chief Executive or at Director level, primarily in Hong Kong, and also in London and Manila. Since 2011, Mr Stone has provided telecoms advisory services to telecom companies and investors in Hong Kong, China, South East Asia and the Middle East. Mr Stone has more than 48 years of experience in the telecom and mobile industries. Mr Stone is a fellow member of The Hong Kong Institute of Directors. Mr Stone also serves as an independent non-executive director of a subsidiary of the Company. Directors' Report Annual Report 2018 55 lain Ferguson Bruce, age 78, has been an independent non-executive director since April 2004. Mr Bruce joined KPMG in Hong Kong in 1964 and was elected to its partnership in 1971. He was the Senior Partner of KPMG from 1991 until his retirement in 1996 and served as Chairman of KPMG Asia Pacific from 1993 to 1997. Since 1964, Mr Bruce has been a member of the Institute of Chartered Accountants of Scotland, and is a fellow of the Hong Kong Institute of Certified Public Accountants, with over 54 years of international experience in accounting and consulting. He is also a fellow of The Hong Kong Institute of Directors and the Hong Kong Securities and Investment Institute (formerly known as Hong Kong Securities Institute). Mr Bruce is currently an independent non-executive director of Goodbaby International Holdings Limited, a manufacturer of durable juvenile products, South Shore Holdings Limited (formerly known as The 13 Holdings Limited), a construction, engineering services and hotel development company, and Wing On Company International Limited, a department store operating and real property investment company; all of these companies are publicly listed on the Stock Exchange. Mr Bruce is also an independent non-executive director of Yingli Green Energy Holding Company Limited, a China- based vertically integrated photovoltaic product manufacturer that is listed on the New York Stock Exchange. Mr Bruce was a non-executive director of Noble Group Limited, a commodity trading company that is publicly listed on The Singapore Exchange Securities Trading Limited, up to 11 May 2017, and was also an independent non-executive director of Citibank (Hong Kong) Limited, up to 2 August 2017. Mr Bruce was also an independent non-executive director of MSIG Insurance (Hong Kong) Limited, up to 1 July 2018. Li Dong Sheng, age 61, has been an independent non-executive director since April 2004. Mr Li is the Chairman and Chief Executive Officer of TCL Corporation, which produces consumer electronic products and is listed on the Shenzhen Stock Exchange. Mr Li is a non-executive director of Fantasia Holdings Group Co., Limited, a leading property developer and property related service provider in China that is listed on the Stock Exchange. Mr Li graduated from South China University of Technology in 1982 with a Bachelor degree in radio technology and has more than 24 years of experience in the information technology field. Mr Li is the Chairman of TCL Communication Technology Holdings Limited, which was delisted for privatisation from the Stock Exchange on 30 September 2016. Mr Li was the Chairman and executive director of TCL Multimedia Technology Holdings Limited (now known as TCL Electronics Holdings Limited) that is listed on the Stock Exchange up to 22 September 2017, and was also an independent director of Legrand that is listed on the New York Stock Exchange Euronext up to 30 May 2018. Charles St Leger Searle, age 55, has been a non-executive director since June 2001. Mr Searle is currently the Chief Executive Officer of Naspers Internet Listed Assets. He serves on the board of a number of companies associated with the Naspers Group, including Mail.ru Group Limited that is listed on the London Stock Exchange and MakeMyTrip Limited that is listed on NASDAQ. Prior to joining the Naspers Group, he held positions at Cable & Wireless plc and at Deloitte & Touche in London and Sydney. Mr Searle is a graduate of the University of Cape Town and a member of the Institute of Chartered Accountants in Australia and New Zealand. Mr Searle has more than 25 years of international experience in the telecommunications and Internet industries. Mr Searle also serves as a director of certain subsidiaries of the Company. Directors' Report Tencent Holdings Limited 54 Jacobus Petrus (Koos) Bekker, age 66, has been a non-executive director since November 2012. Koos led the founding team of the M-Net/MultiChoice pay-television business in 1985. He was also a founder director of MTN in cellular telephony. Koos headed the MIH group in its international and Internet expansions until 1997, when he became chief executive of Naspers. He serves on the boards of other companies within the group and associates, as well as other bodies. In April 2015, he became non-executive chair. Academic qualifications include BA Hons and honorary doctorate in commerce (Stellenbosch University), LLB (University of the Witwatersrand) and MBA (Columbia University, New York). Directors' Report the year Total: 2018 Vesting period lain Ferguson Bruce 24 March 2014 20,000 10,000 10,000 24 March 2015 to 24 March 2019 2 April 2015 15,000 7,500 7,500 2 April 2016 to 2 April 2019 21 March 2016 15,000 5,000 10,000 21 March 2017 to 21 March 2020 24 March 2017 20,000 5,000 15,000 24 March 2018 to 2018 31 December during the year the year Directors' Report 7. Vesting and Lapse 8. Voting Rights 2007 Share Award Scheme Awarded Shares and the related income derived therefrom are subject to a vesting scale to be determined by the Board at the date of grant of the award. Vesting of the shares will be conditional on the Selected Participant satisfying all vesting conditions specified by the Board at the time of making the award until and on each of the relevant vesting dates and his/her execution of the relevant documents to effect the transfer from the Trustee. The Trustee shall not exercise the voting rights in respect of any shares held by it pursuant to the Trustee Deed I (including but not limited to the Awarded Shares and any bonus shares and scrip shares derived therefrom). 2013 Share Award Scheme The vesting of the Awarded Shares is subject to the Selected Participant remaining at all times after the Grant Date and on the date of vesting, an Eligible Person, subject to the rules of the 2013 Share Award Scheme. Subject to the satisfaction of all vesting conditions as prescribed in the 2013 Share Award Scheme, the Selected Participants will be entitled to receive the Awarded Shares. The Trustee does not exercise any voting rights in respect of any shares held pursuant to the Trustee Deed II or as nominee. The Company shall comply with the relevant Listing Rules when granting the Awarded Shares. If awards are made to the directors or substantial shareholders of the Group, such awards shall constitute connected transaction under Chapter 14A of the Listing Rules and the Company shall comply with the relevant requirements under the Listing Rules. During the year, a total of 20,940,149 Awarded Shares were granted under the 2013 Share Award Scheme and out of which, 39,500 Awarded Shares were granted to the independent non-executive directors of the Company. Details of the movements in the Share Award Schemes during the year are set out in Note 33 to the consolidated financial statements. 24 March 2021 During the year, a total of 24,098,204 shares were issued to option holders who exercised their share options granted under the Post-IPO Option Scheme II, the Post-IPO Option Scheme III and the Post-IPO Option Scheme IV, and pursuant to the Share Award Schemes. Tencent Holdings Limited Directors' Report As at 31 December 2018, there were a total of 158,988 outstanding Awarded Shares granted to the directors of the Company, details of which are as follows: Number of Awarded Shares As at 1 January Granted during Vested As at Name of director Date of grant 2018 50 the year 9 April 2018 10,000 24 March 2018 to 24 March 2021 9 April 2018 13,000 13,000 9 April 2019 to 9 April 2022 Total: 70,000 13,000 27,500 55,500 Annual Report 2018 51 Directors' Report As at 1 January Number of Awarded Shares Granted during Vested As at during 31 December Name of director Date of grant 15,000 10,000 5,000 24 March 2017 9 April 2019 to 9 April 2022 Total: 70,000 10,000 27,500 52,500 lan Charles Stone 24 March 2014 20,000 10,000 10,000 20,000 24 March 2015 to 2 April 2015 15,000 7,500 7,500 2 April 2016 to 2 April 2019 21 March 2016 15,000 5,000 10,000 21 March 2017 to 21 March 2020 24 March 2019 18,606 Annual Report 2018 69 Pursuant to the trademark licence agreement dated 28 February 2004 entered into between Tencent Technology, as licensor, and Shiji Kaixuan, as licensee, Tencent Technology shall grant to Shiji Kaixuan a non-exclusive licence to use specified trademarks against payment of annual royalties determined as a percentage of Shiji Kaixuan's annual revenues (which may be adjusted pursuant to the agreement or the SKT CFC). During the year, no trademark licence was transacted under such arrangements, save as disclosed elsewhere in this section. lan Charles Stone 2. 1. Transactions carried out during the year ended 31 December 2018, which have been eliminated in the consolidated financial statements of the Group, are set out as follows: Directors' Report 67 Annual Report 2018 The Auditor had carried out procedures on the transactions pursuant to the Structure Contracts and had provided a letter to the Board confirming that such transactions had been approved by the Board and had been entered into, in all material respects, in accordance with the relevant Structure Contracts and had been operated so as to transfer the Surplus Cash of the OPCOS as at 31 December 2018 to the WFOES and that no dividends or other distributions had been made by the OPCOS to the holders of their equity interests. The Company's independent non-executive directors had reviewed the Structure Contracts (as defined in the section "Our History and Structure - Structure Contracts" of the IPO prospectus of the Company) and confirmed that the transactions carried out during the financial year had been entered into in accordance with the relevant provisions of the Structure Contracts and, had been operated so as to transfer by the date of this annual report Tencent Computer's and Shiji Kaixuan's Surplus Cash (as defined in the section "Our History and Structure Structure Contracts" of the IPO prospectus of the Company) as at 31 December 2018 to Tencent Technology, Cyber Tianjin (formerly known as Shidai Zhaoyang Technology (Shenzhen) Company Limited in the IPO prospectus of the Company), Tencent Beijing, Shenzhen Tencent Information, Tencent Chengdu, Chongqing Tencent Information, Shanghai Tencent Information, Tencent Shanghai, Tencent Wuhan, Hainan Network, Guangzhou Tencent Technology, Shenzhen Tencent Network and Guian New Area Tencent Cyber. The Company's independent non-executive directors had also confirmed that no dividends or other distributions had been made by the OPCOS to the holders of their equity interests and the terms of any new Structure Contracts entered into, renewed and/ or cloned during the relevant financial period are fair and reasonable so far as the Group was concerned and in the interests of the Company's shareholders as a whole. To this extent, similar Structure Contracts were entered into relating to the New OPCOS. Review of the transactions carried out under the Structure Contracts during the financial year Directors' Report 66 Tencent Holdings Limited Provision of value-added services in the PRC Provision of value-added services in the PRC Provision of value-added services in the PRC The above OPCOs are significant to the Group as they hold relevant licences to provide Internet information services and other value-added telecommunications services. The aggregate gross revenue and net asset value of the above OPCOS that are subject to the Structure Contracts amounted to approximately RMB153 billion for the year ended 31 December 2018 and approximately RMB32 billion as at 31 December 2018 respectively. Beijing Starsinhand Beijing BIZCOM Wang Dian Shiji Kaixuan Tencent Computer Shiji Kaixuan PRC Provision of Internet advertisement services in the 54.29% by Ma Huateng 22.85% by Zhang Zhidong 11.43% by Xu Chenye 11.43% by Chen Yidan Shiji Kaixuan 3. Pursuant to the TCS CFC, the parties shall co-operate in the provision of communications services. Tencent Technology and its affiliates shall allow Tencent Computer to use its and its affiliates' assets and to provide services to Tencent Computer. Tencent Computer shall transfer all of its Surplus Cash to Tencent Technology and its affiliates as consideration. The parties also established the TCS Co-operation Committee according to this agreement. During the year, revenue sharing amounting to approximately RMB64,288 million, RMB2,932 million, RMB18,901 million, RMB15,638 million, RMB7,600 million, RMB2,197 million, RMB1,996 million, RMB186 million, RMB5,174 million, RMB1,351 million, RMB111 million, RMB108 million and RMB24 million were paid or payable by Tencent Computer to Tencent Technology, Cyber Tianjin, Tencent Beijing, Tencent Chengdu, Tencent Shanghai, Tencent Wuhan, Chongqing Tencent Information, Shanghai Tencent Information, Shenzhen Tencent Information, Hainan Network, Guangzhou Tencent Technology, Shenzhen Tencent Network and Guian New Area Tencent Cyber respectively. Pursuant to the SKT CFC, the parties shall co-operate in the provision of communications services. Cyber Tianjin and its affiliates shall allow Shiji Kaixuan to use its and its affiliates' assets and to provide services to Shiji Kaixuan. Shiji Kaixuan shall transfer all of its Surplus Cash to Cyber Tianjin and its affiliates as consideration. The parties also established the SKT Co-operation Committee according to this agreement. During the year, no services was transacted under such arrangements, save as disclosed elsewhere in this section. Pursuant to the amended and restated intellectual property transfer agreement dated 28 February 2004 entered into between Tencent Technology and Tencent Computer, Tencent Computer shall assign to Tencent Technology its principal present and future intellectual property rights, free from encumbrances (except for licences granted in the ordinary course of Tencent Computer's business) in consideration of Tencent Technology's undertaking to provide certain technology and information services to Tencent Computer. During the year, no intellectual property transfer was transacted under such arrangements, save as disclosed elsewhere in this section. 240,000 433,000 (Note 5) Yang Siu Shun Personal 31,474 0.0003% (Note 6) 62 Tencent Holdings Limited Directors' Report Note: 11.43% by Chen Yidan 1. Pursuant to the trademark licence agreement dated 28 February 2004 entered into between Tencent Technology, as licensor, and Tencent Computer, as licensee, Tencent Technology shall grant to Tencent Computer a non-exclusive licence to use specified trademarks against payment of annual royalties determined as a percentage of Tencent Computer's annual revenues (which may be adjusted pursuant to the agreement or the TCS CFC). During the year, no trademark licence was transacted under such arrangements, save as disclosed elsewhere in this section. Pursuant to the domain name licence agreement dated 28 February 2004 entered into between Tencent Technology, as licensor, and Shiji Kaixuan, as licensee, Tencent Technology shall grant to Shiji Kaixuan a non-exclusive licence to use specified domain names against payment of annual royalties determined as a percentage of Shiji Kaixuan's annual revenues (which may be adjusted pursuant to the agreement or the SKT CFC). During the year, no domain name licence was transacted under such arrangements, save as disclosed elsewhere in this section. Pursuant to the domain name licence agreement dated 28 February 2004 entered into between Tencent Technology, as licensor, and Tencent Computer, as licensee, Tencent Technology shall grant to Tencent Computer a non-exclusive licence to use specified domain names against payment of annual royalties determined by the TCS Co-operation Committee within a range of percentages of Tencent Computer's annual revenues. During the year, no domain name licence was transacted under such arrangements, save as disclosed elsewhere in this section. Pursuant to the intellectual property transfer agreement dated 28 February 2004 entered into between Cyber Tianjin and Shiji Kaixuan, Shiji Kaixuan shall assign to Cyber Tianjin its principal present and future intellectual property rights, free from encumbrance (except for licences granted in the ordinary course of Shiji Kaixuan's business) in consideration of Cyber Tianjin's undertaking to provide certain technology and information services to Shiji Kaixuan. During the year, no intellectual property transfer was transacted under such arrangements, save as disclosed elsewhere in this section. 8. 7. 6. 5. 4. Directors' Report Tencent Holdings Limited 68 2. Provision of value-added services and Internet advertisement services in the PRC 11.43% by Xu Chenye 22.85% by Zhang Zhidong (registered capital) RMB5,971,427 (registered capital) RMB35,285,705 Personal Shiji Kaixuan 54.29% Personal Tencent Computer Ma Huateng Approximate % of shareholding Number of shares and class of shares held 54.29% Nature of interest Name of director (B) Long position in the shares of associated corporations of the Company Interests of spouse or child under 18 as beneficial owner Interests of beneficial owner The interest comprises 8,236 shares and 23,238 underlying shares in respect of the awarded shares granted pursuant to the 2013 Share Award Scheme. Details of the awarded shares granted to this director are set out above under "Share Award Schemes". The interest comprises 377,500 shares and 55,500 underlying shares in respect of the awarded shares granted pursuant to the 2007 Share Award Scheme and the 2013 Share Award Scheme. Details of the awarded shares granted to this director are set out above under "Share Award Schemes". The interest comprises 322,000 shares and 52,500 underlying shares in respect of the awarded shares granted pursuant to the 2007 Share Award Scheme and the 2013 Share Award Scheme. Details of the awarded shares granted to this director are set out above under "Share Award Schemes". The interest comprises 25,050 shares and 27,750 underlying shares in respect of the awarded shares granted pursuant to the 2007 Share Award Scheme and the 2013 Share Award Scheme. Details of the awarded shares granted to this director are set out above under "Share Award Schemes". The interest comprises 31,968,000 shares and 17,215,800 underlying shares in respect of the share options granted pursuant to the Post-IPO Option Scheme II and the Post-IPO Option Scheme III. Details of the share options granted to this director are set out above under "Share Option Schemes". Advance Data Services Limited, a British Virgin Islands company wholly-owned by Ma Huateng, holds 723,507,500 shares directly and 96,000,000 shares indirectly through its wholly-owned subsidiary, Ma Huateng Global Foundation. 6. 5. Name of associated corporation Family+ Save as disclosed above, none of the directors or chief executive of the Company and their associates, had interests or short positions in any shares, underlying shares or debentures of the Company and its associated corporations as at 31 December 2018. 63 54.29% by Ma Huateng Tencent Computer Business activities as at 31 December 2018 Name of the operating companies Registered owners Set out below are the registered owners and business activities of the OPCOS which had entered into transactions with the Group during the year ended 31 December 2018: Particulars of the OPCOS Directors' Report 65 Annual Report 2018 However, the Company's PRC legal advisers also advised that there are substantial uncertainties regarding the interpretation and application of the currently applicable PRC laws, rules and regulations. Accordingly, the PRC regulatory authorities and PRC courts may in the future take a view that is contrary to the position of the Company's PRC legal advisers concerning the Structure Contracts. Annual Report 2018 In the view of the Company's PRC legal advisers, the arrangement of the Structure Contracts does not violate applicable existing PRC laws and regulations as the Company indirectly operates the value-added telecommunication service business, online and mobile games, online advertising and other Internet and wireless portals in the PRC through the OPCOS that hold the necessary licences for the existing lines of businesses. Requirements related to Structure Contracts (other than relevant foreign ownership restrictions) include the Notice on Further Strengthening the Administration of Pre-examination and Approval of Online Games and the Examination and Approval of Imported Online Games (關於貫徹落實國務院《“三定”規定》和中央編辦有關解釋,進一步加強網絡遊戲前置審批和進口 GT)(the “Circular 13") jointly issued by PRC General Administration of Press and Publication, the National Copyright Administration and the National Office of Combating Pornography and Illegal Publications in September 2009 provides that foreign investors are not permitted to invest in online game-operating businesses in the PRC via wholly- owned, equity joint venture or co-operative joint venture investments and further expressly prohibits foreign investors from gaining control over or participating in domestic online game operators through indirect ways such as establishing other joint venture companies or entering into contractual or technical arrangements with the Chinese licence holders. 2018 Requirements related to Structure Contracts (other than relevant foreign ownership restrictions) as at 31 December Directors' Report Tencent Holdings Limited 64 For a summary of the major terms of the Structure Contracts, please refer to the sections headed “Our History and Structure" and "Structure Contracts" in the IPO prospectus of the Company. During the year ended 31 December 2018, there was no material change in the Structure Contracts and/or the circumstances under which they were adopted, and none of the Structure Contracts has been unwound as none of the restrictions that led to the adoption of Structure Contracts has been removed. Current PRC laws and regulations limit foreign investment in businesses providing value-added telecommunications services in China. As foreign-invested enterprises, the WFOEs do not have licences to provide Internet content or information services and other telecommunications value-added services. Accordingly, the value-added telecommunications business of the Group has been conducted through Tencent Computer, Shiji Kaixuan and the new operating companies (the “New OPCOS”) (collectively, the "OPCOS") by themselves or through their subsidiaries under the Structure Contracts (as defined in the section "Our History and Structure - Structure Contracts" of the IPO prospectus of the Company). As a result of the Structure Contracts, the Group is able to recognise and receive the economic benefit of the business and operations of the OPCOS. The Structure Contracts are also designed to provide the Company with effective control over and (to the extent permitted by PRC law) the right to acquire the equity interests in and/or assets of the OPCOS. The reasons for using Structure Contracts Reference is made to the waiver granted by the Stock Exchange regarding the compliance with the applicable disclosure, reporting and shareholders' approval requirements under Chapter 14A of the Listing Rules when the Company was listed in June 2004. CONNECTED TRANSACTIONS Directors' Report However, Circular 13 does not provide any interpretation of the term "foreign investors" or make a distinction between foreign online game companies and companies under a corporate structure similar to the Group. Thus, it is unclear whether the State General Administration of Press, Publication, Radio, Film and Television will deem the Group's structure and operations to be in violation of these provisions. 4. 0.005% Personal DIRECTORS' INTERESTS IN SECURITIES Directors' Report Annual Report 2018 61 Save as disclosed in this annual report, neither the Company nor any of its subsidiaries was a party to any arrangements to enable directors of the Company to acquire benefits by means of the acquisition of shares in, or debentures of, the Company or any other body corporate at any time during the year or at the end of the year. DIRECTORS' RIGHTS TO ACQUIRE SHARES OR DEBENTURES A permitted indemnity provision for the benefit of the directors of the Company is currently in force and was in force throughout the financial year. The Company has taken out and maintained directors and officers liability insurance which provides appropriate cover for, among others, directors of the Company. PERMITTED INDEMNITY PROVISION Save as disclosed in this annual report, no transaction, arrangement or contract of significance in relation to the Group's business to which the Company or any of its subsidiaries was a party and in which a director of the Company or an entity connected with a director of the Company had a material interest, whether directly or indirectly, subsisted at the end of the year or at any time during the year. DIRECTORS' INTERESTS IN TRANSACTIONS, ARRANGEMENTS OR CONTRACTS Save as disclosed above, none of the directors who are proposed for re-election at the 2019 AGM has a service contract with the Company which is not determinable by the Company within one year without payment of compensation, other than statutory compensation. Mr Lau Chi Ping Martin has entered into a service contract with the Company for a term of three years ended 31 December 2018. The term of the service contract has been extended for another 3 years by way of a supplemental agreement. Mr Lau is entitled to an annual bonus based on the performance of the Company in an amount to be determined by the Remuneration Committee. Mr Lau is entitled to participate in all employee benefit plans, programmes and arrangements of the Company. Mr Ma Huateng has entered into a service contract with the Company for a term of three years from 1 January 2016 to 31 December 2018. The term of the service contract has been extended for another 3 years by way of a supplemental agreement. The term of the service contract can be further extended by agreement between the Company and Mr Ma. The Company may terminate the service contract by three months' written notice at any time, subject to paying his salary for the shorter of six months and a portion of his annual bonus for the year in which termination occurred pro rata to the portion of the year before the termination becomes effective. DIRECTORS' SERVICE CONTRACTS Directors' Report Tencent Holdings Limited 60 60 Xi Dan, age 43, Senior Vice President, joined the Company in 2002 and has been responsible for overseeing the Company's talent development and functional management since May 2008. Prior to joining the Company, Mr Xi was responsible for HR management in ZTE Corporation and has more than 23 years of experience in IT and Internet industries. Mr Xi received a Bachelor of Science degree in Applied Computer Science from Shenzhen University in 1996 and an MBA degree from Tsinghua University in 2005. Mr Xi currently serves as a director or officer of certain subsidiaries of the Company. Guo Kaitian, age 46, Senior Vice President, joined the Company in 2002 and has been responsible for overseeing the Company's functional divisions of legal affairs, administration, infrastructure, procurement, public strategy, safety management and corporate social responsibility. Mr Guo received a Bachelor of Law degree from Zhongnan University of Economics and Law in 1996. Mr Guo currently serves as a director of a subsidiary of the Company. Directors' Report 193,000 As at 31 December 2018, the interests and short positions of the directors and the chief executive of the Company in the shares, underlying shares and debentures of the Company or its associated corporations (within the meaning of Part XV of the SFO) which (a) were required to be notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests and short positions which they have taken, or are deemed to have taken, under such provisions of the SFO); or (b) were required, pursuant to section 352 of the SFO, to be recorded in the register required to be kept by the Company; or (c) were required, pursuant to the Model Code, to be notified to the Company and the Stock Exchange were as follows: (A) Long position in the shares and underlying shares of the Company 3. Nature of interest (Note 4) Name of director 0.004% 374,500 lain Ferguson Bruce (Note 3) 0.0006% 52,800 Personal Li Dong Sheng Personal 0.52% 8.61% 49,183,800 819,507,500 Personal * Lau Chi Ping Martin Corporate (Note 1) Ma Huateng Number of shares/ underlying shares held (Note 2) Approximate % of shareholding reviews the Company's corporate governance and makes recommendations to the Board; Corporate Governance Committee Corporate Governance Report 77 Annual Report 2018 reviews the Company's financial information; reviews the work done by the Company's management with respect to risk management and internal control systems; and exercises oversight of the Company's financial reporting system; • • handles the relationship with the Company's external auditor; Audit Committee reviews and monitors the training and continuous professional development of the directors and senior management team; oversees the risks undertaken by the Company including determining the level of risk the Company expects to and is able to take. reviews and monitors the Company's policies and practices on its compliance with legal and regulatory requirements; develops, reviews and monitors the code of conduct and compliance manual (if any) applicable to employees and directors; reviews and monitors the implementation of the board diversity policy of the Company. reviews the Company's compliance with the CG Code and disclosure in the Corporate Governance Report. All directors have full and timely access to all relevant information as well as the advice and services of the Company's general counsel and the company secretary, with a view to ensuring that Board procedures and all applicable rules and regulations are followed. All directors may also obtain independent professional advice at the Company's expense for carrying out their The major work of the committees during the year 2018 is set out on pages 84 to 87. Corporate Governance Report 78 Tencent Holdings Limited ensures that these remuneration proposals are aligned to corporate goals and objectives; and reviews and approves proposals about the policy and structure of remuneration of directors and senior management team; Remuneration Committee The Company's governance structure of these committees can be summarised as follows: assesses the independence of independent non-executive directors; and reviews and makes recommendations to the Board on individuals nominated to be directors by shareholders; reviews and monitors the structure, size, composition and diversity of the Board in light of the Company's strategy; identifies suitable and qualified individuals and makes recommendations to the Board as to new Board members, by taking into account the individual's experience, knowledge, skills and background, as well as the Listing Rules requirements; Nomination Committee ensures compliance with the Listing Rules and any other relevant laws and regulations on any mergers, acquisitions and disposals. • identifies, considers and makes recommendations on mergers, acquisitions and disposals; and Investment Committee reviews the shareholders communication policy and makes recommendations to the Board where appropriate to enhance effective communications between the Company and its shareholders; and To better serve the long-term interests of our stakeholders, the Board delegates certain matters requiring particular time, attention and expertise to its committees. The Board has determined that these matters are better dealt with by the committees as they require independent oversight and specialist input. As such, the Board has established five committees to assist the Board: Audit Committee, Corporate Governance Committee, Investment Committee, Nomination Committee and Remuneration Committee. Each of the committees has its terms of reference which clearly specify its powers and authorities. All committees report back to the Board and make recommendations to the Board if necessary. determines the Group's communication policy; regularly evaluates its own performance and effectiveness. Charles St Leger Searle Independent non-executive directors lain Ferguson Bruce lan Charles Stone Yang Siu Shun Participated in continuous professional development¹ Jacobus Petrus (Koos) Bekker V √ V V 1 Attended training/ seminar/ conference arranged by the Company or other external parties or read relevant materials. A high level of corporate governance and integrity cannot be maintained only with the Board's efforts. Each of the Group's employees plays a role in contributing to such cause. A code of conduct which emphasises integrity and respect is distributed by the Company to all employees and it forms part of the employment agreement with each of the employees. Annual Report 2018 79 V The Board delegates the responsibility of day-to-day business and operations to the Company's senior management team, which includes its chief officers, the president and executive vice-presidents. The senior management team meets once every two weeks or as frequent as necessary to formulate policies and make recommendations to the Board. The senior management team administers, enforces, interprets and supervises compliance with the internal rules and operational procedures of the Company as well as its subsidiaries and conducts regular reviews, recommends and advises on appropriate amendments to such rules and procedures. The senior management team reports to the Board on a regular basis and communicates with the Board whenever required. Non-executive directors Ma Huateng considers and, if appropriate, declares the payment of dividends to shareholders; and defines levels of delegation in respect of specific matters, with required authority to Board committees and management; monitors non-financial aspects pertaining to the businesses of the Group; establishes Board committees with clear terms of reference and responsibilities as appropriate; ensures that the Group has appropriate risk management, internal control, internal audit and regulatory compliance procedures in place and that it communicates adequately with shareholders and stakeholders; determines director selection, orientation and evaluation; Corporate Governance Report Lau Chi Ping Martin Tencent Holdings Limited approves the Company's financial statements and interim and annual reports; appoints the Chief Executive Officer, who reports to the Board, and ensures that succession is planned; functions. We believe education and training are important for maintaining an effective Board. New directors undergo an orientation programme designed to provide a thorough understanding of the Group's operations and businesses, and also receive a handbook outlining their responsibilities under the Listing Rules and applicable laws. Existing directors are provided with tailored training programmes covering topics such as best practices in corporate governance, legal and regulatory trends and, given the nature of our business, emerging technologies and products. Directors also regularly meet with the senior management team to understand the Group's businesses, governance policies and regulatory environment. During the year ended 31 December 2018, the Company arranged training on topics relating to corporate governance, legal and regulatory updates and product trends which are relevant to the Group's businesses. The chart below summarises the participation of each of the directors in continuous professional development during the year ended 31 December 2018: Name of director Executive directors 76 Li Dong Sheng ensures that no director or any of his associates is involved in deciding his own remuneration. approves the annual business plan and budget proposed by management; Long/ short position Nature of interest/capacity shares/ underlying Approximate % shares held of shareholding MIH TC Advance Data Services Limited Long position Long position Corporate (Note 1) Corporate (Note 2) Name of shareholder 2,961,223,600 819,507,500 8.61% Note: 1. 2. MIH TC is wholly-owned by Naspers Limited indirectly through its wholly-owned intermediary companies, MIH Holdings Proprietary Limited, MIH Ming He Holdings Limited and MIH Services FZ LLC. As such, Naspers Limited, MIH Holdings Proprietary Limited, MIH Ming He Holdings Limited and MIH Services FZ LLC are deemed to be interested in the same block of 2,961,223,600 shares under Part XV of the SFO. Advance Data Services Limited holds 723,507,500 shares directly and 96,000,000 shares indirectly through its wholly-owned subsidiary, Ma Huateng Global Foundation. As Advance Data Services Limited is wholly-owned by Ma Huateng, Mr Ma has an interest in these shares as disclosed under the section of "Directors' Interests in Securities". Save as disclosed above, the Company had not been notified of any other persons (other than the directors or chief executive of the Company) who, as at 31 December 2018, had interests or short positions in the shares and underlying shares of the Company as recorded in the register required to be kept under section 336 of the SFO. 72 Tencent Holdings Limited 31.10% Directors' Report Number of As at 31 December 2018, the following persons, other than the directors or chief executive of the Company, had interests or short positions in the shares or underlying shares of the Company which would fall to be disclosed to the Company under the provisions of Divisions 2 and 3 of Part XV of the SFO as recorded in the register required to be kept by the Company under section 336 of the SFO, or who was, directly or indirectly, interested in 5% or more of the shares of the Company: retains full and effective control over the Group and monitors management with regard to the implementation of the approved annual business plan and budget; Directors' Report 9. 10. 11. Pursuant to the information consultancy services agreement dated 28 February 2004 entered into between Tencent Technology, as consultant, and Tencent Computer, Tencent Technology shall provide specified information consultancy services to Tencent Computer against payment of an annual consultancy service fee determined by the TCS Co-operation Committee within a range of percentages of Tencent Computer's annual revenues. During the year, no consultancy service was transacted under such arrangements, save as disclosed elsewhere in this section. Pursuant to the technical consultancy services agreement dated 28 February 2004 entered into between Tencent Technology, as consultant, and Shiji Kaixuan, Tencent Technology shall provide specified technical consultancy services to Shiji Kaixuan against payment of an annual consultancy service fee determined by the SKT Co-operation Committee within a range of percentages of Shiji Kaixuan's annual revenues. During the year, no consultancy service was transacted under such arrangements, save as disclosed elsewhere in this section. Pursuant to the co-operation framework agreement entered into between each of the New OPCOS and one of the WFOES, the parties shall cooperate in the provision of communications services. For each agreement, the WFOEs shall allow the New OPCOS to use its and its affiliates' assets and provide services to the New OPCOS. The New OPCOS shall transfer all of its Surplus Cash to the WFOES and its affiliates as consideration. Co-operation committees have also been established according to these agreements. During the year, revenue sharing amounting to approximately RMB2 million, RMB3 million and RMB83 million was paid or payable by Wang Dian to Tencent Technology, Cyber Tianjin and Tencent Beijing respectively. Revenue sharing amounting to approximately RMB3 million, RMB22 million and RMBO.012 million was paid or payable by Beijing BIZCOM to Tencent Technology, Cyber Tianjin and Tencent Beijing respectively. Revenue sharing amounting to approximately RMB3 million and RMB1 million was paid or payable by Beijing Starsinhand to Cyber Tianjin and Tencent Beijing respectively. 10 Tencent Holdings Limited Long/ short position in the shares of the Company Directors' Report Due to regulatory limitations restricting foreign investment in businesses providing value-added telecommunications services in China, the Company conducts some of its business in the PRC through the OPCOs. These contractual arrangements may not be as effective in providing control as direct ownership. Pursuant to the Structure Contracts, the arbitration tribunal is entitled to decide compensation for the equity interests or property ownership of OPCOS, decide to implement enforceable remedy (including mandatorily requiring OPCOS to transfer the equity interests of OPCOS to the WFOES, etc.) or order the bankruptcy of OPCOS. Prior to the formation of the arbitration tribunal, the courts of the places where the major assets of OPCOS are situated are entitled to implement interim remedies to ensure the enforcement of the future decisions of the arbitration tribunals. The WFOES have been structured and located in order to benefit from preferential tax treatments offered to companies located in designated economic zones and/or operating software-related businesses. Although the relevant governmental authority has granted such preferential tax treatment to certain WFOES and OPCOS, there can be no assurance that the conditions under which these treatments are provided will always be present. The relevant WFOES and OPCOS would use their reasonable endeavours to take all necessary actions, including but not limited to maintaining or acquiring their status as "High and New Technology Enterprise" or "National Key Software Enterprise", in order to continue to enjoy the reduced income tax rate and the other tax concessions. Due to the legal constraints in relation to foreign investment in the telecommunications value-added services industry in the PRC, a number of agreements have been entered into between members of the Group whereby the Company and the WFOEs derive substantially all their revenues from transactions with the OPCOs. The recognition of revenues outlined in these intragroup contracts could be challenged by tax authorities and any adjustment in tax treatment could have a material and adverse impact on the taxable profitability of the Group. As advised by the Company's PRC legal advisers, it is unlikely that the tax treatment of revenues will be challenged by the PRC tax authorities, provided that the transactions under these intra-group contracts represent bona fide transactions conducted on an arm's length basis. The Company will take all necessary actions to ensure and monitor that relevant transactions are to be conducted on an arm's length basis to minimise the risks of adjustment in tax treatment. For details of the risks associated with the Structure Contracts, please refer to the section headed “Risk factors - Risks relating to our structure" in the IPO prospectus of the Company. Other connected transactions Save as the related parties transaction disclosed in Note 13(a) (Senior management's emoluments), Note 13(b) (Five highest paid individuals), Note 14 (Benefits and interests of directors), Note 20 (Transactions with associates), Note 25 (Loans to investees and investees' shareholders) and Note 33 (Share-based payments) to the consolidated financial statements, no related party transaction disclosed in the consolidated financial statements constitutes a discloseable connected transaction as defined under the Listing Rules. The Company has complied with the disclosure requirements set out in Chapter 14A of the Listing Rules. Annual Report 2018 71 Directors' Report INTERESTS OF SUBSTANTIAL SHAREHOLDERS The risks associated with Structure Contracts and the actions taken by the Company to mitigate the risks MANAGEMENT CONTRACTS 70 MAJOR CUSTOMERS AND SUPPLIERS The register of members of the Company will be closed from Tuesday, 21 May 2019 to Wednesday, 22 May 2019, both days inclusive, during which period no transfer of shares will be registered. In order to qualify for the proposed final dividend, all duly completed transfer forms accompanied by the relevant share certificates must be lodged with the Company's branch share registrar, Computershare Hong Kong Investor Services Limited, at Shops 1712-1716, 17th Floor, Hopewell Centre, 183 Queen's Road East, Wan Chai, Hong Kong for registration not later than 4:30 p.m. on Monday, 20 May 2019. AUDITOR The financial statements have been audited by PricewaterhouseCoopers who will retire and, being eligible, offer themselves for re-appointment at the 2019 AGM. On behalf of the Board Ma Huateng Chairman Hong Kong, 21 March 2019 Annual Report 2018 75 Corporate Governance Report Maintaining the highest standards of corporate governance and ethical business practices are core values of the Group. The Board views effective corporate governance practices as a priority of the Group, with the aim of providing our investors with a thorough understanding of the Group's management and how such management oversees and manages different businesses of the Group. Our belief is that investors will realise significant long-term value when the Group's businesses are conducted in an open and responsible manner. Ethical business practices go hand in hand with strong corporate governance, and we believe that running our businesses in an ethical manner will lead to public trust and will ultimately create shareholder value for the Group. CORPORATE GOVERNANCE PRACTICES The Company's corporate governance practices are based on the code provisions as set out in the CG Code. The Board believes that throughout the year ended 31 December 2018, the Company complied with the applicable code provisions set out in the CG Code, except for the deviation from code provisions A.2.1 regarding the segregation of the roles of the chairman and chief executive and A.4.2 regarding the retirement and re-election of directors. The Board continues to monitor and review the Company's corporate governance practices and makes necessary changes when appropriate. BOARD OF DIRECTORS The Board's fundamental responsibility is to exercise its best judgment and to act in the best interests of the Company and its shareholders. The Board oversees management's efforts to promote the Company's success while operating in an effective and responsible manner. The Board also formulates the Company's overall business strategy and monitors management's execution of such strategy. The Board has defined the business and governance issues for which it needs to be responsible for, and these matters are reviewed periodically to ensure that the Company maintains effective and up-to-date corporate governance practices. In this regard, the Board: • determines the Group's mission, provides its strategic direction and is responsible for the approval of strategic plans; No contracts concerning the management and administration of the whole or any substantial part of the business of the Company were entered into or existed during the year. • (B) Entitlement to the Proposed Final Dividend The register of members of the Company will be closed from Thursday, 9 May 2019 to Wednesday, 15 May 2019, both days inclusive, during which period no transfer of shares will be registered. In order to be entitled to attend and vote at the 2019 AGM, all duly completed transfer forms accompanied by the relevant share certificates must be lodged with the Company's branch share registrar, Computershare Hong Kong Investor Services Limited, at Shops 1712-1716, 17th Floor, Hopewell Centre, 183 Queen's Road East, Wan Chai, Hong Kong for registration not later than 4:30 p.m. on Wednesday, 8 May 2019. Responsibilities Directors' Report (A) Entitlement to Attend and Vote at the 2019 AGM For the year ended 31 December 2018, the five largest customers of the Group accounted for approximately 4.23% of the Group's total revenues while the largest customer of the Group accounted for approximately 1.37% of the Group's total revenues. In addition, for the year ended 31 December 2018, the five largest suppliers of the Group accounted for approximately 18.63% of the Group's total purchases while the largest supplier of the Group accounted for approximately 5% of the Group's total purchases. AUDIT COMMITTEE The Audit Committee, together with the Auditor, has reviewed the Group's audited consolidated financial statements for the year ended 31 December 2018. The Audit Committee has also reviewed the accounting principles and practices adopted by the Group and discussed auditing, risk management, internal control and financial reporting matters. None of the directors, their close associates or any shareholder (which to the knowledge of the directors owns more than 5% of the number of issued shares of the Company) had an interest in any of the major customers or suppliers noted above. The Group is committed to minimising the impact on the environment from our business activities and the details of such efforts are set out in the section headed "Environment" in the Environmental, Social and Governance Report in this annual report. As far as the Board is aware, the Group has complied with the relevant laws and regulations that have a significant impact on the Group in all material respects. Annual Report 2018 73 18 Directors' Report ADOPTION OF CODE OF CONDUCT REGARDING DIRECTORS' SECURITIES TRANSACTIONS The Company has adopted a code of conduct regarding directors' securities transactions on terms no less exacting than the required standard set out in the Model Code. The directors of the Company have complied with such code of conduct throughout the accounting year covered by this annual report. ENVIRONMENT AND COMPLIANCE WITH LAWS There is no provision for pre-emptive rights under the Articles of Association, or the laws of Cayman Islands, which would oblige the Company to offer new shares on a pro rata basis to existing shareholders. PRE-EMPTIVE RIGHTS Tencent Holdings Limited 74 SUFFICIENCY OF PUBLIC FLOAT The total remuneration cost incurred by the Group for the year ended 31 December 2018 was RMB42,153 million (2017: RMB34,866 million). As at the date of this annual report, based on information that is publicly available to the Company and within the knowledge of its directors, the directors confirm that the Company has maintained during the year the amount of public float as required under the Listing Rules. The remuneration policy and package of the Group's employees are periodically reviewed. Apart from pension funds and in- house training programmes, discretionary bonuses, share awards and share options may be awarded to employees according to the assessment of individual performance. As at 31 December 2018, the Group had 54,309 employees (2017: 44,796). The number of employees employed by the Group varies from time to time depending on needs and employees are remunerated based on industry practice. EMPLOYEE AND REMUNERATION POLICIES CLOSURE OF REGISTER OF MEMBERS Li Dong Sheng 6/6 lain Ferguson Bruce 1/1 1/1 2/2 8/8 Independent non-executive directors Jacobus Petrus (Koos) Bekker 1/1 4/4 6/6 Non-executive directors 1/1 1/1 6/6 1/1 Charles St Leger Searle 919 1/1 lan Charles Stone 2/2 8/8 6/6 6/6 1/1 4/4 1/1 2/2 4/6 8/8 1/1 2/2 8/8 6/6 0/1 3/4 1/1 Yang Siu Shun 6/6 Lau Chi Ping Martin Annual Report 2018 Executive directors Further, in compliance with Rule 3.10 of the Listing Rules, two of our independent non-executive directors have the appropriate professional qualifications of accounting or related financial management expertise, and provide valuable advice from time to time to the Board. The Company has also received from each independent non-executive director a confirmation annually of his independence and the Nomination Committee has conducted an annual review and considers that all independent non-executive directors are independent, taking into account of the independence guidelines set out in Rule 3.13 of the Listing Rules in the context of the length of service of each independent non-executive director. The Board values the importance of professional judgment and advice provided by non-executive directors to safeguard the interests of the shareholders. The non-executive directors contribute diversified qualifications and experience to the Group by expressing their views in professional, constructive and informed manner, and actively participate in Board and committee meetings and to bring professional judgment and advice on issues relating to the Group's strategies, policies, performance, accountability, resources, key appointments, standards of conduct, conflicts of interests and management process, with the shareholders' interests being the utmost important factor. The non-executive directors also exercise their professional judgment and utilise their expertise to scrutinise the Company's performance in achieving agreed corporate goals, and monitor performance reporting. In order to take advantage of the skills, experiences and diversity of perspectives of the directors and in order to ensure that the directors give sufficient time and attention to the Group's affairs, we request each of the directors to disclose to the Company, on a quarterly basis, the number and the nature of offices held in public companies or organisations and other significant commitments. The Board's composition is in compliance with the requirement under Rule 3.10A of the Listing Rules that the number of independent non-executive directors must represent at least one-third of the Board. The Board believes that the balance between the executive directors and the non-executive directors is reasonable and adequate to provide sufficient checks and balances that safeguard the interests of the shareholders and the Group. A list of directors and their respective biographies are set out on pages 53 to 56 of this annual report. As at the date of this annual report, the Board is comprised of eight directors, with two executive directors, two non-executive directors and four independent non-executive directors. During the year ended 31 December 2018 and up to the date of this annual report, there is no change to the composition of the Board. Composition Corporate Governance Report Tencent Holdings Limited As part of our corporate governance practice to provide transparency to the investor community and in compliance with the Listing Rules and the CG Code, independent non-executive directors are identified as such in all corporate communications containing the names of the directors. In addition, an updated list of directors identifying the independent non-executive directors and the roles and functions of the directors is maintained on the Company Website and the Stock Exchange's website. 80 The Board is therefore of the view that there is an adequate balance of power and that appropriate safeguards are in place. Nevertheless, the Board will continue to regularly monitor and review the Company's current structure and to make necessary changes when appropriate. Besides, all major decisions have been made in consultation with members of the Board and appropriate committees, as well as the senior management team. Chief officers and senior executives are invited to attend Board meetings from time to time to make presentations and answer Board's enquiries. In addition, directors are encouraged to participate actively in all Board and committee meetings of which they are members, and the Chairman ensures that all issues raised are properly briefed at the Board meetings, and he works with the senior management team to provide adequate, accurate, clear, complete and reliable information to members of the Board in a timely manner. Further, the Chairman ensures that adequate time is available for discussion for all items at the Board meetings. During the year ended 31 December 2018, the Chairman held a meeting with the non-executive directors (including the independent non-executive directors) without the presence of the executive directors as required by the Listing Rules. In view of the ever-changing business environment in which our Group operates, the Chairman and Chief Executive Officer must be technically sophisticated and sensitive to fast and rapid market changes, including changes in users' preferences, in order to promote the different businesses of the Group. The Board thus considers that a segregation of the roles of the Chairman and Chief Executive Officer may create unnecessary costs for the daily operation of the Group. Mr Ma Huateng serves as the Chairman and Chief Executive Officer of the Company. This is at variance with code provision A.2.1 of the CG Code, which provides that the roles of chairman and chief executive should be separate and should not be performed by the same individual. The division of responsibilities between the chairman and chief executive should be clearly established and set out in writing. Chairman and Chief Executive Officer informal updates from time to time and structured monthly updates on the Company's performance, position and prospects are provided to the directors. 1/1 the company secretary attends training in compliance with the Listing Rules requirements; and 18 Ma Huateng 81 Corporate Governance Report Committee Meeting Committee Committee Committee Board Name of director Remuneration General Governance Nomination Audit 18 Annual Attendance/ No. of Board, Committee Meetings and Annual General Meeting Board Activity Corporate Governance Report 82 Tencent Holdings Limited The Chairman, in accordance with the Articles of Association, whilst holding such office is not subject to retirement by rotation nor taken into account in determining the number of directors to retire in each year. Therefore, there is a deviation from code provision A.4.2 of the CG Code. The Chairman is one of the founders of the Group and he plays a key role in the growth and development of the Group and his continuing presence in the Board is vital to the sustainable development of the Group. Given the importance of the Chairman's role in the development of the Group, the Board considers that the deviation from code provision A.4.2 of the CG Code has no material impact on the operation of the Group as a whole. Code provision A.4.2 of the CG Code provides that all directors appointed to fill a casual vacancy should be subject to election by shareholders at the first general meeting after appointment. Every director, including those appointed for a specific term, should be subject to retirement by rotation at least once every three years. The Board is the core of the Group's success, and with the appropriate composition of the Board, we can benefit from the right set of skills, experience and diversity of perspectives to take the Company forward. Therefore, it is essential for the Company to maintain a formal, considered and transparent procedure for the appointment of new directors to the Board. It is our corporate governance practice and in accordance with the Articles of Association that all directors (except for the Chairman) should be subject to re-election at regular intervals and the resignation and removal of any director should be explained with reasons. In the 2018 annual general meeting, Messrs Li Dong Sheng and lain Ferguson Bruce retired and were re-elected. Appointments, Re-election and Removal Corporate At the Board meetings, the Board discussed a wide range of matters, including the Group's overall strategies, financial and operational performances, approved the annual, interim and quarterly results of the Group, the appointment of directors, business prospects, regulatory compliance and corporate governance, and other significant matters. The company secretary, in consultation with the Chairman and the senior management team, prepares the agenda for each meeting and all directors are given the opportunity to include matters for discussion in the agenda. The company secretary also ensures that all applicable rules and regulations in relation to the Board meetings are followed. The company secretary sends notice of the Board meeting to each of the directors at least 14 days in advance of each regular Board meeting. The company secretary also sends the agenda, board papers and relevant information relating to the Group to each of the directors at least 3 days in advance of each regular Board meeting and committee meeting, and keeps the directors updated on the Group's financial performance and latest developments. If any director raises any queries, steps will be taken to respond to such queries as promptly and fully as possible. If there is potential or actual conflict of interests involving a substantial shareholder or a director, such director will declare his interest and will abstain from voting on such matters. The directors may approach the Company's senior management team when necessary. The directors may also seek independent professional advice at the Company's expense in appropriate circumstances. 86 83 The Third Line of Defence mainly consists of the IA and the anti-fraud investigation department. The IA holds a high degree of independence and is responsible for providing an independent evaluation on the effectiveness of the Company's risk management and internal control systems, and monitoring management's continuous improvement over the risk management and internal control areas. The anti-fraud investigation department is responsible for receiving whistleblower reports through various channels and for following up and investigating alleged fraudulent activities. It also assists management in promoting the "Tencent Sunshine Code of Conduct" (the "Sunshine Code") and the value of integrity to all employees of the Company. The IA and the anti-fraud investigation department have direct reporting lines to the Audit Committee. These systems are designed to manage rather than eliminate the risk of failure to achieve business objectives, and can only provide reasonable but not absolute assurance against material misstatement or loss. The Board and management have always placed importance on the Company's risk management and internal control systems. In 2018, the Company has invested even more resources in the continuous improvement of the risk management and internal control systems, which have also increased the awareness of risk management among the employees. The internal control function has continuously worked closely with and provided proactive supports to the business groups in their business development and risk management. Furthermore, the IA has also continued to promote the deployment of continuous audits to provide more effective and timely independent evaluations. The anti-fraud investigation department further strengthened the values of integrity among the employees, followed up and investigated the alleged fraudulent activities timely. The connection and interaction among the three lines of defence have been further strengthened to have more positive supports to the Company. Risk Management The Remuneration Committee's major work during the year 2018 includes the following: The Third Line of Defence -- Independent Assurance The Company is committed to continuously improving the risk management system, including structure, process and culture, through the enhancement of risk management ability, to ensure long-term growth and sustainable development of the Company's business. Annual Report 2018 89 Corporate Governance Report Tencent Holdings Limited The Remuneration Committee has the delegated responsibility to determine the remuneration packages of each member of the senior management team and make recommendations to the Board on the remuneration packages of each director. The Remuneration Committee met four times in 2018. Individual attendance of each Remuneration Committee member is set out on page 83. The Remuneration Committee comprises only non-executive directors. Its members are Mr Ian Charles Stone, Mr Li Dong Sheng (both are independent non-executive directors) and Mr Jacobus Petrus (Koos) Bekker (non-executive director). The Remuneration Committee is chaired by Mr lan Charles Stone. Remuneration Committee The Company has established a risk management system (including the "Three Lines of Defence" internal monitoring model as detailed above) which sets out the roles and responsibilities of each relevant party as well as the relevant risk management policies and processes. Each business group of the Company, on a regular basis, identifies and assesses risk factors that may negatively impact the achievement of its objectives, and formulates appropriate response measures. The Company's staff also attends training in relation to risk management and internal control on a regular basis. During 2018, the Nomination Committee reviewed board composition and director succession, and the board diversity policy, and also considered and made recommendations to the Board on the re-designation of the Chairman of the Audit Committee and the re-appointment of the retiring directors at the 2018 annual general meeting. The Nomination Committee has also assessed the independence of the independent non-executive directors and considers all of them to be independent, taking into account of the independence guidelines set out in Rule 3.13 of the Listing Rules in the context of the length of service of each independent non-executive director. The Company recognises the benefits of having a diverse Board, and views diversity at Board level as a business imperative that will help the Company achieve its strategic objectives and maintain a competitive advantage. As such, the Board has set measurable objectives for the implementation of the board diversity policy to ensure that the Board has the appropriate balance of skills, experience and diversity of perspectives that are required to support the execution of its business strategy and maintain the effectiveness of the Board. The Nomination Committee is satisfied that the board diversity policy is successfully implemented with reference to the measurable objectives. The Nomination Committee will continue to monitor the implementation of the board diversity policy and will review the board diversity policy periodically to ensure its continued effectiveness. Corporate Governance Report 88 training has been and will continue to be provided to directors on a timely basis, including briefing the directors on any updates to the Listing Rules and relevant laws; reviewing and recommending to the Board in respect of the remuneration policies and structure of the Company by benchmarking peer companies with a similar scale to ensure that the Company's remuneration packages are competitive to recruit the best talents in the industry and to retain key staff; reviewing and recommending to the Board on the remuneration packages for the directors; assessing performance and, reviewing and approving adjustments to the remuneration packages for the members of the senior management team; and reviewing and approving compensation awards granted to senior management team, to recognise their contributions to the Company and to provide incentives for future performances. In conducting its work in relation to the remuneration of directors and senior management team, the Remuneration Committee ensured that no individual or any of his associates was involved in determining his own remuneration. It also ensured that remuneration awards were determined by reference to the performance of the individual and the Company and were aligned with the market practice and conditions, the Company's goals and strategies. They are designed to attract, retain and motivate high performing individuals, and reflect the specifics of individual roles. In respect of non-executive directors, the Remuneration Committee has reviewed the fees payable to them taking into account the particular nature of their duties, relevant guidance available and the requirements of the Listing Rules. ACCOUNTS, RISK MANAGEMENT AND INTERNAL CONTROL Tencent Holdings Limited As part of the Board's responsibility, the Board ensures that a balanced and clear assessment of the Group's performance and prospects is presented. The directors acknowledge that it is their responsibility to prepare the accounts that give a true and fair view of the Group's financial position on a going-concern basis and other announcements and financial disclosures. To assist the Board in discharging its responsibilities, the senior management team provides updates to the Board from time to time, including the Group's business and financial position in sufficient detail, to give the directors a balanced, understandable and clear assessment of the performance, position and prospects of the Group. The senior management team also provides all necessary and relevant information to the Board, giving the directors sufficient explanation and information they need to discharge their responsibilities and make an informed assessment of financial and other information put before them for approval. The Company auditor's statement in respect of their reporting responsibilities is set out in the "Independent Auditor's Report". Corporate Governance Report Adequate and effective risk management and internal control systems are key to safeguarding the achievement of the Company's business strategies. The risk management and internal control systems shall also ensure the achievement of the Company's objectives in operational effectiveness and efficiency, reliable financial reporting, and compliance with applicable laws, regulations and policies. The Board acknowledges that it is the Board's responsibility to ensure that the Company has established and maintained adequate and effective risk management and internal control systems. The Board delegates its responsibility to the Audit Committee to review the practices of management with respect to risk management and internal control, including the design, implementation and supervision of the risk management and internal control systems. This review formally takes place on a quarterly basis. The Audit Committee also reviews the effectiveness of the risk management and internal control systems on an annual basis. The Board is responsible for overseeing the risk appetite of the Company including determining the risk level the Company expects and is able to take, and proactively considering, analysing and formulating strategies to manage the key risks that the Company is exposed to. To ensure that the risk management and internal control systems are effective, the Company, under the supervision and guidance of the Board and factoring the actual needs of the Company, has adopted the "Three Lines of Defence" internal monitoring model as an official organisational structure for risk management and internal control. The First Line of Defence -- Operation and Management The First Line of Defence is mainly formed by the business and functional departments of each business group of the Company who are responsible for the day-to-day operation and management. It is responsible for designing and implementing controls to address the risks. The Second Line of Defence -- Risk Management The Second Line of Defence is mainly the IC. This line of defence is responsible for formulating policies related to the risk management and internal control of the Company and for planning and implementing the establishment of integrated risk control systems. For ensuring effective implementation of such systems, this line of defence also assists and supervises the first line of defence in the establishment and improvement of risk management and internal control systems. Annual Report 2018 87 Annual Report 2018 The Nomination Committee met once in 2018. Individual attendance of each Nomination Committee member is set out on page 83. Nomination Committee • Corporate Governance Report Tencent Holdings Limited 84 the status of compliance with the CG Code, the Listing Rules and relevant laws by the Group; the 2018 first and third quarters results announcements; the 2018 interim report and interim results announcement; the 2017 annual report, including the Corporate Governance Report, the Environmental, Social and Governance Report, Directors' Report and the financial statements, as well as the related results announcement; • The Audit Committee's major work during the year 2018 includes reviewing: Mr Yang Siu Shun was appointed as the Chairman of the Audit Committee and Mr lain Ferguson Bruce ceased to be the Chairman of the Audit Committee with effect from the conclusion of the annual general meeting of the Company held on 16 May 2018. * The Audit Committee comprises only non-executive directors. Its members are Mr Yang Siu Shun*, Mr lain Ferguson Bruce*, Mr lan Charles Stone (all of them are independent non-executive directors) and Mr Charles St Leger Searle (non-executive director). Mr Yang Siu Shun, who chairs the Audit Committee, and Mr lain Ferguson Bruce and Mr Charles St Leger Searle have appropriate professional qualifications and experiences in financial matters. Audit Committee As described above, the Board has established five committees, each of which has been delegated responsibilities and reports back to the Board: Audit Committee, Corporate Governance Committee, Investment Committee, Nomination Committee and Remuneration Committee. The roles and functions of these committees are set out in their respective terms of reference. The terms of reference of each of these committees will be revised from time to time to ensure that they continue to meet the needs of the Company and to ensure compliance with the CG Code. The terms of reference of the Audit Committee, the Nomination Committee and the Remuneration Committee are available on the Company Website and the Stock Exchange's website. THE COMMITTEES The company secretary ensures that there is a good and timely flow of information to the Board. The company secretary is responsible for taking minutes of all Board and committee meetings and ensuring that sufficient details of the matters considered and decisions reached have been recorded. Draft and final version of the minutes of meetings are sent to the directors for comments and records respectively within a reasonable time after each meeting, and final minutes with the relevant board papers and related materials are kept by the company secretary and are available for review and inspection by the directors at any time. Corporate Governance Report The Audit Committee meets not less than four times a year; the Audit Committee met eight times in 2018. Individual attendance of each Audit Committee member is set out on page 83. In addition to the members of the Audit Committee, meetings were attended by the Chief Financial Officer, the Head of IA and the Head of IC, and the external auditor at the invitation of the Audit Committee. The Nomination Committee comprises a majority of independent non-executive directors. Its members are Mr Ma Huateng, Mr Li Dong Sheng, Mr lain Ferguson Bruce, Mr Ian Charles Stone (all three are independent non-executive directors) and Mr Charles St Leger Searle (non-executive director). The Nomination Committee is chaired by Mr Ma Huateng. in relation to the external auditor, their plans, reports and management letter, fees, involvement in non-audit services, and their terms of engagement; the adequacy of resources, qualifications and training of the Group's finance department; and In 2018, the Investment Committee had considered and passed various resolutions on its decisions on the Group's acquisitions and disposals. The Investment Committee comprises a majority of executive directors. Its members are Mr Lau Chi Ping Martin, Mr Ma Huateng and Mr Charles St Leger Searle. The Investment Committee is chaired by Mr Lau Chi Ping Martin. Investment Committee Corporate Governance Report Annual Report 2018 85 reviewed legal and regulatory compliance, including the insider dealing policy, the disclosure of inside information policy and the shareholders communication policy. reviewed the Company's policies and practices on corporate governance; and reviewed the Company's compliance with the ESG Reporting Guide and disclosure in the Environmental, Social and Governance Report; the plans (including those for 2018), resources and work of the Company's internal auditors; reviewed the Company's compliance with the CG Code and disclosure in the Corporate Governance Report; • The Corporate Governance Committee's major work during the year 2018 includes the following: The Corporate Governance Committee met twice in 2018. Individual attendance of each Corporate Governance Committee member is set out on page 83. The Corporate Governance Committee comprises only non-executive directors. Its members are Mr Charles St Leger Searle (non-executive director), Mr lain Ferguson Bruce, Mr Ian Charles Stone and Mr Yang Siu Shun (all of them are independent non-executive directors). The Corporate Governance Committee is chaired by Mr Charles St Leger Searle. Corporate Governance Committee In view of the new requirement for extending the cooling-off period to 2 years for former professional advisers to take up the position of an independent non-executive director of listed issuers under the revised CG Code which has become effective from 1 January 2019, the terms of reference of the Audit Committee were revised and adopted in December 2018 to align with the revised CG Code. PricewaterhouseCoopers ("PwC") is the Company's external auditor. The Audit Committee annually reviews the relationship of the Company with PwC. Having also reviewed the effectiveness of the external audit process as well as the independence and objectivity of PwC, the Audit Committee is satisfied with this relationship. As such, the Audit Committee has recommended their re-appointment at the 2019 AGM. the effectiveness of the Company's financial reporting system, the system of internal controls in operation, risk management system and associated procedures within the Group. discussed on the arrangements made for directors and senior management team to attend training sessions for continuous professional development; review of the shareholders communication policy has been and will be conducted on a regular basis; The Board met six times in 2018. The attendance of each director at Board, committee meetings and annual general meeting, whether in person or by means of electronic communication, is detailed in the table below: To stay abreast of the high level of corporate governance and maintain transparency of our corporate governance practices, we have continued to adopt and foster the following corporate governance practices: Corporate Governance Report • In addition, the Board has adopted various practices to bring the Group to a high level of corporate governance and compliance with the CG Code. Corporate Information 311 DEFINITION 180 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 178 CONSOLIDATED STATEMENT OF CASH FLOWS 174 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY 171 CONSOLIDATED STATEMENT OF FINANCIAL POSITION 170 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME 169 CONSOLIDATED INCOME STATEMENT 160 INDEPENDENT AUDITOR'S REPORT 110 ENVIRONMENTAL, SOCIAL AND GOVERNANCE REPORT CORPORATE GOVERNANCE REPORT 77 30 DIRECTORS' REPORT 9 MANAGEMENT DISCUSSION AND ANALYSIS CHAIRMAN'S STATEMENT 4 FINANCIAL SUMMARY 3 CORPORATE INFORMATION 2 CONTENTS Annual Report 智慧溝通 靈感無限 DIRECTORS 56,118 32,697 Ma Huateng (Chairman) (retired with effect from lain Ferguson Bruce Ke Yang Yang Siu Shun lan Charles Stone Charles St Leger Searle (Chairman) CORPORATE GOVERNANCE COMMITTEE (retired with effect from 20 May 2021) lain Ferguson Bruce Charles St Leger Searle lan Charles Stone 2021 Yang Siu Shun (Chairman) 20 May 2021) (retired with effect from lain Ferguson Bruce Ke Yang Yang Siu Shun lan Charles Stone Li Dong Sheng Independent Non-Executive Directors Jacobus Petrus (Koos) Bekker Charles St Leger Searle Non-Executive Directors Lau Chi Ping Martin AUDIT COMMITTEE Executive Directors smart communication inspires 20 May 2021) 506,441 700,018 1,015,778 1,127,552 178,446 217,080 253,968 317,647 484,812 554,672 723,521 953,986 1,333,425 1,612,364 Equity and liabilities Equity attributable to equity holders of the Company 256,074 323,510 432,706 703,984 806,299 Non-controlling interests 21,019 376,226 Total assets Current assets Non-current assets 騰訊控股有限公司 Incorporated in the Cayman Islands with limited liability Tencent Holdings Limited Tencent 腾讯 159,539 Non-IFRS profit attributable to equity holders of the Company 65,126 77,469 94,351 122,742 (Stock Code 股份代號:700) 123,788 As at 31 December 2017 2018 2019 2020 RMB'Million RMB'Million RMB'Million RMB'Million 2021 RMB'Million Assets CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION 於開曼群島註冊成立的有限公司 Lau Chi Ping Martin (Chairman) Ma Huateng Charles St Leger Searle 72,471 Profit for the year 248,062 180,022 109,400 94,466 88,215 Profit before income tax 245,944 221,532 167,533 142,120 116,925 Gross profit 560,118 482,064 377,289 312,694 237,760 Revenues RMB'Million RMB'Million 2021 149,404 79,984 95,888 160,125 114,601 92,481 82,023 Non-IFRS operating profit 200,323 277,834 116,670 66,339 78,218 equity holders of the Company Total comprehensive income attributable to 2020 200,390 119,901 67,760 79,061 Total comprehensive income for the year 224,822 159,847 93,310 78,719 71,510 Profit attributable to equity holders of the Company 227,810 281,173 2019 RMB'Million RMB'Million RMB'Million The PRC Shenzhen, 518054 Nanshan District No. 33 Haitian 2nd Road Tencent Binhai Towers TENCENT GROUP HEAD OFFICE Grand Cayman KY1-1111 Cayman Islands Hutchins Drive, P.O. Box 2681 Cricket Square REGISTERED OFFICE The Hongkong and Shanghai Banking Corporation Limited PRINCIPAL PLACE OF BUSINESS Bank of China Limited Certified Public Accountants PricewaterhouseCoopers AUDITOR Jacobus Petrus (Koos) Bekker lan Charles Stone (Chairman) Li Dong Sheng REMUNERATION COMMITTEE 20 May 2021) Charles St Leger Searle lain Ferguson Bruce (retired with effect from 20 May 2021) (appointed with effect from lan Charles Stone Yang Siu Shun Ma Huateng (Chairman) Li Dong Sheng NOMINATION COMMITTEE PRINCIPAL BANKERS INVESTMENT COMMITTEE IN HONG KONG No. 1 Queen's Road East Wanchai 2018 2017 Year ended 31 December Financial Summary CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME 700 Tencent Holdings Limited 2 00 STOCK CODE www.tencent.com 29/F., Three Pacific Place COMPANY WEBSITE Shops 1712-1716, 17th Floor Hopewell Centre Services Limited Computershare Hong Kong Investor HONG KONG BRANCH SHARE REGISTRAR AND TRANSFER OFFICE Grand Cayman, KY1-1100 Cayman Islands Camana Bay Gardenia Court P.O. Box 1586 Suntera (Cayman) Limited Suite 3204, Unit 2A Block 3, Building D CAYMAN ISLANDS PRINCIPAL SHARE REGISTRAR AND TRANSFER OFFICE Hong Kong 183 Queen's Road East Wan Chai, Hong Kong 74,059 552.1 Total equity 00 00 8 Tencent Holdings Limited Management Discussion and Analysis YEAR ENDED 31 DECEMBER 2021 COMPARED TO YEAR ENDED 31 DECEMBER 2020 The following table sets forth the comparative figures for the years ended 31 December 2021 and 2020: Revenues Cost of revenues Gross profit Interest income Other gains, net Selling and marketing expenses 70,394 Operating profit Year ended 31 December 2021 2020 (RMB in millions) 560,118 Hong Kong, 23 March 2022 Ma Huateng Chairman On behalf of the Board, I would like to thank wholeheartedly our staff and management team for their dedication and professionalism, which have been the cornerstone of the Group's sustainable development. Further, I would like to extend our gratitude to all our shareholders and stakeholders for their continuous support and trust. We will continue to adhere to our strategy of promoting sustainable innovations for social value, alongside nurturing the consumer Internet and embracing the industrial Internet, and contribute more to the common good and value of our society. APPRECIATION For communication and collaboration SaaS, we upgraded the integration among WeCom, Tencent Meeting and Tencent Docs to provide enhanced solutions for enterprises. We also enabled differentiated CRM functions in WeCom via deepened connection with Weixin. While we are currently prioritising scale expansion before significant revenue generation, the monetisation success of critical enterprise SaaS such as CRM software in international markets, as well as the significant size and fast growth of domestic PaaS spending, validate the monetisation potential of critical enterprise SaaS in China. In view of the changes in market environment, we are repositioning our focus for laaS and PaaS from revenue growth at all costs to customer value creation and quality of growth. We believe that the change in focus will benefit our customers, as well as our margins, over the longer term. 00 6 Tencent Holdings Limited Chairman's Statement Environmental, Social and Governance ("ESG") Initiatives We are committed to harnessing technology to build a sustainable future for our consumers, enterprises, and society at large. Environment 482,064 We announced our commitment to achieve carbon neutrality in our own operations and supply chain, and to use green power for 100% of all electricity consumed by 2030. In our inaugural Tencent Carbon Neutrality Target and Roadmap Report, we outlined key approaches in reaching the net zero goal for scopes 1, 2 and 3. We will improve our power efficiency through technology innovations, increase our usage of renewable energy, actively participate in green power trading, and explore investments in renewable energy projects. We joined the Science-Based Carbon Targets initiative (SBTi) to facilitate the transition to a zero-carbon operation. In 2021, we established the Sustainable Social Value (SSV) Organisation and announced our commitment to common prosperity initiatives. We upgraded our charitable fundraising platform, extending the reach of our annual "99 Giving Day" to engage 69 million donations and 12,000 enterprises. Leveraging Internet of Things solutions and Weixin Mini Programs, we built a public emergency response platform which connects emergency control centres with volunteers and locates nearby Automated External Defibrillator equipment for offering first aid. We adapted many of our apps to provide elderly-oriented and barrier-free services for senior citizens. We set up dedicated funds to support basic scientific research, as well as critical healthcare and environmental technologies. Governance Supplementing risk management and internal control policies we already have in place, we enhanced our internal anti- trust compliance system in 2021, including establishing a dedicated compliance department, updating guidelines for all our businesses, and strengthening staff training. We also updated our policies on anti-money laundering and sanctions compliance to closely follow domestic and global regulatory requirements and trends. Our corporate culture supports diversity and inclusion. We collaborated with the United Nation Development Programme (UNDP) to produce videos and articles promoting women leadership in the technology industry. Annual Report 2021 7 Chairman's Statement DIVIDENDS The Board has recommended the payment of a final dividend of HKD1.60 per share (2020: HKD1.60 per share) for the year ended 31 December 2021, subject to the approval of the shareholders at the 2022 AGM. Such proposed dividend will be payable on 6 June 2022 to the shareholders whose names appear on the register of members of the Company on 25 May 2022. On 23 December 2021, the Board resolved to declare a special interim dividend in the form of a distribution in specie of approximately 457 million Class A ordinary shares of JD.com indirectly held by the Company to the shareholders whose names appeared on the register of members of the Company on 25 January 2022 in proportion to their then respective shareholdings in the Company on the basis of 1 Class A ordinary share of JD.com for every 21 Shares held by the shareholders, being rounded down to the nearest whole number of Class A ordinary shares of JD.com. Social Cloud and Other Business Services (314,174) 245,944 Non-controlling interests Non-IFRS operating profit Non-IFRS profit attributable to equity holders of the Company (20,252) (19,897) 227,810 160,125 224,822 159,847 2,988 278 227,810 160,125 159,539 149,404 123,788 122,742 Annual Report 2021 9 Equity holders of the Company Attributable to: Profit for the year Income tax expense 221,532 6,650 6,957 149,467 57,131 (40,594) (33,758) (89,847) (67,625) (260,532) 271,620 Finance costs, net (7,114) (7,887) Share of (loss)/profit of associates and joint ventures, net (16,444) 3,672 Profit before income tax 248,062 180,022 184,237 We strengthened our payment ecosystem by enhancing user security, upgrading transaction and customer management functions for SMEs, as well as reducing merchants' transaction friction via tools such as Weixin Pay Score. We now support e-CNY as an additional funding option within Weixin Pay, as part of the PBOC's e-CNY pilot phase. General and administrative expenses We continued to enhance our differentiated advertising solutions, while adapting to regulatory changes and the evolving macroeconomic environment. For the fourth quarter of 2021, Weixin's daily active advertisers expanded by over 30% year- on-year. Over one-third of Moments' advertising revenue was generated from advertisements using Mini Programs as landing pages and advertisements connecting users to customer service representatives via WeCom. We expect our advertising business to resume growth in late 2022, as we adapt to the new environment and further upgrade our advertising solutions. 554,672 723,521 953,986 1,333,425 1,612,364 Annual Report 2021 3 Chairman's Statement I am pleased to present our annual report for the year ended 31 December 2021 to the shareholders. RESULTS The Group's audited profit attributable to equity holders of the Company for the year ended 31 December 2021 was RMB224,822 million, an increase of 41% compared with the results for the previous year. Basic and diluted EPS for the year ended 31 December 2021 were RMB23.597 and RMB23.164, respectively. The Group's non-IFRS profit attributable to equity holders of the Company for the year ended 31 December 2021 was RMB123,788 million, an increase of 1% compared with the results for the previous year. Non-IFRS basic and diluted EPS for the year ended 31 December 2021 were RMB12.992 and RMB12.698, respectively. OPERATING INFORMATION As at As at Year-on- As at Quarter-on- 31 December 31 December Total equity and liabilities 735,671 555,382 465,162 277,093 356,207 488,824 778,043 876,693 FinTech 125,839 164,879 225,006 2021 286,303 Current liabilities 151,740 202,435 240,156 269,079 403,098 Total liabilities 277,579 367,314 332,573 2020 Non-current liabilities quarter 00 4 Tencent Holdings Limited Chairman's Statement Communication and Social Weixin Video Accounts' time spent per user and total video views more than doubled year-on-year as we enriched content diversity and enhanced our product experience. Video Accounts Live Streaming achieved significant breakthroughs in user reach and engagement, exclusively hosting popular boy band Westlife's first-ever online concert, which drew 27 million viewers. While our current focus is primarily on user engagement, we believe Video Accounts will provide significant monetisation opportunities, including short video feeds advertisements, live streaming tipping and live streaming eCommerce. Weixin Mini Programs facilitated independent merchants to thrive within their own private domains, with their physical goods GMV doubling in 2021. Our Health Code has served 1.3 billion users making 180 billion visits, becoming the most-used ePass for verifying health and travel status during the pandemic. QQ integrated Unreal Engine's graphics capabilities to enable real-time rendering and physics simulation, providing more attractive visuals and lifelike interactions for users. We are testing an application of Unreal Engine in Super QQ Show, which allows users to customise and dress up their 3D virtual avatars, for use in various social scenarios. Digital Content Our fee-based VAS subscriptions grew 8% year-on-year to 236 million. Tencent Video increased its subscription counts 1% year-on-year to 124 million, and cemented its number one position in China with diversified content across animated series, drama series and sports. In view of the latest market conditions, we are implementing a cost optimisation process to reduce financial losses at Tencent Video while maintaining its leading position. For music, we grew subscription counts 36% year-on- year to 76 million, benefitting from expanded sales channels and high-quality content and services. 2021 was a challenging year, in which we embraced changes and implemented certain measures that reinforced the Company's long-term sustainability, but had the effect of slowing our revenue growth. Despite financial headwinds, we continued to make strategic headway, including driving widespread adoption of our enterprise software and productivity tools, increasing content creation and consumption in our Video Accounts, and expanding our International Games business. We believe the China Internet industry is structurally shifting to a healthier mode characterised by a re-focus on user value, technology innovation, and social responsibility. We are proactively adapting to the new environment by managing costs, increasing efficiency, sharpening our focus on key strategic areas, and repositioning ourselves for sustainable long-term growth. Below are some highlights from our key products and business lines during the reporting quarter: Domestic Games Our industry-leading efforts in restricting time spent and spending by Minors yielded effective results. In the fourth quarter of 2021, total time spent by Minors reduced by 88% year-on-year, and contributed 0.9% of the total time spent on our Domestic Games. Total grossing receipts from Minors reduced by 73% year-on-year, and contributed 1.5% of the total grossing receipts of our Domestic Games. Looking ahead, we expect to fully digest the impact of Minor protection measures in the second half of 2022. We believe we will benefit from more new game launches when there are new releases of Banhao. Annual Report 2021 5 Chairman's Statement We achieved notable progress across different platforms and genres. Among international mobile games, we developed and operate 5 out of the top 10 titles measured by DAU. League of Legends' animated series, Arcane, topped Netflix's English-language TV series viewership chart during the week following its release. League of Legends World Championship consolidated its leadership as the world's most popular eSports tournament, attracting a record-high of approximately 74 million peak concurrent viewers for its Finals. Clash Royale released one of the biggest updates in its history, boosting daily active users and grossing receipts. We launched our global game publishing brand, Level Infinite, to support our studios and partners in delivering games to international gamers. Going forward, we aim to grow further our existing titles via deepening market penetration, product enhancements and operational optimisation. In addition, we will continue to release new titles, which we expect to drive additional growth, particularly for 2023 and beyond. Online Advertising year 30 September change We are cultivating our key IP franchises more deeply and broadly. For example, we are developing new games, animated series and a movie based on Honour of Kings' characters. We provided events tied into the Winter Olympics in Peacekeeper Elite, QQ Speed Mobile and QQ Dancer Mobile, delivering lifelike sports experience across multiple genres. Strategic Progress and Outlook International Games 0.4% BUSINESS REVIEW AND OUTLOOK change (in millions, unless specified) Combined MAU of Weixin and WeChat 1,268.2 1,225.0 3.5% Smart device MAU of QQ 594.9 2021 235.4 1,262.6 573.7 0.4% -3.8% Fee-based VAS registered subscriptions 236.3 219.5 -7.2% 7.7% Remuneration Committee The Remuneration Committee comprises only non-executive directors. Its members are Mr lan Charles Stone, Mr Li Dong Sheng (both are independent non-executive directors) and Mr Jacobus Petrus (Koos) Bekker (non-executive director). The Remuneration Committee is chaired by Mr lan Charles Stone. Tencent Holdings Limited The Remuneration Committee has the delegated responsibility to determine the remuneration packages of each member of the senior management team and make recommendations to the Board on the remuneration package of each director. Corporate Governance Report reviewing and recommending to the Board in respect of the remuneration policies and structure of the Company by benchmarking peer companies with a similar scale to ensure that the Company's remuneration packages are competitive to recruit the best talents in the industry and to retain key staff; The Remuneration Committee met four times in 2021. Individual attendance of each Remuneration Committee member is set out on page 85. The Remuneration Committee's major work during the year 2021 includes the following: Monitoring, Reporting Annual Report 2021 The Nomination Committee will report annually on the Board's composition and make appropriate disclosures regarding the board diversity policy in the Corporate Governance Report of the Company's annual reports. It will also monitor the implementation of the board diversity policy. and Review The Company will ensure that there are channels (in addition to independent non-executive directors) where independent views are available, including but not limited to availability of access by directors of the Company to external independent professional advice to assist their performance of duties. In considering whether an independent non-executive director should be proposed for re-election, the Nomination Committee and the Board will assess and evaluate the independent non-executive director's contribution to the Board during the term, in particular, whether the independent non-executive director is able to bring independent views to the Board. In assessing whether a potential candidate is qualified to become an independent non-executive director of the Company, the Nomination Committee and the Board will consider, among others, whether the candidate is able to devote sufficient time on performing his/her duties as an independent non-executive director of the Company, and the background and qualification of the candidate, in order to assess whether such candidate is able to bring independent views to the Board. reviewing and recommending to the Board on the remuneration packages for the directors; Corporate Governance Report 93 Independent Views Tencent Holdings Limited reviewing and approving compensation awards granted to senior management team, recognising their contributions to the Company and providing incentives for future performances; Annual Report 2021 The Nomination Committee will ensure that the Board has the appropriate balance of skills, experience and diversity of perspectives that are required to support the execution of its business strategy and in order for the Board to be effective. 95 Our First Line of Defence is mainly comprised of business and functional departments of each business group of the Company who are responsible for the day-to-day operation and management. They are responsible for designing and implementing controls to address the risks. First Line of Defence - Operation and Management Under the supervision and guidance of the Board, the Company has adopted a risk management and internal control structure, referred to as the "Three Lines of Defence" model, to ensure the effectiveness of its risk management and internal control systems. The Board acknowledges that it is their responsibility to ensure that the Company has established and maintained adequate and effective risk management and internal control systems. The Board delegates their responsibility to the Audit Committee to review the practices of management with respect to risk management and internal control, including the design, implementation and supervision of the risk management and internal control systems, on a quarterly basis. The Audit Committee also reviews the effectiveness of the risk management and internal control systems on an annual basis. The Board is responsible for overseeing the risk appetite of the Company including determining the Company's acceptable level of risk, and proactively considering, analysing and formulating strategies to manage the Company's significant risks. The risks mentioned above also include, but are not limited to, significant risks related to the environment, social and governance aspects of the Company. Adequate and effective risk management and internal control systems are key to safeguarding the achievement of the Company's strategic objectives. Risk management and internal control systems shall ensure the Company's effective business operation, the accuracy and reliability of financial reporting, as well as the compliance with applicable laws, regulations and policies. As part of the Board's responsibilities, the Board ensures that the assessment over the Group's performance and prospects are clearly and comprehensively presented. The directors acknowledge that it is their ultimate responsibility to prepare the accounts which give a true and fair view of the financial position of the Group on a going-concern basis and other announcements and financial disclosures. To assist the Board in discharging their responsibilities, management provides updates to the Board from time to time, including the Group's detailed business and financial position, in order to give the directors a balanced, understandable and clear assessment of the performance, position and prospects of the Group. Management also provides all necessary and relevant information to the Board, giving the directors sufficient explanation and information they need to discharge their responsibilities and make an informed assessment of financial and other information put before them for approval. The Auditor's statement in respect of their reporting responsibilities is set out in the "Independent Auditor's Report" of this annual report. ACCOUNTS, RISK MANAGEMENT AND INTERNAL CONTROL Corporate Governance Report 94 0 In respect of non-executive directors, the Remuneration Committee has reviewed the fees payable to them taking into account the particular nature of their duties, relevant guidance available and the requirements of the Listing Rules. In conducting its work in relation to the remuneration of directors and senior management team, the Remuneration Committee ensured that no individual or any of his associates was involved in determining his own remuneration. It also ensured that remuneration awards were determined by reference to the performance of the individual and the Company and were aligned with the market practice and conditions, the Company's goals and strategies. The remuneration awards are designed to attract, retain and motivate high performing individuals, and reflect the specifics of individual roles. For further details of emoluments of the senior management by band, please refer to Note 13 to the consolidated financial statements. reviewing and approving the service contracts entered into by each executive director with the Group respectively. reviewing and endorsing the amendments to the 2013 Share Award Scheme and the 2019 Share Award Scheme; and assessing performance and, reviewing and approving adjustments to the remuneration packages for the members of the senior management team; 92 (f) Board appointments will be made on the basis of merit and fairness, with due regard to the benefits of diversity on the Board. The Nomination Committee will continue to have primary responsibility for identifying suitably qualified candidates to become members of the Board and, in carrying out this responsibility, will give adequate consideration to the board diversity policy. In forming its perspective on diversity, the Nomination Committee will also take into account factors based on the Company's business model and specific needs from time to time, including without limitation, skills, knowledge, experience, gender and background. (g) other relevant factors which will be considered by the Nomination Committee on a case-by- case basis. The Nomination Committee has the discretion to nominate any person as it considers appropriate. Tencent Holdings Limited Corporate Governance Report Nomination Procedure by Nomination Committee The Nomination Committee will have a meeting at least once a year, and candidates, if any, will be identified for consideration. Nomination from the human resources department, external agencies, Board referrals, or shareholders, if appropriate, will be considered. Where a retiring director, being eligible, offers himself/herself for re-election, the Nomination Committee will review the overall contribution to the Company of the retiring director and will also determine whether the retiring director continues to meet the selection criteria set out in the board nomination policy. The Nomination Committee will assess the eligibility of a candidate to become a director of the Company taking into account factors, including without limitation his/her reputation, character, knowledge and experience, and make recommendations for the Board's consideration and approval. The Board will consider and approve the appointment, if appropriate, based upon the recommendation of the Nomination Committee. Monitoring, Reporting and Review The Nomination Committee will report annually on the Board's composition and make appropriate disclosures regarding the board diversity policy in the Corporate Governance Report of the Company's annual reports. Annual Report 2021 91 Corporate Governance Report A summary of the board diversity policy is set out as follows: Corporate Governance Report Purpose and Objectives the candidate or the re-elected director's ability to commit and devote sufficient time and attention to the Company's affairs; and 00 the candidate or the re-elected director's reputation for integrity, accomplishment and experience in the relevant sectors; the expected contribution that the candidate would add to the Board and to ensure the Board has a balance of skills, experience and diversity of perspectives appropriate to the requirements of the Company's business; Measurable Objectives The Company recognises the benefits of having a diverse Board, and views diversity at Board level as a business imperative that will help the Company achieve its strategic objectives and maintain a competitive advantage. A truly diverse Board will be achieved through a number of factors, including but not limited to differences in skills, knowledge, experience and background. Policy Statement The board diversity policy aims to set out the approach to enable the Nomination Committee to achieve diversity on the Board. A summary of the board nomination policy and related nomination procedures is set out as follows: Purpose and Objectives The board nomination policy aims to set out the approach to enable the Nomination Committee to nominate a director to the Board. Director Selection Criteria 00 90 In the determination of the suitability of a candidate, the Nomination Committee will consider a range of factors, including but not limited to the following selection criteria, before making recommendations to the Board: (a) the Company's prevailing board diversity policy and the requirements under the Listing Rules; (b) the independence of the independent non-executive directors and the independence criteria set out in Rule 3.13 of the Listing Rules; (c) potential or actual conflicts of interest of the candidate or the re-elected director; (d) (e) Second Line of Defence - Risk Management 00 Third Line of Defence - Independent Assurance On behalf of the Board, the Audit Committee supervises the overall risk status of the Company and assesses the change in the nature and severity of the Company's major risks. The Audit Committee considers that management has taken appropriate measures to address and manage the significant risks that they are responsible for at a level acceptable to the Board. Below is a summary of the significant risks of the Company along with the applicable response strategies. The Company's risk profile may change and the list below is not intended to be exhaustive. 1. Regulatory and compliance risk Regulatory authorities around the world have heightened the regulatory requirements for the Internet and technology industry and have introduced new laws and regulations. As the Company continuously expands its businesses both locally and overseas, it is required to keep up and comply with the relevant applicable laws and regulations in different countries and jurisdictions, including but not limited to laws and regulations relating to privacy and data protection, anti-trust, anti-unfair competition, IP, telecommunications and Internet, gaming, Internet finance, labour protection, foreign investment, international trade, etc. In addition, the development of various industries around the world may be impacted by global regulatory uncertainties and uncertainties in international relations. The Company has set up dedicated compliance departments and compliance specialist teams, engaging external professional consultants to work closely and communicate with management, communicating with regulatory authorities in a timely manner, actively staying on top of the changes to relevant laws and regulations, adjusting strategies and taking appropriate actions or measures, improving internal training and the understanding of the latest laws and regulations, and enhancing the corresponding management system to ensure the Company is in compliance with such applicable laws and regulations. The Company has taken practical steps to devote substantial resources in various areas to ensure the Company's compliance with regulatory requirements. 00 98 Tencent Holdings Limited 2. Macroeconomic risk Corporate Governance Report The Company's revenue generated from certain businesses is closely related to the macroeconomy and the overall consumption environment. Global and regional economic uncertainties, COVID-19 epidemic and other factors may reduce individual users' purchasing power and their willingness to consume, resulting in a decrease in corporates' revenue and thereby leading to a reduction in the resources they invest in market and business development. All of the above factors may adversely affect certain revenue streams of the Company. The changes in trading and investment policies and market changes resulting from the changes in international circumstances and the epidemic may negatively affect the Company's operation, market and collaboration with its business partners, which may in turn affect and weaken the Company's competitiveness and growth potential. In response to the macroeconomic uncertainties, the Company adjusts its business development strategy in a scientific, flexible and reasonable manner to align with the macroeconomic environment, and to continuously seek opportunities for business development. The Company attaches great importance to product and service solutions, achieves sustainable business growth through the improvement of user experience, and builds long-term and stable relationships with its existing customers. Despite an adverse macroeconomic environment where economic growth slows down, epidemic remains volatile, and international relations remain uncertain, the Company will continue to provide product solutions and digital services to assist corporates in further enhancing competitiveness and improving productivity during this particular period, create value for its customers and business partners, and fulfill its social responsibility with the mission of "Tech for Good". 3. Our Second Line of Defence is mainly the IC. They are responsible for formulating policies related to the risk management and internal control of the Company and for planning and implementing the establishment of integrated risk control systems. To ensure the effective implementation of such systems, they also assist and supervise the first line of defence in the establishment and improvement of risk management and internal control systems. As an Internet and technology company with a diverse portfolio of businesses, products, users and business partners, as well as increasingly complex business models, the Company draws attention from the public and media. The Company needs to fully consider possible crisis and actively responds to them, to avoid the escalation of problems or crisis. The Company also needs to disclose comprehensive and proper information to the public. Otherwise, it may damage the Company's reputation, brand and image, and adversely affect the business and prospects of the Company. In adherence to the principles of openness and transparency, the Company has communicated with the public in a timely manner and disclosed comprehensive and proper information. In response to crisis, the Company has established the corresponding emergency response mechanism, to follow up on the progression of crisis, assess risks, make prompt decisions, and adjust its businesses to reduce the impact. The Company has set up professional public relations department and teams for crisis management to continuously improve its crisis management and public relations capabilities, with established emergency response and public relations management mechanisms, and to provide training and guidance related to crisis management. The public relations teams have maintained close interaction with management and business groups of the Company, to continuously gather public opinions, analyse relevant market information for management to enable management timely respond and disclose comprehensive and proper information to the public according to the Company's policies and procedures; and protect the Company's reputation. Annual Report 2021 99 Corporate Governance Report As the complexity of the Company's business increases and the external environment continues to evolve, the Company faces significant risks, including but not limited to ESG risk. Through risk management analysis and evaluation, the management has identified ten significant risks for the financial year 2021, nine of which remained the same as disclosed in financial year 2020. Among the nine significant risks, the "Regulatory and compliance risk", "Crisis management, public relations and reputation risk", "Information security risk" and "M&A and investment management risk” have increased while the other risks remain at a similar level as last year. Meanwhile, considering the global macroeconomic uncertainty and volatility and the impact of COVID-19 epidemic, one new significant risk, "Macroeconomic risk", is included in 2021. Significant Risks of the Company Crisis management, public relations and reputation risk 97 Corporate Governance Report Our Third Line of Defence is comprised of the IA and the Anti-fraud Investigation Department. The IA holds a high degree of independence and is responsible for providing independent evaluation on the effectiveness of the Company's risk management and internal control systems, and monitoring the Company's improvement on risk management and internal controls. The IA and the Anti-fraud Investigation Department have direct reporting lines to the Audit Committee. The Three Lines of Defence model of the risk management and internal control systems are designed to manage rather than eliminate the risk of failure to achieve business objectives of the Company, and can only provide reasonable but not absolute assurance against material misstatement or loss. The Board and management have always placed importance on the Company's risk management and internal control systems. In 2021, the Company has invested more resources in the continuous improvement of the risk management and internal control systems, which have also continuously increased the awareness of risk management among the employees. The internal control function has continuously worked closely with and provided proactive support to the business groups in their business development and risk management. Furthermore, the IA has also continued to promote the deployment of various internal audit projects and continuous audits to provide more effective and timelier independent evaluations. The Anti-fraud Investigation Department further strengthened the values of integrity among the employees, followed up and investigated the alleged fraudulent activities. The connection and interaction among the three lines of defence have been further enhanced to provide more effective support to the Company's development. 00 96 Tencent Holdings Limited Corporate Governance Report The Company has formulated policies and established management systems to enhance and support the Company's compliance with anti-corruption laws and regulations. The Anti-fraud Investigation Department is responsible for receiving whistleblower reports through various channels and following up and investigating alleged fraudulent activities. It also assists management in promoting the "Tencent Sunshine Code of Conduct" (the "Sunshine Code") and the value of integrity to all employees of the Company. The Company is committed to continuously improving its risk management system, including structure, process and culture, and its risk management ability, to ensure long-term growth and sustainable development of the Company's business. Risk Management The Audit Committee, on behalf of the Board, assesses and determines the nature and level of the risks that the Company is willing to take in order to achieve its business objectives and formulates appropriate response strategies which include designating responsible departments for handling each significant risk. The Audit Committee provides guidance to the Company's management to implement effective risk management system with support from the IC. Annual Report 2021 The IC collects, analyses and consolidates a list of significant risks at the business level, and provides input on risk response strategies and control measures for such risks. These significant risks as well as the corresponding risk responses and control measures will be reviewed by management and subsequently by the Audit Committee before reporting to the Board; The IC analyses and evaluates the responses to significant risks from time to time, and reports to the Audit Committee at least once a year; and • Being an Internet and technology company with a wide variety of rapidly-changing businesses, the Company has adopted the following dynamic risk management process in response to the ever-changing risk landscape: Risk Management Process The Company has established a risk management system (including the "Three Lines of Defence" internal monitoring model as detailed above) which sets out the roles and responsibilities of each relevant party in the system as well as the relevant risk management policies and processes. Each business group of the Company, on a regular basis, identifies and assesses any risks that may negatively impact the achievement of its objectives, and formulates appropriate response measures. The Company also provides risk management and internal control training for staff on a regular basis. Business and functional departments of each business group identify, assess and respond to risks in the course of operation in a systematic manner, escalating concerns and communicating results to the IC; The Company has adopted the Model Code. The Company has also adopted an insider dealing policy to govern and regulate securities transactions by employees who are likely to be in possession of inside information relating to the Company, the terms of which are no less exacting than those of the Model Code. The Company has made specific enquiries with the directors and the directors have confirmed they have complied with the Model Code throughout 2021. Appointment Terms of Non-Executive Directors Each non-executive director, whether independent or not, is appointed for a term of one year and is subject to retirement by rotation at least once every three years. A director appointed to fill a casual vacancy or as an addition to the Board will be subject to re-election by shareholders at the first general meeting after his/her appointment. 00 108 Tencent Holdings Limited Corporate Governance Report The statement of the external auditor of the Company about their reporting responsibilities for the financial statements is set out in the "Independent Auditor's Report" on pages 160 to 168. During the year ended 31 December 2021, the remuneration paid/payable to the Company's external auditor, PwC, was disclosed in Note 8 to the consolidated financial statements. The audit and audit-related services conducted by the external auditor mainly comprise of statutory audits and reviews for the Group and its certain subsidiaries. The non-audit services conducted by the external auditor mainly include tax advisory services for our M&A and other corporate transactions, due diligence services and other services such as ESG assurance service and services relating to risk management and internal control review. Please refer to Note 8 to the financial statements for a breakdown of the fees paid for the key non-audit services. The Company has arranged appropriate directors and officers liability insurance in respect of legal action against the directors and officers. External Auditor and Auditor's Remuneration Framework for Disclosure of Inside Information The Company has in place a framework for the handling and disclosure of inside information in compliance with the SFO. The framework sets out the procedures and internal controls for the handling and dissemination of inside information in a timely manner so as to allow all the shareholders and stakeholders to assess the latest position of the Group. Under the framework, if an employee is aware of any project, transaction, information or situation which he/she thinks could potentially be inside information, he/she should contact the Head of Compliance and Transactions Department, the general counsel and the company secretary as soon as possible. Legal analysis and consultations with the Company's directors and senior executives will be made so as to identify whether any such information constitutes inside information and is required to be disclosed to the public pursuant to the SFO. The framework and its effectiveness are subject to review on a regular basis according to established procedures. Model Code for Securities Transactions by Directors of Listed Issuers Directors and Officers Liability Insurance There has not been any change to the Company's memorandum and articles of association during the year ended 31 December 2021. The Company's general meetings provide a transparent and open platform for the Company's shareholders to communicate with the Board and the senior management team. The Chairman, other members of the Board and relevant members of the senior management team, under normal circumstances, attend to answer questions raised and discuss matters in relation to the Company in an open manner. Save as Mr Li Dong Sheng and Professor Ke Yang, all directors attended the 2021 AGM and the 2021 EGM, with a view to understanding the views of the Company's shareholders. The company secretary provided the minutes of the 2021 AGM and the 2021 EGM to all directors to have a thorough understanding of the views of the Company's shareholders. The Company's external auditor will also attend the annual general meeting to answer questions relating to the conduct of the audit, the auditor's report and auditor independence. The Company is required to disclose certain information pursuant to the Listing Rules and the CG Code. Set out below is the information which has not been covered above. Annual Report 2021 To enable our shareholders and other stakeholders to exercise their rights in an informed manner based on a good understanding of the Group's operations, businesses and financial information, the Company adopted the shareholders communication policy which aims to ensure that our shareholders and other stakeholders at large are provided with ready, equal, regular and timely access to material information about the Group. The policy also sets out a number of ways to ensure effective and efficient communication with our shareholders and other stakeholders is achieved, including but not limited to our quarterly results announcements, webcasts, responses to shareholders' enquiries, corporate communications (in both English and Chinese, to facilitate shareholders' understanding), posting of relevant information on the Company Website, shareholders' meetings and investment market communications. To facilitate communication between the Company, our shareholders and the investment community, investor and analyst briefings, one-on-one meetings, domestic and international roadshows, media interviews and specialist industry forums are organised on a regular basis and are attended by our directors and designated spokespersons. In addition, the Company Website has been adopted as the designated hub for publication of the Company's announcements, press releases and other corporate communications including the shareholders communication policy and the investor calendar which highlights important dates for Shareholders' information. Our dividend policy also set out in the "Corporate Governance Report” on page 108 of this annual report and the historical information of dividend payout is available on the "Interactive Share Price Chart & Dividend History" section on the Company Website. 106 Tencent Holdings Limited Corporate Governance Report The Company also encourages shareholders' active participation in annual general meetings and other general meetings. Notices to shareholders for annual general meetings are sent to shareholders at least 20 clear business days before the meetings and at least 10 clear business days for all other general meetings to allow sufficient time for their consideration of the proposed resolutions. Our shareholders communication policy also requires appropriate arrangements to be put in place for the annual general meetings to encourage and facilitate shareholders' participation, and the process of the meetings is monitored and reviewed on a regular basis to ensure that shareholders' needs are best served. Pursuant to the Articles of Association, any one or more shareholder(s) of the Company holding at the date of deposit of the requisition not less than one-tenth of the paid up capital of the Company carrying the right of voting at general meetings of the Company shall at all times have the right, by written requisition to the Board or the company secretary, to require an extraordinary general meeting to be called by the Board for the transaction of any business specified in such requisition. Such requests must be sent to the Board or the company secretary at the Company's registered office at Cricket Square, Hutchins Drive, P.O. Box 2681, Grand Cayman KY1-1111, Cayman Islands, or by email to cosec@tencent.com, and such meeting shall be held within two months after the deposit of such requisition. If a shareholder wishes to propose a person for election as a director at a general meeting, he/she should provide a written requisition to the Board or the company secretary to call an extraordinary meeting following the procedures set forth above, or lodge a written notice to nominate a person at the Company's Hong Kong principal place of business at 29/F., Three Pacific Place, No. 1 Queen's Road East, Wanchai, Hong Kong, or the Company's branch share registrar, Computershare Hong Kong Investor Services Limited at Shops 1712-1716, 17th Floor, Hopewell Centre, 183 Queen's Road East, Wan Chai, Hong Kong. Detailed Procedures for Shareholders to Propose A Person for Election as A Director is also available on the Company Website. In order to ensure that shareholders' interests and rights are adequately protected, a separate resolution will be proposed for each substantially separate issue at the general meetings, and all resolutions will be voted by poll pursuant to the Articles of Association and the Listing Rules. To ensure that the shareholders are familiar with the detailed procedures for conducting a poll, detailed procedures for conducting a poll are explained at the commencement of the general meetings, and all questions from shareholders on the voting procedures will be answered before the poll voting starts. An external scrutineer will be appointed to monitor and count the votes cast by poll. Poll results will be posted on the Company Website and the Stock Exchange's website after each general meeting. Annual Report 2021 107 Corporate Governance Report Apart from participating in the Company's general meetings, shareholders and other stakeholders may at any time contact or send enquiries and concerns to us via the Company Website, or by addressing them to the Investor Relations teams, and sending them by post to the Investor Relations, Tencent Holdings Limited, at 29/F., Three Pacific Place, No. 1 Queen's Road East, Wanchai, Hong Kong, or by email to ir@tencent.com. Shareholders may also contact the Company's Hong Kong branch share registrar, Computershare Hong Kong Investor Services Limited, if they have any enquiries about their shareholdings and entitlements to dividends. DIVIDEND POLICY The Company endeavours to maintain sufficient working capital to develop and operate the business of the Group and to provide sustainable returns to the shareholders of the Company. Under the current dividend policy of the Company, dividends may be declared out of the distributable earnings or reserves of the Company. While the dividend payout ratio is not pre-determined, in proposing or declaring any dividend payout, the Board shall take into account the Group's earnings performance, general financial position, debt covenants, future working capital and investment requirements, and other factors that the Board considers relevant and appropriate. DISCLOSURE OF OTHER INFORMATION Significant Change in the Constitutional Documents 00 109 100 Management of the Company is responsible for the design, implementation and maintenance of the effectiveness of internal control systems. The Board and the Audit Committee are responsible for monitoring and overseeing the performance of management over the internal control systems to ensure its appropriateness and effectiveness. The Company's internal control systems clearly define the roles and responsibilities of each party as well as the authorisation and approvals required for the key actions of each party. Policies and procedures are in place for the key business processes. This information is clearly conveyed to employees in practice and emphasised the importance of the internal control systems. All employees must strictly follow the policies which cover, amongst other things, financial, legal and operational issues that set the control standards for the management of each business process. In order to further strengthen the accountability of the management team in the internal control systems of the Company and to assist in determining the effectiveness of such internal control systems, the management team of each business group conducts self-assessment and confirms the internal control status of the business group for which it is responsible. The IC assists management in preparing a self-assessment questionnaire according to the COSO Framework and guides the management of each business group to carry out the self-assessment. The IC is also responsible for collecting and summarising the results of self-assessment. The Chief Executive Officer of the Company reviews this summarised self-assessment of each business group, assesses the general effectiveness of the internal control systems of the Company and submits the written confirmation thereof on behalf of management to the Audit Committee and the Board. In addition, the IC supervises the establishment of the risk management and internal control systems set up by management, ensures that management has implemented appropriate measures and reports the general situation of risk management and internal control of the Company to the Audit Committee on a quarterly basis. The IA, serving as the independent third line of defence, conducts objective evaluation on the effectiveness of the Company's risk management and internal control systems and reports the results to the Audit Committee. The Company has also engaged independent professional consulting firms to perform a review of the Group's internal control framework and an assessment of its internal audit quality to ensure their standards are in compliance with international best practices. Annual Report 2021 105 Corporate Governance Report The Audit Committee, on behalf of the Board, continuously reviews the risk management and internal control systems. The review process comprises of, among other things, meetings with management of business groups, IA, IC, legal team, and the external auditor, reviewing the relevant work reports and information of key performance indicators, the management's self-assessment on internal control as detailed above and discussing the significant risks with senior management of the Company. The Board is of the view that throughout the year ended 31 December 2021, the risk management and internal control systems of the Company are effective and adequate. In addition, the Board believes that the Company's accounting and financial reporting functions as well as the ESG performance and reporting functions have been performed by staff with the appropriate qualifications and experience and that such staff receives appropriate and sufficient training and development. Based on the report of the Audit Committee, the Board also believes that sufficient resources have been obtained for the Company's internal audit function and that its staff qualifications and experience, training programmes and budgets etc., are sufficient. SHAREHOLDERS The Company has always valued the importance of the internal control systems and has implemented its internal control systems according to the COSO Framework. The Company has a certain scale of investment activities in diverse fields. It is important for the Company to adopt robust procedures in the formulation of investment strategies and strong treasury management, both at the investment evaluation stage as well as the post-investment stage. Failure to promptly and effectively manage investment risks could hinder the realisation of investment strategies and lead to probable financial loss of the Company. M&A and investment management risk 6. Tencent Holdings Limited 00 The Company stays on top of trends in market and industry development, as well as user needs, keeps up with the technological development through innovation in frontier technology and explores application of technologies in new scenarios. The Company stays focused on expectation changes in user experience, stays active in promoting the incubation of new business, keeps exploring new forms of business, and recruits talent, optimises its organisational structure, and enhances the innovation capabilities by improving talent quality with cultivating young talent. The Company also continuously enhances its technical capabilities and innovation environment to develop products that meet the expectations of the market, to continuously improve user experience and to maintain its competitiveness in the market. The Company collaborates with its partners to jointly innovate, enhance its service capabilities, and create value for users and the society. The Internet and technology industry is highly competitive, innovative and ever-changing at all times. The development of technologies brings evolutional changes to the existing business models; and the cross-sectoral expansion of non-Internet and technology companies bring in more new players into the market. Users' expectations for innovative products and services are also increasing. Therefore, how to create value for more users and promote innovative and sustainable social values through innovation in technology, product and business model are the key challenges of the Company. Market competition and innovation risk 5. The Company strongly believes that protecting user and customer data is the key prerequisite for delivering secured and high-quality products and user experience. With a strong commitment to protecting data privacy and security, the Company strictly complies with applicable laws and regulations, and strives to provide the highest level of protection on such information and data. In this regard, the Company has formulated and kept optimising control measures to protect such information and data. Information security is ensured through effective management systems, encryption, access restrictions and controls, the establishment of appropriate and effective management processes, and continuous improvement of the business continuity and disaster recovery management. In addition, the Company arranges regular reviews by independent specialists over the Company's data protection practices; and provides training for staff to enhance their awareness of information security. All countries and jurisdictions continue to heighten its supervision over cyber security and personal information protection. Protecting and safeguarding user and customer data is the top priority of the Company. The Company continues to pay attention to the laws and policies relating to user privacy and data protection in various jurisdictions and is fully aware that any loss or leakage of such information could have a significant negative impact on the affected users and customers. This could expose the Company to significant liability and significant reputational risk. Information security risk 4. Corporate Governance Report Corporate Governance Report Internal Control Effectiveness of Risk Management and Internal Control 104 Tencent Holdings Limited The Company takes the management of investment risks seriously and has established an Investment Committee under the Board, dedicated an investment team to identify investment opportunities, appointed finance, legal and other relevant professional teams to manage relevant risks, put in place the investment risk evaluation and approval process, and conducted comprehensive analysis. The Company has also designated finance, legal and other relevant professional teams to support and monitor the performance of the investee companies. These teams periodically analyse and review relevant operating and financial information of the investee companies to ensure that they continue to satisfy the Company's investment strategies. In addition, the Company has invested resources in internal audit and internal control functions to continuously support the management of its controlling subsidiaries in establishing more sound risk management and internal control systems. 7. ToB business risk The Company has actively developed various ToB businesses related to Industrial Internet. With the rapid development of the ToB business, if the Company fails to adjust its business strategy to respond to changes in industry trends and market needs on a timely basis, to keep optimising its organisational structure with support from professional talent, to improve its internal management system and processes for ToB business, to enhance its supply chain management capabilities, and to improve its cooperation mechanisms with various business partners, it may face more managerial challenges, and may affect the sustainable development of its ToB business and the realisation of the Company's strategic goals. The Company continues to accumulate and solidify its experience in the ToB business by analysing development trends in different industries and changes in user needs. The Company has started to increase its footprints in the ToB business by integrating cloud computing, Al, Internet of Things, security and other advanced technologies for deployments in various industry-specific scenarios, to build a new, intelligent ecosystem that efficiently connects customers and enterprises. This has been applied across many industries including social services, tourism, healthcare, industry, agriculture, transport, energy, retail, financial services, etc. Furthermore, the Company is continuously developing its ToB business, optimising its management over business structure, human resources, management policies and business processes, and improving its supply chain management capabilities to ensure the effective operation of the ToB business for rapid and sustainable development. Through continuous technological innovation, the Company continues to enhance its ability to serve corporate clients and to promote the integration and development of the digital economy with the real economy. Annual Report 2021 Corporate Governance Report Corporate Governance Report 8. Business continuity risk The stability of servers and network infrastructure for products and platforms of the Company is of vital importance for the successful operation of the Company's business as well as the provision of high-quality user experience. Any material functional defect, interruption, breakdown or other issues in connection are likely to adversely impact the Company's businesses. In addition, the Company's operations may be affected by uncontrollable external factors such as natural disasters, social security events, epidemic disease or energy supply. Relevant incidents may damage workplaces and equipment that are vital to the Company and its business partners, and threaten the health of their employees, which results in disruption of Company's normal operation. The Company continues to invest in its network infrastructure to enhance its established business recovery mechanism to ensure network security in order to provide consistent support to business development. Meanwhile, the Company has established dedicated teams to develop business contingency plans and to perform regular drills. All business departments also implemented various emergency measures to ensure smooth business operation. In addition, an independent dedicated team has been set up to perform regular checks on the effectiveness of the relevant emergency mechanisms and measures, as well as the drills and its results. In terms of energy use, the Company continues to increase the proportion of renewable energy, deploy rooftop solar PV system for data centers, build energy storage stations, and participate in green power trading. In the post-pandemic era, the Company's emergency response team continues to operate effectively, closely monitoring risks, keeping up with policy changes, and responding to both risks and policy changes in a timely and appropriate manner. For example, the Company provides mobile working solution plan and various functional support, to support the business group in responding to urgent needs through adjusting resource allocation and timely deployment of emergency measures to ensure employee safety and continued operations of the Company's business. The Company also performs emergency drills to improve business's capabilities in responding to emergencies. Meanwhile, the Company also works closely with partners to seek solutions to application scenarios during these special periods, and to jointly build an open, innovative and secured digital ecosystem to support the economic recovery and business development in the post-pandemic era. 00 102 Tencent Holdings Limited 9. 101 Social responsibility and environmental sustainability risk 00 The Company, with its belief in the value of integrity, has zero tolerance for fraud, and is determined to fight against any fraudulent activities. The Company has established effective internal control systems and is continuously improving it. These systems have been strengthened by systematic, transparent control measures and procedures. To enhance and promote integrity, the Company continuously conducts various training for its employees, suppliers, and business partners. For employees, the Company has established the Sunshine Code that the employees shall strictly follow during their employment and in the course of business dealing with suppliers and business partners. For suppliers and business partners, the Company cooperates with them to create an ecosystem with integrity. The Company has signed an Anti-commercial Bribery Declaration with its suppliers and business partners to alert the counterparts the importance of ethical value and to build a healthy and transparent environment for business. Furthermore, the Company has set up an Anti-fraud Investigation Department for years to proactively collect whistleblowing cases from various channels, and to follow up and investigate alleged fraudulent cases on a timely basis. The Company will terminate the employment immediately with any employee who has been found to be involved in any fraudulent activities. The Company may also pass the relevant case to initiate legal proceeding according to the relevant laws and regulations under more serious circumstances. Any supplier/business partner found to be involved in any fraudulent activities will be blacklisted and deprived of the opportunity to work with the Company permanently. The Company will announce to the public those criminal cases and serious abuse-of-power cases that were investigated and handled by the Company via the "Sunshine Tencent" WeChat official platform. This shows the Company's determination to fight against corruption and fraud, as well as its commitment towards creating a virtuous and honest atmosphere within the Company and the industry. In recent years, fraudulent activities have occurred frequently in the Internet and technology industry and therefore integrity has been an important concern. As the Company continues to develop its business, the form and complexity of its business evolved, and consequently the fraud risk inevitably increased to a certain extent. For example, fraudulent activities caused by collusion between suppliers/business partners and employees can have a negative impact on the reputation and financial position of the Company. Fraud risk Corporate Governance Report Annual Report 2021 103 The Company is committed to promoting environmental sustainability and places environmental protection as one of its top priorities. The Company continuously pays attention to the environment and climate change. The Company also actively responds to China's goal in achieving carbon neutrality by announcing the launch of its carbon neutrality plan in January 2021 and releasing Tencent Carbon Neutrality Target and Roadmap Report in February 2022. The Company commits to carrying out green and low-carbon operations, introducing green and low-carbon concepts to the community and advocating relevant practices, whilst using its digital capabilities to help its partners in achieving low-carbon transformation and to jointly practice low-carbon development. 10. As the first Internet and technology enterprise to establish a charity foundation in China, the Company continues to make donations in various charitable fields, commits itself to providing digital support for charity fundraising and donations, empowers the digitalisation of public welfare, and promotes the sustainable development of the public welfare ecosystem. The Company takes equal emphasis on technology innovation and industrial development, continuously enhances the core capabilities such as cloud computing, Al, big data, security, etc., builds an open ecosystem, promotes industry collaboration, supports the transformation of various industries including healthcare, transportation, tourism, retail, and energy, etc., enhances its digital capabilities in supporting employment and entrepreneurship opportunities, and facilitates the development of digital economy comprehensively. By utilising its core competencies of an Internet company, the Company effectively supports rural governance, attracts talent to return to their villages and improves productivity of villages through the establishment of the "WeCounty" platform. The Company has also launched initiatives such as the "Cultivator Plan" for talent revitalisation, invested continuously in rural digital construction, and promoted rural revitalisation and common prosperity. The Company upholds its vision and mission of "Value for Users, Tech for Good", and constantly reviews its products and platforms from the perspective of social responsibility. With a strategic enhancement in 2021, the Company incorporated "Sustainable Innovations for Social Value" into its core strategy, and actively commits to social responsibility and promotes social and environmental sustainability using Internet and other technologies. Corporate Governance Report Together with several renowned scientists, the Company established and continues to fund the "Xplorer Prize" to encourage the study and research of cutting-edge technologies and foundational science among young scientists. In respect of protection of Minors, the Company upgrades the facial recognition strategies and enhances facial patrolling mechanism on the established "Parental Guardian Platform" and "Healthy Gameplay System" to further prevent Minors from being addicted to games. The Company also provides interest classes in technology to teenagers in less developed areas to improve their Internet literacy. In respect of public emergencies, the Company established a public emergency platform and improves the social capabilities of handling public emergencies through the donation of emergency equipment, transfer of first-aid technical knowledge and cultivation of first-aid awareness. In respect of the supports to elderly and disabled, the Company encourages “Digital Inclusion" by optimising products for the elderly and people with disabilities under the philosophy of "Leave No One Behind" and "Information Accessibility". Meanwhile, the Company also leverages digital technologies, social media and digital content platforms to provide digital solutions for the preservation and inheritance of traditional culture. Annual Report 2021 117 Environmental, Social and Governance Report Environmental, Social and Governance Report In 2021, the Board and senior management evaluated the relative impacts of the climate-related risk factors, including acute physical risk, chronic physical risk, policy & legal risk, technology risk, market risk, and reputational risk on the business, and provided mitigation and adaptation responses. For acute physical risks, we have taken extreme weather events, such as rainstorms, typhoons and high temperatures into consideration during our site selection, construction, and operations of our data centres. We have also drafted corresponding mitigation and adaptation measures to address the potential impacts of these events. We have integrated ESG risks into the Company's overall risk assessment and management system, including risks related to climate change. As part of our climate risk assessment, we consider the probability and the relative impact of the risks on our Company. Risk Management We believe that climate change has also brought various opportunities to Tencent. By improving the efficiencies of energy consumption and water use at our office buildings and data centres, we could optimise operating costs and minimise sensitivity to changes in carbon trading prices. We provide various products and services, including Tencent Cloud, WeCom, Tencent Meeting to help our users reduce their carbon footprint and accelerate their digital transformation. There are transition risks as well. In the context of accelerating the transition to a low-carbon economy, if we fail to effectively control or reduce the carbon emissions generated from our operations and provide low-carbon services and products, it may result in reputational damage, loss of users, or market share reduction. Our carbon neutrality initiative follows the principle of "prioritising the use of active emissions reduction measures while keeping the use of carbon offsets to a minimum". In addition to achieving our carbon neutrality goal, we aim to play a leading role in the transition towards a low-carbon society by (i) fostering open innovation and knowledge sharing and (ii) leveraging the reach and influence of our platforms and products. In terms of physical risks, acute climate events caused by climate change, such as frequent typhoon weather and rainstorms, may affect our operational continuity. On the other hand, chronic risks, such as high temperatures and droughts may increase energy consumption and operating costs for our offices and data centres. Rising sea or water levels may lead to loss of assets in certain regions. We have considered the impact of regional climate when allocating assets and have formulated emergency measures for acute climate events to avoid and reduce operational impacts or asset losses. 116 Tencent Holdings Limited 00 Strategy Climate-related risks and issues are considered and monitored by the Board via the Corporate Governance Committee. Climate change is regarded as a specific issue for revision and discussion. During the reporting period, the Corporate Governance Committee has reviewed the Company's carbon footprint, net-zero goal, and decarbonisation pathways. Governance The risks and impacts of climate change are becoming increasingly significant. Tencent is committed to identifying and mitigating the impacts of climate change on our strategy, business operations, and financial performance. In 2021, we joined the global climate action (for example, achieving the objectives of the Paris Agreement and China's "3060" goal) by pledging to achieve carbon neutrality in our operations and supply chains (including Scope 1, 2 and 3 emissions) as well as transition to 100% green power by 2030. 6.1 Tackling Climate Change 6. ENVIRONMENT From operating our platforms daily to building our network of data centres, we have considered energy conservation, waste reduction, ecological impact, and climate-related risks in our decision-making process and policies. This has enabled us to meet the applicable regulatory requirements in China, including the Energy Conservation Law of the People's Republic of China and Environmental Protection Law of the People's Republic of China. In 2020, China announced that the country would reach carbon neutrality by 2060 and may introduce new regulatory requirements to ensure that this target can be met. The Company will closely monitor the latest developments and endeavour to tackle climate change. Metrics and Targets We are committed to protecting the environment and conserving natural resources to ensure sustainability for future generations. In 2021, we voluntarily pledged to reach carbon neutral for our operations and supply chains by 2030, and announced our commitment to fully transition to green power. We acknowledge that climate change brings physical and transition risks and opportunities to our business. Our physical risks primarily result from acute and chronic risks caused by climate change, while transition risks mainly come from the market and policy changes that arise during the transition to a low-carbon economy. Reputational risks are linked to the potential failure in fulfilling our commitment to developing into a low-carbon business. On the other hand, climate change would also provide us with the opportunity to improve our energy efficiency and develop low-carbon technologies and climate-resilient products and services. We pledge to reach carbon neutrality across our operations and supply chains by 2030, and to switch our electricity supply to 100% green power or renewable energy where feasible. We have signed on the Science-Based Targets initiative ("SBTi") and will work to refine targets for our decarbonisation pathways in the following months. Protect our users, especially Minors and content creators; take responsibility for the content on our online platforms. Scope 1: Direct emissions from operations owned or controlled by the Company (Scope 1) amounted to 0.019 million MtCO2e, or 0.4% of the emissions. We continuously seek ways to improve our energy efficiency by regularly evaluating our office buildings' energy consumption and optimising our energy consumption through innovative technologies. In 2021, we executed energy-saving renovation projects in Tencent Binhai Towers: (i) we replaced LED lighting in our public areas, optimised lighting duration for our underground car parks, and (ii) installed thermostats and fan coil systems with automatic switches in our IT machine rooms and power distribution machine rooms. Environmental, Social and Governance Report We manage our office building's energy and water consumption, through an online Tencent Facility Management system. In addition, we have introduced a real-time monitoring system for self-owned buildings, which provides statistical analysis on electricity and water consumption. • • . Our "Management + Technology + Procedure" approach underpins our energy conservation measures, through which: Environmental considerations are incorporated into the design, construction, and operation of our office buildings. All our new office buildings in China are designed and constructed to attain the Green Building Two Star standards. Energy Management in Office Buildings 6.2 Energy Management Environmental, Social and Governance Report 118 Tencent Holdings Limited 00 Including the construction emission reduction, such as Dachan Bay. 2 Details of Tencent's carbon neutrality goals can be found in the Tencent Carbon Neutrality Target and Roadmap Report. We will help mobilise the transition to a low-carbon society by leveraging the influence of our products and technological capabilities. For our users, we will promote a low-carbon lifestyle. For our business partners, we will assist them in their low-carbon transformation by providing innovative products and enabling technologies. We followed the best practice of prioritising the use of active emissions reduction measures while keeping the use of carbon offsets to a minimum. We will reduce or avoid emissions via a series of measures, including energy- saving initiatives, technological and management innovations to increase power use efficiency², transition to green power or renewable energy by procurement as well as building and investing in renewable energy projects. Steps to achieve our targets can be found in the "Energy Management" section. Scope 3: Indirect emissions generated from the supply chains (Scope 3) amounted to 2.743 million MtCO2e, or 53.7% of the emissions. Scope 2: Indirect emissions generated by purchased electricity and other purchased energy (Scope 2) amounted to 2.349 million MtCO2e, or 45.9% of the emissions. • Based on the Greenhouse Gas ("GHG") Protocol, we began an internal review of our greenhouse gas emissions and used 2021 as the base year to develop our carbon neutrality roadmap and decarbonisation pathways. Our total emissions of 5.111 million metric tons of carbon dioxide equivalents includes: Annual Report 2021 115 20 Intellectual Property We developed technologies and software-as-a-solution products, including but not limited to WeCom and Tencent Meeting, to help industries reduce their carbon footprint and accelerate digital transformation. 13 Responsibility of Content 12 Social Impact of Products & Services 11 Supply Chain Management 10 Labour Standards Employee Health and Safety 9 Diversity and Equal Opportunity 8 14 Employee Career Development 7 Employee Rights & Benefits 6 14 Environmental Impact of Products & Services Energy Use 4 Water Management 3 Waste Management 2 Climate Change & Greenhouse Gas Emissions 1 15 HIGH 19 23 Listen to feedback from users and actively respond to their needs, enquiries and complaints, based on which we continuously enhance the quality of our products and services; and 5 We have developed technologies and solutions for social well-being, including but not limited to mobile applications suitable for the silver generation, enhanced accessibility solutions for communities with activity limitations as well as youth programmes that inspire creativity and teach coding skills. Data Privacy and Cyber Security Protection of Minors We voluntarily pledged to reach carbon neutrality in our operations and supply chains, and to transition to 100% green power by 2030. We have developed the Tencent Sunshine Code of Conduct (the "Sunshine Code") which, amongst others, sets the ethical standards and behaviour expected of our employees and prohibits activities that are not in compliance with applicable laws and regulations, and published an Anti-fraud and whistleblowing Policy that outlines multiple whistleblowing channels. • Our values and culture, which crystallised into our mission to create “Value for Users, Tech for Good", has guided the Company to incorporate social responsibility into our products and services, help industries digitally transform and collaborate with stakeholders to contribute to the sustainable development of society. The Company has continued to promote our culture and adopt various policies and initiatives to provide additional guidance to our employees. For example: Creativity means to push for breakthrough innovations, and explore the possibilities of the future. Collaboration means to be inclusive and collaborative, and strive to progress and evolve; and . • • Integrity means to uphold principles, ethics, openness and fairness; The Company is committed to strengthening our corporate culture, which is built upon our values, vision and purpose. Our values are integrity, proactivity, collaboration and creativity. OUR CULTURE 5. 15 The material topics which fell into the upper right quadrant of the matrix were defined as highly material to the Company. These material ESG topics include Data Privacy and Cyber Security, Protection of Minors, Responsibility of Content, Social Impact of Products & Services, Employee Health and Safety, Intellectual Property, Anti-corruption, Corporate Governance, Labour Standards, Active Stakeholder Engagement, and Anti-trust. 114 Tencent Holdings Limited 23 Active Stakeholder Engagement Impact on Tencent's Business (Extremely Important) 22 Corporate Governance 21 Anti-corruption Our energy-saving policy drives our day-to-day energy-saving measures. Office lights and air conditioners are automatically turned on/off based on the schedule of employees. Whenever employees leave the workplace or meeting rooms, they are also encouraged to manually switch them off. We also have stringent onsite office management in place with routine inspections, where the property management companies closely monitor the electricity consumption. 19 Anti-trust 18 Support Common Prosperity MED 17 Community Investment Digital Inclusion and Digital Literacy 16 Environmental, Social and Governance Report By establishing the "Management + Technology + Procedure" system, we have successfully improved our energy use efficiency, thereby achieving our targets (shown in the Environmental Targets section). Proactivity means to pursue positive contributions, volunteer for responsibility and push for breakthroughs; Energy Management in Data Centres 4. (Important) MATERIALITY Stakeholder Engagement We regularly engage with our stakeholders to learn about their expectations and feedback on our ESG performance. Our stakeholders include users, employees, government and regulatory bodies, investors, business partners, the media and public, and non-governmental organisations ("NGOS"). Our communication channels include but are not limited to regular meetings, investor and press conferences, satisfaction surveys and social media platforms. Assessment on the Materiality of the ESG Topics To identify and understand various ESG topics that are of high priority to Tencent, we have engaged with an external professional agency to conduct a materiality assessment. The assessment process is as follows: 1. 2. Identify a list of potential ESG material topics by taking into consideration: (i) common issues raised by internal and external stakeholders, and (ii) topics highlighted in recognised reporting frameworks, including the ESG Reporting Guide, the Task Force on Climate-Related Financial Disclosures ("TCFD"), the Global Reporting Initiative ("GRI") standards, and the Sustainability Accounting Standards Board ("SASB") standards. Identify key concerns via interviews and online surveys across stakeholder groups, including the Board members, senior executives, employees, customers (users and business partners), suppliers, investors, governments and regulators, academics, media and NGOs. 3. Prioritise relevant material ESG topics through materiality mapping. MED LOW Ο 00 11 17 OO 16 00 • Reduce our carbon footprint and increase renewable energy use, ultimately reaching net-zero in operations and supply chains by 2030; and Consider the environmental impact of our products and services during the development and operation stages; Environmental, Social and Governance Report 00 Impact on Stakeholders (Important) Our efforts in energy-saving at office buildings have earned certifications of international sustainable design standards. Tencent Binhai Towers, Tencent Beijing Headquarters, and Chengdu Tencent Towers A and B have obtained LEED Gold or Platinum certifications. Our shareholders and stakeholders play an important role in our ESG strategy and implementation. The Company has commissioned an independent consultant to conduct online surveys and interviews with our stakeholders, and integrated their feedback into our materiality assessment. For details of our materiality assessment, overall ESG performance and the assurance report, please refer to the standalone ESG report¹ to be disclosed on the Company's website: www.tencent.com/esg. 2. ESG GOVERNANCE STRUCTURE ESG governance at Tencent is overseen by the Board's Corporate Governance Committee and implemented by the Company's ESG Working Group. In 2021, the Corporate Governance Committee expanded its focus to ESG oversight. It shall report regularly to the Board relevant ESG issues as well as the progress of key performance indicators ("KPIs"). The Corporate Governance Committee shall exercise oversight via inquiries, regular updates on the Company's ESG initiatives, reviewing and approving annual ESG reports submitted by the ESG Working Group. The ESG Working Group (the "Working Group") is a cross-functional body established in January 2022 and reports to the Corporate Governance Committee twice a year. The Working Group, which is tasked to advance Tencent's overall ESG performance and promotes internal coordination, operates on three levels: • ESG Steering Team leads the Working Group to set out the Company's ESG strategy and priorities. Co-chaired by the Chief Strategy Officer and Chief Financial Officer, it has a good representation of senior executives from various business groups or functional lines covering specific ESG topics. 1 Our standalone ESG report will be downloadable from our Company Website. We decided to distribute electronic versions only in favour of nature conservation and carbon emissions reduction. Our ESG report will only be published on a standalone basis for the financial years commencing on or after 1 January 2022. 00 • 112 Environmental, Social and Governance Report ESG Coordination Office supports the ESG Steering Team in identifying ESG objectives and collaborating with various business and functional teams to develop action plans and track progress. In addition, it serves as the secretariat of the Working Group and reports the Company's ESG matters to the Corporate Governance Committee regularly. ESG Champions comprise of employee representatives from various business groups and functional teams covering specific ESG topics. Leveraging their respective areas of expertise, ESG Champions drive the implementation of the Company's ESG initiatives and provide regular updates to the ESG Coordination Office. We will review the composition of the Working Group from time and time to ensure the Corporate Governance Committee is kept abreast of the Company's ESG initiatives and overall performance. 3. BOARD STATEMENT The Board oversees ESG matters via the Corporate Governance Committee and is engaged in formulating and implementing the Company's ESG strategy. The Corporate Governance Committee supported the Company's decision to strengthen ESG governance via the establishment of the ESG Working Group, where the ESG Coordination Office serves as the secretariat. The Board was involved in the materiality assessment and prioritisation of key ESG topics of Tencent, which was conducted by an independent professional consultancy. The Board has participated in surveys and interviews that solicit views and recommendations on ESG topics that may have significant influence on the Company's long-term sustainability (please refer to the sections titled "Stakeholder Engagement” and “Assessment on the Materiality of the ESG Topics" for more details). Key ESG risks have been incorporated into the Company's comprehensive risk management system. From principal business leaders to senior management, the Group has formulated risk response measures by considering the possibility, impact, and trends of key ESG risks. The Board has regularly reviewed these key risks at the Board and Corporate Governance Committee meetings and has made recommendations to the measures taken. During the reporting period, the Board has reviewed the Company's carbon neutrality plan, progress in certain sustainable social value projects and the annual ESG report. Annual Report 2021 113 Tencent Holdings Limited 5. Environment (Extremely Important) Annual Report 2021 111 110 Tencent Holdings Limited Environmental, Social and Governance Report 1. Business operations • • Operate in compliance with applicable laws and regulations; Operate business with integrity and protect the interests of shareholders and stakeholders; and 00 Provide our employees a safe, inclusive and equitable work environment; empower them to pursue professional growth. 3. Users • • . Protect the privacy of our users and the security of their data and digital properties; Annual Report 2021 119 Environmental, Social and Governance Report We have always focused our efforts on improving resource efficiency and increasing the proportion of renewable energy use in our data centres, which are pivotal to reducing our carbon footprint. 2. Our ESG strategy focuses on the management of risks and the pursuit of opportunities, unlocked by the ongoing convergence of physical and virtual worlds as well as the digital transformation enabling industries to extend their presence online and expand globally. The implementation of our ESG strategy can be summarised as follows: Assist in driving the transition towards a low-carbon society via the promotion of a low-carbon lifestyle for users, and technologies that enhance the management of climate change for enterprises. We integrated our corporate social responsibility and charitable activities to form a new Sustainable Social Value ("SSV") organisation. SSV is funded with an initial capital of RMB50 billion to invest in key areas, including research in basic sciences, education innovation, rural revitalisation, carbon neutrality, primary healthcare, philanthropic platform, assisting with public emergencies, technologies enabling the silver generation, enhanced accessibility, and digitalisation of culture. We allocated an additional RMB50 billion to support the "Common Prosperity" initiative in China. • • • Community and industry Combat illegal or unwarranted behaviours that are harmful to long-term business partnerships by empowering our IC and Anti-Fraud Investigation Department. Ensure fair and equitable treatment when dealing with our business partners; encourage them to give us feedback on our business practices; and Contribute to the advancement of the internet industry via open-source partnerships and open platform collaboration. • Assist industries, especially small and medium-sized enterprises, in managing digital transformation; . 4. Business partners Environmental, Social and Governance Report Increase community investment, and leverage our platforms and technologies to implement “Tech for Good"; Create and promote a digitally inclusive environment; and 1. ENVIRONMENTAL, SOCIAL AND GOVERNANCE STRATEGY Tencent's Environmental, Social and Governance ("ESG") strategy is guided by our long-established mission and vision, "Value for Users, Tech for Good”. The mission and vision, in which our employees respond to what they like most about Tencent in the annual employee surveys, is the driving force behind the incorporation of ESG considerations into our products, services and business operations. In view of the rapid changes in societal and business environments, including the COVID-19 pandemic, extreme weather, macroeconomic challenges, regulatory tightening, mobile internet ubiquity and new enabling technologies, as well as the digital upgrade of local economies, we have strengthened our capabilities to manage the associated risks and nurture new opportunities. Since April 2021, we have taken an innovative and coordinated approach to create value for our users, business partners and the society, and to strengthen our foundation in ESG governance. Specifically: • We upgraded our corporate strategy to promote "Sustainable Innovations for Social Value" alongside our existing consumer internet and industrial internet strategies. • We established a new ESG governance structure to support the Board's expanded oversight on the Company's ESG matters, coordinate internal priorities and engage stakeholders via the ESG Working Group and the ESG Coordination Office. 00 has been achieved. The target for 2021 has been achieved. • The target for 2021 The target for 2021 has been achieved. • For any given year, all destroyed hard drive components and waste lead-acid accumulators will be collected by qualified vendors for harmless disposal. For any given year, all Tencent-owned office buildings in the Mainland of China will categorise waste. For any given year, at least one additional data centre will obtain ISO 50001 or GB/T 23331 energy management system certification. 122 Energy Management in Data Centres Waste Management Tencent Holdings Limited Scope 1 emissions (million MtCO2e) 2,3 Indicators 324 Hazardous waste (tonnes)6 9.12 Total GHG emissions per unit of revenue (MtCO2e/RMB Million) 2.743 Scope 3 emissions (million MtCO2e) 2,3,5 2.349 Scope 2 emissions (million MtCO2e) 2,3,4 0.019 The target for 2021 has been achieved. 5.111 Total GHG emissions (Scope 1, 2, 3) (million MtCO2e) 1,2,3 31 December 2021 As at Environmental, Social and Governance Report Environmental Performance For any given year, the average annual PUE of self-built data centres will not be greater than 1.35. Using the electricity consumption per capita in 2019 as a benchmark, the electricity consumption per capita in all Tencent-owned office buildings in the Mainland of China will be reduced by 15% by the end of 2025. Using the water consumption per capita in 2019 as a benchmark, the water consumption per capita in all Tencent-owned office buildings in the Mainland of China will be reduced by 15% by the end of 2025. Tackling Climate Change Annual Report 2021 Tencent Holdings Limited Environmental, Social and Governance Report 6.3 Waste Management In response to the national call and local policy on garbage classification, we reinforced recycling practices by educating our employees on waste management. On-site inspections are performed to ensure proper garbage classification. Waste generated in office buildings is categorised and transferred to a government-authorised waste treatment agency. In 2021, we strengthened the waste management of Tencent-owned offices by tracking and monitoring our generated waste. We have implemented an electronic waste recycling and disposal programme at our data centres. The programme first examines whether old servers can be reused before they are dissembled. Otherwise, obsolete servers and other electronic waste, including waste computers, notebooks and monitors will be recycled and reused by qualified second-hand vendors. Environmental, Social and Governance Report We have entered into agreements that guarantee 100% of our hazardous waste will be handled in strict compliance with relevant regulations. These types of wastes include lead-acid accumulators and destroyed hard drive components from data centres and waste toner and waste ink cartridges from office printers. Our impacts on the environment and natural resources primarily come from greenhouse gas emissions, energy consumption and waste production, where relevant policies and measures can be found in the previous sections. This section elucidates our strategies around water and other emission management. We have implemented water-saving measures across our office buildings, including utilising water-saving appliances, monitoring daily water consumption, setting water-use targets, and educating employees on water conservation. To accelerate the efforts around water conservation at our data centres, we are preparing to kickstart a few research projects on water cooling and recycling. For Tencent Binhai Towers and Beijing Headquarters, we monitor the levels of air pollutants, including PM2.5, PM10, carbon monoxide, and carbon dioxide inside and outside the buildings with an online monitoring system, which is backed up by a manual measuring system. A smart ventilation system is installed to respond to the changing carbon monoxide and carbon dioxide levels in our underground car park and office spaces. For our office cafeterias, the cooking ventilation comprises a fire-resistant environmental exhaust hood that removes oil droplets, activated carbon filtration and air ionisation. Environmental Performance Summary Unless otherwise specified, the following environmental targets and performance data cover Tencent's office buildings and data centres in the Mainland of China and Hong Kong. Hazardous waste per unit of revenue (tonnes/RMB Million) 6.4 Water and Other Emission Management Energy Management in Office Buildings Environmental Targets Targets Section with Detailed Steps to Achieve the Targets The interim target for 2021 has been achieved. The interim target for 2021 has been achieved. The target for 2021 has been achieved. The target for 2021 has been achieved. Target and baseline have been set recently. Target has been set recently. In 2021, we formulated environmental targets. The progress is shown in the following table. Progress Updates in 2021 certification. For any given year, the property management companies of all Tencent-owned office buildings in the Mainland of China will obtain the environmental management system (EMS) Using green power for 100% of all electricity consumed by 2030. Achieving carbon neutrality by 2030 across our operations and supply chains. • • • By the end of 2021, Tencent Beijing Headquarters would have obtained LEED Gold certification. 121 6,201,652 29,850 In November 2021, we announced the introduction of a new benefit scheme to reward long-serving employees to be implemented in 2022. On top of the statutory retirement plan, our employees will be provided with a package which includes customised souvenirs, a long-service gratuity, and a retirement honorarium when they legally retire from Tencent. Incumbent employees who have served the Company for over 5 years will be provided with long-term health insurance. Incumbent employees who have worked for over 10 years will be given customised souvenirs and an additional 10-day leave. Incumbent employees who have worked for over 15 years will be offered lifetime health insurance and the option to retire early with a retirement package. Employees who have worked for over 20 years will receive a tailor-made commemoration gift package and customised employee badge. We strive to provide employees with a wide variety of health-related benefits. For more details related to the specific benefits, please refer to the "Health and Safety" section. Communication We engage with our employees through various communication channels, including annual gatherings, internal forums and emails. Our objective is to foster a culture where employees are encouraged to freely express their views. We also respond and address employees' concerns throughout their career development and learning process. Every year, we conduct a company-wide anonymous employee engagement and satisfaction survey through an independent third-party agency. Based on the survey analysis, our Human Resources Department works with managers to develop action plans to strengthen the overall performance and development accordingly. In 2021, a total of 46,437 employees responded to the annual survey, which revealed greater engagement and overall satisfaction rates. The top three aspects employees were most satisfied with were "Culture/Values", "Tech for Good", and "Company's Future Development". For three consecutive years, “Culture/Values" received the highest recognition from our employees, scoring over 85% satisfaction rate. Annual Report 2021 127 Environmental, Social and Governance Report 7.2 Growth and Development We provide a career development system and professional training for our employees as they build their careers at Tencent. In 2019, we updated our Employee Career Development Management Policy to better support the development of our employees. Career Path System There are two internal career development channels, namely a professional channel and a management channel. The professional channel branches out to multiple fields of expertise, and each field further diversifies into various development paths with built-in tiers of seniority. The management channel is more streamlined. Our employees can choose to take the development channel that is most suitable for their career at Tencent. These approaches enable our employees to develop their careers in a thoughtful manner and be recognised for their contributions to the Company. We have also built a mechanism for employees who wish to pursue a new direction in their careers within Tencent's diverse business portfolio. Huoshui Programme ("HSP"), an internal talent transfer portal, was launched in 2012. Employees can apply for a role across various functions and regions after their first year of employment. In 2021, HSP facilitated over 4,000 internal transfers. It greatly boosted the vitality of the Company as it brought more talents from different backgrounds to our core products and fast-growing businesses. For those who are planning to relocate to another city or country, HSP can be an alternative option for them without leaving the Company. Our effective talent allocation programme was used as a case study by the Harvard Business School previously and was included in the case library of Tsinghua School of Economics and Management in 2021. Training Programmes Established in 2007, Tencent Academy runs a suite of training programmes such as on-boarding, on-the-job training and leadership training to support employees at every stage of their careers. As employees gradually gain work experience and promotion opportunities, we offer them a curated series of relevant courses to complement their development and learning goals. The Academy also offers employees qualification programmes and monetary rewards for those who have successfully obtained certifications. In addition to on-site training, Tencent Academy also provides an online learning platform that enables employees to learn anytime, anywhere. To help employees of different positions address various professional needs, Tencent Academy offers courses on products, operational skills, technology, data analysis, marketing, design, risk management, customer engagement, and many more. As of 2021, Tencent Academy has offered 784 types of courses, of which 111 of them were recently added. These courses were offered all year round and added up to 12,000 classes in total. The average training hours and participation rate were over 40 hours and 99.61% respectively. 00 128 Tencent Holdings Limited Environmental, Social and Governance Report Tencent Academy invited experts to share their knowledge on scientific innovation, technology, and product design at the Tencent Technology Week in October 2021 and Tencent Design Week in December 2021, as well as other professional events. We believe that these opportunities can inspire and help employees gain new perspectives for their personal growth. In the spirit of sharing, we have an internal interactive platform for senior employees or domain experts to share their experiences with employees. To promote capacity building within our industry's value chain, we have made some of our training resources available to certain business partners and investee companies. Performance Evaluation and Promotion To encourage continuous growth and development, employees receive regular objective and fair assessments regarding their performance. A merit-based incentive and performance management system are in place to streamline our assessment processes and ensure consistency across the Company. Employees are expected to write their self-evaluation twice per year, followed by comprehensive feedback provided by their direct supervisor. In addition to the bi-annual evaluation, we encourage supervisors to communicate with their subordinates regularly in order to help employees grow and succeed. Employees may apply for promotion after their interim and year-end performance reviews, provided that they satisfy the requirements with regard to the length of service and performance. Depending on the work scope, the promotion will be reviewed and considered by the relevant internal committee. 120 In case of disagreement on the performance and promotion assessment results, employees can appeal through our grievance procedure and request a re-assessment via our independent internal promotion management platform. We have put in place housing benefit programmes, namely the Tencent Anju Plan and Yiju Plan. Since 2011, Tencent Anju Plan has provided interest-free loans to certain employees in the Mainland of China, where the skyrocketing property price misinformation has placed a lot of pressure on first-time home buyers. The Yiju Plan, launched in 2016, provides recent graduates with a rental subsidy to help reduce their financial burden as they start their careers. In 2021, we raised the upper limit of interest-free loans under the Tencent Anju Plan and increased the rental subsidy under the Tencent Yiju Plan. Under our leave scheme, employees can enjoy fully-paid annual leave and sick leave, half-paid personal leave, and a fully-paid Chinese New Year leave, which are above the statutory standards. New fathers and mothers are entitled to take fully-paid paternity or maternity leave. For parents with children under the age of three, our updated leave scheme provides fully-paid parental leave each year. In addition, all employees are entitled to one day of fully-paid volunteer leave per year. Environmental, Social and Governance Report 126 Tencent Holdings Limited Environmental, Social and Governance Report 11. PUE of data centres is a ratio of the total energy consumption to the energy consumption of IT equipment. During the reporting period, the annual average PUE is calculated by considering all data centres within our operational control that have operated for more than 12 months with a minimum utilisation rate of 30%. 12. 13. Water supply mainly comes from the municipal water supply and there is no issue in sourcing water. In January 2021, we upgraded our capability in water management at our office buildings with the introduction of the Tencent Facility Management system, which allowed us to track, record and analyse water consumption data every month. This upgrade will lay a solid foundation for our expanded reporting scope in the future. Comparable historical numbers are not available as we have only partly collected data at some of our leased sites, where the water usage was managed by third-party property management companies in 2020. Data regarding packaging materials are not applicable to the Company. OUR PEOPLE Employees are the most valuable asset of Tencent. We believe that fostering a sustainable working environment and investing in the development of our employees are crucial to maintaining the long-term competitiveness of the Company. Our employment practices comply with the United Nations Declaration of Human Rights, as well as applicable local laws and regulations in the markets where we operate. 7.1 Rights and Benefits Labour Practices Our employment practice complies with relevant national and regional legislations such as the Labour Law of the People's Republic of China on working hours, training, social insurance and welfare, and health and safety. We offer a flexible work schedule for our employees so that they can achieve greater work-life balance and autonomy. We strictly prohibit child labour and any forms of forced labour. All applicants are asked to provide proof of their educational backgrounds, qualifications, and work experiences. To ensure the legitimacy of the information, a due diligence agent will review and verify the details. Our Group Procurement Department requires suppliers to sign the Corporate Social Responsibility Commitment and operate in accordance with our requirements concerning child labour and forced labour. In the case of any violation of the rules, measures and investigations will be taken immediately in accordance with the applicable laws and regulations. In 2021, there were no violations related to child labour and forced labour. In 2021, we increased the transparency of the review process by encouraging colleagues to attend promotion presentations given by individuals from similar professions. We believe the events can help employees develop a deeper understanding of relevant career trajectories and requirements. We value our relationship with our employees and handle employee departure strictly in accordance with the applicable local laws and regulations. An exit interview is conducted with each departing employee to understand the reasons for their departure and where we can improve as an employer. 125 Environmental, Social and Governance Report 00 Equality, Diversity and Inclusion In addition to regulatory requirements, the protection of human rights and fundamental freedoms have been codified and enforced through our internal policies, including the Sunshine Code. We condemn and prohibit discrimination against any employees and job applicants on the basis of their nationality, race, religion, sex (sexual orientation and gender identity), age, or disability. Our corporate culture supports diversity and inclusion. Employees and management are provided with cross- cultural training and workshops. To foster a community where women can be empowered by each other, we have launched the Women's Leadership and Empowerment initiative, which calls on outstanding female employees to share their stories in the workplace. In 2021, we collaborated with the United Nations Development Programme ("UNDP") to produce inspiring videos and articles about women in the technology industry. By the end of 2021, 25% of our managerial positions were held by female employees. We are committed to inspiring and promoting women in leadership across multiple functions and management levels. We support employees who are starting a family with appropriate benefits, including maternity/paternity leave, breastfeeding leave, parental leave, flexible working hours, maternity allowance and family insurance. We provide applicants and employees access to grievance procedures, where job applicants can raise issues related to discrimination through surveys after interviews, and employees can report workplace discrimination through email and our internal grievance platform. In case of such a report, an independent investigation will follow, and remedies will be implemented accordingly. In 2021, we received the annual China's Best Employer Award organised by Zhaopin and Peking University Social Survey Research Centre, and the Most Caring Employer for Women Award by Lagou.com, a popular job-seeking platform in China. Compensation and Benefits We offer our employees an equitable and competitive compensation and benefits package. It aims to attract, motivate, and retain talents as they develop their long-term career with the Company. Our remuneration and bonus system, which includes salary, special and year-end bonuses, and share option and share reward schemes, is performance-based and designed to reward employees for their outstanding performance. The primary benefits system complies with the relevant laws, regulations, and current market practices. On this basis, we offer a well-established and distinctive welfare programme for employees. Annual Report 2021 7.3 Health and Safety We are committed to supporting the well-being of our employees. To prevent accidents and reduce occupational hazards in the workplace, we have established a framework that complies with international guidelines, applicable laws, and regulations, such as the Guidelines on Occupational Health and Safety Management Systems by the International Labour Organisation and Law of the People's Republic of China on the Prevention and Control of Occupational Diseases. We have employed a Safety Management Policy and Public Emergency Management Policy. Annual Report 2021 129 11.07 887,700 LEED certified office space (m²) Water consumption per unit of revenue (tonnes/RMB Million) Water consumption (tonnes)2,12 1.32 Average PUE in data centre¹l 2,334 On-Site renewable energy (MWh) 63,000 Renewable energy purchased (MWh) 7.81 Total energy consumption per unit of revenue (MWh/RMB Million) Number of LEED certified data centres 4,308,960 3,111,654 Natural gas (m³) 3,261,448 Diesel (L)⁹ 34,160 Including: Gasoline (L) 66,293 Direct energy consumption (MWh) 4,375,253 Total energy consumption (MWh) 2,8 0.053 Non-hazardous waste per unit of revenue (tonnes/RMB Million) Indirect energy consumption: Purchased electricity (MWh)2,10 Non-hazardous waste (tonnes) 1 123 7. Tencent Holdings Limited 124 00 The adjusted total indirect energy consumption in 2020 is 3,128,144 MWh by applying the 2021 reporting scope. 10. Diesel is consumed by backup power generators. 9. Total energy consumption is calculated based on the data of purchased electricity and fuel with reference to the coefficients in the National Standards of the PRC General Principles for Calculation of the Comprehensive Energy Consumption (GB/T 2589-2020). 8. In 2021, we reported the actual weight of garbage collected at our office buildings and have enhanced waste accounting for non-hazardous wastes. The garbage in 2020 was estimated with reference to the Handbook on Domestic Discharge Coefficients for Towns in the First Nationwide Census on Contaminant Discharge published by the State Council of the People's Republic of China in 2008. Non-hazardous wastes produced by data centres mainly includes obsolete servers. Hazardous wastes produced at office buildings mainly includes waste toner cartridges and waste ink cartridges from our printers. Hazardous wastes produced by data centres mainly includes waste lead-acid accumulators and destroyed hard drive components. Annual Report 2021 7. Scope 3 emissions are calculated based on broad-based assumptions with emission factors published in the UK Government GHG Conversion Factors for Company Reporting and EPA Emissions & Generation Resource Integrated Database. The carbon footprint of leased data centres both in China and international markets, where we do not have operational control, is included in Scope 3 accounting. The adjusted Scope 2 emissions in 2020 is 1.71 million MtCO2e by applying the 2021 reporting scope. 5. 4. GHG inventory includes carbon dioxide, methane and nitrous oxide. GHG emissions data as at 31 December 2021 is presented in carbon dioxide equivalent. The GHG calculation methodology has been updated based on the 2006 IPCC Guidelines for National Greenhouse Gas Inventories issued by the Intergovernmental Panel on Climate Change ("IPCC"), the IPCC Fifth Assessment Report, and the provincial electricity emission factors published by the Ministry of Ecology and Environment of China. 3. We expand the 2021 reporting scope of our environmental performance to cover all office buildings and data centres in the Mainland of China and Hong Kong within our operational control. Leased data centres that we do not have operational control are excluded. The reporting scope of 2020 covered only the main office buildings and main data centres in the Mainland of China. We adjusted the reporting scope to align with industry best practices; such an adjustment is the primary driver against the year-on-year increases of the environmental performance reported, while another key driver is the organic growth of our businesses. Due to the nature of the business, the material air emissions of the Company are GHG emissions, arising from fuels and purchased electricity produced from fossil fuels. 2. 1. Note: Environmental, Social and Governance Report 6. 00 0.00058 3 Lowest PUE achieved in the Qingyuan pilot site. We consider the green aspects of our self-built data centres, beginning from site selection, design and technologies to operations and management systems. Each data centre implements the applicable resource conservation and emission regulation measures outlined in its Operational Policy, which includes reducing GHG emissions, water consumption, and the process to handle hazardous and non-hazardous waste appropriately. In terms of energy conservation, we implemented the following measures: • . . Environmental, Social and Governance Report Regarding innovative designs and technologies, Tencent's fourth-generation T-block data centre uses energy-saving technologies that include (i) High Voltage Direct Current technology for electrical systems, (ii) liquid cooling technology, and (iii) indirect evaporative cooling units. These have allowed us to lower the power usage effectiveness ("PUE") to 1.063. In terms of operations and management systems, our proprietary Al platform can automatically and accurately monitor energy data in real-time and conduct refined classification, statistics, and scientific modelling to provide emission reduction solutions. To increase the proportion of renewable energy use, we actively participate in green power trading and explore distributed energy systems. In 2021, we explored the feasibility of green power trading with our newly assembled team of green energy professionals. In September 2021, we made our first attempt in purchasing 60 million kWh hydropower for our Chongqing Cloud Data Centre, allowing the data centre to be supported by 100% renewable energy from August to December 2021. At the Tencent Qingyuan Qingxin Data Centre campus, we built a rooftop photovoltaic power generation system that has generated over 2 million kWh of electricity from September to December 2021. In terms of building green data centres, we have completed environmental impact assessments on all self-built data centres and have obtained approvals or filings in accordance with the Law of the People's Republic of China on Environmental Impact Appraisal. We also pursued third-party building certifications to validate our commitment. In 2021, Tencent Tianjin Data Centre earned a LEED Platinum certification. In the site selection phase, we prioritise areas with abundant renewable and clean energy to power our data centres. For example, the sites in Zhangjiakou Huailai are rich in wind and solar resources, and the sites in Qingyuan, Chongqing, and Guian have strong hydropower and other forms of clean energy. With the development of these data centres, we continue to invest in a wide range of renewable energy technologies, such as photovoltaic systems, hydropower, and wind power technologies. 136 Tencent Holdings Limited Annual Report 2021 135 Environmental, Social and Governance Report 00 Anti-Fraud and Whistleblowing Policy We have published an Anti-Fraud and Whistleblowing Policy (the "Whistleblowing Policy"), which conveys the message of our zero-tolerance in relation to fraudulent activities for all the employees and suppliers/business partners. The Group encourages employees and suppliers/business partners to report any concerns that they may have regarding any non-compliant or potentially fraudulent activities. The Whistleblowing Policy outlines multiple whistleblowing channels and our whistle-blower protection system. We protect the safety of whistle-blowers by ensuring that they do not receive unfair treatment or any form of retaliation during the process. Since 2016, we have used our Weixin Official Account, "Sunshine Tencent" to raise employee's awareness of anti-fraud policies and whistleblowing channels and provide our suppliers/business partners a means to file a formal report directly. Employees, suppliers/business partners and other stakeholders can also report other violations (including but not limited to employees' misconduct, deception, disclosure of trade secrets, or other breaches of business ethics) through our open channels. We encourage the informants to leave their contact information so that we can conduct follow-up investigations and provide them with updates on the progress. We guarantee that anonymous reports that provide adequate information will be dealt with seriously. We guarantee the confidentiality of the submitted information and the informant's identity and take measures to protect the informant from retaliation. Fraud Detection and Corruption Prevention When suspected fraudulent activities are discovered or when a report of suspected fraudulent activities is received, the Anti-Fraud Investigation Department (consisting of professionals who used to be a part of the anti- corruption function at a governmental authority or private enterprise and have profound knowledge in fraud risk management and investigation) is assigned to handle the investigation independently. After the investigation has been completed, the employee found and proven to have committed fraud shall be subject to immediate dismissal. The department in question must, with the assistance of the IC, take corrective actions in response to the business risk or loophole identified during the investigation. If we find that any suppliers or business partners have engaged in serious corruption or fraudulent activities, we will terminate the contracts immediately and will never conduct business with them. In the event that any fraudulent activity violates any relevant laws or regulations, such cases shall be reported to appropriate government authorities. In 2021, we received the results of the four corruption- related cases (including cases we transferred in previous years) that we have transferred to the authorities. Six employees who were involved were dismissed and have faced criminal punishment. Because these cases were discovered and handled in time, they did not incur much impact on the Company's business. After the occurrence of these cases, according to the Sunshine Code, the direct and indirect managers of the employees involved bore the management responsibilities and consequences, such as reprimand, decrease in performance appraisal rating, demotion, dismissal and termination of labour contract. Relevant departments have also taken effective internal control measures to prevent similar cases from recurring. Environmental, Social and Governance Report Environmental, Social and Governance Report Our stance against fraud is clear. In order to convey a message regarding our determination to fight against fraud and introduce our Whistleblowing Policy externally, we sent a letter to our suppliers and business partners and requested them to complete a questionnaire annually since 2015. The questionnaire delineates our corporate values, the Whistleblowing Policy and various reporting channels. By doing so, we learn from our suppliers and business partners whether our employees have requested any gifts, cash, or other benefits and whether they have been mistreated during the course of business. Upon receiving the feedback, we ensure that the questions or concerns raised by our suppliers and our business partners are addressed promptly. The Anti-Fraud Investigation Department will commence a formal investigation when necessary. Our IC has established a procurement management control unit to optimise the Group's Supplier Management System. Through the centralised system, the bidding process can be more standardised and transparent. The Supplier Management System also provides communication channels for suppliers to collect their feedback or complaints. Fraud complaints will be directly transferred to the Anti-Fraud Investigation Department for follow- up. The goal is to ensure that suppliers' complaints and concerns can be resolved in a timely manner, thereby minimising the risk of fraud. Annual Report 2021 137 In 2021, five directors participated in either the Audit Committee meeting, internal audit committee meeting, other internal meetings, or study the Sunshine Code related online video courses to learn about the Risk Management Policy, anti-fraud policies and measures, anti-corruption related laws and regulations, the Sunshine Code, as well as internal corruption cases. 8.2 Anti-Trust We are committed to competing in a fair way and respecting the relevant anti-trust laws and regulations of the jurisdictions where we operate our business. In China, we are committed to complying with the Anti-monopoly Law of the People's Republic of China, which took effect on 1 August 2008, the Anti-monopoly Guidelines of the Anti- monopoly Commission of the State Council on Platform Economy promulgated on 7 February 2021, and other antitrust-related laws, regulations and guidelines. We advocate fair competition and have issued the Corporation Fair Competition Guidelines since 2016. It contains a comprehensive introduction to the Anti-monopoly Law of the People's Republic of China, the implementing regulations, and the enforcement practices. It also sets out compliance requirements corresponding to our business practices. It serves as the basic guide to assist relevant employees in following the rules of fair competition and conducting business activities in conformity with these laws and regulations. In 2016, we established a Competition Policy Office, a specialised department with professional lawyers in charge of anti-trust compliance matters. To the best of our knowledge, we are among the first in the industry to establish such a specialised department. In 2021, we further enhanced our anti-trust compliance system, which focuses on the following three main areas: With the Management Policy for Sensitive Positions (the "Management Policy") in place, we strengthened the construction of the Company's integrity system by improving our corporate governance standards and supervision requirements on risk management and internal control. The Management Policy also defines which positions are regarded as sensitive, including those that are involved in procurement (supplies, services, and resources), marketing, channel sales and resource management, external events, evaluation and selection of potential partners, pricing, resource allocation, key decision-making and other high-risk duties. Corresponding management measures are taken for these positions, including requiring regular job rotation, stripping sensitive responsibilities, participating in various risk management training. The Management Policy also stipulates that the IA reserves the right to audit all sensitive personnel positions and may conduct audits on current or former personnel in sensitive positions at any time. In order to educate our employees about anti-corruption behaviours, we have provided them with mandatory training on our Sunshine Code. We promote anti-corruption through emails, elevator pitch videos, and other internal communication channels. In 2021, we updated the Sunshine Code related online video courses and required the participation of all employees of the Group. For new hires and employees in sensitive positions, we have provided them with a total of 76 face-to-face anti-fraud training courses, covering more than 10,000 participants. In 2021, 100% of our employees have received anti-corruption training. 134 Sunshine Code and Anti-Corruption Training 8. OPERATING PRINCIPLES AND PRACTICES We uphold the value of integrity, proactivity, cooperation, and creativity in our business operation. We comply with all applicable laws and regulations to ensure sustainable development. To achieve business stability, we uphold ourselves to the business ethics and practise risk prevention and control. 8.1 Anti-Corruption We have developed robust systems and measures to prevent, detect, and deter corruption, bribery, or other fraudulent activities while promoting integrity. High-risk business activities and management are subject to periodic audits to assess the effectiveness of the internal control system and ensure the Group complies with the ethical standards that we strive to uphold. According to the Law Against Unfair Competition in the PRC, business operators shall not use monies, assets, or other means to bribe an entity or individuals to obtain transaction opportunities or competitive advantage. According to the Criminal Law of the People's Republic of China, corruption and bribery may constitute a serious criminal offence. We strictly comply with the local anti-corruption and bribery laws and regulations. Annual Report 2021 133 Environmental, Social and Governance Report Risk Management and Internal Control Policy In 2016, we updated the Risk Management and Internal Control Policy (the "Risk Management Policy") and established a system comprising of three risk management lines of defence. • • The first line of defence consists of business and functional departments. We provide targeted training and guidance for relevant employees to help them identify potential risks in their daily work and report such risks to their superiors. The second line of defence comprises of the IC. It establishes a list of major risks at the business level by collecting, summarising, analysing various data, and ensuring that appropriate risk response strategies and monitoring measures have been taken. The management first reviews the information. Then, it is submitted to the Audit Committee for further revision before reporting to the Board. The IC performs timely analysis and evaluation on the response to major risks and reports the results to the Audit Committee quarterly. The Board entrusts the Audit Committee to (i) assess the nature and extent of the risks the Company is willing to accept to achieve its corporate objectives, (ii) determine the major risk response strategies and responsible departments, and (iii) promote the implementation of the response strategies from top-down, supported by the IC. The third line of defence is made up of the IA and the Anti-Fraud Investigation Department. The IA is highly independent and responsible for providing independent evaluation and assurance regarding the effectiveness of the Company's risk management and internal control system. It supervises the management team and helps them improve their risk management and internal monitoring capability. The Anti-Fraud Investigation Department is responsible for receiving reports from various channels and investigating suspected fraud cases. It also assists the management in advocating integrity values by ensuring all employees understand and fully acknowledge the Sunshine Code. Both the Internal Audit and the Anti-Fraud Investigation Departments report directly to the Audit Committee. Through the three lines of defence, we regularly provide targeted risk control training for employees from different positions and businesses to enhance their overall awareness of risk management. 00 • Tencent Holdings Limited Environmental, Social and Governance Report The Risk Management Policy sets out the roles and responsibilities of different stakeholders in risk management and control (including those in relation to fraud). Such Policy emphasises that each business group is primarily responsible for its department's risk management and internal control. If any fraudulent activity is detected, the management of the relevant department shall improve their control procedures promptly to prevent the recurrence of similar incidents. In 2021, our Anti-Fraud Investigation Department found more than 50 cases in violation of Tencent's "high voltage line". Approximately 70 people have been dismissed, amongst which more than 10 people suspected of crimes have been reported to relevant government authorities in accordance with applicable laws and regulations. All employees of the Group are required to strictly follow and comply with the Sunshine Code. It prohibits all kinds of fraudulent activities, bribery, embezzlement, misappropriation of the Company's assets, extortion, falsification of information and any other activities that are not in compliance with the applicable laws and regulations. The Sunshine Code is reviewed annually and updated against the ever-changing needs of the Group as appropriate. That way, it could cater to our business development, reflect the applicable laws and regulations, and capture all kinds of fraudulent activities. Our Sunshine Code was further enhanced in 2021 to (i) strengthen the enforcement and punishment of Code violations, and (ii) revise the conflict-of-interest parameters. Establish a new specialised compliance department and strengthen daily compliance initiatives Update anti-trust compliance guidelines for business 138 Number of employees by employment type Number of employees by management level Number of employees by geographic region Number of employees by age group Number of employees by gender Total number of employees¹ Indicators As at Environmental, Social and Governance Report Environmental, Social and Governance Report Employment Performance Employment Data Summary Tencent Holdings Limited 130 00 Over the past year, COVID-19 outbreaks resurged globally, bringing suffering to people and forcing local economies to a halt. We continue to closely monitor the pandemic and inform employees to quarantine or work from home, if needed. Surgical masks, hand disinfectants and personal protective equipment are provided at our offices, and to employees in need. A continuously updated Tencent COVID-19 Response Guideline is used to provide guidance on office management and promote anti-pandemic awareness among employees. We apply strict practices to ensure a safe working environment, including enhanced cleaning and sanitation procedures, temperature monitoring, social distancing, and other measures that can minimise transmission risks. We formulate detailed emergency plans for fire safety, natural disasters, personal injury and other life-threatening events, and conduct regular drills and simulation tests. In response to medical emergencies in the workplace, we have formed an internal emergency rescue team and provided employees with first-aid training. We have approximately 400 automated external defibrillators ("AED") across our 50-plus offices and data centres. In 2021, our internal first-aid team hosted 150 in-person first-aid training sessions for 5,498 participants and provided online first-aid training courses to 13,838 participants. There are various kinds of insurance available for employees, including social insurance, commercial medical insurance, critical illness insurance, accident insurance, life insurance, and many more. We also organise a wide variety of recreational clubs, such as running, photography, music, dance, language classes, and celebratory activities, including work anniversaries and festival celebrations for our employees. Wherever feasible, we reserve dedicated spaces for recreational facilities on our campuses. For example, in our Shenzhen Headquarters, we have built a 300-meter running track, an indoor rock-climbing wall, table tennis tables, pool tables, a badminton court and a basketball court. We attend to the health and well-being of our employees by investing in various resources, including annual medical check-ups, health seminars, fitness and mindfulness sessions, on-site as well as in-person counselling for physical and mental health, and 24-hour telephone support from relevant professionals. To maintain a safe and comfortable workplace, we have a security system, fire safety system, and food safety monitoring system in place. We invite third parties to conduct security risk audits on our premises every year to identify hardware defects and deficiencies in the operation management system and address other hidden risks. Male Female 00 Under 30 30 to 50 The Mainland of China Tencent Holdings Limited Environmental, Social and Governance Report • Note: Training refers to in-person and online courses offered by the Company to employees. In the spirit of enhancing internal anti-trust scrutiny, we have upgraded and optimised our anti-monopoly compliance system. In accordance with the latest anti-trust legislation, law enforcement and judicial practices, we made revisions to the 2016 Corporation Fair Competition Guidelines and upgraded it to the Group's Anti-trust Compliance Guidelines in 2021. For instance, the updated Guidelines provide more specific compliance guidance for different business scenarios by referring to typical cases published by the authorities. • Strengthen anti-trust compliance training and advocacy We continue to strengthen the relevant compliance training across the Group. The training scheme aims to continually enhance employees' awareness around anti-trust law compliance. We have also invited professionals to host anti-trust related seminars to further advocate anti-trust compliance. In the future, Tencent will continue to actively engage with the regulatory authorities and comply with relevant anti- trust laws and regulations. 8.3 Anti-Money Laundering The Group strictly abides by applicable laws and regulations related to anti-money laundering ("AML") and counter-terrorist financing (“CTF") in the PRC and other countries and regions in which we provide payment processing services. We monitor regulatory changes and respond in a timely manner by engaging in legal interpretation, gap analysis and training, as well as with the assistance of external consultants. We fulfil all relevant regulatory obligations under such applicable rules and regulations including but not limited to the Anti-Money Laundering Law of the People's Republic of China and Administrative Measures for Anti-Money Laundering and Anti-Terrorism Financing of Payment Institutions. Annual Report 2021 139 198 39,420 28,608 19,820 48,406 68,226 31 December 2021 Other countries and regions Management Non-management Formal employees Other categories² Hong Kong, Macao and Taiwan Above 50 39.53 In terms of organisational structure, in 2021, we set up a specialised Anti-Monopoly Compliance Department ("AMCD") that reports regularly to the senior management. The AMCD coordinates with relevant teams and resources to strengthen our anti-trust compliance. The AMCD's work scope includes (i) providing anti- monopoly compliance advice on daily operation, (ii) conducting merger filings, (iii) following up with the domestic and global anti-monopoly legislation, rule-making progress, enforcement and judicial initiatives and analysing impacts on the operation, (iv) training on anti-trust compliance, and (v) actively cooperating with anti-trust regulators' requirements, if any. Our AMCD works closely with different business groups and other stakeholders to continuously improve the formulation and implementation of the relevant compliance policies and mechanisms (including but not limited to the daily compliance initiatives and merger filings). We aim to strengthen our anti-trust compliance and help maintain a fair and competitive environment. 243 The relatively high number of lost working days in 2019 was mainly due to the significant recovery time that we had provided to the employees with fractures. 4. The rate of work-related injuries = (Number of recordable work-related injuries / Number of hours worked) * 1,000,000 * 100%. Work-related fatality rate = (Total number of work-related fatalities / Total number of employees) * 100%. 3. 2. The data refers to the work-related deaths and injuries from accidents reported by Tencent's Human Resources team and verified by local relevant government authorities. In the Mainland of China, such cases, if any, are reported to the Human Resources Department and verified by the Human Resources and Social Security Bureau. 1. Note: 1,0584 281 480 0.21 0.27 0.25 (number of injuries / million of hours worked)³ Working days lost due to work-related injury (days) Rate of work-related injuries Number of injuries 18 28 32 00 132 Tencent Holdings Limited Environmental, Social and Governance Report 55.52 66,906 Management Average training hours of employees by management level 44.12 Female 39.68 Male Average training hours of employees by gender 99.60% 0 Non-management Management Percentage of employees trained by management level 99.59% Female 99.63% Male 31 December 2021 Percentage of employees trained by gender Indicators As at 99.79% 0 Training Performance 0 12.32% The Mainland of China Employee turnover rate by geographic region 19.39% Above 50 10.89% 14.59% 13.53% 11.90% 12.37% 30 to 50 Under 30 Female Employee turnover rate by age group Employee turnover rate by gender Total turnover rate³ 3,117 65,109 62,107 6,119 1,077 Hong Kong, Macao and Taiwan Non-management Male Work-related fatality rate (%)² 15.61% 0 2019 2020 2021 Number of work-related fatalities¹ Indicators Health and Safety Performance¹ 0 131 Environmental, Social and Governance Report Annual Report 2021 Employee turnover rate = (Number of formal employees who left during the reporting year / Number of formal employees at the end of the reporting year) * 100%. Employee turnover reflects the number of formal employees who have left (due to voluntary resignations, dismissals, retirement). Other categories refer to consultants and interns engaged in the businesses directly operated and managed by the Company. The scope of employees includes the number of formal employees and employees of other categories in the businesses directly operated and managed by the Company. 3. 2. 1. Note: 15.00% Other countries and regions 0 Our approach to data protection follows the widely recognised "Privacy by Design" concept, which dictates that all our products and services are designed with privacy protection from the outset and that we continuously think about privacy protection throughout the product lifecycle. Our approach to "Privacy by Design" is encapsulated in three words: "Person-Button-Data". "Person" refers to how the needs of our users are central to everything we do. Core to this is the notion of transparency and our commitment to letting users know how their data is used. Privacy remains our highest priority in all that we do. Users can manage their personal data, and we facilitate this in line with applicable laws and regulations. We only collect the minimum amount of data required to power our products and services. We do not provide users' data to third parties without a clear legal basis, and users are informed as to what data is shared, how it is shared, and with whom it is shared. "Button" symbolises a reminder of our commitment to providing users with the ability to manage their data in an easy, seamless fashion - like the click of a button. Our products and services generally include a privacy control suite or centre where users are empowered to access their data, obtain a copy of their data, request for deletion of their data, or for its migration, in accordance with applicable laws. "Data" refers to user data we safeguard with our thorough and cutting-edge cybersecurity technology and management protocols. Our round-the-clock Security Platform Department comprises some of the world's leading data security experts who collaborate with external security researchers and partners worldwide through our online Tencent Security Response Centre Platform to create a more robust and secure digital environment. Together, these provide world-class threat monitoring, defence, and response mechanisms to safeguard user data and enable prompt detection and remedy of security incidents. Annual Report 2021 143 Annual Report 2021 145 Environmental, Social and Governance Report We believe that users should be able to manage their own data. Therefore, our products and services are designed to the maximal extent that restricts the collection of and access to user data by Tencent or anyone else. While using our products and services, users can manage the scope and extent to which their data is collected, used, and shared. These features have been researched, designed, and implemented over many years in order to protect users' privacy and allow them to directly manage their data. Privacy Impact Assessments and follow-up Our Data Protection Officer undertakes the related responsibilities according to laws, including communicating with regulators and providing advice to management on related compliance requirements in different jurisdictions. The Data Protection Officer is supported by a team of qualified privacy protection professionals and is available to address any questions regarding Tencent's privacy practices, or any product-specific privacy policy, at Dataprotection@tencent.com. Approach and Procedures . Tencent Holdings Limited 144 00 The Board and Management have always attached great importance to the protection of our users' personal data. Tencent's Management is committed to a privacy-first governance approach and has institutionalised a robust internal evaluation process to ensure that all products are fully assessed to comply with all applicable data privacy laws and that all data collected are securely transmitted and stored. From top-down, to bottom-up, data privacy is an organisational effort. Oversight We carefully review all requests to ensure that we comply with all applicable laws and regulations in our response, while respecting our users' rights. That may include taking sufficient internal and third-party professional advice. Whenever possible and subject to applicable laws, we are transparent with our users in the actions that we take in response to valid legal requests, to provide affected users with an opportunity to respond to the request; and We respond to valid legal requests consistently and fairly across all jurisdictions where we offer our products and services, subject to applicable laws and regulations and our interpretation of potential differences between jurisdictions; Tencent acts in accordance with applicable laws and follows the following general principles whenever we receive requests to disclose data from government agencies and regulators: Environmental, Social and Governance Report As part of our privacy-focused work, we regularly undertake Privacy Impact Assessments ("PIAS") for our products and services. These PIAS evaluate the privacy-related risks of our products and services in the relevant jurisdictions where we operate. Our dedicated privacy legal team is trained to identify, highlight, and manage privacy risks, minimise potential impacts to individual rights, and address other adverse privacy issues. Environmental, Social and Governance Report Our privacy protection policy is also published on the product's official website and app, which is also accessible on the Tencent Privacy Protection Platform. Users can also submit complaints or make inquiries through the feedback button on the website, app and privacy feedback email (Dataprivacy@tencent.com). Protection of Minors Tencent has comprehensive systems in place to empower our teams to respond rapidly and effectively to all types of information security incidents, including attacks from attrition, ransomware, the web, email, impersonation, improper usage, system outages and deletion, loss, or theft of data. Our main goals are to continuously ensure the cybersecurity of our platforms, to protect the information entrusted to us by users, and to ensure our operations meet the applicable laws and regulations. We also use various incident analysis mechanisms and risk protocols to ensure that Tencent responds appropriately and swiftly to any threat detected. Tencent complies with all applicable privacy protection and data security laws and regulations in the jurisdictions we operate. To ensure the Company's products and business processes comply with the regulatory requirements, we monitor the relevant regulations and laws in China and international markets closely, implement such new requirements and upgrade our know-how in a timely manner. 148 Tencent Holdings Limited 00 Tencent has always attached great importance to protecting and promoting the healthy development of Minors, which can be demonstrated through our products and services. We utilise technological innovations to upgrade the protection system for Minors and create a series of programmes to support their growth and development. With the Law of the People's Republic of China on the Protection of Minors that came into effect in June 2021, which stipulates the responsibilities and obligations of internet service providers, we have rolled out Minors protection programmes in our various products and fully implemented such measures as required. Environmental, Social and Governance Report 9.3 User Protection We apply our internal best practices in data security to Tencent Cloud's security products and services, including the intelligent gateway, cloud firewall, DDoS (distributed denial-of-service) protection, network intrusion protection, and anti-fraud. It has achieved all-rounded security by identifying and deploying protection measures on physical security, virtualisation security, network security, host security, data security, application security, business security, security audit and security management. With the evolution of cloud computing and security technologies, Tencent Cloud will continue to build an efficient security internal control system, enhance security compliance capabilities, and upgrade cloud security and big data security standards. Tencent Cloud has established an efficient internal control system and strengthened its foundation in data security from the aspects of system process and control activities. Our Cloud Security Management System has also received accreditations globally. Tencent Cloud Environmental, Social and Governance Report Annual Report 2021 147 Incident Management "Percentage of the total number of products sold or shipped subject to recalls for health and safety reasons” and “recall procedures" are not closely relevant to the Company's main businesses. FinTech We keep the personal information of users collected and used during the provision of our services strictly confidential and shall not leak, distort, damage, sell or illegally provide such information to others. We establish and improve the user information protection system by hierarchically managing the access rights of internal staff to ensure data security and prevent any leakage, damage, or loss of information. We provide an easy-to-use channel for employees to look up the Company's data security policy through internal communication tools to timely confirm whether their behaviour meets the Company's security policy requirements. When employees discover potential data security violations, they can report the cases through the internal communication tools or reporting system; once the violations are verified, the Company will take strict disciplinary measures, including but not limited to notice of criticism and corresponding punishment. We provide privacy protection and data security training to all employees, including full-time, part-time and interns, to instill a long-term data security protection culture. In September 2021, we established the Security Technology Committee to enhance the internal coordination of security technologies development and application. We have also strengthened the comprehensive systems by applying various incident analysis mechanisms and risk protocols, enabling us to respond to various information security threats and incidents appropriately and swiftly. 9.2 Data Security4 Environmental, Social and Governance Report 4 Tencent Holdings Limited 146 00 We are committed to a privacy-conscious culture and making the protection of user privacy our top priority. We believe that ensuring privacy is a shared responsibility for all Tencent employees, regardless of their roles or ranks at Tencent. We regularly provide comprehensive and company-wide privacy education and awareness training programmes to all our employees. These programmes are designed to provide employees with an understanding of general privacy and data protection considerations, including "Privacy Protection in Design" and "Privacy Protection by Default," how to build privacy-centric user interfaces, how to identify privacy issues in mergers and acquisitions, how to respect the rights of data subjects and handle related requests, and the risks of cross-border data transfers. We systematically communicate our privacy protection and cybersecurity guidelines and procedures to all employees and strictly enforce safeguards across our products and services at all levels. Culture and Responsibility We provide a variety of security solutions for enhancing users' account security. We continue to conduct self- assessment, optimisation and standardisation of our financial products in accordance with applicable laws and regulations, including the Measures for the Supervision and Administration of Publicly-offered Securities Investment Fund Distributors, the Circular on Standardising the Retrospective Administration of Online Insurance Sales Practices, and the Measures for the Regulation of Internet Insurance Business. Our risk control system provides real-time monitoring 24/7 to ensure the safety of account funds. Users will be informed of any changes in the amount of funds immediately via mobile phone messages, email, and other means. Integrate privacy protection into product design. Security, autonomy, compliance, and transparency laid the foundation of our privacy protection policy. Tencent is privacy-focused on every level. Our dedicated privacy and legal teams work hand-in-hand with our product teams to ensure that our products and services are built with privacy in mind from the ground up, and comply with all applicable laws and regulations. Our product teams also work together with our engineering teams to ensure that our data collection and use practices for products and services are transparent, and that users have control over how their data is used. Clarity and transparency. We strive to introduce the privacy policy on data processing to users in easy-to- understand language. Hong Kong, Macao and Taiwan Other countries and regions As at 31 December 2021 32,439 1,711 4,865 Note: The "number of suppliers" refers to the number of active suppliers in the supplier database during the reporting period, and the "geographical region" refers to the place where the suppliers were registered. PRODUCT RESPONSIBILITY We strive to provide the best user experience with high-quality and reliable products and services. We focus our efforts on protecting data security and user privacy, product health and safety, customer complaints, advertising content and IP rights. We also conduct strict reviews of our products and services offered and related sales, marketing and advertising strategies and materials to ensure compliance with applicable laws and regulations. 00 The Mainland of China 142 Environmental, Social and Governance Report 9.1 User Privacy At Tencent, user privacy and data security are our highest priorities. We believe that protecting the data privacy of our users is essential to creating a safe and market-leading user experience, and that users should be in control of their data and be well-informed of our data policies and practices. Our belief has followed through to our adoption of "Privacy by Design" and "Privacy by Default" when developing our products and services. Management Approach We adhere to the following principles for user privacy protection and data security: • • • • • As one of the leading companies in the game industry, Tencent is committed to creating a healthy game-playing environment for many years. In China, we work with the industry to explore various measures for building a healthy game-playing environment for Minors. We have implemented the real-name system and anti-addiction system in accordance with the regulatory requirements of the PRC. We have also leveraged various advanced technologies within the industry to further enhance our protection system for Minors. In recent years, we have introduced the following measures: Tencent Holdings Limited Number of suppliers by geographical region Number of Suppliers Suppliers, which the Group Procurement Department formally engages with, are also required to sign a Corporate Social Responsibility Commitment. It is a declaration that covers labour rights, child labour-free and forced labour- free practices, health and safety, and environmental protection. We prioritise environmentally friendly products and services when selecting suppliers related to office buildings. We have required all property management companies of our self-owned office buildings to obtain the ISO 14001 environmental management system certification, which has been checked by the Administrative Department every year. Reasonability and necessity. We only collect necessary data to provide better services to users. Protect communication secrets. We strictly abide by laws and regulations, protect users' communication secrets and provide secure communication services. Environmental, Social and Governance Report In view of the complex legal and regulatory compliance landscape across multiple jurisdictions, we continue to improve our money laundering risk management. • In 2021, we updated our policy and released the second version of Tencent's Minimum Standards for Anti-Money Laundering and Sanctions Compliance. The revised standard closely follows domestic and global regulatory requirements and trends. It also re-examines the AML control measures based on the development of the Group's business and products. • The Group's Anti-Money Laundering and Sanctions Compliance Department is responsible for (i) coordinating the management of money laundering and sanctions risk at the Group level for all businesses, (ii) fulfilling AML and sanctions requirements under relevant laws and regulations, and (iii) managing and promoting the implementation of various AML and sanctions initiatives. We have also published the Tencent Anti-Money Laundering Policy Statement and the Tencent Sanctions Policy Statement on the Corporate Governance page of the Company Website. In 2021, we sought strict compliance with all applicable AML and sanctions requirements and promoted initiatives under the framework of the Tencent's Minimum Standards for Anti-Money Laundering and Sanctions Compliance. We will continue to (i) increase staffing and better equip the team via on-the-job and professional training periodically; (ii) improve and update our internal system and processes to comprehensively address all applicable regulatory requirements; (iii) periodically carry out assessments on our systems and processes to enhance the implementation of AML and sanctions compliance, including customer and product risk assessment, transaction monitoring and suspicious transaction report compliance assessment, and list management systems inspection; (iv) deepen cooperation with authorities to fight against money laundering and terrorist financing; and (v) actively participate in international AML and CTF events to exchange industry best practices. 00 140 Tencent Holdings Limited Environmental, Social and Governance Report 8.4 Supply Chain Management Having a sustainable supply chain is one of the fundamental factors for ensuring long-term business growth. We have formulated the Tencent Supplier Management Policy together with the Supplier Management System to provide effective and standardised management of our suppliers. The Supplier Management Policy stipulates the requirements and practices for supplier legal and regulatory compliance, supplier selection and evaluation. The Policy is also set to manage the ethical risks associated with the relationships between our procurement employees and business partners. The Policy and the Sunshine Code specify standardised processes for procurement employees when engaging in procurement activities. Suppliers are required to declare any relationship they may have with our employees in written form. Suppliers must agree to the terms of the Anti-Commercial Bribery Declaration, which requires suppliers to conduct business with the Company in an ethical manner. As of 31 December 2021, all suppliers have been required to comply with the Tencent Supplier Management Policy, and all suppliers in the Mainland of China have been required to sign the Anti-Commercial Bribery Declaration. The online Supplier Management System is used for managing qualified suppliers and the procurement lifecycle. It covers the aspects of finding and selecting suppliers, evaluating supplier performance, and terminating the engagement of suppliers. All details are recorded within the system. • Supplier selection: We have an internal policy that sets out the procedures and mechanisms for supplier onboarding. The Procurement Department looks for qualified suppliers in the market and evaluates offers based on the duration of the cooperation, order volume, and nature of the request. In principle, we will ask for price quotations from at least three vendors whilst considering factors such as the delivery time, operational and technical capabilities, and environmental and social responsibilities. If there is only one vendor available for selection as it dominates the relevant market or it is the only vendor with access to the required goods or services, the particular procurement arrangement will require special approval along with a sufficient and reasonable justification. Before engaging with a supplier, we will conduct due diligence, including qualification checks and site visits on the supplier. The findings and evaluation will be reported to the Procurement Department for final decision. Supplier evaluation: We regularly evaluate the performance of our suppliers and take appropriate steps to address any issues concerning the quality of the suppliers. For underperforming suppliers, subject to applicable contractual arrangements, we may (i) discuss with them about their remedial plans, (ii) suspend the cooperation, (iii) reduce the order volume, (iv) impose penalties, or (v) suspend payment. The Procurement Department may disqualify a supplier for the following events when (i) we suffer from material economic losses due to the delayed delivery, quality issue, or breach of contract by the supplier; (ii) the supplier has received the lowest rating on the rating scale for two consecutive quarters, and (iii) the supplier is in serious breach of business ethics. Annual Report 2021 141 Environmental, Social and Governance Report 9. • • Independent choice. We provide convenient data management options for users to make appropriate choices and manage personal data. • Pioneered a system for parents to manage their children's playtime in February 2017; Introduced the strictest measures in the industry, with mandatory real-name verification and limits on game time and spending in September 2018; Prevented in-game spending by players aged under 12 since August 2021; Minors can only play games between 8-9 pm on Fridays, Saturdays, Sundays, and statutory holidays since 1 September 2021. Industry-leading measures were taken to prevent Minors from using adult accounts. For example, we (i) upgraded our screening system to identify misused adult accounts; and (ii) proactively cracked down on illegal transactions of adult accounts; and In the fourth quarter of 2021, total time spent by Minors reduced by 88% year-on-year and contributed 0.9% of the total time spent on our Domestic Games. Total grossing receipts from Minors reduced by 73% year- on-year and contributed 1.5% of the total grossing receipts of our Domestic Games. Besides the measures on healthy gameplay, we also pay close attention to the usage habits of the Minors in our entertainment and social products. We launched “underage mode" in a number of products, including but not limited to Tencent Video, Weishi, and Weixin, or developed alternative versions of these products suitable for Minors. When the "underage mode" is activated by the guardian or the minor in Tencent Video and Weishi, viewers will have their screen time set on a limit and reminded to take breaks. In addition, we updated Weixin in 2021 with a variety of functions to protect Minors, including (i) parental control over their children's access to videos, subscriptions and Mini Programmes; (ii) curated content for teenagers in Weixin Video Accounts; (iii) closed live broadcast portal to Minors, where they are not allowed to initiate a live broadcast or use the tipping function within; and (iv) disabled access to Q coins top-up, credit card repayment and other services that are not suitable for Minors. Annual Report 2021 149 Security and reliability. We work to prevent user data leakage, damage and loss through reasonable and effective data security technology and management. • Tencent is always thinking about how we can assist social development through the synergistic efforts of our people, platforms and technologies. 10. COMMUNITY 1 November 2017, which specifies rules on the ownership, protection period, registration method and legal responsibility of trademark, patent, copyright and domain names. • Copyright Law of the People's Republic of China amended on 11 November 2020; and • 10.1 Community Investment Patent Law of the People's Republic of China amended on 17 October 2020; The Administrative Measures for Internet Domain Names issued on 24 August 2017 and implemented on In April 2021, the Company established its SSV division, which is a new core engine that drives sustainable innovation for social value. With the initial funding of RMB50 billion, SSV division will promote social value innovation in areas, including (i) research in basic sciences, (ii) education innovation, (iii) rural revitalisation, (iv) carbon neutrality, (v) primary healthcare, (vi) philanthropic platform, (vii) assisting with public emergencies, (viii) technologies enabling the silver generation, (ix) enhanced accessibility for communities with activity limitation, and (x) digitalisation of culture. In August, we further dedicated another RMB50 billion to fund the "Common Prosperity" initiatives in China. This will be mainly used to support low-income communities, improve health care coverage, help rural economic development, and promote grassroots education. As of the end of 2021, SSV division had spent a total of RMB695 million on the above initiatives. 10.2 Charity Donation In addition, Tencent has also developed technologies and solutions for social well-being, including but not limited to developing mobile applications suitable and helpful for the silver generation, creating affordable and effective hearing-aid devices for the hearing impaired, designing programmes to inspire creativity and teach coding skills. Annual Report 2021 153 Environmental, Social and Governance Report Trademark Law of the People's Republic of China amended on 23 April 2019; Initiated and operated by the Tencent Charity Foundation, Tencent Fundraising Platform is a public donation and information platform open to qualified public charities for free. The platform uses internet technology and social media to connect public charity organisations with internet users, enterprises and the media to build an interactive, dynamic and transparent philanthropic online network. In 2021, Tencent Fundraising Platform supported over 26,000 public welfare projects in the Mainland of China and raised a total of RMB5.45 billion. The Group has donated in 2021 a total of RMB1.513 billion, in cash and materials, to Tencent Charity Foundation (the Mainland of China) and RMB7.888 billion since 2007. 10.3 Volunteering Over the last decade, the Tencent Volunteer's Association has been involved and contributed to the areas of online charity, promotion of unhindered Internet access, information technology popularisation, cybersecurity, emergency support, poverty relief, environmental protection, care for the elderly and children with special needs, as well as animal protection. As of 31 December 2021, the Tencent Volunteers' Association has participated in approximately 200,000 hours of voluntary services from approximately 18,000 volunteers. Since April 2012, volunteers were granted one day of fully-paid leave per year. From 1 January 2022, a new matching donation programme will come into effect. For every donation our employee makes, the Company will match a donation to the same amount. For every qualified hour of voluntary work our employee serves, the Company will donate RMB100 correspondingly. To ensure our community investments carry a long-term impact, we engage with experts on various social or environmental topics to better understand the needs of different communities. We have explored and developed various tools and systems that are related to social investment, so as to guide and manage our investment and evaluate impacts in the following ways: (i) identify opportunity and problem to solve within key issue areas; (ii) design solutions and partner with right stakeholders; (iii) monitor and evaluate performance to ensure outcome and impact; and (iv) advocate and scale evidence-based solutions to enable system change. Major laws and regulations we follow include: Our dedicated IP team is mainly responsible for the day-to-day management of legal matters involving trademark, patent, copyright, domain names and other IP rights. We began a comprehensive programme for the management of IP since the early stages of our establishment, and have regularly applied for the registration of IP rights. With the development of our business, we have expanded our global IP portfolio to cover more than 100 countries and regions. As of 31 December 2021, we have obtained over 36,000 officially registered trademarks and over 24,000 issued patents. Coupled with our creation of a vast amount of copyrighted content, we have accumulated IP assets of considerable value. Our IP team has developed a comprehensive database for our patents, trademarks and copyrights, and our strong data analytical skills enable us to manage and monitor our IP rights in a meticulous and efficient manner. To combat infringement of IP rights, our IP team has also established a comprehensive and efficient monitoring and maintenance system and has devised various enforcement policies and measures to protect our IP rights. Please see further details on the Company's website (https://www.tencent.com/legal/html/en-us/property.html). Tencent Holdings Limited According to the relevant national laws and regulations, and agreements such as Wexin Software License and Service Agreement, Wexin Official Accounts Platform Service Agreement and QQ Software License and Service Agreement, if users spread unlawful information through Wexin personal account, Wexin Official Accounts, QQ and Qzone, once found and proven, the platform will remove the unlawful content and take actions upon the relevant accounts (such as warning, blocking and limiting some functions of the account). We continue to optimise the audit standards and inspection mechanism of Mini Programmes and Mini Games access. We conduct reviews and tests in accordance with legal and regulatory requirements on the developers and their submitted application contents for gaining access to the Mini Programmes and Mini Games platform. Developers who offer services that involve special industries, such as medical, finance and games, shall provide corresponding qualifications and approval documents. If the developers fail to provide the relevant certificates, their request to publish their Mini Programmes and Mini Games onto the platform will be consequently denied. We manage the platform in accordance with the above-mentioned relevant agreements and platform rules, and take timely actions upon receiving users' complaints and reports, as well as taking corresponding measures for developers who fail to operate legally. We attach great importance to educating our users on various risk prevention topics, such as internet pornography and fraud through the "Weixin Safety Centre", "QQ Security Centre" official accounts and other official channels. Weixin and QQ each provides a mechanism for users to report any false or improper content published on their platforms. We continue to improve the efficiency of handling users' complaints regarding infringement and promote access to the reporting channels. We also provide guidance to users on filing complaints and reports on any violations of laws and regulations, or violations of their legitimate rights and interests through prescribed channels on our platforms. In 2021, Tencent released 3,189 articles on dispelling misinformation, which has been viewed more than 310 million times. In order to help the silver generation and other vulnerable groups gain better access to the mobile internet, for instance, Wexin and a number of products launched the "Easy Mode" in 2021, which offers big text fonts, large icons and high contrast colours to enhance their product experience. 00 150 Tencent Holdings Limited Environmental, Social and Governance Report Responsible Advertising According to the Advertising Law of the People's Republic of China and the Interim Measures for Administration of Internet Advertising, advertising operators and advertising publishers shall verify all relevant business documents pursuant to laws and administrative regulations and verify the advertising contents. We review the advertising contents strictly in accordance with the above laws and regulations and require clients who intend to use the Tencent Marketing Solution platform to publish advertisements to ensure the legality of the advertising content. They must also show that they have valid qualifications to publish relevant advertisements and that the advertising contents are proven to be genuine. After the review is approved, we conduct checks on the advertising content to ensure its compliance through our automatic inspection system which is equipped with multiple capabilities along with our professional inspectors. Once violations of laws and regulations or relevant rules of Tencent Marketing Solution are found, we will take measures, such as refusing the release of illegal advertising materials, removing illegal advertisements from the platforms, requiring the violator to bear liability for breach of contract. Meanwhile, we strive to better protect the rights and interests of users and comply with the requirements of current laws and regulations; for that, we continue to establish and improve the compliance assessment regarding the advertising business, promote training and advocacy for employees and partners, enhance system capabilities so as to continuously strengthen our compliance with the relevant laws for the advertising business. In 2021, the Group strictly complied with the applicable laws and regulations. Internet services We have established an accessible and effective mechanism for our internet service for receiving and handling feedback/complaints via our open reporting channels. Product Departments of the Company learn about users' opinions through online surveys, questionnaires, social media platforms, phone calls with users and regular product researches. We incorporate their suggestions accordingly during product design and product optimisation. Environmental, Social and Governance Report Our Customer Service Department is responsible for handling and answering customers' complaints and inquiries about our business. In 2021, Tencent customer service assisted approximately 470 million users and provided services approximately 2.28 billion times. Regarding users' complaints received during our provision of services, a dedicated team under Customer Service is responsible for conducting a comprehensive investigation of the incident and providing solutions to the user. In 2021, a total of 2,009,210 user complaints were received, 99% of the complaints were handled within three working days. In terms of the business types, there were 1,238,395 complaints related to games, accounting for 61.6%, 171,955 complaints related to payment, accounting for 8.6%, 289,661 complaints related to social networks, accounting for 14.4%, and 309,199 complaints related to other businesses, accounting for 15.4%. 151 Environmental, Social and Governance Report Cloud Services Tencent provides global leading cloud computing, big data, Al and other technological products and services to government agencies, corporations and individual developers. The Cloud Technology Operation Service Department is supported by a professional team responsible for customer's pre-sales, after-sales, technical delivery consultation and complaint handling. With the expansion of Tencent Cloud business, the scale of services undertaken by Tencent Cloud has also increased year by year, with 4.76 million number of services in 2021. In response to the users' complaints received during our provision of service, Tencent Cloud has set up a dedicated handling team and a comprehensive process to provide satisfactory solutions to better protect the rights of its users. In 2021, 320 complaints were received from users and 85% of the complaints were handled within seven days. 9.5 Intellectual Property Tencent protects the intellectual property rights of third-party platforms and its own platforms via our team of dedicated intellectual property enforcement attorneys who are committed to fighting infringement. 00 00 152 Annual Report 2021 Environmental, Social and Governance Report This ESG report is prepared in accordance with the ESG Reporting Guide. This report also references selected disclosures from the GRI standards and the SASB standards. It also applies the disclosure recommendations developed by the TCFD for climate-related disclosure in accordance with the Stock Exchange's requirements. For more details about our ESG performance, please refer to the standalone ESG report to be disclosed on the Company's website: www.tencent.com/esg. Tencent Holdings Limited COMPILATION ILLUSTRATION General Disclosure ENVIRONMENT A1.1 ENVIRONMENT Environmental Performance Summary A1.2 ENVIRONMENT Tackling Climate Change Environmental Performance Summary Emissions A1.3 Environmental Performance Summary A1.4 ENVIRONMENT Environmental Performance Summary A1.5 ENVIRONMENT Tackling Climate Change Environmental Targets ENVIRONMENT A1.6 ENVIRONMENT 154 Aspect A1: COMPILATION ILLUSTRATION Environmental, Social and Governance Report ESG APPENDIX 1. COMPILATION ILLUSTRATION PricewaterhouseCoopers has been commissioned by the Company to conduct a limited assurance on the selected ESG KPIs in accordance with the International Standard on Assurance Engagements - Assurance Engagements Other than Audits or Reviews of Historical Financial Information (ISAE) 3000 (Revised). For more details regarding the assurance process and the complete assurance report, please refer to the standalone ESG report to be disclosed on the Company Website. During the process of identifying the scope of the reporting boundary, we ensure that the report reflects our ESG impact and performance. Unless otherwise specified, the report covers the ESG performance of the business activities directly operated and managed by the Company during the reporting period from 1 January 2021 to 31 December 2021. The report is aligned with the principles of "materiality", "quantitative", "balance" and "consistency" as follows. Materiality: We have conducted a detailed materiality assessment to identify and evaluate key ESG issues that are most important to our business as well as our internal and external stakeholders. The information gathered from the materiality assessment was then used to determine the disclosure content of this report. For details of the materiality assessment, please refer to the chapter titled "Materiality". Quantitative: We disclose measurable environmental and social KPIs and set quantitative performance targets where applicable. The measurement standards, methodologies, assumptions and/or calculation tools of the KPIs in this report, as well as the source of the conversion factors used, have been explained in the corresponding context (where applicable). Balance: This report aims to provide a balanced representation of the Group's ESG efforts around the environment, our people, operating principles and practices product responsibility and community. Consistency: This year's ESG report has been prepared with the same method used in previous years. Changes that may affect a meaningful comparison with previous reports have been explained in the corresponding section. The ESG report is to be read together with this annual report, in particular the Corporate Governance Report within this annual report, the ESG standalone report, as well as the section headed "ESG" on our Company's website. Reporting Boundary Should Annual Report 2021 155 Environmental, Social and Governance Report ESG APPENDIX 2. ESG INDICATOR INDEX Disclosure Requirements Governance Structure Reporting Principles Sections in this Report ESG GOVERNANCE STRUCTURE BOARD STATEMENT MATERIALITY you have any questions, please contact us at ESG@tencent.com. 9.4 Customer Service Growth and Development 00 00 158 Tencent Holdings Limited Supply Chain Management OPERATING PRINCIPLES AND PRACTICES Supply Chain Management Environmental, Social and Governance Report Disclosure Requirements Sections in this Report Aspect B6: General Disclosure PRODUCT RESPONSIBILITY Product Responsibility B6.1 B6.2 B6.3 B6.4 B5.4 OPERATING PRINCIPLES AND PRACTICES B5.3 Supply Chain Management Labour Standards B4.1 B4.2 OUR PEOPLE • Rights and Benefits OUR PEOPLE Rights and Benefits B6.5 General Disclosure Aspect B5: Supply Chain Management B5.1 Supply Chain Management OPERATING PRINCIPLES AND PRACTICES Supply Chain Management B5.2 OPERATING PRINCIPLES AND PRACTICES OPERATING PRINCIPLES AND PRACTICES Aspect B4: Not closely relevant to the Company's main businesses PRODUCT RESPONSIBILITY PRODUCT RESPONSIBILITY • Anti-Corruption OPERATING PRINCIPLES AND PRACTICES Anti-Corruption General Disclosure COMMUNITY Aspect B8: Community Investment B8.1 B8.2 COMMUNITY Community Investment COMMUNITY • Charity Donation Volunteering Annual Report 2021 159 OPERATING PRINCIPLES AND PRACTICES Anti-Corruption OPERATING PRINCIPLES AND PRACTICES Anti-Corruption Intellectual Property PRODUCT RESPONSIBILITY . User Privacy • Data Security User Protection The "recall procedures" is not closely relevant to the Customer Service Company's main business User Privacy Aspect B7: General Disclosure OPERATING PRINCIPLES AND PRACTICES Anti-corruption B7.1 B7.2 B7.3 PRODUCT RESPONSIBILITY OUR PEOPLE General Disclosure Employment Data Summary • Environmental Targets ENVIRONMENT • Water and Other Emission Management Environmental Targets Not closely relevant to the Company's main businesses ENVIRONMENT Aspect A3: General Disclosure The Environment and Natural Resources A3.1 Aspect A4: General Disclosure Climate Change Aspect B1: Employment • Energy Management ENVIRONMENT Environmental Performance Summary ENVIRONMENT 156 Tencent Holdings Limited Environmental Targets Disclosure Requirements Aspect A2: Use of Resources Environmental, Social and Governance Report General Disclosure ENVIRONMENT A2.1 A2.3 A2.4 A2.5 Sections in this Report ENVIRONMENT Energy Management ENVIRONMENT . Environmental Performance Summary A2.2 ENVIRONMENT • A4.1 OUR PEOPLE • Employment Data Summary OUR PEOPLE • Employment Data Summary OUR PEOPLE Health and Safety B2.3 General Disclosure Aspect B3: Development and Training B3.1 B3.2 OUR PEOPLE • Employment Data Summary OUR PEOPLE OUR PEOPLE • Waste Management B2.2 Health and Safety Tackling Climate Change ENVIRONMENT Tackling Climate Change General Disclosure OUR PEOPLE B1.1 OUR PEOPLE Employment Data Summary B1.2 B2.1 OUR PEOPLE Annual Report 2021 157 Environmental, Social and Governance Report Disclosure Requirements Sections in this Report Aspect B2: General Disclosure OUR PEOPLE Health and Safety Employment Data Summary Responsible Content and Internet Community Gross profit Our opinion on the consolidated financial statements does not cover the other information and we do not express any form of assurance conclusion thereon. concern. Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation. Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the Group audit. We remain solely responsible for our audit opinion. Annual Report 2021 167 Independent Auditor's Report We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, actions taken to eliminate threats or safeguards applied. Conclude on the appropriateness of the directors' use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group's ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor's report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor's report. However, future events or conditions may cause the Group to cease to continue as a going From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor's report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. PricewaterhouseCoopers Certified Public Accountants Hong Kong, 23 March 2022 00 168 Tencent Holdings Limited Consolidated Income Statement The engagement partner on the audit resulting in this independent auditor's report is Tong Yu Keung. For the year ended 31 December 2021 Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the directors. Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. OTHER INFORMATION The directors of the Company are responsible for the other information. The other information comprises all of the information included in the annual report other than the consolidated financial statements and our auditor's report thereon. In connection with our audit of the consolidated financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. RESPONSIBILITIES OF DIRECTORS AND THOSE CHARGED WITH GOVERNANCE FOR THE CONSOLIDATED FINANCIAL STATEMENTS The directors of the Company are responsible for the preparation of the consolidated financial statements that give a true and fair view in accordance with IFRSS and the disclosure requirements of the Hong Kong Companies Ordinance, and for such internal control as the directors determine is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. In preparing the consolidated financial statements, the directors are responsible for assessing the Group's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or to cease operations, or have no realistic alternative but to do so. Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group's internal control. Those charged with governance are responsible for overseeing the Group's financial reporting process. Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion. We report our opinion solely to you, as a body, and for no other purpose. We do not assume responsibility towards or accept liability to any other person for the contents of this report. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements. 00 166 Tencent Holdings Limited Independent Auditor's Report As part of an audit in accordance with ISAs, we exercise professional judgment and maintain professional scepticism throughout the audit. We also: • AUDITOR'S RESPONSIBILITIES FOR THE AUDIT OF THE CONSOLIDATED FINANCIAL STATEMENTS Year ended 31 December 2021 Note 58 6 18 00 560,118 482,064 (314,174) (260,532) 245,944 General and administrative expenses 221,532 6,957 149,467 57,131 (40,594) (33,758) 8 (89,847) 6,650 Selling and marketing expenses Other gains, net Interest income RMB'Million 2020 RMB'Million Revenues Value-added Services Online Advertising FinTech and Business Services Others 291,572 264,212 88,666 82,271 172,195 128,086 7,685 7,495 Cost of revenues Independent Auditor's Report Annual Report 2021 165 We involved our internal valuation experts to discuss with management and assess the appropriateness of valuation methodology and assumptions used. We tested, on a sample basis, valuation of Level 3 financial instruments as at 31 December 2021 by evaluating the underlying assumptions and inputs including risk-free rates, expected volatility, relevant underlying financial projections, and market information of recent transactions (such as recent fund raising transactions undertaken by the investees) as well as underlying supporting documentation. We also tested, on a sample basis, the arithmetical accuracy of the valuation computation. We found that the valuation methodology of Level 3 financial instruments was acceptable and the assumptions made by management were supported by available evidence. In respect of the fair value measurement of Level 3 financial instruments, we tested the key controls, on a sample basis, in relation to the valuation process including the adoption of applicable valuation methodology and the application of appropriate assumptions in different circumstances, by inspection of the evidence of management's review, where we found no material exceptions. We conducted our audit in accordance with International Standards on Auditing ("ISAS"). Our responsibilities under those standards are further described in the Auditor's Responsibilities for the Audit of the Consolidated Financial Statements section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Independence We are independent of the Group in accordance with the International Code of Ethics for Professional Accountants (including International Independence Standards) issued by the International Ethics Standards Board for Accountants ("IESBA Code"), and we have fulfilled our other ethical responsibilities in accordance with the IESBA Code. KEY AUDIT MATTERS Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated financial statements of the current period. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. BASIS FOR OPINION Key audit matters identified in our audit are summarised as follows: Revenue recognition on provision of online games value-added services - estimates of the lifespans of virtual items Impairment assessments of goodwill, investments in associates and joint ventures Fair value measurement of financial instruments, including financial assets at fair value through profit or loss, financial assets at fair value through other comprehensive income and other financial liabilities Annual Report 2021 161 Independent Auditor's Report Key Audit Matter • Independent Auditor's Report 160 Tencent Holdings Limited 00 Independent Auditor's Report TO THE SHAREHOLDERS OF TENCENT HOLDINGS LIMITED (incorporated in the Cayman Islands with limited liability) OPINION What we have audited The consolidated financial statements of Tencent Holdings Limited (the "Company") and its subsidiaries (the "Group"), which are set out on pages 169 to 310, comprise: • the consolidated statement of financial position as at 31 December 2021; • the consolidated income statement for the year then ended; • the consolidated statement of comprehensive income for the year then ended; • the consolidated statement of changes in equity for the year then ended; the consolidated statement of cash flows for the year then ended; and the notes to the consolidated financial statements, which include significant accounting policies and other explanatory information. Our opinion In our opinion, the consolidated financial statements give a true and fair view of the consolidated financial position of the Group as at 31 December 2021, and of its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards ("IFRSS") and have been properly prepared in compliance with the disclosure requirements of the Hong Kong Companies Ordinance. Revenue recognition on provision of online games value-added services - estimates of the lifespans of virtual items (67,625) Refer to Notes 2.28(a), 4(a) and 5(b) to the consolidated financial statements During the year ended 31 December 2021, majority of the Group's revenue from value-added services was contributed by online games and was predominately derived from the sales of virtual items. Independent Auditor's Report Key Audit Matter Impairment assessments of goodwill, investments in associates and joint ventures (continued) How our audit addressed the Key Audit Matter 00 164 Tencent Holdings Limited In respect of the impairment assessments of cash generating units that contain goodwill, investments in associates and investments in joint ventures using discounted cash flows, we assessed the key assumptions adopted including revenue growth rates, profit margins, discount rates and other assumptions by examining the approved financial/business forecast models, and comparing actual results for the year against the previous period's forecasts and the applicable industry/business data external to the Group. We assessed certain of these key assumptions with the involvement of our internal valuation experts. We considered that the key assumptions adopted by management were in line with our expectation and evidence obtained. 163 In respect of the impairment assessments of cash generating units that contain goodwill, investments in associates and investments in joint ventures using market approach, we assessed the valuation assumptions including the selection of comparable companies, recent market transactions, and liquidity discount for lack of marketability, etc. We assessed these key assumptions adopted by management with the involvement of our internal valuation experts based on our industry knowledge and independent research performed by us. We considered that the key assumptions adopted by management were in line with our expectation and evidence obtained. Independent Auditor's Report Key Audit Matter Fair value measurement of financial instruments, including financial assets at fair value through profit or loss, financial assets at fair value through other comprehensive income and other financial liabilities Refer to Notes 3.3, 4(c), 24, 25 and 39 to the consolidated financial statements As at 31 December 2021, the Group's financial assets and financial liabilities which were carried at fair value mainly comprised financial assets at fair value through profit or loss, financial assets at fair value through other comprehensive income and other financial liabilities of approximately RMB202,757 million, RMB250,257 million and RMB2,802 million, respectively, of which approximately RMB193,591 million of these financial assets and approximately RMB2,444 million of these financial liabilities were measured based on significant unobservable inputs and classified as "Level 3 financial instruments". We focused on this area due to the high degree of judgment required in determining the respective fair values of Level 3 financial instruments, which do not have direct open market quoted values, with respect to the adoption of applicable valuation methodology and the application of appropriate assumptions in the valuation. How our audit addressed the Key Audit Matter We independently tested, on a sample basis, the accuracy of mathematical calculation applied in the valuation models and the calculation of impairment charges. We did not identify any material exceptions from our testing. Annual Report 2021 Management adopted different valuation models, on a case by case basis, in carrying out the impairment assessments, mainly including discounted cash flows and market approach. We assessed, on a sample basis, the basis management used to identify separate groups of cash generating units that contain goodwill, the impairment approaches and the valuation models used in management's impairment assessments, which we found to be appropriate. We also tested, on a sample basis, key controls in respect of the impairment assessments, including the determination of appropriate impairment approaches, valuation models and assumptions and the calculation of impairment provisions, where we found no material exceptions. We focused on this area due to the fact that management applied significant judgments in determining the expected users' relationship periods for certain virtual items. These judgments included (i) the determination of key assumptions applied in the expected users' relationship periods, including but not limited to historical users' consumption patterns, churn rates and reactivity on marketing activities, games life-cycle, and the Group's marketing strategy; and (ii) the identification of events that may trigger changes in the expected users' relationship periods. How our audit addressed the Key Audit Matter We discussed with management and evaluated their judgments on key assumptions in determining the estimated lifespans of the virtual items that were based on the expected users' relationship periods. We tested, on a sample basis, key controls in respect of the recognition of revenue from sales of virtual items, including management's review and approval of (i) determination of the estimated lifespans of new virtual items prior to their launches; and (ii) changes in the estimated lifespans of existing virtual items based on periodic reassessment on any indications triggering such changes. We also assessed the data generated from the Group's information system supporting the management's review, tested the information system logic for generation of reports, and checked, on a sample basis, the monthly computation of revenue recognised on selected virtual items generated directly from the Group's information system. We assessed, on a sample basis, the expected users' relationship periods adopted by management by testing the data integrity of historical users' consumption patterns and calculation of the churn rates. We also evaluated the consideration made by management in determining the underlying assumptions for expected users' relationship periods with reference to historical operating and marketing data of the relevant games. We also assessed, on a sample basis, the historical accuracy of the management's estimation process by comparing the actual users' relationship periods for the year against the original estimation for selected virtual items. 00 162 Tencent Holdings Limited We found that the results of our procedures performed to be materially consistent with management's assessment. Independent Auditor's Report Key Audit Matter Impairment assessments of goodwill, investments in associates and joint ventures Refer to Notes 2.12(a), 2.14, 4(b), 20, 21 and 22 to the consolidated financial statements As at 31 December 2021, the Group held significant amounts of goodwill, investments in associates and joint ventures amounting to RMB112,173 million, RMB316,574 million and RMB6,614 million, respectively. Impairment of RMB8,702 million, RMB15,391 million and RMB904 million had been provided for against the carrying amounts of goodwill, investments in associates and investments in joint ventures, respectively, during the year ended 31 December 2021. We focused on this area due to the magnitude of the carrying amounts of these assets and the fact that significant judgments were required by management (i) to identify whether any impairment indicators existed for any of these assets during the year; (ii) to determine the appropriate impairment approaches, i.e. fair value less costs of disposal or value in use; and (iii) to select key assumptions to be adopted in the valuation models, including discounted cash flows and market approach, for the impairment assessments. How our audit addressed the Key Audit Matter We tested management's assessment including periodic impairment indications evaluation as to whether indicators of impairment exist by corroborating with management and market information. The Group recognises revenue from sales of virtual items to the users in respect of value-added services rendered on the Group's online platforms. The relevant revenue is recognised over the lifespans of the respective virtual items determined by the management, on an item by item basis, with reference to the expected users' relationship periods or the stipulated period of validity of the relevant virtual items, depending on the terms of the virtual items. Operating profit 7 184,237 of the Company (in RMB per share) - basic - diluted 224,822 159,847 2,988 278 227,810 Earnings per share for profit attributable to equity holders 160,125 23.597 12(b) 23.164 16.523 The notes on pages 180 to 310 are an integral part of these consolidated financial statements. Annual Report 2021 169 271,620 12(a) Non-controlling interests 16.844 Attributable to: Equity holders of the Company Share of (loss)/profit of associates and joint ventures, net 10 19 (7,114) Finance costs, net (16,444) 3,672 Profit before income tax (7,887) 180,022 Income tax expense 11 (20,252) (19,897) 227,810 160,125 Profit for the year 248,062 Other tax liabilities ུ # 9 41 40 109,470 94,030 36 60,582 54,308 19,003 14,242 12,506 12,134 Current income tax liabilities 2021 For the year ended 31 December 2021 227,810 160,125 2,240 RMB'Million RMB'Million Note Consolidated Statement of Comprehensive Income 2020 Items that will not be subsequently reclassified to profit or loss Other fair value gains/(losses) Share of other comprehensive income of associates and joint ventures Transfer of share of other comprehensive loss/(income) to profit or loss upon disposal and deemed disposal of associates and joint ventures Currency translation differences Items that may be subsequently reclassified to profit or loss Other comprehensive income, net of tax: Profit for the year Year ended 31 December 2,149 Prepayments, deposits and other assets 39 Share of other comprehensive income of associates and joint ventures Other financial assets Deferred income tax assets Term deposits 222222222 20 Financial assets at fair value through other comprehensive income 171,376 316,574 297,609 6,614 7,649 24 192,184 159,437 Other financial liabilities 735,671 269,079 3,554 5,567 Lease liabilities 18 5,446 3,822 Total liabilities Deferred revenue 87,846 82,827 Dividends payable for distribution in specie 15(b) 102,451 403,098 5(c)(i) Gain from changes in fair value of assets held for distribution 387 32 As at 31 December 2021 As at 31 December 2021 Note RMB'Million 2020 RMB'Million Non-current assets Property, plant and equipment 16 61,914 59,843 Land use rights 17 17,728 16,091 Right-of-use assets 165,944 Investments in joint ventures Investments in associates 583 517 Intangible assets Consolidated Statement of Financial Position Investment properties 5,923 19 Construction in progress 12,929 20,468 18 4,939 ASSETS 281,173 200,390 8 334 125 Tencent Holdings Limited 170 00 (3) The notes on pages 180 to 310 are an integral part of these consolidated financial statements. Equity holders of the Company Attributable to: Total comprehensive income for the year Other fair value gains Currency translation differences Net (losses)/gains from changes in fair value of financial assets at fair value through other comprehensive income Non-controlling interests 32 (19,392) 2,796 (1,552) 3,339 67 277,834 Financial assets at fair value through profit or loss 200,323 281,173 (7,262) 200,390 (27,420) 291 (1,285) 130,525 (16,166) (558) 5,380 121,048 25 70,394 213,091 1,612,364 Total assets 317,647 484,812 102,451 152,798 167,966 31 2,520 2,476 31 68,487 83,813 29 6,593 10,573 24 Term deposits Restricted cash Cash and cash equivalents Assets held for distribution 322 223 30 1,333,425 49,331 26 65,390 40,321 27 1,749 1,133 44,981 Annual Report 2021 171 Consolidated Statement of Financial Position RMB'Million 33 67,330 48,793 33 (4,843) 2020 (4,412) 73,901 121,139 669,911 538,464 806,299 703,984 34 Financial assets at fair value through profit or loss LIABILITIES Non-controlling interests As at 31 December 2021 EQUITY As at 31 December 2021 Note RMB'Million Total equity Equity attributable to equity holders of the Company 33 Share premium Shares held for share award schemes Other reserves Retained earnings ww ww Share capital 250,257 Other financial assets 778,043 2021 Note RMB'Million 2020 RMB'Million Current liabilities Accounts payable Other payables and accruals Borrowings Prepayments, deposits and other assets Accounts receivable 814 1,063 555,382 74,059 Inventories Current assets 26 37,177 24,630 27 1,261 4 As at 31 December 28 21,348 29 19,491 31,681 1,127,552 1,015,778 26,068 As at 31 December 2021 Consolidated Statement of Financial Position 172 Tencent Holdings Limited Other financial liabilities 9,910 9,966 38 Long-term payables 122,057 39 145,590 Notes payable 112,145 136,936 36 Borrowings Non-current liabilities 37 876,693 5,912 Deferred income tax liabilities 00 286,303 332,573 6,678 4,526 5(c)(i) 9,254 Deferred revenue 16,501 18 Lease liabilities 16,061 13,142 28 10,198 Total equity and liabilities 1,571 1,333,425 133 (13) 334 - transfer of share of other comprehensive income to profit or loss upon disposal and deemed disposal of associates (3) (3) (3) - net gains from changes in fair value of financial assets at fair value through other comprehensive income 127,873 127,873 2,652 347 160,125 278 159,847 35,271 (4,002) 16,786 384,651 432,706 56.118 488,824 130,525 Balance at 1 January 2020 Profit for the year Other comprehensive income, net of tax: - share of other comprehensive income/(loss) of associates and joint ventures 347 42 159,847 Comprehensive income RMB'Million -currency translation differences (9,016) (29,302) and investment properties Purchase of property, plant and equipment, construction in progress 15 281,173 Transfer of gains on disposal and deemed disposal of financial instruments to retained earnings (5,151) 5,151 Share of other changes in net assets of associates and joint ventures 3,320 3,320 (2) (34,070) Proceeds from disposals of property, plant and equipment 191 Purchase of/prepayment for intangible assets 469 (8,547) - other fair value losses, net (1,214) (1,214) (47) (1,261) (9,016) Total comprehensive income for the year 159,847 277,834 3,339 (1,704) Purchase of/prepayment for land use rights (27,182) (31,159) 117,987 RMB'Million RMB'Million equity 783 783 Recognition of put option liabilities arising from business combinations (1,289) (1,289) (1,289) Transfer of equity interests of subsidiaries to non-controlling interests 1,746 306 (2,323) (271) 10 (261) 783 783 of non-controlling interests Lapses of put option liabilities in respect non wholly-owned subsidiaries Dilution of/changes in interests in subsidiaries (4,305) (4,305) (4,616) (8,921) 205 Total transactions with equity holders at their (5,347) 736 941 Changes in put option liabilities in respect of non-controlling interests 1,483 1,483 88 205 capacity as equity holders for the year 18,537 (431) Share for share Other Retained Non-controlling Total capital Share premium award schemes RMB'Million RMB'Million RMB'Million RMB'Million earnings RMB'Million Total interests reserves 3,318 Shares held For the year ended 31 December 2021 (3,651) (115,803) (101,348) (3,733) (105,081) Balance at 31 December 2021 67,330 Attributable to equity holders of the Company (4,843) 669,911 806,299 70,394 876,693 Annual Report 2021 175 Consolidated Statement of Changes in Equity 73,901 Transfer of share of other changes in net assets of associates to profit or loss upon disposal and deemed disposal (2,730) (2,730) (2,730) Transfer of equity interests of subsidiaries to non-controlling interests 1,527 246 (6,472) (4,699) 4,563 (136) Total transactions with equity holders at their capacity as equity holders for the year 13,522 (410) business combinations Recognition of put option liabilities arising from (1,058) (293) Changes in put option liabilities in respect of non-controlling interests 12,459 12,459 15 15 (2,795) (11,649) (2,795) (5,975) (684) (684) 1,407 723 (765) (765) (3,180) (11,185) (9,722) 14,604 Note RMB'Million 2020 RMB'Million 43(a) 203,712 214,441 2021 (28,526) 175,186 194,119 Cash flows from investing activities Payments for business combinations, net of cash acquired Net inflow of cash in respect of disposal of a subsidiary (21,944) (15,097) (20,322) Dilution of/changes in interests in subsidiaries Year ended 31 December Income tax paid 4,882 Balance at 31 December 2020 48,793 (4,412) 121,139 538,464 703,984 Net cash flows generated from operating activities 74,059 The notes on pages 180 to 310 are an integral part of these consolidated financial statements. Annual Report 2021 177 Consolidated Statement of Cash Flows For the year ended 31 December 2021 Cash flows from operating activities Cash generated from operations 778,043 (33) non wholly-owned subsidiaries Disposal and deemed disposal of subsidiaries Total capital premium award schemes RMB'Million RMB'Million RMB'Million reserves RMB'Million earnings RMB'Million Total interests RMB'Million RMB'Million equity RMB'Million 1,768 1,716 Non-controlling Retained Other for share (154) (154) (154) 00 176 Tencent Holdings Limited Transactions with equity holders 314 Capital injection - value of employee services Consolidated Statement of Changes in Equity For the year ended 31 December 2021 Attributable to equity holders of the Company Shares held Share Share Employee share option schemes: 314 60 60 (1,209) 1,209 Tax benefit from share-based payments 588 588 588 Profit appropriations to statutory reserves - vesting of awarded shares 736 (10,449) (10,449) (1,176) (11,625) Dividends Non-controlling interests arising from business combinations (736) Acquisition of additional equity interests in (1,865) 10,566 1,828 62 60 1,890 1,716 1,716 Employee share award schemes: (1,865) - 9,720 413 13 - shares withheld for share award schemes (1,865) 10,133 433 - value of employee services 1,612,364 (33) 1,289 8,430 Transfer of share of other changes in net assets of associates and joint ventures to profit or loss upon disposal and deemed disposal (5,089) (5,089) (5,089) 00 174 Tencent Holdings Limited Transactions with equity holders Capital injection Employee share option schemes: - value of employee services - proceeds from shares issued Employee share award schemes: 1 8,429 8,429 associates and joint ventures 224,822 200,323 67 200,390 Transfer of gains on disposal and deemed disposal of financial instruments to retained earnings Consolidated Statement of Changes in Equity (22,393) Transfer of share of other comprehensive income to retained earnings upon disposal and deemed disposal of associates and joint ventures (35) 35 Share of other changes in net assets of 22,393 (24,499) For the year ended 31 December 2021 Shares held - 53 - 1,714 1,043 612 1112 612 412 54 43 54 1,768 1,043 - - value of employee services 18,347 1,661 1,043 equity RMB'Million RMB'Million interests Share Share for share Other Retained Non-controlling Total Attributable to equity holders of the Company capital reserves RMB'Million RMB'Million RMB'Million RMB'Million earnings RMB'Million Total RMB'Million premium award schemes Total comprehensive income for the year 2,796 90 Share Share capital RMB'Million premium for share award schemes Other Retained Non-controlling Total RMB'Million RMB'Million reserves RMB'Million earnings RMB'Million Total interests Shares held Attributable to equity holders of the Company deemed disposal of associates and joint ventures -transfer of share of other comprehensive loss to profit or loss upon disposal and The notes on pages 180 to 310 are an integral part of these consolidated financial statements. The consolidated financial statements on pages 169 to 310 were approved by the Board of Directors on 23 March 2022 and were signed on its behalf: Ma Huateng Lau Chi Ping Martin Director Director Annual Report 2021 equity 173 For the year ended 31 December 2021 Balance at 1 January 2021 Comprehensive income Profit for the year Other comprehensive income, net of tax: - share of other comprehensive income of associates and joint ventures Consolidated Statement of Changes in Equity RMB'Million RMB'Million RMB'Million 5,380 - net losses from changes in fair value of financial assets at fair value through other comprehensive income (15,073) (15,073) (1,093) 5,380 (16,166) (18,032) (18,032) (1,918) (19,950) - other fair value gains, net 2,706 2,706 -currency translation differences 611 5,380 - gain from changes in fair value of 48,793 (4,412) 121,139 538,464 703,984 74,059 778,043 assets held for distribution 512 224,822 224,822 2,988 227,810 512 512 888 12 18,958 543 - shares withheld for share award schemes Interest received (59,169) (55,713) Placement of term deposits with initial terms of over three months 32,177 55,140 Receipt from maturity of term deposits with initial terms of over three months 484 1,127 Loans repayments from investees and others (1,755) (11,251) Payments for loans to investees and others 1,626 338 4,923 5,610 Dividends received Net cash flows used in investing activities Payments for repurchase of shares Interest paid Principal elements of lease payments Repayments of notes payable Net proceeds from issuance of notes payable Repayments of long-term borrowings Proceeds from long-term borrowings Proceeds from disposals of other financial assets Cash flows from financing activities Proceeds from short-term borrowings Repayments of short-term borrowings Consolidated Statement of Cash Flows 178 Tencent Holdings Limited 00 (181,955) (178,549) 2,153 3,324 For the year ended 31 December 2021 (859) (2,202) 13,168 (50,091) Payments for acquisition of investments in associates (12,683) (1,015) (13,698) Dividends distribution in specie (Note 15(b)) (102,451) (30,533) (102,451) Distributions from a non wholly-owned subsidiary (1,401) (1,401) Non-controlling interests arising from business combinations (Note 42) Disposal and deemed disposal of subsidiaries Acquisition of additional equity interests in (102,451) Proceeds from issuance of ordinary shares as a result of exercise Proceeds from disposals of investments in associates 2,208 28,800 (60,066) (79,350) Payments for acquisition of financial assets at fair value through profit or loss Proceeds from disposals of financial assets at fair value through profit or loss Payments for acquisition/settlements of other financial instruments 7,648 33,521 Proceeds from disposals of financial assets at fair value through other comprehensive income 4,035 (12,719) comprehensive income Payments for acquisition of financial assets at fair value through other 1,383 Proceeds from disposals of investments in joint ventures (247) (364) Payments for acquisition of investments in joint ventures (28,251) 1,289 of share options Year ended 31 December Cash dividends (12,683) 179 Annual Report 2021 152,798 167,966 (6,004) (3,089) 132,991 152,798 25,811 18,257 13,647 21,620 (1,079) (2,170) (2,170) (2,170) Repurchase and cancellation of shares (2,827) (2,827) 19,501 (2,827) - vesting of awarded shares (2,090) 2,090 (1,403) Tax benefit from share-based payments 4662 ' 462 66% Profit appropriations to statutory reserves 669 (669) 462 (10,339) (12,503) (9,263) (4,423) (10,460) 47,948 27,060 (15,899) (777) 26,323 (3,537) 33,348 (22,944) 5,090 23,103 RMB'Million 2020 RMB'Million 2021 (8,512) Shares withheld for share award schemes (7,525) (2,170) (9,199) The notes on pages 180 to 310 are an integral part of these consolidated financial statements. Cash and cash equivalents at end of the year Cash and cash equivalents at beginning of the year Exchange losses on cash and cash equivalents Net increase in cash and cash equivalents Net cash flows generated from financing activities Dividends paid to non-controlling interests (7,076) Dividends paid to the Company's shareholders 600 727 Proceeds from issuance of additional equity of non wholly-owned subsidiaries Proceeds from partial disposals of equity interests in non wholly-owned subsidiaries Payments for acquisition of non-controlling interests in non wholly-owned subsidiaries (1,865) (2,827) 1,716 1,043 110 - proceeds from shares issued IFRS Practice Statement 2 Subsidiaries SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (continued) 2 For the year ended 31 December 2021 Notes to the Consolidated Financial Statements Annual Report 2021 185 Investments in subsidiaries are accounted for at cost less impairment. Cost includes direct attributable costs of investment. The results of subsidiaries are accounted for by the Company on the basis of dividends received and receivable. In addition, the contribution to the Company's Share Scheme Trust (as defined in Note 48(f)), a controlled structured entity, is stated at cost in "Contribution to Share Scheme Trust”, and will be transferred to the "Shares held for share award schemes" under equity when the contribution is used for the acquisition of the Company's shares. (b) Separate financial statements When the Group ceases to have control, any retained interest in the entity is re-measured to its fair value at the date when control is lost, with the change in carrying amount recognised in the consolidated income statement. The fair value is the initial carrying amount for the purposes of subsequently accounting for the retained interest as an associate, a joint venture or a financial asset. In addition, any amounts previously recognised in other comprehensive income in respect of that entity are accounted for as if the Group had directly disposed of the related assets or liabilities. It means that amounts previously recognised in other comprehensive income are reclassified to the consolidated income statement or transferred to another category of equity as specified/permitted by applicable IFRSS. (iii) Disposal of subsidiaries 2.3 Associates Transactions with non-controlling interests that do not result in a loss of control are accounted for as equity transactions - that is, as transactions with the owners of the subsidiary in their capacity as owners. The difference between fair value of any consideration paid and the relevant share acquired of the carrying amount of net assets of the subsidiary is recorded in equity. Gains or losses on disposals to non-controlling interests are also recorded in equity. (ii) (a) Consolidation (continued) 2.2 Subsidiaries (continued) For the year ended 31 December 2021 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (continued) 2 Notes to the Consolidated Financial Statements Tencent Holdings Limited 184 Changes in ownership interests in subsidiaries without change of control Associates are all entities over which the Group has significant influence but not control or joint control, generally but not necessarily accompanying a shareholding of between 20% and 50% of the voting rights. Investments in associates are accounted for using the equity method of accounting and are initially recognised at cost. The Group's investments in associates include underlying goodwill identified on acquisition, net of any accumulated impairment loss. The Group's share of its associates' post-acquisition profit or loss is recognised in the consolidated income statement, and its share of post-acquisition movements in other comprehensive income is recognised in other comprehensive income. Dividends received or receivable from associates are recognised as a reduction in the carrying amount of the investment. Where the Group's share of losses in an associate equals or exceeds its interests in the associate, including any other unsecured long-term receivables, the Group does not recognise further losses, unless it has incurred legal or constructive obligations or made payments on behalf of the associate. The Group determines at each reporting date whether there is any objective evidence that investments accounted for using the equity method, including investments in associates and joint arrangements (Note 2.4), are impaired. If this is the case, the Group calculates the amount of impairment as the difference between the recoverable amount of the investment and its carrying value and recognises the amount in "Other gains/(losses), net" in the consolidated income statement. Notes to the Consolidated Financial Statements Annual Report 2021 187 The cost of associates/joint ventures acquired in stages, except for the change from an associate to a joint venture, is measured as the sum of the fair value of the interests previously held plus the fair value of any additional consideration transferred as of the date when they become associates/joint ventures. A gain or loss on remeasurement of the previously held interests is taken to the consolidated income statement. 2.5 Investments in associates/joint ventures achieved in stages Unrealised gains on transactions between the Group and its joint ventures are eliminated to the extent of the Group's interests in the joint ventures. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of the joint ventures have been changed where necessary to ensure consistency with the policies adopted by the Group. Under the equity method of accounting, interests in joint ventures are initially recognised at cost and adjusted thereafter to recognise the Group's share of the post-acquisition profit or loss and movements in other comprehensive income. Where the Group's share of losses in a joint venture equals or exceeds its interests in the joint venture (which includes any other unsecured long-term receivables that, in substance, form part of the Group's net investment in the joint venture), the Group does not recognise further losses, unless it has incurred legal or constructive obligations or made payments on behalf of the joint venture. Joint ventures are accounted for using the equity method. Joint ventures The Group recognises its direct right to the assets, liabilities, revenues and expenses of joint operations and its share of any jointly held or incurred assets, liabilities, revenues and expenses. These have been incorporated in the financial statements under the appropriate headings. Joint operations Under IFRS 11 investments in joint arrangements are classified as either joint operations or joint ventures depending on the contractual rights and obligations of each investor. 2.4 Joint arrangements For the year ended 31 December 2021 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (continued) 2 Notes to the Consolidated Financial Statements Tencent Holdings Limited 186 00 Gains or losses on dilution of equity interest in associates are recognised in the consolidated income statement. If the ownership interest in an associate is reduced but significant influence is retained, only a proportionate share of the amounts previously recognised in other comprehensive income is reclassified to consolidated income statement where appropriate. Unrealised gains on transactions between the Group and its associates are eliminated to the extent of the Group's interests in the associates. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of associates have been changed where necessary to ensure consistency with the policies adopted by the Group. 00 The excess of the total of consideration transferred, the amount of any non-controlling interest in the acquiree and the acquisition-date fair value of any previous equity interest in the acquiree over the fair value of the identifiable net assets acquired is recorded as goodwill. If the total of consideration transferred, non-controlling interest recognised and previously held interest measured is less than the fair value of the net assets of the subsidiary acquired in the case of a bargain purchase, the difference is recognised directly in the consolidated income statement. Any contingent consideration to be transferred by the Group is recognised at fair value at the acquisition date. Subsequent changes to the fair value of the contingent consideration that is deemed to be an asset or liability is recognised in profit or loss. Contingent consideration that is classified as equity is not re-measured, and its subsequent settlement is accounted for within equity. If the business combination is achieved in stages, the acquisition date carrying value of the acquirer's previously held equity interest in the acquiree is re-measured to fair value at the acquisition date; any gains or losses arising from such re-measurement are recognised in profit or loss. Notes to the Consolidated Financial Statements Tencent Holdings Limited 182 00 arising from a Single Transaction 1 January 2023 Deferred Tax related to Assets and Liabilities Amendments to IAS 12 1 January 2023 Definition of Accounting Estimates 1 January 2023 1 January 2023 Classification of Liabilities as Current or Non-current 1 January 2023 1 January 2022 1 January 2022 Onerous Contracts - Cost of Fulfilling a Contract Disclosure of Accounting Policies Insurance Contracts 2018-2020 Cycle Annual Improvements to IFRS Standards 2 For the year ended 31 December 2021 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (continued) Basis of preparation (continued) Acquisition-related costs are expensed as incurred. The Group recognises any non-controlling interest in the acquiree on an acquisition-by-acquisition basis. Non-controlling interests in the acquiree that are present ownership interests and entitle their holders to a proportionate share of the entity's net assets in the event of liquidation are measured at either fair value or the present ownership interests' proportionate share in the recognised amounts of the acquiree's identifiable net assets. (i) Business combinations (continued) (a) Consolidation (continued) 2.2 Subsidiaries (continued) 2 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (continued) For the year ended 31 December 2021 Notes to the Consolidated Financial Statements 183 Annual Report 2021 The Group applies the acquisition method to account for business combinations. The consideration transferred for the acquisition of a subsidiary is the fair values of the assets transferred, the liabilities incurred to the former owners of the acquiree and the equity interests issued by the Group. The consideration transferred also includes the fair value of any asset or liability resulting from a contingent consideration arrangement, which is recognised under "Other financial assets" or "Other financial liabilities" in the consolidated financial statements. Identifiable assets acquired and liabilities and contingent consideration assumed in a business combination are measured initially at their fair values at the acquisition date. Business combinations (i) Intra-group transactions, balances and unrealised gains on transactions between group companies are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the transferred asset. When necessary, amounts reported by subsidiaries have been adjusted to conform with the Group's accounting policies. Subsidiaries are all entities (including structured entities) over which the Group has control. The Group controls an entity where the Group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. Subsidiaries are consolidated from the date on which control is transferred to the Group. They are deconsolidated from the date that control ceases. (a) Consolidation 2.2 The Group considers the lease as a single transaction in which the assets and liabilities are integrally linked. There is no net temporary difference at inception. Subsequently, when differences on settlement of the liabilities and the amortisation of right-of-use assets arise, there will be a net temporary difference on which deferred income tax is recognised. Upon the effective date of amendments to IAS 12 on 1 January 2023, the Group will need to recognise a deferred income tax asset and a deferred income tax liability for the temporary differences arising on a lease on initial recognition. New standards and amendments to standards issued but not yet effective (continued) For the year ended 31 December 2021 (b) 2.1 2 Impairment testing of the investments in subsidiaries is required upon receiving dividends from these investments if the dividends exceed the total comprehensive income of the subsidiaries in the period the dividends are declared or if the carrying amount of the investments in the separate financial statements exceeds the carrying amount in the consolidated financial statements of the investee's net assets including goodwill. 2.6 Disposal of associates and joint ventures 2.1 Basis of preparation The consolidated financial statements of the Group have been prepared in accordance with all applicable International Financial Reporting Standards ("IFRSS"). The consolidated financial statements have been prepared under the historical cost convention, as modified by the revaluation of financial assets at fair value through profit or loss ("FVPL"), financial assets at fair value through other comprehensive income ("FVOCI"), dividends payable for distribution in specie, certain other financial assets and liabilities, which are carried at fair value. The preparation of financial statements in conformity with IFRSS requires the use of certain critical accounting estimates. It also requires management to exercise its judgment in the process of applying the Group's accounting policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in Note 4. (a) Amendments to standards adopted by the Group The following amendments to standards have been adopted by the Group for the first time for the financial year beginning on 1 January 2021: Amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16 Interest rate benchmark reform - phase 2 ("phase 2") The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. Annual Report 2021 181 For the year ended 31 December 2021 2 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (continued) 2.1 Basis of preparation (continued) (a) Amendments to standards adopted by the Group (continued) (b) The amendments are relevant to the Group given that it applies hedge accounting to its benchmark interest rate exposures. The Group has floating rate debts, linked to USD LIBOR, including borrowings and senior notes, whose cash flows are hedged by using interest rate swaps. The LIBOR benchmark in which the Group continues to have hedging instrument is USD LIBOR. It is expected that the transition out of USD LIBOR hedging derivatives will be completed before 30 June 2023, and no significant impact arose as a result of applying those amendments during the year ended 31 December 2021. Notes to the Consolidated Financial Statements SUMMARY OF PRINCIPAL ACCOUNTING POLICIES 2 Similar Structure Contracts were also executed for other PRC operating companies established by the Group similar to Tencent Computer subsequent to 2000. All these PRC operating companies are treated as controlled structured entities of the Company and their financial statements have also been consolidated by the Company. See details in Note 48. Amendments to IAS 8 Notes to the Consolidated Financial Statements For the year ended 31 December 2021 1 GENERAL INFORMATION Tencent Holdings Limited (the "Company") was incorporated in the Cayman Islands with limited liability. The address of its registered office is Cricket Square, Hutchins Drive, P.O. Box 2681, Grand Cayman KY1-1111, Cayman Islands. The shares of the Company have been listed on the Main Board of the Stock Exchange of Hong Kong Limited (the "Stock Exchange") since 16 June 2004. The Company is an investment holding company. The Company and its subsidiaries (collectively, the "Group") are principally engaged in the provision of Value-added Services ("VAS"), Online Advertising services and FinTech and Business Services. The operations of the Group were initially conducted through Shenzhen Tencent Computer Systems Company Limited ("Tencent Computer"), a limited liability company established in the PRC by certain shareholders of the Company on 11 November 1998. Tencent Computer is legally owned by the core founders of the Company who are PRC citizens (the "Registered Shareholders"). The PRC regulations restrict foreign ownership of companies that provide value-added telecommunications services, which include activities and services operated by Tencent Computer. In order to enable the Company to own and control the business of the Group, the Company established a subsidiary, Tencent Technology (Shenzhen) Company Limited ("Tencent Technology"), which is a wholly foreign owned enterprise incorporated in the PRC, on 24 February 2000. Under a series of contractual arrangements (collectively, “Structure Contracts") entered into among the Company, Tencent Technology, Tencent Computer and the Registered Shareholders, the Company is able to effectively control, recognise and receive substantially all the economic benefit of the business and operations of Tencent Computer. In summary, the Structure Contracts provide the Company through Tencent Technology with, among other things: • the right to receive the cash received by Tencent Computer from its operations which is surplus to its requirements, having regard to its forecast working capital needs, capital expenditure, and other short-term anticipated expenditure through various commercial arrangements; the right to ensure that Tencent Technology owns the valuable assets of the business through the assignment to Tencent Technology of the principal present and future intellectual property rights of Tencent Computer; and the right to control the management, financial and operating policies of Tencent Computer. 00 180 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (continued) Notes to the Consolidated Financial Statements For the year ended 31 December 2021 1 GENERAL INFORMATION (continued) As a result, Tencent Computer is accounted for as a controlled structured entity (see also Note 2.2(a) and Note 48) and the formation of the Group in 2000 was accounted for as a business combination between entities under common control under a method similar to the uniting of interests method for recording all assets and liabilities at predecessor carrying amounts. This approach was adopted because in management's belief it best reflected the substance of the formation. New standards and amendments to standards issued but not yet effective The following new standards and amendments to standards have not come into effect for the financial year beginning on 1 January 2021 and have not been early adopted by the Group in preparing the consolidated financial statements. None of these is expected to have a significant effect on the consolidated financial statements of the Group. Tencent Holdings Limited on or after Group companies (c) Non-monetary items that are measured at fair value in foreign currency are translated using the exchange rates at the date when the fair value was determined. Translation differences on non-monetary assets and liabilities carried at fair value are reported as part of the fair value gain or loss. For example, translation differences on non-monetary financial assets and liabilities such as equity instruments held at fair value through profit or loss are recognised in the consolidated income statement as part of the fair value gain or loss and translation differences on non-monetary financial assets, such as equity instruments classified as FVOCI, are included in other comprehensive income. (b) Transactions and balances (continued) 2.8 Foreign currency translation (continued) SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (continued) 2 For the year ended 31 December 2021 Notes to the Consolidated Financial Statements Tencent Holdings Limited 188 00 Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the consolidated income statement. (b) Items included in the financial statements of each of the Group's entities are measured using the currency of the primary economic environment in which the entity operates (the "functional currency"). The functional currency of the Company and certain of its overseas subsidiaries is United States Dollars ("USD"). As the major operations of the Group are within the PRC, the Group presents its consolidated financial statements in Renminbi ("RMB"), unless otherwise stated. (a) Functional and presentation currency 2.8 Foreign currency translation Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-makers, who are responsible for allocating resources and assessing performance of the operating segments and making strategic decisions. The chief operating decision-makers mainly include the executive directors. 2.7 Segment reporting When the Group ceases to continue equity accounting for an associate or joint venture because of a loss of significant influence or joint control, it measures any retained investment at fair value. A gain or loss is recognised at any difference between the fair value of any retained interest plus any proceeds from disposing part of the interests in the associate or joint venture and the carrying amount of the investment at the date the equity method of accounting was discontinued. The amounts previously recognised in other comprehensive income in respect of an associate or joint venture should be reclassified to the consolidated income statement or transferred to another category of equity as specified and permitted by applicable IFRSS when the Group ceases to continue equity accounting for the associate or joint venture. Effective for annual periods beginning The results and financial position of all the group entities (none of which has the currency of a hyper- inflationary economy) that have a functional currency different from the presentation currency of RMB are translated into the presentation currency as follows: (i) Transactions and balances (ii) Amendments to IAS 28 and IFRS 10 Amendments to IAS 16 Assets and liabilities for each statement of financial position presented are translated at the closing rate at the date of that statement of financial position; Sale or Contribution of Assets between an Investor and its Associate or Joint Venture Property, Plant and Equipment: Proceeds To be determined 1 January 2022 Amendments to IFRS 3 Reference to the Conceptual Framework 1 January 2022 Amendments to IFRSS Amendments to IAS 37 before Intended Use Amendments to IAS 1 Amendments to IAS 1 and 189 Annual Report 2021 Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate. Currency translation differences arising are recognised in other comprehensive income. On consolidation, exchange differences arising from the translation of the net investment in foreign operations, and of borrowings and other financial instruments designated as hedges of such investments, are taken to other comprehensive income. Income and expenses for each income statement are translated at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the rate on the dates of the transactions); and All resulting currency translation differences are recognised as a separate component of other comprehensive income. IFRS 17 (iii) (11,616) (10,435) (24,380) (23,862) 109,723 53,137 (1,942) (1,863) Share of losses of associates and joint ventures, net (8,267) 22,984 Profit before income tax (5,668) Finance costs, net 86,199 2021 1,703 62,747 57,817 (79,621) (86,371) 142,368 144,188 (RMB in millions) 2021 30 September Three months ended 31 December Unaudited 99,593 Operating profit 1,703 45,527 18 Profit for the period General and administrative expenses Cost of revenues for VAS increased by 14% year-on-year to RMB138.6 billion for the year ended 31 December 2021, due to revenue sharing costs associated with our Video Accounts live streaming service, increased channel and content costs for games, as well as increased costs associated with the consolidation of HUYA. 19 Annual Report 2021 Revenues from FinTech and Business Services increased by 11% to RMB48.0 billion for the fourth quarter of 2021, reflecting seasonally higher revenues from cloud services due to year-end project deployments, as well as higher revenues from payment services. Revenues from Online Advertising decreased by 4% to RMB21.5 billion for the fourth quarter of 2021, reflecting a slower-than-usual seasonal spending upturn in advertiser categories such as eCommerce and consumer staples, as well as weakness in categories such as Internet services, education, and games. Social and Others Advertising revenues decreased by 4% to RMB18.3 billion, reflecting lower advertising revenues from Weixin and QQ properties, as well as our mobile advertising network, partly offset by the consolidation of Sogou's advertising revenue. Media Advertising revenues decreased by 8% to RMB3.2 billion, primarily due to lower advertising revenues from the Tencent Video service. Revenues from VAS decreased by 4% to RMB71.9 billion for the fourth quarter of 2021. Domestic Games revenues decreased by 12% to RMB29.6 billion due to lower revenues from several of our existing games reflecting seasonally lower revenues in the fourth quarter as well as additional measures implemented in the quarter for the protection of Minors. This weakness was partly offset by revenue contributions from recently launched titles including League of Legends: Wild Rift and Fight of The Golden Spatula. International Games revenues increased by 16% to RMB13.2 billion, reflecting revenue growth from games such as Valorant, Brawl Stars, and Clash Royale, as well as a true-up adjustment to revenue of Supercell upon periodic review of our revenue deferral periods. Social Networks revenues decreased by 4% to RMB29.1 billion, due to the decrease in revenues from in-game item sales, partly offset by revenue growth from our Video Accounts live streaming service. Revenues. Revenues increased by 1% to RMB144.2 billion for the fourth quarter of 2021 on a quarter-on-quarter basis. Management Discussion and Analysis Tencent Holdings Limited 00 31,751 24,880 Non-IFRS profit attributable to equity holders of the Company Income tax expense 40,828 Non-IFRS operating profit 40,075 95,705 565 747 Non-controlling interests 39,510 94,958 Equity holders of the Company Attributable to: 40,075 95,705 (5,452) (3,888) 33,151 Selling and marketing expenses Management Discussion and Analysis Interest income 13 Annual Report 2021 Profit attributable to equity holders of the Company. Profit attributable to equity holders of the Company increased by 41% to RMB224.8 billion for the year ended 31 December 2021 on a year-on-year basis. Non-IFRS profit attributable to equity holders of the Company increased by 1% to RMB123.8 billion for the year ended 31 December 2021. Income tax expense. Income tax expense increased by 2% to RMB20.3 billion for the year ended 31 December 2021 on a year-on-year basis. Share of loss/profit of associates and joint ventures, net. We recorded share of losses of associates and joint ventures of RMB16.4 billion for the year ended 31 December 2021, compared to share of profits of RMB3.7 billion for the year ended 31 December 2020. Non-IFRS share of losses of associates and joint ventures were RMB1.0 billion for the year ended 31 December 2021, compared to non-IFRS share of profits of RMB6.7 billion for the year ended 31 December 2020, reflecting increased investments in community retail initiatives by certain associates, and losses recognised from an associate in the transportation services vertical. Finance costs, net. Net finance costs decreased by 10% to RMB7.1 billion for the year ended 31 December 2021 on a year-on-year basis, primarily due to net exchange gains recognised for the year ended 31 December 2021 compared to net exchange losses for the year ended 31 December 2020, partly offset by the increase in interest expenses as a result of increased indebtedness. Management Discussion and Analysis Tencent Holdings Limited 12 00 General and administrative expenses. General and administrative expenses increased by 33% to RMB89.8 billion for the year ended 31 December 2021 on a year-on-year basis, mainly driven by increased R&D expenses and staff costs, including higher share-based compensation expenses, reflecting unusually intense competition for talent in 2020 and 2021, which we expect to moderate in 2022. As a percentage of revenues, general and administrative expenses increased to 16% for the year ended 31 December 2021 from 14% for the year ended 31 December 2020. Selling and marketing expenses. Selling and marketing expenses increased by 20% to RMB40.6 billion for the year ended 31 December 2021 on a year-on-year basis, reflecting greater marketing spending on games and Business Services, including those associated with the consolidation of recently acquired subsidiaries. As a percentage of revenues, selling and marketing expenses was 7% for the year ended 31 December 2021, broadly stable compared to the year ended 31 December 2020. Other gains, net. We recorded net other gains of RMB149.5 billion for the year ended 31 December 2021, which were primarily non-IFRS adjustment items such as net gains on deemed disposals and disposals of certain investee companies (including a RMB78.2 billion gain from deemed disposal of JD.com), and net fair value gains from revaluation of certain investee companies, partly offset by impairment provisions against certain investee companies reflecting revisions of their financial outlooks and changes in their business environments. Cost of revenues for FinTech and Business Services increased by 32% year-on-year to RMB120.8 billion for the year ended 31 December 2021, reflecting increased transaction costs due to payment volume growth, as well as our continuous investment in cloud computing talent and operations. Cost of revenues for Online Advertising increased by 20% year-on-year to RMB48.1 billion for the year ended 31 December 2021, driven by increased server and bandwidth costs including those associated with our Video Accounts service, as well as increased content costs, primarily for our Tencent Video and Tencent Sports services. Management Discussion and Analysis Revenues. Revenues increased by 16% to RMB560.1 billion for the year ended 31 December 2021 on a year-on-year basis. The following table sets forth our revenues by line of business for the years ended 31 December 2021 and 2020: Year ended 31 December 2021 2020 % of total % of total revenues Amount revenues Amount (RMB in millions, unless specified) VAS 291,572 Management Discussion and Analysis 52% FOURTH QUARTER OF 2021 COMPARED TO FOURTH QUARTER OF 2020 Revenues 63,713 109,723 (19,779) (24,380) (10,033) (11,616) 32,936 86,199 Operating profit General and administrative expenses Selling and marketing expenses Other gains, net 1,708 1,703 Interest income 58,881 57,817 (74,788) (86,371) 133,669 144,188 (RMB in millions) 2020 2021 31 December Three months ended 31 December Unaudited Gross profit Cost of revenues The following table sets forth the comparative figures for the fourth quarter of 2021 and the fourth quarter of 2020: Finance costs, net 264,212 Online Advertising Amount revenues Amount (RMB in millions, unless specified) VAS 138,636 48% 121,287 46% Online Advertising 48,072 54% 40,011 49% FinTech and Business Services 120,799 70% 91,835 72% Others 6,667 87% 7,399 99% Total cost of revenues 314,174 260,532 Annual Report 2021 11 % of segment 55% revenues 2020 88,666 16% 82,271 17% FinTech and Business Services Others 172,195 31% 128,086 27% 7,685 1% 7,495 1% Total revenues 560,118 100% 482,064 100% Revenues from VAS¹ increased by 10% to RMB291.6 billion for the year ended 31 December 2021 on a year-on- year basis. Domestic Games revenues grew by 6% to RMB128.8 billion, driven by games including Honour of Kings, Call of Duty Mobile and Moonlight Blade Mobile, partly offset by a decrease in revenues from DnF and Peacekeeper Elite. We implemented a comprehensive set of measures for the protection of Minors within our Domestic Games, which impacted revenue growth directly (less spending by Minors) and indirectly (developer resources focused on implementation of new measures). International Games revenues grew by 31% to RMB45.5 billion, due to robust performance of games including PUBG Mobile, Valorant, Brawl Stars and Clash of Clans. Social Networks revenues increased by 8% to RMB117.3 billion, driven by our Video Accounts live streaming service, video subscription service, and contribution from consolidation of HUYA since April 2020. 1 From the third quarter of 2021, we disclose revenues from Domestic Games and International Games as new sub-segments under VAS, reflecting the increasing scale of our International Games business. Mobile games VAS revenues (including mobile games revenues attributable to our Social Networks business) increased by 12% year-on-year to RMB164.8 billion, while PC client games revenues grew by 2% year-on-year to RMB45.3 billion for the year ended 31 December 2021. 10 Tencent Holdings Limited Management Discussion and Analysis Revenues from Online Advertising increased by 8% to RMB88.6 billion for the year ended 31 December 2021 on a year-on-year basis, with strong growth witnessed in the early half of the year, followed by significant slowdown and then decline in the latter half of the year as our advertisers and our own advertising services adapted to the new economic and regulatory environment, particularly in the third and fourth quarters. Online Advertising full year revenue growth reflected the relative resilience of the consumer staples category, as well as consolidation of Bitauto's and Sogou's advertising revenues, partly offset by headwinds from regulatory changes in advertiser categories including education, property and insurance, as well as by regulatory measures on the online advertising industry itself, such as limitations on launch screen advertisements. Social and Others Advertising revenues grew by 11% to RMB75.3 billion, driven by increased advertiser demand for Weixin properties. Media Advertising revenues decreased by 7% to RMB13.3 billion, mainly due to lower advertising revenues from our media platforms including Tencent News and Tencent Video amid the challenging macro environment and delays to content launches. Revenues from FinTech and Business Services increased by 34% to RMB172.2 billion for the year ended 31 December 2021 on a year-on-year basis. FinTech Services revenue growth primarily reflected increasing commercial payment volume. Business Services revenues increased rapidly year-on-year, due to digitalisation of traditional industries and videolisation of the Internet industry, as well as consolidation of Bitauto's Business Services revenue since November 2020. Cost of revenues. Cost of revenues increased by 21% to RMB314.2 billion for the year ended 31 December 2021 on a year-on-year basis, primarily driven by transaction costs to handle increased payment-related transaction volumes, content and infrastructure investments, cloud project deployment costs, as well as channel and distribution costs. As a percentage of revenues, cost of revenues increased to 56% for the year ended 31 December 2021 from 54% for the year ended 31 December 2020, reflecting our continuous investment in key strategic areas, as well as a revenue mix shift toward currently lower gross margin activities. The following table sets forth our cost of revenues by line of business for the years ended 31 December 2021 and 2020: Other gains, net 2021 % of segment (1,863) Year ended 31 December Share of (loss)/profit of associates and joint ventures, net 47% 11,520 57% 12,338 Online Advertising 49% 32,512 51% 36,869 VAS (RMB in millions, unless specified) revenues Amount FinTech and Business Services Others revenues % of segment % of segment 31 December 2020 31 December 2021 Unaudited Three months ended Cost of revenues. Cost of revenues increased by 15% to RMB86.4 billion for the fourth quarter of 2021 on a year-on-year basis, driven by transaction costs to handle increased payment-related transaction volumes, cloud project deployment costs, server and bandwidth costs, as well as content costs, partly offset by decreased channel and distribution costs. As a percentage of revenues, cost of revenues increased to 60% for the fourth quarter of 2021 from 56% for the fourth quarter of 2020, reflecting costs growing faster than revenues in certain businesses and our continued investment in key strategic areas. The following table sets forth our cost of revenues by line of business for the fourth quarter of 2021 and the fourth quarter of 2020: Revenues from FinTech and Business Services increased by 25% to RMB48.0 billion for the fourth quarter of 2021 on a year-on-year basis. FinTech Services revenue growth mainly reflected increasing commercial payment volume. Business Services revenue growth was primarily driven by increased use of our services by Internet services, public transportation and retail industries. Management Discussion and Analysis 15 Annual Report 2021 2 Mobile games VAS revenues (including mobile games revenues attributable to our Social Networks business) increased by 9% year-on- year to RMB40.0 billion, while PC client games revenues grew by 4% year-on-year to RMB10.6 billion for the fourth quarter of 2021. Revenues from Online Advertising decreased by 13% to RMB21.5 billion for the fourth quarter of 2021 on a year- on-year basis. The year-on-year decrease in Online Advertising revenues reflected weakness in advertiser categories including education, games and Internet services, partly offset by the consolidation of Sogou's advertising revenue. Social and Others Advertising revenues decreased by 10% to RMB18.3 billion, primarily due to lower advertising revenues from our mobile advertising network and Weixin Moments. Media Advertising revenues decreased by 25% to RMB3.2 billion, reflecting lower advertising revenues from Tencent Video and Tencent News services. Revenues from VAS2 increased by 7% to RMB71.9 billion for the fourth quarter of 2021 on a year-on-year basis. Domestic Games revenues grew by 1% to RMB29.6 billion, driven by games including Honour of Kings, as well as recently launched titles such as Fight of The Golden Spatula and League of Legends: Wild Rift, partly offset by the decrease in revenues from Moonlight Blade Mobile and Peacekeeper Elite. International Games revenues grew by 34% to RMB13.2 billion, reflecting new content for Valorant and Clash Royale, a true-up adjustment to revenue of Supercell upon periodic review of our revenue deferral periods, and consolidation of Digital Extremes. Social Networks revenues grew by 4% to RMB29.1 billion, driven by our Video Accounts live streaming service, video and music subscription services. Amount 34,942 73% 27,538 (2,253) Cost of revenues Revenues The following table sets forth the comparative figures for the fourth quarter of 2021 and the third quarter of 2021: FOURTH QUARTER OF 2021 COMPARED TO THIRD QUARTER OF 2021 Management Discussion and Analysis 17 Annual Report 2021 Profit attributable to equity holders of the Company. Profit attributable to equity holders of the Company increased by 60% to RMB95.0 billion for the fourth quarter of 2021 on a year-on-year basis. Non-IFRS profit attributable to equity holders of the Company decreased by 25% to RMB24.9 billion for the fourth quarter of 2021 as costs and expenses generally increased faster than revenues, and as net associate contributions moved from profits to losses, for the reasons cited above. Income tax expense. Income tax expense increased by 5% to RMB3.9 billion for the fourth quarter of 2021 on a year-on-year basis. Share of loss/profit of associates and joint ventures, net. We recorded share of losses of associates and joint ventures of RMB8.3 billion for the fourth quarter of 2021, compared to share of profits of RMB1.6 billion for the fourth quarter of 2020. Non-IFRS share of losses of associates and joint ventures were RMB0.8 billion for the fourth quarter of 2021, compared to non-IFRS share of profits of RMB2.7 billion for the fourth quarter of 2020, reflecting increased investments in community retail initiatives by certain associates, and losses recognised from an associate in the transportation services vertical. Finance costs, net. Net finance costs decreased by 17% to RMB1.9 billion for the fourth quarter of 2021 on a year-on-year basis, primarily due to foreign exchange gains recognised this quarter compared to losses for the fourth quarter of 2020, partly offset by the increase in interest expenses as a result of increased indebtedness. General and administrative expenses. General and administrative expenses increased by 23% to RMB24.4 billion for the fourth quarter of 2021 on a year-on-year basis, mainly driven by increased R&D expenses and staff costs, including higher share-based compensation expenses, reflecting unusually intense competition for talent in 2020 and 2021, which we expect to moderate in 2022. As a percentage of revenues, general and administrative expenses increased to 17% for the fourth quarter of 2021 from 15% for the fourth quarter of 2020. Selling and marketing expenses. Selling and marketing expenses increased by 16% to RMB11.6 billion for the fourth quarter of 2021 on a year-on-year basis, reflecting increased marketing spending on games partly offset by decreased spending on digital content services. As a percentage of revenues, selling and marketing expenses was 8% for the fourth quarter of 2021, broadly stable compared to the fourth quarter of 2020. Other gains, net. We recorded net other gains of RMB86.2 billion for the fourth quarter of 2021, which were primarily non-IFRS adjustment items such as net gains on deemed disposals and disposals of certain investee companies (including a RMB78.0 billion gain arising from the cessation of JD.com as an associate, due to the resignation of our board representative). Cost of revenues for FinTech and Business Services increased by 27% to RMB34.9 billion for the fourth quarter of 2021 on a year-on-year basis, reflecting increased transaction costs due to payment volume growth, and our continuous investment in cloud computing talent and operations. Management Discussion and Analysis Tencent Holdings Limited 16 00 Cost of revenues for Online Advertising increased by 7% to RMB12.3 billion for the fourth quarter of 2021 on a year-on- year basis, driven by increased server and bandwidth costs including those associated with our Video Accounts service, as well as increased content costs, partly offset by decreased channel and distribution costs. Cost of revenues for VAS increased by 13% to RMB36.9 billion for the fourth quarter of 2021 on a year-on-year basis, mainly due to increased content and channel costs for games, as well as revenue sharing costs associated with our Video Accounts live streaming service. 86,371 Total cost of revenues 91% 3,218 79% 2,222 72% 100% 133,669 74,788 144,188 Tencent Holdings Limited 14 00 33,207 24,880 Non-IFRS profit attributable to equity holders of the Company 38,084 33,151 Non-IFRS operating profit 59,369 95,705 67 747 Non-controlling interests 59,302 94,958 Equity holders of the Company 59,369 95,705 (3,709) (3,888) Profit for the period Income tax expense 63,078 99,593 Profit before income tax 100% 1,618 (8,267) Management Discussion and Analysis Revenues. Revenues increased by 8% to RMB144.2 billion for the fourth quarter of 2021 on a year-on-year basis. The following table sets forth our revenues by line of business for the fourth quarter of 2021 and the fourth quarter of 2020: Attributable to: 31 December 2021 3,541 3% Unaudited Three months ended Total revenues 2% 2,799 29% 38,494 47,958 FinTech and Business Services Others 18% 24,655 15% 21,518 Online Advertising 33% 66,979 % of total % of total Gross profit 50% Amount Amount revenues revenues (RMB in millions, unless specified) VAS 71,913 50% 31 December 2020 2.16 Derivative and hedging activities Gains or losses relating to the effective portion of the change in intrinsic value of the options are recognised in the cash flow hedge reserve within equity. The changes in the time value of the options that relate to the hedged item ("aligned time value") are recognised within other comprehensive income in the costs of hedging reserve within equity. Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently re-measured at fair value. Derivatives are carried as financial assets when the fair value is positive and as financial liabilities when the fair value is negative, which are recognised under "Other financial assets' and "Other financial liabilities” in the consolidated financial statements, respectively. The method of recognising the resulting gain or loss depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. The Group designates certain derivatives as hedges of a particular risk associated with the cash flows of a recognised asset or liability or a highly probable forecast transaction (cash flow hedges). The Group documents at the inception of the hedging relationship the economic relationship between hedging instruments and hedged items including whether the hedging instrument is expected to offset changes in cash flows of hedged items. The Group documents its risk management objective and strategy for undertaking various hedge transactions at the inception of each hedge relationship. A hedging relationship qualifies for hedge accounting if it meets all of the hedge effectiveness requirements under IFRS 9. The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognised through other comprehensive income within equity, while any ineffective portion is recognised immediately in profit or loss, within “Other gains/(losses), net". 2 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (continued) Notes to the Consolidated Financial Statements 196 Tencent Holdings Limited 2 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (continued) For the year ended 31 December 2021 Amounts accumulated in equity are accounted for, depending on the nature of the underlying hedged transaction, as follows: For the year ended 31 December 2021 2.16 Derivative and hedging activities (continued) 00 Notes to the Consolidated Financial Statements For the year ended 31 December 2021 Annual Report 2021 The Group reclassifies debt investments when and only when its business model for managing those assets changes. • 00 194 Tencent Holdings Limited Notes to the Consolidated Financial Statements 2 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (continued) 2.15 Investments and other financial assets (continued) (a) Classification and measurement (continued) Equity instruments The Group initially recognises and subsequently measures all equity investments at fair value. Upon initial recognition, the Group's management can elect to classify irrevocably its equity investments as financial assets at FVOCI when they meet the definition of equity instrument under IAS 32 and are not held for trading. The classification is determined on an instrument-by-instrument basis. Where the Group has made the irrevocable election to present fair value gains and losses on equity investments in other comprehensive income, there is no subsequent reclassification of fair value gains and losses to profit or loss following the derecognition of the investments. Dividends from such investments continue to be recognised in profit or loss as “Other gains/(losses), net” when the Group's right to receive payments is established. Equity instruments designated as FVOCI are not subject to impairment assessment. FVPL include financial assets designated upon initial recognition at fair value through profit or loss and financial assets that do not meet the criteria for amortised cost or FVOCI. Changes in the fair value of FVPL are recognised in "Other gains/(losses), net" in the consolidated income statement. (b) Impairment The Group assesses on a forward-looking basis the expected credit losses associated with its debt instruments carried at amortised cost and FVOCI. The impairment methodology applied depends on whether there has been a significant increase in credit risk. For accounts receivable and contract assets, the Group applies the simplified approach permitted by IFRS 9, which requires expected lifetime losses to be recognised since initial recognition. Impairment on deposits and other receivables is measured as either 12-month expected credit losses or lifetime expected credit losses, depending on whether there has been a significant increase in credit risk since initial recognition. If a significant increase in credit risk of a deposit or receivable has occurred since initial recognition, the impairment is measured as lifetime expected credit losses. 195 Where the hedged item subsequently results in the recognition of a non-financial asset, the amounts accumulated in equity are removed from other reserves and included within the initial cost of the asset. These deferred amounts are ultimately recognised in profit or loss as the hedged item affects profit or loss. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (continued) For any other cash flow hedges, the gain or loss relating to the effective portion of the derivatives is reclassified to profit or loss at the same time when the hedged cash flows affects profit or loss. 00 198 Tencent Holdings Limited Notes to the Consolidated Financial Statements 2 For the year ended 31 December 2021 2.21 Share capital Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or share options are shown in equity as a deduction from the proceeds. Where any Group company purchases the Company's equity instruments, the consideration paid, including any directly attributable incremental costs, is deducted from equity attributable to the Company's equity holders as treasury shares until the shares are cancelled or reissued. Where such shares are subsequently reissued, any consideration received (net of any directly attributable incremental transaction costs) is included in equity attributable to the Company's equity holders. 2.22 Accounts payable Accounts payable are obligations to pay for services or goods that have been acquired in the ordinary course of business from suppliers. Accounts payable are presented as current liabilities unless payment is not due within 12 months after the end of the reporting period. Accounts payable are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method. 2.23 Put option arrangements on non-controlling interest Put options on non-controlling interest of the Group are financial instruments granted by the Group which permit the holders to put back to the Group their shares in certain non wholly-owned subsidiaries of the Group for cash or other financial instruments when certain conditions are met. If the Group does not have the unconditional right to avoid delivering cash or other financial instruments under the put option, a financial liability is initially recognised under "Other financial liabilities” in the consolidated financial statements at the present value of the estimated future cash outflows on exercise under the put option. Subsequently, if the Group revises its estimates of payments, the Group will adjust the carrying amount of the financial liability to reflect actual and revised estimated cash outflows. The Group will recalculate the carrying amount based on the present value of revised estimated future cash outflows at the financial instrument's original effective interest rate and the adjustment will be recognised in the consolidated statement of changes in equity. In the event that the put option expires unexercised, the liability is derecognised with a corresponding adjustment to equity. The put option liabilities are current liabilities unless the put option first becomes exercisable 12 months after the end of the reporting period. Annual Report 2021 199 FVPL: Financial assets that do not meet the criteria for amortised cost or FVOCI are classified as and measured at fair value through profit or loss. A gain or loss on a debt investment measured at fair value through profit or loss which is not part of a hedging relationship is recognised in profit or loss and presented in "Other gains/(losses), net" for the period in which it arises. The Group does not recognise cash amounts deposited with banks in the Mainland of China (which are received under its payment business) under users' entrustment in the consolidated statement of financial position as the Group holds these cash amounts as a custodian according to the relevant users' agreements. Cash and cash equivalents mainly include cash on hand, deposits held at call with banks, and other short-term highly liquid investments with initial maturities of three months or less. 2.20 Cash and cash equivalents Accounts receivable are recognised initially at the amount of consideration that is unconditional unless they contain significant financing components, when they are recognised at fair value and subsequently measured at amortised cost using the effective interest method, less provision for impairment that is subject to expected credit loss model (Note 3.1(b)). When a hedging instrument expires, or is sold or terminated, or when a hedge no longer meets the criteria for hedge accounting, any cumulative deferred gain or loss and deferred costs of hedging in equity at that time remain in equity until the forecast transaction occurs. When the forecast transaction is no longer expected to occur, the cumulative gain or loss and deferred costs of hedging included in equity are immediately reclassified to profit or loss. Hedge relationships The "phase 2" amendments address issues arising during interest rate benchmark reform, including specifying when the Interest rate benchmark reform - phase 1 ("phase 1") amendments will cease to apply, when hedge designations and documentation should be updated, and when hedges of the alternative benchmark rate as the hedged risk are permitted. The "phase 1" amendments provided temporary relief from applying specific hedge accounting requirements to hedging relationships directly affected by Inter Bank Offered Rate ("IBOR") reform. The reliefs had the effect that IBOR reform should not generally cause hedge accounting to terminate prior to contracts being amended. However, any hedge ineffectiveness continued to be recorded in the income statement. Furthermore, the amendments set out triggers for when the reliefs would end, which included the uncertainty arising from interest rate benchmark reform no longer being present. The LIBOR benchmark in which the Group continues to have hedging instrument is USD LIBOR, for which it is expected that the transition out will be completed before 30 June 2023. The Group will update its hedge documentation to reflect the changes in designation (including designating an alternative benchmark rate as a hedged risk, amending the description of the hedged item, and amending the description of hedging instrument) by the end of the reporting period in which the changes are made. These amendments to the hedge documentation do not require the Group to discontinue its hedge relationships. Annual Report 2021 197 • Notes to the Consolidated Financial Statements 2 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (continued) 2.17 Offsetting financial instruments Financial assets and liabilities are offset, and the net amount is reported in the consolidated statement of financial position when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or realise the assets and settle the liabilities simultaneously. The legally enforceable right must not be contingent on future events and must be enforceable in the normal course of business and in certain circumstances, such as default, insolvency, bankruptcy or the termination of a contract. 2.18 Inventories Inventories, mainly consisting of merchandise for sale, are primarily accounted for using the weighted average method and are stated at the lower of cost and net realisable value. 2.19 Accounts receivable Accounts receivable are amounts due from customers or agents for services performed or merchandise sold in the ordinary course of business. Accounts receivable are presented as current assets unless collection is not expected within 12 months after the end of the reporting period. For the year ended 31 December 2021 FVOCI: Financial assets that are held for collection of contractual cash flows and for selling the financial assets, where the assets' cash flows represent solely payments of principal and interest, are classified as and measured at FVOCI. Movements in the carrying amount of these financial assets are taken through other comprehensive income, except for the recognition of impairment losses or reversals, interest income and foreign exchange gains and losses which are recognised in profit or loss. When the financial asset is derecognised, the cumulative gain or loss previously recognised in other comprehensive income is reclassified from equity to profit or loss and recognised in "Other gains/ (losses), net" in the consolidated income statement. Interest income from these financial assets is recognised using the effective interest method. Foreign exchange gains and losses are presented in "Finance costs, net" and impairment losses or reversals are presented in "Other gains/(losses), net". Investment properties' carrying amounts are written down immediately to their recoverable amounts if their carrying amounts are greater than their estimated recoverable amounts (Note 2.14). • Amortised cost: Financial assets that are held for collection of contractual cash flows where those cash flows represent solely payments of principal and interest are classified as and measured at amortised cost. A gain or loss on a debt investment measured at amortised cost which is not part of a hedging relationship is recognised in profit or loss when the asset is derecognised or impaired. Interest income from these financial assets is recognised using the effective interest method. 00 190 Tencent Holdings Limited Notes to the Consolidated Financial Statements 2 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (continued) For the year ended 31 December 2021 2.10 Investment properties • Depreciation is calculated on the straight-line method to allocate their costs net of their residual values over their estimated useful lives of 20-50 years. Investment properties' residual values and useful lives are reviewed, and adjusted if appropriate, at the end of each reporting period. 2.11 Land use rights Land use rights are up-front payments to acquire long-term interest in land. These payments are stated at cost and charged to the consolidated income statement on a straight-line basis over the remaining period of the lease. 2.12 Intangible assets (a) Goodwill Goodwill on acquisition of subsidiaries is recognised as described in Note 2.2(a) and included in "Intangible assets" in the consolidated financial statements. For the purpose of impairment testing, goodwill acquired in a business combination is allocated to each of the cash-generating units ("CGUs"), or groups of CGUs, that is expected to benefit from the synergies of the combination. Each CGU or group of CGUs to which the goodwill is allocated represents the lowest level within the entity at which the goodwill is monitored for internal management purposes. Gains and losses on disposals are determined by comparing the proceeds with the carrying amount and are recognised in "Other gains/(losses), net" in the consolidated income statement. An asset's carrying amount is written down immediately to its recoverable amount if the asset's carrying amount is greater than its estimated recoverable amount (Note 2.14). Construction in progress represents buildings under construction, which is stated at actual construction costs less any impairment loss. Construction in progress is transferred to property, plant and equipment when completed and ready for use. The assets' residual values and useful lives are reviewed, and adjusted if appropriate, at the end of each reporting period. Notes to the Consolidated Financial Statements For the year ended 31 December 2021 2 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (continued) 2.9 Property, plant and equipment All property, plant and equipment are stated at historical costs less accumulated depreciation and accumulated impairment charges. Historical costs include expenditures that are directly attributable to the acquisition of the items. Subsequent costs are included in the asset's carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the items will flow to the Group and the cost of the items can be measured reliably. The carrying amount of the replaced part is derecognised. All other repairs and maintenance are charged to the consolidated income statement during the reporting period in which they are incurred. Depreciation is calculated using the straight-line method to allocate their cost net of their residual values over their estimated useful lives, as follows: Goodwill impairment reviews are undertaken annually or more frequently if events or changes in circumstances indicate a potential impairment. The carrying amount of the CGU or group of CGUs including the allocated goodwill is compared to the recoverable amount, which is the higher of value in use and the fair value less costs of disposal. Any impairment is recognised immediately under "Other gains/(losses), net" and is not subsequently reversed. 20-50 years Computer and other operating equipment 2~10 years 2-5 years 5 years Shorter of their useful lives and the lease term Furniture and office equipment Motor vehicles Leasehold improvements Buildings Annual Report 2021 Investment properties are held for long-term rental yields and are not occupied by the Group. Investment properties are carried at historical costs less accumulated depreciation and accumulated impairment charges. Historical costs include expenditures that are directly attributable to the acquisition of the items. Notes to the Consolidated Financial Statements (a) Classification and measurement The Group classifies its financial assets in the following measurement categories: • those to be measured subsequently at fair value (either through other comprehensive income, or through profit or loss); and • those to be measured at amortised cost. The classification depends on the Group's business model for managing the financial assets and the contractual terms of the cash flows. Except for accounts receivable, at initial recognition, the Group measures a financial asset at its fair value plus, in the case of a financial asset not at fair value through profit or loss, transaction costs that are directly attributable to the acquisition of the financial asset. Transaction costs of financial assets carried at fair value through profit or loss are expensed in profit or loss. Annual Report 2021 2.15 Investments and other financial assets 193 For the year ended 31 December 2021 2 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (continued) 2.15 Investments and other financial assets (continued) (a) Classification and measurement (continued) Financial assets with embedded derivatives are considered in their entirety when determining whether their cash flows are solely payments of principal and interest. Debt instruments Initial recognition and subsequent measurement of debt instruments depend on the Group's business model for managing the asset and the contractual cash flow characteristics of the asset. There are three categories into which the Group classifies its debt instruments: 191 Assets that have an indefinite useful life or are not yet available for use are not subject to amortisation and are tested annually for impairment, or more frequently if events or changes in circumstances indicate that they might be impaired. Other assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset's carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset's fair value less costs of disposal and value in use. For the purpose of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). Non-financial assets other than goodwill that suffered impairment are reviewed for possible reversal of the impairment at each reporting date. Notes to the Consolidated Financial Statements For the year ended 31 December 2021 2.14 Impairment of non-financial assets For the year ended 31 December 2021 2 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (continued) 2.12 Intangible assets (continued) (b) Media contents mainly include game licenses, video and music contents, and literature copyrights. They are initially recognised and measured at cost or estimated fair value as acquired through business combinations. Media contents are amortised using a straight-line method or an accelerated method which reflects the estimated consumption patterns. (c) Other intangible assets Other intangible assets mainly include trademarks, other copyrights, computer software and technology, non- compete agreements, customer relationships and land with indefinite useful life. They are initially recognised and measured at cost or estimated fair value of intangible assets acquired through business combinations. Land with indefinite useful life is not subject to amortisation and impairment reviews are undertaken annually or more frequently if events or changes in circumstances indicate a potential impairment. Other intangible assets are amortised over their estimated useful lives (generally one to ten years) using the straight-line method which reflects the pattern in which the intangible assets' future economic benefits are expected to be consumed. Media contents The consideration paid by the Share Scheme Trust (see Note 48(f)) for purchasing the Company's shares from the market, including any directly attributable incremental cost, is presented as “Shares held for share award schemes" and the amount is deducted from total equity. When the Share Scheme Trust transfers the Company's shares to the awardees upon vesting, the related costs of the awarded shares vested are credited to "Shares held for share award schemes", with a corresponding adjustment made to "Share premium". 00 192 Tencent Holdings Limited Notes to the Consolidated Financial Statements 2 2.13 Shares held for share award schemes SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (continued) Notes to the Consolidated Financial Statements 2 Tencent Holdings Limited 208 A contract liability is the Group's obligation to transfer goods or services to a customer for which the Group has received consideration (or an amount of consideration is due) from the customer. The Group's contract liabilities mainly comprise virtual items, unamortised pre-paid tokens or cards, Internet traffic and other support to be offered to certain investee companies in the future periods measured at their fair value on the inception dates, and customer loyalty incentives offered to the customers (Note 5(c)). Contract costs include incremental costs of obtaining a contract and costs to fulfil a contract with the customers. The contract costs are amortised using a method which is consistent with the pattern of recognition of the respective revenues. The Group has applied the practical expedient to recognise the contract cost relating to obtaining a contract as an expense when incurred, if otherwise the amortisation period is one year or less. Contract liabilities and contract costs For the year ended 31 December 2021 00 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (continued) Annual Report 2021 Interest income is calculated by applying the effective interest rate to the gross carrying amount of a financial asset except for financial assets that subsequently become credit-impaired. For credit-impaired financial assets the effective interest rate is applied to the net carrying amount of the financial asset (after deduction of the loss allowance). Interest income is presented as “Interest income" where it is mainly earned from financial assets that are held for cash management purposes. 2.30 Dividend income Dividends are received from FVPL and FVOCI. Dividends are recognised in "Other gains/(losses), net" in the consolidated income statement when the right to receive payment is established. This applies even if they are paid out of pre-acquisition profits, unless the dividend clearly represents a recovery of part of the cost of an investment. In this case, the dividend is recognised in other comprehensive income if it relates to an investment measured at FVOCI. 2.31 Government grants/subsidies Grants/Subsidies from government are recognised at their fair values where there is a reasonable assurance that the grants/subsidies will be received and the Group will comply with all attached conditions. Under these circumstances, the grants/subsidies are recognised as income or matched with the associated costs and expenses which the grants/subsidies are intended to compensate. 2.32 Leases The Group leases land (Note 2.11), various buildings, computer and other operating equipment and others. Rental contracts other than land are typically made for fixed periods of no longer than 10 years. Lease terms are negotiated on an individual basis and contain a wide range of different terms and conditions. The lease agreements do not impose any covenants, but leased assets may not be used as security for borrowing purposes. A lease is recognised as a right-of-use asset and a corresponding liability at the date at which the leased asset is available for use by the Group. A right-of-use asset arising from land lease is presented as “Land use rights". 209 (f) 2.29 Interest income The Group reports the revenue on a gross or net basis depending on whether the Group is acting as a principal or an agent in a transaction. The Group is a principal if it controls the specified product or service before that product or service is transferred to a customer or it has a right to direct others to provide the product or service to the customer on the Group's behalf. Indicators that the Group is a principal include but are not limited to whether the Group (i) is the primary obligor in the arrangement; (ii) has latitude in establishing the selling price; (iii) has discretion in supplier selection; (iv) changes the product or performs part of the service, and (v) has involvement in the determination of product or service specifications. 201 (e) (b) Pension obligations The Group participates in various defined contribution retirement benefit plans which are available to all relevant employees. These plans are generally funded through payments to schemes established by governments or trustee-administered funds. A defined contribution plan is a pension plan under which the Group pays contributions on a mandatory, contractual or voluntary basis into a separate fund. The Group has no legal or constructive obligations to pay further contributions if the fund does not hold sufficient assets to pay all employees the benefits relating to employee services in the current and prior years. The Group's contributions to the defined contribution plans are expensed as incurred and not reduced by contributions forfeited by those employees who leave the plans prior to vesting fully in the contributions. (c) Long-term employee benefit obligations In addition to participating in the defined contribution plan as described above, the Group also provides commercial health insurance benefits to certain eligible employees till their resignation or retirement. These obligations are classified as non-current liabilities unless it is expected to be settled wholly within 12 months after the end of the reporting period. These long-term employee benefit obligations are measured as the present value of expected future payments to be made in respect of services provided by employees up to the end of the reporting period using the projected unit credit method. Expected future payments are discounted using market yields at the end of the reporting period of high-quality corporate bonds with terms and currencies that match, as closely as possible, the estimated future cash outflows. For currencies for which there is no deep market in such high-quality corporate bonds, the market yields on government bonds denominated in that currency were applied. Remeasurements as a result of experience adjustments and changes in actuarial assumptions are recognised in profit or loss. 00 202 Tencent Holdings Limited Notes to the Consolidated Financial Statements 2 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (continued) For the year ended 31 December 2021 2.26 Employee benefits (continued) (d) Long-term service awards The Group recognises a liability and an expense for long-term service awards where cash is paid to retired employees qualified for certain criteria as one-off retirement bonus and it was considered as defined benefit plan. The method of accounting is similar to those used for long-term employee benefits as described above, except that remeasurement gains and losses arising from experience adjustments and changes in actuarial assumptions are recognised in other comprehensive income in the period in which they occur. (e) Share-based compensation benefits The Group operates a number of share-based compensation plans (including share option schemes and share award schemes), under which the Group receives services from employees and other qualifying participants as consideration for equity instruments (including share options and awarded shares) of the Group. The fair value of the employee services and other qualifying participants' services received in exchange for the grant of equity instruments of the Group is recognised as an expense over the vesting period, i.e. the period over which all of the specified vesting conditions are to be satisfied and credited to equity. For grant of share options, the total amount to be expensed is determined by reference to the fair value of the options granted by using option-pricing model, “Enhanced FAS 123" binomial model (the “Binomial Model"), which includes the impact of market performance conditions (such as the Company's share price) but excludes the impact of service condition and non-market performance conditions. For grant of award shares, the total amount to be expensed is determined by reference to the market price of the Company's shares at the grant date. The Group also adopts valuation and actuarial techniques to assess the fair value of other equity instruments of the Group granted under the share-based compensation plans as appropriate. Non-market performance and service conditions are included in assumptions about the number of options that are expected to become vested. From the perspective of the Company, the grants of its equity instruments to employees of its subsidiaries are made in exchange for their services related to the subsidiaries. Accordingly, the share-based compensation expenses are treated as part of the “Investments in subsidiaries” or “Other receivables” in the Company's statement of financial position. Annual Report 2021 203 Notes to the Consolidated Financial Statements For the year ended 31 December 2021 2 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (continued) Employee entitlements to annual leave are recognised when they are accrued to employees. A provision is made for the estimated liability for annual leave as a result of services rendered by employees up to the end of the reporting period. Employee entitlements to sick and maternity leave are not recognised until the time of leave. (a) Employee leave entitlements SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (continued) 2 Principal agent consideration Notes to the Consolidated Financial Statements For the year ended 31 December 2021 2 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (continued) 2.24 Borrowings, notes payable and borrowing costs Borrowings and notes payable issued by the Group are recognised initially at fair value, net of transaction costs incurred. They are subsequently carried at amortised cost. Any difference between proceeds (net of transaction costs) and the redemption value is recognised in the consolidated income statement over their terms using the effective interest method. Fees paid on the establishment of loan facilities are recognised as transaction costs of the loan facilities to the extent that it is probable that some or all of the facility will be drawn down. In this case, the fee is deferred until the draw-down occurs. To the extent there is no evidence that it is probable that some or all of the facility will be drawn down, the fee is capitalised as a prepayment for liquidity services and amortised over the term of the facility to which it relates. Borrowings and notes payable are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the end of the reporting period. General and specific finance costs directly attributable to the acquisition and construction of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets, until such time as the assets are substantially ready for their intended use or sale. During the year ended 31 December 2021, finance cost capitalised was insignificant to the Group. 2.25 Current and deferred income tax The income tax expense for the year comprises current and deferred income tax, which is recognised in the consolidated income statement, except to the extent that it relates to items recognised in other comprehensive income or directly in equity. In this case, the income tax is also recognised in other comprehensive income or in equity, respectively. The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the end of the reporting period in the countries where the Company's subsidiaries operate and generate taxable income. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation and considers whether it is probable that a taxation authority will accept an uncertain tax treatment. When it is not probable, the Group measures its tax balances either based on the most likely amount or the expected value, depending on which method provides a better prediction of the resolution of the uncertainty. 00 2.26 Employee benefits (continued) 200 2 Notes to the Consolidated Financial Statements For the year ended 31 December 2021 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (continued) 2.25 Current and deferred income tax (continued) Deferred income tax is recognised, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, deferred income tax is not accounted for if it arises from initial recognition of goodwill or of an asset or liability in a transaction other than a business combination that at the time of the transaction neither accounting nor taxable profit or loss is affected. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantively enacted by the end of the reporting period and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled. Deferred income tax assets are recognised only to the extent that it is probable that future taxable profit will be available to utilise those temporary differences and tax losses. Deferred income tax liabilities are provided on temporary differences arising from investments in subsidiaries, associates and joint ventures, except for deferred income tax liability where the timing of the reversal of the temporary differences is controlled by the Group and it is probable that the temporary difference will not reverse in the foreseeable future. Generally, the Group is unable to control the reversal of the temporary difference for associates and joint ventures. Only when there is an agreement in place that gives the Group the ability to control the reversal of the temporary difference in the foreseeable future, deferred income tax liability in relation to taxable temporary differences arising from the associates' and joint ventures' undistributed profit is not recognised. Deferred income tax assets are recognised on deductible temporary differences arising from investments in subsidiaries, associates and joint arrangements only to the extent that it is probable the temporary difference will reverse in the future and there is sufficient taxable profit available against which the temporary difference can be utilised. Deferred income tax assets and liabilities are offset where there is a legally enforceable right to offset current tax assets against current tax liabilities and where the deferred income tax assets and liabilities relate to income taxes levied by the same taxation authority on either the taxable entity or different taxable entities where there is an intention to settle the balances on a net basis. Annual Report 2021 Notes to the Consolidated Financial Statements For the year ended 31 December 2021 Tencent Holdings Limited (e) Share-based compensation benefits (continued) 2.26 Employee benefits When the options are exercised, the proceeds received net of any directly attributable transaction costs are credited to share capital (nominal value) and share premium. When the vested equity instruments are later forfeited prior to expiry date, the amount previously recognised in share premium will be transferred to retained earnings. The Group adopts different revenue recognition methods based on its specific responsibilities/obligations in different VAS offerings. 00 206 Tencent Holdings Limited Notes to the Consolidated Financial Statements 2 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (continued) For the year ended 31 December 2021 2.28 Revenue recognition (continued) (b) Online Advertising Online Advertising revenues mainly comprise revenues derived from media advertisements and from social and other advertisements, depending on the placement of advertising properties and inventories. Advertising contracts are signed to establish the prices and advertising services to be provided based on different arrangements, including display-based advertising that are display of ads for an agreed period of time, and performance-based advertising that are based on actual performance measurement. The Group also opens its online platforms to third-party game/application developers under certain co- operation agreements, of which the Group pays to the third-party game/application developers a pre- determined percentage of the fees paid by and collected from the users of the Group's online platforms for the virtual items purchased. The Group recognises the related revenue on a gross or net basis depending on whether the Group is acting as a principal or an agent in the transaction. Revenue from display-based advertising is recognised on number of display/impression basis or depending on the contractual measures. Revenue from performance-based advertising is recognised when relevant specific performance measures are fulfilled. Where the contracts include multiple performance obligations, the Group allocates the transaction price to each performance obligation on a relative stand-alone selling price basis, which is determined based on the prices charged to or expected to recover from customers. FinTech and Business Services revenues mainly comprise revenues derived from provision of FinTech and cloud services. FinTech service revenues mainly include commissions from payment, wealth management and other FinTech services, which are generally determined as a percentage based on the value of transaction amount or retention amount. Revenue related to such commissions is recognised upon a point in time when the Group satisfies its performance obligations by rendering services. Cloud services are mainly charged on either a subscription or consumption basis. For cloud service contracts billed based on a fixed amount for a specified service period, revenue is recognised over the subscribed period when the services are delivered to customers. For cloud service provided on a consumption basis, revenue is recognised based on the customer utilisation of the resources. When a cloud-based service includes multiple performance obligations, the Group allocates the transaction price to each performance obligation on a relative stand-alone selling price basis, which is determined based on the prices charged to or expected to recover from customers. Annual Report 2021 207 Notes to the Consolidated Financial Statements For the year ended 31 December 2021 2 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (continued) 2.28 Revenue recognition (continued) (d) Other revenues At each reporting period end, the Group revises the estimates of the number of options and awarded shares that are expected to ultimately vest. It recognises the impact of the revision to original estimates, if any, in the consolidated income statement of the Group, with a corresponding adjustment to equity. The Group's other revenues are primarily derived from production of and distribution of, films and television programmes for third parties, copyrights licensing, merchandise sales and various other activities. The Group recognises other revenues when the respective services are rendered, or when the control of the products is transferred to customers. FinTech and Business Services In respect of the Group's VAS directly delivered to the Group's customers and paid through various third- party platforms, these third-party platforms collect the relevant service fees (the “Online Service Fees") on behalf of the Group and they are entitled to a pre-determined percentage of platform provider fees (as part of "Channel and distribution costs"). Such Channel and distribution costs are withheld and deducted from the gross Online Service Fees collected by these platforms from the users, with the net amounts remitted to the Group. The Group recognises the Online Service Fees as revenue on a gross or net basis depending on whether the Group is acting as a principal or an agent in these transactions based on the assessment according to the criteria stated in (e) below. (c) Where the contracts include multiple performance obligations, the Group allocates the transaction price to each performance obligation on a relative stand-alone selling price basis, which is determined based on the prices charged to or expected to recover from customers. If the Group repurchases vested equity instruments, the payments made to the employees and other qualifying participants shall be accounted for as a deduction from equity, except to the extent that the payment exceeds the fair value of the equity instruments repurchased, measured at the repurchase date. Any such excess shall be recognised as an expense. If the terms of an equity-settled award are modified, at a minimum an expense is recognised as if the terms had not been modified. An additional expense is recognised for any modification that increases the total fair value of the share-based payment arrangement, or is otherwise beneficial to the employees and other qualifying participants, as measured at the date of modification. Cash-settled share-based payment transactions are those arrangements which the terms provide the Group to settle the transaction in cash. Upon the satisfaction of the vesting conditions, the Group shall account for that transaction as a cash-settled share-based payment transaction if, and to the extent that, the Group has incurred a liability to settle in cash. For cash-settled share-based payments, a liability equal to the portion of the services received is recognised at the current fair value determined at the end of the reporting period. 00 204 Tencent Holdings Limited Notes to the Consolidated Financial Statements SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (continued) For the year ended 31 December 2021 2.27 Provisions Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events; it is probable that an outflow of resources will be required to settle the obligation; and the amount can be reliably estimated. Provisions are not recognised for future operating losses. Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognised even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small. Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in the provision due to passage of time is recognised as interest expense. 2 For the year ended 31 December 2021 The Group generates revenues primarily from provision of VAS, Online Advertising services, FinTech and Business Services, and other online related services in the PRC. Revenue is recognised when the control of the goods or services is transferred to a customer. Depending on the terms of the contract and the laws that apply to the contract, control of the goods and services may be transferred over time or at a point in time. (a) VAS Revenues from VAS primarily include revenues from the provision of online games and social networks services. Online games revenues are mainly derived from sales of in-game virtual items, and social networks revenues are mainly derived from sales of virtual items such as VAS subscriptions across various online platforms, and games revenues attributable to social networks business. The Group offers virtual items to users on the Group's online platforms. The VAS fees are paid directly by end users mainly via online payment channels. Revenue from VAS is recognised when the Group satisfies its performance obligations by rendering services. Given that there is an explicit or implicit obligation of the Group to maintain the virtual items operated on the Group's platforms and allow users to gain access to them, revenue is recognised over the estimated lifespans of the respective virtual items. The estimated lifespans of different virtual items are determined by the management based on either the expected user relationship periods or the stipulated period of validity of the relevant virtual items depending on the respective term of virtual items. VAS (continued) Annual Report 2021 205 Notes to the Consolidated Financial Statements 2 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (continued) 2.28 Revenue recognition (continued) (a) 2.28 Revenue recognition 1,195 (8,650) As at 31 December 2020 (721) (406) Monetary assets, current 4 3,902 Monetary assets, non-current 34 Monetary liabilities, current (5,241) 10,238 Monetary liabilities, non-current denominated (6,224) Monetary liabilities, current Monetary assets, non-current 4,587 11,059 Monetary assets, current As at 31 December 2021 RMB'Million RMB'Million Non-USD denominated As at 31 December 2021, the Group's major monetary assets and liabilities exposed to foreign exchange risk are listed below: USD (2,408) (2,671) Monetary liabilities, non-current (a) Market risk (continued) (1,021) The Group manages its foreign exchange risk by performing regular reviews of the Group's net foreign exchange exposures. The Group's income and operating cash flows are substantially independent of changes in market interest rates and the Group has no significant interest-bearing assets except for loans to investees and investees' shareholders, term deposits with initial terms of over three months, restricted cash and cash and cash equivalents, details of which have been disclosed in Notes 26, 29 and 31. (iii) Interest rate risk For the year ended 31 December 2021 Financial risk factors (continued) 3.1 FINANCIAL RISK MANAGEMENT (continued) 3 Notes to the Consolidated Financial Statements Tencent Holdings Limited Sensitivity analysis is performed by management to assess the exposure of the Group's financial results to equity price risk of FVPL and FVOCI at the end of each reporting period. If prices of the respective instruments held by the Group had been 5% (31 December 2020: 5%) higher/lower as at 31 December 2021, profit for the year would have been approximately RMB9,815 million (2020: RMB8,326 million) higher/lower as a result of gains/losses on financial instruments classified as at FVPL, other comprehensive income would have been approximately RMB12,348 million (2020: RMB10,529 million) higher/lower as a result of gains/losses on financial instruments classified as at FVOCI. The Group is exposed to equity price risk mainly arising from investments held by the Group that are classified either as FVPL (Note 24) or FVOCI (Note 25). To manage its price risk arising from the investments, the Group diversifies its investment portfolio. The investments are made either for strategic purposes, or for the purpose of achieving investment yield and balancing the Group's liquidity level simultaneously. Each investment is managed by management on a case by case basis. 214 00 (6,663) Price risk As at 31 December 2021, management considers that any reasonable changes in foreign exchange rates of the above currencies against the two major functional currencies would not result in a significant change in the Group's results, as the net carrying amounts of financial assets and liabilities denominated in a currency other than the respective subsidiaries' functional currencies are considered to be not significant. Accordingly, no sensitivity analysis is presented for foreign exchange risk. During the year ended 31 December 2021, the Group reported exchange gains of approximately RMB804 million (2020: exchange losses of approximately RMB438 million) within "Finance costs, net" in the consolidated income statement. Foreign exchange risk (continued) (i) (a) Market risk (continued) 3.1 Financial risk factors (continued) FINANCIAL RISK MANAGEMENT (continued) 3 For the year ended 31 December 2021 Notes to the Consolidated Financial Statements 213 Annual Report 2021 477 (5,041) (ii) The Group operates internationally and is exposed to foreign exchange risk arising from various currency exposures, primarily with respect to Hong Kong Dollars ("HKD"), USD and Euro ("EUR"). Foreign exchange risk arises when future commercial transactions or recognised assets and liabilities are denominated in a currency that is not the respective functional currency of the Group's subsidiaries. The functional currency of the Company and majority of its overseas subsidiaries is USD whereas the functional currency of the subsidiaries which operate in the PRC is RMB. Assets and liabilities arising from a lease are initially measured on a present value basis. Lease liabilities include the net present value of the following lease payments: Foreign exchange risk If a readily observable amortising loan rate is available to the individual lessee (through recent financing or market data) which has a similar payment profile to the lease, then the Group entities use that rate as a starting point to determine the incremental borrowing rate. 2.32 Leases (continued) For the year ended 31 December 2021 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (continued) 2 Notes to the Consolidated Financial Statements 210 Tencent Holdings Limited 00 makes adjustments specific to the lease, e.g. term, country, currency and security. uses a build-up approach that starts with a risk-free rate adjusted for credit risk for leases held by the Group, which does not have recent third-party financing; and where possible, uses recent third-party financing received by the individual lessee as a starting point, adjusted to reflect changes in financing conditions since third-party financing was received; • To determine the incremental borrowing rate, the Group: The lease payments are discounted using the interest rate implicit in the lease. If that rate cannot be readily determined, which is generally the case for leases in the Group, the lessee's incremental borrowing rate is used, being the rate that the individual lessee would have to pay to borrow the funds necessary to obtain an asset of similar value to the right-of-use asset in a similar economic environment with similar terms, security and conditions. payments of penalties for terminating the lease, if the lease term reflects the lessee exercising that option. • the exercise price of a purchase option if the lessee is reasonably certain to exercise that option; and • amounts expected to be payable by the lessee under residual value guarantees; . variable lease payments that are based on an index or a rate; . fixed payments (including in-substance fixed payments), less any lease incentives receivable; • If the interest rate of term deposits with initial terms of over three months had been 50 basis points higher/lower, the profit before income tax for the year ended 31 December 2021 would have been RMB517 million (2020: RMB501 million) higher/lower. If the interest rate of cash and cash equivalents had been 50 basis points higher/lower, the profit before income tax for the year ended 31 December 2021 would have been RMB840 million (2020: RMB764 million) higher/lower. 2.32 Leases (continued) 2 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (continued) For the year ended 31 December 2021 Notes to the Consolidated Financial Statements Lease payments are allocated between principal and finance cost. The finance cost is charged to profit or loss over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. Right-of-use assets are measured at cost comprising the following: • the amount of the initial measurement of lease liability; • (i) (a) Market risk 3.1 Financial risk factors (continued) FINANCIAL RISK MANAGEMENT (continued) 3 Notes to the Consolidated Financial Statements Tencent Holdings Limited 212 00 The Group's activities expose it to a variety of financial risks: market risk (including foreign exchange risk, price risk and interest rate risk), credit risk and liquidity risk. The Group's overall risk management strategy seeks to minimise the potential adverse effects on the financial performance of the Group. Risk management is carried out by the management of the Group. 3.1 Financial risk factors FINANCIAL RISK MANAGEMENT 3 Costs incurred on development projects (relating to the design and testing of new or improved products) are capitalised when recognition criteria are fulfilled and tests for impairment are performed annually. Other development expenditures that do not meet those criteria are recognised as expenses as incurred. Development costs previously recognised as expenses are not recognised as assets in subsequent periods. For the year ended 31 December 2021 Research expenditure is recognised as an expense as incurred. The non-cash assets to be distributed are presented as “Assets held for distribution" in the consolidated statement of financial position. In respect of a dividend by way of distribution of non-cash assets, the liability to distribute the non-cash assets as a dividend is measured at the fair value of the assets to be distributed on the declaration date. At the end of the reporting period and at the date of settlement, the Group reviews and adjusts the carrying amount of the dividend liability, and any subsequent change in the fair value of the dividend liability is recognised in equity as an adjustment to the amount of the dividend distribution. Upon settlement, the difference between the fair value of the assets distributed, which is also the carrying amount of the dividend liability, and the carrying amount of the assets distributed, if any, is recognised in profit or loss. Dividends distribution to the Company's shareholders is recognised as a liability in the Group's and Company's financial statements in the period in which the dividend is approved by the Company's shareholders or board of directors where appropriate and no longer at the discretion of the Group. 2.33 Dividends distribution 2 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (continued) For the year ended 31 December 2021 Notes to the Consolidated Financial Statements Annual Report 2021 211 Payments associated with short-term leases are recognised on a straight-line basis as an expense in profit or loss. Short-term leases are leases with a lease term of 12 months or less without a purchase option. A right-of-use asset is generally depreciated over the shorter of the asset's useful life and the lease term on a straight-line basis. If the Group is reasonably certain to exercise a purchase option, the right-of-use asset is depreciated over the underlying asset's useful life. restoration costs. any initial direct costs; and • any lease payments made at or before the commencement date less any lease incentives received; 2.34 Research and development expenses The Group's exposure to changes in interest rates is also attributable to its borrowings and notes payable, details of which have been disclosed in Notes 36 and 37, representing a substantial portion of the Group's debts. Borrowings and notes payable carried at floating rates expose the Group to cash flow interest-rate risk whereas those carried at fixed rates expose the Group to fair value interest-rate risk. 3.1 Financial risk factors (continued) The Group entered into certain interest rate swap contracts to hedge its exposure arising from borrowings and senior notes carried at floating rates. Under these interest rate swap contracts, the Group agreed with the counterparties to exchange, at specified interval, the difference between fixed contract rates and floating-rate interest amounts calculated by reference to the agreed notional amounts. These interest rate swap contracts had the economic effect of converting borrowings and senior notes from floating rates to fixed rates and were qualified for hedge accounting. Details of the Group's outstanding interest rate swap contracts as at 31 December 2021 are mainly disclosed in both Note 27 and 39. 3.1 Financial risk factors (continued) FINANCIAL RISK MANAGEMENT (continued) 3 For the year ended 31 December 2021 Notes to the Consolidated Financial Statements Management is closely monitoring the progress of the alternative selection and assessing the potential impacts on a continuous basis. It is expected that the transition will be completed before 30 June 2023, and no significant impact arose during the year ended 31 December 2021. 148,880 1,253 148,880 1,253 to USD LIBOR Total assets and liabilities exposed 358 358 1,253 1,253 Other financial liabilities Other financial assets Measured at fair value 7,970 140,552 140,552 7,970 Liabilities RMB'Million RMB'Million Assets Liabilities RMB'Million RMB'Million Assets Carrying amount at 31 December 2021 (b) Credit risk The Group is exposed to credit risk in relation to its cash and deposits placed with banks and financial institutions, accounts receivable, other receivables, as well as short-term investments measured at amortised cost, at FVOCI and at FVPL. The carrying amount of each class of these financial assets represents the Group's maximum exposure to credit risk in relation to the corresponding class of financial assets. The majority of the balances of accounts receivable are due from online advertising customers and agencies, content production related customers, FinTech and cloud customers and third party platform providers. To manage the risk arising from accounts receivable, the Group has policies in place to ensure that revenues of credit terms are made to counterparties with an appropriate credit history and the management performs ongoing credit evaluations of its counterparties. The credit periods granted to these customers are disclosed in Note 30 and the credit quality of these customers is assessed, which takes into account their financial position, past experience and other factors. The Group has a large number of customers and there is no significant concentration of credit risk. Other receivables are mainly comprised of receivables related to financial services, interest receivables, loans to investees and investees' shareholders, lease deposits and other receivables. Management manages the loans by category, makes periodic assessments as well as individual assessment on the recoverability of other receivables based on historical settlement records and past experience. 219 Annual Report 2021 The Group applies the simplified approach to provide for expected credit losses prescribed by IFRS 9, which permits the use of the lifetime expected loss provision for all accounts receivable. In view of the sound financial position and collection history of receivables due from these counterparties and insignificant risk of default, to measure the expected credit losses, accounts receivable have been grouped based on shared credit risk characteristics and the days past due. Credit risk of accounts receivable To manage this risk, the Group only makes transactions with state-owned banks and financial institutions in the PRC and reputable international banks and financial institutions outside of the PRC. There has been no recent history of default in relation to these banks and financial institutions. The expected credit loss is close to zero. (!!) Credit risk of cash and deposits (i) significant changes in the expected performance and behavior of the counterparty, including changes in the payment status of the counterparty. actual or expected significant changes in the operating results of the counterparty; and actual or expected significant adverse changes in business, financial economic conditions that are expected to cause a significant change to the counterparty's ability to meet its obligations; • external credit rating (as far as available); • Of which: Have not yet to transitioned to an alternative benchmark interest rate as at 31 December 2021 • internal credit rating; The Group considers the credit risk characteristics of different financial instruments when determining if there is significant increase in credit risk. For financial instruments with or without significant increase in credit risk, lifetime or 12-month expected credit losses are provided respectively. (b) Credit risk (continued) 3.1 Financial risk factors (continued) For the year ended 31 December 2021 FINANCIAL RISK MANAGEMENT (continued) 3 Notes to the Consolidated Financial Statements Tencent Holdings Limited Stage 3: If the financial instrument is credit-impaired, the financial instrument is included in stage 3. Stage 2: If the credit risk has increased significantly since its initial recognition but not yet deemed to be credit-impaired, the financial instrument is included in stage 2. Stage 1: If the credit risk has not increased significantly since its initial recognition, the financial asset is included in stage 1. 218 00 For financial assets whose impairment losses are measured using expected credit loss model, the Group assesses whether their credit risk has increased significantly since their initial recognition, and applies a three-stage impairment model to calculate their impairment allowance and recognise their expected credit losses, as follows: The Group considers the probability of default upon initial recognition of asset and whether there has been a significant increase in credit risk on an ongoing basis throughout each of the years. To assess whether there is a significant increase in credit risk, the Group compares risk of a default occurring on the assets as at year end with the risk of default as at the date of initial recognition. In particular, the following indicators are incorporated: The Group regularly monitors its interest rate risk to identify if there are any undue exposures to significant interest rate movements and manages its cash flow interest rate risk by using interest rate swaps, whenever considered necessary. Notes payable Measured at amortised cost (1,937) (249) (109) 4 1,253 1 Changes in fair value of outstanding hedging instruments Hedge ratio Maturity date Notional amount Carrying amount (non-current liabilities) Carrying amount (current liabilities) Carrying amount (non-current assets) Carrying amount (current assets) RMB'Million RMB'Million 2020 2021 Interest rate swaps The effects of the interest rate swaps on the Group's financial position and performance are as follows: (iii) Interest rate risk (continued) (a) Market risk (continued) 3.1 Financial risk factors (continued) FINANCIAL RISK MANAGEMENT (continued) 3 For the year ended 31 December 2021 Notes to the Consolidated Financial Statements 215 Annual Report 2021 104,708 100,889 2022/3/29 - 2021/6/15 ~ Assets and liabilities exposed to USD LIBOR The LIBOR benchmark in the aforesaid floating-rate borrowings and notes payable in which the Group continues to have hedging instrument is USD LIBOR. The following table contains details of all the financial instruments that the Group held at 31 December 2021 which reference USD LIBOR and have not yet transitioned to an alternative interest rate benchmark: (iii) Interest rate risk (continued) (a) Market risk (continued) FINANCIAL RISK MANAGEMENT (continued) 3 For the year ended 31 December 2021 Notes to the Consolidated Financial Statements Tencent Holdings Limited 216 00 As at 31 December 2021 and 2020, management considered that any reasonable changes in the interest rates would not result in a significant change in the Group's results as the Group's exposure to cash flow interest-rate risk arising from its borrowings and notes payable carried at floating rates after considering the effect of hedging is considered to be insignificant. Swaps currently in place covered majority of the floating-rate borrowings and notes payable principal outstanding. 100,889 Borrowings 104,708 0.77% Notional amount directly impacted by IBOR reform Weighted average hedged rate for the year effectiveness (1,552) 2,796 Change in value of hedged item used to determine hedge since 1 January (1,552) 2,796 1:1 1:1 2024/12/23 2026/2/24 0.88% Annual Report 2021 217 RMB'Million 224 Tencent Holdings Limited 00 5,309 3,352 1,957 Other financial liabilities 1,129 9 1,120 Other financial assets 213,091 Notes to the Consolidated Financial Statements 13,626 FVOCI 172,537 139,271 5,646 27,620 FVPL As at 31 December 2020 102,451 102,451 in specie (Note) Dividends payable for distribution 199,465 3 FINANCIAL RISK MANAGEMENT (continued) 3.3 Fair value estimation (continued) Financial assets Business combinations Additions Opening balance During the year ended 31 December 2021, there was no transfer between level 1 and 2 for recurring fair value measurements. Transfers in and out of level 3 measurements are set out in the following table, which presents the changes of financial instruments in level 3 for the years ended 31 December 2021 and 2020: 3.3 Fair value estimation (continued) 00 FINANCIAL RISK MANAGEMENT (continued) 3 For the year ended 31 December 2021 Notes to the Consolidated Financial Statements Annual Report 2021 225 instruments. Other techniques, such as discounted cash flow analysis, are used to determine fair value for financial The fair value of interest rate swaps is calculated as the present value of the estimated future cash flows based on observable yield curves; and • • • Dealer quotes for similar instruments; Specific valuation techniques used to value financial instruments mainly include: If one or more of the significant inputs are not based on observable market data, the instrument is included in level 3. The fair value of financial instruments that are not traded in an active market is determined by using valuation techniques. These valuation techniques maximise the use of observable market data where it is available and rely as little as possible on entity specific estimates. If all significant inputs required for evaluating the fair value of a financial instrument are observable, the instrument is included in level 2. The fair value of financial instruments traded in active markets is determined with reference to quoted market prices at the end of the reporting period. A market is regarded as active if quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service, or regulatory agency, and those prices represent actual and regularly occurring market transactions on an arm's length basis. These instruments are included in level 1. It represented the dividend liability resulting from distribution in specie which was measured at fair value of JD.com Inc. ("JD. com") shares to be distributed (Note 15(b)). For the year ended 31 December 2021 Note: 2,802 Financial liabilities 2,444 17 3 For the year ended 31 December 2021 Notes to the Consolidated Financial Statements 223 Annual Report 2021 Adjusted EBITDA represents operating profit less interest income and other gains/(losses), net, and adding back depreciation of property, plant and equipment, investment properties as well as right-of-use assets, amortisation of intangible assets and land use rights, and equity-settled share-based compensation expenses. 1.36 1.55 183,314 194,798 248,444 3.3 Fair value estimation 301,529 145,590 126,387 155,939 RMB'Million RMB'Million 2020 2021 As at 31 December Note: Total debts/Adjusted EBITDA ratio Adjusted EBITDA (Note) 122,057 The table below analyses the Group's financial instruments carried at fair value as at 31 December 2021 by level of the inputs to valuation techniques used to measure fair value. Such inputs are categorised into three levels within a fair value hierarchy as follows: • • 1,709 358 Other financial liabilities Other financial assets 102,451 102,451 -- Assets held for distribution 250,257 22,469 227,788 FVOCI 202,757 171,122 8,069 23,566 As at 31 December 2021 FVPL RMB'Million Total Level 3 RMB'Million RMB'Million RMB'Million Level 2 Level 1 Inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs) (level 3). Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices) (level 2); and Quoted prices (unadjusted) in active markets for identical assets or liabilities (level 1); 1,726 2021 2020 2021 Annual Report 2021 -0.58%-5.39% 0.15%-5.35% Risk-free rate 27% 63% Depends on rights and restrictions of shares held by the Group FVPL and FVOCI companies in 29%-70% 147,132 Expected volatility 185,774 Investments in unlisted RMB'Million 227 2020 2020 2021 RMB'Million to fair value Relationship of unobservable inputs Range of inputs as at 31 December Significant unobservable inputs Fair value as at 31 December Description The following table summarises the quantitative information about the significant unobservable inputs used in level 3 fair value measurements of investments in unlisted companies. etc. The components of the level 3 instruments mainly include investments in unlisted companies classified as FVPL or FVOCI, other financial assets, and other financial liabilities. Other financial liabilities mainly include contingent consideration payable related to certain business combinations. As these investments and instruments are not traded in an active market, the majority of their fair values have been determined using applicable valuation techniques including comparable companies approach, comparable transactions approach and other option pricing approach. These valuation approaches require significant judgments, assumptions and inputs, including risk-free rates, expected volatility, relevant underlying financial projections, and market information of recent transactions (such as recent fund-raising transactions undertaken by the investees) and other exposure, 2021 Notes to the Consolidated Financial Statements For the year ended 31 December 2021 3 Annual Report 2021 229 Judgment is required to identify any impairment indicators existing for any of the Group's goodwill and other non- financial assets, to determine appropriate impairment approaches, i.e., fair value less costs of disposal or value in use, for impairment review purposes, and to select key assumptions applied in the adopted valuation models, including discounted cash flows and market approach. Changing the assumptions selected by management in assessing impairment could materially affect the result of the impairment test and in turn affect the Group's financial condition and results of operations. If there is a significant adverse change in the key assumptions applied, it may be necessary to take additional impairment charge to the consolidated income statement. The Group tests annually whether goodwill has suffered any impairment. Goodwill and other non-financial assets, mainly including property, plant and equipment, construction in progress, other intangible assets, investment properties, land use rights, right-of-use assets as well as investments in associates and joint ventures are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be fully recoverable. The recoverable amounts have been determined based on value-in-use calculations or fair value less costs of disposal. These calculations require the use of judgments and estimates. (b) Recoverability of non-financial assets The Group will continue to monitor the average lifespans of the virtual items. The results may differ from the historical period, and any change in the estimates may result in the revenue being recognised on a different basis from that in prior periods. (a) The estimates of the lifespans of virtual items provided on the Group's online platforms (continued) Significant judgments are required in determining the expected users' relationship periods, including but not limited to historical users' consumption patterns, churn out rate and reactivity on marketing activities, games life- cycle, and the Group's marketing strategy. The Group has adopted a policy of assessing the estimated lifespans of virtual items on a regular basis whenever there is any indication of change in the expected users' relationship periods. CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS (continued) 4 For the year ended 31 December 2021 Notes to the Consolidated Financial Statements Tencent Holdings Limited 228 00 As mentioned in Note 2.28(a), the end users purchase certain virtual items provided on the Group's online platforms and the relevant revenue is recognised based on the estimated lifespans of the virtual items. The estimated lifespans of different virtual items are determined by the management based on either the expected users' relationship periods or the stipulated period of validity of the relevant virtual items depending on the respective terms of virtual items. (a) The estimates of the lifespans of virtual items provided on the Group's online platforms The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal to the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are addressed below: Estimates and judgments are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS 4 For the fair value of contingent consideration related to business combination, if growth rate of net profit had been 5% higher or lower as at 31 December 2021, the fair value would have increased by approximately RMB36 million (2020: RMB73 million) or decreased by approximately RMB45 million (2020: RMB97 million). If the expected volatility had been 5% higher or lower as at 31 December 2021, the fair value would have decreased by approximately RMB37 million (2020: RMB66 million) or increased by approximately RMB41 million (2020: RMB66 million). For the fair value of the Group's investments in unlisted companies, the sensitivity analysis is performed by management, see Note 3.1(a)(ii) for details. For contingent consideration related to a business combination of a subsidiary, which is principally engaged in the television series and film production business, the significant unobservable inputs are growth rate of net profit and expected volatility, which are 10% (31 December 2020: 15%) and 30% (31 December 2020: 35%), respectively. The higher the growth rate, the higher the fair value; and the higher the expected volatility, the lower the fair value. Note: (continued) 3.3 Fair value estimation (continued) FINANCIAL RISK MANAGEMENT (continued) The Group has a team of personnel who performs valuation on these level 3 instruments for financial reporting purposes. The team performs valuation, or necessary updates, at least once every quarter, which coincides with the Group's quarterly reporting dates. On an annual basis, the team adopts various valuation techniques to determine the fair value of the Group's level 3 instruments. External valuation experts may also be involved and consulted when it is necessary. Valuation processes inputs and relationships to fair value (Level 3) During the years ended 31 December 2021 and 2020, transfers from level 3 to level 1 were mainly due to the successful Initial Public Offerings ("IPOS") of existing investees. For the year ended 31 December 2021 2,133 17,120 comprehensive income Changes in fair value recognised in other Transfers Disposals/Settlements (41,653) (90,778) (1,246) (803) (4,902) (11,333) 10 2,142 102 56,393 79,756 1,873 3,352 123,093 152,906 RMB'Million RMB'Million RMB'Million 2020 Changes in fair value recognised in profit or loss* Total debts 52,076 (46) Note: 3.3 Fair value estimation (continued) FINANCIAL RISK MANAGEMENT (continued) 3 Notes to the Consolidated Financial Statements 226 Tencent Holdings Limited 636 (113) 11,032 12,053 reporting period to balances held at the end of the recognised in profit or loss attributable *Includes unrealised gains/(losses) 3,352 2,444 152,906 193,608 Closing balance (52) (161) (7,916) (6,139) Currency translation differences 635 25,748 Notes payable (Note 37) FINANCIAL RISK MANAGEMENT (continued) The Group assesses its creditworthiness based on its business and financial risk profile and monitors its capital by regularly reviewing its debts to adjusted earnings before interest, tax, depreciation and amortisation ("EBITDA") (Note) ratio, being the measure of the Group's ability to pay off all of its debts which in turn reflects the Group's financial health and liquidity position. The total debts/adjusted EBITDA ratio calculated by dividing the total debts by adjusted EBITDA is as follows: 24,321 3,711 9,541 5,192 5,877 Lease liabilities 161,494 6 131,505 9,046 20,937 Borrowings 10,060 51 4,092 5,917 Long-term payables Other financial liabilities 3,795 2,117 2,848 172 77 109 Other financial liabilities Derivatives: 102,451 102,451 in specie 213,859 Dividends payable for distribution 140,690 costs and welfare accruals) customers and others, staff prepayments received from and accruals (excluding Accounts payable, other payables 9,776 1,016 140,690 152,539 42,196 14,268 Notes to the Consolidated Financial Statements Tencent Holdings Limited 220 00 Management considers the credit risk of other receivables is insignificant when they have a low risk of default and the issuer has a strong capacity to meet its contractual cash flow obligations in the near term, and the loss allowance recognised is therefore limited to 12 months expected losses. In view of insignificant risk of default and credit risk since initial recognition, management believes that the expected credit loss under the 12 months expected losses method is immaterial. (iii) Credit risk of other receivables Impairment losses on accounts receivables are presented as net impairment losses within operating profit. Subsequent recoveries of amounts previously written off are credited against the same item. A default on accounts receivable occurs when the counterparty fails to make contractual payments within 90 days when they fall due. To measure the expected credit losses, accounts receivable are grouped on the basis of shared credit risk characteristics, such as industry, with the objective of facilitating an analysis to identify significant increases in credit risk and recognition of loss allowance on a timely basis. Accounts receivable are written off, in whole or in part, when it has exhausted all practical recovery efforts and has concluded that there is no reasonable expectation of recovery. Indicators that there is no reasonable expectation of recovery include, amongst others, the failure of a debtor to engage in a repayment plan within the Group, and a failure to make contractual payments for a period of greater than 3 years past due. 3 The expected loss rates are based on the payment profiles of revenue over 12 months before 31 December 2021 and the corresponding historical credit losses experienced within this period or probability of a receivable progressing through successive stages of delinquency to write-off. The historical loss rates are adjusted to reflect current and forward-looking information on macroeconomic factors affecting the ability of the customers to settle the receivables. The Group has identified the Gross Domestic Product ("GDP") to be the most relevant factor. Various economic scenarios are considered in generating the forward-looking adjustment, including the recent influences of the coronavirus pandemic situation. (ii) Credit risk (continued) (b) 3.1 Financial risk factors (continued) FINANCIAL RISK MANAGEMENT (continued) 3 For the year ended 31 December 2021 Notes to the Consolidated Financial Statements Credit risk of accounts receivable (continued) 358 FINANCIAL RISK MANAGEMENT (continued) 3.1 Financial risk factors (continued) 4,856 Notes payable Non-derivatives: At 31 December 2021 RMB'Million RMB'Million RMB'Million RMB'Million For the year ended 31 December 2021 Borrowings (Note 36) Over 5 years Between 2 and 5 years Between 1 and 2 years 1 year Less than The table below analyses the Group's financial liabilities by relevant maturity groupings based on the remaining period since the end of the reporting period to the contractual maturity date (or the earliest date a financial liability may become payable in the absence of a fixed maturity date). The amounts disclosed in the table are the contractual undiscounted cash flows or the carrying amount of the financial assets to be delivered. The Group aims to maintain sufficient cash and cash equivalents and readily marketable securities, which are classified as FVPL. Due to the dynamic nature of the underlying businesses, the Group maintains flexibility in funding by maintaining adequate balances of such. (c) Liquidity risk Total 278,715 RMB'Million 190,354 customers and others, staff prepayments received from and accruals (excluding Accounts payable, other payables 12,083 603 4,279 2,207 4,994 Other financial liabilities 15,237 2,465 5,492 3,294 3,986 Lease liabilities 131,300 costs and welfare accruals) 121,903 121,903 Derivatives: 36,617 Capital refers to equity and external debts (including borrowings and notes payable). In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares, repurchase the Company's shares or raise/repay debts. The Group's objectives on managing capital are to safeguard the Group's ability to continue as a going concern and support the sustainable growth of the Group in order to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to enhance shareholders' value in the long term. 3.2 Capital risk management For the year ended 31 December 2021 FINANCIAL RISK MANAGEMENT (continued) 3 Notes to the Consolidated Financial Statements 2 222 Tencent Holdings Limited 122,685 169,281 18,819 150,517 1,957 1,617 309 Other financial liabilities 461,302 110,160 31 15,609 Over 5 years and 5 years and 2 years 1 year Between 2 Between 1 Less than (c) Liquidity risk (continued) Total 00 3 For the year ended 31 December 2021 Notes to the Consolidated Financial Statements 221 Annual Report 2021 663,009 157,323 5,529 FINANCIAL RISK MANAGEMENT (continued) RMB'Million 3.1 Financial risk factors (continued) RMB'Million Borrowings RMB'Million 10,157 120 6,551 3,486 Long-term payables 119,495 41,182 168,665 3,994 3,994 Notes payable Non-derivatives: At 31 December 2020 RMB'Million RMB'Million - North America 415,685 539,900 The Mainland of China and Hong Kong 242,477 For the year ended 31 December 2021 CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS (continued) 4 148,455 243,296 Investments 141,876 23,795 103,386 61,894 - Europe 63,117 57,750 Others 13,681 62,261 (c) Fair value measurement of FVPL, FVOCI and other financial liabilities 60,612 Online Advertising - Asia excluding the Mainland of China and Hong Kong The fair value assessment of FVPL, FVOCI and other financial liabilities that are measured at level 3 fair value hierarchy requires significant estimates, which include risk-free rates, expected volatility, relevant underlying financial projections, market information of recent transactions (such as recent fund raising transactions undertaken by the investees) and other assumptions. Changes in these assumptions and estimates could materially affect the respective fair value of these investments. For the year ended 31 December 2021 As mentioned in Note 2.26(e), the Group has granted share options to its employees and other qualifying participants. The directors have adopted the Binomial Model to determine the total fair value of the options granted, which is to be expensed over the respective vesting periods. Significant estimates and judgment on key parameters, such as risk free rate, dividend yield and expected volatility, are required to be made by the directors based on historical experience and other relevant factors in applying the Binomial Model (Note 35). Changes in these estimates and judgments could materially affect the fair value of these options granted. Online Advertising; VAS; VAS 00 The Group has the following reportable segments for the years ended 31 December 2021 and 2020: The chief operating decision-makers mainly include executive directors of the Company. They review the Group's internal reporting in order to assess performance, allocate resources, and determine the operating segments based on these reports. (a) Description of segments and principal activities 5 SEGMENT INFORMATION AND REVENUES Notes to the Consolidated Financial Statements 231 Annual Report 2021 The Group is required to reassess whether it controls the investee if facts and circumstances indicate a change to one or more of the three factors of control. Consolidation is required only if control exists. The Group controls an investee when it has all the following: (i) power over the investee; (ii) exposure, or rights, to variable returns from its involvement with the investee; and (iii) the ability to use its power over the investee to affect the amount of the Group's returns. Power results from rights that can be straightforward through voting rights or complicated in contractual arrangements. Variable returns normally encompass financial benefits and risks, but in certain cases, they also include operational values specific to the Group. These three factors cannot be considered in isolation by the Group in its assessment of control over an investee. Where the factors of control are not apparent, significant judgement is applied in the assessment, which is based on an overall analysis of all of the relevant facts and circumstances. Scope of consolidation FinTech and Business Services; and (f) The Group is subject to income taxes in numerous jurisdictions. Significant judgment is required in determining the worldwide provision for income taxes. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact current income tax and deferred income tax in the period in which such determination is made. (e) Income taxes 4 CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS (continued) For the year ended 31 December 2021 Notes to the Consolidated Financial Statements 230 Tencent Holdings Limited 00 The Group has to estimate the expected yearly percentage of grantees that will stay within the Group at the end of vesting periods of the options and awarded shares (the “Expected Retention Rate") in order to determine the amount of share-based compensation expenses charged to the consolidated income statement. Where the final retention rate is different from the initial estimate, such difference will impact the share-based compensation expenses in subsequent periods. As at 31 December 2021, the Expected Retention Rate of the Group's wholly- owned subsidiaries was assessed to be not lower than 89% (31 December 2020: not lower than 91%). The fair value of share options granted to employees and other qualifying participants determined using the Binomial Model was approximately HKD2,994 million (equivalent to approximately RMB2,513 million) in 2021 (2020: approximately HKD1,073 million (equivalent to approximately RMB976 million)). (d) Share-based compensation arrangements Contract liabilities: RMB'Million RMB'Million 117,258 Social networks 156,101 174,314 Games 264,212 291,572 - VAS Revenue from contracts with customers RMB'Million 2020 108,111 2021 (b) Disaggregation of revenue from contracts with customers All the revenues derived from any single external customer were less than 10% of the Group's total revenues during the years ended 31 December 2021 and 2020. As at 31 December 2021, the total non-current assets other than financial instruments and deferred income tax assets located in the Mainland of China and other regions amounted to RMB446,565 million (31 December 2020: RMB400,877 million) and RMB182,612 million (31 December 2020: RMB177,427 million), respectively. (a) Description of segments and principal activities (continued) SEGMENT INFORMATION AND REVENUES (continued) 5 For the year ended 31 December 2021 Notes to the Consolidated Financial Statements - Others. 1,333,425 234 Tencent Holdings Limited In the following table, revenue of the Group from contracts with customers is disaggregated by revenue source. The table also includes a reconciliation to the segment information (Note 5(a)). - Online Advertising 88,666 82,271 2020 2021 As at 31 December The Group has recognised the following liabilities related to contracts with customers under "Deferred revenue": (c) Assets and liabilities related to contracts with customers SEGMENT INFORMATION AND REVENUES (continued) 5 For the year ended 31 December 2021 Notes to the Consolidated Financial Statements 235 Annual Report 2021 482,064 560,118 7,495 7,685 - Others 128,086 172,195 - FinTech and Business Services 14,292 13,317 Media advertising 67,979 75,349 Social and others advertising RMB'Million The "Others" business segment consists of the financials of investment in, production of and distribution of, films and television programmes for third parties, copyrights licensing, merchandise sales and various other activities. 1,612,364 There were no material inter-segment sales during the years ended 31 December 2021 and 2020. The revenues from external customers reported to the chief operating decision-makers are measured in a manner consistent with that applied in the consolidated income statement. RMB'Million RMB'Million Segment revenues 264,212 82,271 128,086 7,495 482,064 Gross profit 142,925 42,260 RMB'Million RMB'Million 36,251 221,532 Cost of revenues Depreciation Amortisation 5,006 3,331 9,170 87 17,594 17,771 6,628 96 RMB'Million Total Others 7,685 560,118 Gross profit 152,936 40,594 51,396 1,018 245,944 Cost of revenues Depreciation 5,797 5,322 Amortisation 18,740 7,810 10,268 72 106 21,493 1,973 28,595 Year ended 31 December 2020 FinTech and VAS Online Advertising Business Services 30 2,329 26,758 The reconciliation of gross profit to profit before income tax is shown in the consolidated income statement. RMB'Million 490,415 400,062 291,572 Segment revenues RMB'Million RMB'Million RMB'Million RMB'Million RMB'Million Total Others Business Services Advertising VAS Online FinTech and Year ended 31 December 2021 The segment information provided to the chief operating decision-makers for the reportable segments for the years ended 31 December 2021 and 2020 is as follows: (a) Description of segments and principal activities (continued) For the year ended 31 December 2021 SEGMENT INFORMATION AND REVENUES (continued) 5 Notes to the Consolidated Financial Statements 232 Tencent Holdings Limited Other information, together with the segment information, provided to the chief operating decision-makers, is measured in a manner consistent with that applied in these consolidated financial statements. There were no segment assets and segment liabilities information provided to the chief operating decision-makers. RMB'Million The chief operating decision-makers assess the performance of the operating segments mainly based on segment revenue and gross profit of each operating segment. The selling and marketing expenses and general and administrative expenses are common costs incurred for these operating segments as a whole and therefore, they are not included in the measure of the segments' performance which is used by the chief operating decision- makers as a basis for the purpose of resource allocation and assessment of segment performance. Interest income, other gains/(losses), net, finance costs, net, share of profit/(loss) of associates and joint ventures, net and income tax expense are also not allocated to individual operating segment. 2020 As at 31 December Annual Report 2021 2,588 233 Notes to the Consolidated Financial Statements For the year ended 31 December 2021 5 SEGMENT INFORMATION AND REVENUES (continued) (a) Description of segments and principal activities (continued) The Company is domiciled in the Cayman Islands while the Group mainly operates its businesses in the Mainland of China. During the years ended 31 December 2021 and 2020, breakdown of the total revenues by geographical location is as follows: 00 Revenues - The Mainland of China - Others 2021 2020 RMB'Million RMB'Million 513,688 448,165 46,430 33,899 560,118 482,064 The Group also conducts operations in the North America, Europe and other regions, and holds investments (including investments in associates, investments in joint ventures, FVPL, FVOCI and assets held for distribution) in various territories. The geographical information on the total assets is as follows: Operating assets - The Mainland of China - Others 2021 4,797 238 Tencent Holdings Limited 6,601 The impairment provision for investee companies, goodwill and other intangible assets arising from acquisitions mainly comprised the following: 2021 2020 RMB'Million RMB'Million Investments in associates (Note 21) 15,391 5,254 For the year ended 31 December 2021 Investments in joint ventures and others 1,388 Goodwill and other intangible assets arising from acquisitions (Note 20) 8,713 4,780 25,028 11,422 (d) The donations mainly include RMB1,600 million of charity funds and RMB450 million for Sustainable Social Value and Common Prosperity Programme ("SSV & CPP"). 924 Notes to the Consolidated Financial Statements (c) Note: (continued) 1,765 1,229 (1,833) 149,467 57,131 The disposal and deemed disposal gains of approximately RMB118,051 million recognised during the year ended 31 December 2021 comprised the following: net gains of approximately RMB18,646 million (2020: RMB 15,492 million) on dilution of the Group's equity interests in certain associates due to new equity interests being issued by these associates (Note 21). These investee companies are principally engaged in games development, finance, online video-sharing platform, eCommerce and Internet-related businesses; and aggregated net gains of approximately RMB99,405 million (2020: RMB8,898 million) on disposals, partial disposals or other deemed disposals of various investments of the Group, which mainly comprised the following: (i) step down gain of approximately RMB78.0 billion arising from the investment in JD.com, details of which are explained in Note 21(b)(i); (ii) (iii) step down gain of approximately RMB11.6 billion arising from the transfer of an investee company engaged in games development from associate to FVOCI as a result of retirement of board representatives (Note 25(v)); and step up gain of approximately RMB3,807 million arising from the completion of privatisation of Sogou Inc. ("Sogou"), an investment transferred from investment in an associate to a subsidiary (Note 42(a)). During the year ended 31 December 2021, the net fair value gains on FVPL comprised net gains of approximately RMB47,424 million (2020: RMB37,257 million) as a result of increase in valuations of certain investee companies, and approximately RMB136 million associated with treasury investments (2020: nil). 00 172,195 7 OTHER GAINS, NET (continued) 8 EXPENSES BY NATURE 2021 2020 RMB'Million Auditor's remuneration - Audit and audit-related services - Non-audit services - Tax advisory - Due diligence service Other services 148 127 54 37 14 11 23 8 17 18 Annual Report 2021 239 Notes to the Consolidated Financial Statements 21,458 660 26,166 Depreciation of property, plant and equipment, investment properties and RMB'Million Transaction costs (Note (a)) 129,136 107,628 Employee benefits expenses (Note (b) and Note 13) 95,523 69,638 Content costs (excluding amortisation of intangible assets) 66,911 58,285 Amortisation of intangible assets (Note (c) and Note 20) 31,430 29,073 Promotion and advertising expenses 31,335 26,596 Bandwidth and server custody fees (excluding depreciation of right-of-use assets) 27,260 21,876 right-of-use assets (Note 16 and Note 18) FinTech and Business Services Others 88,666 Revenue recognised that was included in the contract liability balance For the year ended 31 December 2021 Revenue recognised in relation to contract liabilities (ii) Note: (continued) (c) Assets and liabilities related to contracts with customers (continued) SEGMENT INFORMATION AND REVENUES (continued) 5 Notes to the Consolidated Financial Statements Tencent Holdings Limited 236 00 Contract liabilities mainly comprised virtual items, unamortised pre-paid tokens or cards, Internet traffic and other support to be offered to certain investee companies in the future periods measured at their fair value on the relevant inception dates, and customer loyalty incentives offered to the customers. 72,542 71,558 Contract liabilities (i) Note: 181 108 NET 2021 2020 RMB'Million The following table shows the extent of the revenue recognised in the current reporting period which relates to carried- forward contract liabilities: RMB'Million 2021 RMB'Million Notes to the Consolidated Financial Statements Annual Report 2021 237 Interest income mainly represents interest income from bank deposits, including bank balance and term deposits. INTEREST INCOME 6 As at 31 December 2021 and 2020, total capitalised contract costs to obtain or fulfill contracts with customers were immaterial. 47,984 65,044 137 181 1,783 5,636 3,034 2,665 43,030 56,562 Others FinTech and Business Services Online Advertising VAS at the beginning of the year: OTHER GAINS, RMB'Million 2020 Net gains on disposals and deemed disposals of investee companies (Note (a)) Net fair value gains on FVPL (Note (b)) 118,051 24,390 For the year ended 31 December 2021 (2,600) (2,050) 1,652 157 7,922 8,888 (11,422) (25,028) (b) (a) 7 Others Dividend income Donations (Note (d)) Net fair value gains on other financial instruments Subsidies and tax rebates assets arising from acquisitions (Note (c)) Impairment provision for investee companies, goodwill and other intangible 6,952 37,257 Note: 47,560 During the year ended 31 December 2021, employee benefits expenses included the share-based compensation expenses of approximately RMB22,222 million (2020: RMB13,745 million), which contained those incurred for SSV & CPP of approximately RMB21 million (2020: nil). (c) No significant development expenses had been capitalised for the years ended 31 December 2021 and 2020. Amortisation charges of intangible assets are mainly in respect of media content including video and music content, game licenses, and other content. During the year ended 31 December 2021, amortisation of media content was approximately RMB28,393 million (2020: RMB26,620 million). (d) During the year ended 31 December 2021, expenses incurred for regulatory fines in the Mainland of China and certain litigation settlements were approximately RMB976 million (2020: nil), of which approximately RMB630 million (2020: nil) were included in "Other gains, net". During the year ended 31 December 2021, amortisation of intangible assets included the amortisation of intangible assets resulting from business combinations of approximately RMB4,651 million (2020: RMB3,299 million). During the year ended 31 December 2021, expenses incurred for SSV & CPP (excluding share-based compensation expenses) were approximately RMB224 million (2020: nil). During the year ended 31 December 2021, the Group incurred expenses for the purpose of research and development of approximately RMB51,880 million (2020: RMB38,972 million), which comprised employee benefits expenses of approximately RMB42,958 million (2020: RMB31,643 million). 00 240 Tencent Holdings Limited (e) (b) For the year ended 31 December 2021 (a) Note: 8 EXPENSES BY NATURE (continued) Notes to the Consolidated Financial Statements 224,822 159,847 (217) (403) 224,605 9,528 9,490 168 160 Transaction costs primarily consist of bank handling fees, channel and distribution costs. 159,444 Diluted EPS (RMB per share) 9,696 Pension insurance Medical insurance Unemployment insurance Housing fund Percentage 12.0 20.0% 5.0-10.0% 0.25 1.5% 10.0-12.0% The Group has announced policies which become effective on 1 January 2022, that, additional employee benefits will be provided by the Group to certain employees, including (i) commercial health insurance benefits to certain eligible employees who have completed a required period of service; and (ii) one-off retirement cash bonus upon the retirement of the qualified employees. The financial impacts relating to these employee benefits for the year ended 31 December 2021 were immaterial. 00 246 Tencent Holdings Limited The majority of the Group's contributions to pension plans are related to the local employees in the PRC. All local employees of the subsidiaries in the PRC participate in employee social security plans established in the PRC, which cover pension, medical and other welfare benefits. The plans are organised and administered by the governmental authorities. Except for the contributions made to these social security plans, the Group has no other material commitments owing to the employees. According to the relevant regulations, the portion of premium and welfare benefit contributions that should be borne by the companies within the Group as required by the above social security plans are principally determined based on percentages of the basic salaries of employees, subject to certain ceilings imposed. These contributions are paid to the respective labour and social welfare authorities and are expensed as incurred. The applicable percentages used to provide for these social security plans for the years ended 31 December 2021 and 2020 are listed below: Notes to the Consolidated Financial Statements 13 EMPLOYEE BENEFITS EXPENSES (continued) (a) Senior management's emoluments Senior management includes directors, chief executive officer ("CEO"), president and other senior executives. The aggregate compensation paid/payable to senior management for employee services excluding the directors and the CEO, whose details have been reflected in Note 14(a), is as follows: Salaries, bonuses, allowances and benefits in kind Contributions to pension plans Share-based compensation expenses The emoluments of the senior management fell within the following bands: Emolument bands HKD8,000,000 - HKD50,000,000 HKD50,000,001 ~ HKD200,000,000 HKD200,000,001 ~ HKD400,000,000 HKD400,000,001 ~ HKD800,000,000 HKD800,000,001 ~ HKD1,200,000,000 HKD1,200,000,001 ~ HKD2,000,000,000 For the year ended 31 December 2021 Note: 69,638 95,523 9,650 23.164 16.523 Annual Report 2021 245 Notes to the Consolidated Financial Statements For the year ended 31 December 2021 13 EMPLOYEE BENEFITS EXPENSES 2021 2020 RMB'Million RMB'Million Wages, salaries and bonuses 61,058 48,192 Contributions to pension plans (Note) 5,630 2,911 Share-based compensation expenses 22,222 13,745 Welfare, medical and other expenses (Note) 6,470 4,679 Training expenses 143 111 9 2021 FINANCE COSTS, NET Exchange (gains)/losses, net Others Income tax expense 285 7 20,252 19,897 Annual Report 2021 243 Notes to the Consolidated Financial Statements For the year ended 31 December 2021 11 TAXATION (continued) (b) Value-added tax and other taxes The operations of the Group are also mainly subject to the following taxes in the PRC: Category Tax rate Value-added tax ("VAT") 6-13% 3,658 Basis of levy 5,462 3,900 44,087 Effects of different tax rates applicable to different subsidiaries of the Group (49,202) (29,779) Effects of tax holiday and preferential tax benefits on assessable profits of subsidiaries incorporated in the Mainland of China (4,945) (3,466) Income not subject to tax (63) (65) Expenses not deductible for tax purposes 1,539 1,555 Withholding tax on earnings expected to be remitted by subsidiaries (Note 28) 1,050 Unrecognised deferred income tax assets Sales value of goods sold and services fee income, offset by VAT on purchases Taxable advertising income Cultural construction fee 159,847 9,528 9,490 23.597 16.844 Notes to the Consolidated Financial Statements For the year ended 31 December 2021 12 EARNINGS PER SHARE (continued) (b) Diluted The share options and awarded shares granted by the Company have potential dilutive effect on the EPS. Diluted EPS is calculated by adjusting the weighted average number of ordinary shares outstanding by the assumption of the conversion of all potential dilutive ordinary shares arising from share options and awarded shares granted by the Company (collectively forming the denominator for computing the diluted EPS). In addition, the profit attributable to equity holders of the Company (numerator) has been adjusted by the effect of the share options and restricted shares granted by the Company's non wholly-owned subsidiaries and associates, excluding those which have anti-dilutive effect on the Group's diluted EPS. Profit attributable to equity holders of the Company (RMB'Million) Dilution effect arising from share-based awards issued by non wholly-owned subsidiaries and associates (RMB'Million) Profit attributable to equity holders of the Company for the calculation of diluted EPS (RMB'Million) Weighted average number of ordinary shares in issue (million shares) Adjustments for share options and awarded shares (million shares) Weighted average number of ordinary shares for the calculation of diluted EPS (million shares) 224,822 2020 2021 Tencent Holdings Limited 3% (Note i) City construction tax 7% Net VAT payable amount Educational surcharge 5% Net VAT payable amount 66,126 Note: 12 EARNINGS PER SHARE (a) Basic Basic earnings per share ("EPS") is calculated by dividing the profit attributable to equity holders of the Company by the weighted average number of ordinary shares in issue during the year. Profit attributable to equity holders of the Company (RMB'Million) Weighted average number of ordinary shares in issue (million shares) Basic EPS (RMB per share) 00 244 (i) Effective from 1 July 2019 and until 31 December 2024, the rate of cultural construction fee has been reduced by 50% in certain regions, while during the period from 1 January 2020 to 31 December 2021, this fee is exempted. Interest and related expenses Tax calculated at a tax rate of 25% 264,506 3,748 (76) (16,444) 3,672 11 TAXATION (a) Income tax expense Income tax expense is recognised based on management's best knowledge of the income tax rates expected for the financial year. (i) Cayman Islands and British Virgin Islands corporate income tax The Group was not subject to any taxation in the Cayman Islands and the British Virgin Islands for the years ended 31 December 2021 and 2020. (ii) Hong Kong profits tax Hong Kong profits tax has been provided for at the rate of 16.5% on the estimated assessable profits for the years ended 31 December 2021 and 2020. Annual Report 2021 241 Notes to the Consolidated Financial Statements For the year ended 31 December 2021 11 TAXATION (continued) (16,592) 148 (a) Income tax expense (continued) RMB'Million 2020 Notes to the Consolidated Financial Statements For the year ended 31 December 2021 2021 2020 RMB'Million RMB'Million 7,918 7,449 (804) 438 7,114 7,887 Interest and related expenses mainly arose from borrowings, notes payable and lease liabilities disclosed in Notes 36, 37 and 18, respectively. 10 SHARE OF (LOSS)/PROFIT OF ASSOCIATES AND JOINT VENTURES, NET Share of (loss)/profit of associates (Note 21) Share of profit/(loss) of joint ventures (Note 22) 2021 RMB'Million (iii) PRC CIT PRC CIT has been provided for at applicable tax rates under the relevant regulations of the PRC after considering the available preferential tax benefits from refunds and allowances, and on the estimated assessable profit of entities within the Group established in the Mainland of China for the years ended 31 December 2021 and 2020. The general PRC CIT rate is 25% in 2021 and 2020. Certain subsidiaries of the Group in the Mainland of China were approved as High and New Technology Enterprise and they were subject to a preferential corporate income tax rate of 15% for the years ended 31 December 2021 and 2020. Moreover, according to the announcement and circular issued by relevant government authorities, a subsidiary was qualified as national key software enterprise and subject to a preferential corporate income tax rate of 10%. RMB'Million 26,039 (5,787) 19,499 398 20,252 19,897 The taxation on the Group's profit before income tax differs from the theoretical amount that would arise using the tax rate of 25% for the year (2020: 25%), being the general tax rate of the major subsidiaries of the Group before enjoying preferential tax treatments, as follows: 2021 2020 RMB'Million RMB'Million Profit before income tax 248,062 180,022 Share of loss/(profit) of associates and joint ventures, net 16,444 (3,672) RMB'Million 2020 2021 For the year ended 31 December 2021 In addition, certain subsidiaries of the Company are entitled to other tax concessions, mainly including the preferential policy of "2-year exemption and 3-year half rate concession" and the preferential tax rate of 15% applicable to some subsidiaries located in certain areas of the Mainland of China upon fulfillment of certain requirements of the respective local governments. 2020 Corporate income tax in other jurisdictions (v) Income tax on profit arising from other jurisdictions, including the United States, Europe, Asia and South America, had been calculated on the estimated assessable profit for the year at the respective rates prevailing in the relevant jurisdictions, ranging from 12.5% to 35%. Withholding tax According to applicable tax regulations prevailing in the PRC, dividends distributed by a company established in the Mainland of China to a foreign investor with respect to profit derived after 1 January 2008 are generally subject to a 10% withholding tax. If a foreign investor is incorporated in Hong Kong, under the double taxation arrangement between the Mainland of China and Hong Kong, the relevant withholding tax rate applicable to such foreign investor will be reduced from 10% to 5% subject to the fulfilment of certain conditions. 176,350 Dividends distributed from certain jurisdictions that the Group's entities operate in are also subject to withholding tax at respective applicable tax rates. 242 Tencent Holdings Limited Notes to the Consolidated Financial Statements 11 TAXATION (continued) (a) Income tax expense (continued) The income tax expense of the Group is analysed as follows: Current income tax Deferred income tax (Note 28) 00 (iv) 2020 RMB'000 466,665 99 291,775 22,997 6,949 1,148 Lau Chi Ping Martin 44,135 24 110 35,522 7,331 1,148 Ma Huateng (CEO) (Note (i)) RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 Total in kind plans expenses Bonuses Salaries Fees 322,968 lain Ferguson Bruce 462 1,474 2021 RMB'000 464,262 249 Annual Report 2021 388,550 123 309,326 110 58,519 14,280 6,192 3,034 2,298 Name of director 6,037 Ke Yang Yang Siu Shun Charles St Leger Searle Jacobus Petrus (Koos) Bekker 3,644 2,908 736 Li Dong Sheng 6,796 5,815 981 lan Charles Stone 1,936 981 736 and benefits 5,056 Allowances 30,241 35,290 1,063,362 2020 RMB'000 2021 RMB'000 Allowances and benefits in kind Share-based compensation expenses Contributions to pension plans Bonuses Salaries 00 The five individuals whose emoluments were the highest in the Group did not include any director during the year 2021 (2020: included one director). All of these individuals have not received any emolument from the Group as an inducement to join the Group during the years ended 31 December 2021 and 2020. The emoluments paid/ payable to the five (2020: remaining four) individuals during the years were as follows: (b) Five highest paid individuals 13 EMPLOYEE BENEFITS EXPENSES (continued) 523,349 For the year ended 31 December 2021 Annual Report 2021 247 2 1333 1 26312| 2021 Number of individuals 3,163,515 5,056,376 2,696,137 4,591,385 to pension compensation 713 729 Notes to the Consolidated Financial Statements 10,455 2,884,398 2020 1,957,518 For the year ended 31 December 2021 3,846 Contributions Share-based During the year ended 31 December 2021: The remuneration of every director and the CEO is set out below: 14 BENEFITS AND INTERESTS OF DIRECTORS Notes to the Consolidated Financial Statements 1 1 1 --| || ||2-||-- 1 (a) Directors' and the chief executive's emoluments 1 3,993,668 2,515,110 163 156 Emolument bands HKD352,500,001 ~ HKD353,000,000 The emoluments of the above five individuals (2020: four) fell within the following bands: HKD553,000,001 ~ HKD553,500,000 HKD590,000,001 ~ HKD590,500,000 HKD1,121,500,001 ~ HKD1,122,000,000 HKD1,155,500,001 ~ HKD1,156,000,000 HKD1,588,500,001 ~ HKD1,589,000,000 HKD1,599,000,001 ~ HKD1,599,500,000 248 Tencent Holdings Limited Number of individuals 2021 2020 HKD357,500,001 ~ HKD358,000,000 Opening net book amount 10,238 Year ended 31 December 2020 46,824 1,519 24 829 34,214 10,238 97 218 (973) 14 108 Currency translation differences (33,067) (1,508) 34,214 (32) Net book amount 829 28,186 1,519 Depreciation (27,988) (124) (6) (109) (1) Disposals 30,808 221 28 421 1,952 Additions 250 59 31 18 133 9 Business combinations 46,824 24 (2,566) (355) 79,673 13,112 Net book amount (1) (1) (3) (292) (58) Currency translation differences (64,318) (2,264) (61) (1,487) (55,909) (4,597) Accumulated depreciation and impairment 126,587 3,860 137 2,545 102,278 (970) 46,077 Accumulated depreciation and impairment 1,055 1,595 2,930 56 1,788 62,094 12,805 Cost At 1 January 2020 RMB'Million Total Motor Leasehold vehicles improvements RMB'Million RMB'Million and office equipment Furniture Computer and other operating equipment RMB'Million RMB'Million RMB'Million Buildings 16 PROPERTY, PLANT AND EQUIPMENT (continued) For the year ended 31 December 2021 Notes to the Consolidated Financial Statements 253 Annual Report 2021 61,914 75 (16,023) 15,609 (384) The land use rights mainly represented prepaid operating lease payments in respect of land in the Mainland of China with remaining lease periods of 27 to 49 years. 16,091 17,728 (1) (5) 6 (465) (484) 793 18 LEASES (EXCLUDING LAND USE RIGHTS) 2,120 16,091 RMB'Million RMB'Million 2020 2021 For the year ended 31 December 2021 Notes to the Consolidated Financial Statements Closing net book amount Currency translation differences 155 (a) Amounts recognised in the consolidated statement of financial position Movement of right-of-use assets (excluding land use rights, disclosed in Note 17) is analysed as follows: Opening net book amount (169) (177) (3,773) (4,649) 5,991 12,365 320 10,847 12,929 180 RMB'Million RMB'Million 2020 2021 Note: Closing net book amount Currency translation differences Impairment Reduction (Note) Depreciation Additions Business combinations Impairment reversal Amortisation Additions Business combinations 107,160 3,165 113 2,196 86,946 14,740 Cost At 31 December 2020 59,843 1,355 70 988 46,202 11,228 Closing net book amount (257) (53) (4) (199) Currency translation differences (17,658) Accumulated depreciation and impairment (270) (3,511) (1,218) Opening net book amount 17 LAND USE RIGHTS Tencent Holdings Limited 254 00 During the year ended 31 December 2021, depreciation of RMB 19,098 million (2020: RMB15,654 million), RMB257 million (2020: RMB256 million) and RMB2,142 million (2020: RMB1,748 million) were charged to cost of revenues, selling and marketing expenses and general and administrative expenses, respectively. 59,843 1,355 70 988 46,202 11,228 Net book amount (39) 44 10 (91) Currency translation differences (47,278) (1,854) (42) (40,653) (1,667) 159,437 (173) Accumulated amortisation and impairment 190,104 4,049 8,535 78,911 4,553 94,056 (1,368) Cost RMB'Million RMB'Million Total Others Trademarks RMB'Million RMB'Million RMB'Million RMB'Million At 1 January 2020 Media contents (2,615) (785) Year ended 31 December 2020 128,860 2,149 7,759 23,540 1,956 93,456 (55,504) Net book amount 9 133 18 768 Currency translation differences (62,178) (1,906) 934 Opening net book amount technology software and Currency translation differences (114,044) (3,799) (3,256) (88,359) (4,355) (14,275) (4,899) Accumulated amortisation and impairment 9,354 12,977 125,114 12,679 131,347 Cost At 31 December 2021 291,471 Goodwill (83) (446) Computer For the year ended 31 December 2021 Notes to the Consolidated Financial Statements 20 INTANGIBLE ASSETS (continued) Tencent Holdings Limited 258 00 (466) 171,376 9,275 36,289 8,241 112,173 Net book amount (6,051) (157) 5,398 171,376 93,456 23,540 1,547 Closing net book amount 108,623 3,627 34,162 10,000 3,025 (55) 159,437 Cost 112,090 6,879 107,271 12,015 5,965 244,220 At 31 December 2020 Accumulated amortisation and impairment 159 (19) (13) (1,716) Amortisation (631) (26,620) (866) (956) 124 (29,073) (4,205) (92) (92) (483) (4,872) Currency translation differences 1,338 Impairment provision 1,956 (5,573) (73,366) 36,209 1,079 1 34,314 815 Additions 28,482 Disposals 821 4,563 1,634 18,034 Business combinations 128,860 2,149 7,759 3,430 (3,251) 17,767 Annual Report 2021 (2,183) (2,891) (87,264) Currency translation differences 2,106 257 168 259 (49) Net book amount 108,623 3,627 34,162 10,000 3,025 159,437 2,481 5,398 9,275 36,289 (3,180) 3,408 4,173 3,935 4,939 RMB'Million RMB'Million (2,415) 2020 Closing net book amount Currency translation differences Business combinations Transfer to property, plant and equipment For the year ended 31 December 2021 Notes to the Consolidated Financial Statements Additions 2021 Opening net book amount 1 11 Others Trademarks contents technology Goodwill RMB'Million Media software and (10) Computer For the year ended 31 December 2021 Notes to the Consolidated Financial Statements 257 Annual Report 2021 As at 31 December 2021, construction in progress mainly comprised office buildings and data centers under construction located in the PRC. 4,939 5,923 20 INTANGIBLE ASSETS Total 19 CONSTRUCTION IN PROGRESS 00 RMB'Million 2020 2021 Computer and other operating equipment Others Buildings Depreciation charge of right-of-use assets The consolidated income statement included the following amounts relating to leases (excluding the amortisation of land use rights, disclosed in Note 17): RMB'Million (b) Amounts recognised in consolidated income statement For the year ended 31 December 2021 Notes to the Consolidated Financial Statements Annual Report 2021 255 The reduction of right-of-use assets for the years ended 31 December 2021 and 2020 mainly arose from the early termination and modification of lease contracts. 12,929 20,468 (287) 18 LEASES (EXCLUDING LAND USE RIGHTS) (continued) 256 Tencent Holdings Limited 2,203 2,422 The total cash outflow in financing activities for leases during the year ended 31 December 2021 was approximately RMB5,086 million (2020: RMB4,068 million), including principal elements of lease payments of approximately RMB4,423 million (2020: RMB3,537 million) and related interest paid of approximately RMB663 million (2020: RMB531 million), respectively. Some leases of computer and other operating equipment contain variable lease payments. Variable payments are used for a variety of reasons, including managing cash outflows and minimising the fixed costs. Variable lease payments that depend on usage of bandwidth are recognised in profit or loss in the period in which the conditions that trigger those payments occur. Variable lease payments relating to computer and other operating equipment leases during the year ended 31 December 2021 were considered to be insignificant. 3,983 4,947 Expense relating to variable lease payments not included in lease liabilities (included in cost of revenues and expenses) 1,475 1,721 1,782 Expense relating to short-term leases not included in lease liabilities (included in cost of revenues and expenses) 559 719 3,773 4,649 19 24 1,972 Interest expense (included in finance costs, net) RMB'Million RMB'Million RMB'Million RMB'Million RMB'Million At 1 January 2021 (28,393) (999) Amortisation (1,127) (3) (1,120) (2) (1,071) Disposals 52 7 30,759 780 Additions 30,130 3,402 31,598 954 (967) Impairment (provision)/reversal 8,241 112,173 Closing net book amount (8,532) (108) (614) (723) (31,430) (82) Currency translation differences (8,700) (3) (1) 9 (3) (8,702) (7,005) 1,595 4,920 19,259 2,106 Currency translation differences (87,264) (2,891) (2,183) (73,366) (3,251) (1) (5,573) 244,220 5,965 12,015 107,271 6,879 112,090 Cost Accumulated amortisation and impairment 257 168 (49) Business combinations (Note 42) (36) 3,025 10,000 34,162 3,627 108,623 Opening net book amount Year ended 31 December 2021 159,437 3,025 10,000 34,162 3,627 108,623 Net book amount 2,481 (7) Cost 46,202 61,914 00 No director received any emolument from the Group as an inducement to join or leave the Group or compensation for loss of office. No director waived or has agreed to waive any emoluments during the years ended 31 December 2021 and 2020. During the year ended 31 December 2021, 3,374,630 options (2020: 4,399,815 options) were granted to one executive director of the Company, out of which 843,657 options were voluntarily waived in February 2022, and 40,500 awarded shares were granted to four independent non-executive directors of the Company (2020: 59,500 awarded shares were granted to five independent non-executive directors of the Company). (iii) (ii) (i) Allowances and benefits in kind include leave pay, insurance premium and club membership. Note: 506,860 109 250 402,287 84,362 13,205 6,809 2,201 1,444 4,845 3,919 926 757 Ke Yang 88 Tencent Holdings Limited Notes to the Consolidated Financial Statements For the year ended 31 December 2021 These JD.com Shares to be distributed (Note 21(b)) are classified and presented as “Assets held for distribution' upon the Declaration Date (Note 32). 00 As announced on 23 December 2021 (the “Declaration Date"), the Company resolved to declare a special interim dividend in the form of a distribution in specie of approximately 457 million Class A ordinary shares of JD.com ("JD.com Shares") to the shareholders whose names appeared on the register of members of the Company on 25 January 2022 in proportion to their then respective shareholdings in the Company on the basis of 1 Class A ordinary share of JD.com for every 21 shares held by the shareholders, being rounded down to the nearest whole number of Class A ordinary shares of JD.com and fractional entitlements to the JD.com Shares will be distributed in the form of cash-in-lieu payment, except that the net proceeds of less than HKD100 will not be distributed. Accordingly, approximately 457 million Class A ordinary shares of JD.com are expected to be distributed ("JD.com Shares to be distributed"), representing approximately 14.7% of the total number of issued shares of JD.com as at the Declaration Date. (b) Interim dividend by way of distribution in specie 15 DIVIDENDS (continued) For the year ended 31 December 2021 Notes to the Consolidated Financial Statements Annual Report 2021 251 A final dividend in respect of the year ended 31 December 2021 of HKD1.60 per share (2020: HKD1.60 per share) was proposed pursuant to a resolution passed by the Board on 23 March 2022 and subject to the approval of the shareholders at the 2022 annual general meeting of the Company to be held on 18 May 2022 or any adjournment thereof. This proposed dividend is not reflected as dividend payable in the consolidated financial statements. The final dividends amounting to HKD15,238 million (2020: HKD11,378 million) were paid during the year ended 31 December 2021. (a) Final dividends 15 DIVIDENDS No significant transactions, arrangements and contracts in relation to the Group's business to which the Company was a party and in which a director of the Company had a material interest, whether directly or indirectly, subsisted at the end of the year or at any time during the year. (e) Directors' material interests in transactions, arrangements or contracts No loans, quasi-loans and other dealings in favour of directors, their controlled bodies corporate and connected entities subsisted at the end of the year or at any time during the year. (d) Information about loans, quasi-loans and other dealings in favour of directors, their controlled bodies and connected entities No consideration provided to or receivable by third parties for making available directors' services subsisted at the end of the year or at any time during the year. (c) Consideration provided to third parties for making available directors' services No director's termination benefit subsisted at the end of the year or at any time during the year. (b) Directors' termination benefits 14 BENEFITS AND INTERESTS OF DIRECTORS (continued) Yang Siu Shun Charles St Leger Searle Jacobus Petrus (Koos) Bekker 3,076 (Note (i)) RMB'000 RMB'000 RMB'000 Total in kind plans expenses RMB'000 RMB'000 RMB'000 RMB'000 Bonuses Salaries Fees Name of director to pension compensation and benefits Allowances Contributions Share-based During the year ended 31 December 2020: (a) Directors' and the chief executive's emoluments (continued) 14 BENEFITS AND INTERESTS OF DIRECTORS (continued) For the year ended 31 December 2021 Notes to the Consolidated Financial Statements Ma Huateng (CEO) " 1,174 50,746 2,318 758 Li Dong Sheng 5,646 4,636 1,010 lan Charles Stone 4,640 3,630 1,010 lain Ferguson Bruce 427,714 85 386,340 33,616 6,499 1,174 Lau Chi Ping Martin 58,738 24 88 6,706 Dividends payable for distribution in specie of approximately RMB97.1 billion was recognised on the Declaration Date and measured at fair value using the market price of the JD.com Shares to be distributed. Subsequent changes in the fair value of the said dividends payable as a result of the changes in the fair value of the JD.com Shares to be distributed was recognised in equity as an adjustment to the amount of the dividend distribution until its settlement. Fair value changes on the dividends payable amounting to approximately RMB5.4 billion were recognised in equity since the Declaration Date up to 31 December 2021. As at 31 December 2021, the amount of dividends payable for distribution in specie was approximately RMB102.5 billion. At 31 December 2021 252 Tencent Holdings Limited 51 59,843 1,355 70 23581 (28) (327) (19,602) (1,080) Depreciation (5) (1,508) (53) Disposals 387 20,946 3,074 Additions 25 242 Business combinations 319 988 37 25,149 The share certificates for the JD.com Shares to be distributed are dispatched to the qualifying shareholders in March 2022. 1,595 75 1,055 46,077 13,112 Closing net book amount (45) (13) (201) (57) Currency translation differences (3) (1) (2) Impairment (21,497) (460) (1,581) (10) (5) 705 888 (316) Opening net book amount 113 2,196 86,946 14,740 Cost At 1 January 2021 RMB'Million RMB'Million RMB'Million RMB'Million RMB'Million Total Leasehold Motor vehicles improvements and office equipment operating equipment Buildings RMB'Million Furniture and other 16 PROPERTY, PLANT AND EQUIPMENT For the year ended 31 December 2021 Notes to the Consolidated Financial Statements 11,228 3,165 107,160 Computer (3,511) 59,843 Accumulated depreciation and impairment 1,355 Year ended 31 December 2021 70 988 46,202 11,228 Net book amount (39) 70 (1) 44 (42) (47,278) Currency translation differences (1,854) (40,653) (91) 10 (1) (1,218) (c) Notes to the Consolidated Financial Statements Both external and internal sources of information of associates are considered in assessing whether there is any indication that the investment may be impaired, including but not limited to financial position, business performance and market capitalisation. The Group carries out impairment assessment on those investments with impairment indications, and the respective recoverable amounts of investments are determined with reference to the higher of fair value less costs of disposal and value in use. In respect of the recoverable amount using value in use, the discounted cash flows calculations were based on cash flow projections estimated by management and the key assumptions adopted in these cash flow projections included revenue growth rates, profit margins and discount rates. In respect of the recoverable amount based on fair value less costs of disposal, the amount was calculated with reference to their respective market prices, or using certain key valuation assumptions including the selection of comparable companies, recent market transactions and liquidity discount for lack of marketability. During the year ended 31 December 2021, an aggregate impairment loss of approximately RMB15,391 million (2020: RMB5,254 million) has been recognised for associates with impairment indicators. The majority of these associates' recoverable amounts were determined using fair value less costs of disposal where the fair value is determined according to the principle set out in Note 3.3. 00 264 Tencent Holdings Limited Fair value of stakes 21 INVESTMENTS IN ASSOCIATES (continued) The associates of the Group have been accounted for by using equity method based on the financial information of the associates prepared under the accounting policies generally consistent with those of the Group. The Group's share of the results, the revenues, the aggregated assets (including goodwill) and liabilities of its associates, as well as the fair value of its stakes in the associates which are listed entities, are shown in aggregate as follows: (Loss)/profit in listed from Other Total associates For the year ended 31 December 2021 Note: (continued) (i) For the year ended 31 December 2021 (ii) Assets (iii) (iv) the Group acquired additional ordinary shares of an existing investee, which is engaged in eCommerce at a cash consideration of approximately RMB3,554 million. Upon completion of the additional investment, the Group's equity interests in the investee have been increased from 5.23% to 6.26%. Since there is no change in the assessment of significant influence, this investment continues to be considered as an associate of the Group; the Group acquired 27% shares of a new investee engaged in games development at a cash consideration of approximately USD540 million (equivalent to approximately RMB3,474 million); the Group acquired additional ordinary shares of an existing investee, which is engaged in games development at a cash consideration of approximately RMB2,795 million. Upon completion of the additional investment, the Group's equity interests in the investee have been increased from 5% to 10%. Since there is no change in the assessment of significant influence, this investment continues to be considered as an associate of the Group; and (b) 21 INVESTMENTS IN ASSOCIATES (continued) (v) During the year ended 31 December 2021, transfers mainly comprised the following: (ii) the entire investment in JD.com of the Group with a carrying value of approximately RMB39.0 billion was transferred from investment in an associate to financial instruments as a result of resignation of board representative and the Group irrevocably designated it as FVOCI (Note 25(iv)) with step down gain of approximately RMB78.0 billion recognised in "Other gains, net" (Note 7(a)); investment in an existing associate engaged in games development of approximately RMB6.6 billion transferred to FVOCI (Note 25(v)) as a result of retirement of board representative; and (iii) investments in associates of approximately RMB33,982 million transferred from FVPL mainly due to conversion of the redeemable instruments into ordinary shares upon their IPOs or obtaining board representatives. Annual Report 2021 263 Notes to the Consolidated Financial Statements new associates and additional investments in existing associates with an aggregate amount of approximately RMB33,673 million during the year ended 31 December 2021, which are principally engaged in games development, eCommerce platform and other Internet-related businesses. RMB'Million 339,926 Revenues RMB'Million 508 (16,084) 2020 Listed entities 313,183 142,135 202,612 3,867 549 4,416 981,902 Non-listed entities 314,850 188,289 54,044 (119) a consortium (the "UMG Consortium") formed together with Tencent Music Entertainment Group ("TME"), a non wholly- owned subsidiary of the Company, and certain global financial investors to acquire additional 10% equity interests in Universal Music Group ("UMG") from its parent company, Vivendi S.A.. The Group's additional investment in the UMG Consortium amounted to approximately EUR975 million (equivalent to approximately RMB7,792 million), and the investment remained as an associate; (16,592) 326,978 643,552 (2,285) continuing comprehensive comprehensive operation income (loss)/income RMB'Million RMB'Million RMB'Million as at 31 December RMB'Million 2021 Listed entities (Note) 351,357 150,572 Liabilities RMB'Million 285,557 157 (13,799) Non-listed entities 292,195 176,406 54,369 (2,636) 351 (13,956) (i) 297,609 (a) For the year ended 31 December 2021 21 INVESTMENTS IN ASSOCIATES Investments in associates - Listed entities - Unlisted entities As at 31 December 2021 2020 Notes to the Consolidated Financial Statements RMB'Million 200,785 171,048 115,789 126,561 316,574 (186) 2021 2020 RMB'Million RMB'Million Annual Report 2021 261 In the CGUS related to interactive live video business and Online Advertising segment, the recoverable amounts were determined using discounted cash flow calculations which derived from five-year period financial projections with compound annual revenue growth rates of not more than 15% plus a terminal value calculated at a growth rate of not more than 5%. Pre-tax discount rate of 15% was applied in the discounted cash flows calculations, which reflected time value of money and the assessment of specific risks of the respective industries. 20 INTANGIBLE ASSETS (continued) During the year ended 31 December 2021, amortisation of RMB28,595 million (2020: RMB26,758 million) and RMB2,835 million (2020: RMB2,315 million) were charged to cost of revenues and general and administrative expenses, respectively. During the year ended 31 December 2021, impairment losses of RMB8,713 million (2020: RMB4,780 million) on goodwill and other intangible assets arising from acquisitions were charged to the consolidated income statement under "Other gains/(losses), net", and RMB13 million were reversed from (2020: RMB92 million were charged to) "Cost of revenues". Impairment tests for goodwill Goodwill was allocated to VAS segment with RMB101,345 million (31 December 2020: RMB104,688 million), Online Advertising segment with RMB6,478 million (31 December 2020: nil), FinTech and Business Services segment with RMB1,433 million (31 December 2020: RMB1,018 million) and Others segment with RMB2,917 million (31 December 2020: RMB2,917 million). The Group carries out its impairment testing on goodwill by comparing the recoverable amounts of CGUS or groups of CGUS to their carrying amounts. For the purpose of goodwill impairment review, the recoverable amount of a CGU (or groups of CGUS) is the higher of its fair value less costs of disposal and its value in use. The key assumptions used for the calculation of the recoverable amounts of the CGUs (or groups of CGUs) under impairment testing were as follows: For goodwill attributable to the Group's online game business within VAS segment, fair value less costs of disposal was primarily determined based on ratios of EV (enterprise value) divided by EBITDA of several comparable public companies (range: 15-22x) (2020: range: 20-27x) multiplied by the EBITDA of the related CGU (or group of CGUs) and discounted for lack of marketability at a range of 10% to 20% (2020: 10% to 20%). The comparable public companies were chosen based on factors such as industry similarity, company size, profitability and financial risks etc. The remaining goodwill allocated to the CGUS (or groups of CGUs) after impairment related to Online Advertising segment and interactive live video business was not material to the Group's consolidated financial statements and therefore no sensitivity analysis was presented. 00 Tencent Holdings Limited Notes to the Consolidated Financial Statements For the year ended 31 December 2021 20 INTANGIBLE ASSETS (continued) Impairment tests for goodwill (continued) For goodwill attributable to the Group's online music business and online literature business within VAS segment, FinTech and Business Services segment and television series and film production within Others segment, value in use using discounted cash flows was calculated, generally, based on five-year financial projections plus a terminal value related to cash flows beyond the projection period extrapolated at an estimated terminal growth rate of generally not more than 5% (2020: not more than 5%). Pre-tax discount rates ranging from 14% to 22% (2020: 13% to 23%) were applied, which reflected assessment of time value and specific risks relating to the industries that the Group operates in. Management leveraged their experiences in the industries and provided forecast based on past performance and their anticipation of future business and market developments. Key parameters applied in the financial projections for impairment review purpose also included revenue growth rates, on a compound annual basis, of not more than 25% (2020: not more than 22%). Management has not identified any reasonably possible change in key assumptions that could cause carrying amounts of the above CGUS (or groups of CGUS) to exceed the recoverable amounts. In light of the economic, operating environment and market uncertainties at the financial year end, the carrying amounts of the CGUS related to interactive live video business within VAS segment and Online Advertising segment have been reduced to their respective recoverable amounts through recognition of impairment loss against goodwill of RMB4,012 million and RMB4,500 million respectively as a result of the impairment test performed as detailed below. 260 During the year ended 31 December 2021, the Group's additions to investments in associates mainly comprised the following: RMB'Million 297,609 Disposals (3,238) (2,227) Impairment provision, net (Note (c)) (15,391) (5,254) Currency translation differences At end of the year (344) (3,548) 316,574 297,609 00 262 Tencent Holdings Limited Notes to the Consolidated Financial Statements For the year ended 31 December 2021 21 INVESTMENTS IN ASSOCIATES (continued) Note: (2,329) At beginning of the year (1,407) 3,310 213,614 Additions (Note (a)) Transfers (Note (b)) 51,288 37,651 (19,731) 33,585 Dilution gains on deemed disposal (Note 7(a)) Dividends 18,646 Share of (loss)/profit of associates (Note 10) (16,592) 3,748 Share of other comprehensive income of associates 508 363 Share of other changes in net assets of associates 8,430 15,492 (305) 1,284 330,424 19,802 23,554 Investments in unlisted entities 163,382 133,506 Treasury investments and others 9,000 8,884 192,184 165,944 Included in current assets: Investments in listed entities 4 10 Treasury investments and others 10,569 6,583 Investments in listed entities RMB'Million RMB'Million 2020 5,309 Financial liabilities measured according to IFRIC 17: Dividends payable for distribution in specie (Note 15(b)) 102,451 586,049 409,098 Annual Report 2021 267 10,573 Notes to the Consolidated Financial Statements 23 FINANCIAL INSTRUMENTS BY CATEGORY (continued) The Group's exposure to various risks associated with the financial instruments is discussed in Note 3. The maximum exposure to credit risk at the end of the reporting period is the carrying amount of each class of financial assets mentioned above. 24 FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS 00 FVPL include the following: Included in non-current assets: As at 31 December 2021 For the year ended 31 December 2021 6,593 202,757 172,537 (6,298) (9,302) At end of the year 202,757 172,537 Note: (a) (b) Currency translation differences During the year ended 31 December 2021, the Group's additions and transfers mainly comprised the following: (ii) (iii) an additional investment in a social network platform of approximately USD531 million (equivalent to approximately RMB3,432 million); new investments and additional investments with an aggregate amount of approximately RMB80,946 million in listed and unlisted entities. These companies are principally engaged in express delivery, Internet platform, retail, eCommerce, technology and other Internet-related businesses. None of the above investment was individually significant that triggers any disclosure requirements pursuant to Chapter 14 of the Listing Rules at the time of inception; and except as described in Note 21(b), transfers also mainly comprised certain investments with an aggregate amount of approximately RMB27,233 million designated as FVOCI due to the conversion of preferred shares into ordinary shares upon their IPOs. Management has assessed the level of influence that the Group exercises on certain FVPL with shareholding exceeding 20%. Since these investments are either held in form of redeemable instruments or interests in limited life partnership without significant influence, these investments have been classified as FVPL. Annual Report 2021 269 (i) 2,802 (13,314) Disposals and others 268 Tencent Holdings Limited Notes to the Consolidated Financial Statements For the year ended 31 December 2021 24 FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS (continued) Movement of FVPL is analysed as follows: 2021 2020 RMB'Million (34,282) RMB'Million 172,537 135,936 Additions and transfers (Note (a) and Note 21(b)) 23,240 21,960 Changes in fair value (Note 7) 47,560 37,257 At beginning of the year Other financial liabilities (Note 39) Financial liabilities at fair value: 27,873 Financial assets As at 31 December 2021 2020 RMB'Million RMB'Million Financial assets at amortised cost: Deposits and other receivables (Note 26) As at 31 December 2021, the financial instruments of the Group are analysed as follows: 32,682 Term deposits (Note 29) 103,304 100,168 Accounts receivable (Note 30) 49,331 44,981 Cash and cash equivalents (Note 31(a)) 167,966 17,527 152,798 23 FINANCIAL INSTRUMENTS BY CATEGORY Notes to the Consolidated Financial Statements 256,656 3,748 363 4,111 Note: As at 31 December 2021, listed entities of the investments in associates consist of directly and indirectly held listed equity interests. Annual Report 2021 265 For the year ended 31 December 2021 Notes to the Consolidated Financial Statements 21 INVESTMENTS IN ASSOCIATES (continued) Management has assessed the level of influence that the Group exercises on certain associates with the respective shareholding below 20% and certain associates with shareholding over 50% (voting power is below 50%), with total carrying amounts of RMB214,927 million and RMB18,675 million as at 31 December 2021, respectively (31 December 2020: RMB212,349 million and RMB15,936 million, respectively). Management determined that it has significant influence thereon through the board representation or other arrangements made, and it has no control or joint control over such investees as the Group has no power to direct relevant activities due to other arrangements made. Consequently, these investments have been classified as associates. There were no material contingent liabilities relating to the Group's interests in the associates. 22 INVESTMENTS IN JOINT VENTURES As at 31 December 2021, the Group's investments in joint ventures of RMB6,614 million (31 December 2020: RMB7,649 million) mainly comprised an investee company that is a special purpose vehicle of which the Group has a majority stake therein for the investment in one of the telecommunication carriers in the PRC and other joint venture initiatives in new retail and entertainment-related businesses. 00 Share of profit amounting to RMB148 million was recognised during the year ended 31 December 2021 (2020: share of loss amounting to RMB76 million) (Note 10). During the year ended 31 December 2021, the Group made an aggregate impairment provision of RMB904 million (2020: RMB1,388 million) against the carrying amounts of the investments in joint ventures, based on the respective assessed recoverable amounts. For the year ended 31 December 2021 628,033 Restricted cash (Note 31(b)) 2,520 Notes payable (Note 37) 145,590 122,057 Long-term payables (Note 38) 9,966 9,910 Other financial liabilities (Note 39) 6,664 126,387 9,512 109,470 94,030 Lease liabilities (Note 18) 21,947 14,020 Other payables and accruals (excluding prepayments received from customers and others, staff costs and welfare accruals) (Note 41) 31,220 Accounts payable (Note 40) 2,476 155,939 Financial liabilities at amortised cost: Other financial assets (Note 27) For the year ended 31 December 2021 8 Financial assets at fair value: FVPL (Note 24) 202,757 172,537 FVOCI (Note 25) Borrowings (Note 36) 250,257 Assets held for distribution (Note 32) 102,451 Other financial assets (Note 27) 1,726 1,129 914,234 704,759 Financial liabilities 213,091 Notes to the Consolidated Financial Statements 266 Tencent Holdings Limited 634,661 190 (35) 263 (1,050) 962 income statement Credited/(charged) to consolidated (2,541) (2,541) Business combinations (19,718) (300) (3,845) (928) (3,561) (6,188) (4,896) At 1 January 2021 RMB'Million RMB'Million RMB'Million RMB'Million RMB'Million RMB'Million RMB'Million Total Others depreciation investees and FVOCI (98) 232 Withholding tax paid 3,313 Business combinations (15,010) (227) (2,746) (886) (1,743) (5,781) (3,627) At 1 January 2020 (17,918) (122) (3,655) (963) (2,827) subsidiaries (3,926) At 31 December 2021 375 16 276 50 421 1280 (1) 50 Currency translation differences 421 changes in equity Credited to consolidated statement of 3,313 (6,425) (1,965) combinations disposals of 2,214 1,792 (387) 1,112 Credited/(charged) to consolidated income statement 165 165 Business combinations 20,378 4,973 8,666 684 6,055 At 1 January 2020 30,844 8,848 12,022 1,707 8,267 At 31 December 2021 (79) (115) 36 Currency translation differences 247 247 Credited to consolidated statement of changes in equity 5,555 1,614 4,731 Charged to consolidated statement of changes in equity (24) (24) of FVPL be remitted by in business Accelerated Deemed Changes in fair value earnings anticipated to acquired tax on the Intangible assets Withholding Deferred income tax liabilities on temporary differences arising from For the year ended 31 December 2021 The movements of deferred income tax liabilities before offsetting were as follows: tax 28 DEFERRED INCOME TAXES (continued) Tencent Holdings Limited 274 00 The Group only recognises deferred income tax assets for cumulative tax losses if it is probable that future taxable profits will be available to utilise those tax losses. Management will continue to assess the recognition of deferred income tax assets in future reporting periods. As at 31 December 2021, the Group did not recognise deferred income tax assets of RMB2,922 million (31 December 2020: RMB2,783 million) in respect of cumulative tax losses amounting to RMB13,412 million (31 December 2020: RMB12,690 million). These tax losses in the Mainland of China will expire from 2022 to 2026. Note: 25,005 7,083 10,458 297 7,167 At 31 December 2020 (245) (245) Currency translation differences Notes to the Consolidated Financial Statements (20) (1,985) Credited/(charged) to consolidated 21,639 RMB'Million RMB'Million 2020 2021 As at 31 December 44,981 49,331 (3,892) (4,129) 48,873 53,460 RMB'Million RMB'Million 2020 2021 As at 31 December The majority of the Group's accounts receivable were denominated in RMB. Over 90 days ~ 61 - 90 days 31 - 60 days 0-30 days Accounts receivable and their ageing analysis, based on recognition date, are as follows: For the year ended 31 December 2021 Loss allowance Accounts receivable from contracts with customers Notes to the Consolidated Financial Statements 30 ACCOUNTS RECEIVABLE 19,708 13,255 10,867 6,105 5,621 5,580 4,324 5,416 6,087 12,961 13,751 15,835 19,548 RMB'Million RMB'Million 2020 2021 As at 31 December Tencent Holdings Limited Others Third party platform providers Online advertising customers and agencies FinTech and cloud customers The carrying amounts of accounts receivable of the Group's major agents/customers are as follows: 30 ACCOUNTS RECEIVABLE (continued) For the year ended 31 December 2021 Notes to the Consolidated Financial Statements 277 Annual Report 2021 44,981 49,331 9,900 8,332 4,506 Content production related customers 276 00 Term deposits with initial terms of over three months were neither past due nor impaired. As at 31 December 2021, the carrying amounts of the term deposits with initial terms of over three months approximated their fair values. 275 Annual Report 2021 (19,718) (300) (3,845) (928) (3,561) (6,188) (4,896) At 31 December 2020 35 (1,106) 82 16 Notes to the Consolidated Financial Statements (64) (1,106) changes in equity Charged to consolidated statement of 3,477 3,477 Withholding tax paid (5,129) (54) (1,099) (42) (794) (3,900) 760 income statement Currency translation differences 1,480 For the year ended 31 December 2021 As at 31 December 2021, the Group recognised the relevant deferred income tax liabilities of RMB3,926 million (31 December 2020: RMB6, 188 million) on earnings anticipated to be remitted by certain subsidiaries in the foreseeable future. No withholding tax had been provided for the earnings of approximately RMB96,262 million (31 December 2020: RMB33,832 million) expected to be retained by the PRC subsidiaries and not to be remitted to a foreign investor in the foreseeable future based on several factors, including management's estimation of overseas funding requirements. 100,168 103,304 68,487 83,813 2,913 3,964 14,083 24,039 51,491 55,810 Other currencies USD term deposits RMB term deposits Included in current assets: 28 DEFERRED INCOME TAXES (continued) 31,681 16 18 31,665 19,473 RMB'Million 2020 RMB'Million 2021 As at 31 December Other currencies RMB term deposits Included in non-current assets: An analysis of the Group's term deposits by currencies is as follows: 29 TERM DEPOSITS 19,491 5,189 1,374 Credited to consolidated income statement Loans to investees and investees' shareholders (Note (a)) 966 1,290 Lease deposits and other deposits 2,948 5,604 Interest receivables 3,700 10,343 Receivables related to financial services 14,499 15,795 Running royalty fees for online games (Note (b)) 10,244 18,714 Prepayments and prepaid expenses Included in current assets: 24,630 37,177 6,581 7,439 667 445 Running royalty fees for online games (Note (b)) Others 1,078 4,058 Loans to investees and investees' shareholders (Note (a)) 889 6,717 1,154 258 Refundable value-added tax 1,151 2021 As at 31 December - to be recovered within 12 months - to be recovered after more than 12 months Deferred income tax assets: The analysis of deferred income tax assets and liabilities before offsetting is as follows: Deferred income taxes are calculated in full on temporary differences under the liability method using the tax rates which are expected to apply at the time of reversal of the temporary differences. 28 DEFERRED INCOME TAXES As at 31 December 2021, the Group's other financial assets mainly comprised the treasury investments measured at amortised cost amounting to RMB1,284 million (31 December 2020: RMB8 million), and the outstanding interest rate swap contracts measured at fair value amounting to RMB1,253 million (31 December 2020: RMB5 million) to hedge the Group's exposure arising from borrowings and senior notes carried at floating rates. 27 OTHER FINANCIAL ASSETS For the year ended 31 December 2021 Notes to the Consolidated Financial Statements Annual Report 2021 271 As at 31 December 2021, the carrying amounts of deposits and other assets (excluding prepayments and refundable value-added tax) approximated their fair values. As at 31 December 2021, loss allowances made against the gross amounts of deposits and other assets were not significant. Prepayments for capital transactions Running royalty fees for online games comprised prepaid royalty fees, unamortised running royalty fees and deferred Online Service Fees. As at 31 December 2021, the balances of loans to investees and investees' shareholders were mainly repayable within a period of one to five years (included in non-current assets), or within one year (included in current assets), and are interest-bearing at rates of not higher than 12.0% per annum (31 December 2020: not higher than 12.0% per annum). (a) Note: 64,951 102,567 40,321 65,390 6,659 10,211 Others 182 1,128 Dividend and other investment-related receivables 865 (b) 2020 15,415 Prepayments for media contents and game licences RMB'Million RMB'Million 2020 2021 213,091 250,257 13,626 22,392 77 199,465 227,788 RMB'Million RMB'Million 2020 2021 As at 31 December Note: At end of the year Currency translation differences Disposals Changes in fair value Additions and transfers (Note) At beginning of the year Movement of FVOCI is analysed as follows: Treasury investments Equity investments in unlisted entities Equity investments in listed entities FVOCI include the following: 25 FINANCIAL ASSETS AT FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME For the year ended 31 December 2021 213,091 81,721 93,211 16,474 RMB'Million RMB'Million 2020 2021 As at 31 December Included in non-current assets: 26 PREPAYMENTS, DEPOSITS AND OTHER ASSETS For the year ended 31 December 2021 Notes to the Consolidated Financial Statements 270 Tencent Holdings Limited 00 an existing investee company engaged in games development with carrying value of approximately RMB6.6 billion transferred from investment in an associate to FVOCI due to retirement of board representative, resulting in step down gain of approximately RMB11.6 billion (Note 7(a)(ii)). transfer from investment in an associate in relation to the Class A ordinary shares of JD.com held by the Group to the extent of approximately RMB15.2 billion (Note 21(b)(i)) (other than those held by the Group for the Distribution in Specie of approximately RMB97.1 billion that were classified as "Assets held for distribution" (Note 32)); and (v) 18,518 (iv) (iii) a new investment in a games development entity of approximately RMB2,616 million; (ii) an additional investment in an eCommerce entity of approximately JPY72,406 million (equivalent to approximately RMB4,294 million); (i) During the year ended 31 December 2021, except as described in Note 24(a)(iii), the Group's additions and transfers mainly comprised the following: 213,091 250,257 (9,802) (5,656) (6,957) (33,555) 131,655 (16,834) new investments and additional investments with an aggregate amount of approximately RMB23,473 million. These companies are principally engaged in publishing, Internet platform, technology, property management and other Internet-related businesses; RMB'Million RMB'Million 17,878 At 31 December 2020 1,488 (1,488) Set-off of deferred income tax assets/liabilities (210) 35 (245) Currency translation differences (1,130) (1,106) (24) Charged to consolidated statement of changes in equity 3,477 3,477 Withholding taxes paid (398) (5,129) 4,731 Credited/(charged) to consolidated income statement (Note 11) (1,820) (1,985) 165 Business combinations 5,368 (12,841) 18,209 At 1 January 2020 RMB'Million RMB'Million 21,348 (16,061) 5,287 Annual Report 2021 116 19 84 13 Business combinations 25,005 7,083 10,458 297 7,167 At 1 January 2021 (Note) RMB'Million Total RMB'Million payments and others RMB'Million Tax losses RMB'Million RMB'Million assets Accrued of intangible Share-based amortisation Accelerated Deferred income tax assets on temporary differences arising from The movements of deferred income tax assets before offsetting were as follows: 28 DEFERRED INCOME TAXES (continued) For the year ended 31 December 2021 Notes to the Consolidated Financial Statements 273 expenses RMB'Million net liabilities assets At 1 January 2021 RMB'Million RMB'Million RMB'Million Deferred income tax, net liabilities assets Deferred income tax income tax Deferred The movements of the deferred income tax assets/liabilities account were as follows: 28 DEFERRED INCOME TAXES (continued) For the year ended 31 December 2021 Notes to the Consolidated Financial Statements 21,348 272 Tencent Holdings Limited (19,718) (17,918) (1,727) (1,299) ― to be recovered within 12 months (17,991) (16,619) ― to be recovered after more than 12 months Deferred income tax liabilities: 25,005 30,844 11,873 12,966 13,132 00 1,087 (16,061) Business combinations Deferred income tax, income tax income tax Deferred Deferred 12,926 (13,142) 26,068 At 31 December 2021 1,119 (1,119) Set-off of deferred income tax assets/liabilities 296 375 5,287 (79) 668 421 247 Credited to consolidated statement of changes in equity 3,313 3,313 Withholding taxes paid 5,787 232 5,555 Credited to consolidated income statement (Note 11) (2,425) (2,541) 116 Currency translation differences 49,331 44,981 279 Notes to the Consolidated Financial Statements Annual Report 2021 On the Declaration Date, the JD.com Shares of approximately RMB97.1 billion designated as FVOCI were measured at fair value and classified as assets held for distribution. Subsequent changes in the fair value of these JD.com Shares amounting to approximately RMB5.4 billion were recorded in other comprehensive income during the year ended 31 December 2021. As at 31 December 2021, assets held for distribution represented the JD.com Shares held by the Group to be distributed in specie as the interim dividend declared on 23 December 2021 (Note 15(b) and Note 25(iv)). 32 ASSETS HELD FOR DISTRIBUTION As at 31 December 2021, restricted deposits held at banks of RMB2,476 million (31 December 2020: RMB2,520 million) were mainly denominated in RMB, the majority of which were reserves provided for certain licensed business under regulatory requirements. (b) Restricted cash Approximately RMB77,181 million (31 December 2020: RMB58,651 million) and RMB1,133 million (31 December 2020: RMB7,207 million) within the total balance of the Group's cash and cash equivalents were denominated in RMB and placed with banks in the Mainland of China and Hong Kong, respectively. Some online advertising customers and agencies are usually granted with a credit period within 90 days immediately following the month-end in which the relevant obligations under the relevant contracted advertising orders are delivered. Third party platform providers usually settle the amounts due by them within 60 days. Other customers, mainly including content production related customers and FinTech and cloud customers, are usually granted with a credit period within 90 days. 167,966 67,565 83,156 Term deposits and highly liquid investments with initial terms within three months Bank balances and cash 85,233 152,798 RMB'Million The Group applies the simplified approach permitted by IFRS 9, which requires expected lifetime losses to be recognised from initial recognition of the assets. The provision matrix is determined based on historical observed default rates over the expected life of the receivables with similar credit risk characteristics and is adjusted for forward-looking estimates. The historical observed default rates are updated and changes in the forward-looking estimates are analysed at year end. For the years ended 31 December 2021 and 2020, information about the impairment of accounts receivable and the Group's exposure to credit risk and foreign exchange risk can be found in Note 3.1. 84,810 As at 31 December 2021, the carrying amounts of accounts receivable approximated their fair values. 00 278 31 BANK BALANCES AND CASH Tencent Holdings Limited Notes to the Consolidated Financial Statements For the year ended 31 December 2021 As at 31 December 2021 2020 RMB'Million (a) Cash and cash equivalents associates and joint ventures (420) (5,151) Share of other changes in net assets of 3,320 - Employee share award schemes Transfer of share of other changes in net assets of associates to profit or loss upon disposal and deemed disposal Value of employee services: - Employee share option schemes Tax benefit from share-based payments 3,320 (4,731) Other fair value losses, net instruments to retained earnings deemed disposal of financial Transfer of gains on disposal and 16,786 (483) 5,817 3,524 3,145 7,408 11.167 (13,792) Balance at 1 January 2020 Acquisition of additional equity interests (Note (d)) in non wholly-owned subsidiaries associates and joint ventures Transfer of share of other comprehensive Transfer of equity interests of subsidiaries (6,472) (2,795) 588 588 413 413 60 60 (154) 347 (154) 127,873 income to profit or loss upon disposal (2,795) (Note (c)) Net gains from changes in fair value of FVOCI Profit appropriations to statutory reserves (684) in subsidiaries Dilution of/changes in interests (765) of non-controlling interests Changes in put option liability in respect (2,730) arising from business combinations Recognition of put option liabilities (6,472) to non-controlling interests Share of other comprehensive income of (Note (b)) FVOCI RMB'Million 8,004 4,929 (23,903) 14,743 102,223 (32,684) Balance at 31 December 2021 5,380 5,380 assets held for distribution Gain from changes in fair value of 2,706 2,706 Other fair value gains, net 783 783 non-controlling interests Lapses of put option liability in respect of 8 (18,032) (18,032) 8 Currency translation differences and joint ventures disposal of associates 512 (15,073) 669 589 73,901 Annual Report 2021 283 Total RMB'Million RMB'Million RMB'Million RMB'Million RMB'Million RMB'Million RMB'Million Others reserves reserves differences joint ventures (Note (a)) (2,730) compensation statutory translation and Capital PRC Share-based Currency in associates Investments OTHER RESERVES (continued) 34 For the year ended 31 December 2021 Notes to the Consolidated Financial Statements reserves (765) Expiry Date 736 The Group has elected to recognise changes in the fair value of certain investments in equity instruments in other comprehensive income. These changes are accumulated with FVOCI reserve with equity. The Group transfers amounts from this reserve to retained earnings when the relevant equity instruments are derecognised. During the year ended 31 December 2021, the acquisition of additional equity interests in non wholly-owned subsidiaries mainly comprised the additional acquisition of equity interest of Halti S.A. ("Halti"), a non wholly-owned subsidiary of the Group. The Group acquired additional 12.81% equity interest of Halti based on the agreed purchase price. This transaction was accounted for as transaction with non-controlling interest, and the excess of considerations over the aggregate carrying amounts of acquired non-controlling interests of RMB2,409 million was recognised directly in equity. Annual Report 2021 285 Notes to the Consolidated Financial Statements For the year ended 31 December 2021 35 SHARE-BASED PAYMENTS (a) Share option schemes The Company has adopted five share option schemes, namely, the Pre-IPO Option Scheme, the Post-IPO Option Scheme I, the Post-IPO Option Scheme II, the Post-IPO Option Scheme III and the Post-IPO Option Scheme IV. The Pre-IPO Option Scheme, the Post-IPO Option Scheme I, the Post-IPO Option Scheme II and the Post-IPO Option Scheme III expired on 31 December 2011, 23 March 2014, 16 May 2017 and 13 May 2019, respectively. Upon the expiry of these schemes, no further options would be granted under these schemes, but the options granted prior to such expiry continued to be valid and exercisable in accordance with provisions of the schemes. As at 31 December 2021, there were no outstanding options exercisable of the Pre-IPO Option Scheme, the Post- IPO Option Scheme I and the Post-IPO Option Scheme III. In respect of the Post-IPO Option Scheme IV which continues to be in force, the Board may, at its discretion, grant options to any qualifying participants to subscribe for shares in the Company, subject to the terms and conditions stipulated therein. The exercise price must be in compliance with the requirement under the Listing Rules. In addition, the option vesting period is determined by the Board provided that it is not later than the last day of a 7-year period for the Post-IPO Option Scheme IV after the date of grant of option. During the year ended 31 December 2021, the Company allowed certain grantees under the Post-IPO Option Scheme II and the Post-IPO Option Scheme IV to surrender their rights to receive a portion of the underlying shares (with equivalent fair value) to set off against the exercise price and/or individual income tax payable when they exercised their options. 00 (e) 286 Notes to the Consolidated Financial Statements For the year ended 31 December 2021 35 SHARE-BASED PAYMENTS (continued) (a) Share option schemes (continued) (i) Movements in share options Movements in the number of share options outstanding and their related weighted average exercise prices are as follows: Post-IPO Option Scheme II Average exercise price Post-IPO Option Scheme IV No. of Average options exercise price Total No. of options No. of options At 1 January 2021 Tencent Holdings Limited HKD205.36 (d) With approvals obtained from respective boards of directors of these companies, the Reserve Fund can be used to offset accumulated deficit or to increase capital. (3) 1 (9,016) (9,016) (1,214) (1,214) Balance at 31 December 2020 (27,238) 134,309 10,918 (5,871) 4,260 6,878 Share-based compensation reserve arises from share option schemes and share award schemes adopted by the subsidiaries of the Group (Note 35(d)). (2,117) 00 284 Tencent Holdings Limited 34 OTHER RESERVES (continued) Note: Notes to the Consolidated Financial Statements For the year ended 31 December 2021 (a) (b) (c) The capital reserve mainly arises from transactions undertaken with non-controlling interests. In accordance with the Companies Laws of the PRC and the stipulated provisions of the articles of association of subsidiaries with limited liabilities in the PRC, appropriation of net profit (after offsetting accumulated losses from prior years) should be made by these companies to their respective Statutory Surplus Reserve Funds and the Discretionary Reserve Funds before distributions are made to the owners. The percentage of appropriation to Statutory Surplus Reserve Fund is 10%. The amount to be transferred to the Discretionary Reserve Fund is determined by the equity owners of these companies. When the balance of the Statutory Surplus Reserve Fund reaches 50% of the registered capital, such transfer needs not to be made. Both the Statutory Surplus Reserve Fund and Discretionary Reserves Fund can be capitalised as capital of an enterprise, provided that the remaining Statutory Surplus Reserve Fund shall not be less than 25% of the registered capital. In addition, in accordance with the Law of the PRC on Enterprises with Foreign Investments and the stipulated provisions of the articles of association of wholly owned foreign subsidiaries in the PRC, appropriation from net profit (after offsetting accumulated losses brought forward from prior years) should be made by these companies to their respective Reserve Fund. The percentage of net profit to be appropriated to the Reserve Fund is not less than 10% of the net profit. When the balance of the Reserve Fund reaches 50% of the registered capital, such transfer needs not to be made. 121,139 (684) 37,435,134 Exercised Notes to the Consolidated Financial Statements For the year ended 31 December 2021 35 SHARE-BASED PAYMENTS (continued) (a) Share option schemes (continued) (i) Movements in share options (continued) During the year ended 31 December 2021, 3,374,630 options (2020: 4,399,815 options) were granted to an executive director of the Company, out of which 843,657 options were voluntarily waived in February 2022. As a result of the Distribution in Specie (Note 15(b)), pursuant to the scheme rules of the Post-IPO Option Scheme II and the Post-IPO Option Scheme IV, adjustments had been made to the exercise price of the share options which remained outstanding thereunder as at the Ex-dividend Date. Please refer to the announcement of the Company dated 14 March 2022 for details. During the year ended 31 December 2021, 4,834,315 options (2020: 15,656,921 options) were exercised. The weighted average price of the shares at the time these options were exercised was HKD559.01 per share (equivalent to approximately RMB464.92 per share) (2020: HKD539.43 per share (equivalent to approximately RMB464.09 per share)). (ii) Outstanding share options Details of the expiry dates, exercise prices and the respective numbers of share options which remained outstanding as at 31 December 2021 and 2020 are as follows: Number of share options Annual Report 2021 287 31 December 669 Range of exercise price 2021 2020 7 years commencing from the date of grant of options (Post-IPO Option Scheme II and Post-IPO Option Scheme IV) HKD112.30 HKD174.86 10,018,592 11,082,519 Currency translation differences and deemed disposal of associates 347 127,873 736 31 December Granted HKD376.39 20,038,030 50,692,601 HKD200.96 HKD189.79 (2,278,079) Lapsed/forfeited HKD124.30 (10,938) HKD380.50 HKD587.26 HKD321.25 HKD429.76 67,806,750 105,241,884 16,785,250 16,785,250 (2,556,236) (4,834,315) (346,483) (357,421) At 31 December 2021 HKD206.40 35,146,117 HKD424.63 81,689,281 116,835,398 Exercisable as at 31 December 2021 HKD206.36 35,024,304 30,654,571 HKD381.54 30,418,848 65,443,152 HKD185.86 Granted Exercised HKD129.34 (12,919,216) Lapsed/forfeited HKD175.14 (4,450) 50,358,800 HKD375.36 61,738,193 112,096,993 HKD396.39 9,318,989 9,318,989 HKD321.74 (2,737,705) (15,656,921) HKD364.34 (512,727) (517,177) At 31 December 2020 HKD205.36 37,435,134 HKD380.50 67,806,750 105,241,884 Exercisable as at 31 December 2020 At 1 January 2020 205 Profit appropriations to statutory reserves (1,289) Tencent Holdings Limited 280 00 62,487 (4,843) 67,330 9,608,378,469 2,052 306 1,746 At 31 December 2021 non-controlling interests Transfer of equity interests of subsidiaries to (2,170) (2,170) (5,581,800) 2,090 (2,090) - shares vested from share award schemes and transferred to the grantees (Note (d)) Repurchase and cancellation of shares (Note (e)) 15,213,243 - shares allotted for share award schemes (Note (c)) (2,827) (2,827) 18,347 18,347 - shares withheld for share award schemes (Note (b)) - value of employee services Notes to the Consolidated Financial Statements For the year ended 31 December 2021 33 SHARE CAPITAL, SHARE PREMIUM AND SHARES HELD FOR SHARE AWARD SCHEMES (continued) Number of issued and fully 26,640,678 - shares allotted for share award schemes (Note (c)) (1,865) (1,865) 9,720 9,720 - shares withheld for share award schemes (Note (b)) -value of employee services Employee share award schemes: 1,716 1,768 1,716 14,656,747 Employee share award schemes: 1,768 - value of employee services Employee share option schemes: 31,269 (4,002) 35,271 9,552,615,286 At 1 January 2020 Total RMB'Million for share award schemes RMB'Million RMB'Million Share capital Share premium RMB'Million paid ordinary shares* Shares held - shares issued (Note (a)) 1,043 1,661 1,043 9,797,440 1,726,848 8,576,483 116,835,398 105,241,884 The outstanding share options as of 31 December 2021 were divided into one to four tranches on an equal basis as at their grant dates. The first tranche can be exercised after a specified period ranging from one month to five years from the grant date, and then the remaining tranches will become exercisable in each subsequent year. 00 288 Tencent Holdings Limited Notes to the Consolidated Financial Statements For the year ended 31 December 2021 35 SHARE-BASED PAYMENTS (continued) (a) Share option schemes (continued) HKD502.50~HKD586.00 HKD606.30~HKD618.00 (iii) Fair value of options Other than the exercise price mentioned above, significant judgment on parameters, such as risk free rate, dividend yield and expected volatility, are required to be made by the directors in applying the Binomial Model, which are summarised as below. 2021 2020 Weighted average share price at the grant date Risk free rate Dividend yield HKD582.94 0.94% 1.35% 0.23% Expected volatility (Note) 31.00% 32.00% HKD396.24 0.27% 1.52% 0.23% 30.00% 31.00% Note: The expected volatility, measured as the standard deviation of expected share price returns, is determined based on the average daily trading price volatility of the shares of the Company. Annual Report 2021 289 The directors of the Company have used the Binomial Model to determine the fair value of the options as at the respective grant dates, which is to be expensed over the relevant vesting period. The weighted average fair value of options granted during the year ended 31 December 2021 was HKD178.35 per share (equivalent to approximately RMB149.72 per share) (2020: HKD115.13 per share (equivalent to approximately RMB104.72 per share)). - shares vested from share award schemes and transferred to the grantees (Note (d)) Transfer of equity interests of subsidiaries to 22,362,446 HKD403.16~HKD444.20 4,834,315 1,661 - shares issued (Note (a)) - value of employee services Employee share option schemes: 44,381 (4,412) 48,793 9,593,912,711 At 1 January 2021 RMB'Million Total for share award schemes RMB'Million 22,263,239 Share premium RMB'Million Share capital paid ordinary shares* Shares held Number of issued and fully As at 31 December 2021 and 2020, the authorised share capital of the Company comprises 50,000,000,000 ordinary shares with par value of HKD0.00002 per share. 33 SHARE CAPITAL, SHARE PREMIUM AND SHARES HELD FOR SHARE AWARD SCHEMES For the year ended 31 December 2021 HKD225.44~HKD272.36 29,843,566 32,520,471 HKD334.20~HKD386.60 36,336,078 37,549,600 RMB'Million 1,483 (1,209) non-controlling interests 611 53 (35) (35) Tax benefit from share-based payments Acquisition of additional equity interests - Employee share award schemes - Employee share option schemes Value of employee services: of associates and joint ventures disposal and deemed disposal income to retained earnings upon Transfer of share of other comprehensive (5,089) (5,089) disposal loss upon disposal and deemed joint ventures to profit or net assets of associates and Transfer of share of other changes in 8,429 (22,393) 8,429 associates and joint ventures Share of other changes in net assets of (22,393) (Note (d)) instruments to retained earnings 611 ទ≡ 53 462 (2,323) (4,305) 512 12 (15,073) upon disposal and deemed loss to profit or loss Transfer of share of other comprehensive associates and joint ventures Share of other comprehensive income of value of FVOCI Net losses from changes in fair 205 deemed disposal of financial in subsidiaries 1,483 of non-controlling interests Changes in put option liabilities in respect (1,289) arising from business combinations Recognition of put option liabilities (2,323) to non-controlling interests Transfer of equity interests of subsidiaries (4,305) (Note (e)) in non wholly-owned subsidiaries 462 Dilution of/changes in interests Transfer of gains on disposal and 121,139 (2,117) Notes to the Consolidated Financial Statements 34 OTHER RESERVES 282 Tencent Holdings Limited During the year ended 31 December 2021, the Company repurchased 5,581,800 of its own shares from the market which were subsequently cancelled (2020: nil). The shares were acquired at prices ranging from HKD412.60 to HKD516.00, with an average price of HKD465.58 per share. During the year ended 31 December 2021, the Share Scheme Trust transferred 32,749,222 ordinary shares of the Company (2020: 27,351,216 ordinary shares) to the share awardees upon vesting of the awarded shares (Note 35(b)). (e) (d) During the year ended 31 December 2021, the Company allotted 15,213,243 ordinary shares (2020: 26,640,678 ordinary shares) to the Share Scheme Trust for the purpose of granting awarded shares to the participants under the Share Award Schemes. (c) 00 During the year ended 31 December 2021, the Share Scheme Trust withheld 5,921,232 ordinary shares (2020: 4,259,939 ordinary shares) of the Company for an amount of approximately HKD3,394 million (equivalent to approximately RMB2,827 million) (2020: HKD2,108 million (equivalent to approximately RMB1,865 million)), which had been deducted from the equity. During the year ended 31 December 2021, 4,834,315 Post-IPO options (2020: 15,656,921 Post-IPO options) with exercise prices ranging from HKD116.40 to HKD546.50 (2020: HKD112.30 to HKD444.20) were exercised. In 2020, the right to receive 1,000,174 options was surrendered by the grantees under the Post-IPO Option Scheme II to set off against the exercise consideration and individual income tax payable by the grantees when they exercise their options. (b) For the year ended 31 December 2021 (a) 33 SHARE CAPITAL, SHARE PREMIUM AND SHARES HELD FOR SHARE AWARD SCHEMES (continued) For the year ended 31 December 2021 Notes to the Consolidated Financial Statements Annual Report 2021 281 As at 31 December 2021, the total number of issued ordinary shares of the Company included 69,902,440 shares (31 December 2020: 81,517,187 shares) held under the Share Award Schemes. 44,381 (4,412) 48,793 1,773 246 1,527 9,593,912,711 At 31 December 2020 Note: 1,209 Investments Currency 6,878 4,260 (5,871) 10,918 134,309 (27,238) Balance at 1 January 2021 (Note (c)) (Note (b)) (Note (a)) Total RMB'Million Others RMB'Million reserves RMB'Million in associates RMB'Million RMB'Million RMB'Million RMB'Million reserves differences ventures FVOCI reserves Share-based compensation PRC statutory translation and joint Capital RMB'Million (3) Notes to the Consolidated Financial Statements As Share-based reported compensation Share-based investee of intangible provisions/ Income tax reported compensation companies (a) (b) assets (c) (reversals) (d) effects Non-IFRS (RMB in millions, unless specified) Operating profit 63,713 3,744 (34,652) 885 4,394 38,084 As Profit for the period Impairment losses from 6,452 70 70 (572) 31,751 EPS (RMB per share) - basic 4.143 - diluted 4.074 Operating margin 37% Net margin 28% 3.329 3.269 29% 23% Unaudited three months ended 31 December 2020 Adjustments Net (gains)/ Amortisation 59,369 4,896 (36,149) Tencent Holdings Limited Management Discussion and Analysis Year ended 31 December 2021 Adjustments Net (gains)/ losses from Amortisation Impairment As Share-based investee of intangible provisions/ SSV& Income tax reported compensation companies assets (reversals) CPP 24 26% 28% 3.413 2,260 4,407 (329) 34,454 Profit attributable to equity holders 59,302 4,735 (36,928) 1,926 2,719 4,407 33,207 - basic 6.240 - diluted 6.112 Operating margin 48% Net margin 44% 3.494 (235) (26,491) 10,063 39,510 to equity holders 94,958 7,776 (97,804) 3,010 15,573 604 1,567 (804) 24,880 EPS (RMB per share) - basic 9.957 - diluted 9.788 Operating margin 76% Net margin 66% 2.609 2.547 Profit attributable 25,758 (866) 1,568 effects Non-IFRS (b) (c) (e) (RMB in millions, unless specified) Operating profit 109,723 5,664 (100,349) 23% 1,316 604 976 33,151 Profit for the period 95,705 7,880 (98,046) 3,340 15,573 604 15,217 Others 18% 23 (RMB in millions, unless specified) Operating profit 53,137 6,652 (26,569) 1,149 6,389 Profit for the period 40,075 10,242 (26,781) 3,093 6,452 772 70 40,828 70 (633) 32,518 Profit attributable to equity holders B (d) (b) (a) Management Discussion and Analysis Unaudited three months ended 30 September 2021 Adjustments Net (gains)/ losses from Amortisation Impairment As Share-based investee Annual Report 2021 of intangible SSV& Income tax reported compensation companies assets (reversals) CPP effects Non-IFRS provisions/ Others effects (a) 170,873 167,966 (RMB in millions) 2021 2021 Unaudited 30 September 31 December Audited Tencent Holdings Limited 28 00 Net debt Notes payable Borrowings Cash and cash equivalents Term deposits and others Our cash and debt positions as at 31 December 2021 and 30 September 2021 were as follows: LIQUIDITY AND FINANCIAL RESOURCES We continue to closely monitor the performance of our investment portfolio and strategically make investments, M&A, and explore opportunities in monetising some of the existing investments if appropriate opportunities in the market arise. (3,299) (4,651) 3,672 113,320 (16,444) 118,609 289,482 Management Discussion and Analysis Note: (a) (b) Including put options granted to employees of investee companies on their shares and shares to be issued under investee companies' share-based incentive plans which can be acquired by the Group, and other incentives 29 Annual Report 2021 The Group had no material contingent liabilities outstanding as at 31 December 2021. The Group assesses its creditworthiness based on its business and financial risk profile and monitors its capital by regularly reviewing its debts to adjusted EBITDA ratio, being the measure of the Group's ability to pay off all of its debts which in turn reflects the Group's financial health and liquidity position. Details are set out in Note 3.2 to the consolidated financial statements. The Group has floating rate debts, linked to USD LIBOR, including borrowings and senior notes, whose cash flows are hedged by using interest rate swaps. The effects of the interest rate swaps on the Group's financial position and performance are set out in Note 3.1 to the consolidated financial statements. As at 31 December 2021, the Group's total debts comprised borrowings and notes payable. Particulars of the Group's borrowings and notes payable are set out in Note 36 and Note 37 to the consolidated financial statements respectively. As at 31 December 2021, bank balances and cash held at banks of the Group were mainly denominated in RMB. The Group considers that any reasonable changes in foreign exchange rates of currencies against major functional currencies would not result in a significant change in the Group's results, as the net carrying amounts of financial assets and liabilities denominated in a currency other than the respective subsidiaries' functional currencies are considered to be not significant. For the fourth quarter of 2021, the Group had free cash flow of RMB33.5 billion. This was a result of net cash flow generated from operating activities of RMB51.3 billion, offset by payments for capital expenditures of RMB7.5 billion, payments for media content of RMB8.8 billion, and payments for lease liabilities of RMB1.5 billion. As at 31 December 2021, the Group had net debt of RMB20.2 billion, compared to net debt of RMB26.1 billion as at 30 September 2021. The sequential improvement was mainly due to free cash flow generation and on-market divestitures of certain listed securities, partly offset by our strategic investments in other companies. Management Discussion and Analysis (26,146) (20,243) (148,077) (145,590) (167,551) (155,939) 281,286 (11,422) (25,028) Amortisation of intangible assets resulting from acquisitions Tencent Holdings Limited 26 00 3 Including those held via special purpose vehicles, on an attributable basis. Including net (gains)/losses on deemed disposals/disposals of investee companies, fair value changes arising from investee companies, and other expenses in relation to equity transactions of investee companies (c) Amortisation of intangible assets resulting from acquisitions (d) Impairment provisions/(reversals) for associates, joint ventures, goodwill and other intangible assets arising from acquisitions (e) Mainly including donations and expenses incurred for the Group's SSV & CPP initiatives (excluding share-based compensation expenses) (f) Mainly including expenses incurred for regulatory fines in the Mainland of China and certain litigation settlements (g) Income tax effects of non-IFRS adjustments INVESTMENTS HELD As at 31 December 2021, our investment portfolio amounted to approximately RMB878,653 million (31 December 2020: RMB690,886 million) as recorded in the consolidated statement of financial position under various categories including: investments in associates and joint ventures which are accounted for by using equity method; and financial assets at fair value through profit or loss and through other comprehensive income (including assets held for distribution). Changes in respective items in the consolidated statement of financial position have been disclosed in the notes to the consolidated financial statements in this annual report. We manage our investment portfolio with a primary objective to strengthen our leading position in core businesses and complement our "Connection" strategy in various industries, particularly in social and digital content, 020 and smart retail sectors. We also invest in transportation, FinTech, cloud and other sectors. Management Discussion and Analysis As at 31 December 2021, we held approximately 529 million shares in JD.com, a company operating an eCommerce platform in China, representing approximately 17% of its total outstanding shares. The fair value of this investment was approximately RMB118.5 billion, which accounted for approximately 7% of the Group's total assets as at 31 December 2021. This investment was initially accounted for as investment in an associate and was then transferred to and accounted for as financial assets at fair value through other comprehensive income on 23 December 2021, following the resignation of the Group's representative on the board of JD.com, Mr Lau Chi Ping Martin, as a director of JD.com ("Board Representative's Resignation"). The cost of our investment in JD.com was approximately RMB20.9 billion. During the year ended 31 December 2021, the Group did not receive any dividends from JD.com, and there were deemed disposal gains of approximately RMB78.0 billion arising from the Board Representative's Resignation and unrealised gains of approximately RMB6.2 billion arising from changes in fair value under equity. The Group does not have nor does it exercise any managerial influence on JD.com after the Board Representative's Resignation and regards the investment in JD.com as a passive investment. Except JD.com, there was no other individual investment with a carrying value of 5% or more of the Group's total assets as at 31 December 2021. On 23 December 2021, the Board resolved to declare the Distribution in Specie. The JD.com Shares to be distributed under the Distribution in Specie were presented as “Assets held for distribution" in the consolidated statement of financial position of the Group as at 31 December 2021. The share certificates of the JD.com Shares to be distributed are dispatched to the qualifying shareholders in March 2022. Immediately following the completion of the Distribution in Specie, the Company's beneficial ownership would be reduced to approximately 2.3% in JD.com (based on the total number of issued shares of JD.com as at 31 December 2021). Please refer to the announcements of the Company dated 23 December 2021 and 25 March 2022 for further details in relation to the Distribution in Specie. Notwithstanding the Distribution in Specie, the Group and JD.com will continue to maintain their business relationship in the ordinary course of business. Save as disclosed herein, there were no material changes in our significant investment portfolio that need to be disclosed under paragraph 32 of Appendix 16 to the Listing Rules. Share of (loss)/profit of associates and joint ventures, net intangible assets from acquisitions Impairment provision for investee companies, goodwill and other 38,909 47,717 Net fair value gains 24,390 118,051 Net gains on disposals and deemed disposals of investee companies 1,765 25 660 RMB'Million RMB'Million 2020 2021 (Classified by nature of income) Income of Principal Investment Return from our investment portfolio amounted to RMB120,305 million for the year ended 31 December 2021, with an increase of 123% compared to last year. Details of our return from investment portfolio are as follows: Management Discussion and Analysis 27 Annual Report 2021 Dividend income Annual Report 2021 26% 31% to equity holders 224,822 30,070 (166,661) 10,848 25,534 674 1,567 (3,066) 123,788 EPS (RMB per share) - basic 23.597 - diluted 23.164 Operating margin 48% Net margin 41% 12.992 12.698 Profit attributable 127,919 (3,291) 1,568 (b) (c) (d) (e) = (RMB in millions, unless specified) Operating profit 271,620 22,222 (165,632) 28% 4,651 674 976 159,539 Profit for the year 227,810 30,816 (167,471) 12,272 25,541 674 25,028 Non-IFRS 23% Adjustments 126,983 Profit attributable to equity holders 159,847 16,228 (69,473) 6,387 10,673 (920) 122,742 EPS (RMB per share) - basic 16.844 - diluted 16.523 Operating margin 38% Net margin 33% 12.934 12.689 (1,290) 12,684 7,723 (69,348) Net (gains)/ losses from Amortisation Impairment investee of intangible companies provisions/ Income tax assets (reversals) effects Non-IFRS Year ended 31 December 2020 (c) Operating profit 184,237 13,745 (63,299) 3,299 11,422 149,404 Profit for the year 160,125 17,089 (RMB in millions, unless specified) CPP EPS (RMB per share) assets (20,243) 11,063 (26,146) (20,243) Net (debt)/cash (c) 7,449 7,918 11,063 1,766 2,188 Interest and related expenses 38% 35% 35% 35% 29% 2,092 Capital expenditures (d) 11,661 7,061 Operating profit Adjustments: The following table reconciles our operating profit to our EBITDA and Adjusted EBITDA for the periods presented: Management Discussion and Analysis 21 Annual Report 2021 Capital expenditures consist of additions (excluding business combinations) to property, plant and equipment, construction in progress, investment properties, land use rights and intangible assets (excluding video and music content, game licences and other content). Net (debt)/cash represents period end balance and is calculated as cash and cash equivalents, plus term deposits and others, minus borrowings and notes payable. (d) (c) Adjusted EBITDA margin is calculated by dividing Adjusted EBITDA by revenues. (b) EBITDA is calculated as operating profit minus interest income and other gains/losses, net, and adding back depreciation of property, plant and equipment, investment properties as well as right-of-use assets, and amortisation of intangible assets and land use rights. Adjusted EBITDA is calculated as EBITDA plus equity-settled share-based compensation expenses. (a) Note: 33,960 33,392 9,659 Adjusted EBITDA margin (b) 183,314 194,798 46,533 Management Discussion and Analysis OTHER FINANCIAL INFORMATION Tencent Holdings Limited 20 20 00 Profit attributable to equity holders of the Company. Profit attributable to equity holders of the Company increased by 140% to RMB95.0 billion for the fourth quarter of 2021 on a quarter-on-quarter basis. Non-IFRS profit attributable to equity holders of the Company decreased by 22% to RMB24.9 billion for the fourth quarter of 2021. Share of losses of associates and joint ventures, net. We recorded share of losses of associates and joint ventures of RMB8.3 billion for the fourth quarter of 2021, compared to share of losses of RMB5.7 billion for the third quarter of 2021. Non-IFRS share of losses of associates and joint ventures were RMBO.8 billion for the fourth quarter of 2021, compared to non-IFRS share of losses of RMBO.3 billion for the third quarter of 2021, reflecting increased losses recognised from certain associates in verticals such as transportation services and local services. General and administrative expenses. General and administrative expenses increased by 2% to RMB24.4 billion for the fourth quarter of 2021 on a quarter-on-quarter basis. Selling and marketing expenses. Selling and marketing expenses increased by 11% to RMB11.6 billion for the fourth quarter of 2021 on a quarter-on-quarter basis, due to increased marketing spending related to games (including expenses associated with the global launch of the Arcane animated series), and Business Services, partly offset by decreased spending on user acquisition for non-core areas. Cost of revenues for FinTech and Business Services increased by 13% to RMB34.9 billion for the fourth quarter of 2021, primarily due to increased investment in cloud computing talent and operations, costs associated with year-end cloud project deployments, as well as increased transaction costs due to payment volume growth. Cost of revenues for Online Advertising increased by 2% to RMB12.3 billion for the fourth quarter of 2021, driven by increased bandwidth and server costs, including those associated with Video Accounts, partly offset by decreased channel and distribution costs as well as content costs. Cost of revenues for VAS increased by 4% to RMB36.9 billion for the fourth quarter of 2021 primarily due to increased content costs, including those associated with eSports events held in the quarter. Cost of revenues. Cost of revenues increased by 8% to RMB86.4 billion for the fourth quarter of 2021 on a quarter-on- quarter basis, reflecting increased investment in Business Services, content costs, and transaction costs of FinTech services, partly offset by decreased channel and distribution costs. As a percentage of revenues, cost of revenues increased to 60% for the fourth quarter of 2021 from 56% for the third quarter of 2021, reflecting costs growing faster than revenues in certain businesses and seasonality. Management Discussion and Analysis (reversals) The fair value of our shareholdings³ in listed investee companies (excluding subsidiaries) amounted to RMB982,835 million as at 31 December 2021. Unaudited 31 December Three months ended 31 December 49,257 42,267 Adjusted EBITDA (a) 170,680 173,173 42,872 42,683 36,568 EBITDA (a) 2020 2021 31 December 31 December 31 December 2020 2021 2021 30 September Year ended Unaudited Three months ended 30 September (RMB in millions, unless specified) 2021 49,257 42,267 Adjusted EBITDA 12,634 21,625 3,661 6,574 5,699 Equity-settled share-based compensation 170,680 173,173 42,872 42,683 36,568 EBITDA 29,073 31,504 46,533 7,828 194,798 00 Year ended SSV& Income tax provisions/ of intangible investee companies As Share-based reported compensation Impairment Amortisation Net (gains)/ losses from Adjustments Unaudited three months ended 31 December 2021 The following tables set forth the reconciliations of the Group's non-IFRS financial measures for the fourth quarter of 2021 and 2020, the third quarter of 2021, and the years ended 31 December 2021 and 2020 to the nearest measures prepared in accordance with IFRS: The Company's management believes that the non-IFRS financial measures provide investors with useful supplementary information to assess the performance of the Group's core operations by excluding certain non-cash items and certain impact of M&A transactions. In addition, non-IFRS adjustments include relevant non-IFRS adjustments for the Group's major associates based on available published financials of the relevant major associates, or estimates made by the Company's management based on available information, certain expectations, assumptions and premises. To supplement the consolidated results of the Group prepared in accordance with IFRS, certain additional non-IFRS financial measures (in terms of operating profit, operating margin, profit for the period, net margin, profit attributable to equity holders of the Company, basic EPS and diluted EPS) have been presented in this annual report. These unaudited non-IFRS financial measures should be considered in addition to, not as a substitute for, measures of the Group's financial performance prepared in accordance with IFRS. In addition, these non-IFRS financial measures may be defined differently from similar terms used by other companies. NON-IFRS FINANCIAL MEASURES 22 Tencent Holdings Limited 183,314 7,730 Management Discussion and Analysis and land use rights (6,650) (1,708) (1,703) (1,703) Interest income 184,237 271,620 53,137 109,723 (RMB in millions, unless specified) 2020 2021 31 December 31 December 7,905 31 December 2020 2021 (6,957) Other gains, net 63,713 (22,984) 3,773 4,649 (86,199) 1,036 1,129 1,376 17,685 21,517 Depreciation of right-of-use assets Amortisation of intangible assets 5,374 5,466 (32,936) investment properties Depreciation of property, plant and equipment and (149,467) 4,939 (57,131) Tencent Holdings Limited 294 00 0.910% The Group had entered into certain interest rate swap contracts to hedge its exposure arising from its senior notes carried 1.375% 4.700% Notes to the Consolidated Financial Statements USD17,550 ~ at floating rates. The Group's outstanding interest rate swap contracts as at 31 December 2021 are detailed in Note 27 and Note 39. As at 31 December 37 NOTES PAYABLE (continued) The notes payable are repayable as follows: Between 1 and 2 years Between 2 and 5 years More than 5 years 2021 RMB'Million 2020 9,554 LIBOR + 0.605% RMB'Million For the year ended 31 December 2021 USD1,250 RMB'Million 1.375% ~ 37 NOTES PAYABLE 29,883 Included in non-current liabilities: Non-current portion of long-term USD notes payable As at 31 December 2021 2020 RMB'Million 145,590 122,057 The aggregate principal amounts of notes payable and applicable interest rates are as follows: 31 December 2021 31 December 2020 Amount (Million) Interest rate (per annum) Amount (Million) Interest rate (per annum) USD notes payable USD1,250 USD notes payable USD21,700 LIBOR + 0.605% ~ 0.910% 4.700% 30,572 6,664 91,485 Notes to the Consolidated Financial Statements For the year ended 31 December 2021 39 OTHER FINANCIAL LIABILITIES Measured at amortised cost: Redemption liability (Note (a)) As at 31 December 2021 RMB'Million 2020 RMB'Million 9,512 Measured at fair value: Contingent consideration RMB'Million 2020 2021 As at 31 December 36 BORROWINGS The Group has to estimate the expected yearly percentage of grantees that will stay within the Group at the end of vesting periods of the options and awarded shares (the "Expected Retention Rate”) in order to determine the amount of share-based compensation expenses charged to the consolidated income statement. As at 31 December 2021, the Expected Retention Rate of the Group's wholly-owned subsidiaries was assessed to be not lower than 89% (31 December 2020: not lower than 91%). (e) Expected retention rate of grantees 35 SHARE-BASED PAYMENTS (continued) For the year ended 31 December 2021 As at 31 December 2021, the carrying amounts of borrowings approximated their fair values. 295 Annual Report 2021 9,910 9,966 145,590 122,057 All of these notes payable issued by the Group were unsecured. In April 2021, the Company updated the Global Medium Term Note Programme (the "Programme”) to include, among other things, the Company's recent corporate and financial information. In April 2021, the Company issued four tranches of senior notes under the Programme with an aggregate principal amount of USD4.15 billion from 10 years to 40 years, with interest rates ranging from 2.88% to 3.94%. As at 31 December 2021, the fair value of the notes payable amounted to RMB150,998 million (31 December 2020: RMB132,037 million). The respective fair values were assessed based on the active market prices of these notes at the reporting dates or by making reference to similar instruments traded in the observable market. 38 LONG-TERM PAYABLES Payables relating to media contents and running royalty fee for online games Cash-settled share-based compensation payables (Note 35(d)) Purchase consideration payables for investee companies Others 106,153 As at 31 December 2020 RMB'Million RMB'Million 7,049 7,290 615 1,018 133 104 2,169 1,498 2021 The Group had entered into certain interest rate swap contracts to hedge its exposure arising from its long-term bank borrowings carried at floating rates. The Group's outstanding interest rate swap contracts as at 31 December 2021 are detailed in Note 27 and Note 39. 300 For the year ended 31 December 2021 1,083 2 1 16 1 19,003 14,242 155,939 126,387 36 BORROWINGS (continued) Note: Notes to the Consolidated Financial Statements For the year ended 31 December 2021 (a) The aggregate principal amounts of long-term bank borrowings and applicable interest rates are as follows: 31 December 2021 31 December 2020 Amount Interest rate Amount (Million) (per annum) (Million) Notes to the Consolidated Financial Statements 783 4,061 144 Non-current portion of long-term USD bank borrowings, unsecured (Note (a)) Non-current portion of long-term EUR bank borrowings, unsecured (Note (a)) Non-current portion of long-term EUR bank borrowings, secured (Note (a)) Non-current portion of long-term RMB bank borrowings, unsecured (Note (a)) Non-current portion of long-term JPY bank borrowings, unsecured (Note (a)) Non-current portion of long-term JPY bank borrowings, secured (Note (a)) 136,874 110,629 1,204 11 12 - 300 47 4 Included in current liabilities: Interest rate (per annum) RMB bank borrowings, unsecured (Note (b)) Current portion of long-term USD bank borrowings, unsecured (Note (a)) Current portion of long-term RMB bank borrowings, unsecured (Note (a)) Current portion of long-term EUR bank borrowings, unsecured (Note (a)) Current portion of long-term EUR bank borrowings, secured (Note (a)) Current portion of long-term JPY bank borrowings, unsecured (Note (a)) Current portion of long-term JPY bank borrowings, secured (Note (a)) 00 292 Tencent Holdings Limited 136,936 112,145 13,340 4,079 200 100 9,135 RMB bank borrowings, secured (Note (b)) USD bank borrowings, unsecured (Note (b)) HKD bank borrowings, secured (Note (b)) 36 BORROWINGS (continued) USD bank borrowings USD bank borrowings 1 142,399 (b) The aggregate principal amounts of short-term bank borrowings and applicable interest rates are as follows: RMB bank borrowings USD bank borrowings HKD bank borrowings 112,929 31 December 2021 31 December 2020 Amount (Million) Interest rate (per annum) Amount (Million) Interest rate (per annum) RMB13,540 2.45% 5.10% RMB4,179 USD1,400 HKD171 3.55% 5.22% LIBOR + 0.45% - 0.50% HIBOR+ 0.90% - 3.90% Annual Report 2021 293 Notes to the Consolidated Financial Statements 6 784 4,409 107,735 129,197 5,463 7,733 USD60 EUR bank borrowings EUR152 RMB bank borrowings RMB300 LIBOR + 0.80% ~ 1.27% 1.41% 0.52% 1.00% 5.70% USD17,075 LIBOR + 0.70% ~ 1.27% EUR151 RMB300 0.52% 1.00% 5.70% JPY bank borrowings USD22,045 JPY1,234 The zero interest rate of JPY borrowings was due to the special interest exemption for COVID-19 by Tokyo Metropolitan Government. The long-term bank borrowings are repayable as follows: Within 1 year Between 1 and 2 years Between 2 and 5 years Over 5 years As at 31 December 2021 2020 RMB'Million RMB'Million 0.00% 2.50% Annual Report 2021 291 7,015 (d) Share options and share award schemes adopted by subsidiaries 60,582 54,308 Note: Others primarily consist of deposits from third parties, reserve for platform services, sundry payables and other accruals. Annual Report 2021 297 Notes to the Consolidated Financial Statements For the year ended 31 December 2021 42 BUSINESS COMBINATIONS 13,597 (a) Privatisation of Sogou Goodwill of approximately RMB10,978 million was recognised as a result of the transaction. It was mainly attributable to the operating synergies and economies of scale expected to be derived from combining the operations. None of the goodwill is expected to be deductible for income tax purpose. The following table summarises the purchase consideration, fair value of assets acquired and liabilities assumed as at the acquisition date of Sogou. RMB'Million Total consideration: Cash consideration 13,812 Fair value of the previously held interests 8,822 On 23 September 2021, the Group completed the privatisation of Sogou, an existing listed associate (NYSE: SOGO; with equity interests held of approximately 39%) of the Group, at a cash consideration of approximately USD2,135 million (equivalent to approximately RMB13,812 million) for all of the remaining interest ("Privatisation"). As a result of the Privatisation, Sogou became a wholly-owned subsidiary of the Group. The existing equity interest (of approximately 39%) held under investment in an associate was re-measured to fair value and resulted in step up gain of approximately RMB3,807 million (Note 7(a)(iii)). 22,634 15,878 Certain subsidiaries of the Group operate their own share-based compensation plans (share option and/or share award schemes). Their exercise prices of the share options, as well as the vesting periods of the share options and awarded shares are determined by the respective board of directors of these subsidiaries at their sole discretion and in accordance with the relevant rules. The share options or restricted shares of the subsidiaries granted are normally vested by several tranches. Participants of some subsidiaries have the right to request the Group to repurchase their vested equity interests of the respective subsidiaries ("Repurchase Transaction"). The Group has discretion to settle the Repurchase Transaction either by using equity instruments of the Company or by cash. For the Repurchase Transaction which the Group has settlement options, the directors of the Company are currently of the view that some of them would be settled by equity instruments of the Company. As a result, they are accounted for using the equity-settled share-based payment method. For some of them settled in cash, they are accounted for using cash-settled share-based payment method. 845 844 Prepayments received from customers and others 649 894 Others (Note) 82,594,936 121,314,396 At end of the year (32,749,222) (27,351,216) (5,586,066) 37,196,540 77,054,748 76,615,755 82,594,936 2020 2021 Number of awarded shares (3,866,143) Recognised amounts of identifiable assets acquired and liabilities assumed: Intangible assets 7,500 The Group's revenue for the year ended 31 December 2021 would be increased by not more than 5% and results for the year ended 31 December 2021 would not be materially different should the transaction have occurred on 1 January 2021. The related transaction costs of the transaction are not material to the Group's consolidated financial information. (b) Other business combinations During the year ended 31 December 2021, the Group also acquired certain insignificant subsidiaries. The aggregate considerations for these acquisitions were approximately RMB10,854 million, fair value of net assets acquired (including identifiable intangible assets), non-controlling interests and goodwill recognised were approximately RMB3,862 million, RMB1,289 million and RMB8,281 million, respectively. The revenue and the results contributed by these acquired subsidiaries for the period since respective acquisition date were insignificant to the Group. The Group's revenue and results for the year would not be materially different if these acquisitions have occurred on 1 January 2021. The related transaction costs of these business combinations are not material to the Group's consolidated financial statements. Annual Report 2021 299 For the year ended 31 December 2021 Notes to the Consolidated Financial Statements 35 SHARE-BASED PAYMENTS (continued) (b) Share award schemes The Company has adopted three share award schemes (the "Share Award Schemes") as of 31 December 2021, which are administered by an independent trustee appointed by the Group. The vesting period of the awarded shares is determined by the Board. Movements in the number of awarded shares for the years ended 31 December 2021 and 2020 are as follows: At beginning of the year Granted Lapsed/forfeited Vested and transferred For the year ended 31 December 2021 Note: (a) Privatisation of Sogou (continued) 42 BUSINESS COMBINATIONS (continued) Cash and cash equivalents and term deposits 4,325 Other assets 3,780 Deferred income tax liabilities (1,872) Other payables and accruals (740) Other liabilities (1,337) Total identifiable net assets Goodwill 11,656 10,978 22,634 00 298 Tencent Holdings Limited Notes to the Consolidated Financial Statements Purchase of land use rights and construction related costs 1,119 Vested but not transferred as at the end of the year Interests payable Note: 5,912 9,254 3,554 5,567 9,466 14,821 (a) (b) It mainly comprised redemption liability arising from put option arrangements with non-controlling shareholders of acquired subsidiaries of approximately RMB6,664 million (31 December 2020: RMB9,512 million). It represented the Group's outstanding interest rate swap contracts measured at fair value amounting to RMB358 million (31 December 2020: RMB1,937 million). The aggregate notional principal amounts of the outstanding interest rate swap contracts were USD2,825 million (equivalent to approximately RMB18,011 million) (31 December 2020: USD15,058 million (equivalent to approximately RMB98,252 million)). 00 296 Tencent Holdings Limited Notes to the Consolidated Financial Statements For the year ended 31 December 2021 40 ACCOUNTS PAYABLE Accounts payable and their ageing analysis, based on invoice date, are as follows: 0-30 days 31 - 60 days 61 - 90 days Over 90 days 41 OTHER PAYABLES AND ACCRUALS As at 31 December 2021 2020 RMB'Million RMB'Million Current liabilities 1,279 Non-current liabilities 14,821 The related share-based compensation expenses incurred for the years ended 31 December 2021 and 2020 were insignificant to the Group. For aligning the interests of key employees with the Group, the Group established several employees' investment plans in the form of limited liability partnerships (the "EIS”) among which the six EISs approved/established in 2014, 2015, 2016, 2017 and 2021 are in effect as at 31 December 2021. According to the term of the EISS, the Board may, at its absolute discretion, invite any qualifying participants of the Group, excluding any director of the Company, to participate in the EISS by subscribing for the partnership interest at cash consideration. The participating employees are entitled to the economic benefits generated by the EISS, if any, after a specified vesting period under the respective EISS, ranging from four to seven years. Wholly-owned subsidiaries of the Company acting as general partner of these EISS administer and in essence, control the EISs. These EISs are therefore consolidated by the Company as structured entities. (c) Employee investment schemes The outstanding awarded shares as of 31 December 2021 were divided into one to five tranches on an equal basis as at their grant dates. The first tranche can be exercised immediately or after a specified period ranging from one month to five years from the grant date, and the remaining tranches will become exercisable in each subsequent year. (b) Share award schemes (continued) 35 SHARE-BASED PAYMENTS (continued) For the year ended 31 December 2021 Notes to the Consolidated Financial Statements Tencent Holdings Limited 290 00 The weighted average fair value of awarded shares granted during the year ended 31 December 2021 was HKD569.60 per share (equivalent to approximately RMB476.25 per share) (2020: HKD481.61 per share (equivalent to approximately RMB431.90 per share)). The fair value of the awarded shares was calculated based on the market price of the Company's shares at the respective grant date. The expected dividends during the vesting period have been taken into account when assessing the fair value of these awarded shares. As a result of the Distribution in Specie (Note 15(b)), pursuant to the scheme rules of the 2013 Share Award Scheme and the 2019 Share Award Scheme, adjustments had been made to the number of shares subject to share awards which remained unvested as at the Ex-dividend Date. Please refer to the announcement of the Company dated 14 March 2022 for details. During the year ended 31 December 2021, 40,500 awarded shares were granted to four independent non- executive directors of the Company (2020: 59,500 awarded shares were granted to five independent non-executive directors of the Company). 30,172 17,515 2,405 3,308 Interest rate swap (Note (b)) Others 358 1,937 39 64 2,802 5,309 9,466 Included in: 82,916 102,396 2,196 109,470 94,030 As at 31 December 2021 2020 RMB'Million RMB'Million Staff costs and welfare accruals 28,713 25,541 Selling and marketing expense accruals 7,668 Included in non-current liabilities: General and administrative expenses accruals 3,371 2,750 Purchase consideration payables for investee companies 2,179 2,548 8,253 2,999 RMB'Million 1,329 665 2,746 66,701 116,883 236 140,642 117,119 Amounts due to subsidiaries 9,105 23,938 25,811 20,481 114 Other payables and accruals 1,198 1,080 Dividends payable for distribution in specie Cash flows 102,451 22,796 45,952 140,528 Other financial liabilities Total equity 2,685 506 Retained earnings (b) (1,114) 3,708 Other reserves (b) (4,412) Current liabilities LIABILITIES 48,793 67,330 RMB'Million RMB'Million 2020 2021 Non-current liabilities Notes payable Shares held for share award schemes (4,843) Prepayments, deposits and other receivables Share capital Construction/purchase of buildings and purchase of land use rights Purchase of other property, plant and equipment Capital investment in investees As at 31 December 2021 2020 RMB'Million RMB'Million 3,337 3,541 286 391 12,798 21,656 16,421 25,588 (b) Other commitments 9,847 11,392 years Later than one year and not later than five 11,443 15,481 Contracted: Not later than one year RMB'Million 2020 2021 As at 31 December Contracted: The future aggregate minimum payments under non-cancellable bandwidth, online game licensing and media contents agreements are as follows: RMB'Million Capital commitments as at 31 December 2021 and 2020 are analysed as follows: (a) Capital commitments 44 COMMITMENTS 12,715 Other non-cash movements (Note) 9,546 9,277 76 7,792 (1,271) 619 (6,004) Exchange impacts 5,259 (47,948) 10,460 (15,552) (2,214) Later than five years 427 (59) For the year ended 31 December 2021 Notes to the Consolidated Financial Statements 302 Tencent Holdings Limited 00 It mainly resulted from the reclassification from non-current to current and assets/liabilities acquired from business combinations. Note: (2) 11,063 (112,145) (14,242) 106,709 152,798 Net cash as at 31 December 2020 11,810 (122,057) As at 31 December 6,113 32,986 76 9 81 Investments in subsidiaries Investments in associates Contribution to Share Scheme Trust 181,284 157,675 Current assets Amounts due from subsidiaries 49,927 26,565 10 312 Cash and cash equivalents 116 80 EQUITY (a) Financial position of the Company (continued) 46 FINANCIAL POSITION AND RESERVE MOVEMENT OF THE COMPANY (continued) For the year ended 31 December 2021 Notes to the Consolidated Financial Statements 305 359 Annual Report 2021 333,788 Total assets 26,957 152,504 102,451 Assets held for distribution 184,632 157,481 180,881 37 During the year ended 31 December 2021, the Group had undertaken transactions relating to the provision of various services such as FinTech services, business services and online advertising to certain associates and joint ventures, which mainly engaged in various Internet businesses such as eCommerce, 020 platforms, FinTech services under, among others, certain business co-operation arrangements. As at 31 December 2021, contract liabilities relating to support to be offered to certain associates and joint ventures were RMB3,262 million (31 December 2020: RMB5,469 million). As at 31 December 2021, trade payables and other payables to related parties were RMB2,257 million and RMB172 million, respectively (31 December 2020: RMB3,719 million and RMB333 million, respectively). As at 31 December 2021, trade receivables and other receivables from related parties were RMB12,589 million and RMB161 million, respectively (31 December 2020: RMB9,840 million and RMB67 million, respectively). (b) Year end balances with related parties The Group has commercial arrangements with certain associates to purchase online game licenses and related services, film and television content and related services, FinTech and Business Services and others. During the year ended 31 December 2021, the amounts relating to these contents and services received from associates were RMB8,278 million, RMB7,040 million, RMB4,335 million and RMB1,430 million, respectively (2020: RMB8,266 million, RMB5,285million, RMB3,058 million and RMB1,489 million, respectively). The Group has commercial arrangements with certain associates and joint ventures to provide Online Advertising services, FinTech and Business Services, and other services. During the year ended 31 December 2021, revenue recognised in connection with these services provided to associates and joint ventures of RMB12,085 million, RMB38,745 million and RMB3,599 million were recorded in the consolidated income statement, respectively (2020: RMB11,554 million, RMB25,885 million and RMB2,629 million respectively). Other than the transactions and balances disclosed above or elsewhere in the consolidated financial statements, the Group had no other material transactions with related parties during the years ended 31 December 2021 and 2020, and no other material balances with related parties as at 31 December 2021 and 2020. (a) Significant transactions with related parties For the year ended 31 December 2021 Notes to the Consolidated Financial Statements Annual Report 2021 303 Except as disclosed in Note 13(a) (Senior management's emoluments), Note 13(b) (Five highest paid individuals), Note 14 (Benefits and interests of directors), Note 26 (Loans to investees and investees' shareholders) and Note 35 (Share- based payments) to the consolidated financial statements, other significant transactions carried out between the Group and its related parties during the years are presented as followings. The related party transactions were carried out in the normal course of business and at terms negotiated between the Group and the respective related parties. 45 RELATED PARTY TRANSACTIONS 25,489 45 RELATED PARTY TRANSACTIONS (continued) 4,199 00 304 35 RMB'Million 2020 RMB'Million 2021 As at 31 December (16,107) Intangible assets ASSETS (a) Financial position of the Company 46 FINANCIAL POSITION AND RESERVE MOVEMENT OF THE COMPANY For the year ended 31 December 2021 Notes to the Consolidated Financial Statements Tencent Holdings Limited Non-current assets (83,327) Share premium (104,257) Notes payable - repayable after one year (145,590) (122,057) Net (debt)/cash (20,243) 11,063 Annual Report 2021 301 Notes to the Consolidated Financial Statements For the year ended 31 December 2021 43 CONSOLIDATED CASH FLOW STATEMENT (continued) (c) Net (debt)/cash reconciliation (continued) Cash and Term Borrowings cash deposits equivalents RMB'Million Notes payable - repayable within one year and others RMB'Million (112,145) Borrowings repayable after one year (b) Major non-cash transactions Major non-cash transaction during the year ended 31 December 2021 was the dividend declared to be distributed in specie of JD.com Shares (Note 15(b)). (c) Net (debt)/cash reconciliation This section sets out an analysis of net (debt)/cash and the movements in net (debt)/cash for each of the years presented. Net (debt)/cash As at 31 December 2021 2020 RMB'Million RMB'Million Cash and cash equivalents 167,966 152,798 Term deposits and others 113,320 106,709 Borrowings - repayable within one year (19,003) (14,242) (136,936) due within 1 year Borrowings due after Notes payable (27,060) (41,184) Exchange impacts (3,089) (871) 199 3,044 3,597 2,880 Other non-cash movements (Note) 7,133 (5,576) 5,511 (70) 6,998 Net debt as at 31 December 2021 167,966 113,320 (19,003) (33,346) 616 349 18,257 Notes payable due within due after 1 year 1 year 1 year Total RMB'Million RMB'Million 43 CONSOLIDATED CASH FLOW STATEMENT (continued) RMB'Million RMB'Million Net cash as at 1 January 2021 152,798 106,709 (14,242) (112,145) (122,057) 11,063 Cash flows RMB'Million (10,534) For the year ended 31 December 2021 Tencent Holdings Limited (118,051) (24,390) (660) (1,765) Depreciation of property, plant and equipment, investment properties and right-of-use assets 26,166 21,458 Amortisation of intangible assets and land use rights 31,504 29,316 Net gains on disposals of intangible assets and property, plant and equipment (35) (120) Interest income (6,650) (6,957) Interest and related expenses 7,918 7,449 19,897 Equity-settled share-based compensation expenses 20,252 Net gains on disposals and deemed disposals of investee companies (22,695) 72,270 132,991 Net debt as at 1 January 2020 (20,243) 126,445 Notes to the Consolidated Financial Statements For the year ended 31 December 2021 43 CONSOLIDATED CASH FLOW STATEMENT (a) Reconciliation of net profit to cash inflow from operating activities: Profit for the year Adjustments for: 2021 2020 RMB'Million RMB'Million 227,810 160,125 Income tax expense Dividend income 21,625 12,634 Share of loss/(profit) of associates and joint ventures, net (17,782) 117 Accounts payable 20,598 13,033 Other payables and accruals (1,184) 2,828 Other tax liabilities (305) 886 Deferred revenue Cash generated from operations 2,293 18,184 203,712 214,441 00 300 Prepayments, deposits and other receivables (95) 1,297 Inventories 16,444 (3,672) Impairment provision for investments in associates, investments in joint ventures and others 16,315 6,642 Net fair value gains on FVPL and other financial instruments (47,717) (38,909) Notes to the Consolidated Financial Statements Net impairment of intangible assets, land use rights, right-of-use assets and 8,704 4,872 Exchange (gains)/losses, net (804) 438 Changes in working capital: Accounts receivable (4,026) (7,530) property, plant and equipment 21,561 reserves RMB'Million Total equity and liabilities by the Group (%) Principal activities and place of operation Tencent Technology (Shanghai) Company Limited Established in the PRC, USD5,000,000 100% Development of softwares and provision wholly foreign owned enterprise of information technology services in the PRC Tencent Technology (Chengdu) Company Limited Proportion of equity interest held Established in the PRC, wholly foreign owned enterprise 100% Development of softwares and provision of information technology services in the PRC Tencent Technology (Wuhan) Company Limited Established in the PRC, USD30,000,000 100% Development of softwares and provision wholly foreign owned enterprise USD220,000,000 issued/paid-in capital Place of establishment and nature of legal entity Name Beijing BIZCOM Technology Company Limited Beijing Starsinhand Technology Company Limited Tencent Cyber (Shenzhen) Company Limited Established in the PRC, limited liability company Established in the PRC, limited liability company Established in the PRC, wholly foreign owned enterprise RMB1,216,500,000 100% Provision of value-added services (Note (a)) in the PRC RMB10,000,000 100% (Note (a)) Provision of value-added services in the PRC USD30,000,000 100% Development of softwares in the PRC 00 308 Tencent Holdings Limited Notes to the Consolidated Financial Statements For the year ended 31 December 2021 48 SUBSIDIARIES AND CONTROLLED STRUCTURED ENTITIES (continued) Particulars of of information technology services in the PRC in the PRC Tencent Cloud Computing (Beijing) Company Limited limited liability company USD280,030 50.18%* Provision of online music Cayman Islands, entertainment services in the PRC limited liability company Supercell Oy Established in Finland, limited liability company EUR2,500 81.76% Established in the Development and operation of Shenzhen Tencent Culture Media Company Limited Established in the PRC, limited liability company RMB5,000,000 100% Design and production of advertisement in the PRC on an outstanding basis Annual Report 2021 309 Total liabilities mobile games in Finland TME (Note (b)) limited liability company Provision of online literature services in the PRC 100% (Note (a)) Provision of information system integration services in the PRC Beijing Tencent Culture Media Company Limited Established in the PRC, limited liability company RMB5,000,000 100% Design and production of advertisement in the PRC Riot Games, Inc. Established in the USD1,308 99.88% Development and operation of United States, online games in the United States limited liability company China Literature Limited Established in the USD102,203 57.18%* Cayman Islands, Established in the PRC, RMB1,042,500,000 Provision of value-added services (145,590) RMB10,290,000 At 1 January 2020 Profit for the year Dividends Currency translation differences At 31 December 2020 47 SUBSEQUENT EVENTS 2,729 171 10,405 (10,449) 3,708 (1,285) (1,114) Disposal of Equity Interests of Sea Limited On 4 January 2022, the Group has entered into a transaction to divest an aggregate of 14,492,751 Class A ordinary shares of Sea Limited ("Sea"; NYSE: SE), an existing associate of the Group, and to convert its all supervoting Class B ordinary shares to Class A ordinary shares (collectively, the "Transaction"). Upon the completion of the Transaction, the Group's equity interest in Sea was reduced from 21.3% to 18.7% with its voting power reduced to less than 10%. In connection with the Transaction, the Group is subject to a lockup period of six months for further disposal of shares of Sea. The Transaction has been completed as of the date of this annual report. Annual Report 2021 307 Notes to the Consolidated Financial Statements For the year ended 31 December 2021 48 SUBSIDIARIES AND CONTROLLED STRUCTURED ENTITIES The following is a list of principal subsidiaries of the Company as at 31 December 2021: Particulars of 2,685 506 At 31 December 2021 (558) Profit for the year (1,114) 2,685 At 1 January 2021 (136,936) Other Retained earnings RMB'Million (b) Reserve movement of the Company 46 FINANCIAL POSITION AND RESERVE MOVEMENT OF THE COMPANY (continued) For the year ended 31 December 2021 Notes to the Consolidated Financial Statements Tencent Holdings Limited 306 00 184,632 333,788 267,087 100% (Note (a)) Dividends 112,955 (115,134) Gain from changes in fair value of assets held for distribution Currency translation differences 5,380 Name Place of establishment and nature of legal entity 138,680 Proportion of equity interest held USD90,000,000 100% Development of softwares and provision wholly foreign of information technology services owned enterprise in the PRC Tencent Asset Management Limited Established in the British Virgin Islands, limited liability company USD100 100% Asset management in Hong Kong Tencent Technology (Beijing) Company Limited Established in the PRC, 100% Development and sale of softwares and wholly foreign provision of information technology owned enterprise services in the PRC Nanjing Wang Dian Technology Company Limited Established in the PRC, limited liability company issued/paid-in Established in the PRC, Tencent Cyber (Tianjin) Company Limited USD1,000,000 (Note (a)) capital services in the PRC by the Group (%) Principal activities and place of operation Tencent Computer Established in the PRC, limited liability company RMB65,000,000 Provision of value-added services and (Note (a)) Internet advertisement services in the PRC Tencent Technology Established in the PRC, 100% 100% USD2,000,000 Provision of Internet advertisement RMB11,000,000 Established in the PRC, limited liability company 100% of information technology services in the PRC Shenzhen Shiji Kaixuan Technology Company Limited owned enterprise wholly foreign Development of softwares and provision PlayerUnknown's Battlegrounds 00 "Pre-IPO Option Scheme" the Pre-IPO Share Option Scheme adopted by the Company on 27 July 2001 "PUBG" PRC corporate income tax as defined in the "Corporate Income Tax Law of the People's Republic of China" the Post-IPO Share Option Scheme adopted by the Company on 16 May 2007 the Post-IPO Share Option Scheme adopted by the Company on 17 May 2017 the Post-IPO Share Option Scheme adopted by the Company on 13 May 2009 the Post-IPO Share Option Scheme adopted by the Company on 24 March 2004 personal computer 316 Tencent Holdings Limited "PRC CIT" People's Bank of China the People's Republic of China Term "SaaS" "Reference Date" the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong) as amended, supplemented or otherwise modified from time to time "PRC" or "China" "SFO" any Eligible Person(s) selected by the Board to participate in the respective Share Award Schemes Software-as-a-Service "Selected Participant(s)" the lawful currency of the PRC the remuneration committee of the Company in respect to a Selected Participant, the date of final approval by the Board of the total number of shares of the Company to be awarded to the relevant Selected Participant on a single occasion pursuant to the 2007 Share Award Scheme research and development Definition Definition "RMB" " "Remuneration Committee' "R&D" "Post-IPO Option Scheme IV" "MAU" "Post-IPO Option Scheme II" Definition 315 Annual Report 2021 monthly active user accounts mergers and acquisitions the Rules Governing the Listing of Securities on the Stock Exchange "M&A" "Listing Rules" London InterBank Offered Rate the lawful currency of Japan the approximately 457 million Class A ordinary shares in the share capital of JD.com with a par value of USD0.00002 each, held by the Group conferring a holder of a Class A ordinary share to one vote per share on any resolution tabled at JD.com's general meeting and which are to be distributed pursuant to the Distribution in Specie JD.com, Inc., a company controlled through weighted voting rights and incorporated in the Cayman Islands with limited liability, whose American depositary shares are listed on NASDAQ (stock symbol: JD, ISIN Code: US47215P1066) and whose Class A ordinary shares are listed on the Stock Exchange (stock code: 9618) initial public offering " "Shanghai Tencent Information" Term "Post-IPO Option Scheme III" Definition "Minor(s)" "Post-IPO Option Scheme I" "PC" "PBOC" Platform-as-a-Service "PaaS" online-to-offline, or offline-to-online the nomination committee of the Company "020" "Nomination Committee" NASDAQ Global Select Market "NASDAQ" the Model Code for Securities Transactions by Directors of Listed Issuers set out in Appendix 10 to the Listing Rules players who are aged under 18 MIH TC Holdings Limited "Model Code" "MIH TC" "Share(s)" Tencent Technology (Shanghai) Company Limited Shanghai Tencent Information Technology Company Limited Tencent Technology (Shenzhen) Company Limited "Tencent Technology" intellectual property "Tencent Shanghai" Shenzhen Tencent Enterprise Management Limited "Tencent Enterprise Management" "Tencent Wuhan" Shenzhen Tencent Computer Systems Company Limited "Tencent Computer" Term 318 Tencent Holdings Limited 00 Tencent Technology (Chengdu) Company Limited "Tencent Chengdu❞ Definition "TME" "ToB" "Trust Deed I" 319 Annual Report 2021 the United States of America "United States" Schemes an independent trustee appointed by the Company for managing the Share Award a trust deed entered into between the Company and the Trustee (as restated, supplemented and amended from time to time) in respect of the appointment of the Trustee for the administration of the 2019 Share Award Scheme a trust deed entered into between the Company and the Trustee (as restated, supplemented and amended from time to time) in respect of the appointment of the Trustee for the administration of the 2013 Share Award Scheme a trust deed entered into between the Company and the Trustee (as restated, supplemented and amended from time to time) in respect of the appointment of the Trustee for the administration of the 2007 Share Award Scheme Product/Service provided to business customers Tencent Music Entertainment Group (NYSE: TME), a non wholly-owned subsidiary of the Company which is incorporated in the Cayman Islands with limited liability and the shares of which are listed on the New York Stock Exchange Definition "Trustee" "Trust Deed III" "Trust Deed II" Tencent Technology (Beijing) Company Limited "Tencent Beijing" the co-operation committee established under the TCS CFC "TCS Co-operation Committee” "Shenzhen Tencent Tianyou" Shenzhen Tencent Network Information Technology Company Limited "Shenzhen Tencent Network" Shenzhen Tencent Information Technology Company Limited "Shenzhen Tencent Information" Definition Term Definition 317 Annual Report 2021 with effect from 15 May 2014, each existing issued and unissued share of HKD0.0001 each in the share capital of the Company was subdivided into five subdivided shares of HKD0.00002 each, after passing of an ordinary resolution at the annual general meeting of the Company held on 14 May 2014 and granting by the Stock Exchange of the listing of, and permission to deal in, the subdivided shares "Share Subdivision' the 2007 Share Award Scheme, the 2013 Share Award Scheme and the 2019 Share Award Scheme time) ordinary share(s) of HKD0.00002 each in the share capital of the Company (or of such other nominal amount as shall result from a sub-division, consolidation, reclassification or reconstruction of the share capital of the Company from time to Shenzhen Tencent Tianyou Technology Company Limited "Share Award Schemes" "Shiji Kaixuan" "SKT Co-operation Committee” the co-operation framework contract dated 28 February 2004 entered into between Tencent Technology and Tencent Computer Supercell Oy, a private company incorporated in Finland The Stock Exchange of Hong Kong Limited Sustainable Social Value and Common Prosperity Programme Sogou Inc., a company incorporated in the Cayman Islands with limited liability, which became a wholly-owned subsidiary of the Company following completion of its privatisation in September 2021 small and medium enterprises the co-operation committee established under the SKT CFC the co-operation framework contract dated 28 February 2004 entered into between Cyber Tianjin and Shiji Kaixuan Shenzhen Shiji Kaixuan Technology Company Limited "TCS CFC" "Supercell" "Stock Exchange" "SSV & CPP" “Sogou” "SMES" "SKT CFC" "LIBOR" Tencent Technology (Wuhan) Company Limited "JD.com Shares' Term Definition 311 Annual Report 2021 the share(s) of the Company awarded under the Share Award Schemes PricewaterhouseCoopers, the auditor of the Company "Awarded Share(s)" "Auditor" the audit committee of the Company "Audit Committee" the second amended and restated articles of association of the Company adopted by special resolution passed on 13 May 2020 artificial intelligence "Articles of Association" "AI" 25 November 2019, being the date on which the Company adopted the 2019 Share Award Scheme "Adoption Date III" 13 November 2013, being the date on which the Company adopted the 2013 Share Award Scheme Definition 13 December 2007, being the date on which the Company adopted the 2007 Share Award Scheme "Beijing BIZCOM" "Bitauto" "COSO Framework" the corporate governance committee of the Company the website of the Company at www.tencent.com Tencent Holdings Limited, a limited liability company organised and existing under the laws of the Cayman Islands and the Shares of which are listed on the Stock Exchange China Literature Limited, a non wholly-owned subsidiary of the Company which is incorporated in the Cayman Islands with limited liability and the shares of which are listed on the Stock Exchange the corporate governance code as set out in Appendix 14 to the Listing Rules the board of directors of the Company Bitauto Holdings Limited, a company incorporated in the Cayman Islands with limited liability, which became a non wholly-owned subsidiary of the Company following completion of its privatisation in November 2020 "Corporate Governance Committee" "Company Website" "Company" "Chongqing Tencent Information" "China Literature" "CG Code" "Board" Beijing Starsinhand Technology Company Limited Beijing BIZCOM Technology Company Limited "Beijing Starsinhand" "CRM" the annual general meeting of the Company to be held on 18 May 2022 or any adjournment thereof "Adoption Date I" As mentioned in Note (a) above and Note 35(c), the Company has consolidated the operating entities within the Group without any legal interests and the EISS out of which wholly-owned subsidiaries of the Company act as general partner. In addition, due to the implementation of the share award schemes of the Group mentioned in Note 35(b), the Company has also set up a structured entity ("Share Scheme Trust"), and its particulars are as follows: Consolidation of structured entities As at 31 December 2021, cash and cash equivalents, term deposits and restricted cash of the Group, amounting to RMB152,662 million were held in the Mainland of China and they are subject to local exchange control and other financial and treasury regulations. The local exchange control, and other financial and treasury regulations provide for restrictions, on payment of dividends, share repurchase and offshore investments, other than through normal activities. All subsidiaries' undertakings are included in the consolidation. The proportion of the voting rights in the subsidiary's undertakings held directly by the parent company does not differ from its proportion of ordinary shares held. The parent company does not have any shareholdings in the preference shares of subsidiary's undertakings included in the Group. Significant restrictions The directors of the Company considered that the non wholly-owned subsidiaries with non-controlling interests are not significant to the Group, therefore, no summarised financial information of these non wholly-owned subsidiaries is presented separately. In September 2020, TME issued two tranches of senior notes with an aggregate principal amount of USD800 million due in 5 years to 10 years, with interest rate ranging from 1.375% to 2.000%. As at 31 December 2021, the principal amount and net book balance of its notes payable were USD800 million and USD794 million (equivalent to RMB5,101 million and RMB5,062 million), respectively. As described in Note 1, the Company does not have legal ownership in equity of these structured entities or their subsidiaries. Nevertheless, under certain contractual agreements entered into with the registered owners of these structured entities, the Company and its other legally owned subsidiaries control these companies by way of controlling the voting rights, governing their financial and operating policies, appointing or removing the majority of the members of their controlling authorities, and casting the majority of votes at meetings of such authorities. In addition, such contractual agreements also transfer the risks and rewards of these companies to the Company and/or its other legally owned subsidiaries. As a result, they are presented as controlled structured entities of the Company. (f) (e) (d) (c) (b) (a) Note: 48 SUBSIDIARIES AND CONTROLLED STRUCTURED ENTITIES (continued) For the year ended 31 December 2021 "JPY" Structured entity "Adoption Date II" Share Scheme Trust Administering and holding the Company's shares acquired for share award schemes which are set up for the benefits of eligible persons of the Schemes Notes to the Consolidated Financial Statements "2022 AGM" the share award scheme adopted by the Company on Adoption Date III, as amended from time to time "2019 Share Award Scheme" the share award scheme adopted by the Company on Adoption Date II, as amended from time to time the share award scheme adopted by the Company on Adoption Date I, as amended Definition "2013 Share Award Scheme" "2007 Share Award Scheme" Term In this annual report, unless the context otherwise requires, the following expressions shall have the following meanings: Definition Tencent Holdings Limited 310 00 During the year ended 31 December 2021, the Company contributed approximately RMB2,827 million (2020: RMB1,865 million) to the Share Scheme Trust for financing its acquisition of the Company's shares. As the Company has the power to govern the financial and operating policies of the Share Scheme Trust and can derive benefits from the contributions of the eligible persons who are awarded with the shares by the schemes, the directors of the Company consider that it is appropriate to consolidate the Share Scheme Trust. Principal activities the Internal Control Integrated Framework issued by the Committee of Sponsoring Organisations Chongqing Tencent Information Technology Company Limited "Cyber Shenzhen" internal audit department of the Company is incorporated in the Cayman Islands with limited liability and the shares of which are listed on the New York Stock Exchange HUYA Inc. (NYSE: HUYA), a non wholly-owned subsidiary of the Company which the Hong Kong Special Administrative Region, the PRC the lawful currency of Hong Kong Hong Kong InterBank Offered Rate Hainan Tencent Network Information Technology Company Limited "laas" "IA" "HUYA" “Hong Kong” "HKD" Customer Relationship Management "Hainan Network" Guian New Area Tencent Cyber Company Limited "Guian New Area Tencent Cyber" Guangzhou Tencent Technology Company Limited Infrastructure-as-a-Service "IAS" International Accounting Standards "IC" "JD.com" "IPO" "IP" the investment committee of the Company "Investment Committee" for the purpose of preparing financial and operating information, International Games refers to our games business other than our Domestic Games business "International Games" Definition the Company and its subsidiaries Definition Tencent Holdings Limited 314 00 Instant Messaging "IM" International Financial Reporting Standards risk management and internal control department of the Company "IFRS" Term in relation to any Awarded Share, the date on which the Awarded Share is, was or is to be granted "HIBOR" "Group" "EBITDA" for the purpose of preparing financial and operating information, Domestic Games refers to our games business in the PRC, excluding the Hong Kong Special Administrative Region, the Macao Special Administrative Region and Taiwan "Domestic Games" Dungeon and Fighter "Guangzhou Tencent Technology" the distribution of a special interim dividend by the Company in the form of a distribution in specie of the JD.com Shares held by the Group to the shareholders whose names appeared on the register of members of the Company on 25 January 2022 in proportion to their then respective shareholdings in the Company on the basis of 1 Class A ordinary share of JD.com for every 21 Shares held by the shareholders "Distribution in Specie" Definition Definition Term 312 Tencent Holdings Limited daily active user accounts Tencent Cyber (Tianjin) Company Limited 0 "DAU" "Cyber Tianjin" Tencent Cyber (Shenzhen) Company Limited "Eligible Person(s)" "EPS" "DnF" "Ex-dividend Date" "Grant Date' Definition "ESG Reporting Guide" Definition 313 Annual Report 2021 gross merchandise value "GMV" Term financial technology 20 January 2022, being the date of commencement of dealing in the Shares on an ex-entitlement basis following the declaration of interim dividend by way of the Distribution in Specie as announced by the Company on 23 December 2021 the environmental, social and governance reporting guide as set out in Appendix 27 to the Listing Rules earnings per share any person(s) eligible to participate in the respective Share Award Schemes earnings before interest, tax, depreciation and amortisation "FPO" "FinTech" Follow-on Public Offering "Wuhan Tencent Information" Tencent Technology, Cyber Tianjin, Tencent Beijing, Shenzhen Tencent Information, Tencent Chengdu, Chongqing Tencent Information, Shanghai Tencent Information, Tencent Shanghai, Tencent Wuhan, Hainan Network, Guangzhou Tencent Technology, Shenzhen Tencent Network, Guian New Area Tencent Cyber, Cyber Shenzhen and Wuhan Tencent Information Nanjing Wang Dian Technology Company Limited value-added services "WFOES" "Wang Dian" "USD" the lawful currency of the United States Definition Term Definition Wuhan Tencent Information Technology Company Limited "VAS" 00 Zipcode : 518054 Tencent 腾讯 320 Tencent Holdings Limited 852-25201148 Facsimile Telephone : 852-21795122 Wanchai, Hong Kong 29/F., Three Pacific Place Tencent Holdings Limited Hong Kong Office No. 1 Queen's Road East Facsimile Telephone: 86-755-86013388 Weixin Official Account for Investor Relations Tencent IR Tencent Binhai Towers, No. 33 Haitian 2nd Road Nanshan District, Shenzhen, the PRC Tencent Group Head Office Website: www.tencent.com : 86-755-86013399 158.10 185,220 762,361 6 Jul 2016 21 Mar 2017 to 20 Mar 2023 (Note 3) 5,215,000 296,451 5,590,000 21 Mar 2016 10 Jul 2016 to 9 Jul 2022 (Note 3) 148.90 577,141 108,369 404,820 375,000 174.86 225.44 24 Mar 2017 272.36 4,469 4,469 10 Jul 2017 24 Mar 2018 to 23 Mar 2024 (Note 3) 225.44 19,050,875 1,109,375 20,160,250 24 Mar 2017 24 Mar 2018 to 23 Mar 2024 (Note 1) 10 Jul 2015 826,650 115,715 942,365 6 Jul 2017 to 5 Jul 2023 (Note 3) 2 Apr 2016 to 1 Apr 2022 (Note 3) 116.40 180,000 the year the year 2021 Date of grant Exercise 31 December during the year during during 1 January As at forfeited Exercised Granted As at --- 70,525 2021 price Exercise period 35,000 215,000 2 Apr 2015 12 Dec 2016 to 11 Dec 2021 (Note 4) 10 Jul 2018 to 9 Jul 2024 (Note 2) 40,350 40,350 12 Dec 2014 10 Jul 2015 to 9 Jul 2021 (Note 3) 124.30 10,938 309,050 319,988 10 Jul 2014 (Note 16) HKD (Note 15) 149.80 10 Jul 2017 18,446 - 1,407,612 31 December during during during 1 January As at forfeited Exercise Exercised As at Lapsed/ Number of share options Directors' Report 35 Annual Report 2021 24 May 2019 to 23 May 2025 (Note 2) Granted 407.00 Date of grant the year Lapsed/ 70,525 22 Jun 2018 22 Jun 2019 to 21 Jun 2025 (Note 1) 403.16 13,055 13,055 2021 22 Jun 2018 (Note 15) HKD Exercise period price 2021 the year the year (Note 16) 6,144,941 26,390 24 May 2018 144,050 16 Jan 2018 23 Nov 2018 to 22 Nov 2024 (Note 2) 419.60 71,190 71,190 23 Nov 2017 12,000 10 Jul 2019 to 9 Jul 2024 (Note 4) 13,486 4,960 10 Jul 2017 10 Jul 2018 to 9 Jul 2024 (Note 3) 272.36 4,698,086 39,243 272.36 26,390 132,050 444.20 9 Apr 2018 9 Apr 2019 to 8 Apr 2025 (Note 3) 410.00 16,619,759 11,367 16,631,126 9 Apr 2018 9 Apr 2019 to 8 Apr 2025 (Note 2) 16 Jan 2019 to 15 Jan 2025 (Note 2) 410.00 191,555 9 Apr 2018 9 Apr 2019 to 8 Apr 2025 (Note 1) 410.00 1,873,075 75,840 1,948,915 - 191,555 Number of share options In April 2021, the Company issued four tranches of senior notes with an aggregate principal amount of USD4.15 billion under the Global Medium Term Note Programme for the Company's general corporate purposes. Directors' Report 516.00 4,249,200 596,186,676 412.60 478.20 1,332,600 Total: August September paid HKD HKD HKD consideration Lowest price paid Highest price paid purchased 443.40 2,002,589,555 5,581,800 2,598,776,231 HUYA As at 31 December 2021, China Literature had fully utilised all net proceeds from its IPO. The shares of China Literature were listed on the Stock Exchange on 8 November 2017 and the net proceeds raised by China Literature during its IPO were approximately HKD7,235 million (equivalent to approximately RMB6,145 million). China Literature As at 31 December 2021, TME had used all net proceeds from its IPO in the manner set out in its IPO prospectus for content acquisition, strategic investments, and other operating and investment purposes. The American depositary shares of TME were listed on the New York Stock Exchange on 12 December 2018 and the net proceeds raised by TME during its IPO were approximately USD509 million. TME Month of purchase in 2021 The use of proceeds from the IPO and FPO of TME, China Literature and HUYA, our non wholly-owned subsidiaries, are set out below: Directors' Report Tencent Holdings Limited 32 00 Details of the issuance of debt securities are set out in Note 37 to the consolidated financial statements. ISSUANCE OF DEBT SECURITIES Save as disclosed above and in Note 33 to the consolidated financial statements, neither the Company nor any of its subsidiaries has purchased, sold or redeemed any of the Company's listed securities during the year ended 31 December 2021. USE OF PROCEEDS FROM IPO AND FPO OF NON WHOLLY-OWNED SUBSIDIARIES No. of Shares Aggregate Purchase consideration per Share Tencent Holdings Limited 30 Details of the movements in the reserves of the Group and the Company during the year are set out in the consolidated statement of changes in equity on pages 174 to 177, Note 33, Note 34 and Note 46 to the consolidated financial statements respectively. As at 31 December 2021, the Company had distributable reserves amounting to RMB66,701 million (2020: RMB45,952 million). The Company may pay dividends out of share premium, retained earnings and any other reserves provided that immediately following the payment of such dividends, the Company will be in a position to pay off its debts as they fall due in the ordinary course of business. RESERVES On 23 December 2021, the Board resolved to declare a special interim dividend in the form of a distribution in specie of approximately 457 million Class A ordinary shares of JD.com indirectly held by the Company to the shareholders whose names appeared on the register of members of the Company on 25 January 2022 in proportion to their then respective shareholdings in the Company on the basis of 1 Class A ordinary share of JD.com for every 21 Shares held by the shareholders, being rounded down to the nearest whole number of Class A ordinary shares of JD.com. Directors' Report The Board has recommended the payment of a final dividend of HKD1.60 per share for the year ended 31 December 2021. The dividend is expected to be payable on 6 June 2022 to the shareholders whose names appear on the register of members of the Company on 25 May 2022. The total final dividend proposed for the year is HKD1.60 per share. RESULTS AND APPROPRIATIONS The analysis of the Group's revenues and contribution to results by business segments and the Group's revenues by geographical area of operations is set out in Note 5 to the consolidated financial statements. The principal activity of the Company is investment holding. The activities of the principal subsidiaries are set out in Note 48 to the consolidated financial statements. PRINCIPAL ACTIVITIES The directors have pleasure in presenting their report together with the audited financial statements for the year ended 31 December 2021. Directors' Report 403.16 The results of the Group for the year are set out in the consolidated statement of comprehensive income on page 170 of this annual report. The American depositary shares of HUYA were listed on the New York Stock Exchange on 11 May 2018 and the net proceeds raised by HUYA during its IPO were approximately USD190 million. The net proceeds raised by HUYA in its FPO launched in April 2019 were approximately USD314 million. PROPERTY, PLANT AND EQUIPMENT BUSINESS REVIEW AND DIVIDEND During the year ended 31 December 2021, the Company repurchased 5,581,800 Shares on the Stock Exchange for an aggregate consideration of approximately HKD2,598.8 million before expenses. The repurchased Shares were subsequently cancelled. The repurchase was effected by the Board for the enhancement of shareholder value in the long term. Details of the Shares repurchased are as follows: PURCHASE, SALE OR REDEMPTION OF THE COMPANY'S LISTED SECURITIES A summary of the condensed consolidated results and financial positions of the Group is set out on page 3 of this annual report. FINANCIAL SUMMARY The donation made by the Group in the year was RMB2,050 million. DONATION Directors' Report Details of the movements in property, plant and equipment of the Group during the year are set out in Note 16 to the consolidated financial statements. 31 Particulars of the Group's borrowings and notes payable are set out in Note 36 and Note 37 to the consolidated financial statements respectively. BORROWINGS AND NOTES PAYABLE Particulars of the Company's principal subsidiaries as at 31 December 2021 are set out in Note 48 to the consolidated financial statements. SUBSIDIARIES Details of the movements in the share capital of the Company during the year are set out in Note 33 to the consolidated financial statements. SHARE CAPITAL A fair review of the business of the Group, comprising a discussion and analysis of the Group's performance during the year, an indication of likely future development in the business of the Group and the proposed dividend for the year ended 31 December 2021 are set out in the "Chairman's Statement" on pages 4 to 8 of this annual report. Particulars of important events affecting the Group that have occurred since the end of the financial year 2021 are set out in Note 47 to the consolidated financial statements. An analysis using financial key performance indicators is set out in the "Management Discussion and Analysis" on pages 9 to 29 of this annual report. Discussions on the Group's environmental policies and performance, and an account of the Group's key relationships with its stakeholders are set out in the “Environmental, Social and Governance Report" on pages 110 to 159 of this annual report. Details regarding the Group's compliance with the relevant laws and regulations which have a significant impact on the Group are also set out in the "Environmental, Social and Governance Report" on pages 110 to 159 and the "Corporate Governance Report" on pages 77 to 109 as well as on page 74 of this annual report. A description of the principal risks and uncertainties facing the Group is set out in the "Corporate Governance Report" on pages 77 to 109 of this annual report. All such discussions form part of this annual report. Annual Report 2021 As at 31 December 2021, HUYA had used all net proceeds from its IPO and USD29.6 million of the net proceeds from its FPO for investing in overseas expansion and for general corporate purposes. The remaining balance of the net proceeds was placed with banks. HUYA will apply the remaining net proceeds in the manner as set out in its FPO prospectus. SHARE OPTION SCHEMES 3,374,630 3,374,630 (Note 2) 30 March 2021 19 March 2027 (Note 1) 20 March 2021 to 359.60 4,399,815 618.00 4,399,815 3 April 2026 (Note 1) 4 April 2020 to 376.00 -- 3,506,580 3,506,580 4 April 2019 8 April 2025 (Note 1) 20 March 2020 9 April 2019 to 30 March 2022 to Total: Tencent Holdings Limited 34 00 the Ex-dividend Date. Please refer to the announcement of the Company dated 14 March 2022 for details. As a result of the Distribution in Specie, pursuant to the scheme rules of the Post-IPO Option Scheme II and the Post-IPO Option Scheme IV, adjustments had been made to the exercise price of the share options as shown above which remained outstanding as at 4. No options granted to the director were exercised, cancelled or lapsed during the year. 29 March 2028 (Note 1) 3. For options granted with exercisable date determined based on the grant date of options, the first 25% of the total options shall be vested and can be exercised 1 year after the grant date, and each 25% of the total options will be vested and become exercisable in each subsequent year. 2. 1. Note: 23,496,825 3,374,630 20,122,195 The closing price immediately before the date on which the options were granted on 30 March 2021 was HKD612 per Share, which was adjusted to HKD594.008 per Share on the Ex-dividend Date. Out of these 3,374,630 options, 843,657 options which would be exercisable during the period between 30 March 2022 and 29 March 2028 were voluntarily waived by Mr Lau in February 2022. Details of movements of share options granted to employees of the Group (apart from director(s) of the Company) during the year ended 31 December 2021 are as follows: 410.00 3,215,800 the year Exercise during 31 December As at Exercised Granted during 1 January 2021 the year Date of grant As at Number of share options As at 31 December 2021, there were a total of 23,496,825 outstanding share options granted to a director of the Company, details of which are as follows: Directors' Report 33 Annual Report 2021 The Company has adopted five share option schemes, namely, the Pre-IPO Option Scheme, the Post-IPO Option Scheme I, the Post-IPO Option Scheme II, the Post-IPO Option Scheme III and the Post-IPO Option Scheme IV. The Pre-IPO Option Scheme, the Post-IPO Option Scheme I, the Post-IPO Option Scheme II and the Post-IPO Option Scheme III expired on 31 December 2011, 23 March 2014, 16 May 2017 and 13 May 2019 respectively. In respect of the Post-IPO Option Scheme IV, the Board may, at its discretion, grant options to any qualifying participants to subscribe for shares in the Company, subject to the terms and conditions stipulated therein. Name of director - 3,215,800 2021 Exercise period 9 April 2018 23 March 2024 (Note 1) 24 March 2018 to 225.44 5,250,000 5,250,000 24 March 2017 price 20 March 2023 (Note 1) 158.10 - 3,750,000 3,750,000 21 March 2016 Lau Chi Ping Martin (Note 4) HKD 21 March 2017 to 22 Jun 2019 to 21 Jun 2025 (Note 2) 23 Nov 2020 4,093,568 618.00 100,335 100,335 30 Mar 2021 8 Feb 2022 to 29 Mar 2028 (Note 9 and Note 11) 618.00 1,062,910 15,745 8 Feb 2022 to 29 Mar 2028 (Note 8 and Note 11) 1,078,655 15 Dec 2021 to 22 Dec 2027 (Note 10) 575.80 105,207 105,207 23 Dec 2020 15 Dec 2021 to 22 Dec 2027 (Note 9) 575.80 14,028 30 Mar 2021 14,028 30 Mar 2021 4,333 during during As at forfeited Exercised As at Lapsed/ Number of share options 4,333 Directors' Report Annual Report 2021 15 Feb 2022 to 29 Mar 2028 (Note 8 and Note 11) 618.00 3,049 3,049 30 Mar 2021 15 Feb 2022 to 29 Mar 2028 (Note 10 and Note 11) 618.00 37 23 Dec 2020 15 Nov 2021 to 22 Nov 2027 (Note 8) 586.00 15 Jul 2021 to 20 Aug 2027 (Note 9) 518.00 24,465 24,465 21 Aug 2020 5 Jul 2022 to 9 Jul 2027 (Note 8) 546.50 3,507 21 Aug 2020 3,507 5 Jul 2021 to 9 Jul 2027 (Note 8) 546.50 1,360,471 51,172 16,539 1,428,182 10 Jul 2020 15 May 2021 to 21 May 2027 (Note 10) 10 Jul 2020 10,535 10,535 518.00 16,825 16,825 23 Nov 2020 15 Oct 2021 to 22 Nov 2027 (Note 10) 586.00 8,855 8,855 23 Nov 2020 15 Oct 2021 to 22 Nov 2027 (Note 9) 586.00 108,708 1,572 110,280 15 Aug 2021 to 20 Aug 2027 (Note 8) 518.00 4,964 4,964 21 Aug 2020 15 Aug 2021 to 20 Aug 2027 (Note 10) during 31 December Exercise 2021 For options granted with exercisable date determined based on the grant date of options, 100% of the total options shall be vested and can be exercised 5 years after the grant date. 7. 6. Directors' Report Tencent Holdings Limited 38 For options granted with exercisable date determined based on the grant date of options, the first 25% of the total options shall be vested and can be exercised 3 years after the grant date, and each 25% of the total options will be vested and become exercisable in each subsequent year. For options granted with exercisable date determined based on the grant date of options, the first 25% of the total options shall be vested and can be exercised 2 years after the grant date, and each 25% of the total options will be vested and become exercisable in each subsequent year. Subject to the satisfaction of certain conditions, the first 25% of the total options shall be vested and can be exercised on the dates as specified in the relevant grant letters, and each 25% of the total options will be vested and become exercisable in each subsequent year. For options granted with exercisable date determined based on the grant date of options, the first 25% of the total options shall be vested and can be exercised 1 year after the grant date, and each 25% of the total options will be vested and become exercisable in each subsequent year. For options granted with exercisable date determined based on the grant date of options, the first 50% of the total options shall be vested and can be exercised 1 year after the grant date, and the remaining 50% of the total options will be vested and become exercisable in the subsequent year. 5. 4. 3. 2. 1. Note: 93,338,573 For options granted with exercisable date determined based on the grant date of options, the first 33.33% (one-third) of the total options shall be vested and can be exercised 1 year after the grant date, and each 33.33% (one-third) of the total options will be vested and become exercisable in each subsequent year. 8. 9. 10. 39 Annual Report 2021 No options granted to the employees of the Group were cancelled during the year. 17. As a result of the Distribution in Specie, pursuant to the scheme rules of the Post-IPO Option Scheme II and the Post-IPO Option Scheme IV, adjustments had been made to the exercise price of the share options as shown above which remained outstanding as at the Ex-dividend Date. Please refer to the announcement of the Company dated 14 March 2022 for details. The weighted average closing price immediately before the date on which the options were exercised was HKD555.17 per Share, which was adjusted to HKD538.852 per Share on the Ex-dividend Date. The closing price immediately before the date on which the options were granted on 16 November 2021 was HKD491.8 per Share, which was adjusted to HKD477.342 per Share on the Ex-dividend Date. The closing price immediately before the date on which the options were granted on 14 July 2021 was HKD555.5 per Share, which was adjusted to HKD539.169 per Share on the Ex-dividend Date. The closing price immediately before the date on which the options were granted on 10 June 2021 was HKD603 per Share, which was adjusted to HKD585.272 per Share on the Ex-dividend Date. The closing price immediately before the date on which the options were granted on 30 March 2021 was HKD612 per Share, which was adjusted to HKD594.008 per Share on the Ex-dividend Date. 16. 15. 14. 13. 12. 11. The first 33.33% (one-third) of the total options shall be vested and can be exercised on the dates as specified in the relevant grant letters, and each 33.33% (one-third) of the total options will be vested and become exercisable in each subsequent year. The first 50% of the total options shall be vested and can be exercised on the dates as specified in the relevant grant letters, and the remaining 50% of the total options will be vested and become exercisable in the subsequent year. The first 25% of the total options shall be vested and can be exercised on the dates as specified in the relevant grant letters, and each 25% of the total options will be vested and become exercisable in each subsequent year. 357,421 429.52 85,119,689 13,410,620 4,834,315 15 Oct 2022 to 15 Nov 2028 (Note 10 and Note 14) 11,778 10 Jun 2021 30 Mar 2022 to 29 Mar 2028 (Note 8 and Note 11) 618.00 3,867,841 3,867,841 30 Mar 2021 1 January -- 11,778 Date of grant HKD (Note 15) Exercise period price 2021 the year the year the year (Note 16) 606.30 5 Jul 2021 to 9 Jun 2028 (Note 8 and Note 12) 10 Jun 2021 502.50 15,694 15,694 16 Nov 2021 15 Sep 2022 to 15 Nov 2028 (Note 10 and Note 14) 502.50 - 172,897 172,897 16 Nov 2021 5 Jul 2022 to 13 Jul 2028 (Note 8 and Note 13) 556.50 7,951,284 53,147 8,004,431 14 Jul 2021 15 May 2022 to 9 Jun 2028 (Note 10 and Note 12) 606.30 -- 151,607 151,607 Total: 6 Jul 2018 Granted 390,530 Lapsed/ Directors' Report Number of share options Tencent Holdings Limited 36 00 15 Jan 2021 to 7 Jan 2027 (Note 10) 382.00 26,250 26,250 8 Jan 2020 15 Dec 2020 to 7 Jan 2027 (Note 10) 382.00 111,510 As at 111,510 15 Nov 2020 to 1 Dec 2026 (Note 10) 335.84 17,664 17,500 35,164 2 Dec 2019 15 Aug 2020 to 22 Aug 2026 (Note 7) 334.20 213,990 213,990 23 Aug 2019 15 Aug 2020 to 22 Aug 2026 (Note 8) 334.20 43,585 8 Jan 2020 Granted Exercised forfeited the year the year the year 2021 price Exercise period (Note 15) HKD (Note 16) 20 Mar 2020 Exercise 90,848 4,629 295,053 359.60 21 Jan 2021 to 19 Mar 2027 (Note 9) 20 Mar 2020 As at 1 January during during during 31 December 24,210 - 49,840 22 May 2020 20 Mar 2021 to 19 Mar 2027 (Note 8) 359.60 2,560,491 24,329 2,584,820 49,840 67,795 23 Aug 2019 15 Aug 2020 to 22 Aug 2026 (Note 10) 95,106 288,972 4 Apr 2019 6 Jul 2019 to 23 Aug 2025 (Note 8) 354.00 - 2,660 2,660 24 Aug 2018 24 Aug 2019 to 23 Aug 2025 (Note 2) 354.00 17,780 17,780 24 Aug 2018 6 Jul 2021 to 5 Jul 2025 (Note 5) 386.60 14,246 13,685 603,278 108,973 3,381,317 386.60 6 Jul 2019 to 5 Jul 2025 (Note 3) 6 Jul 2018 193,866 8,050 6,050 386.60 6 Jul 2020 to 5 Jul 2025 (Note 4) 6 Jul 2018 34,230 6,299 2,000 2021 376.00 4 Apr 2019 334.20 9,870 9,870 19,740 23 Aug 2019 8 Jul 2021 to 7 Jul 2026 (Note 4) 359.04 12,005 12,005 8 Jul 2019 8 Jul 2020 to 7 Jul 2026 (Note 3) 359.04 1,740,226 58,317 153,813 1,952,356 8 Jul 2019 2,283,120 2,283,120 376.00 4 Apr 2020 to 3 Apr 2026 (Note 3) 4 Apr 2019 17,500,000 4 Apr 2020 to 3 Apr 2026 (Note 1) - 17,500,000 4 Apr 2024 to 3 Apr 2026 (Note 6) 8 Jul 2019 665 -665 .. 359.04 8 Jul 2020 to 7 Jul 2026 (Note 1) 376.00 Date of grant 7. 49 46 00 The total number of options available for grant under the TME Plan is 33,295,600, which represents approximately 1.01% and 2.11% of the total issued shares and the total Class A ordinary shares of TME as at the date of this annual report, respectively. Note: No options shall be granted after 17 May 2027, being the tenth anniversary of the effective date, unless the TME Plan is otherwise terminated earlier. Exercise price shall be at least the higher of (i) the nominal value of a TME share; (ii) the fair market value of a TME share of such option on the date of grant; and (iii) the average fair market value of a TME share of such option for the five business days immediately preceding the date of grant. 8. The term of each option shall be fixed by the compensation committee of the board of directors of TME or such other committee as may be designated by the board of directors of TME but shall not exceed 10 years from the date of grant of such option. There is no minimum period for which an option must be held before it can be exercised. 1% of the total outstanding shares of TME in issue from time to time within any 12-month period up to the date of the latest grant unless TME obtains the approval of the Company's shareholders. The maximum number of Class A ordinary shares of TME available for issuance (as refreshed by the Company's shareholders at the extraordinary general meeting held on 15 May 2019) upon exercise of options which may be granted under the TME Plan is 97,951,238, which represents 3.0% of the total issued shares of TME and 6.2% of the total Class A ordinary shares of TME as at the date of this annual report, respectively. Holders of options and other types of awards granted by a company acquired by TME or with which TME combines with are eligible for grants of substitute awards under the TME Plan to the extent permitted under applicable regulations of any stock exchange on which TME is listed. Tencent Holdings Limited Any employee of TME or any other individual who provides services to TME or any of its affiliates as determined by the compensation committee of the board of directors of TME or such other committee as may be designated by the board of directors of TME shall be eligible to receive an award under the TME Plan. a) The purpose of the TME Plan is to motivate and reward its employees and other individuals who are expected to contribute significantly to the success of TME and its subsidiaries to perform at the highest level and to further the best interests of TME and its shareholders. Remaining life of the scheme 8. Exercise price 7. Acceptance of offer 6. Option period 5. Maximum entitlement of each participant b) Maximum number of shares Directors' Report 1. Acceptance of offer 6. Vesting schedule and exercise period of each eligible participant Maximum entitlement (continued) Scheme Limit and maximum number of shares which may be issued 5. 4. Scheme Limit, refreshment of 3. A summary of the share option plan of China Literature, which took effect on 24 May 2021 (the “China Literature Plan"), is set out below: Directors' Report Annual Report 2021 China Literature may seek the approval of its shareholders in general meeting to refresh the Scheme Limit such that the total number of shares which may be issued upon exercise of all options that may be granted under the China Literature Plan and any other option scheme/ plan involving the issue or grant of options over shares or other securities by China Literature under the limit as refreshed shall not exceed 10% of the issued share capital of China Literature as at the date of approval of the refreshed limit. A total of 25,470,141 shares may be granted under the China Literature Plan, representing 2.5% of the issued share capital as at the date of the adoption of the China Literature Plan (the "Scheme Limit") and 2.5% of the issued share capital as at the date of this annual report, respectively, unless otherwise permitted by the Listing Rules or China Literature obtaining the approval of its shareholders to refresh the Scheme Limit. (i) any employee (whether full time or part time), executives or officers, directors (including executive, non-executive and independent non-executive directors) of any member of the China Literature Group; and (ii) any individual or entity that is (as applicable) either (a) a business partner of ("Business Partner") of (1) any member of the China Literature Group or (2) any entity in which any member of the China Literature Group holds an equity interest, and shall, for the purpose of the China Literature Plan, exclude any members of the China Literature Group ("Invested Entity"), (b) a consultant, adviser or agent of any member of the China Literature Group, any Invested Entity or any Business Partner or (c) an employee (whether full time or part time), executives or officers, directors (including executive, non-executive and independent non-executive directors) of any Invested Entity or any Business Partner who, in the sole opinion of the board of directors of China Literature, have contributed or will contribute to the growth and development of the China Literature Group or any Invested Entity. The purpose of the China Literature Plan is to (i) provide incentives and rewards to the directors, employees, advisors, consultants and business partners of China Literature and its subsidiaries (the “China Literature Group") for their contributions to, and continuing efforts to promote the interest of, China Literature; (ii) recognise the contributions that the eligible participants have made to China Literature with an opportunity to acquire a proprietary interest in China Literature; (iii) encourage and retain such individuals for the continual operation and development of the China Literature Group; (iv) provide additional incentives for them to achieve performance goals; (v) attract suitable personnel for further development of the China Literature Group; (vi) motivate the participants to maximise the value of China Literature for the benefits of both the eligible participants and China Literature, with a view to achieving the objectives of increasing the value of the China Literature Group and aligning the interests of the eligible participants directly to the shareholders of China Literature through ownership of shares of China Literature. refreshment of Scheme Limit and maximum number of shares which may be issued Scheme Limit, Eligible Participants 3. 2. Purpose 47 4. 3. Eligible participants Directors' Report MOVEMENTS IN THE SHARE OPTIONS Details of the movements in the share options of the Company during the year are set out in Note 35 to the consolidated financial statements. VALUATION OF SHARE OPTIONS Details of the valuation of share options of the Company during the year are set out in Note 35 to the consolidated financial statements. SHARE AWARD SCHEMES The Company adopted the following three Share Award Schemes with major terms and details set out below: 1. Purpose 2. Duration and Termination Tencent Holdings Limited 3. 2007 Share Award Scheme 2013 Share Award Scheme 2019 Share Award Scheme To recognise the contributions and to attract, motivate and retain eligible participants (including any director) of the Group It shall be valid and effective for a period of 15 years from the Adoption Date I. It shall be valid and effective unless and until being terminated on the earlier of: (i) the 15th anniversary date of the Adoption Date II; and (ii) such date of early termination as determined by the Board provided that such termination does not affect any subsisting rights of any Selected Participant. It shall be valid and effective unless and until being terminated on the earlier of: (i) the 15th anniversary date of the Adoption Date III; and (ii) such date of early termination as determined by the Board provided that such termination does not affect any subsisting rights of any Selected Participant. 2% of the issued shares of the Company as at the Adoption Date (i.e. 178,776,160 Shares (after the effect of the Share Subdivision)) 3% of the issued shares of the Company as at the Adoption Date II (i.e. 278,937,260 Shares (after the effect of the Share Subdivision and the Distribution in Specie)) 2% of the issued shares of the Company as at the Adoption Date III (i.e. 191,047,317 Shares (after the effect of the Distribution in Specie)) Annual Report 2021 Maximum number of Shares that can be awarded 48 00 The total number of options available for grant under the China Literature Plan is 17,658,688, which represents approximately 1.73% of the issued shares of China Literature as at the date of this annual report. 2. Purpose 1. A summary of the share option plan of TME, which was approved by the Company's shareholders on 17 May 2017 (the "TME Plan"), is set out below: Directors' Report 45 Annual Report 2021 The total number of Shares available for issue under the Post-IPO Option Scheme IV is 289,802,600, which represents approximately 3.01% of the issued shares of the Company as at the date of this annual report. The Post-IPO Option Scheme II expired on 16 May 2017 and no further options will be granted under the scheme. 2. 1. Note: It shall be valid and effective for a period of ten years commencing on 17 May 2017. average closing price of the securities as stated in the Stock Exchange's daily quotations sheets for the five business days immediately preceding the date of grant; and (iii) the nominal value of the Share. The exercise price must be at least the higher of: (i) the closing price of the securities as stated in the Stock Exchange's daily quotations sheet on the date of grant, which must be a business day; (ii) the Options granted must be accepted within 28 days of the date of grant, upon payment of HKD1 per grant. Remaining life of the scheme China Literature may seek the approval of its shareholders in general meeting to grant options which will result in the number of shares in respect of all the options granted under the China Literature Plan and all the options granted under any other option scheme exceeding 10% of the issued share capital of China Literature, provided that such options are granted only to participants specifically identified by China Literature before the approval of shareholders is sought. The maximum number of shares which may be issued upon exercise of all outstanding options granted and yet to be exercised under the China Literature Plan and any other options granted and yet to be exercised under any other option scheme shall not exceed 30% of the issued share capital of China Literature from time to time. No option may be granted to any eligible participant which, if exercised in full, would result in the total number of shares issued and to be issued upon exercise of the options already granted or to be granted to such eligible participant under the China Literature Plan (including exercised, cancelled and outstanding options) in the 12-month period up to and including the grant date of such new grant exceeding 1% in aggregate of the issued share capital of China Literature as at the grant date of such new grant. Any grant of further options above this limit shall be subject to the requirements provided under the Listing Rules. The board of directors of China Literature or the chairman of China Literature (as the case may be) may specify the exercise period and the vesting schedule of the options in the grant letter. Unless the options have been withdrawn and cancelled or been forfeited in whole or in part, the grantee may exercise his rights under the China Literature Plan according to the vesting schedule set out in the relevant grant letter. The option must be exercised no more than 10 years from the grant date. There is no minimum period for which an option must be held before it can be exercised. An amount of RMB1.00 must be paid by the grantee to China Literature upon acceptance of options within 3 days after such acceptance or other time as prescribed by China Literature, and such remittance shall not be refundable and shall not be deemed to be a part payment of the subscription price. The subscription price shall be a price determined by the board of directors of China Literature or the chairman of China Literature (as the case may be) and notified to grantee and will be the highest of: (a) the closing price of a share as stated in the Stock Exchange's daily quotations sheet on the grant date of the relevant options, which must be a business day; (b) an amount equivalent to the average closing price of a share as stated in the Stock Exchange's daily quotation sheets for the 5 business days immediately preceding the grant date of the relevant options; and (c) the nominal value per share on the grant date. The China Literature Plan is valid and effective for a period of ten years commencing on 24 May 2021, unless the China Literature Plan is otherwise terminated earlier. Note: Subscription price Options granted must generally be accepted within 28 days of the date of grant as specified in the award agreement. Grantees are not required to pay any premium for the acceptance of options. 15 Dec 2021 to 14 Dec 2030 (Note 4) 541,488 27,591,917 Hou Xiaonan 2,900,000 2,900,000 12 Jul 2021 Cheng Wu Directors Exercise period price HKD (Note 3) 2021 12 Jul 2021 Exercise the year 2021 Date of grant Name of director during 1 January As at Exercised Granted As at during 31 December the year Number of share options 2,175,000 82.85 82.85 Tencent Holdings Limited 42 00 7,811,453 7,811,453 Total: 2,736,453 2,736,453 Sub-total: 12 Jul 2022 to 12 Jul 2032 (Note 2) 5 Nov 2022 to 5 Nov 2032 (Note 2) 2,175,000 82.85 53.14 1,786,539 5 Nov 2021 949,914 949,914 12 Jul 2021 Employees 5,075,000 5,075,000 Sub-total: 12 Jul 2021 to 12 Jul 2031 (Note 1) 12 Jul 2021 to 12 Jul 2031 (Note 1) 1,786,539 Details of movements of share options granted to directors and employees of China Literature under the share option plan adopted by China Literature, a subsidiary of the Company, during the year ended 31 December 2021 are as follows: No options granted to employees and certain external consultants of TME were cancelled during the year. The expected volatility was estimated based on the historical volatility of the share prices of similar United States public companies for a period equal to the expected life preceding the grant date. Sub-total: 1 Mar 2016 to 28 Feb 2025 (Note 1) 0.27 50,000 50,000 1 Mar 2015 1 Mar 2016 to 28 Feb 2025 (Note 1) 0.000076 192,801 86,000 328,801 278,801 (Note 7) consultants External 7,216,862 26,806,285 8,543,982 Sub-total: 15 Dec 2022 to 14 Dec 2031 (Note 4 and Note 5) 44 3.32 307,792 1 Mar 2015 136,000 192,801 Total: The fair value of the options as at the respective grant date was determined using the "Enhanced FAS 123" binomial model which is to be expensed over the relevant vesting period. The weighted average fair value of options granted during the year ended 31 December 2021 was USD2.65 per share. Other than the exercise price mentioned above, significant assumptions (which are subject to subjectivity and uncertainty) used to estimate the fair value of the options include risk-free rate (1.22% -1.63%), dividend yield (nil) and expected volatility* (43.5% - 50%). The weighted average closing price immediately before the date on which the options were exercised by certain external consultants of TME was USD9.96 per share. The weighted average closing price immediately before the date on which the options were exercised by employees of TME was USD10.26 per share. The closing price immediately before the date on which the options were granted on 15 May 2021, 15 July 2021, 30 July 2021, 15 September 2021 and 15 December 2021, was USD7.61 per share, USD6.36 per share, USD5.32 per share, USD4.03 per share and USD3.19 per share, respectively. The first 33.33% (one-third) of the total options shall be vested and can be exercised 1 year after the commencement date as specified in the relevant grant letters, and each 33.33% (one-third) of the total options will be vested and become exercisable in each subsequent year. The first 25% of the total options shall be vested and can be exercised 2 years after the commencement date as specified in the relevant grant letters, and each 25% of the total options will be vested and become exercisable in each subsequent year. 9. 8. 7. 6. 5. 4. 3. Directors' Report 41 Annual Report 2021 Subject to the satisfaction of certain conditions, the first 25% of the total options shall be vested and can be exercised on the dates as specified in the relevant grant letters, and each 25% of the total options will be vested and become exercisable in each subsequent year. The first 25% of the total options shall be vested and can be exercised 1 year after the commencement dates as specified in the relevant grant letters, and each 12.5% of the total options will be vested and become exercisable in each subsequent six months. 2. 1. Note: 541,488 27,784,718 27,135,086 8,543,982 7,352,862 Directors' Report 307,792 Note: 2. Maximum number of Shares 3. Any employee (whether full time or part time), executive or officer, director (including executive, non-executive and independent non-executive directors) of any member of the Group or any invested entity, and any consultant, adviser or agent of any member of the Board, who have contributed or will contribute to the growth and development of the Group or any invested entity Any employee (whether full time or part time), executive or officer, director (including executive, non-executive and independent non-executive directors) of any member of the Group or any invested entity, which is any entity in which the Group holds an equity interest, and any consultant, adviser or agent of any member of the Board, who have contributed or will contribute to the growth and development of the Group or any invested entity To recognise the contribution that certain individuals have made to the Group, to attract the best available personnel and to promote the success of the Group's business Post-IPO Option Scheme IV Post-IPO Option Scheme II Qualifying participants 2. Purposes The maximum number of Shares in respect of which options may be granted under the Post-IPO Option Scheme II shall be 444,518,270 Shares (after the effect of the Share Subdivision), 5% of the relevant class of securities of the Company in issue as at 16 May 2007. The maximum number of Shares which may be issued upon exercise of all outstanding options granted and yet to be exercised under the Post-IPO Option Scheme II and any other share option schemes, including the Pre-IPO Option Scheme, the Post-IPO Option Scheme I, the Post-IPO Option Scheme III and the Post-IPO Option Scheme IV, must not in aggregate exceed 30% of the issued shares 1. SUMMARY OF THE SHARE OPTION SCHEMES Directors' Report 43 Annual Report 2021 No options granted to the employees of HUYA were cancelled during the year. 3. All outstanding options were granted before HUYA became our subsidiary, and became vested and exercisable prior to or upon HUYA becoming our subsidiary. The weighted average closing price immediately before the date on which the options were exercised was USD12.98 per share. 2. 1. Details Note: of the Company from time to time (Note 1). the scheme Tencent Holdings Limited Details 4. Maximum entitlement of each participant 5. Option period Directors' Report Post-IPO Option Scheme II 1% of the issued shares of the Company from time to time within any 12-month period up to the date of the latest grant The option period is determined by the Board provided that it is not later than the last day of the 7-year period after the date of grant of the options. There is no minimum period for which an option must be held before it can be exercised. The maximum number of Shares in respect of which options may be granted under the Post-IPO Option Scheme IV shall be 379,099,339 Shares, 4% of the relevant. class of securities of the Company in issue as at 17 May 2017. The maximum number of Shares which may be issued upon exercise of all outstanding options granted and yet to be exercised under the Post-IPO Option Scheme IV and any other share option schemes, including the Pre- IPO Option Scheme, the Post-IPO Option Scheme I, the Post-IPO Option Scheme II and the Post-IPO Option Scheme III, must not in aggregate exceed 30% of the issued shares of the Company from time to time (Note 2). Post-IPO Option Scheme IV The option period is determined by the Board provided that it is not later than the last day of the 7-year period after the date of grant of the options. There is no minimum period for which an option must be held before it can be exercised. 6. Acceptance of offer 7. Exercise price Options granted must be accepted within 28 days of the date of grant, upon payment of HKD1 per grant. The exercise price must be at least the higher of: (i) the closing price of the securities as stated in the Stock Exchange's daily quotations sheet on the date of grant, which must be a business day; (ii) the average closing price of the securities as stated in the Stock Exchange's daily quotations sheets for the five business days immediately preceding the date of grant; and (iii) the nominal value of the Share. 8. Remaining life of It expired on 16 May 2017. 1% of the issued shares of the Company from time to time within any 12-month period up to the date of the latest grant 259,315 533,425 792,740 Date of grant Exercise during 31 December during As at forfeited Exercised Granted during 1 January As at 2021 Lapsed/ Details of movements of share options granted to employees of HUYA under the share option schemes adopted by HUYA, a subsidiary of the Company, during the year ended 31 December 2021 are as follows: No options granted to directors and employees of China Literature were exercised, cancelled or lapsed during the year. 5. The expected volatility, measured as the standard deviation of expected share price returns, is determined based on the average daily closing price volatility of the shares of the comparative companies within an observation period which was commensurate with the maturity of the share options. The fair value of the options as at the respective grant date was determined using the binomial model which is to be expensed over the relevant vesting period. The weighted average fair value of options granted during the year ended 31 December 2021 was HKD20.26 per share. Other than the exercise price mentioned above, significant assumptions (which are subject to subjectivity and uncertainty) used to estimate the fair value of the options include risk-free rate (1.6%), dividend yield (nil) and expected volatility* (25%). The closing price immediately before the date on which the options were granted on 12 July 2021 and 5 November 2021, was HKD80.65 per share and HKD53.25 per share, respectively. The first 25% of the total options shall be vested and can be exercised 1 year after the grant date, and each 25% of the total options will be vested and become exercisable in each subsequent year. The first 25% of the total options shall be vested and can be exercised after the grant date, and each 25% of the total options will be vested and become exercisable in each subsequent year. 4. 3. Number of share options the year the year the year Total: Till 1 Jul 2028 (Note 2) 2.55 9,000 9,000 1 Jul 2018 Till 9 Aug 2027 (Note 2) 2.55 100,315 477,187 577,502 9 Aug 2017 Till 9 Aug 2027 (Note 2) 2.55 159,000 47,238 206,238 9 Aug 2017 USD (Note 1) Exercise period price 2021 1. 15 Dec 2021 00 4.24 00 40 40 Tencent Holdings Limited Number of share options Directors' Report Lapsed/ As at Granted 12 Jul 2020 to 16 Oct 2028 (Note 3) Exercised As at 1 January during during during 31 December Exercise Date of grant 2021 the year forfeited the year 7.14 52,500 31 Aug 2018 to 30 Aug 2027 (Note 1) 20 Dec 2017 3,973,756 1,137,084 2,836,672 2.32 20 Dec 2018 to 19 Dec 2027 (Note 2) 16 Apr 2018 650,000 30,000 2,763,500 325,000 4.04 16 Apr 2019 to 15 Apr 2028 (Note 2) 17 Oct 2018 1,821,500 125,000 1,696,500 7.14 12 Jul 2019 to 16 Oct 2028 (Note 2) 17 Oct 2018 2,846,000 325,000 the year 2021 price 71,930 7.17 15 Oct 2021 to 14 Oct 2030 (Note 4) 15 Dec 2020 169,080 169,080 9.53 15 May 2021 1,262,240 71,930 1,262,240 15 May 2022 to 14 May 2031 (Note 2 and Note 5) 15 Jul 2021 148,130 148,130 15 Sep 2022 to 14 Sep 2031 (Note 4 and Note 5) 15 Jul 2022 to 14 May 2031 (Note 4 and Note 5) 30 Jul 2021 6,570,868 243,126 7.61 15 Oct 2020 15 Aug 2021 to 14 Aug 2030 (Note 4) 7.56 Exercise period USD (Note 8) (Note 6) Employees 14 Jun 2019 1,637,002 15,384 1,621,618 7.05 14 Jun 2020 to 13 Jun 2029 (Note 2) 12 Jun 2020 4,285,570 81,198 110,540 4,093,832 6.20 12 Jun 2021 to 11 Jun 2030 (Note 2) 15 Aug 2020 208,790 208,790 0.27 6,327,742 1,271,442 1,444,538 USD Employees 1 Mar 2015 460,220 167,476 292,744 0.000076 1 Mar 2016 to 28 Feb 2025 (Note 1) 1 Mar 2015 (Note 6) 417,410 179,020 0.27 1 Mar 2016 to 28 Feb 2025 (Note 1) 30 Mar 2015 700,882 297,598 403,284 0.27 30 Mar 2016 to 29 Mar 2025 (Note 1) 238,390 1 Oct 2015 (Note 8) price Directors' Report Details of movements of share options granted to employees and certain external consultants of TME under the share option schemes adopted by TME, a subsidiary of the Company, during the year ended 31 December 2021 are as follows: Number of share options Lapsed/ As at Granted Exercised forfeited As at Exercise period 1 January during during 31 December Exercise Date of grant 2021 the year the year the year 2021 during 125,100 61,340 63,760 30 Jun 2016 3,063,364 1,522,590 1,540,774 0.27 30 Jun 2017 to 29 Jun 2026 (Note 1) 16 Jun 2017 367,892 364,230 30 Jun 2017 to 29 Jun 2026 (Note 1) 3,662 5 Jul 2017 to 15 Jun 2027 (Note 2) 16 Jun 2017 2,370,864 940,806 1,430,058 2.32 31 Mar 2018 to 15 Jun 2027 (Note 2) 31 Aug 2017 2,748,802 2.32 0.000076 81,638 81,638 0.27 1 Oct 2016 to 30 Sep 2025 (Note 1) 31 Dec 2015 599,658 403,642 196,016 0.27 31 Dec 2016 to 30 Dec 2025 (Note 1) 1 Mar 2016 107,889 57,144 50,745 0.27 1 Mar 2017 to 28 Feb 2026 (Note 1) 31 Mar 2016 98,938 26,304 72,634 0.27 31 Mar 2017 to 30 Mar 2026 (Note 1) 30 Jun 2016 32,822 5.29 6.37 15 Sep 2021 30 Jul 2022 to 29 Jul 2031 (Note 2 and Note 5) 254,952 254,952 20 March 2020 Date of grant 2021 the year the year 2021 Vesting period (Note) lan Charles Stone 24 March 2017 5,000 5,000 24 March 2018 to Name of director 31 December As at 24 March 2021 Vested Granted during 1 January As at Number of Awarded Shares As at 31 December 2021, there were a total of 105,992 outstanding Awarded Shares granted to the directors of the Company, details of which are as follows: Directors' Report 53 Annual Report 2021 During the year, a total of 20,047,558 Shares were issued to option holders who exercised their share options granted under the Post-IPO Option Scheme II and the Post-IPO Option Scheme IV, and pursuant to the Share Award Schemes. During the year, a total of 4,723,407 and 72,331,341 Awarded Shares were granted under the 2013 Share Award Scheme and the 2019 Share Award Scheme respectively, out of which 40,500 Awarded Shares were granted to the independent non- executive directors of the Company under the 2019 Share Award Scheme. Details of the movements in the Share Award Schemes during the year are set out in Note 35 to the consolidated financial statements. The Company shall comply with the relevant Listing Rules when granting the Awarded Shares. If awards are made to the directors or substantial shareholders of the Group, such awards shall constitute connected transaction under Chapter 14A of the Listing Rules and the Company shall comply with the relevant requirements under the Listing Rules. The Trustee shall not exercise any voting rights in respect of any Shares held pursuant to the Trust Deed III or as nominee. during 9 April 2018 3,250 The Trustee shall not exercise any voting rights in respect of any Shares held pursuant to the Trust Deed II or as nominee. Yang Siu Shun Ke Yang lain Ferguson Bruce (retired with effect from 20 May 2021) In accordance with Article 87 of the Articles of Association, Mr Li Dong Sheng and Mr lan Charles Stone will retire at the 2022 AGM and, being eligible, will offer themselves for re-election. The Company has received from each independent non-executive director an annual confirmation of his/her independence pursuant to Rule 3.13 of the Listing Rules and the Board considers them independent. 00 56 Tencent Holdings Limited Directors' Report BIOGRAPHICAL DETAILS AND OTHER INFORMATION OF DIRECTORS Ma Huateng, age 50, is an executive director, Chairman of the Board and Chief Executive Officer of the Company. Mr Ma has overall responsibilities for strategic planning and positioning and management of the Group. Mr Ma is one of the core founders and has been employed by the Group since 1999. Prior to his current employment, Mr Ma was in charge of research and development for Internet paging system development at China Motion Telecom Development Limited, a supplier of telecommunications services and products in China. Mr Ma is a deputy to the 13th National People's Congress. Mr Ma has a Bachelor of Science degree specialising in Computer and its Application obtained in 1993 from Shenzhen University and more than 28 years of experience in the telecommunications and Internet industries. He is a director of Advance Data Services Limited, which has an interest in the shares of the Company which would fall to be disclosed to the Company under the provisions of Divisions 2 and 3 of Part XV of the SFO. Mr Ma also serves as a director of certain subsidiaries of the Company. Lau Chi Ping Martin, age 48, is an executive director and President of the Company. Mr Lau joined the Company in 2005 as the Chief Strategy and Investment Officer and was responsible for corporate strategies, investments, mergers and acquisitions and investor relations. In 2006, Mr Lau was promoted to President of the Company to manage the day-to-day operation of the Company. In 2007, he was appointed as an executive director of the Company. Prior to joining the Company, Mr Lau was an executive director at Goldman Sachs (Asia) L.L.C.'s investment banking division and the Chief Operating Officer of its Telecom, Media and Technology Group. Prior to that, he worked at McKinsey & Company, Inc. as a management consultant. Mr Lau received a Bachelor of Science degree in Electrical Engineering from University of Michigan, a Master of Science degree in Electrical Engineering from Stanford University and an MBA degree from Kellogg Graduate School of Management, Northwestern University. Mr Lau is currently a non-executive director of Kingsoft Corporation Limited, an Internet based software developer, distributor and software service provider, and Meituan, a leading eCommerce platform for services in China, both of these companies are publicly listed on the Stock Exchange. Mr Lau is also a director of Vipshop Holdings Limited, an online discount retailer company, TME, an online music entertainment platform in China, and DiDi Global Inc., a leading mobility technology platform in China, all of these companies are listed on the New York Stock Exchange. Mr Lau was a director of Leju Holdings Limited, an online-to-offline real estate services provider in China that is listed on the New York Stock Exchange, up to 18 August 2020, and JD.com, an online direct sales company in China that is listed on NASDAQ and the Stock Exchange, up to 23 December 2021. Mr Lau also serves as a director/corporate representative of certain subsidiaries of the Company. Jacobus Petrus (Koos) Bekker, age 69, has been a non-executive director since November 2012. Koos led the founding team of the M-Net/MultiChoice pay-television business in 1985. He was also a founder director of MTN in cellular telephony. Koos headed the MIH group in its international and Internet expansions until 1997, when he became chief executive of Naspers, which is listed on the Johannesburg Stock Exchange and London Stock Exchange. He serves on the boards of other companies within the group and associates, as well as other bodies. In April 2015, he became non-executive chair. On 14 August 2019, he was appointed as non-executive chair of Prosus N.V., which is listed on Euronext Amsterdam and on the Johannesburg Stock Exchange. Academic qualifications include BA Hons and honorary doctorate in commerce (Stellenbosch University), LLB (University of the Witwatersrand) and MBA (Columbia University, New York). Annual Report 2021 57 30 March 2021 20 March 2024 3,250 9 April 2019 to 9 April 2022 4 April 2019 12,750 4,250 6,500 8,500 4 April 2023 20 March 2020 17,000 4,250 12,750 20 March 2021 to 4 April 2020 to The Trustee shall not exercise any voting rights in respect of any Shares held pursuant to the Trust Deed I (including but not limited to the Awarded Shares and any bonus Shares and scrip Shares derived therefrom). 8. lan Charles Stone The Board may at any time at its discretion, in respect of each Selected Participant, cause to be paid the relevant amount from the Company's resources or any subsidiary's resources into an account for the purchase and/or subscription of the Awarded Shares after the Grant Date. The Board may, from time to time, at its absolute discretion select any Eligible Person to be a Selected Participant and grant to such Selected Participant Awarded Shares. The Board may at any time at its discretion, in respect of each Selected Participant, cause to be paid the relevant amount from the Company's resources or any subsidiary's resources into an account for the purchase and/or subscription of the Awarded Shares after the Grant Date. The Board may, from time to time, at its absolute discretion select any Eligible Person to be a Selected Participant and grant to such Selected Participant Awarded Shares. The Board shall, in respect of each Selected Participant, cause to be paid the relevant amount from the Company's resources into an account or to the Trustee to be held on trust for the relevant Selected Participant for the purchase and/or subscription of the Awarded Shares as soon as practicable after the Reference Date. The Board shall select the Eligible Person(s) and determine the number of Shares to be awarded. 50 50 Operation 5. 1% of the issued shares of the Company as at the Adoption Date III (i.e. 95,523,658 Shares (after the effect of the Distribution in Specie)) 1% of the issued shares of the Company as at the Adoption Date II (i.e. 92,979,085 Shares (after the effect of the Share Subdivision and the Distribution in Specie)) 1% of the issued shares of the Company as at the Adoption Date I (i.e. 89,388,080 Shares (after the effect of the Share Subdivision)) Maximum entitlement of each participant Tencent Holdings Limited 2019 Share Award Scheme 2007 Share Award Scheme Directors' Report 4. 00 Li Dong Sheng, age 64, has been an independent non-executive director since April 2004. Mr Li is the Chairman and Chief Executive Officer of TCL Technology Group Corporation that is listed on the Shenzhen Stock Exchange, and the strategic development consultant of TCL Electronics Holdings Limited that is listed on the Stock Exchange, both of which produce consumer electronic products. Mr Li graduated from South China University of Technology in 1982 with a Bachelor degree in radio technology and has more than 27 years of experience in the information technology field. Mr Li was a non-executive director of Fantasia Holdings Group Co., Limited, a leading property developer and property related service provider in China that is listed on the Stock Exchange, up to 29 May 2020, and was the Chairman and an executive director of TCL Electronics Holdings Limited, up to 9 August 2021. lan Charles Stone, age 71, has been an independent non-executive director since April 2004. Mr Stone is currently an independent advisor on Technology, Media and Telecoms after retiring from PCCW in Hong Kong in 2011. His career in the last 32 years has been primarily in leading mobile telecoms businesses, and new wireless and Internet technology, during which time he held senior roles in PCCW, SmarTone, First Pacific, Hong Kong Telecom and CSL, as Chief Executive or at Director level, primarily in Hong Kong, and also in London and Manila. Since 2011, Mr Stone has provided telecoms advisory services to telecom companies and investors in Hong Kong (China), the Mainland of China, South East Asia and the Middle East and has more than 51 years of experience in the telecom and mobile industries. Mr Stone is also an independent director of Summit Healthcare Acquisition Corp. that is listed on NASDAQ. Mr Stone is a fellow member of The Hong Kong Institute of Directors. 00 58 Tencent Holdings Limited Directors' Report Yang Siu Shun, age 66, has been an independent non-executive director since July 2016. Mr Yang is currently serving as a Member of the 13th National Committee of the Chinese People's Political Consultative Conference, a Justice of the Peace in Hong Kong, a Steward of the Hong Kong Jockey Club, and an independent non-executive director of Industrial and Commercial Bank of China Limited which is publicly listed on the Stock Exchange and the Shanghai Stock Exchange. Mr Yang retired from PricewaterhouseCoopers ("PwC") on 30 June 2015. Before his retirement, he served as the Chairman and Senior Partner of PwC Hong Kong, the Executive Chairman and Senior Partner of PwC China and Hong Kong, one of the five members of the Global Network Leadership Team of PwC and the PwC Asia Pacific Chairman. Mr Yang served as a Board Member and the Audit Committee Chairman of The Hang Seng University of Hong Kong (formerly known as Hang Seng Management College), up to 30 September 2018 and the Deputy Chairman of the Council of Hong Kong Metropolitan University ("HKMU") (formerly known as The Open University of Hong Kong), up to 19 June 2019. Mr Yang also served as a Member of the Exchange Fund Advisory Committee of the Hong Kong Monetary Authority, up to 31 August 2021. Mr Yang graduated from the London School of Economics and Political Science in 1978 and was awarded the degree of Honorary Doctor of Social Sciences by HKMU in 2019. Mr Yang is a Fellow Member of the Institute of Chartered Accountants in England and Wales, the Hong Kong Institute of Certified Public Accountants and the Chartered Institute of Management Accountants. Ke Yang, age 66, has been an independent non-executive director since August 2019. Professor Ke is currently the Director of Laboratory of Genetics of Peking University Cancer Hospital and an international member of the United States National Academy of Medicine. Professor Ke is also Vice-president of the Peking University Alumni Association, President of the Peking University Health Science Center Alumni Association, Vice-president of China Medical Women's Association, President of the Health Professional Education Committee of the Chinese Association of Higher Education, Vice-chairperson of the Steering Committee of Clinical Medicine of the Committee of Academic Degrees of the State Council, and Vice-president of Cancer Foundation of China. Professor Ke's research focus is on the upper gastrointestinal tumors, including the cloning of gastric cancer related genes and the functional study of such genes. Together with her team, she has also established the population cohort in esophageal cancer high incidence regions in China, studied the etiology of esophageal cancer, and evaluated the effects and economic efficacy of early screening of the disease. She has published more than 100 papers and had registered patents and been granted awards at national and provincial levels for technological and educational achievements. Professor Ke was a member of the 11th and 12th National Committee of the Chinese People's Political Consultative Conference, an executive Vice-president of Peking University and of the Peking University Health Science Center (formerly known as Beijing Medical College), a member of the Committee of Academic Degrees of the State Council, a member of the Healthcare Reform Advisory Committee of the State Council, the Chairperson of the Working Committee for Graduate Medical and Pharmaceutical Education of the Office of Academic Degrees of the State Council, and Vice-president of the 24th and 25th Chinese Medical Association. Professor Ke graduated from the Peking University Health Science Center in 1982. From 1985 to 1988, Professor Ke worked at the National Cancer Institute of the National Institutes of Health of the United States as a postdoctoral fellow. Professor Ke is currently an independent non-executive director of Keymed Biosciences Inc. which is publicly listed on the Stock Exchange. Annual Report 2021 59 2013 Share Award Scheme 6. Restrictions 2007 Share Award Scheme 2019 Share Award Scheme 2013 Share Award Scheme Directors' Report 2007 Share Award Scheme Tencent Holdings Limited 52 00 Subject to the satisfaction of all vesting conditions as prescribed in the 2019 Share Award Scheme, the Selected Participants will be entitled to receive the Awarded Shares. The vesting of the Awarded Shares is subject to the Selected Participant remaining at all times after the Grant Date and on the date of vesting, an Eligible Person, subject to the rules of the 2019 Share Award Scheme. Subject to the satisfaction of all vesting conditions as prescribed in the 2013 Share Award Scheme, the Selected Participants will be entitled to receive the Awarded Shares. The vesting of the Awarded Shares is subject to the Selected Participant remaining at all times after the Grant Date and on the date of vesting, an Eligible Person, subject to the rules of the 2013 Share Award Scheme. Awarded Shares and the related income derived therefrom are subject to a vesting scale to be determined by the Board at the date of grant of the award. Vesting of the Shares will be conditional on the Selected Participant satisfying all vesting conditions specified by the Board at the time of making the award until and on each of the relevant vesting dates and his/ her execution of the relevant documents to effect the transfer from the Trustee. not required under the Listing Rules); and (2) the deadline for the Company to publish its quarterly, interim or annual results announcement for any such period, and ending on the date of such announcement; or (iv) in any other circumstances where dealings by Selected Participant (including directors) are prohibited under the Listing Rules, the SFO or any other applicable law or regulation or where the requisite approval from any applicable regulatory authorities has not been granted. not required under the Listing Rules); and (2) the deadline for the Company to publish its quarterly, interim or annual results announcement for any such period, and ending on the date of such announcement; or (iv) in any other circumstances where dealings by Selected Participant (including directors) are prohibited under the Listing Rules, the SFO or any other applicable law or regulation or where the requisite approval from any applicable regulatory authorities has not been granted. 2019 Share Award Scheme 2013 Share Award Scheme 2007 Share Award Scheme 2013 Share Award Scheme Directors' Report 2019 Share Award Scheme No award shall be made by the Board and no instructions to acquire Shares and allot new Shares shall be given by the Board or the Trustee under the 2007 Share Award Scheme where any director is in possession of unpublished price-sensitive information in relation to the Group or where dealings by directors are prohibited under any code or requirement of the Listing Rules and all applicable laws from time to time. No award may be made by the Board to any Selected Participant: (i) where the Company has information that must be disclosed under Rule 13.09 of the Listing Rules or where the Company reasonably believes there is inside information which must be disclosed under Part XIVA of the SFO, until such inside information has been published on the websites of the Stock Exchange and the Company; (ii) after any inside information in relation to the securities of the Company has occurred or has become the subject of a decision, until such inside information has been published; (iii) within the period commencing 60 days (in the case of yearly results), or 30 days (in the case of results for half-year, quarterly or other interim period) immediately preceding the earlier of (1) the date of a meeting of the Board (as such date is first notified to the Stock Exchange) for the approval of the Company's results for any year, half-year, quarterly or other interim period (whether or Voting Rights No award may be made by the Board to any Selected Participant: (i) where the Company has information that must be disclosed under Rule 13.09 of the Listing Rules or where the Company reasonably believes there is inside information which must be disclosed under Part XIVA of the SFO, until such inside information has been published on the websites of the Stock Exchange and the Company; (ii) after any inside information in relation to the securities of the Company has occurred or has become the subject of a decision, until such inside information has been published; (iii) within the period commencing 60 days (in the case of yearly results), or 30 days (in the case of results for half-year, quarterly or other interim period) immediately preceding the earlier of (1) the date of a meeting of the Board (as such date is first notified to the Stock Exchange) for the approval of the Company's results for any year, half-year, quarterly or other interim period (whether or 51 Directors' Report 6. Restrictions (continued) 7. Vesting and Lapse Annual Report 2021 Li Dong Sheng Independent Non-Executive Directors Charles St Leger Searle 7,500 3,750 11,250 Directors' Report 4 April 2019 9 April 2022 9 April 2019 to 2,500 2,500 5,000 9 April 2018 24 March 2021 24 March 2018 to 2,500 2,500 Charles St Leger Searle, age 58, has been a non-executive director since June 2001. Mr Searle is currently the Chief Executive Officer of Naspers Internet Listed Assets. He serves on the board of a number of companies associated with the Naspers Group, and was a director of VK Company Limited (formerly known as Mail.ru Group Limited) that is listed on the London Stock Exchange and the Moscow Exchange until his resignation on 4 March 2022. Mr Searle was a director of MakeMyTrip Limited that is listed on NASDAQ, up to 30 August 2019. Prior to joining the Naspers Group, he held positions at Cable & Wireless plc and at Deloitte & Touche in London and Sydney. Mr Searle is a graduate of the University of Cape Town and a member of the Institute of Chartered Accountants in Australia and New Zealand. Mr Searle has more than 28 years of international experience in the telecommunications and Internet industries. Mr Searle also serves as a director of certain subsidiaries of the Company. 24 March 2017 Granted during Vested As at during 31 December Name of director 4 April 2020 to Date of grant the year the year 2021 Vesting period (Note) Yang Siu Shun 2021 Number of Awarded Shares Total: 7,000 30 March 2022 to 15,000 3,750 11,250 20 March 2021 to 20 March 2024 30 March 2021 12,500 12,500 30 March 2022 to 30 March 2025 Total: 33,750 12,500 12,500 33,750 Ke Yang 23 August 2019 20 March 2024 20 March 2021 to 4,500 1,500 23 August 2023 23 August 2020 to 30 March 2025 2,992 7,000 30 March 2021 6,000 20 March 2020 Note: 4,488 1,496 4 April 2023 1 January Directors' Report 24 March 2017 Li Dong Sheng 38,500 16,750 14,000 41,250 Total: 30 March 2025 30 March 2022 to 14,000 14,000 10,488 7,000 2,996 14,492 Grand Total: 106,113 Jacobus Petrus (Koos) Bekker Non-Executive Directors Lau Chi Ping Martin Ma Huateng (Chairman) Executive Directors The directors and senior management of the Company during the year and up to the date of this annual report were: 2,500 DIRECTORS AND SENIOR MANAGEMENT 55 Annual Report 2021 As a result of the Distribution of Specie, pursuant to the scheme rules of the 2013 Share Award Scheme and the 2019 Share Award Scheme, adjustments had been made to the number of Shares subject to share awards which remained unvested as at the Ex-dividend Date. Please refer to the announcement of the Company dated 14 March 2022 for details. 105,992 40,621 40,500 Directors' Report As at 2,500 24 March 2018 to Tencent Holdings Limited 54 00 19,250 8,375 7,000 20,625 Total: 30 March 2025 30 March 2022 to 7,000 7,000 30 March 2021 20 March 2024 20 March 2021 to 6,375 2,125 24 March 2021 9 April 2018 3,250 1,625 9 April 2019 to 9 April 2022 - 4 April 2019 2,125 4,250 4 April 2020 to 4 April 2023 20 March 2020 8,500 6,375 1,625 Provision of value-added services and Internet advertisement services in the PRC BIOGRAPHICAL DETAILS OF SENIOR MANAGEMENT Personal* 38,974 0.0004% (Note 5) Ke Yang Personal* 18,984 0.0002% Yang Siu Shun (Note 6) 64 Tencent Holdings Limited Note: 1. Advance Data Services Limited, a British Virgin Islands company wholly-owned by Mr Ma Huateng, holds 709,859,700 Shares directly and 95,000,000 Shares indirectly through its wholly-owned subsidiary, Ma Huateng Global Foundation. 2. 3. The interest comprises 32,567,826 Shares and 23,496,825 underlying Shares in respect of the share options granted pursuant to the Post-IPO Option Scheme II and the Post-IPO Option Scheme IV. Details of the share options granted to this director are set out above under "Share Option Schemes". 00 (Note 4) 316,000 240,000 It is uncertain whether any new PRC laws, rules or regulations relating to Structure Contracts will be adopted or if adopted, what they would provide. On 15 March 2019, the Standing Committee of National People's Congress promulgated Law of Foreign Investment which became effective on 1 January 2020 (the "2019 Law of Foreign Investment"). While the 2019 Law of Foreign Investment does not define Structure Contracts as a form of foreign investment explicitly, the Company cannot assure that future laws and regulations will not provide for Structure Contracts as a form of foreign investment. Therefore, there can be no assurance that the Company's control over OPCOs through Structure Contracts will not be deemed as foreign investment in the future. If the Structure Contracts were to be deemed as a method of foreign investment under any future laws, regulations and rules, and if any of the Company's business operations were to fall under the "negative list" for foreign investment, the Company would need to take further actions in order to comply with these laws, regulations and rules, which may materially and adversely affect its current corporate structure, business, financial condition and results of operations. However, the Company's PRC legal advisers also advised that there are substantial uncertainties regarding the interpretation and application of the currently applicable PRC laws, rules and regulations. Accordingly, the PRC regulatory authorities and PRC courts may in the future take a view that is contrary to the position of the Company's PRC legal advisers concerning the Structure Contracts. In the view of the Company's PRC legal advisers, the arrangement of the Structure Contracts does not violate applicable existing PRC laws and regulations as the Company indirectly operates the value-added telecommunication service business, online and mobile games, online advertising and other Internet and wireless portals in the PRC through OPCOS that hold the necessary licences for the existing lines of businesses. However, the Circular 13 does not provide any interpretation of the term "foreign investors" or make a distinction between foreign online game companies and companies under a corporate structure similar to the Group. Thus, it is unclear whether the State General Administration of Press, Publication, Radio, Film and Television will deem the Group's structure and operations to be in violation of these provisions. (Note 7) 804,859,700 8.38% 56,064,651 0.58% (Note 2) Li Dong Sheng Personal* 36,375 0.0004% (Note 3) lan Charles Stone Personal* Family* 76,000 0.003% The interest comprises 17,125 Shares and 19,250 underlying Shares in respect of the Awarded Shares granted pursuant to the 2013 Share Award Scheme and the 2019 Share Award Scheme. Details of the Awarded Shares granted to this director are set out above under "Share Award Schemes". 4. The interest comprises 277,500 Shares and 38,500 underlying Shares in respect of the Awarded Shares granted pursuant to the 2013 Share Award Scheme and the 2019 Share Award Scheme. Details of the Awarded Shares granted to this director are set out above under "Share Award Schemes". 5. 54.29% Save as disclosed above, none of the directors or chief executive of the Company and their associates, had interests or short positions in any shares, underlying shares or debentures of the Company and its associated corporations as at 31 December 2021. Annual Report 2021 65 Directors' Report CONNECTED TRANSACTIONS Reference is made to the waiver granted by the Stock Exchange regarding the compliance with the applicable disclosure, reporting and shareholders' approval requirements under Chapter 14A of the Listing Rules when the Company was listed in June 2004. The reasons for using Structure Contracts Current PRC laws and regulations limit foreign investment in businesses providing value-added telecommunications services in China. As foreign-invested enterprises, the WFOEs do not have licences to provide Internet content or information services and other telecommunications value-added services. Accordingly, the value-added telecommunications business of the Group has been conducted through Tencent Computer, Shiji Kaixuan, Wang Dian, Beijing BIZCOM, Beijing Starsinhand and Shenzhen Tencent Tianyou (Wang Dian, Beijing BIZCOM, Beijing Starsinhand and Shenzhen Tencent Tianyou are referred herein as the "New OPCOS", and together with Tencent Computer and Shiji Kaixuan, the "OPCOS") by themselves or through their subsidiaries under the Structure Contracts (as defined in the section "Our History and Structure - Structure Contracts" of the IPO prospectus of the Company). As a result of the Structure Contracts, the Group is able to recognise and receive the economic benefit of the business and operations of the OPCOs. The Structure Contracts are also designed to provide the Company with effective control over and (to the extent permitted by PRC law) the right to acquire the equity interests in and/or assets of the OPCOS. For a summary of the major terms of the Structure Contracts, please refer to the sections headed "Our History and Structure" and "Structure Contracts" in the IPO prospectus. During the year ended 31 December 2021, there was no material change in the Structure Contracts and/or the circumstances under which they were adopted, and none of the Structure Contracts has been unwound as none of the restrictions that led to the adoption of Structure Contracts has been removed. 00 99 66 Tencent Holdings Limited Directors' Report Requirements related to Structure Contracts (other than relevant foreign ownership restrictions) as at 31 December 2021 Requirements related to Structure Contracts (other than relevant foreign ownership restrictions) include the Notice on Further Strengthening the Administration of Pre-examination and Approval of Online Games and the Examination and Approval of Imported Online Games (關於貫徹落實國務院《“三定”規定》和中央編辦有關解釋,進一步加強網絡遊戲前置審批和進口 GT)(the “Circular 13") jointly issued by PRC General Administration of Press and Publication, the National Copyright Administration and the National Office of Combating Pornography and Illegal Publications in September 2009, which provides that foreign investors are not permitted to invest in online game-operating businesses in the PRC via wholly-owned, equity joint venture or co-operative joint venture investments and further expressly prohibits foreign investors from gaining control over or participating in domestic online game operators through indirect ways such as establishing other joint venture companies or entering into contractual or technical arrangements with the Chinese licence holders. Directors' Report RMB5,971,427 (registered capital) Annual Report 2021 Personal 54.29% The interest comprises 5,224 Shares and 33,750 underlying Shares in respect of the Awarded Shares granted pursuant to the 2013 Share Award Scheme and the 2019 Share Award Scheme. Details of the Awarded Shares granted to this director are set out above under "Share Award Schemes". 6. The interest comprises 4,492 Shares and 14,492 underlying Shares in respect of the Awarded Shares granted pursuant to the 2013 Share Award Scheme and the 2019 Share Award Scheme. Details of the Awarded Shares granted to this director are set out above under "Share Award Schemes". 7. As at 31 December 2021, the total number of issued shares of the Company was 9,608,378,469. * Interests of beneficial owner Interests of spouse or child under 18 as beneficial owner (B) Long position in the shares of associated corporations of the Company Name of director Ma Huateng Name of associated corporation Nature of interest Number of shares and class of shares held Approximate % of shareholding Tencent Computer Personal RMB35,285,705 (registered capital) Shiji Kaixuan 67 Directors' Report Particulars of the OPCOS Directors' Report DIRECTORS' SERVICE CONTRACTS Each of Mr Ma Huateng and Mr Lau Chi Ping Martin has entered into a service contract with the Company for a term of three years from 1 January 2022 to 31 December 2024. The term of their service contracts can be renewed upon expiry and the Company may terminate their service contracts by three months' written notice. None of the directors who are proposed for re-election at the 2022 AGM has a service contract with the Company which is not determinable by the Company within one year without payment of compensation, other than statutory compensation. DIRECTORS' INTERESTS IN TRANSACTIONS, ARRANGEMENTS OR CONTRACTS Save as disclosed in this annual report, no transaction, arrangement or contract of significance in relation to the Group's business to which the Company or any of its subsidiaries was a party and in which a director of the Company or an entity connected with a director of the Company had a material interest, whether directly or indirectly, subsisted at the end of the year or at any time during the year. PERMITTED INDEMNITY PROVISION A permitted indemnity provision for the benefit of the directors of the Company is currently in force and was in force throughout the financial year. The Company has taken out and maintained directors and officers liability insurance which provides appropriate cover for, among others, directors of the Company. DIRECTORS' RIGHTS TO ACQUIRE SHARES OR DEBENTURES Save as disclosed in this annual report, neither the Company nor any of its subsidiaries was a party to any arrangements to enable directors of the Company to acquire benefits by means of the acquisition of shares in, or debentures of, the Company or any other body corporate at any time during the year or at the end of the year. Annual Report 2021 63 Directors' Report DIRECTORS' INTERESTS IN SECURITIES As at 31 December 2021, the interests and short positions of the directors and the chief executive of the Company in the shares, underlying shares and debentures of the Company or its associated corporations (within the meaning of Part XV of the SFO) which (a) were required to be notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests and short positions which they have taken, or are deemed to have taken, under such provisions of the SFO); or (b) were required, pursuant to section 352 of the SFO, to be recorded in the register required to be kept by the Company; or (c) were required, pursuant to the Model Code, to be notified to the Company and the Stock Exchange were as follows: (A) Long position in the shares and underlying shares of the Company Name of director Nature of interest Ma Huateng Tencent Holdings Limited Corporate (Note 1) 62 Yeung Kwok On, age 60, Senior Management Adviser, joined the Company in 2008. He supports and facilitates organisational innovation and leadership development within the Company and its key strategic partners. Mr Yeung also serves as Dean of TencentX, a corporate learning platform that has approximately 500 entrepreneur alumni. Prior to joining the Company, Mr Yeung, as a professor, had taught at University of Michigan and China Europe International Business School and also served as Chief HR Officer of Acer Group from 1998 to 2002. Mr Yeung received a Bachelor's and a Master's degree from The University of Hong Kong and a Doctoral degree from University of Michigan. Xu Chenye, age 50, Chief Information Officer, oversees the strategic planning and development for the website properties and communities, and customer relations of the Company. Mr Xu is one of the core founders and has been employed by the Group since 1999. Prior to that, Mr Xu had experiences in software system design, network administration as well as marketing and sales management in his previous position at Shenzhen Data Telecommunications Bureau. Mr Xu received a Bachelor of Science degree in Computer Science from Shenzhen University in 1993 and a Master of Science degree in Computer Science from Nanjing University in 1996. Mr Xu currently serves as a director or officer of certain subsidiaries of the Company. Ren Yuxin, age 46, Chief Operating Officer and President of Platform & Content Group and Interactive Entertainment Group, joined the Company in 2000 and had served as the General Manager for the Value-Added Services Development Division and General Manager for the Interactive Entertainment Business Division. Since September 2005, Mr Ren has been responsible for the research and development, operations, marketing and sales of gaming products for the Interactive Entertainment Business. Since May 2012, Mr Ren has been appointed as Chief Operating Officer and is now in charge of the overall operation of the Platform & Content Group and the Interactive Entertainment Group. Prior to joining the Company, Mr Ren worked at Huawei Technologies Co., Ltd. Mr Ren received a Bachelor of Science degree in Computer Science and Engineering from University of Electronic Science and Technology of China in 1998 and an EMBA degree from China Europe International Business School (CEIBS) in 2008. Zhang Xiaolong, age 52, Senior Executive Vice President and President of Weixin Group, joined the Company in March 2005 and had served as the General Manager for the Guangzhou R&D Division and led the QQ Mail team to be the top mail service provider in China. Later he was promoted to Corporate Vice President and since September 2012, Mr Zhang has been appointed as Senior Vice President in charge of the product and team management of Weixin/WeChat and QQ Mail. He is also responsible for the management and review of major innovation projects. In May 2014, Mr Zhang was promoted to Senior Executive Vice President in charge of the Weixin Group. Prior to joining the Company, Mr Zhang developed Foxmail independently in 1997 as the first generation of Internet software developer in China. He joined Boda China as Corporate Vice President in 2000, responsible for corporate mail developing. Mr Zhang received a Master's degree in Telecommunications from Huazhong University of Science and Technology in 1994. James Gordon Mitchell, age 48, Chief Strategy Officer and Senior Executive Vice President, joined the Company in 2011. He is responsible for various functions, including the Company's strategic planning and implementation, investor relations, mergers and acquisitions and investment activities. Prior to joining the Company, Mr Mitchell had worked in investment banking for 16 years. Most recently, Mr Mitchell was a managing director at Goldman Sachs in New York, leading the bank's Communications, Media and Entertainment research team, which analysed Internet, entertainment and media companies globally. Mr Mitchell received a degree from Oxford University and holds a Chartered Financial Analyst Certification. Mr Mitchell currently serves as a director of certain subsidiaries of the Company. 00 60 Directors' Report Directors' Report Tong Tao Sang, age 48, Senior Executive Vice President, President of Cloud and Smart Industries Group, is leading the Industrial Internet strategy and the enterprise businesses for Tencent. Mr Tong manages the security labs, the multi-media lab, and Youtu Al lab, and he is one of the co-chairs of Tencent's technology council. Mr Tong joined the Company as a technical architect in 2005, and had previously led QQ, Qzone, QQshow, and their advertising and value-added services. Mr Tong received a Bachelor of Science degree in Computer Engineering from University of Michigan, Ann Arbor and a Master of Science degree in Electrical Engineering from Stanford University. Mr Tong currently serves as a director of certain subsidiaries of the Company. Lu Shan, age 47, Senior Executive Vice President and President of Technology and Engineering Group, joined the Company in 2000 and had served as the General Manager for the IM Product Division, Vice President for the Platform Research and Development System and Senior Vice President for the Operations Platform System. Since March 2008, Mr Lu has been in charge of management of the Operations Platform System of the Company. Since May 2012, Mr Lu has been in charge of management of the Technology and Engineering Group. Prior to joining the Company, he worked for Shenzhen Liming Network Systems Limited. Mr Lu received a Bachelor of Science degree in Computer Science and Technology from University of Science and Technology of China (USTC) in 1998. Mr Lu currently serves as a director or officer of certain subsidiaries of the Company. David A M Wallerstein, age 47, Chief exploration Officer and Senior Executive Vice President, joined the Company in 2001. He drives the Company's active participation in emerging technologies, business areas, and ideas, with a passion for contributing to a more resilient planet. Prior to joining the Company, Mr Wallerstein worked for Naspers in China. Mr Wallerstein received a Bachelor's degree from University of Washington and a Master's degree from UC Berkeley. Mr Wallerstein currently serves as a director of a subsidiary of the Company. Ma Xiaoyi, age 48, Senior Vice President, joined the Company in 2007 and has been responsible for international publishing of Tencent Games, establishing and maintaining long-term business partnerships and cooperation for the Company since November 2008. Prior to joining the Company, Mr Ma served as the General Manager of the games division of OPTIC Communication Co., Ltd. Prior to that, Mr Ma worked as the General Manager in Shanghai EasyService Technology Development Ltd. Mr Ma graduated from Shanghai Jiaotong University in 1997, and received an EMBA degree from Fudan University in 2008. Mr Ma currently serves as a director of certain subsidiaries of the Company. Lin Ching-Hua, age 49, Senior Vice President, joined the Company in 2013 and has been responsible for the exploration and development of the Company's Advertising and Smart Retail businesses. He also oversees strategic development of the Company and drives the Group's strategic upgrade and business collaboration. In 2020, Mr Lin was promoted to Senior Vice President. Prior to joining the Company, Mr Lin was a partner at McKinsey & Company and the managing partner of its Taiwan office. Mr Lin received a Bachelor of Sociology degree from National Taiwan University and a Master of Business Administration degree from Harvard University. Mr Lin currently serves as a director or officer of certain subsidiaries of the Company. Annual Report 2021 61 Directors' Report John Shek Hon Lo, age 53, Chief Financial Officer and Senior Vice President, joined the Company in 2004 and was appointed as Chief Financial Officer in May 2012. Prior to joining the Company, Mr Lo worked at PricewaterhouseCoopers. He is a Fellow of the CPA Australia, a Fellow of the Hong Kong Institute of Certified Public Accountants, a Fellow of the Chartered Institute of Management Accountants and a Member of the Association of Chartered Certified Accountants. Mr Lo received a Bachelor of Business degree in Accounting from Curtin University and an EMBA degree from Kellogg Graduate School of Management, Northwestern University and The Hong Kong University of Science and Technology. Mr Lo currently serves as a director of a subsidiary of the Company. Guo Kaitian, age 49, Senior Vice President, joined the Company in 2002 and has been responsible for overseeing the Company's functional divisions of legal affairs, administration, infrastructure, procurement, public strategy, information security and corporate social responsibility. Mr Guo received a Bachelor of Law degree from Zhongnan University of Economics and Law in 1996. Mr Guo currently serves as a director of a subsidiary of the Company. Xi Dan, age 46, Senior Vice President, joined the Company in 2002 and has been responsible for overseeing the Company's talent development and functional management since May 2008. Prior to joining the Company, Mr Xi was responsible for HR management in ZTE Corporation and has more than 26 years of experience in IT and Internet industries. Mr Xi received a Bachelor of Science degree in Applied Computer Science from Shenzhen University in 1996 and an MBA degree from Tsinghua University in 2005. Mr Xi currently serves as a director or officer of certain subsidiaries of the Company. 00 Lau Chi Ping Martin Tencent Holdings Limited Number of shares/ underlying shares held Tencent Enterprise Management Provision of value-added services in the PRC Shiji Kaixuan Provision of value-added services in the PRC Provision of value-added services in the PRC Provision of Internet advertisement services in the PRC Tencent Computer 54.29% by Ma Huateng 22.85% by Zhang Zhidong 11.43% by Xu Chenye 11.43% by Chen Yidan Shiji Kaixuan Beijing Starsinhand Beijing BIZCOM Wang Dian Shiji Kaixuan 54.29% by Ma Huateng 22.85% by Zhang Zhidong 11.43% by Xu Chenye 11.43% by Chen Yidan Tencent Computer Business activities Name of the operating companies Registered owners Personal* Set out below is the registered owners and business activities of the OPCOS which had entered into transactions with the Group during the year ended 31 December 2021: Provision of value-added services in the PRC Shenzhen Tencent Tianyou* as at 31 December 2021 The above OPCOs are significant to the Group as they hold relevant licences to provide Internet information services and other value-added telecommunications services. The aggregate gross revenue and net asset value of the above OPCOS that are subject to the Structure Contracts amounted to approximately RMB264 billion for the year ended 31 December 2021 and approximately RMB46 billion as at 31 December 2021 respectively. Approximate % of shareholding Ultimate registered owners being Mr Ma Huateng and Mr Xu Chenye, both being founders, and a management team member, each ultimately interested in 60%, 35% and 5% respectively of Tencent Enterprise Management. Annual Report 2021 3. Pursuant to the SKT CFC, the parties shall co-operate in the provision of communications services. Cyber Tianjin and its affiliates shall allow Shiji Kaixuan to use its and its affiliates' assets and to provide services to Shiji Kaixuan. Shiji Kaixuan shall transfer all of its Surplus Cash to Cyber Tianjin and its affiliates as consideration. The parties also established the SKT Co-operation Committee according to this agreement. During the year, no services were transacted under such arrangements, save as disclosed elsewhere in this section. Pursuant to the TCS CFC, the parties shall co-operate in the provision of communications services. Tencent Technology and its affiliates shall allow Tencent Computer to use its and its affiliates' assets and to provide services to Tencent Computer. Tencent Computer shall transfer all of its Surplus Cash to Tencent Technology and its affiliates as consideration. The parties also established the TCS Co-operation Committee according to this agreement. During the year, revenue sharing amounting to approximately RMB132,913 million, RMB2,746 million, RMB17,476 million, RMB47,796 million, RMB17,883 million, RMB1,738 million, RMB2,857 million, RMB2,635 million, RMB2,931 million, RMB239 million, RMB1,058 million, RMB107 million, RMB1,042 million and RMB402 million were paid or payable by Tencent Computer to Tencent Technology, Cyber Tianjin, Tencent Beijing, Tencent Chengdu, Tencent Shanghai, Tencent Wuhan, Chongqing Tencent Information, Shenzhen Tencent Information, Hainan Network, Guangzhou Tencent Technology, Shenzhen Tencent Network, Guian New Area Tencent Cyber, Cyber Shenzhen and Wuhan Tencent Information respectively. 2. 1. Pursuant to the amended and restated IP transfer agreement dated 28 February 2004 entered into between Tencent Technology and Tencent Computer, Tencent Computer shall assign to Tencent Technology its principal present and future IP rights, free from encumbrances (except for licences granted in the ordinary course of Tencent Computer's business) in consideration of Tencent Technology's undertaking to provide certain technology and information services to Tencent Computer. During the year, no IP transfer was transacted under such arrangements, save as disclosed elsewhere in this section. The Auditor had carried out procedures on the transactions conducted pursuant to the Structure Contracts and had provided a letter to the Board confirming that such transactions had been approved by the Board and had been entered into, in all material respects, in accordance with the relevant Structure Contracts and had been operated so as to transfer the Surplus Cash of the OPCOS as at 31 December 2021 to the WFOES and that no dividends or other distributions had been made by the OPCOS to the holders of their equity interests. Review of the transactions carried out under the Structure Contracts during the financial year The Company's independent non-executive directors had reviewed the Structure Contracts and confirmed that the transactions carried out during the financial year had been entered into in accordance with the relevant provisions of the Structure Contracts and, had been operated so as to transfer by the date of this annual report the Surplus Cash (as defined in the section "Our History and Structure - Structure Contracts" of the IPO prospectus of the Company) of each of the OPCOS as at 31 December 2021 to Tencent Technology, Cyber Tianjin (formerly known as Shidai Zhaoyang Technology (Shenzhen) Company Limited in the IPO prospectus of the Company), Tencent Beijing, Shenzhen Tencent Information, Tencent Chengdu, Chongqing Tencent Information, Shanghai Tencent Information, Tencent Shanghai, Tencent Wuhan, Hainan Network, Guangzhou Tencent Technology, Shenzhen Tencent Network, Guian New Area Tencent Cyber, Cyber Shenzhen and Wuhan Tencent Information. Transactions carried out during the year ended 31 December 2021, which have been eliminated in the consolidated financial statements of the Group, are set out as follows: 00 68 69 Tencent Holdings Limited The Company's independent non-executive directors had also confirmed that no dividends or other distributions had been made by the OPCOS to the holders of their equity interests and the terms of any new Structure Contracts entered into, renewed and/or cloned during the relevant financial period are fair and reasonable so far as the Group was concerned and in the interests of the Company's shareholders as a whole. To this extent, similar Structure Contracts were entered into relating to the New OPCOS. Directors' Report shares held 1. Note: 8.38% 804,859,700 28.82% 2,769,333,600 Corporate (Note 1) Corporate (Note 2) Long position Advance Data Services Limited Number of shares/ underlying MIH TC (Note 3) of shareholding MIH TC is controlled by Naspers Limited and held through its non wholly-owned subsidiary, Prosus N.V., which in turn holds MIH TC through MIH Internet Holdings B.V. MIH TC and MIH Internet Holdings B.V. are both wholly-owned subsidiaries of Prosus N.V. As such, Naspers Limited, Prosus N.V., MIH Internet Holdings B.V. and MIH TC are deemed to be interested in the same block of 2,769,333,600 Shares under Part XV of the SFO. Approximate % Long position MANAGEMENT CONTRACTS Advance Data Services Limited holds 709,859,700 Shares directly and 95,000,000 Shares indirectly through its wholly-owned subsidiary, Ma Huateng Global Foundation. As Advance Data Services Limited is wholly-owned by Mr Ma Huateng, Mr Ma has an interest in these shares as disclosed under the section of "Directors' Interests in Securities". 00 74 Nature of interest/ capacity The Group is committed to minimising the impact on the environment from our business activities and the details of such efforts are set out in the section headed "Environment" in the "Environmental, Social and Governance Report" in this annual report. As far as the Board is aware, the Group has complied with the relevant laws and regulations that have a significant impact on the Group in all material respects. ENVIRONMENT AND COMPLIANCE WITH LAWS The Audit Committee, together with the Auditor, has reviewed the Group's audited consolidated financial statements for the year ended 31 December 2021. The Audit Committee has also reviewed the accounting principles and practices adopted by the Group and discussed auditing, risk management, internal control and financial reporting matters. AUDIT COMMITTEE None of the directors, their close associates or any shareholder (which to the knowledge of the directors owns more than 5% of the number of issued shares of the Company) had an interest in any of the major customers or suppliers noted above. For the year ended 31 December 2021, the five largest customers of the Group accounted for approximately 7.15% of the Group's total revenues while the largest customer of the Group accounted for approximately 3.05% of the Group's total revenues. In addition, for the year ended 31 December 2021, the five largest suppliers of the Group accounted for approximately 17.19% of the Group's total purchases while the largest supplier of the Group accounted for approximately 5.67% of the Group's total purchases. MAJOR CUSTOMERS AND SUPPLIERS No contracts concerning the management and administration of the whole or any substantial part of the business of the Company were entered into or existed during the year. Directors' Report 73 Annual Report 2021 Save as disclosed above, the Company had not been notified of any other persons (other than the directors or chief executive of the Company) who, as at 31 December 2021, had interests or short positions in the shares and underlying shares of the Company as recorded in the register required to be kept under section 336 of the SFO. As at 31 December 2021, the total number of issued shares of the Company was 9,608,378,469. 3. 2. Long/ short position 10. Long/ short position in the shares of the Company Tencent Holdings Limited 70 70 00 Pursuant to the trademark licence agreement dated 28 February 2004 entered into between Tencent Technology, as licensor, and Shiji Kaixuan, as licensee, Tencent Technology shall grant to Shiji Kaixuan a non-exclusive licence to use specified trademarks against payment of annual royalties determined as a percentage of Shiji Kaixuan's annual revenues (which may be adjusted pursuant to the agreement or the SKT CFC). During the year, no trademark licence was transacted under such arrangements, save as disclosed elsewhere in this section. 8. Pursuant to the trademark licence agreement dated 28 February 2004 entered into between Tencent Technology, as licensor, and Tencent Computer, as licensee, Tencent Technology shall grant to Tencent Computer a non-exclusive licence to use specified trademarks against payment of annual royalties determined as a percentage of Tencent Computer's annual revenues (which may be adjusted pursuant to the agreement or the TCS CFC). During the year, no trademark licence was transacted under such arrangements, save as disclosed elsewhere in this section. Directors' Report 7. 6. Pursuant to the domain name licence agreement dated 28 February 2004 entered into between Tencent Technology, as licensor, and Tencent Computer, as licensee, Tencent Technology shall grant to Tencent Computer a non-exclusive licence to use specified domain names against payment of annual royalties determined by the TCS Co-operation Committee within a range of percentages of Tencent Computer's annual revenues. During the year, no domain name licence was transacted under such arrangements, save as disclosed elsewhere in this section. 5. Pursuant to the IP transfer agreement dated 28 February 2004 entered into between Cyber Tianjin and Shiji Kaixuan, Shiji Kaixuan shall assign to Cyber Tianjin its principal present and future IP rights, free from encumbrance (except for licences granted in the ordinary course of Shiji Kaixuan's business) in consideration of Cyber Tianjin's undertaking to provide certain technology and information services to Shiji Kaixuan. During the year, no IP transfer was transacted under such arrangements, save as disclosed elsewhere in this section. 4. Directors' Report Tencent Holdings Limited Pursuant to the domain name licence agreement dated 28 February 2004 entered into between Tencent Technology, as licensor, and Shiji Kaixuan, as licensee, Tencent Technology shall grant to Shiji Kaixuan a non-exclusive licence to use specified domain names against payment of annual royalties determined as a percentage of Shiji Kaixuan's annual revenues (which may be adjusted pursuant to the agreement or the SKT CFC). During the year, no domain name licence was transacted under such arrangements, save as disclosed elsewhere in this section. 9. Pursuant to the information consultancy services agreement dated 28 February 2004 entered into between Tencent Technology, as consultant, and Tencent Computer, Tencent Technology shall provide specified information consultancy services to Tencent Computer against payment of an annual consultancy service fee determined by the TCS Co-operation Committee within a range of percentages of Tencent Computer's annual revenues. During the year, no consultancy service was transacted under such arrangements, save as disclosed elsewhere in this section. Pursuant to the technical consultancy services agreement dated 28 February 2004 entered into between Tencent Technology, as consultant, and Shiji Kaixuan, Tencent Technology shall provide specified technical consultancy services to Shiji Kaixuan against payment of an annual consultancy service fee determined by the SKT Co-operation Committee within a range of percentages of Shiji Kaixuan's annual revenues. During the year, no consultancy service was transacted under such arrangements, save as disclosed elsewhere in this section. As at 31 December 2021, the following persons, other than the directors or chief executive of the Company, had interests or short positions in the shares or underlying shares of the Company which would fall to be disclosed to the Company under the provisions of Divisions 2 and 3 of Part XV of the SFO as recorded in the register required to be kept by the Company under section 336 of the SFO, or who was, directly or indirectly, interested in 5% or more of the shares of the Company: INTERESTS OF SUBSTANTIAL SHAREHOLDERS Directors' Report Tencent Holdings Limited 72 The Group entered into certain transactions with “related parties" as defined under applicable accounting standards during the financial year ended 31 December 2021 which were disclosed in Note 13(a) (Senior management's emoluments), Note 13(b) (Five highest paid individuals), Note 14 (Benefits and interests of directors), Note 26 (Loans to investees and investees' shareholders), Note 35 (Share-based payments) and Note 45 (Related party transactions) to the consolidated financial statements. Save as the related parties transactions involving payment of remuneration to certain directors of the Group which constitute continuing connected transactions fully exempt from the connected transaction requirements under Rule 14A.76(1) or Rule 14A.95 of the Listing Rules, no related parties transactions disclosed in the consolidated financial statements constitutes a connected transaction as defined under Chapter 14A of the Listing Rules. Other connected transactions For details of the risks associated with the Structure Contracts, please refer to the section headed “Risk factors - Risks relating to our structure" in the IPO prospectus. Due to the legal constraints in relation to foreign investment in the telecommunications value-added services industry in the PRC, a number of agreements have been entered into between members of the Group whereby the Company and the WFOES derive substantially all their revenues from transactions with the OPCOs. The recognition of revenues outlined in these intra- group contracts could be challenged by tax authorities and any adjustment in tax treatment could have a material and adverse impact on the taxable profitability of the Group. As advised by the Company's PRC legal advisers, it is unlikely that the tax treatment of revenues will be challenged by the PRC tax authorities, provided that the transactions under these intra-group contracts represent bona fide transactions conducted on an arm's length basis. The Company will take all necessary actions to ensure and monitor that relevant transactions are to be conducted on an arm's length basis to minimise the risks of adjustment in tax treatment. The WFOES have been structured and located in order to benefit from preferential tax treatments offered to companies located in designated economic zones and/or operating software-related businesses. Although the relevant governmental authority has granted such preferential tax treatment to certain WFOES and OPCOS, there can be no assurance that the conditions under which these treatments are provided will always be present. The relevant WFOEs and OPCOS would use their reasonable endeavours to take all necessary actions, including but not limited to maintaining or acquiring their status as "High and New Technology Enterprise" or "National Key Software Enterprise", in order to continue to enjoy the reduced income tax rate and the other tax concessions. Due to regulatory limitations restricting foreign investment in businesses providing value-added telecommunications services in China, the Company conducts some of its business in the PRC through the OPCOs. These contractual arrangements may not be as effective in providing control as direct ownership. Pursuant to the Structure Contracts, the arbitration tribunal is entitled to decide compensation for the equity interests or property ownership of OPCOs, decide to implement enforceable remedy (including mandatorily requiring OPCOs to transfer the equity interests of OPCOS to the WFOES, etc.) or order the bankruptcy of OPCOS. Prior to the formation of the arbitration tribunal, the courts of the places where the major assets of OPCOS are situated are entitled to implement interim remedies to ensure the enforcement of the future decisions of the arbitration tribunals. The risks associated with Structure Contracts and the actions taken by the Company to mitigate the risks Directors' Report 71 Annual Report 2021 Pursuant to the co-operation framework agreement entered into between each of the New OPCOS and one of the WFOES, the parties shall cooperate in the provision of communications services. For each agreement, the WFOES shall allow the New OPCOs to use its and its affiliates' assets and provide services to the New OPCOs. The New OPCOS shall transfer all of its Surplus Cash to the WFOES and its affiliates as consideration. Co-operation committees have also been established according to these agreements. During the year, (i) revenue sharing amounting to approximately RMBO.569 million, RMBO.969 million and RMB24 million was paid or payable by Wang Dian to Tencent Technology, Cyber Tianjin and Tencent Beijing respectively; (ii) revenue sharing amounting to approximately RMBO.559 million and RMB5 million was paid or payable by Beijing BIZCOM to Tencent Technology and Cyber Tianjin respectively; (iii) revenue sharing amounting to approximately RMB0.463 million and RMBO.177 million was paid or payable by Beijing Starsinhand to Cyber Tianjin and Tencent Beijing respectively; (iv) revenue sharing amounting to approximately RMB83 million, RMB1 million and RMB7 million was paid or payable by Shenzhen Tencent Tianyou to Tencent Technology, Tencent Shanghai, and Hainan Network respectively. 11. Name of shareholder Directors' Report 76 The Company has adopted a code of conduct regarding directors' securities transactions on terms no less exacting than the required standard set out in the Model Code. The directors of the Company have complied with such code of conduct throughout the accounting year covered by this annual report. The Company's governance structure of these committees can be summarised as follows: Corporate Governance Report Tencent Holdings Limited 78 00 To better serve the long-term interests of our stakeholders, the Board delegates certain matters requiring particular time, attention and expertise to its committees. The Board has determined that these matters are better dealt with by the committees as they require independent oversight and specialist input. As such, the Board has established five committees to assist the Board: Audit Committee, Corporate Governance Committee, Investment Committee, Nomination Committee and Remuneration Committee. Each of the committees has its terms of reference which clearly specifies its powers and authorities. All committees report back to the Board and make recommendations to the Board if necessary. The Board delegates the responsibility of day-to-day business and operations to the Company's senior management team, which includes its chief officers, the president and executive vice-presidents. The senior management team meets once every two weeks or as frequently as necessary to formulate policies and make recommendations to the Board. The senior management team administers, enforces, interprets and supervises compliance with the internal rules and operational procedures of the Company as well as its subsidiaries and conducts regular reviews, recommends and advises on appropriate amendments to such rules and procedures. The senior management team reports to the Board on a regular basis and communicates with the Board whenever required. Audit Committee regularly evaluates its own performance and effectiveness. monitors non-financial aspects pertaining to the businesses of the Group; defines levels of delegation in respect of specific matters, with required authority to Board committees and management; establishes Board committees with clear terms of reference and responsibilities as appropriate; ensures that the Group has appropriate risk management, internal control, internal audit and regulatory compliance procedures in place and that it communicates adequately with shareholders and stakeholders; determines directors' selection, orientation and evaluation; determines the Group's communication policy; approves the Company's financial statements and interim and annual reports; considers and, if appropriate, declares the payment of dividends to shareholders; and appoints the Chief Executive Officer, who reports to the Board, and ensures that succession is planned; • reviews the Company's financial information; ADOPTION OF CODE OF CONDUCT REGARDING DIRECTORS' SECURITIES TRANSACTIONS 79 Annual Report 2021 reviews and monitors the training and continuous professional development of the directors and senior management team. reviews the Company's ESG strategy and makes recommendations to the Board; and reviews the Company's compliance with the CG Code and disclosure in the Corporate Governance Report and the ESG Report; reviews and monitors the progress made against ESG-related goals and targets; handles the relationship with the Company's external auditor; reviews the shareholders communication policy and makes recommendations to the Board where appropriate to enhance effective communications between the Company and its shareholders; reviews and monitors the Company's policies and practices on its compliance with legal and regulatory requirements; reviews the Company's corporate governance and makes recommendations to the Board; Corporate Governance Committee oversees the Group's anti-money laundering and sanctions compliance system. oversees the risks undertaken by the Company including determining the level of risk the Company expects to and is able to take; and reviews the work done by the Company's management with respect to risk management and internal control systems; exercises oversight of the Company's financial reporting system; develops, reviews and monitors the code of conduct and compliance manual (if any) applicable to employees and directors; Corporate Governance Report reviews and monitors the evaluation and management of issues related to the Company's Environmental, Social and Governance ("ESG") matters; Annual Report 2021 For the purpose of determining the shareholders' entitlement to the proposed final dividend, the register of members of the Company will be closed from Tuesday, 24 May 2022 to Wednesday, 25 May 2022, both days inclusive, during which period no transfer of Shares will be registered. In order to qualify for the proposed final dividend, all duly completed transfer forms accompanied by the relevant share certificates must be lodged with the Company's branch share registrar, Computershare Hong Kong Investor Services Limited, at Shops 1712-1716, 17th Floor, Hopewell Centre, 183 Queen's Road East, Wan Chai, Hong Kong for registration not later than 4:30 p.m. on Monday, 23 May 2022. (B) Entitlement to the Proposed Final Dividend For the purpose of determining the shareholders' entitlement to attend and vote at the 2022 AGM, the register of members of the Company will be closed from Friday, 13 May 2022 to Wednesday, 18 May 2022, both days inclusive, during which period no transfer of Shares will be registered. In order to be entitled to attend and vote at the 2022 AGM, all duly completed transfer forms accompanied by the relevant share certificates must be lodged with the Company's branch share registrar, Computershare Hong Kong Investor Services Limited, at Shops 1712-1716, 17th Floor, Hopewell Centre, 183 Queen's Road East, Wan Chai, Hong Kong for registration not later than 4:30 p.m. on Thursday, 12 May 2022. (A) Entitlement to Attend and Vote at the 2022 AGM CLOSURE OF REGISTER OF MEMBERS Directors' Report 75 AUDITOR Annual Report 2021 SUFFICIENCY OF PUBLIC FLOAT The total remuneration cost incurred by the Group for the year ended 31 December 2021 was RMB95,523 million (2020: RMB69,638 million). The remuneration policy and package of the Group's employees are periodically reviewed. Apart from pension funds and in- house training programmes, discretionary bonuses, share awards and share options may be awarded to employees according to the assessment of individual performance. EMPLOYEE AND REMUNERATION POLICIES There is no provision for pre-emptive rights under the Articles of Association, or the laws of the Cayman Islands, which would oblige the Company to offer new shares on a pro rata basis to existing shareholders of the Company. 77 PRE-EMPTIVE RIGHTS As at the date of this annual report, based on information that is publicly available to the Company and within the knowledge of its directors, the directors confirm that the Company has maintained during the year the amount of public float as required under the Listing Rules. The financial statements have been audited by PricewaterhouseCoopers who will retire and, being eligible, offer themselves for re-appointment at the 2022 AGM. As at 31 December 2021, the Group had 112,771 employees (2020: 85,858). The number of employees employed by the Group varies from time to time depending on needs and employees are remunerated based on industry practice. Ma Huateng Chairman On behalf of the Board retains full and effective control over the Group and monitors management with regard to the implementation of the approved annual business plan and budget; determines the Group's mission, provides its strategic direction and is responsible for the approval of strategic plans; approves the annual business plan and budget proposed by management; The Board has defined the business and governance issues for which it needs to be responsible, and these matters are reviewed periodically to ensure that the Company maintains effective and up-to-date corporate governance practices. In this regard, the Board: The Board's fundamental responsibility is to exercise its best judgment and to act in the best interests of the Company and its shareholders. The Board oversees management's efforts to promote the Company's success while operating in an effective and responsible manner. The Board also formulates the Company's overall business strategy and monitors management's execution of such strategy. Responsibilities BOARD OF DIRECTORS • The Company's corporate governance practices are based on the code provisions as set out in the CG Code. The Board believes that throughout the year ended 31 December 2021, the Company complied with the applicable code provisions set out in the CG Code, except for the deviation from code provisions A.2.1 (now rearranged as C.2.1) regarding the segregation of the roles of the chairman and chief executive and A.4.2 (now rearranged as B.2.2) regarding the retirement and re-election of directors. The reasons for the deviations are further explained in the sub-sections headed “Chairman and Chief Executive Officer" and "Appointments, Re-election and Removal" below. CORPORATE GOVERNANCE PRACTICES Maintaining the highest standards of corporate governance and ethical business practices are core values of the Group. The Board views effective corporate governance practices as a priority of the Group, with the aim of providing our investors with a thorough understanding of the Group's management and how such management oversees and manages different businesses of the Group. Our belief is that investors will realise significant long-term value when the Group's businesses are conducted in an open and responsible manner. Ethical business practices go hand in hand with strong corporate governance, and we believe that running our businesses in an ethical manner will lead to public trust and will ultimately create shareholder value for the Group. Corporate Governance Report Tencent Holdings Limited 00 The Board continues to monitor and review the Company's corporate governance practices and makes necessary changes when appropriate. Hong Kong, 23 March 2022 Meeting 84 Tencent Holdings Limited Corporate Governance Report Board Activity The Board met five times in 2021. The attendance of each director at Board meetings, committee meetings, the annual general meeting and the extraordinary general meeting, whether in person or by means of electronic communication, is detailed in the table below: Board Audit Name of director Committee Annual Extraordinary Governance Nomination Remuneration General Committee Committee Committee Meeting General Corporate 00 Corporate Governance Report The Chairman, in accordance with the Articles of Association, whilst holding such office is not subject to retirement by rotation nor taken into account in determining the number of directors to retire in each year. Therefore, this is a deviation from code provision A.4.2 (now rearranged as B.2.2) of the CG Code. The Chairman is one of the founders of the Group and he plays a key role in the growth and development of the Group and his continuing presence in the Board is vital to the sustainable development of the Group. Given the importance of the Chairman's role in the development of the Group, the Board considers that the deviation from code provision A.4.2 (now rearranged as B.2.2) of the CG Code has no material impact on the operation of the Group as a whole. Code provision A.4.2 (now rearranged as B.2.2) of the CG Code provides that every director, including those appointed for a specific term, should be subject to retirement by rotation at least once every three years. The Board is the core of the Group's success, and with the appropriate composition of the Board, we can benefit from the right set of skills, experience and diversity of perspectives to take the Company forward. Therefore, it is essential for the Company to maintain a formal, considered and transparent procedure for the appointment of new directors to the Board. It is our corporate governance practice and in accordance with the Articles of Association that all directors (except for the Chairman) should be subject to re-election at regular intervals and the resignation and removal of any director should be explained with reasons. At the 2021 AGM, Mr lain Ferguson Bruce retired with effect from the conclusion of the 2021 AGM and Mr Yang Siu Shun retired and was re-elected. Appointments, Re-election and Removal As part of our corporate governance practice to provide transparency to the investor community and in compliance with the Listing Rules and the CG Code, independent non-executive directors are identified as such in all corporate communications containing the names of the directors. In addition, an updated list of directors identifying the independent non-executive directors and the roles and functions of the directors is maintained on the Company Website and the Stock Exchange's website. 83 Annual Report 2021 Further, in compliance with Rule 3.10 of the Listing Rules, one of our independent non-executive directors has the appropriate professional qualifications of accounting or related financial management expertise, and provide valuable advice from time to time to the Board. The Company has also received from each independent non-executive director a confirmation annually of their independence and the Nomination Committee has conducted an annual review and considers that all independent non-executive directors are independent, taking into account of the independence guidelines set out in Rule 3.13 of the Listing Rules in the context of the length of service of each independent non-executive director. The Board values the importance of professional judgment and advice provided by non-executive directors to safeguard the interests of the shareholders. The non-executive directors contribute diversified qualifications and experience to the Group by expressing their views in a professional, constructive and informed manner, and actively participate in Board and committee meetings and bring professional judgment and advice on issues relating to the Group's strategies, policies, performance, accountability, resources, key appointments, standards of conduct, conflicts of interests and management process, with the shareholders' interests being the utmost important factor. The non-executive directors also take the lead where potential conflicts of interests arise and exercise their professional judgment and utilise their expertise to scrutinise the Company's performance in achieving agreed corporate goals, and monitor performance reporting. In order to take advantage of the skills, experiences and diversity of perspectives of the directors and in order to ensure that the directors give sufficient time and attention to the Group's affairs, we request each of the directors to disclose to the Company, on a quarterly basis, the number and the nature of offices held in public companies or organisations and other significant commitments. The Board's composition is in compliance with the requirement under Rule 3.10A of the Listing Rules that the number of independent non-executive directors must represent at least one-third of the Board. The Board believes that the balance between the executive directors and the non-executive directors is reasonable and adequate to provide sufficient checks and balances that safeguard the interests of the shareholders and the Group. A list of directors and their respective biographies which include their positions held at the Company and certain subsidiaries are set out on pages 56 to 59 of this annual report. There is no relationship (including financial, business, family or other material/relevant relationship(s)) among members of the Board. As at the date of this annual report, the Board is comprised of eight directors, with two executive directors, two non-executive directors and four independent non-executive directors. During the year ended 31 December 2021 and up to the date of this annual report, there is no change to the composition of the Board except that Mr lain Ferguson Bruce has retired as an independent non-executive director with effect from the conclusion of the 2021 AGM. Executive directors Composition As the re-election of Mr Li Dong Sheng, who was re-elected in 2018, was not considered at the 2021 AGM, there is a deviation from code provision A.4.2 (now rearranged as B.2.2) of the CG Code. Notwithstanding Mr Li Dong Sheng was not subject to retirement by rotation at the 2021 AGM, his biography and details of his emoluments are set out in the Directors' Report and Note 14 to the consolidated financial statements respectively for shareholders' information. The Nomination Committee has assessed and confirmed the independence of Mr Li Dong Sheng in 2021. Considering that the re-election of Mr Li Dong Sheng will be considered at the 2022 AGM, the Board believes that such deviation does not have a material impact on the operation of the Company as a whole. Ma Huateng == 5/5 The Board is therefore of the view that there is an adequate balance of power and that appropriate safeguards are in place. Nevertheless, the Board will continue to regularly monitor and review the Company's current structure and make necessary changes when appropriate. Yang Siu Shun³ 5/5 lan Charles Stone 2/2 lain Ferguson Bruce² 5/5 Li Dong Sheng¹ Independent non-executive directors 1/1 == 1/1 1/1 1/1 1/1 2/2 8/8 5/5 Charles St Leger Searle 4/4 5/5 Jacobus Petrus (Koos) Bekker Non-executive directors 1/1 1/1 1/1 1/1 1/1 5/5 Lau Chi Ping Martin Corporate Governance Report Jacobus Petrus (Koos) Bekker 82 Independent non-executive directors Charles St Leger Searle Non-executive directors Lau Chi Ping Martin Ma Huateng Executive directors Name of director We believe education and training are important for maintaining an effective Board. New directors undergo an orientation programme designed to provide a thorough understanding of the Group's operations and businesses, and also receive a handbook outlining their responsibilities under the Listing Rules and applicable laws. Existing directors are provided with tailored training programmes covering topics such as best practices in corporate governance, legal and regulatory trends and, given the nature of our business, emerging technologies and products. Directors also regularly meet with the senior management team to understand the Group's businesses, governance policies and regulatory environment. During the year ended 31 December 2021, the Company arranged training on topics relating to corporate governance, legal and regulatory updates and product trends which are relevant to the Group's businesses. The table below summarises the participation of each of the directors in continuous professional development during the year ended 31 December 2021: Corporate Governance Report Tencent Holdings Limited 60 80 00 All directors have full and timely access to all relevant information as well as the advice and services of the Company's general counsel and the company secretary, with a view to ensuring that Board procedures and all applicable rules and regulations are followed. All directors may also obtain independent professional advice at the Company's expense for carrying out their functions. The major work of these committees during the year 2021 is set out on pages 87 to 94. ensures that no director or any of his associates is involved in deciding his own remuneration. ensures that these remuneration proposals are aligned to corporate goals and objectives; and reviews and approves proposals about the policy and structure of remuneration of directors and senior management team; Remuneration Committee reviews and monitors the implementation of the board diversity policy and the board nomination policy of the Company. assesses the independence of independent non-executive directors and the perspectives, skills and experience that such director can bring to the Board; and reviews and makes recommendations to the Board on individuals nominated to be directors by shareholders; identifies suitable and qualified individuals and makes recommendations to the Board as to new Board members, by taking into account the individual's experience, knowledge, skills, gender and background, as well as the Listing Rules requirements; reviews and monitors the structure, size, composition and diversity of the Board in light of the Company's strategy; Nomination Committee ensures compliance with the Listing Rules and any other relevant laws and regulations on any mergers, acquisitions and disposals. identifies, considers and makes recommendations on mergers, acquisitions and disposals; and Investment Committee 5/5 Li Dong Sheng lain Ferguson Bruce² lan Charles Stone Yang Siu Shun 00 Besides, all major decisions have been made in consultation with members of the Board and appropriate committees, as well as the senior management team. Chief officers and senior executives are invited to attend Board meetings from time to time to make presentations and answer the Board's enquiries. In addition, directors are encouraged to participate actively in all Board and committee meetings of which they are members, and the Chairman ensures that all issues raised are properly briefed at the Board meetings, and he works with the senior management team to provide adequate, accurate, clear, complete and reliable information to members of the Board in a timely manner. Further, the Chairman ensures that adequate time is available for discussion for all items at the Board meetings. During the year ended 31 December 2021, the Chairman held a meeting with the independent non-executive directors without the presence of other directors as required by the Listing Rules. In view of the ever-changing business environment in which our Group operates, the Chairman and Chief Executive Officer must be technically sophisticated and sensitive to fast and rapid market changes, including changes in users' preferences, in order to promote the different businesses of the Group. The Board thus considers that a segregation of the roles of the Chairman and Chief Executive Officer may create unnecessary costs for the daily operation of the Group. Mr Ma Huateng serves as the Chairman and Chief Executive Officer of the Company. This is at variance with code provision A.2.1 (now rearranged as C.2.1) of the CG Code, which provides that the roles of chairman and chief executive should be separate and should not be performed by the same individual, and that the division of responsibilities between the chairman and chief executive should be clearly established and set out in writing. Chairman and Chief Executive Officer informal updates from time to time and structured monthly updates on the Company's performance, position and prospects are provided to the directors. the company secretary who is an employee of the Company attends training in compliance with the Listing Rules requirements; and Corporate Governance Report • • To stay abreast of the high level of corporate governance and maintain transparency of our corporate governance practices, we have continued to adopt and foster the following corporate governance practices: In addition, the Board has adopted various practices to bring the Group to a high level of corporate governance and compliance with the CG Code. A high level of corporate governance and integrity cannot be maintained only with the Board's efforts. Each of the Group's employees plays a role in contributing to such cause. A code of conduct which emphasises integrity and respect is distributed by the Company to all employees and it forms part of the employment agreement with each of the employees. Corporate Governance Report Tencent Holdings Limited 81 Mr lain Ferguson Bruce retired as an independent non-executive director and ceased to be a member of the Audit Committee, Corporate Governance Committee and Nomination Committee with effect from the conclusion of the annual general meeting of the Company held on 20 May 2021 (the "2021 AGM"). 2 Attended training/seminar/ conference arranged by the Company or other external parties or read relevant materials. 1 V V V V √ V V development¹ Participated in continuous professional Ke Yang Annual Report 2021 € 80 000 review of the shareholders communication policy has been and will be conducted on a regular basis; 1/1 The Corporate Governance Committee met twice in 2021. Individual attendance of each Corporate Governance Committee member is set out on page 85. The Corporate Governance Committee comprises only non-executive directors. Its members are Mr Charles St Leger Searle (non-executive director), Mr lan Charles Stone, Mr Yang Siu Shun and Professor Ke Yang (all of them are independent non-executive directors). The Corporate Governance Committee is chaired by Mr Charles St Leger Searle. Corporate Governance Committee Corporate Governance Report 87 Annual Report 2021 PricewaterhouseCoopers ("PwC") is the Company's external auditor. The Audit Committee annually reviews the relationship of the Company with PwC. Having also reviewed the effectiveness of the external audit process as well as the independence and objectivity of PwC, the Audit Committee is satisfied with this relationship. As such, the Audit Committee has recommended their re-appointment at the 2022 AGM. reviewing the effectiveness of the Company's financial reporting system, the system of internal controls in operation, risk management system and associated procedures within the Group. The Corporate Governance Committee's major work during the year 2021 and up to the date of this annual report includes the following: reviewing the adequacy of resources, qualifications and training of the Group's finance department; and in relation to the external auditor, reviewing their plans, reports and management letter, fees, involvement in non-audit services, and their terms of engagement; • reviewing the dividend policy of the Company; reviewing the status of compliance with the CG Code, the Listing Rules and relevant laws by the Group; reviewing the 2021 first and third quarters results announcements; reviewing the 2021 interim report and interim results announcement; reviewing the 2020 annual report, including the Corporate Governance Report, the ESG Report, the Directors' Report and the financial statements, as well as the related results announcement; The Audit Committee's major work during the year 2021 includes the following: reviewing the plans (including those for 2021), resources and work of the Company's internal auditors; The Audit Committee meets not less than four times a year; the Audit Committee met eight times in 2021. Individual attendance of each Audit Committee member is set out on page 85. In addition to the members of the Audit Committee, meetings were attended by the Chief Financial Officer, the Head of IA and the Head of IC, and the external auditor at the invitation of the Audit Committee. reviewing the Company's policies and practices on corporate governance and ESG; reviewing the Company's compliance with the CG Code and disclosure in the Corporate Governance Report; 4/4 training has been and will continue to be provided to the directors on a timely basis, including briefing the directors on any updates to the Listing Rules and relevant laws; 89 Annual Report 2021 During 2021, the Nomination Committee reviewed board composition and director succession, the board diversity policy and the board nomination policy, and also considered and made recommendations to the Board on the re-appointment of the retiring directors at the 2021 AGM. The board diversity policy was revised and adopted in March 2022. The Nomination Committee has also assessed the independence of the independent non-executive directors and considers all of them to be independent, taking into account of the independence guidelines set out in Rule 3.13 of the Listing Rules in the context of the length of service of each independent non-executive director, and the perspectives, skills and experience that such director can bring to the Board. The Company recognises the benefits of having a diverse Board, and views diversity at Board level as a business imperative that will help the Company achieve its strategic objectives and maintain a competitive advantage. As such, the Board has set measurable objectives for the implementation of the board diversity policy to ensure that the Board has the appropriate balance of skills, experience and diversity of perspectives that are required to support the execution of its business strategy and maintain the effectiveness of the Board. The Nomination Committee is satisfied that the board diversity policy and the board nomination policy are successfully implemented with reference to the measurable objectives. The Nomination Committee will continue to conduct periodic review and monitor the implementation of the board diversity policy and the board nomination policy to ensure their continued effectiveness. The Nomination Committee met once in 2021. Individual attendance of each Nomination Committee member is set out on page 85. The Nomination Committee comprises a majority of independent non-executive directors. Its members are Mr Ma Huateng, Mr Li Dong Sheng, Mr lan Charles Stone, Mr Yang Siu Shun (appointed as a member of the Nomination Committee with effect from the conclusion of the 2021 AGM) (all three are independent non-executive directors) and Mr Charles St Leger Searle (non-executive director). The Nomination Committee is chaired by Mr Ma Huateng. Nomination Committee reviewing legal and regulatory compliance, including the insider dealing policy, the disclosure of inside information policy and the shareholders communication policy. The insider dealing policy and the shareholders communication policy were revised and adopted in March 2022; In 2021, the Investment Committee had considered and passed various resolutions on its decisions on the Group's acquisitions and disposals. Investment Committee Corporate Governance Report Tencent Holdings Limited 88 00 discussing the arrangements made for directors and senior management team to attend training sessions for continuous professional development; and considering the Company's environmental targets; reviewing the Company's compliance with the ESG Reporting Guide and disclosure in the ESG Report; The Investment Committee comprises a majority of executive directors. Its members are Mr Lau Chi Ping Martin, Mr Ma Huateng and Mr Charles St Leger Searle. The Investment Committee is chaired by Mr Lau Chi Ping Martin. The Audit Committee comprises only non-executive directors. Its members are Mr Yang Siu Shun, Mr lan Charles Stone (both are independent non-executive directors) and Mr Charles St Leger Searle (non-executive director). Mr Yang Siu Shun, who chairs the Audit Committee, and Mr Charles St Leger Searle have appropriate professional qualifications and experiences in financial matters. updating the terms of reference to specify the additional oversight role of the Corporate Governance Committee on the Company's ESG matters and making recommendations to the Board. Corporate Governance Report 0/0 1/1 1/1 4/4 1/1 H 1/1 1/1 1/1 1/1 4/4 1/1 ཌཌ-S 2/2 8/8 2/2 Audit Committee 8/8 0/1 1/1 0/1 5/5 Tencent Holdings Limited 86 Ke Yang¹ 00 As described above, the Board has established five committees, each of which has been delegated responsibilities and reports back to the Board: Audit Committee, Corporate Governance Committee, Investment Committee, Nomination Committee and Remuneration Committee. The roles and functions of these committees are set out in their respective terms of reference. The terms of reference of each of these committees will be revised from time to time to ensure that they continue to meet the needs of the Company and to ensure compliance with the CG Code. The terms of reference of the Audit Committee, the Nomination Committee and the Remuneration Committee are available on the Company Website and the Stock Exchange's website. THE COMMITTEES At the Board meetings, the Board discussed a wide range of matters, including the Group's overall strategies, financial and operational performances, approved the annual, interim and quarterly results of the Group, the appointment of directors, business prospects, regulatory compliance and corporate governance, and other significant matters. The company secretary, in consultation with the Chairman and the senior management team, prepares the agenda for each meeting and all directors are given the opportunity to include matters for discussion in the agenda. The company secretary also ensures that all applicable rules and regulations in relation to the Board meetings are followed. The company secretary sends notice of the Board meeting to each of the directors at least 14 days in advance of each regular Board meeting. The company secretary also sends the agenda, board papers and relevant information relating to the Group to each of the directors at least 3 days in advance of each regular Board meeting and committee meeting, and keeps the directors updated on the Group's financial performance and latest developments. If any director raises any queries, steps will be taken to respond to such queries as promptly and fully as possible. If there is potential or actual conflict of interests involving a substantial shareholder or a director, such director will declare his/her interest and will abstain from voting on such matters. The directors may approach the Company's senior management team when necessary. The directors may also seek independent professional advice at the Company's expense in appropriate circumstances. Corporate Governance Report 85 Annual Report 2021 The company secretary ensures that there is a good and timely flow of information to the Board. The company secretary is responsible for taking minutes of all Board and committee meetings and ensuring that sufficient details of the matters considered and decisions reached have been recorded. Draft and final version of the minutes of meetings are sent to the directors for comments and records respectively within a reasonable time after each meeting, and final minutes with the relevant board papers and related materials are kept by the company secretary and are available for review and inspection by the directors at any time. 3 Mr lain Ferguson Bruce retired as an independent non-executive director and ceased to be a member of the Audit Committee, Corporate Governance Committee and Nomination Committee with effect from the conclusion of the 2021 AGM. 2 2/2 Mr Li Dong Sheng and Professor Ke Yang were not able to attend the 2021 AGM and the extraordinary general meeting of the Company held on 20 May 2021 (the "2021 EGM") due to other prior business commitments. 1 0/1 Mr Yang Siu Shun has been appointed as a member of the Nomination Committee with effect from the conclusion of the 2021 AGM. 0/1 Current liabilities 782,860 873,681 Non-current liabilities 332,573 286,303 361,067 351,408 240,156 876,693 225,006 778,043 808,591 Total equity 65,090 61,469 70,394 74,059 56,118 Non-controlling interests 721,391 806,299 703,984 269,079 432,706 488,824 403,098 The Group's audited profit attributable to equity holders of the Company for the year ended 31 December 2023 was RMB115,216 million, a decrease of 39% compared with the results for the previous year. Basic and diluted EPS for the year ended 31 December 2023 were RMB12.186 and RMB11.887, respectively. 352,157 Equity attributable to equity holders of the Company 31 December As at Year- As at As at OPERATING INFORMATION The Group's non-IFRS profit attributable to equity holders of the Company for the year ended 31 December 2023 was RMB157,688 million, an increase of 36% compared with the results for the previous year. Non-IFRS basic and diluted EPS for the year ended 31 December 2023 were RMB16.678 and RMB16.320, respectively. RESULTS I am pleased to present our annual report for the year ended 31 December 2023 to the shareholders. Chairman's Statement 3 434,204 Annual Report 2023 1,577,246 1,578,131 1,612,364 1,333,425 953,986 703,565 795,271 735,671 555,382 465,162 Total equity and liabilities Total liabilities Certain items have been reclassified from above to below the operating profit line, and the comparative figures for prior periods have been restated accordingly. Please refer to Note 2.2 in the notes to the consolidated financial statements for details. Equity and liabilities Total comprehensive income attributable to 1,578,131 152,729* 143,241* 108,052* Non-IFRS operating profit (Restated for prior years) 102,130 60,699 200,323 277,834 116,670 equity holders of the Company 31 December 107,182 143,203* 59,564 281,173 119,901 Total comprehensive income for the year 115,216 188,243 224,822 159,847 93,310 Profit attributable to equity holders of the Company 118,048 188,709 227,810 200,390 1,577,246 191,886 equity holders of the Company 1,612,364 1,333,425 953,986 518,446 1,058,800 1,012,142 565,989 1,127,552 484,812 1,015,778 317,647 700,018 253,968 Total assets Current assets Non-current assets Non-IFRS profit attributable to Assets 2022 RMB'Million 2021 RMB'Million RMB'Million 2020 2019 RMB'Million As at 31 December CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION 157,688 115,649 123,788 122,742 94,351 2023 RMB'Million 2023 2 on-year 30 September change 2023 (29,229) (34,211) 238,746 293,109 (315,806) (315,906) 554,552 609,015 (RMB in millions) 2022 Restated* 2023 Year ended 31 December (103,525) Operating profit General and administrative expenses Selling and marketing expenses Gross profit Cost of revenues Revenues The following table sets forth the comparative figures for the years ended 31 December 2023 and 2022: YEAR ENDED 31 DECEMBER 2023 COMPARED TO YEAR ENDED 31 DECEMBER 2022 Management Discussion and Analysis Tencent Holdings Limited 6 00 Hong Kong, 20 March 2024 Other gains/(losses), net Chairman (106,696) 8,006* Non-controlling interests Equity holders of the Company Attributable to: 188,709 118,048 (21,516) (43,276) Profit for the year Income tax expense 210,225 161,324 Profit before income tax 4,701 (16,129) Share of profit/(loss) of associates and joint ventures, net (9,352) (12,268) Finance costs 8,592* 13,808 Interest income 116,287* (6,090) Net gains/(losses) from investments and others 110,827* 160,074 5,800 Ma Huateng Our commitment to the principle of "Value for Users, Tech for Good" remains unwavering. We will continue to create value for our shareholders and the community, and do our utmost in fostering innovations, addressing societal needs and contributing to a sustainable future for all. On behalf of the Board, I would like to express our profound gratitude to our entire staff and management team for their exceptional commitment and contributions that have resulted in our resilient and sustainable performance amid ongoing challenges. I would also like to extend our sincere appreciation to our shareholders and stakeholders for their continuous support and confidence in the Company. 4 00 Video Accounts' total user time spent more than doubled, driven by DAU and time spent per user, benefitting from enhanced recommendation algorithms. We provided more monetisation support for Video Accounts creators, such as facilitating merchandise sales through live streaming, and matching creators with brands for marketing campaigns. Below are some highlights from our key products and services for 2023: In 2023, we achieved breakthroughs in a number of products and services, as Video Accounts' total user time spent more than doubled, enhancements to our advertising Al model significantly improved our targeting performance, and international contribution to our games revenue reached a record 30%. These developments drove high-quality revenue streams which fuelled our gross profit growth of 23%, and supported our plan to step up capital returns to shareholders. Tencent Hunyuan developed into a top-tier foundation model with superior performance in numerical reasoning, logical inference, and multi-turn conversations. In addition, we actively sought to leverage our technology and platform to create value for society through initiatives such as our digital philanthropy platform, one of the largest of its kind in the world, whose 99 Giving Day event raised a record RMB3.8 billion in public donations. BUSINESS REVIEW AND OUTLOOK 1% 245 6% 234 248 Fee-based VAS registered subscriptions Tencent Holdings Limited -0.7% -3% 572 554 Mobile device MAU of QQ 0.5% 1,336 2% 1,313 1,343 Combined MAU of Weixin and WeChat (in millions, unless specified) Quarter- on-quarter change 558 Chairman's Statement Mini Games' gross receipts increased over 50%, with Mini Games representing the leading casual game platform in China. QQ Channels enhanced interest-based user interactions across categories such as games, lifestyle and knowledge-based content. APPRECIATION The Board has recommended the payment of a final dividend of HKD3.40 per Share (2022: HKD2.40 per Share) for the year ended 31 December 2023, subject to the approval of the shareholders at the 2024 AGM. Such proposed dividend is expected to be payable on 31 May 2024 to the shareholders whose names appear on the register of members of the Company on 22 May 2024. DIVIDEND In August 2023, we joined the United Nations Global Compact ("UNGC"), demonstrating our commitment to integrating UNGC's principles into our strategy, culture and day-to-day operations, and supporting UNGC's Sustainable Development Goals. We made progress in our decarbonisation journey by applying our fourth-generation data centre technology to reduce emissions and increasing the adoption of renewable energy. • Our New Cornerstone Investigator Program has supported 104 scientists, contributing to the development of basic science research. Our digital philanthropy platform helped raise a record RMB3.8 billion in public donations during the 99 Giving Day campaign, up 15% year-on-year. • Harnessing our technology and platform, we continue to create social value for our users, partners and the society at large. Below are some highlights of our environmental, social and governance initiatives for 2023: Chairman's Statement 5 Annual Report 2023 Subject to shareholders' approval at the 2024 AGM 3 The average number of subscriptions as of the last day of each month during 4Q2023 160,125 As at 31 December 2023 1 We returned substantial capital to shareholders in 2023 through payment of cash dividend, share repurchases, and settlement of distribution in specie. We have proposed to increase our annual dividend in respect of the year ended 31 December 2023 by 42%, to HKD3.40 per share³ (equivalent to approximately HKD32 billion), and we intend to at least double the size of our share repurchases, from approximately HKD49 billion in 2023 to over HKD100 billion in 2024. We launched our proprietary foundation model, Tencent Hunyuan, and scaled it up to trillion parameter scale, utilising a Mixture of Experts architecture. • WeCom and Tencent Meeting deployed generative Al-powered functionalities and increased their monetisation. We strengthened our payment compliance capabilities, enhanced Mini Program-based transaction tools and upgraded cross-border payment experience. We upgraded our Al-powered advertising technology platform, which significantly enhanced our targeting accuracy and thus advertising revenue. The number of Tencent mobile and PC "major hit games" in China surpassing average quarterly DAU of 5 million for mobile or 2 million for PC, and generating over RMB4 billion annual gross receipts (thresholds which we view as indicative of a major and enduring hit), increased from 6 in 2022 to 8 in 2023. Tencent Video and TME extended their leadership in the long-form video and music streaming industries, with 117 million¹ video subscriptions and 107 million² music subscriptions. 2022 95,888 STOCK CODES 161,324 00 Revenues from VAS increased by 4% year-on-year to RMB298.4 billion for the year ended 31 December 2023. International Games revenues increased by 14% to RMB53.2 billion, or by 8% excluding the effect of currency fluctuations, benefitting from the robust performance of VALORANT, contributions from recently launched games Goddess of Victory: NIKKE and Triple Match 3D, and a recovery in PUBG Mobile in the second half of the year. Domestic Games revenues increased by 2% to RMB126.7 billion, on contributions from our recently released VALORANT and Lost Ark, and robust growth in emerging titles such as Arena Breakout and Fight of the Golden Spatula, partly offset by a weak contribution from Peacekeeper Elite. Social Networks revenues grew by 1% year-on-year to RMB118.5 billion, due to revenue growth from music subscriptions and Mini Games platform service fees, partially offset by revenue declines from music-related and games-related live streaming services. Revenues from Online Advertising increased by 23% year-on-year to RMB101.5 billion for the year ended 31 December 2023. This growth was driven by new inventories in Video Accounts and Weixin Search, plus the ongoing upgrade of our advertising platform. We saw increased advertising spending with us by all major advertiser categories except automotive, with notable step-ups in spending by consumer goods, Internet services and healthcare categories. 00 8 Tencent Holdings Limited Management Discussion and Analysis Revenues from FinTech and Business Services rose by 15% year-on-year to RMB203.8 billion for the year ended 31 December 2023. FinTech Services achieved double-digit growth, driven by increased payment activities and higher revenue from wealth management services. Business Services revenues also increased at a double-digit rate, driven by the introduction of eCommerce technology service fees in Video Accounts, alongside moderate growth for cloud services. Cost of revenues. Cost of revenues were RMB315.9 billion for the year ended 31 December 2023, largely stable year-on-year. Transaction costs, and channel and distribution costs, increased, while bandwidth and server costs, along with content costs, decreased. Gross profit. Gross profit rose by 23% year-on-year to RMB293.1 billion for the year ended 31 December 2023, and gross margin increased to 48% from 43% in the previous year. This margin improvement was primarily driven by a shift in revenue mix towards high-quality revenue streams, particularly Video Accounts advertising, eCommerce technology service fees, and Mini Games platform service fees, and away from lower-margin revenue streams, such as music-related and games-related live streaming services. The following table sets forth our gross profit and gross margin by line of business for the years ended 31 December 2023 and 2022: Amount Year ended 31 December 100% 2023 Gross margin Gross Amount margin (RMB in millions, unless specified) VAS 161,919 54% 145,647 51% Online Advertising 51,344 2022 51% 554,552 609,015 % of total % of total revenues Amount revenues (RMB in millions, unless specified) VAS 298,375 49% 287,565 52% Online Advertising 100% 101,482 82,729 15% FinTech and Business Services Others 203,763 33% 177,064 32% 5,395 1% 7,194 1% Total revenues 17% 2022 35,009 FinTech and Business Services 129 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME 128 CONSOLIDATED INCOME STATEMENT 119 INDEPENDENT AUDITOR'S REPORT 85 CORPORATE GOVERNANCE REPORT 26 DIRECTORS' REPORT MANAGEMENT DISCUSSION AND ANALYSIS 7 CHAIRMAN'S STATEMENT 4 FINANCIAL SUMMARY 3 CORPORATE INFORMATION 130 CONSOLIDATED STATEMENT OF FINANCIAL POSITION 2 Annual Report 智慧溝通 靈感無限 2023 smart communication inspires RMB Counter Stock Code:80700 HKD Counter Stock Code: 700 於開曼群島註冊成立的有限公司 騰訊控股有限公司 Incorporated in the Cayman Islands with limited liability Tencent Holdings Limited Tencent 腾讯 Non-IFRS profit attributable to equity holders of the Company CONTENTS 42% 133 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY 139 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 80,636 40% 58,374 33% Others (790) (15%) (284) (4%) Total gross profit 293,109 48% 137 CONSOLIDATED STATEMENT OF CASH FLOWS 238,746 Annual Report 2023 9 Non-Executive Directors with effect from 17 May 2023) (ceased to be a director Lau Chi Ping Martin Ma Huateng (Chairman) Executive Directors DIRECTORS Corporate Information 00 273 DEFINITION 43% 2023 Year ended 31 December Amount RMB'Million 2019 Restated* Year ended 31 December CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Financial Summary Tencent Holdings Limited 2 00 80700 700 HKD counter RMB counter www.tencent.com 2020 Restated* RMB'Million COMPANY WEBSITE Shops 1712-1716, 17th Floor Hopewell Centre Services Limited Computershare Hong Kong Investor HONG KONG BRANCH SHARE REGISTRAR AND TRANSFER OFFICE Grand Cayman, KY1-1100 Cayman Islands Camana Bay P.O. Box 1586 Gardenia Court Suntera (Cayman) Limited Suite 3204, Unit 2A Block 3, Building D CAYMAN ISLANDS PRINCIPAL SHARE REGISTRAR AND TRANSFER OFFICE Hong Kong Wanchai No. 1 Queen's Road East 183 Queen's Road East Wan Chai, Hong Kong 29/F., Three Pacific Place 2021 RMB'Million 210,225 248,062 180,022 109,400 Profit before income tax 160,074 110,827* 124,656* 126,197* 96,501* Operating profit (Restated for prior years) 293,109 Restated* 238,746 221,532 167,533 Gross profit 609,015 554,552 560,118 482,064 377,289 Revenues RMB'Million 2023 2022 Restated* RMB'Million 245,944 IN HONG KONG PRINCIPAL PLACE OF BUSINESS Nanshan District Shenzhen, 518054 The PRC CORPORATE GOVERNANCE COMMITTEE lan Charles Stone Charles St Leger Searle Yang Siu Shun (Chairman) AUDIT COMMITTEE Zhang Xiulan Ke Yang Yang Siu Shun lan Charles Stone Li Dong Sheng Independent Non-Executive Directors Jacobus Petrus (Koos) Bekker Charles St Leger Searle 115,216 Charles St Leger Searle (Chairman) 188,243 466 118,048 188,709 191,886 143,203* 157,688 115,649 Certain items have been reclassified from above to below the operating profit line, and the comparative figures for prior periods have been restated accordingly. Please refer to Note 2.2 in the notes to the consolidated financial statements for details. Annual Report 2023 7 Management Discussion and Analysis Revenues. Revenues increased by 10% year-on-year to RMB609.0 billion for the year ended 31 December 2023. The following table sets forth our revenues by line of business for the years ended 31 December 2023 and 2022: 2,832 lan Charles Stone Yang Siu Shun Ke Yang No. 33 Haitian 2nd Road Tencent Binhai Towers TENCENT GROUP HEAD OFFICE Grand Cayman KY1-1111 Cayman Islands Hutchins Drive, P.O. Box 2681 Cricket Square REGISTERED OFFICE The Hongkong and Shanghai Banking Corporation Limited Bank of China Limited PRINCIPAL BANKERS and Registered Public Interest Entity Auditor Certified Public Accountants PricewaterhouseCoopers AUDITOR Jacobus Petrus (Koos) Bekker lan Charles Stone (Chairman) Li Dong Sheng REMUNERATION COMMITTEE Charles St Leger Searle lan Charles Stone Yang Siu Shun Li Dong Sheng Ma Huateng (Chairman) NOMINATION COMMITTEE Charles St Leger Searle Ma Huateng Lau Chi Ping Martin (Chairman) INVESTMENT COMMITTEE Zhang Xiulan Profit for the year Non-IFRS operating profit Mr Ma Huateng serves as the Chairman and Chief Executive Officer of the Company. This is at variance with code provision C.2.1 of the CG Code, which provides that the roles of chairman and chief executive should be separate and should not be performed by the same individual, and that the division of responsibilities between the chairman and chief executive should be clearly established and set out in writing. To stay abreast of the high level of corporate governance and maintain transparency of our corporate governance practices, we have continued to adopt and foster the following corporate governance practices: Independent non-executive directors 1/1 1/1 1/1 2/2 1/1 1/1 4/4 22 8/8 Li Dong Sheng 5/5 5/5 Jacobus Petrus (Koos) Bekker Non-executive directors 1/1 1/1 1/1 1/1 1/1 2/2 Lau Chi Ping Martin* Charles St Leger Searle 5/5 4/5 lan Charles Stone 1/1 2/2 5/5 Ke Yang 1/1 1/1 1/1 2/2 8/8 5/5 1/1 Yang Siu Shun 1/1 4/4 1/1 1/1 4/4 བུབུ 1/1 2/2 8/8 5/5 1/1 1/1 Ma Huateng Meeting Annual Report 2023 In order to take advantage of the skills, experiences and diversity of perspectives of the directors and in order to ensure that the directors give sufficient time and attention to the Group's affairs, we request each director to disclose to the Company, on a quarterly basis, the number and the nature of offices held in public companies or organisations and other significant commitments. The Board's composition is in compliance with the requirement under Rule 3.10A of the Listing Rules that the number of independent non-executive directors must represent at least one-third of the Board. The Board believes that the balance between the executive director and the non-executive directors is reasonable and adequate to provide sufficient checks and balances that safeguard the interests of the shareholders and the Group. A list of directors and their respective biographies which include their positions held at the Company and certain subsidiaries are set out on pages 64 to 67 of this annual report. There is no relationship (including financial, business, family or other material/relevant relationship(s)) among members of the Board. As at the date of this annual report, the Board is comprised of eight directors, with the executive director, two non-executive directors and five independent non-executive directors. During the year ended 31 December 2023 and up to the date of this annual report, there is no change to the composition of the Board except that Mr Lau Chi Ping Martin ceased to be an executive director with effect from the conclusion of the 2023 AGM. Composition The Board is therefore of the view that there is an adequate balance of power and that appropriate safeguards are in place. Nevertheless, the Board will continue to regularly monitor and review the Company's current structure and make necessary changes when appropriate. Besides, all major decisions have been made in consultation with members of the Board and appropriate committees, as well as the senior management team. Chief officers and senior executives are invited to attend Board meetings from time to time to make presentations and answer the Board's enquiries. In addition, directors are encouraged to participate actively in all Board and committee meetings of which they are members, and the Chairman ensures that all issues raised are properly briefed at the Board meetings, and he works with the senior management team to provide adequate, accurate, clear, complete and reliable information to members of the Board in a timely manner. Further, the Chairman ensures that adequate time is available for discussion for all items at the Board meetings. During the year ended 31 December 2023, the Chairman held a meeting with the independent non-executive directors without the presence of other directors as required by the Listing Rules. Corporate Governance Report Tencent Holdings Limited 90 91 00 In view of the ever-changing business environment in which our Group operates, the Chairman and Chief Executive Officer must be technically sophisticated and sensitive to fast and rapid market changes, including changes in users' preferences, in order to promote the different businesses of the Group. The Board thus considers that a segregation of the roles of the Chairman and Chief Executive Officer may create unnecessary costs for the daily operation of the Group. Chairman and Chief Executive Officer informal updates from time to time and structured monthly updates on the Company's performance, position and prospects are provided to the directors. the company secretary who is an employee of the Company attends training in compliance with the Listing Rules requirements; and training has been and will continue to be provided to the directors on a timely basis, including briefing the directors on any updates to the Listing Rules and relevant laws; review of the shareholders communication policy has been and will be conducted on a regular basis; • In addition, the Board has adopted various practices to bring the Group to a high level of corporate governance and compliance with the CG Code. A high level of corporate governance and integrity cannot be maintained only with the Board's efforts. Each of the Group's employees plays a role in contributing to such cause. A code of conduct which emphasises integrity and respect is distributed by the Company to all employees and it forms part of the employment agreement with each of the employees. Corporate Governance Report 00 Executive directors Corporate Governance Report Further, in compliance with Rule 3.10 of the Listing Rules, one of our independent non-executive directors has the appropriate professional qualifications in accounting or related financial management expertise, and provides valuable advice from time to time to the Board. The Company has also received from each independent non-executive director a confirmation annually of their independence and the Nomination Committee has conducted an annual review and considers that all independent non- executive directors are independent, taking into account of the independence guidelines set out in Rule 3.13 of the Listing Rules in the context of the length of service of each independent non-executive director. Meeting Committee Committee Committee Committee Board General Annual Extraordinary General Governance Nomination Remuneration Audit Corporate Name of director The Board values the importance of professional judgment and advice provided by non-executive directors to safeguard the interests of the shareholders. The non-executive directors contribute diversified qualifications and experience to the Group by expressing their views in a professional, constructive and informed manner, and actively participate in Board and committee meetings and bring professional judgment and advice on issues relating to the Group's strategies, policies, performance, accountability, resources, key appointments, standards of conduct, conflicts of interests and management process, with the shareholders' interests being the utmost important factor. The non-executive directors also take the lead where potential conflicts of interests arise and exercise their professional judgment and utilise their expertise to scrutinise the Company's performance in achieving agreed corporate goals, and monitor performance reporting. The Board met five times in 2023. The attendance of each director at Board meetings, committee meetings, the annual general meeting and the extraordinary general meeting, whether in person or by means of electronic communication, is detailed in the table below: As the re-election of Mr Charles St Leger Searle and Professor Ke Yang, who were re-elected in 2020, were not considered at the 2023 AGM, there is a deviation from code provision B.2.2 of the CG Code. Notwithstanding that Mr Charles St Leger Searle and Professor Ke Yang were not subject to retirement by rotation at the 2023 AGM, their biographies and details of their emoluments are set out in the Directors' Report and Note 16 to the consolidated financial statements respectively for shareholders' information. Considering that the re-election of Mr Charles St Leger Searle and Professor Ke Yang will be considered at the 2024 AGM, the Board believes that such deviation does not have a material impact on the operation of the Company as a whole. The Chairman, in accordance with the Articles of Association, whilst holding such office is not subject to retirement by rotation nor taken into account in determining the number of directors to retire in each year. Therefore, this is a deviation from code provision B.2.2 of the CG Code. The Chairman is one of the founders of the Group and he plays a key role in the growth and development of the Group and his continuing presence in the Board is vital to the sustainable development of the Group. Given the importance of the Chairman's role in the development of the Group, the Board considers that the deviation from code provision B.2.2 of the CG Code has no material impact on the operation of the Group as a whole. Corporate Governance Report Tencent Holdings Limited 92 00 Code provision B.2.2 of the CG Code provides that every director, including those appointed for a specific term, should be subject to retirement by rotation at least once every three years. The Board is the core of the Group's success, and with the appropriate composition of the Board, we can benefit from the right set of skills, experience and diversity of perspectives to take the Company forward. Therefore, it is essential for the Company to maintain a formal, considered and transparent procedure for the appointment of new directors to the Board. It is our corporate governance practice and in accordance with the Articles of Association that all directors (except for the Chairman) should be subject to re-election at regular intervals and the resignation and removal of any director should be explained with reasons. At the 2023 AGM, Mr Lau Chi Ping Martin and Mr Jacobus Petrus (Koos) Bekker retired and Mr Jacobus Petrus (Koos) Bekker was re-elected whilst Mr Lau Chi Ping Martin did not offer himself for re-election. Professor Zhang Xiulan was re-elected at the 2023 AGM pursuant to Article 86(3) of the Articles of Association. Appointments, Re-election and Removal As part of our corporate governance practice to provide transparency to the investor community and in compliance with the Listing Rules and the CG Code, independent non-executive directors are identified as such in all corporate communications containing the names of the directors. In addition, an updated list of directors identifying the independent non-executive directors and the roles and functions of the directors is maintained on the Company Website and the Stock Exchange's website. Board Activity Zhang Xiulan 5/5 The Nomination Committee comprises a majority of independent non-executive directors. Its members are Mr Ma Huateng, Mr Li Dong Sheng, Mr Ian Charles Stone, Mr Yang Siu Shun (all three are independent non-executive directors) and Mr Charles St Leger Searle (non-executive director). The Nomination Committee is chaired by Mr Ma Huateng. (a) the Company's prevailing board diversity policy and the requirements under the Listing Rules; In the determination of the suitability of a candidate, the Nomination Committee will consider a range of factors, including but not limited to the following selection criteria, before making recommendations to the Board: 98 00 Director Selection Criteria The board nomination policy aims to set out the approach to enable the Nomination Committee to nominate a director to the Board. Purpose and Objectives A summary of the board nomination policy and related nomination procedures is set out as follows: (b) Corporate Governance Report Annual Report 2023 During 2023, the Nomination Committee reviewed board composition and director succession, the board diversity policy and the board nomination policy, and also considered and made recommendations to the Board on the re-appointment of the retiring directors at the 2023 AGM. The Nomination Committee has also assessed the independence of the independent non-executive directors and considers all of them to be independent, taking into account of the independence guidelines set out in Rule 3.13 of the Listing Rules in the context of the length of service of each independent non-executive director, and the perspectives, skills and experience that such director can bring to the Board. The Company recognises the benefits of having a diverse Board, and views diversity at Board level as a business imperative that will help the Company achieve its strategic objectives and maintain a competitive advantage. As such, the Board has set measurable objectives for the implementation of the board diversity policy to ensure that the Board has the appropriate balance of skills, experience and diversity of perspectives that are required to support the execution of its business strategy and maintain the effectiveness of the Board. The Nomination Committee is satisfied that the board diversity policy and the board nomination policy are successfully implemented with reference to the measurable objectives. The Nomination Committee will continue to conduct periodic review and monitor the implementation of the board diversity policy and the board nomination policy to ensure their continued effectiveness. The Nomination Committee met once in 2023. Individual attendance of each Nomination Committee member is set out on page 93. 2/2 Nomination Committee In 2023, the Investment Committee had considered and passed various resolutions on its decisions on the Group's acquisitions and disposals. The Investment Committee comprises executive director, non-executive director and the President of the Company. Its members are Mr Lau Chi Ping Martin, Mr Ma Huateng and Mr Charles St Leger Searle (non-executive director). The Investment Committee is chaired by Mr Lau Chi Ping Martin, the President of the Company. Investment Committee 97 the independence of the independent non-executive directors and the independence criteria set out in Rule 3.13 of the Listing Rules; (c) potential or actual conflicts of interest of the candidate or the re-elected director; Annual Report 2023 99 The Nomination Committee will report annually on the Board's composition and make appropriate disclosures regarding the board diversity policy in the Corporate Governance Report of the Company's annual reports. Monitoring, Reporting and Review The Board will consider and approve the appointment, if appropriate, based upon the recommendation of the Nomination Committee. The Nomination Committee will assess the eligibility of a candidate to become a director of the Company taking into account factors, including without limitation his/her reputation, character, knowledge and experience, and make recommendations for the Board's consideration and approval. Where a retiring director, being eligible, offers himself/herself for re-election, the Nomination Committee will review the overall contribution to the Company of the retiring director and will also determine whether the retiring director continues to meet the selection criteria set out in the board nomination policy. The Nomination Committee will have a meeting at least once a year, and candidates, if any, will be identified for consideration. Nomination from the human resources department, external agencies, Board referrals, or shareholders, if appropriate, will be considered. Nomination Procedure by Nomination Committee Corporate Governance Report Tencent Holdings Limited The Nomination Committee has the discretion to nominate any person as it considers appropriate. other relevant factors which will be considered by the Nomination Committee on a case-by- case basis. (g) the candidate or the re-elected director's ability to commit and devote sufficient time and attention to the Company's affairs; and the candidate or the re-elected director's reputation for integrity, accomplishment and experience in the relevant sectors; (f) (e) the expected contribution that the candidate would add to the Board and to ensure the Board has a balance of skills, experience and diversity of perspectives appropriate to the requirements of the Company's business; (d) 96 Tencent Holdings Limited discussing the arrangements made for directors and senior management team to attend training sessions for continuous professional development. Corporate Governance Report considering the Company's environmental targets; and 00 The Audit Committee should meet not less than four times a year and the Audit Committee met eight times in 2023. Individual attendance of each Audit Committee member is set out on page 93. In addition to the members of the Audit Committee, meetings were attended by the Chief Financial Officer, the Financial Controller, the Treasurer, the Head of IA and the Head of IC, and the external auditor at the invitation of the Audit Committee. The Audit Committee comprises only non-executive directors. Its members are Mr Yang Siu Shun, Mr lan Charles Stone (both are independent non-executive directors) and Mr Charles St Leger Searle (non-executive director). Mr Yang Siu Shun, who chairs the Audit Committee, and Mr Charles St Leger Searle have appropriate professional qualifications and experiences in financial matters. Audit Committee Corporate Governance Report Tencent Holdings Limited 94 00 As described above, the Board has established five committees, each of which has been delegated responsibilities and reports back to the Board: Audit Committee, Corporate Governance Committee, Investment Committee, Nomination Committee and Remuneration Committee. The roles and functions of these committees are set out in their respective terms of reference. The terms of reference of each of these committees will be revised from time to time to ensure that they continue to meet the needs of the Company and to ensure compliance with the CG Code. The terms of reference of the Audit Committee, the Nomination Committee and the Remuneration Committee are available on the Company Website under the section headed "Investors - Environment, Social and Governance - Governance - Board Committees" and on the Stock Exchange's website. THE COMMITTEES The company secretary ensures that there is a good and timely flow of information to the Board. The company secretary is responsible for taking minutes of all Board and committee meetings and ensuring that sufficient details of the matters considered and decisions reached have been recorded. Draft and final versions of the minutes of meetings are sent to the directors for comments and records respectively within a reasonable time after each meeting, and final minutes with the relevant board papers and related materials are kept by the company secretary and are available for review and inspection by the directors at any time. At the Board meetings, the Board discussed a wide range of matters, including the Group's overall strategies, financial and operational performances, approved the annual, interim and quarterly results of the Group, the appointment of directors, business prospects, regulatory compliance and corporate governance, and other significant matters. The company secretary, in consultation with the Chairman and the senior management team, prepares the agenda for each meeting and all directors are given the opportunity to include matters for discussion in the agenda. The company secretary also ensures that all applicable rules and regulations in relation to the Board meetings are followed. The company secretary sends notice of the Board meeting to each of the directors at least 14 days in advance of each regular Board meeting. The company secretary also sends the agenda, board papers and relevant information relating to the Group to each of the directors at least 3 days in advance of each regular Board meeting and committee meeting, and keeps the directors updated on the Group's financial performance and latest developments. If any director raises any queries, steps will be taken to respond to such queries as promptly and fully as possible. If there is potential or actual conflict of interests involving a substantial shareholder or a director, such director will declare his/her interest and will abstain from voting on such matters. The directors may approach the Company's senior management team when necessary. The directors may also seek independent professional advice at the Company's expense in appropriate circumstances. Corporate Governance Report 93 Annual Report 2023 Mr Lau Chi Ping Martin ceased to be an executive director with effect from the conclusion of the 2023 AGM. * 1/1 1/1 • reviewing the 2022 annual report, including the Corporate Governance Report, the ESG Report, the Directors' Report and the financial statements, as well as the related results announcement; The Audit Committee's major work during the year 2023 includes the following: reviewing the 2023 first and third quarters results announcements; reviewing the Company's compliance with the ESG Reporting Guide and disclosure in the ESG Report; reviewing the Company's compliance with the CG Code and disclosure in the Corporate Governance Report; reviewing legal and regulatory compliance, including the insider dealing policy, the disclosure of inside information policy and the shareholders communication policy. The insider dealing policy was revised and adopted in March 2023 and March 2024 respectively; reviewing the Company's policies and practices on corporate governance and ESG; The Corporate Governance Committee's major work during the year 2023 and up to the date of this annual report includes the following: The Corporate Governance Committee met twice in 2023. Individual attendance of each Corporate Governance Committee member is set out on page 93. reviewing the 2023 interim report and interim results announcement; Corporate Governance Committee Corporate Governance Report The Corporate Governance Committee comprises only non-executive directors. Its members are Mr Charles St Leger Searle (non-executive director), Mr Ian Charles Stone, Mr Yang Siu Shun, Professor Ke Yang and Professor Zhang Xiulan (all of them are independent non-executive directors). The Corporate Governance Committee is chaired by Mr Charles St Leger Searle. Annual Report 2023 PricewaterhouseCoopers ("PwC") is the Company's external auditor. The Audit Committee annually reviews the relationship of the Company with PwC. Having reviewed the effectiveness of the external audit process as well as the independence and objectivity of PwC, the Audit Committee is satisfied with this relationship. As such, the Audit Committee has recommended their re-appointment at the 2024 AGM. reviewing the effectiveness of the Company's financial reporting system, the system of internal controls in operation, risk management system and associated procedures within the Group. reviewing the adequacy of resources, qualifications and training of the Group's finance department; and reviewing the plans (including those for 2023), resources and work of the Company's internal auditors; in relation to the external auditor, reviewing their plans, reports and management letter, fees, involvement in non-audit services, and their terms of engagement; • reviewing the dividend policy of the Company; 95 reviewing the status of compliance with the CG Code, the Listing Rules and relevant laws by the Group; Measurable Objectives Policy Statement The board diversity policy aims to set out the approach to enable the Nomination Committee to achieve diversity on the Board. A summary of the board diversity policy is set out as follows: Corporate Governance Report Purpose and Objectives As at 31 December 2023, our workforce (inclusive of permanent employees and other employees who are engaged in direct employment relationships with the Company only) consisted of 40,469 male employees and 16,311 female employees, representing approximately 71.3% and 28.7% of the total workforce, respectively. As at 31 December 2023, female members accounted for approximately 7.9% of senior management team, and approximately 24.8% of the managerial positions of the Company were held by female employees. In March 2023, the Company released "Our Commitment to Diversity, Equity and Inclusion", declaring its plan to integrate diversity, equity and inclusion ("DEI") into its workplace culture and daily operations, and gradually achieve the DEI goals. The Company regularly reviews the DEI implementation progress and will continue to enhance diversity in different levels of workforce. For further details regarding the gender diversity of our workforce (including the gender ratio), please refer to the sections headed "Implement Diversity, Equity, and Inclusion" and "ESG Key Performance Tables" in the Environmental, Social and Governance Report 2023. The Company will ensure that there are channels (in addition to independent non-executive directors) where independent views are available, including but not limited to availability of access by directors of the Company to external independent professional advice to assist their performance of duties. 00 In considering whether an independent non-executive director should be proposed for re-election, the Nomination Committee and the Board will assess and evaluate the independent non-executive director's contribution to the Board during the term, in particular, whether the independent non-executive director is able to bring independent views to the Board. 100 Tencent Holdings Limited Corporate Governance Report Independent Views In assessing whether a potential candidate is qualified to become an independent non-executive director of the Company, the Nomination Committee and the Board will consider, among others, whether the candidate is able to devote sufficient time on performing his/her duties as an independent non-executive director of the Company, and the background and qualification of the candidate, in order to assess whether such candidate is able to bring independent views to the Board. The Nomination Committee will ensure that the Board has the appropriate balance of skills, experience and diversity of perspectives that are required to support the execution of its business strategy and in order for the Board to be effective. Monitoring, Reporting and Review The Company recognises the benefits of having a diverse Board, and views diversity at Board level as a business imperative that will help the Company achieve its strategic objectives and maintain a competitive advantage. A truly diverse Board will be achieved through a number of factors, including but not limited to differences in skills, knowledge, experience and background. Board appointments will be made on the basis of merit and fairness, with due regard to the benefits of diversity on the Board. The Nomination Committee will continue to have primary responsibility for identifying suitably qualified candidates to become members of the Board and, in carrying out this responsibility, will give adequate consideration to the board diversity policy. In forming its perspective on diversity, the Nomination Committee will also take into account factors based on the Company's business model and specific needs from time to time, including without limitation, skills, knowledge, experience, gender and background. The Nomination Committee and the Board would ensure that appropriate balance of gender diversity is achieved with reference to the expectation of shareholders as well as international and local recommended best practices. Following the appointment of one female director in 2022, the female representation of the Board was increased to above 20%. The Board has achieved gender diversity and targets to reach 30% female representation of the Board by 2030. The Nomination Committee will report annually on the Board's composition and make appropriate disclosures regarding the board diversity policy in the Corporate Governance Report of the Company's annual reports. It will also monitor the implementation of the board diversity policy. 1. Below is a summary of the significant risks of the Company along with the applicable response strategies. The Company's risk profile may change, and the list below is not intended to be exhaustive. Corporate Governance Report Tencent Holdings Limited 106 00 On behalf of the Board, the Audit Committee supervises the overall risk management of the Company and assesses, the risk acceptable level, risk rating and the response strategies of the Company's risks. The Audit Committee considers that management has taken appropriate measures to address and manage the significant risks that they are responsible for at a level acceptable to the Board. The complexity of the Company's business continues to increase, and the external environment continues to evolve. Management faces a wide range of risks, including but not limited to ESG risk. Through risk management analysis and evaluation, management considers that the ten significant risks disclosed in the financial year 2022 still exist, among which the "Market competition and innovation risk" and "Business continuity risk" have increased to a certain extent while the other risks remain at a similar risk level as last year. Significant Risks of the Company The Audit Committee, on behalf of the Board, assesses and determines the nature and level of the risks that the Company is willing to take in order to achieve its business objectives and formulates appropriate response strategies which include designating responsible departments for handling each significant risk. The Audit Committee provides guidance to the Company's management to implement effective risk management system with support from the IC. Market competition and innovation risk The IC analyses and evaluates the responses to significant risks from time to time, and reports to the Audit Committee at least once a year; and Business and functional departments of each business group identify, assess and respond to risks in the course of operation in a bottom-up and systematic manner; • Being an Internet and technology company with a wide variety of rapidly changing businesses, the Company has adopted the following dynamic risk management process in response to the ever-changing risk landscape: Risk Management Process Corporate Governance Report 105 Annual Report 2023 The Company has established a risk management system (including the "Three Lines Model" as detailed above) which sets out the roles and responsibilities of each relevant party in the system as well as the relevant risk management policies and processes. Each business group of the Company, on a regular basis, identifies and assesses any risks that may negatively impact the achievement of its objectives, and formulates appropriate response measures. The Company also provides risk management and internal control training for staff on a regular basis. The Company is committed to continuously improving its risk management system, including its structure, process, and culture. By enhancing the Company's risk management capabilities, it ensures the healthy and sustainable development of the Company's business. Risk Management Through collecting, consolidating and analysing the Company's businesses, the IC builds a list of significant risks at both the corporate and business level, and ensures that appropriate risk response strategies and control measures have been taken for such risks. These significant risks as well as the corresponding risk responses and control measures will be reviewed by management and subsequently by the Audit Committee before reporting to the Board; In addition, the Company incorporates the evaluation results of the risk management and internal control practices of business groups and functional departments into the performance review process. The Internet and technology industries are highly competitive with rapid product updates and replacements, and the development of Al-related technologies is progressing rapidly. The development of technologies brings evolutional changes to the existing business models and brings in more new players into the market. The existing market competition landscape may face major changes. Therefore, how to promote innovative and sustainable social values through innovation in technology, product and business model is one of the key challenges of the Company. Macroeconomic risk The Board had reviewed the implementation and effectiveness of the above mechanisms during the year 2023. Annual Report 2023 109 The Company treasures its brand and reputation. In adherence to the principles of openness and transparency, the Company communicates to the public comprehensive and accurate information in a timely manner. In response to crisis, the Company has established a corresponding response mechanism, to follow up on the development of crisis, conduct risk assessment, and make prompt decisions, to reduce the impact of the crisis on the Company. The Company has also set up a public relations department and professional teams to establish and continuously enhance its public relations, brand and reputation management mechanism, to provide training and guidance related to public relations management, to continuously improve its response capabilities, and to reduce the possibility of crisis. The public relations team maintains close contact with the Company's management and business teams, pays close attention to and gathers public opinions, analyses relevant information in a timely manner and reports to management to enable management to respond promptly and effectively in accordance with the Company's policies and procedures and disclose comprehensive and accurate information to the public in a timely manner and to continuously protect the Company's reputation. As an Internet and technology company, the Company has a diverse portfolio of businesses and products with increasingly complicated business models, and an extensive network of users and business partners, which draws attention from the public and media to the Company's brand. The Company needs to fully consider possible crisis that may occur in its domestic and international business operations, and actively responds to them to avoid further deepening of issues or escalation of crisis. The Company also needs to timely disclose comprehensive and accurate information to the public. Otherwise, it may damage the Company's reputation, brand and image, and may adversely affect the business and prospects of the Company. Crisis management, public relations and reputational risk The Company strongly believes that the security of user data and privacy is the key prerequisite for delivering secured and high-quality products and user experience. The Company strictly complies with local relevant laws and regulations, continuously invests resources in strengthening information security management. The Company classifies user and client data as the Company's most sensitive information. It has also established and will continue to enhance the policies and management measures to ensure the security of such information and data. The management measures of the Company include but are not limited to establishing effective information management systems with the use of encryption, data access restrictions and controls, establishment of rigorous approval processes, and the strict control of data transmission and storage. In addition, the Company has established a specialised team to conduct independent regular reviews over the management of the business groups' sensitive information and data, and provide training on information security to raise employees' awareness of information security. The Company has obtained multiple well-acknowledged certifications in relation to information security to safeguard the information security of users and customers. The Company upholds the mission and vision of “Value for Users, Tech for Good" and constantly improves the infrastructure of its network and data security. Corporate Governance Report 5. Tencent Holdings Limited 108 2. 00 Information security risk The Company has taken practical steps to devote substantial resources in various areas to ensure the Company's compliance with regulatory requirements. The Company has set up both domestic and international dedicated departments and specialist teams, engaged external professional consultants, communicated with relevant regulatory authorities in a timely manner, kept abreast of the changes to relevant laws and regulations, adjusted strategies accordingly, taken appropriate actions or measures, improved internal training and the understanding of the laws and regulations, and enhanced the corresponding management system and policies to ensure that the Company is in compliance with such applicable laws and regulations. As the Company continuously expands its businesses domestically and globally, the Company must abide by and comply with the relevant applicable laws and regulations in different countries and jurisdictions, including but not limited to laws and regulations relating to privacy and data protection, anti-trust, anti-unfair competition, consumer protection, IP, labour protection, and continue to pay attention to changes in industry laws and regulations, including but not limited to telecommunications and Internet, gaming, Internet finance, foreign investment, international trade, etc. In addition, changes in international circumstances may affect the development of global policies and regulations and impact the development of various industries across different regions. 4. Regulatory and compliance risk 3. Based on the changes in macroeconomic environment, the Company adjusts its business development strategy in a scientific, flexible, and reasonable manner to address the risks posed by the macroeconomic risks, and continuously seeks opportunities for business growth. The Company attaches great importance to product innovation, upholds the business philosophy of focusing on user value, continuously improves user experience, and builds long-term and stable relationships with its existing customers to achieve sustainable business growth. Meanwhile, the Company will continue to uphold its mission and vision of “Value for Users, Tech for Good" to provide innovative product solutions and digital services to assist its clients and business partners in further enhancing their competitiveness and productivity to achieve sustainable growth, and to also create value for its customers and business partners, and fulfill its social responsibility. Corporate Governance Report Annual Report 2023 107 The Company's revenue generated from certain businesses is closely related to the macro-economic circumstances and the overall consumption economy. As the Company continues to expand its international businesses, factors such as the ever-changing international circumstances, the difference in the speed of economic development across regions, and emergency events may reduce individual users' purchasing power and their willingness to consume, impacting the operation and profits of our corporate clients, and thereby leading to a reduction in the resources they invest in business development and market expansion, which may in turn adversely affect certain revenue streams of the Company. In addition, the uncertainty of international situation may lead to changes in trading and investment policies and markets, and negatively impact the Company's operations and collaborations with its business partners, and in turn affect and weaken the Company's competitiveness and growth potential. All countries and jurisdictions continue to heighten the regulatory enforcement over cyber security and personal data protection. The security of personal user and corporate client data is the top priority of the Company. The Company continues to pay attention to the laws and policies relating to user privacy and data security in various jurisdictions and is fully aware that any loss or theft of such information could have a significant negative impact on the affected users and clients, which could expose the Company to significant legal liability and significant reputational risk. The Company provides regular risk management and internal control training to all employees through various channels such as on-site and online courses, comic series, and online interactive columns. The training covers topics such as risk management system, key risk analysis and internal control activities. Risk management training is included in the mandatory courses for new employees to increase the overall employees' risk awareness. The Company attaches great importance to innovation and stays on top of the developments of the industry and user needs, keeps up with the technological development through innovation in frontier technology, and constantly improves the Company's products and services. It also explores the application scenarios of emerging technologies and brings additional values and experiences to its users and business partners. By attracting and cultivating key talents and increasing investment in scientific research, the Company continuously improves its technology and innovation abilities, which integrate with "Hunyuan" model and other innovative technologies, and brings more cutting-edge technological benefits to the Company's business and products. The Company also continuously optimises its resource allocation, enhances its core products and business, strengthens its product development and technical capabilities, explores innovative business models, develops products that meet the expectations of both domestic and international markets, continuously improves user experience, promotes sustainable and high quality development of its businesses and increases its market competitiveness. The Company collaborates with its partners to jointly innovate, enhance service capabilities, and support the ecosystem in order to achieve product service growth and continuous iterative innovation, and create value for users and the society. Risk Culture Building Corporate Governance Report Tencent Holdings Limited 102 00 All the options or awards involving new Shares granted to Employee Participants during the year ended 31 December 2023 were without performance targets. In view that (i) the grantees are employees of the Group who would contribute directly to the overall business performance, sustainable development and/or good corporate governance of the Group; (ii) the grant was a recognition for the grantees' past contributions to the Group; and (iii) the options or awards were subject to certain vesting conditions and terms of the 2023 Share Option Scheme and the 2023 Share Award Scheme, which already cover situations where the options or awards would lapse in the event that the grantees cease to be employees of the Group, the Remuneration Committee was of the view that the grant of options or awards to Employee Participants without performance targets is market competitive and aligns with the purposes of the 2023 Share Option Scheme and the 2023 Share Award Scheme. reviewing and recommending to the Board on the adoption of and amendments to the share incentive schemes of certain subsidiaries of the Company. reviewing and approving (a) the grant of options under the Post-IPO Option Scheme IV and the 2023 Share Option Scheme, and the grants of share awards under the 2013 Share Award Scheme, the 2019 Share Award Scheme and the 2023 Share Award Scheme, respectively; (b) the adjustment to the exercise prices of the outstanding share options under the Post-IPO Option Scheme II and the Post-IPO Option Scheme IV as a result of the distribution in specie of Meituan Shares; and (c) the adjustment to the number of unvested restricted shares under the 2013 Share Award Scheme and the 2019 Share Award Scheme as a result of the distribution in specie of Meituan Shares; and reviewing and endorsing the amendments to the 2013 Share Award Scheme and the 2019 Share Award Scheme; reviewing and endorsing the adoption of the 2023 Share Option Scheme and the 2023 Share Award Scheme; assessing performance and, reviewing and approving adjustments to the remuneration packages for the members of the senior management team; reviewing and recommending to the Board on the remuneration packages for the directors; reviewing and recommending to the Board in respect of the remuneration policies and structure of the Company by benchmarking peer companies with a similar scale to ensure that the Company's remuneration packages are competitive to recruit the best talents in the industry and to retain key staff; The Remuneration Committee's major work during the year 2023 includes the following: Corporate Governance Report 101 Annual Report 2023 The Remuneration Committee has the delegated responsibility to determine the remuneration packages of each member of the senior management team and make recommendations to the Board on the remuneration package of each director. The Remuneration Committee met four times in 2023. Individual attendance of each Remuneration Committee member is set out on page 93. The Remuneration Committee comprises only non-executive directors. Its members are Mr Ian Charles Stone, Mr Li Dong Sheng (both are independent non-executive directors) and Mr Jacobus Petrus (Koos) Bekker (non-executive director). The Remuneration Committee is chaired by Mr lan Charles Stone. The Company is committed to establishing and improving the internal control environment, to strengthening employees' risk management awareness, and to continuously enhancing its risk management capabilities. Remuneration Committee In conducting its work in relation to the remuneration of directors and senior management team, the Remuneration Committee ensured that no individual or any of his/her associates was involved in determining his/her own remuneration. It also ensured that remuneration awards were determined by reference to the performance of the individual and the Company and were aligned with the market practice and conditions, the Company's goals and strategies. The remuneration awards are designed to attract, retain and motivate high performing individuals, and reflect the specifics of individual roles. For further details of emoluments of the senior management by band, please refer to Note 15 to the consolidated financial statements. In respect of non-executive directors, the Remuneration Committee has reviewed the fees payable to them taking into account the particular nature of their duties, relevant guidance available and the requirements of the Listing Rules. reviewing and approving compensation awards granted to senior management team, recognising their contributions to the Company and providing incentives for future performances; The Company has formulated policies and established management systems to enhance and support the Company's compliance with anti-corruption laws and regulations. The Anti-fraud Investigation Department is responsible for receiving whistleblower reports through various channels and following up and investigating alleged fraudulent activities. It also assists management in promoting the value of integrity and the “Tencent Sunshine Code of Conduct” (the “Sunshine Code”) to all employees of the Company. ACCOUNTS, RISK MANAGEMENT AND INTERNAL CONTROL Tencent Holdings Limited 104 00 The Three Lines Model of the risk management and internal control systems are designed to manage rather than eliminate the risk of failing to implement the business strategy of the Company, and can only provide reasonable but not absolute assurance against material misstatement or loss. The IA and the Anti-fraud Investigation Department have direct reporting lines to the Audit Committee. The IA holds a high degree of independence and is responsible for providing independent evaluation and verification on the effectiveness of the Company's risk management and internal control systems, and monitoring the management's improvement and enhancement on risk management and internal controls. Our Third Line is comprised of the IA and the Anti-fraud Investigation Department. The Third Line - Independent Assurance Corporate Governance Report The Board and management always prioritise the maintenance and establishment of the Company's risk management and internal control systems. In 2023, the Company has consistently improved the risk management and internal control systems, and has also continuously increased the awareness of risk management among employees. The Internal Control Department continues to delve into the front-line of the business and provide active monitoring supports during business operations over risk management and internal controls. IC strengthens its digital capabilities to further assist the business groups in identifying and managing the risks more comprehensively and timely, driving healthy business development. The Internal Audit Department continues to carry out independent audits over various key businesses and management areas. IA improves its digital audit capabilities to effectively identify risks and provide effective and timely independent evaluations. The Anti- fraud Investigation Department further advocates the value of integrity among the employees, increases the expectation on management standards, and applies digital methods to proactively and timely follow up and investigate the alleged fraudulent activities. The connection and interaction among the three lines have been further enhanced to provide more effective support to the Company's development. Our Second Line is mainly the IC. They are responsible for formulating policies related to the risk management and internal control of the Company and for planning and implementing the establishment of integrated risk control systems. To ensure the effective implementation of such systems, they also assist and supervise the first line in the establishment and improvement of risk management and internal control systems. Our First Line is mainly comprised of business and functional departments of each business group of the Company who are responsible for the day-to-day operation and management. They are responsible for designing and implementing controls to address the risks. The First Line - Operation and Management Under the supervision and guidance of the Board, the Company has adopted a risk management and internal control structure, referred to as the "Three Lines Model”, to ensure the effectiveness of its risk management and internal control systems. The Board is responsible for overseeing risks that the Company faces, determining the risk appetite of the Company, and proactively considering, analysing and formulating strategies to manage the Company's significant risks to acceptable levels. The risks mentioned above also include, but are not limited to, significant risks relating to the environment, social and governance aspects of the Company. Corporate Governance Report Annual Report 2023 103 The Board acknowledges that it is its responsibility to ensure that the Company has established and maintained adequate and effective risk management and internal control systems. The Board delegates its responsibility to the Audit Committee to review the practices of management with respect to risk management and internal control on a quarterly basis, including the design, implementation and monitoring of risk management and internal control systems. The Audit Committee also reviews the effectiveness of risk management and internal control systems on an annual basis. The members of the Audit Committee have extensive experience and knowledge in financial management and risk management. They also receive updates on the latest risk management requirements and best practices from the internal teams and would discuss in the quarterly Audit Committee meetings if necessary. In respect of risk management organisational structure establishment, risk management process implementation, and risk culture enhancement, the Company has been continuously improving its risk management and internal control system and enhancing risk management capabilities to ensure the healthy and sustainable development of the Company. Adequate and effective risk management and internal control systems are key to safeguarding the achievement of the Company's strategic objectives. Risk management and internal control systems shall ensure the Company's effective business operation, the truthfulness and accuracy of financial reporting, as well as the compliance with applicable laws, regulations and policies. As part of the Board's responsibilities, the Board ensures that the assessment over the Group's performance and prospects are comprehensively and clearly presented. The directors acknowledge that it is their ultimate responsibilities to prepare the accounts which give a true and fair view of the financial position of the Group on a going-concern basis and other announcements and financial disclosures. To assist the Board in discharging its responsibilities, management provides updates to the Board from time to time, including the Group's detailed business and financial position information, in order to facilitate the directors to perform a comprehensive, understandable and clear assessment of the performance, position and prospects of the Group. Management also provides all necessary and relevant information to the Board, giving the directors sufficient explanation and information they need, to discharge their responsibilities and make an informed assessment of financial and other information put before them for approval. The Auditor's statement in respect of their reporting responsibilities is set out in the "Independent Auditor's Report" of this annual report. The Second Line - Risk Management The Company is required to disclose certain information pursuant to the Listing Rules and the CG Code. Set out below is the information which has not been covered above. Significant Change in the Constitutional Documents There has not been any change in the Company's memorandum and articles of association during the year ended 31 December 2023. Annual Report 2023 Annual Report 2023 115 Corporate Governance Report Model Code for Securities Transactions by Directors of Listed Issuers The Company has adopted the Model Code. The Company has also adopted an insider dealing policy to govern and regulate securities transactions by employees who are likely to be in possession of inside information relating to the Company, the terms of which are no less exacting than those of the Model Code. The Company has made specific enquiries with the directors and the directors have confirmed they have complied with the Model Code throughout 2023. DISCLOSURE OF OTHER INFORMATION Appointment Terms of Non-Executive Directors 117 Under the current dividend policy of the Company, dividends may be declared out of the distributable earnings or reserves of the Company. While the dividend payout ratio is not pre-determined, in proposing or declaring any dividend payout, the Board shall take into account the Group's earnings performance, general financial position, debt covenants, future working capital requirements and investment needs, and other factors that the Board considers relevant and appropriate. The dividend policy of the Company is also set out in the "Corporate Governance Report" on page 117 of this annual report and the historical information of dividend payout is available on the Company Website under the section headed "Investors - Equity & Bond Information - Interactive Share Price Chart & Dividend History". DIVIDEND POLICY Apart from participating in the Company's general meetings, shareholders and other stakeholders may at any time contact or send enquiries and concerns to us via the Company Website, or by addressing them to the Investor Relations teams, and sending them by post to the Investor Relations teams, Tencent Holdings Limited, at 29/F., Three Pacific Place, No. 1 Queen's Road East, Wanchai, Hong Kong, or by email to ir@tencent.com. Shareholders may also contact the Company's Hong Kong branch share registrar, Computershare Hong Kong Investor Services Limited, if they have any enquiries about their shareholdings and entitlements to dividends. In order to ensure that shareholders' interests and rights are adequately protected, a separate resolution will be proposed for each substantially separate issue at the general meetings, and all resolutions will be voted by poll pursuant to the Articles of Association and the Listing Rules. To ensure that the shareholders are familiar with the detailed procedures for conducting a poll, detailed procedures for conducting a poll are explained at the commencement of the general meetings, and all questions from shareholders on the voting procedures will be answered before the poll voting starts. An external scrutineer will be appointed to monitor and count the votes cast by poll. Poll results will be posted on the Company Website and the Stock Exchange's website after each general meeting. Corporate Governance Report 116 Tencent Holdings Limited 00 Pursuant to the Articles of Association, any one or more shareholder(s) of the Company holding at the date of deposit of the requisition not less than one-tenth of the paid up capital of the Company carrying the right of voting at general meetings of the Company shall at all times have the right, by written requisition to the Board or the company secretary, to require an extraordinary general meeting to be called by the Board for the transaction of any business specified in such requisition. Such requests must be sent to the Board or the company secretary at the Company's registered office at Cricket Square, Hutchins Drive, P.O. Box 2681, Grand Cayman KY1-1111, Cayman Islands, or by email to cosec@tencent.com, and such meeting shall be held within two months after the deposit of such requisition. If a shareholder wishes to propose a person for election as a director at a general meeting, he/she should provide a written requisition to the Board or the company secretary to call an extraordinary meeting following the procedures set forth above, or lodge a written notice to nominate a person at the Company's Hong Kong principal place of business at 29/F., Three Pacific Place, No. 1 Queen's Road East, Wanchai, Hong Kong, or the Company's branch share registrar, Computershare Hong Kong Investor Services Limited at Shops 1712-1716, 17th Floor, Hopewell Centre, 183 Queen's Road East, Wan Chai, Hong Kong. Detailed procedures for shareholders to propose a person for election as a director are available on the Company Website under the section headed "Investors - Environment, Social and Governance - Governance - Shareholders". The Company's general meetings provide a transparent and open platform for the Company's shareholders to communicate with the Board and the senior management team. The Chairman, other members of the Board and relevant members of the senior management team, under normal circumstances, attend to answer questions raised and discuss matters in relation to the Company in an open manner. All directors attended the 2023 AGM and the extraordinary general meeting held on 17 May 2023 ("2023 EGM"), with a view to understanding the views of the Company's shareholders. The company secretary provided the minutes of the 2023 AGM and the 2023 EGM to all directors to have a thorough understanding of the views of the Company's shareholders. The Company's external auditor will also attend the annual general meeting to answer questions relating to the conduct of the audit, the auditor's report and auditor independence. The Company also encourages shareholders' active participation in annual general meetings and other general meetings. Notices to shareholders for annual general meetings are sent to shareholders at least 21 clear days before the meetings and at least 14 clear days for all other general meetings to allow sufficient time for their consideration of the proposed resolutions. The Company's shareholders communication policy also requires appropriate arrangements to be put in place for the annual general meetings to encourage and facilitate shareholders' participation, and the process of the meetings is monitored and reviewed on a regular basis to ensure that shareholders' needs are best served. Corporate Governance Report Each non-executive director, whether independent or not, is appointed for a term of one year and is subject to retirement by rotation at least once every three years. A director appointed to fill a casual vacancy or as an addition to the Board will be subject to re-election by shareholders at the first general meeting after his/her appointment. The Company endeavours to maintain sufficient working capital to develop and operate the business of the Group and to provide sustainable returns to the shareholders of the Company. Directors and Officers Liability Insurance the notes to the consolidated financial statements, comprising material accounting policy information and other explanatory information. External Auditor and Auditor's Remuneration To enable shareholders and other stakeholders to exercise their rights in an informed manner based on a good understanding of the Group's operations, businesses and financial information, the Company adopted the shareholders communication policy which aims to ensure that shareholders and other stakeholders at large are provided with ready, equal, regular and timely access to material information about the Group. The policy also sets out a number of ways to ensure effective and efficient communication with shareholders and other stakeholders is achieved, including but not limited to our quarterly results announcements, webcasts, responses to shareholders' enquiries, corporate communications (in both English and Chinese, to facilitate shareholders' understanding), posting of relevant information on the Company Website, shareholders' meetings and investment market communications. For shareholders to communicate their views on various matters affecting the Company and the Company to solicit and understand the views of shareholders and other stakeholders, the Company adopts a number of mechanisms, including encouraging shareholders to participate in general meetings or to appoint proxies to attend and vote at the meetings for and on their behalf if they are unable to attend the meetings and making appropriate arrangements for the annual general meetings to encourage and facilitate shareholders' participation. To facilitate communication between the Company, shareholders and the investor community, investor and analyst briefings, one-on-one meetings, domestic and international roadshows, media interviews and specialist industry forums are organised on a regular basis and are attended by our directors and designated spokespersons. In addition, the Company Website has been adopted as the designated hub for publication of the Company's announcements, press releases and other corporate communications including the shareholders communication policy and the investor calendar which highlights important dates for shareholders' information. During the year 2023, the Corporate Governance Committee reviewed the implementation and effectiveness of the shareholders communication policy, including the multiple communication channels for shareholders in place and the steps taken to handle shareholders' enquiries, and considered that the shareholders communication policy has been properly implemented and effective. Annual Report 2023 119 In our opinion, the consolidated financial statements give a true and fair view of the consolidated financial position of the Group as at 31 December 2023, and of its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with IFRS Accounting Standards and have been properly prepared in compliance with the disclosure requirements of the Hong Kong Companies Ordinance. Our opinion • the consolidated statement of cash flows for the year then ended; and the consolidated statement of changes in equity for the year then ended; the consolidated statement of comprehensive income for the year then ended; • • the consolidated income statement for the year then ended; the consolidated statement of financial position as at 31 December 2023; The Company has arranged appropriate directors and officers liability insurance in respect of legal action against the directors and officers. • What we have audited OPINION TO THE SHAREHOLDERS OF TENCENT HOLDINGS LIMITED (incorporated in the Cayman Islands with limited liability) Independent Auditor's Report Tencent Holdings Limited 118 00 Under the framework, if an employee is aware of any project, transaction, information or situation which he/she thinks could potentially be inside information, he/she should contact the Head of Compliance and Transactions Department, the general counsel and the company secretary as soon as possible. Legal analysis and consultations with the Company's directors and senior executives will be made so as to identify whether any such information constitutes inside information and is required to be disclosed to the public pursuant to the SFO. The framework and its effectiveness are subject to review on a regular basis according to established procedures. The Company has in place a framework for the handling and disclosure of inside information in compliance with the SFO. The framework sets out the procedures and internal controls for the handling and dissemination of inside information in a timely manner so as to allow all the shareholders and stakeholders to assess the latest position of the Group. Framework for Disclosure of Inside Information The statement of the external auditor of the Company about their reporting responsibilities for the financial statements is set out in the "Independent Auditor's Report" on pages 119 to 127. During the year ended 31 December 2023, the remuneration paid/payable to the Company's external auditor, PwC, was disclosed in Note 7 to the consolidated financial statements. The audit and audit-related services conducted by the external auditor mainly comprise of statutory audits and reviews for the Group and its certain subsidiaries. The non-audit services conducted by the external auditor mainly include tax advisory services for certain subsidiaries, due diligence services and other services such as ESG assurance service and services relating to risk management and internal control review. Please refer to Note 7 to the consolidated financial statements for a breakdown of the fees paid for the key non-audit services. The consolidated financial statements of Tencent Holdings Limited (the "Company") and its subsidiaries (the "Group"), which are set out on pages 128 to 272, comprise: SHAREHOLDERS 00 Based on theses reviews, the Board is of the view that throughout the year ended 31 December 2023, the risk management and internal control systems of the Company (including the Company's processes for financial reporting and Listing Rules compliance) are effective and adequate. Corporate Governance Report 111 Annual Report 2023 In addition, the Board believes that the Company's accounting and financial reporting functions as well as the ESG performance and reporting functions have been performed by staff with the appropriate qualifications and experience and that such staff receives appropriate and sufficient training and development. Based on the report of the Audit Committee, the Board has reviewed and is satisfied that sufficient resources have been obtained for the Company's internal audit and financial reporting function and that its staff qualifications and experience, training programmes and budgets etc., are sufficient. There is a consensus among organisations of United Nations, international listing rules-setting organisations and regulators that ESG affairs are classified as regular disclosures for listed companies. As one of the important standards to evaluate the health of a company's development, ESG performance will affect how shareholders and other stakeholders determine the value of the Company. Social responsibility and environmental sustainability risk The Company continues to optimise its resource allocation, business strategy, organisational structure, human resources, management systems, business processes, and strengthen its product development, improve its own product competitiveness, so as to enhance the effectiveness of the collaboration with external stakeholders, and to ensure the sustainable and high quality development of ToB business. At the same time, through continuous technological innovation, the Company creates healthy ecosystem with business partners to enhance its ability to serve corporate clients and to promote the integrated development of digital and real economies for better social value. The Company continues to accumulate and solidify its experience in the ToB business, actively follow up and analyse the development trends and changes in customer needs of different industries in both the domestic and foreign markets. The Company has expanded its footprints in various industries including financial services, retail, healthcare, industry, transportation, education, etc. by leveraging technological innovations such as cloud computing and Al technologies to create the smart industry upgrade solutions, and to build a new, intelligent ecosystem that connects consumers and business enterprises. The Company has actively developed various ToB businesses related to Industrial Internet. With the rapid development of the ToB business, if the Company fails to adjust its business strategy to respond to changes in industry trends and market needs on a timely basis, to continuously enhance its organisational structure and suitability with professional talents, to improve its internal management system and processes for ToB businesses, to enhance its supply chain management capabilities, or to improve its collaboration mechanisms with various business partners, it may face more management challenges, and may affect the sustainable development of its ToB businesses and the realisation of the Company's strategic goals. Corporate Governance Report 9. ToB business risk 8. 110 Tencent Holdings Limited The Company pays a lot of attention to investment risk and has established an Investment Committee under the Board. The Company also puts in place an investment evaluation and approval process, and sets up a dedicated professional team to advise on investment projects. Finance, legal and other relevant professional teams are responsible for managing relevant investment risks and following up with post-investment management, reviewing the operating, financial and risk management information of the investee companies on a regular basis, monitoring and analysing the performance of the investee companies, to ensure that they continue to meet the Company's investment strategies. The Company will continuously monitor the trend of the macroeconomic environment and the changes in the laws and regulations of various industries, conduct dynamic analysis and develop strategy for risk management to effectively manage the investment risks. The Company has a diversified investment portfolio. The complex and ever-changing international relations and heightened domestic and foreign regulatory policies have imposed higher requirements over the formulation of investment strategies, fund management, pre-investment evaluation and post-investment management. Failure to timely and effectively manage investment risks could hinder the realisation of investment strategies and lead to probable financial loss of the Company. M&A and investment management risk 7. The Company continues to invest in its network infrastructure, to enhance its business recovery mechanism, to deepen its collaboration with operators to improve management capabilities, to strengthen the stability of its domestic and international product services and business operations, to safeguard network security and to provide consistent support to business development. The Company has also established dedicated teams and defined the responsibilities of different parties to develop contingency plans in relation to business continuity and perform regular drills. All business units also actively implement various emergency measures to ensure the smooth operation of business. In addition, the Company has established an independent team to perform regular checks on the effectiveness of relevant contingency plans, emergency measures and regular drills, and will actively follow up the remedial actions and improvement plans. The stability of servers and network infrastructure for products and platforms of the Company is of vital importance for the sustainable operation of the Company's business as well as the provision of high-quality user experience. Therefore, any material functional defect, interruption, breakdown, or other issues in IT system functions are likely to adversely impact the Company's businesses. In addition, the Company's operations may be affected by uncontrollable external factors such as operator's operational incidents, natural disasters, social security events, epidemic disease or energy supply. Relevant incidents may damage workplaces and equipment that are vital to the operations of the Company and its business partners, and threaten the health of their employees, which results in disruption of the Company's normal operation. Business continuity risk 6. Corporate Governance Report The Company upholds its vision and mission of “Value for Users, Tech for Good", and constantly reviews its products from the perspective of social responsibility and incorporated "Sustainable Innovations for Social Value" into its core strategy as part of its strategic upgrade in 2021. The Company actively commits to promoting social and environmental sustainability with the use of its core technology, products and services capabilities. The Company is committed to continuously improving the privacy protection system, building reasonable and effective data governance policies and processes, enhancing data and network security capabilities to comprehensively safeguard the security of network infrastructure and data assets, practicing the concept of responsible artificial intelligence development, establishing governance structures and implementing security technologies to address risks. The Company has established an ESG team to comprehensively assess and manage ESG risks, enhance ESG performance, and make annual disclosures in accordance with compliance requirements and international standards. The Company has incorporated relevant ESG issues into its annual corporate risk assessment. The Board has authorised the Corporate Governance Committee to comprehensively supervise ESG performance and release annual reports. Please refer to the "Environmental, Social and Governance Report 2023" published by the Company for related details. In respect of the digital safety and wellbeing, the Company has launched "Minors Mode" in multiple products, built protection systems for Minors in games and provided technology-related courses and training to create a safe and healthy digital environment and improve Internet literacy for Minors. Meanwhile, the Company has provided “Caring Mode" in multiple products for the elderly to help them better integrate into the digital world and continuously invested resources into SliverTech to help the elderly achieve a better quality of life using digital technology. The review process comprises of, among other things, meetings with management of business groups, IA, IC, legal team, and the external auditor, reviewing the relevant work reports and information of key performance indicators, the management's self- assessment on internal control as detailed above and discussing the significant risks with senior management of the Company. The Audit Committee, on behalf of the Board, continuously reviews the risk management and internal control systems. Effectiveness of Risk Management and Internal Control Corporate Governance Report 114 Tencent Holdings Limited The Company empowers industrial upgrading with the use of digital technologies, continuously enhances its core capabilities such as cloud computing, Al, big data, cybersecurity, etc., to apply them in the areas of healthcare, rural revitalization and talent cultivation. The Company has been providing long-term support on technologies and scientific research by establishing the "Xplorer Prize" to encourage talented young scientists to study and conduct scientific research of cutting-edge technologies and fundamental sciences and the "New Cornerstone Science Foundation" to encourage outstanding scientists to focus on fundamental research and achieve original innovation from scratch. The Company has also engaged independent professional consulting firms to perform a review of the Group's internal control framework and an assessment of its internal audit quality to ensure their standards are in compliance with international best practices. In addition, the IC supervises the establishment of the risk management and internal control systems set up by management, ensures that management has implemented appropriate measures to resolve material internal control defects and reports the general situation of risk management and internal control of the Company to the Audit Committee on a quarterly basis. The IA, serving as the independent third line, conducts objective evaluation on the effectiveness of the Company's risk management and internal control systems and reports the results to the Audit Committee. In order to further strengthen the accountability of the management team in the internal control systems of the Company and to assist in determining the effectiveness of such internal control systems, the management team of each business group conducts self-assessment and confirms the internal control status of the business group for which it is responsible. The IC assists management in preparing a self-assessment questionnaire according to the COSO Framework and guides the management of each business group to carry out the self-assessment. The IC is also responsible for collecting and summarising the results of self-assessment. The Chief Executive Officer of the Company reviews this summarised self- assessment of each business group, assesses the general effectiveness of the internal control systems of the Company and submits the written confirmation thereof on behalf of management to the Audit Committee and the Board. The Company's internal control systems clearly define the roles and responsibilities of each party as well as the authorisation and approvals required for the key actions of each party. Policies and procedures are in place for the key business processes. This information is clearly conveyed to employees in practice and emphasised the importance of the internal control systems. All employees must strictly follow the policies which cover, amongst other things, financial, legal and operational issues that set the control standards for the management of each business process. Management of the Company is responsible for the design, implementation and maintenance of the effectiveness of internal control systems. The Board and the Audit Committee are responsible for monitoring and overseeing the performance of management over the internal control systems to ensure its appropriateness and effectiveness. The Company has always valued the importance of the internal control systems and has implemented its internal control systems according to the COSO Framework. 00 Corporate Governance Report Internal Control In relation to the public welfare, as the first Internet and technology enterprise to establish a charity foundation in China, the Company self-develops and operates an online donation platform to assist charitable organisations in reaching users and use digital technology to improve the transparency, openness, and efficiency of the public welfare and charity area. In the field of environmental protection, the Company has committed to achieving the goals of carbon neutrality, investing in biodiversity conservation and continuously paying attention to the environment and climate change. The Company has set a goal to achieve carbon neutrality in its own operations and supply chain by 2030 and has released a "Biodiversity Statement", committing to implementing specific actions to reduce dependence on nature and apply digital technology to ecological protection. 112 Tencent Holdings Limited 00 Corporate Governance Report In recent years, fraudulent activities have occurred frequently in the Internet and technology industry and therefore integrity has been an important concern. As the business continues to develop, and the form and complexity continues to evolve, it is inevitable that the Company faces a higher level of fraud risk. For example, fraudulent activities caused by collusion between suppliers/business partners and employees can have a negative impact on the reputation and financial position of the Company. The Company always adheres to the value of integrity, has zero tolerance for fraud, determines to fight against any fraudulent activities and implements measures of sunshine project in the Company. The Company has established effective internal control systems and is continuously improving them. These systems have been strengthened by systematic, transparent control measures and procedures with digital methods. To enhance and promote integrity, the Company continuously conducts various training for its employees, suppliers, and business partners. With regard to employees, the Company has established the Sunshine Code, continuously optimises the relevant requirements, and requires all employees to pass the annual examination on the Sunshine Code and strictly comply with the code during their employment and in the course of dealing with suppliers and business partners. For suppliers and business partners, the Company cooperates with them to create an ecosystem with integrity. The Company has signed an Anti-commercial Bribery Declaration with its suppliers and business partners to build a healthy and transparent environment for business. Furthermore, the Company has set up an Anti-fraud Investigation Department for years to receive whistleblowing reports from various channels, and to follow up and investigate alleged fraudulent cases in a timely manner. Once an employee is found and proven to be fraudulent, he/she will be dismissed immediately. The Company may also transfer the more serious cases to the judiciaries or initiate legal proceeding according to national laws and regulations. At the same time, the Company further raises the requirements for management in relevant policies. The management are required to actively play their roles in risk management to ensure the healthy and sustainable development of the business. Any supplier/business partner found to be involved in any fraudulent activities will be blacklisted and deprived of the opportunity to work with the Company permanently. The Company will announce to the public the criminal cases and serious abuse-of-power cases that were investigated and handled by the Company via the "Sunshine Tencent" WeChat official platform. This shows the Company's determination to fight against corruption and fraud, as well as its commitment towards creating a virtuous and honest atmosphere within the Company and the industry. Annual Report 2023 113 10. Fraud risk 60,699 107,182 59,564 102,130 5,052 (43,276) 107,182 59,564 Annual Report 2023 129 (129,145) (1,135) (10,866) (21,516) (148,686) Independent Auditor's Report As part of an audit in accordance with ISAs, we exercise professional judgment and maintain professional scepticism throughout the audit. We also: • Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group's internal control. Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the directors. Conclude on the appropriateness of the directors' use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group's ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor's report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor's report. However, future events or conditions may cause the Group to cease to continue as a going concern. Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation. Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the Group audit. We remain solely responsible for our audit opinion. 00 126 Tencent Holdings Limited 125 Independent Auditor's Report We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, actions taken to eliminate threats or safeguards applied. From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor's report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. The engagement partner on the audit resulting in this independent auditor's report is Wilson W.Y. Chow. PricewaterhouseCoopers Certified Public Accountants Hong Kong, 20 March 2024 Annual Report 2023 127 Consolidated Income Statement For the year ended 31 December 2023 Year ended 31 December 2023 We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. 2022 Restated Annual Report 2023 AUDITOR'S RESPONSIBILITIES FOR THE AUDIT OF THE CONSOLIDATED FINANCIAL STATEMENTS 123 Independent Auditor's Report Key Audit Matter Fair value measurement of Level 3 financial instruments, including financial assets at fair value through profit or loss and financial assets at fair value through other comprehensive income Refer to Notes 4.3, 5(c), 26 and 27 to the consolidated financial statements. As at 31 December 2023, approximately RMB199,535 million of financial assets at fair value through profit or loss and approximately RMB22,671 million of financial assets at fair value through other comprehensive income were measured based on significant unobservable inputs and classified as "Level 3 financial instruments". We focused on this area due to the high degree of judgment required in determining the respective fair values of Level 3 financial instruments, which do not have open market quoted values, with respect to the adoption of applicable valuation methodology and the application of appropriate assumptions in the valuation. How our audit addressed the Key Audit Matter In respect of the fair value measurement of Level 3 financial instruments, we assessed and tested the effectiveness of management controls in relation to the valuation process employed, which include the adoption of applicable valuation methodology and the related assumptions under different circumstances, and inspected the evidence of management's review. We involved our internal valuation experts to assess the appropriateness of valuation methodology adopted and key assumptions used. We tested, on a sample basis, valuation of Level 3 financial instruments as at 31 December 2023 by evaluating the underlying assumptions and inputs including risk-free rates, expected volatility and market information of recent transactions (such as recent fund raising transactions undertaken by the investees), as well as the underlying supporting documentation. We also tested, on a sample basis, the arithmetical accuracy of the valuation computation. Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion. We report our opinion solely to you, as a body, and for no other purpose. We do not assume responsibility towards or accept liability to any other person for the contents of this report. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements. We found that the valuation methodology of Level 3 financial instruments was acceptable and the assumptions made by management were supported by available evidence. 124 Tencent Holdings Limited Independent Auditor's Report OTHER INFORMATION The directors of the Company are responsible for the other information. The other information comprises all of the information included in the annual report other than the consolidated financial statements and our auditor's report thereon. Our opinion on the consolidated financial statements does not cover the other information and we do not express any form of assurance conclusion thereon. In connection with our audit of the consolidated financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. RESPONSIBILITIES OF DIRECTORS AND THOSE CHARGED WITH GOVERNANCE FOR THE CONSOLIDATED FINANCIAL STATEMENTS The directors of the Company are responsible for the preparation of the consolidated financial statements that give a true and fair view in accordance with IFRS Accounting Standards and the disclosure requirements of the Hong Kong Companies Ordinance, and for such internal control as the directors determine is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. In preparing the consolidated financial statements, the directors are responsible for assessing the Group's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or to cease operations, or have no realistic alternative but to do so. Those charged with governance are responsible for overseeing the Group's financial reporting process. 00 Note RMB'Million (Note 2.2) RMB'Million 4,701 8,006 Operating profit 160,074 110,827 Net gains/(losses) from investments and others 9 (6,090) 116,287 Interest income 10 13,808 8 8,592 11 (12,268) (9,352) Share of profit/(loss) of associates and joint ventures, net 12 5,800 (16,129) (794) 161,324 210,225 Income tax expense 13(a) Finance costs (106,696) (103,525) 7 Revenues Value-added Services Online Advertising FinTech and Business Services Others 298,375 287,565 101,482 82,729 203,763 177,064 5,395 7,194 Cost of revenues Gross profit Selling and marketing expenses General and administrative expenses Other gains/(losses), net 19 609,015 554,552 (315,906) (315,806) 293,109 238,746 7 (34,211) (29,229) Annual Report 2023 We found that the valuation models were acceptable, and the key assumptions used by management were in line with our expectations and supported by available evidence. Profit before income tax In respect of impairment assessments performed using the market approach, we assessed and evaluated, on a sample basis, the valuation assumptions adopted by management including the selection of comparable companies (i.e., by making reference to the respective market segments, geographic areas, and revenue size, etc.), recent market transactions undertaken, liquidity discounts adopted for lack of marketability for unlisted investments, and share prices for listed investments, etc. We assessed these key assumptions adopted by management with the involvement of our internal valuation experts based on our industry knowledge and independent research performed by us. Items that may be subsequently reclassified to profit or loss Share of other comprehensive income of associates and joint ventures Transfer of share of other comprehensive income to profit or loss upon disposal and deemed disposal of associates and joint ventures Transfer to profit or loss upon disposal of financial assets at fair Other comprehensive income, net of tax: 188,709 118,048 RMB'Million RMB'Million Note 2022 Year ended 31 December 2023 For the year ended 31 December 2023 Consolidated Statement of Comprehensive Income Profit for the year (176) 128 Tencent Holdings Limited The notes on pages 139 to 272 are an integral part of these consolidated financial statements. 19.341 11.887 14(b) 19.757 12.186 14(a) - diluted - basic of the Company (in RMB per share) Earnings per share for profit attributable to equity holders 188,709 00 118,048 1,479 (129) We independently tested, on a sample basis, the accuracy of mathematical calculations applied in the valuation models and the calculation of the applicable impairment charges. 11,142 (1,077) The notes on pages 139 to 272 are an integral part of these consolidated financial statements. 937 (561) (29,991) 34 34 Non-controlling interests Equity holders of the Company Attributable to: Total comprehensive income for the year Currency translation differences (9) Share of other comprehensive income of associates and joint ventures Net losses from changes in fair value of assets held for distribution Net gains/(losses) from changes in fair value of financial assets at fair value through other comprehensive income 5,457 (3,581) 18,732 13,328 (52) 59 Other fair value (losses)/gains, net Currency translation differences value through other comprehensive income Net gains/(losses) from changes in fair value of financial assets at fair 13 value through other comprehensive income Items that will not be subsequently reclassified to profit or loss 466 (6,102) 188,243 We focused on this area due to the fact that management applied significant judgments in determining the expected users' relationship periods. These judgments include (i) historical users' consumption patterns, churn rates, game life-cycles, and qualitative factors such as reactivity on marketing activities and the Group's marketing strategy; and (ii) the identification of events that may trigger changes in the estimates of the expected users' relationship periods. How our audit addressed the Key Audit Matter We assessed and tested the effectiveness of controls in respect of determination of expected users' relationship periods for recognition of revenue from sales of in-game permanent virtual items, including management's review and approval of (i) determination of the expected users' relationship periods of new games prior to their launches in the current year; (ii) periodic reassessment on the expected users' relationship periods of existing games; and (iii) changes in the estimates of the expected users' relationship periods on any indicators triggering such changes. We assessed, on a sample basis, the data generated from the Group's information system supporting the management's estimates, including testing the information system logic for generation of the applicable reports, and checking the completeness and accuracy of underlying data utilised in development of the management's estimates. We assessed, on a sample basis, the expected users' relationship periods adopted by management by (i) testing the data integrity of historical users' consumption patterns and calculation of the churn rates; (ii) evaluating the consideration made by management in determining the underlying assumptions for expected users' relationship periods with reference to historical operating and marketing data of the relevant games; and (iii) assessing the accuracy of the management's historical estimation results by comparing the actual users' relationship periods for current year against the original estimation made in prior years. We found that the results of our procedures performed to be materially consistent with management's assessment. Annual Report 2023 121 Independent Auditor's Report Key Audit Matter Impairment assessments of goodwill, investments in associates and joint ventures Refer to Notes 2.8(a), 2.10, 5(b), 22, 23 and 24 to the consolidated financial statements. As at 31 December 2023, the Group had significant amounts of goodwill, investments in associates and joint ventures amounting to RMB126,220 million, RMB253,696 million and RMB7,969 million, respectively. The Group recognises revenue from sales of online games virtual items to the users in respect of value-added services rendered on the Group's online platforms. Among them, revenues from sales of in-game permanent virtual items are recognised ratably over the respective estimates of the expected users' relationship periods of the applicable games. Impairment provisions of RMB5 million and RMB6,847 million had been recognised against the carrying amounts of goodwill and investments in associates, respectively, while impairment reversals of RMB752 million had been recognised for the carrying amounts of investments in joint ventures, during the year ended 31 December 2023. Management adopted either the discounted cash flows or market approach as valuation models depending on the situation of the respective assessments. In assessing the value in use, significant management assumptions have to be applied in the determination of revenue growth rates, terminal growth rates, and discount rates when using discounted cash flows; while in assessing the fair value less costs of disposal, assumptions are applied in the selection of comparable companies, recent market transactions, liquidity discounts adopted for lack of marketability for unlisted investments, and share prices for listed investments when using market approach. How our audit addressed the Key Audit Matter We assessed and tested the effectiveness of controls in respect of (i) the annual impairment assessments of goodwill; and (ii) identification of impairment indicators of and performing impairment assessments on investments in associates and joint ventures, including the determination of appropriate valuation models and assumptions used in impairment provisions. We assessed, on a sample basis, the basis management adopted to ascertain and identify separate groups of cash generating units that contain the goodwill balances; the valuation models used in management's impairment assessments. In respect of the impairment assessments using discounted cash flows, we assessed and evaluated, on a sample basis, the key assumptions adopted including revenue growth rates, terminal growth rates, discount rates and other assumptions adopted by management by examining the approved financial/business forecast models, and comparing actual results for current year against the previous period's forecasts and the applicable industry/ business data available to the Group from external sources. We assessed these key assumptions with the involvement of our internal valuation experts. 00 122 Tencent Holdings Limited Independent Auditor's Report Key Audit Matter Impairment assessments of goodwill, investments in associates and joint ventures (continued) We focused on these areas due to the magnitude of the carrying amounts of these assets and the fact that significant judgments were applied by management. 2,832 Goodwill is subject to impairment assessments annually or more frequently when there is an impairment indicator. Investments in associates and joint ventures are subject to impairment assessment when there is an impairment indicator. In carrying out impairment assessments, significant judgments are required to estimate the recoverable amounts, being the higher of the fair value less costs of disposal and value in use. Refer to Notes 2.22(a), 5(a) and 6(b) to the consolidated financial statements. How our audit addressed the Key Audit Matter Revenue recognition on provision of online games value-added services related to in-game permanent virtual items estimates of the expected users' relationship periods Non-controlling interests - 115,216 Attributable to: 188,709 118,048 Profit for the year Independent Auditor's Report BASIS FOR OPINION We conducted our audit in accordance with International Standards on Auditing ("ISAS"). Our responsibilities under those standards are further described in the Auditor's Responsibilities for the Audit of the Consolidated Financial Statements section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Independence We are independent of the Group in accordance with the International Code of Ethics for Professional Accountants (including International Independence Standards) issued by the International Ethics Standards Board for Accountants ("IESBA Code"), and we have fulfilled our other ethical responsibilities in accordance with the IESBA Code. KEY AUDIT MATTERS Equity holders of the Company these matters. Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated financial statements of the current period. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on the Key Audit Matter Tencent Holdings Limited 120 00 Independent Auditor's Report Impairment assessments of goodwill, investments in associates and joint ventures Revenue recognition on provision of online games value-added services related to in-game permanent virtual items - the estimates of the expected users' relationship periods • Key audit matters identified in our audit are summarised as follows: Fair value measurement of Level 3 financial instruments, including financial assets at fair value through profit or loss and financial assets at fair value through other comprehensive income 873,681 782,860 LIABILITIES Non-current liabilities Borrowings 38 155,819 61,469 163,668 Notes payable 39 12,169 148,669 Long-term payables 40 9,067 Other financial liabilities 41 8,781 5,574 Deferred income tax liabilities 30 17,635 12,162 137,101 65,090 Retained earnings Non-controlling interests 2022 Lease liabilities Equity attributable to equity holders of the Company Share capital 35 Share premium Treasury shares 35 37,989 62,418 35 (4,740) (1,868) Shares held for share award schemes Other reserves 35 (5,350) (4,226) 36 (33,219) (40,914) 813,911 705,981 808,591 721,391 Total equity RMB'Million 38 18,424 14,161 10,446 Current income tax liabilities 17,664 13,488 Other tax liabilities 4,372 Other financial liabilities 41 4,558 3,937 Lease liabilities 6,154 6,354 Deferred revenue 6(c)(i) 86,168 82,216 Dividends payable for distribution in specie 17(b) 147,965 352,157 434,204 RMB'Million Total liabilities 39 Notes payable 11,580 41,537 Deferred revenue 6(c)(i) 3,435 3,503 351,408 361,067 Annual Report 2023 131 Consolidated Statement of Financial Position As at 31 December 2023 Current liabilities As at 31 December 16,468 2023 Note RMB'Million RMB'Million Accounts payable 42 100,948 92,381 Other payables and accruals 43 76,595 61,139 Borrowings 2022 Note 6,987 As at 31 December Intangible assets 570 22 177,727 559 161,802 Investments in associates 23 253,696 246,043 Investments in joint ventures 24 7,969 6,672 Financial assets at fair value through profit or loss 26 211,145 206,085 Financial assets at fair value through other comprehensive income 27 213,951 185,247 Prepayments, deposits and other assets 28 28,439 36,752 Investment properties 9,229 13,583 22,524 703,565 RMB'Million Consolidated Statement of Financial Position As at 31 December 2023 ASSETS As at 31 December 2023 Note RMB'Million 2022 RMB'Million Non-current assets Other financial assets Property, plant and equipment Right-of-use assets Construction in progress 21 8 22 2 18 53,232 53,978 19 17,179 18,046 20 20,464 Land use rights 2023 29 Deferred income tax assets 31 185,983 104,776 Restricted cash 33 3,818 2,783 Cash and cash equivalents 33 172,320 156,739 Assets held for distribution 34 147,965 518,446 565,989 Total assets 1,577,246 1,578,131 00 130 Tencent Holdings Limited EQUITY Consolidated Statement of Financial Position As at 31 December 2023 Term deposits 27,963 14,903 26 30 29,017 29,882 Term deposits 31 29,301 28,336 1,058,800 1,012,142 Current assets Inventories 456 2,527 2,333 32 46,606 45,467 Prepayments, deposits and other assets 28 88,411 76,685 Other financial assets 29 5,949 1,278 Financial assets at fair value through profit or loss Accounts receivable 795,271 RMB'Million 1,577,246 (14,560) (1,610) (12,950) (12,950) (1,868) . (1,868) (28,010) (28,010) 1 88 (1,868) Repurchase of shares (to be cancelled) (28,010) Repurchase and cancellation of shares (1,082) 1,082 Profit appropriations to statutory reserves 5 5 5 Tax benefit from share-based payments 2,882 (2,882) -vesting of awarded shares (2.882) (130,156) (130,156) (130,156) Cash dividends Recognition of put option liabilities arising from 848 121 727 727 (1) (1) 100 1,029 (929) (929) (4,207) (2,882) (5,199) 992 908 908 non-controlling interests Changes in put option liabilities in respect of Disposal of subsidiaries Dilution of interests in subsidiaries non wholly-owned subsidiaries Acquisition of additional equity interests in business combinations Non-controlling interests arising from Dividends under distribution in specie 992 business combinations (2,882) 22,502 equity interests Total earnings reserves award schemes shares premium capital Total Non-controlling Retained Other for share Treasury Share Share Shares held Attributable to equity holders of the Company For the year ended 31 December 2023 Consolidated Statement of Changes in Equity 135 Annual Report 2023 (5,541) (5,541) RMB'Million RMB'Million RMB'Million RMB'Million 445 22,057 1,425 20,632 - value of employee services Employee share award schemes: 995 995 2,262 97 2,165 110 - shares withheld for share award schemes 995 2,055 -value of employee services Employee share option schemes: 3 3 Capital injections Transactions with equity holders RMB'Million RMB'Million RMB'Million RMB'Million RMB'Million -proceeds from shares issued (5,541) (175) (175) Proceeds from disposal of financial assets at fair value through other (12,925) (8,511) comprehensive income Payments for acquisition of financial assets at fair value through other 352 431 (20) (25) Payments for acquisition of investments in joint ventures Proceeds from disposal of investments in joint ventures 22,269 3,938 Proceeds from disposal of investments in associates (11,602) (5,625) Payments for acquisition of investments in associates (526) (357) Purchase of/prepayments for land use rights (27,645) (26,042) Purchase of/prepayments for intangible assets (22,679) 376 (21,008) 257 Proceeds from disposal of property, plant and equipment comprehensive income 7,727 8,048 Payments for acquisition of financial assets at fair value through profit or loss Net cash flows used in investing activities Dividends received Interest received (127,046) (244,419) Placement of term deposits with initial terms of over three months 92,199 163,713 Receipt from maturity of term deposits with initial terms of over three months 501 1,199 Loans repayments from investees and others and investment properties (2,949) Payments for loans to investees and others 344 (730) Net (outflow)/inflow of acquisition/settlement of other financial assets (870) (3,616) Payments for acquisition/settlement of other financial instruments 20,019 49,324 Proceeds from disposal of financial assets at fair value through profit or loss (41,181) (45,614) (544) (175) Purchase of property, plant and equipment, construction in progress 14 721,391 705,981 (40,914) (4,226) (1,868) 62,418 Balance at 31 December 2022 (154,725) (7,790) (146,935) (144,188) 3,416 617 (1,868) (4,912) capacity as equity holders for the year Total transactions with equity holders in their (489) (3,583) 3,094 179 617 2,298 to non-controlling interests Transfer of equity interests of subsidiaries 61,469 782,860 The notes on pages 139 to 272 are an integral part of these consolidated financial statements. 00 (12,267) (7,633) 146,091 221,962 (27,669) (34,729) 173,760 256,691 45(a) RMB'Million 2022 RMB'Million 33 Note Year ended 31 December Net inflow of cash in respect of disposals of investments in subsidiaries For the year ended 31 December 2023 Consolidated Statement of Cash Flows Payments for business combinations, net of cash acquired Cash flows from investing activities Net cash flows generated from operating activities Income tax paid Cash generated from operations Cash flows from operating activities Tencent Holdings Limited 136 2023 loss upon disposal and deemed disposal of associates and joint ventures to profit or Transfer of share of other changes in net assets 117 117 117 (101) (101) 12 1,361 (1,349) (1,349) (3,111) (4,560) 1,449 1,449 3,386 386 3,386 non-controlling interests Changes in put option liabilities in respect of Disposal of subsidiaries Dilution of interests in subsidiaries non wholly-owned subsidiaries Acquisition of additional equity interests in business combinations Non-controlling interests arising from Dividends under distribution in specie 16 133 Recognition of put option liabilities arising from business combinations (33,219) (5,350) (4,740) 37,989 Balance at 31 December 2023 (20,878) (1,431) (19,447) 10,671 (1,693) (1,124) (2,872) Cash dividends (24,429) Total transactions with equity holders in their (212) (1,462) 1,250 95 1,183 (28) to non-controlling interests Transfer of equity interests of subsidiaries (4,594) (4,594) (4,594) capacity as equity holders for the year 813,911 32,169 32,169 342 18,850 1,583 17,267 -value of employee services Employee share award schemes: 828 828 88 828 net of withholding individual income tax -proceeds from shares issued, 1,824 64 1,760 73 - 1,687 -value of employee services Employee share option schemes: 121 121 Capital injections/(reductions) Transactions with equity holders RMB'Million RMB'Million 19,192 - shares purchased/withheld for share award schemes (4,378) (21,184) (598) (20,586) (20,586) (4,740) (4,740) (4,740) Repurchase of shares (to be cancelled) (40,244) (40,244) 1,868 (42,112) 32,169 Repurchase and cancellation of shares 20 912 Profit appropriations to statutory reserves 21 21 21 Tax benefit from share-based payments 2,071 (2,071) -vesting of awarded shares (4,378) (4,378) (912) 808,591 65,090 873,681 17,938 444 17,494 17,494 -currency translation differences 13 2 11 11 other comprehensive income financial assets at fair value through -transfer to profit or loss upon disposal of (148,738) (2,238) (146,500) (146,500) other comprehensive income financial assets at fair value through - net losses from changes in fair value of (129) (129) (129) joint ventures deemed disposal of associates and income to profit or loss upon disposal and - other fair value gains, net 5,345 5,345 112 7,009 7,009 7,009 associates and joint ventures Share of other changes in net assets of (7) 7 joint ventures and deemed disposal of associates and income to retained earnings upon disposal Transfer of share of other comprehensive (140) -transfer of share of other comprehensive 140 (7,978) 7,838 retained earnings, net of tax disposal of financial instruments to Transfer of losses on disposal and deemed 59,564 (1,135) 60,699 188,243 (127,544) Total comprehensive income for the year 5,457 (140) (6,102) (6,102) (6,102) reserves award schemes shares premium capital Total Non-controlling Retained Other for share Treasury Share earnings Share Attributable to equity holders of the Company For the year ended 31 December 2023 Consolidated Statement of Changes in Equity of associates and joint ventures - share of other comprehensive income Other comprehensive income, net of tax: Profit for the year Comprehensive income Balance at 1 January 2022 Tencent Holdings Limited 134 00 Shares held 10,349 2,011 Total equity of assets held for distribution - net losses from changes in fair value 2,416 79 2,337 188,709 466 188,243 188,243 2,337 876,693 70,394 interests 806,299 73,901 (4,843) 67,330 RMB'Million RMB'Million RMB'Million RMB'Million RMB'Million RMB'Million RMB'Million RMB'Million RMB'Million 669,911 Total equity and liabilities 8,506 (125,161) RMB'Million RMB'Million RMB'Million Annual Report 2023 139 As a result, Tencent Computer is accounted for as a controlled structured entity (see also Note 2.3(a) and Note 50) and the formation of the Group in 2000 was accounted for as a business combination between entities under common control under a method similar to the uniting of interests method for recording all assets and liabilities at predecessor carrying amounts. This approach was adopted because in management's belief it best reflected the substance of the formation. the right to control the management, financial and operating policies of Tencent Computer. . the right to ensure that Tencent Technology owns the valuable assets of the business through the assignment to Tencent Technology of the principal present and future intellectual property rights of Tencent Computer; and the right to receive the cash received by Tencent Computer from its operations which is surplus to its requirements, having regard to its forecast working capital needs, capital expenditure, and other short-term anticipated expenditure through various commercial arrangements; • Under a series of contractual arrangements (collectively, “Structure Contracts") entered into among the Company, Tencent Technology, Tencent Computer and the Registered Shareholders, the Company is able to effectively control, recognise and receive substantially all the economic benefit of the business and operations of Tencent Computer. In summary, the Structure Contracts provide the Company through Tencent Technology with, among other things: The PRC regulations restrict foreign ownership of companies that provide value-added telecommunications services, which include activities and services operated by Tencent Computer. In order to enable the Company to own and control the business of the Group, the Company established a subsidiary, Tencent Technology (Shenzhen) Company Limited ("Tencent Technology"), which is a wholly foreign owned enterprise incorporated in the PRC, on 24 February 2000. The operations of the Group were initially conducted through Shenzhen Tencent Computer Systems Company Limited ("Tencent Computer"), a limited liability company established in the PRC by certain shareholders of the Company on 11 November 1998. Tencent Computer is legally owned by the core founders of the Company who are PRC citizens (the "Registered Shareholders"). The Company is an investment holding company. The Company and its subsidiaries (collectively, the "Group") are principally engaged in the provision of Value-added Services ("VAS"), Online Advertising services and FinTech and Business Services. Tencent Holdings Limited (the "Company") was incorporated in the Cayman Islands with limited liability. The address of its registered office is Cricket Square, Hutchins Drive, P.O. Box 2681, Grand Cayman KY1-1111, Cayman Islands. The shares of the Company have been listed on the Main Board of the Stock Exchange of Hong Kong Limited (the "Stock Exchange") since 16 June 2004. GENERAL INFORMATION 1 For the year ended 31 December 2023 Notes to the Consolidated Financial Statements Tencent Holdings Limited 138 00 The notes on pages 139 to 272 are an integral part of these consolidated financial statements. 156,739 172,320 RMB'Million 7,506 equity Total of associates and joint ventures to profit or loss upon disposal and deemed disposal (118) (118) (118) Annual Report 2023 133 Consolidated Statement of Changes in Equity For the year ended 31 December 2023 Attributable to equity holders of the Company Shares held Share Share Treasury for share Other Retained Non-controlling Total capital RMB'Million premium shares award schemes reserves earnings interests Transfer of share of other changes in net assets 1,353 156,739 Interest paid (29,307) (43,767) (9,342) (11,478) (5,969) (6,652) (10,141) (8,451) (34,116) 22,535 33,641 (15,378) (9,889) 7,701 29,809 RMB'Million 2022 RMB'Million 2023 Year ended 31 December Principal elements of lease payments Repayments of notes payable Repayments of long-term borrowings Proceeds from long-term borrowings Payments for repurchase of shares 167,966 Proceeds from issuance of ordinary shares as a result of exercise 1,070 (18,733) 14,228 (59,953) (82,573) Cash and cash equivalents at end of the year Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at beginning of the year Exchange gains on cash and cash equivalents Net cash flows used in financing activities (2,165) (805) Dividends paid to non-controlling interests (12,952) (20,983) Dividends paid to the Company's shareholders (20) Capital reductions of non-controlling interests in non wholly-owned subsidiaries (4,746) (4,818) 8 196 Proceeds from issuance of additional equity of non wholly-owned subsidiaries Payments for acquisition of non-controlling interests in non wholly-owned subsidiaries (2,882) (4,378) (242) Payments for withholding individual income tax for share option schemes Payments for purchased/withheld of shares for share award schemes 995 of share options 4,680 4,680 4,680 Share Treasury for share Other Retained Non-controlling Total capital premium shares award schemes reserves earnings Total interests equity RMB'Million RMB'Million RMB'Million RMB'Million RMB'Million RMB'Million RMB'Million RMB'Million RMB'Million Share 62,418 Shares held For the year ended 31 December 2023 1,578,131 The notes on pages 139 to 272 are an integral part of these consolidated financial statements. The consolidated financial statements on pages 128 to 272 were approved by the Board on 20 March 2024 and were signed on its behalf: 00 Ma Huateng Yang Siu Shun Director Director 132 Tencent Holdings Limited Balance at 1 January 2023 Comprehensive income Profit for the year Other comprehensive income, net of tax: -share of other comprehensive income of associates and joint ventures - losses from changes in fair value of assets held for distribution -transfer of share of other comprehensive income to profit or loss upon disposal and deemed disposal of associates and joint ventures - net gains from changes in fair value of financial assets at fair value through other comprehensive income Consolidated Statement of Changes in Equity Attributable to equity holders of the Company (1,868) (4,226) (40,914) (3,515) (66) (3,581) Total comprehensive income for the year (13,086) 115,216 102,130 5,052 107,182 Transfer of losses on disposal and deemed disposal of financial instruments to retained earnings, net of tax 17,846 (17,891) (45) (45) 45 Transfer of share of other comprehensive income to retained earnings upon disposal and deemed disposal of associates and joint ventures 66 (66) Share of other changes in net assets of associates and joint ventures (3,515) - other fair value losses, net 12,251 771 705,981 721,391 61,469 782,860 (701) 701 115,216 115,216 2,832 118,048 (701) (36) Repayments of short-term borrowings (737) (29,991) (9) (9) (29,991) (9) 9,650 9,650 1,551 11,201 -currency translation differences 11,480 11,480 (29,991) 2,192 4,698 (104,871) Annual Report 2023 137 Consolidated Statement of Cash Flows For the year ended 31 December 2023 Cash flows from financing activities Proceeds from short-term borrowings The material accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. Transactions with non-controlling interests that do not result in a loss of control are accounted for as equity transactions - that is, as transactions with the owners of the subsidiary in their capacity as owners. The difference between the fair value of any consideration paid and the relevant share acquired of the carrying amount of net assets of the subsidiary is recorded in equity. Gains or losses on disposals to non-controlling interests are also recorded in equity. Changes in ownership interests in subsidiaries without loss of control (ii) The excess of the total of consideration transferred, the amount of any non-controlling interest in the acquiree and the acquisition-date fair value of any previous equity interest in the acquiree over the fair value of the identifiable net assets acquired recorded as goodwill in "Intangible assets" in the consolidated financial statements. Goodwill is not amortised, but must instead subject to an impairment test at least annually (Notes 2.8 and 2.10). If the total of consideration transferred, non- controlling interest recognised and previously held interest measured is less than the fair value of the identifiable net assets of the subsidiary acquired in the case of a bargain purchase, the difference is recognised directly in the consolidated income statement. For the year ended 31 December 2023 2.3 Subsidiaries (continued) (i) (a) Consolidation (continued) (iii) Disposal of subsidiaries SUMMARY OF MATERIAL ACCOUNTING POLICIES (continued) Business combinations (continued) When the Group ceases to have control, any retained interest in the former subsidiary is recognised at its fair value at the date when control is lost and is included in the calculation of the gain or loss on disposal of that subsidiary. The fair value is the initial carrying amount for the purposes of subsequently accounting for the retained interest as an associate, a joint venture or a financial asset. In addition, any amounts previously recognised in other comprehensive income in respect of that entity are accounted for as if the Group had directly disposed of the related assets or liabilities. It means that amounts previously recognised in other comprehensive income are reclassified to the consolidated income statement or transferred to another category of equity as specified/permitted by applicable IFRS Accounting Standards. For the year ended 31 December 2023 145 Notes to the Consolidated Financial Statements Notes to the Consolidated Financial Statements 2 SUMMARY OF MATERIAL ACCOUNTING POLICIES (continued) 2.3 Subsidiaries (continued) (b) Separate financial statements Investments in subsidiaries are accounted for at cost less impairment. Cost includes direct attributable costs of investment. The results of subsidiaries are accounted for by the Company on the basis of dividends received and receivable. In addition, the contribution to the Company's Share Scheme Trust (as defined in Note 50(f)) will be transferred to the "Shares held for share award schemes" under equity when the contribution is used for the acquisition of the Company's shares. Impairment testing of the investments in subsidiaries is required upon receiving dividends from these investments if the dividends exceed the total comprehensive income of the subsidiaries in the period the dividends are declared or if the carrying amount of the investments in the separate financial statements exceeds the carrying amount in the consolidated financial statements of the investee's net assets including goodwill. 2.4 Investments under equity accounting method (a) Associates Annual Report 2023 2 Any contingent consideration to be transferred by the Group is recognised at fair value at the acquisition date. Subsequent changes to the fair value of the contingent consideration that is deemed to be an asset or liability are recognised in profit or loss. Contingent consideration that is classified as equity is not re-measured, and its subsequent settlement is accounted for within equity. 144 Amendments to IAS 7 and IFRS 7 Supplier Finance Arrangements 1 January 2024 Amendments to IAS 21 Lack of Exchangeability 1 January 2025 2.3 Subsidiaries (a) Consolidation Subsidiaries are all entities (including controlled structured entities as stated in Note 1 above) over which the Group has control. The Group controls an entity where the Group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. Subsidiaries are consolidated from the date on which control is transferred to the Group. They are deconsolidated from the date that control ceases. Intra-group transactions, balances and unrealised gains on transactions between group companies are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the transferred asset. When necessary, amounts reported by subsidiaries have been adjusted to conform with the Group's accounting policies. Annual Report 2023 Tencent Holdings Limited 143 2 SUMMARY OF MATERIAL ACCOUNTING POLICIES (continued) 2.3 Subsidiaries (continued) (a) Consolidation (continued) (i) Business combinations The Group applies the acquisition method to account for business combinations. The consideration transferred for the acquisition of a subsidiary is the fair values of the assets transferred, the liabilities incurred to the former owners of the acquiree and the equity interests issued by the Group. The consideration transferred also includes the fair value of any asset or liability resulting from a contingent consideration arrangement, which is recognised under "Other financial assets" or "Other financial liabilities" in the consolidated financial statements. Identifiable assets acquired and liabilities and contingent consideration assumed in a business combination are measured initially at their fair values at the acquisition date. The Group recognises any non-controlling interest in the acquiree on an acquisition-by-acquisition basis. Non-controlling interests in the acquiree that are present ownership interests and entitle their holders to a proportionate share of the entity's net assets in the event of liquidation are measured at either fair value or the present ownership interests' proportionate share in the recognised amounts of the acquiree's identifiable net assets. Acquisition-related costs other than those incurred to issue equity interests are expensed as incurred. If the business combination is achieved in stages, the acquisition date carrying amount of the Group's previously held equity interest in the acquiree is re-measured to fair value at the acquisition date; any gains or losses arising from such re-measurement are recognised in profit or loss. Associates are all entities over which the Group has significant influence but not control or joint control, generally but not necessarily accompanying a shareholding of between 20% and 50% of the voting rights. Investments in associates are accounted for using the equity method of accounting. The Group's investments in associates include underlying goodwill identified on acquisition, net of any accumulated impairment loss. 00 Notes to the Consolidated Financial Statements (b) 146 Joint ventures are joint arrangements whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement and are accounted for using the equity method of accounting. (b) Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised, except as disclosed in Note (c) below, in the consolidated income statement. 00 148 Tencent Holdings Limited Notes to the Consolidated Financial Statements For the year ended 31 December 2023 2 SUMMARY OF MATERIAL ACCOUNTING POLICIES (continued) 2.5 Foreign currency translation (continued) (b) Transactions and balances (continued) Items included in the financial statements of each of the Group's entities are measured using the currency of the primary economic environment in which the entity operates (the "functional currency"). The functional currency of the Company and certain of its overseas subsidiaries is United States Dollars ("USD"). As the major operations of the Group are within the Mainland of China, the Group presents its consolidated financial statements in Renminbi ("RMB"), unless otherwise stated. Non-monetary items that are measured at fair value in foreign currency are translated using the exchange rates at the date when the fair value is determined. Translation differences on non-monetary assets and liabilities carried at fair value are reported as part of the fair value gain or loss. For example, translation differences on non-monetary financial assets and liabilities such as equity instruments held at fair value through profit or loss are recognised in the consolidated income statement as part of the fair value gain or loss and translation differences on non-monetary financial assets, such as equity instruments classified as FVOCI, are included in other comprehensive income. Translation of foreign operations The results and financial position of all the Group's entities (none of which has the currency of a hyper- inflationary economy) that have a functional currency different from the presentation currency of RMB are translated into the presentation currency as follows: (i) Assets and liabilities for each statement of financial position presented are translated at the closing rate at the date of that statement of financial position; (ii) Income and expenses for each income statement are translated at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the rate on the dates of the transactions); and (iii) All resulting currency translation differences are recognised as a separate component of other comprehensive income. On consolidation, exchange differences arising from the translation of the net investment in foreign operations, and of borrowings and other financial instruments designated as hedges of such investments, are taken to other comprehensive income. Goodwill and fair value adjustments arising on the acquisition of a foreign operation are treated as assets and liabilities of the foreign operation and translated at the closing rate. Currency translation differences arising thereon are recognised in other comprehensive income. Annual Report 2023 149 (c) Functional and presentation currency (a) 2.5 Foreign currency translation 00 1 January 2024 Tencent Holdings Limited Notes to the Consolidated Financial Statements 2 SUMMARY OF MATERIAL ACCOUNTING POLICIES (continued) For the year ended 31 December 2023 2.4 Investments under equity accounting method (continued) (c) Equity accounting method Under the equity method of accounting, the investments are initially recognised at cost and subsequently the Group's share of post-acquisition profit or loss of the investees is recognised in the consolidated income statement, the Group's share of post-acquisition movements in other comprehensive income of the investees is recognised in other comprehensive income. When the investees have a change in net assets (other than from a transaction with other investors) that does not affect profit or loss or other comprehensive income, the Group's share of other changes in net assets is recognised in consolidated statement of changes in equity. Dividends received or receivable from associates and joint ventures are recognised as a reduction in the carrying amount of the investment. Where the Group's share of losses in an associate or a joint venture equals or exceeds its interests in the entity, including any other unsecured long-term receivables, the Group does not recognise further losses, unless it has incurred legal or constructive obligations or made payments on behalf of the entity. The Group determines at each reporting date whether there is any objective evidence that investments accounted for using the equity method, including investments in associates and joint ventures, are impaired. If this is the case, the Group calculates the amount of impairment as the difference between the recoverable amount of the investment and its carrying amount and recognises the amount in "Net gains/(losses) from investments and others" in the consolidated income statement. Unrealised gains on transactions between the Group and its associates and joint ventures are eliminated to the extent of the Group's interests in these entities. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of associates and joint ventures have been changed where necessary to ensure consistency with the policies adopted by the Group. An associate or a joint venture of the Group might issue shares to other investors which dilute the Group's interest. This is deemed as a partial disposal of the Group's interest in this entity. A dilution gain or loss arising on the deemed partial disposal is recognised in the consolidated income statement. If the ownership interest in an associate or a joint venture is reduced but significant influence or joint control is retained, only a proportionate share of the amounts previously recognised in other comprehensive income is reclassified to consolidated income statement where appropriate. Annual Report 2023 147 Notes to the Consolidated Financial Statements For the year ended 31 December 2023 2 SUMMARY OF MATERIAL ACCOUNTING POLICIES (continued) 2.4 Investments under equity accounting method (continued) (d) Investments in associates/joint ventures achieved in stages The cost of associates/joint ventures acquired in stages, except for the change from an associate to a joint venture, is measured as the sum of the fair value of the interests previously held plus the fair value of any additional consideration transferred as of the date when they become associates/joint ventures. (e) Disposal of associates and joint ventures When the Group ceases to continue equity accounting for an associate or joint venture because of a loss of significant influence or joint control, it measures any retained investment at fair value. A gain or loss is recognised at any difference between the fair value of any retained interest plus any proceeds from disposing of part of the interests in the associate or joint venture and the carrying amount of the investment at the date the equity method of accounting is discontinued. The amounts previously recognised in other comprehensive income and other changes in equity in respect of the associate or joint venture are reclassified to the consolidated income statement or transferred to another category of equity as specified/ permitted by applicable IFRS Accounting Standards when the Group ceases to continue equity accounting for the associate or joint venture. Joint ventures 2.1 Basis of preparation Non-current Liabilities with Covenants 1 January 2024 554,552 (315,806) - (315,806) 238,746 - 238,746 Interest income 8,592 (8,592) Selling and marketing expenses (29,229) General and administrative expenses (106,696) 554,552 (29,229) (106,696) 124,293 (116,287) 8,006 Operating profit 235,706 (124,879) 110,827 Net gains/(losses) from investments and others 116,287 116,287 Interest income 8,592 Other gains/(losses), net 8,592 Gross profit Revenues SUMMARY OF MATERIAL ACCOUNTING POLICIES The consolidated financial statements of the Group have been prepared in accordance with all applicable International Financial Reporting Standards issued by the International Accounting Standards Board ("IFRS Accounting Standards"). The consolidated financial statements have been prepared under the historical cost convention, as modified by the revaluation of financial assets at fair value through profit or loss ("FVPL"), financial assets at fair value through other comprehensive income ("FVOCI"), dividends payable for distribution in specie, certain other financial assets and liabilities, which are carried at fair value. Similar Structure Contracts were also executed for other PRC operating companies established by the Group similar to Tencent Computer subsequent to 2000. All these PRC operating companies are treated as controlled structured entities of the Company and their financial statements have also been consolidated by the Company. See details in Note 50. 1 GENERAL INFORMATION (continued) For the year ended 31 December 2023 Notes to the Consolidated Financial Statements The preparation of financial statements in conformity with IFRS Accounting Standards requires the use of certain critical accounting estimates. It also requires management to exercise its judgment in the process of applying the Group's accounting policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in Note 5. 2.2 Changes in accounting policies (a) Changes in presentation of the consolidated income statement For the year ended 31 December 2023, certain items in the Group's consolidated income statement have been reclassified. Some items previously within “Other gains/(losses), net” are reclassified to "Net gains/ (losses) from investments and others"; they include (i) impairment provisions for investments accounted for using the equity method; (ii) impairment provisions for goodwill and other intangible assets arising from business combinations; (iii) net gains on disposals and deemed disposals of investee companies; (iv) fair value changes and dividend income arising from investments; (v) donations and others. "Net gains/(losses) from investments and others" as well as "Interest income" are presented below "Operating profit". The management believes that such revised presentation of the consolidated income statement better reflects the results of the Group's day-to-day operations and the financial effects of income and gains/losses in relation to investing activities, which would facilitate users of the consolidated financial statements to have a better understanding of the financial performance of the Group. 2022 comparative figures have been restated to conform to the current year presentation. 00 140 Cost of revenues Tencent Holdings Limited 2 SUMMARY OF MATERIAL ACCOUNTING POLICIES (continued) For the year ended 31 December 2023 2.2 Changes in accounting policies (continued) (a) Changes in presentation of the consolidated income statement (continued) The following table shows the amounts of restatement relating to changes in the presentation of the consolidated income statement, i.e., "interest income" and "net gains/(losses) from investments and others" were presented below the operating profit: Year ended 31 December 2022 As originally Consolidated income statement (extract) presented RMB'Million Difference RMB'Million Restated RMB'Million Notes to the Consolidated Financial Statements Amendments to IAS 1 Finance costs (9,352) Disclosure of Accounting Policies Definition of Accounting Estimates Deferred Tax related to Assets and Liabilities arising from a Single Transaction International Tax Reform - Pillar Two Model Rules The Group has adopted the Amendments to IAS 12 "Deferred Tax related to Assets and Liabilities arising from a Single Transaction" on 1 January 2023, which resulted in the recognition of separate deferred income tax assets and separate deferred income tax liabilities for temporary differences arising on leases, both at initial recognition and subsequently. In accordance with the transitional provisions, the Group adopted the amendments for the first time by recognising deferred tax for all temporary differences related to leases at the beginning of the earliest comparative period presented. As a result, with the beginning of the earliest period presented being 1 January 2022, an adjustment of RMB3,070 million was recognised to the gross amounts of deferred income tax assets and deferred income tax liabilities simultaneously, and the resultant deferred income tax assets and deferred income tax liabilities met the set-off provisions and were presented on a net basis in the consolidated statement of financial position. Since the Group had considered the lease as a single transaction in which the assets and liabilities were integrally linked and recognised deferred tax on a net basis previously, there were nil impact on opening retained earnings upon the adoption of the amendments. In addition, Amendments to IAS 12 "International Tax Reform - Pillar Two Model Rules" were issued on 23 May 2023 which are effective upon issuance and require retrospective application. The Group applied the temporary exception to deferred tax accounting for Pillar Two top-up taxes immediately upon the release of the amendments in May 2023, and provided new disclosures about its exposure to these taxes, the details of which are described in Note 13. Except for Amendments to IAS 12, the adoption of these new and amended standards does not have significant impact on the consolidated financial statements of the Group. 00 142 Tencent Holdings Limited Notes to the Consolidated Financial Statements Insurance Contracts 2 For the year ended 31 December 2023 2.2 Changes in accounting policies (continued) (c) Amendments to standards issued but not yet effective The following amendments to standards have not come into effect for the financial year beginning on 1 January 2023 and have not been early adopted by the Group in preparing the consolidated financial statements. None of these is expected to have a significant effect on the consolidated financial statements of the Group. Effective for annual periods beginning on or after 1 January 2024 Amendments to IFRS 16 Lease Liability in a Sale and Leaseback Amendments to IAS 1 Classification of Liabilities as Current or Non-current SUMMARY OF MATERIAL ACCOUNTING POLICIES (continued) (9,352) Amendments to IAS 12 Amendments to IAS 8 Share of profit/(loss) of associates and joint ventures, net Profit before income tax Income tax expense Profit for the year (16,129) (16,129) 210,225 210,225 (21,516) (21,516) 188,709 Amendments to IAS 12 188,709 141 Notes to the Consolidated Financial Statements For the year ended 31 December 2023 2 SUMMARY OF MATERIAL ACCOUNTING POLICIES (continued) 2.2 Changes in accounting policies (continued) (b) New standard and amendments to standards adopted by the Group The following new standard and amendments to standards have been adopted by the Group for the first time for the financial year beginning on 1 January 2023: IFRS 17 Amendments to IAS 1 and IFRS Practice Statement 2 Annual Report 2023 2 For the year ended 31 December 2023 Accounts receivable are recognised initially at the amount of consideration that is unconditional unless they contain significant financing components, when they are recognised at fair value, and subsequently measured at amortised cost using the effective interest method, less provision for impairment that is subject to ECL model (Note 4.1(b)). Where the hedged item subsequently results in the recognition of a non-financial asset, the amounts accumulated in equity are removed from other reserves and included within the initial cost of the asset. These deferred amounts are ultimately recognised in profit or loss as the hedged item affects profit or loss. For any other cash flow hedges, the gain or loss relating to the effective portion of the derivatives is reclassified to profit or loss at the same time when the hedged cash flows affect profit or loss. For an option that hedges a time-period related hedged item, the aligned time value at the inception date is amortised on a straight-line basis over the period during which the hedged cash flows affect profit or loss. Annual Report 2023 155 Notes to the Consolidated Financial Statements For the year ended 31 December 2023 2 SUMMARY OF MATERIAL ACCOUNTING POLICIES (continued) 2.12 Derivative and hedging activities (continued) When a hedging instrument expires, or is sold or terminated, or when a hedge no longer meets the criteria for hedge accounting, any cumulative deferred gain or loss and deferred costs of hedging in equity at that time remain in equity until the forecast transaction occurs. When the forecast transaction is no longer expected to occur, the cumulative gain or loss and deferred costs of hedging included in equity are immediately reclassified to profit or loss. Hedge relationships The interest rate benchmark reform - phase 2 amendments address issues arising during interest rate benchmark reform, including specifying when the interest rate benchmark reform - phase 1 (“phase 1") amendments will cease to apply, when hedge designations and documentation should be updated, and when hedges of the alternative benchmark rate as the hedged risk are permitted. The "phase 1" amendments provided temporary reliefs from applying specific hedge accounting requirements to hedging relationships directly affected by Inter Bank Offered Rate (“IBOR”) reform. The reliefs had the effect that IBOR reform should not generally cause hedge accounting to terminate prior to contracts being amended. However, any hedge ineffectiveness continued to be recorded in the income statement. Furthermore, the amendments set out triggers for when the reliefs would end, which included the uncertainty arising from interest rate benchmark reform no longer being present. Following the IBOR benchmark reform, all the borrowings and notes payable the Group held which referenced to USD LIBOR, had been transitioned to SOFR/Term SOFR-referenced in July 2023. These amendments to the hedge documentation do not require the Group to discontinue its hedge relationships. 2.13 Accounts receivable Accounts receivable are amounts due from customers or agents for services performed or merchandise sold in the ordinary course of business. Accounts receivable are presented as current assets unless collection is not expected within 12 months after the end of the reporting period. • Except as disclosed below, amounts accumulated in equity are accounted for, depending on the nature of the underlying hedged transaction, as follows: Gains or losses relating to the effective portion of the change in intrinsic value of the options are recognised in the cash flow hedge reserve within equity. The changes in the time value of the options that relate to the hedged item ("aligned time value") are recognised within other comprehensive income in the costs of hedging reserve within equity. A hedging relationship qualifies for hedge accounting if it meets all of the hedge effectiveness requirements under IFRS 9. The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognised through other comprehensive income within equity, while any ineffective portion is recognised immediately in profit or loss. Equity instruments The Group subsequently measures all equity investments at fair value. Upon initial recognition, the Group's management can elect to present fair value gains and losses on equity investments in other comprehensive income when they are in the scope of IFRS 9 and are not held for trading. The classification is determined on an instrument-by-instrument basis. Where the Group has made the irrevocable election to present fair value gains or losses on equity investments in other comprehensive income, there is no subsequent reclassification of fair value gains or losses to profit or loss following the derecognition of the investments. Dividends from such investments continue to be recognised in profit or loss as "Net gains/(losses) from investments and others" when the Group's right to receive payments is established. Equity instruments designated as FVOCI are not subject to impairment assessment. All other investments in equity instruments are classified as and measured at FVPL. Changes in the fair value of FVPL are recognised in "Net gains/(losses) from investments and others" in the consolidated income statement. (b) Impairment The Group assesses on a forward-looking basis the expected credit losses ("ECL") associated with its debt instruments carried at amortised cost and FVOCI. The impairment methodology applied depends on whether there has been a significant increase in credit risk. For accounts receivable and contract assets, the Group applies the simplified approach prescribed by IFRS 9, which requires lifetime ECL to be recognised since initial recognition. 00 Impairment on deposits and other receivables is measured as either 12-month ECL or lifetime ECL, depending on whether there has been a significant increase in credit risk since initial recognition. If a significant increase in credit risk of a deposit or other receivable has occurred since initial recognition, the impairment is measured as lifetime ECL. 154 Tencent Holdings Limited 2 Notes to the Consolidated Financial Statements For the year ended 31 December 2023 SUMMARY OF MATERIAL ACCOUNTING POLICIES (continued) 2.12 Derivative and hedging activities Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently re-measured at fair value. Derivatives are carried as financial assets when the fair value is positive and as financial liabilities when the fair value is negative, which are recognised under "Other financial assets' and "Other financial liabilities” in the consolidated financial statements, respectively. The method of recognising the resulting gain or loss depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. 00 (a) Classification and measurement (continued) 156 Notes to the Consolidated Financial Statements For the year ended 31 December 2023 Borrowings and notes payable are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the end of the reporting period. General and specific finance costs directly attributable to the acquisition and construction of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets, until such time that the assets are substantially ready for their intended use or sale. During the year ended 31 December 2023, finance cost capitalised was insignificant to the Group. 00 158 Tencent Holdings Limited 2 Notes to the Consolidated Financial Statements For the year ended 31 December 2023 SUMMARY OF MATERIAL ACCOUNTING POLICIES (continued) 2.19 Current and deferred income tax The income tax expense for the year comprises current and deferred income tax, which is recognised in the consolidated income statement, except to the extent that it relates to items recognised in other comprehensive income or directly in equity. In this case, the income tax is also recognised in other comprehensive income or in equity, respectively. The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the end of the reporting period in the countries where the Company's subsidiaries operate and generate taxable income. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation and considers whether it is probable that a taxation authority will accept an uncertain tax treatment. When it is not probable, the Group measures its tax balances either based on the most likely amount or the expected value, depending on which method provides a better prediction of the resolution of the uncertainty. Deferred income tax is recognised, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, deferred income tax is not accounted for if it arises from initial recognition of goodwill or of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss and does not give rise to equal taxable and deductible temporary differences. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantively enacted by the end of the reporting period and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled. Deferred income tax assets are recognised only to the extent that it is probable that future taxable profit will be available to utilise those temporary differences and tax losses. Deferred income tax liabilities are provided on temporary differences arising from investments in subsidiaries, associates and joint ventures, except for deferred income tax liability where the timing of the reversal of the temporary differences is controlled by the Group and it is probable that the temporary difference will not reverse in the foreseeable future. Generally, the Group is unable to control the reversal of the temporary difference for associates and joint ventures. Only when there is an agreement in place that gives the Group the ability to control the reversal of the temporary difference in the foreseeable future, deferred income tax liability in relation to taxable temporary differences arising from the associates' and joint ventures' undistributed profit is not recognised. Annual Report 2023 159 Fees paid on the establishment of loan facilities are recognised as transaction costs of the loan facilities to the extent that it is probable that some or all of the facilities will be drawn down. In this case, the fee is deferred until the draw-down occurs. To the extent there is no evidence that it is probable that some or all of the facility will be drawn down, the fee is capitalised as a prepayment for liquidity services and amortised over the term of the facility to which it relates. Borrowings and notes payable issued by the Group are recognised initially at fair value, net of transaction costs incurred. They are subsequently carried at amortised cost. Any difference between proceeds (net of transaction costs) and the redemption value is recognised in the consolidated income statement over their terms using the effective interest method. 2.18 Borrowings, notes payable and borrowing costs The put option liabilities are non-current liabilities unless the put option first becomes exercisable within 12 months after the end of the reporting period. 2 SUMMARY OF MATERIAL ACCOUNTING POLICIES (continued) 2.14 Cash and cash equivalents Cash and cash equivalents mainly include cash on hand, deposits held at call with banks, and other short-term highly liquid investments with initial maturities of three months or less. The Group does not recognise cash amounts deposited with banks in the Mainland of China under users' entrustment (which are received under its payment business) in the consolidated statement of financial position as the Group holds these cash amounts as a custodian according to the relevant users' agreements. 2.15 Repurchase of shares Save as disclosed in Note 2.9, where any group company purchases the Company's equity instruments, the consideration paid, including any directly attributable incremental costs, is deducted from equity attributable to equity holders of the Company as treasury shares until the shares are cancelled or reissued. Where such shares are subsequently reissued, any consideration received (net of any directly attributable incremental transaction costs) is included in equity attributable to equity holders of the Company. 2.16 Accounts payable Tencent Holdings Limited Accounts payable are obligations to pay for services or goods that have been acquired in the ordinary course of business from suppliers. Accounts payable are presented as current liabilities unless payment is not due within 12 months after the end of the reporting period. Annual Report 2023 157 Notes to the Consolidated Financial Statements For the year ended 31 December 2023 2 SUMMARY OF MATERIAL ACCOUNTING POLICIES (continued) 2.17 Put option arrangements on non-controlling interest Put options on non-controlling interest of the Group are financial instruments granted by the Group which permit the holders to put back to the Group their shares in certain non wholly-owned subsidiaries of the Group for cash or other financial instruments when certain conditions are met. If the Group does not have the unconditional right to avoid delivering cash or other financial instruments under the put option, a financial liability is initially recognised under "Other financial liabilities” in the consolidated financial statements at the present value of the estimated future cash outflows on exercise under the put option. Subsequently, if the Group revises its estimates of payments, the Group will adjust the carrying amount of the financial liability to reflect actual and revised estimated cash outflows. The Group will recalculate the carrying amount based on the present value of revised estimated future cash outflows at the financial instrument's original effective interest rate and the adjustment will be recognised in the consolidated statement of changes in equity. In the event that the put option expires unexercised, the liability is derecognised with a corresponding adjustment to equity. Accounts payable are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method. 2.11 Investments and other financial assets (continued) The Group designates certain derivatives as hedges of a particular risk associated with the cash flows of a recognised asset or liability or a highly probable forecast transaction (cash flow hedges). The Group documents at the inception of the hedging relationship the economic relationship between hedging instruments and hedged items including how the hedging instrument is expected to offset changes in cash flows of hedged items. The Group documents its risk management objective and strategy for undertaking various hedge transactions at the inception of each hedge relationship. 2 SUMMARY OF MATERIAL ACCOUNTING POLICIES (continued) 150 Tencent Holdings Limited Notes to the Consolidated Financial Statements 2 SUMMARY OF MATERIAL ACCOUNTING POLICIES (continued) For the year ended 31 December 2023 2.7 Land use rights Gains and losses on disposals are determined by comparing the proceeds with the carrying amount and are recognised in "Other gains/(losses), net" in the consolidated income statement. Land use rights are up-front payments to acquire long-term interest in land. These payments are stated at cost and charged to the consolidated income statement on a straight-line basis over the remaining period of the lease. (a) Goodwill Goodwill on acquisition of subsidiaries is recognised as described in Note 2.3(a) and included in "Intangible assets" in the consolidated financial statements. For the purpose of impairment testing, goodwill acquired in a business combination is allocated to each of the cash-generating units ("CGUS"), or groups of CGUs, that is expected to benefit from the synergies of the combination. Each CGU or group of CGUs to which the goodwill is allocated represents the lowest level within the Group at which the goodwill is monitored for internal management purposes, and is not larger than an operating segment. Goodwill impairment reviews are undertaken annually or more frequently if events or changes in circumstances indicate a potential impairment. The carrying amount of the CGU or group of CGUs including the allocated goodwill is compared to the recoverable amount, which is the higher of value in use and the fair value less costs of disposal. Any impairment is recognised immediately under "Net gains/(losses) from investments and others" and is not subsequently reversed. (b) Media content Media content mainly includes game licenses, long-form video and music content, and literature copyrights. They are initially recognised and measured at cost or estimated fair value as acquired through business combinations. Media content is amortised using a straight-line method or an accelerated method which reflects the estimated consumption patterns. (c) Other intangible assets 2.8 Intangible assets Other intangible assets mainly include trademarks, other copyrights, computer software and technology, non-compete agreements and customer relationships. They are initially recognised and measured at cost or estimated fair value as intangible assets acquired through business combinations. An asset's carrying amount is written down immediately to its recoverable amount if the asset's carrying amount is greater than its estimated recoverable amount (Note 2.10). The assets' residual values and useful lives are reviewed, and adjusted if appropriate, at the end of each reporting period. Notes to the Consolidated Financial Statements For the year ended 31 December 2023 2 SUMMARY OF MATERIAL ACCOUNTING POLICIES (continued) 2.6 Property, plant and equipment and construction in progress All property, plant and equipment are stated at historical costs less accumulated depreciation and accumulated impairment charges. Historical costs include expenditures that are directly attributable to the acquisition of the items. Subsequent costs are included in the asset's carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the items will flow to the Group and the cost of the items can be measured reliably. The carrying amount of the replaced part is derecognised. All other repairs and maintenance are charged to the consolidated income statement during the reporting period in which they are incurred. Depreciation is calculated using the straight-line method to allocate their cost net of their residual values over their estimated useful lives, as follows: Construction in progress represents office buildings and data centers under construction, which is stated at actual construction costs less any impairment loss. Construction in progress is transferred to property, plant and equipment when completed and ready for use. 20-50 years Computer and other operating equipment 2~10 years 2-5 years 5 years Shorter of their useful lives and the lease term Furniture and office equipment Motor vehicles Leasehold improvements Buildings Other intangible assets are amortised over their estimated useful lives (generally one to ten years) using the straight-line method which reflects the pattern in which the intangible assets' future economic benefits are expected to be consumed. 00 For the year ended 31 December 2023 2 SUMMARY OF MATERIAL ACCOUNTING POLICIES (continued) For the year ended 31 December 2023 2.11 Investments and other financial assets (continued) (a) Classification and measurement (continued) Financial assets with embedded derivatives are considered in their entirety when determining whether their cash flows are solely payments of principal and interest. Subsequent measurement of debt instruments depends on the Group's business model for managing the asset and the contractual cash flow characteristics of the asset. There are three categories into which the Group classifies its debt instruments: • Amortised cost: Financial assets that are held for collection of contractual cash flows where those cash flows represent solely payments of principal and interest are classified as and measured at amortised cost. A gain or loss on a debt instrument measured at amortised cost which is not part of a hedging relationship is recognised in profit or loss when the asset is derecognised or impaired. Interest income from these financial assets is recognised using the effective interest method. • FVOCI: Financial assets that are held for collection of contractual cash flows and for selling the financial assets, where the assets' cash flows represent solely payments of principal and interest, are classified as and measured at FVOCI. Gains and losses on these financial assets are taken through other comprehensive income, except for the recognition of impairment losses or reversals, interest income and foreign exchange gains and losses which are recognised in profit or loss. When the financial asset is derecognised, the cumulative gain or loss previously recognised in other comprehensive income is reclassified from equity to profit or loss and recognised in "Net gains/(losses) from investments and others" in the consolidated income statement. Interest income from these financial assets is recognised using the effective interest method. Foreign exchange gains and losses are presented in "Finance costs" and impairment losses or reversals are presented in "Net gains/(losses) from investments and others". • FVPL: Financial assets that do not meet the criteria for amortised cost or FVOCI are classified as and measured at fair value through profit or loss. A gain or loss on a debt instrument measured at fair value through profit or loss which is not part of a hedging relationship is recognised in profit or loss and presented in “Net gains/(losses) from investments and others" for the period in which it arises. The Group reclassifies debt instruments when and only when its business model for managing those assets changes. Annual Report 2023 153 Notes to the Consolidated Financial Statements Annual Report 2023 Notes to the Consolidated Financial Statements Tencent Holdings Limited Debt instruments 00 151 152 For the year ended 31 December 2023 2 SUMMARY OF MATERIAL ACCOUNTING POLICIES (continued) 2.9 Shares held for share award schemes The consideration paid by the Share Scheme Trust (see Note 50(f)) for purchasing the Company's shares from the market, including any directly attributable incremental cost, is presented as “Shares held for share award schemes" and the amount is deducted from total equity. When the Share Scheme Trust transfers the Company's shares to the awardees upon vesting, the related costs of the awarded shares vested are credited to "Shares held for share award schemes", with a corresponding adjustment made to "Share premium”. 2.10 Impairment of non-financial assets Assets that have an indefinite useful life or are not yet available for use are not subject to amortisation and are tested annually for impairment, or more frequently if events or changes in circumstances indicate that they might be impaired. Other assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be fully recoverable. An impairment loss is recognised for the amount by which the asset's carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset's fair value less costs of disposal and value in use. For the purpose of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows which are largely independent of the cash inflows from other assets or groups of assets (CGUs). Non-financial assets other than goodwill that suffered impairment are reviewed for possible reversal of the impairment at each reporting date. Notes to the Consolidated Financial Statements (a) Classification and measurement The Group classifies its financial assets in the following measurement categories: • those to be measured subsequently at fair value (either through other comprehensive income, or through profit or loss); and • those to be measured at amortised cost. The classification depends on the Group's business model for managing the financial assets and the contractual terms of the cash flows. Except for accounts receivable, at initial recognition, the Group measures a financial asset at its fair value plus, in the case of a financial asset not at fair value through profit or loss, transaction costs that are directly attributable to the acquisition of the financial asset. Transaction costs of financial assets carried at fair value through profit or loss are expensed in profit or loss. 2.11 Investments and other financial assets 2 The Group's deferred revenue includes contract liabilities and refundable advance payments in certain businesses. A contract liability is the Group's obligation to transfer goods or services to a customer for which the Group has received consideration (or an amount of consideration is due) from the customer. The Group's contract liabilities mainly comprise unamortised virtual items, prepaid subscription fees, prepaid tokens or cards, Internet traffic and other support to be offered to certain investee companies in the future periods measured at their fair value on the inception dates, and customer loyalty incentives (Note 6(c)), which are presented as "Deferred revenue” in the consolidated statement of financial position. For the year ended 31 December 2023 SUMMARY OF MATERIAL ACCOUNTING POLICIES (continued) (f) 2.22 Revenue recognition (continued) Contract costs include incremental costs of obtaining a contract and costs to fulfil a contract with the customers. The contract costs are amortised using a method which is consistent with the pattern of recognition of the respective revenues. The Group has applied the practical expedient to recognise the contract cost relating to obtaining a contract as an expense when incurred, if otherwise the amortisation period is one year or less. Deferred revenue, contract liabilities and contract costs 2.23 Government grants/subsidies The non-cash assets to be distributed are presented as "Assets held for distribution" in the consolidated statement of financial position. Under these circumstances, the grants/subsidies are recognised as income or deducted in reporting the associated costs and expenses which the grants/subsidies are intended to compensate. FinTech service revenues mainly include commissions from payment, wealth management and other FinTech services, which are generally determined as a percentage based on the value of transaction amount or retention amount. Revenue related to such commissions is recognised upon a point in time when the Group satisfies its performance obligations by rendering services. Annual Report 2023 169 In respect of a dividend by way of distribution of non-cash assets, the liability to distribute the non-cash assets as a dividend is measured at the fair value of the assets to be distributed on the declaration date. At the end of the reporting period and at the date of settlement, the Group reviews and adjusts the carrying amount of the dividend liability, and any subsequent change in the fair value of the dividend liability is recognised in equity as an adjustment to the amount of the dividend distribution. Upon settlement, the difference between the carrying amount of the dividend liability which is also the fair value of the assets distributed, and the carrying amount of the assets distributed, if any, is recognised in profit or loss. Dividends distribution to the Company's shareholders is recognised as a liability in the Group's and the Company's financial statements in the period in which the dividend is approved by the Company's shareholders or Board where appropriate and no longer at the discretion of the Group. 2.25 Dividends distribution Payments associated with short-term leases are recognised on a straight-line basis as an expense in profit or loss. Short-term leases are leases with a lease term of 12 months or less without a purchase option. A right-of-use asset is generally depreciated over the shorter of the asset's useful life and the lease term on a straight-line basis. If the Group is reasonably certain to exercise a purchase option, the right-of-use asset is depreciated over the underlying asset's useful life. Grants/subsidies from the government are recognised at their fair values where there is a reasonable assurance that the grants/subsidies will be received and the Group will comply with all attached conditions. Notes to the Consolidated Financial Statements The Group participates in various defined contribution retirement benefit plans which are available to all relevant employees. These plans are generally funded through payments to schemes established by governments or trustee-administered funds. A defined contribution plan is a pension plan under which the Group pays contributions on a mandatory, contractual or voluntary basis into a separate fund, and the Group has no legal or constructive obligations to pay further contributions if the fund does not hold sufficient assets to pay all employees the benefits relating to employee services in the current and prior years. The Group's contributions to the defined contribution plans are expensed as incurred and not reduced by contributions forfeited by those employees who leave the plans prior to vesting fully in the contributions. 166 restoration costs. Pension obligations (b) Employee entitlements to annual leave are recognised when they are accrued to employees. A provision is made for the estimated liability for annual leave as a result of services rendered by employees up to the end of the reporting period. Employee entitlements to sick and maternity leave are not recognised until the time of leave. (a) Employee leave entitlements 2.20 Employee benefits Deferred income tax assets and liabilities are offset where: (i) there is a legally enforceable right to offset current tax assets against current tax liabilities; and (ii) the deferred income tax assets and liabilities relate to income taxes levied by the same taxation authority on either the same taxable entity or different taxable entities which intend to settle current tax liabilities and assets on a net basis, or to realise the assets and settle the liabilities simultaneously, in each future period in which significant amounts of deferred tax liabilities or assets are expected to be settled or recovered. Deferred income tax assets are recognised on deductible temporary differences arising from investments in subsidiaries, associates and joint ventures only to the extent that it is probable the temporary difference will reverse in the foreseeable future and there is sufficient taxable profit available against which the temporary difference can be utilised. Tencent Holdings Limited 2.19 Current and deferred income tax (continued) 2 For the year ended 31 December 2023 Notes to the Consolidated Financial Statements The Group's other revenues are primarily derived from investments in, production of and distribution of, films and television programmes for third parties, copyrights licensing, merchandise sales and various other activities. The Group recognises other revenues when the respective services are rendered, or when the control of the products is transferred to customers. (e) Principal agent consideration The Group reports the revenue on a gross or net basis depending on whether the Group is acting as a principal or an agent in a transaction. The Group is a principal if it controls the specified product or service before that product or service is transferred to a customer or it has a right to direct others to provide the product or service to the customer on the Group's behalf. Indicators that the Group is a principal include but are not limited to: the Group (i) is the primary obligor in the arrangement; (ii) has latitude in establishing the selling price; (iii) has discretion in supplier selection; (iv) changes the product or performs part of the service; and (v) has involvement in the determination of product or service specifications. 00 SUMMARY OF MATERIAL ACCOUNTING POLICIES (continued) any initial direct costs; and Cloud services are mainly charged on either a subscription or consumption basis. For cloud service contracts billed based on a fixed amount for a specified service period, revenue is recognised over the subscribed period when the services are delivered to customers. For cloud service provided on a consumption basis, revenue is recognised based on the customer utilisation of the resources. When a cloud-based service includes multiple performance obligations, the Group allocates the transaction price to each performance obligation on a relative stand-alone selling price basis, which is determined based on the prices charged to or expected to recover from customers. any lease payments made at or before the commencement date less any lease incentives received; • amounts expected to be payable by the lessee under residual value guarantees; . variable lease payments that are based on an index or a rate; • fixed payments (including in-substance fixed payments), less any lease incentives receivable; • Assets and liabilities arising from a lease are initially measured on a present value basis. Lease liabilities include the net present value of the following lease payments: the exercise price of a purchase option if the lessee is reasonably certain to exercise that option; and 2.24 Leases (continued) 2 For the year ended 31 December 2023 Notes to the Consolidated Financial Statements 167 Annual Report 2023 The Group leases land (Note 2.7), various buildings, computer and other operating equipment and others. Rental contracts other than land are typically made for fixed periods of not longer than 10 years. Lease terms are negotiated on an individual basis and contain a wide range of different terms and conditions. The lease agreements do not impose any covenants, but leased assets may not be used as security for borrowing purposes. A lease is recognised as a right-of-use asset and a corresponding liability at the date at which the leased asset is available for use by the Group. A right-of-use asset arising from land lease is presented as “Land use rights". 2.24 Leases 00 SUMMARY OF MATERIAL ACCOUNTING POLICIES (continued) • payments of penalties for terminating the lease, if the lease term reflects the lessee exercising that option. The lease payments are discounted using the interest rate implicit in the lease. If that rate cannot be readily determined, which is generally the case for leases in the Group, the lessee's incremental borrowing rate is used, being the rate that the individual lessee would have to pay to borrow the funds necessary to obtain an asset of similar value to the right-of-use asset in a similar economic environment with similar terms, security and conditions. For the year ended 31 December 2023 the amount of the initial measurement of lease liability; • Right-of-use assets are measured at cost comprising the following: 2.24 Leases (continued) SUMMARY OF MATERIAL ACCOUNTING POLICIES (continued) 2 Notes to the Consolidated Financial Statements Tencent Holdings Limited 168 00 Lease payments are allocated between principal and finance cost. The finance cost is charged to profit or loss over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. If a readily observable amortising loan rate is available to the individual lessee (through recent financing or market data) which has a similar payment profile to the lease, then the Group entity uses that rate as a starting point to determine the incremental borrowing rate. makes adjustments specific to the lease, e.g., term, country, currency and security. • uses a build-up approach that starts with a risk-free rate adjusted for credit risk for leases held by the lessee, which does not have recent third-party financing; and where possible, uses recent third-party financing received by the individual lessee as a starting point, adjusted to reflect changes in financing conditions since third-party financing was received; • To determine the incremental borrowing rate, the Group: • 160 163 2 For the year ended 31 December 2023 SUMMARY OF MATERIAL ACCOUNTING POLICIES (continued) 2 Notes to the Consolidated Financial Statements Tencent Holdings Limited 164 00 In respect of the Group's VAS directly delivered to the Group's customers and paid through various third- party platforms, these third-party platforms collect the relevant service fees (the “Online Service Fees") on behalf of the Group and they are entitled to a pre-determined percentage of platform provider fees (as part of "Channel and distribution costs"). Such Channel and distribution costs are withheld and deducted from the gross Online Service Fees collected by these platforms from the users, with the net amounts remitted to the Group. The Group recognises the Online Service Fees as revenue on a gross or net basis depending on whether the Group is acting as a principal or an agent in these transactions based on the assessment according to the criteria stated in (e) below. 2.22 Revenue recognition (continued) Where the contracts include multiple performance obligations, the Group allocates the transaction price to each performance obligation on a relative stand-alone selling price basis, which is determined based on the prices charged to or expected to recover from customers. Revenues from VAS primarily include revenues from the provision of online games and social networks services. Online games revenues are mainly derived from sales of in-game virtual items, and social networks revenues are mainly derived from sales of virtual items such as VAS subscriptions across various online platforms, and games revenues attributable to social networks business. The Group offers virtual items to users on the Group's online platforms. The VAS fees are paid directly by end users mainly via online payment channels. VAS (a) The Group generates revenues primarily from provision of VAS, Online Advertising services, FinTech and Business Services, and other online related services in the PRC. Revenue is recognised when the control of the goods or services is transferred to a customer. Depending on the terms of the contract and the laws that apply to the contract, control of the goods and services may be transferred over time or at a point in time. 2.22 Revenue recognition 2 SUMMARY OF MATERIAL ACCOUNTING POLICIES (continued) For the year ended 31 December 2023 Notes to the Consolidated Financial Statements Revenue from VAS is recognised when the Group satisfies its performance obligations by rendering services. Given that there is an explicit or implicit obligation of the Group to maintain the virtual items operated on the Group's platforms and allow users to gain access to them, revenue is recognised over the estimated lifespans of the respective virtual items. Revenues from sales of limited life virtual items are recognised based on the consumption or the stipulated period of validity of the relevant virtual items ratably. Revenues from sales of in-game permanent virtual items are recognised ratably over the respective estimates of the expected users' relationship periods of the applicable games determined by the management. Annual Report 2023 Other revenues VAS (continued) FinTech and Business Services revenues mainly comprise revenues derived from provision of FinTech and cloud services. (d) FinTech and Business Services Tencent Holdings Limited 2.22 Revenue recognition (continued) SUMMARY OF MATERIAL ACCOUNTING POLICIES (continued) 2 For the year ended 31 December 2023 (a) Notes to the Consolidated Financial Statements Annual Report 2023 Revenue from display-based advertising is recognised on number of display/impression basis or depending on the contractual measures. Revenue from performance-based advertising is recognised when relevant specific performance measures are fulfilled. Where the contracts include multiple performance obligations, the Group allocates the transaction price to each performance obligation on a relative stand-alone selling price basis, which is determined based on the prices charged to or expected to recover from customers. Advertising contracts are signed to establish the prices and advertising services to be provided based on different arrangements, including display-based advertising that is display of advertisements for an agreed period of time, and performance-based advertising that is based on actual performance measurement. Online Advertising revenues mainly comprise revenues derived from media advertisements and from social and other advertisements, depending on the placement of advertising properties and inventories. Online Advertising (b) The Group adopts different revenue recognition methods based on its specific responsibilities/obligations in different VAS offerings. The Group also opens its online platforms to third-party game/application developers under certain co- operation agreements, under which the Group pays to the third-party game/application developers a pre- determined percentage of the fees paid by and collected from the users of the Group's online platforms for the virtual items sold. The Group recognises the related revenue on a gross or net basis depending on whether the Group is acting as a principal or an agent in the transaction. 165 Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in the provision due to passage of time is recognised as interest expense. (c) Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events; it is probable that an outflow of resources will be required to settle the obligation; and the amount can be reliably estimated. Provisions are not recognised for future operating losses. 2 For the year ended 31 December 2023 Notes to the Consolidated Financial Statements 161 Annual Report 2023 The Group operates a number of share-based compensation plans (including share option schemes and share award schemes), under which the Group receives services from employees and other qualifying participants as consideration for equity instruments (including share options and awarded shares) of the Group. The fair value of the employee services and other qualifying participants' services received in exchange for the grant of equity instruments of the Group is recognised as an expense over the vesting period, i.e., the period over which all of the specified vesting conditions are to be satisfied and credited to equity. Share-based compensation benefits (e) SUMMARY OF MATERIAL ACCOUNTING POLICIES (continued) The Group recognises a liability and an expense for long-term service awards where cash is paid to retired employees qualified for certain criteria as one-off retirement bonus and it is considered as a defined benefit plan. The method of accounting is similar to those used for long-term employee benefits as described above, except that re-measurement gains and losses arising from experience adjustments and changes in actuarial assumptions are recognised in other comprehensive income in the period in which they occur. (d) These long-term employee benefit obligations are measured as the present value of expected future payments to be made in respect of services provided by employees up to the end of the reporting period using the projected unit credit method. Expected future payments are discounted using market yields at the end of the reporting period of high-quality corporate bonds with terms and currencies that match, as closely as possible, the estimated future cash outflows. For currencies for which there is no deep market in such high-quality corporate bonds, the market yields on government bonds denominated in that currency were applied. Re-measurements as a result of experience adjustments and changes in actuarial assumptions are recognised in profit or loss. In addition to participating in the defined contribution plans as described above, the Group also provides commercial health insurance benefits to certain eligible employees till their resignation or retirement. These obligations are classified as non-current liabilities unless it is expected to be settled wholly within 12 months after the end of the reporting period. (c) Long-term employee benefit obligations 2.20 Employee benefits (continued) SUMMARY OF MATERIAL ACCOUNTING POLICIES (continued) Notes to the Consolidated Financial Statements Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognised even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small. Long-term service awards 2.20 Employee benefits (continued) For the year ended 31 December 2023 For grant of share options, the total amount to be expensed is determined by reference to the fair value of the options granted by using option-pricing model, “Enhanced FAS 123" binomial model (the "Binomial Model"), which includes the impact of market performance conditions (such as the Company's share price) but excludes the impact of service condition and non-market performance conditions. For grant of awarded shares, the total amount to be expensed is determined by reference to the market price of the Company's shares at the grant date. The Group also adopts valuation and actuarial techniques to assess the fair value of other equity instruments of the Group granted under the share-based compensation plans as appropriate. 2.21 Provisions Cash-settled share-based payment transactions are those arrangements where the terms provide the Group to settle the transaction in cash. For cash-settled share-based payments, a liability equal to the portion of the services received is recognised at the current fair value determined at the end of the reporting period until the date of settlement, with any changes in fair value recognised in profit or loss. If a grant of equity instruments is cancelled or settled during the vesting period (other than a grant cancelled by forfeiture when the vesting conditions are not satisfied), the Group accounts for the cancellation or settlement as an acceleration of vesting, and therefore recognises immediately the amount that otherwise would have been recognised for services received over the remainder of the vesting period. If the terms of an equity-settled share-based award are modified, an additional expense is recognised for any modification that increases the total fair value of the share-based payment arrangement, or is otherwise beneficial to the employees and other qualifying participants, as measured at the date of modification. Modifications of an equity-settled share-based award in a manner that is not beneficial to employees are not taken into account when determining the expenses to be recognised. (e) Share-based compensation benefits (continued) (e) Share-based compensation benefits (continued) SUMMARY OF MATERIAL ACCOUNTING POLICIES (continued) For the year ended 31 December 2023 Notes to the Consolidated Financial Statements 2.20 Employee benefits (continued) Tencent Holdings Limited 162 00 If the Group repurchases vested equity instruments, the payments made to the employees and other qualifying participants are accounted for as a deduction from equity, except to the extent that the payment exceeds the fair value of the equity instruments repurchased, measured at the repurchase date. Any such excess is recognised as an expense. When the options are exercised, the proceeds received net of any directly attributable transaction costs are credited to share capital (nominal value) and share premium. When the vested equity instruments are later forfeited prior to expiry date, the amount previously recognised in share premium may be transferred to retained earnings. At each reporting period end, the Group revises the estimates of the number of options and awarded shares that are expected to ultimately vest. It recognises the impact of the revision to original estimates, if any, in the consolidated income statement of the Group, with a corresponding adjustment to equity. From the perspective of the Company, the grants of its equity instruments to employees of its subsidiaries are made in exchange for their services related to the subsidiaries. Accordingly, the share-based compensation expenses are treated as part of the "Investments in subsidiaries", or "Other receivables" if rechargeable, in the Company's statement of financial position. Non-market performance and service conditions are included in assumptions about the number of options and awarded shares that are expected to become vested. 2 Weighted average hedged rate for the year 0.59% 0.64% Swaps currently in place covered the majority of the floating-rate borrowings and notes payable principal outstanding. As at 31 December 2023 and 2022, management considered that any reasonable changes in the interest rates would not result in a significant change in the Group's results as the Group's exposure to cash flow interest-rate risk arising from its borrowings and notes payable carried at floating rates after considering the effect of hedging is considered to be insignificant. 00 176 Other receivables are mainly comprised of loan receivables related to financial services, interest receivables, loans to investees and investees' shareholders, lease deposits and other receivables. Management manages the loans by category, makes periodic assessments as well as individual assessments on the recoverability of other receivables based on historical settlement records and past experience. Notes to the Consolidated Financial Statements For the year ended 31 December 2023 4 FINANCIAL RISK MANAGEMENT (continued) 4.1 Financial risk factors (continued) (b) Credit risk The Group is exposed to credit risk in relation to its cash, deposits and restricted cash placed with banks and financial institutions, accounts receivable, other receivables, derivative financial instruments, as well as debt investments measured at amortised cost, at FVOCI and at FVPL. The carrying amount of each class of these financial assets represents the Group's maximum exposure to credit risk in relation to the corresponding class of financial assets. The majority of the balances of accounts receivable are due from online advertising customers and agents, FinTech and cloud customers, content production related customers and third party platform providers. To manage the credit risk arising from accounts receivable, the Group has policies in place to ensure that credit terms are made to counterparties with an appropriate credit history and the management performs ongoing credit evaluations of its counterparties. The credit periods granted to these customers are disclosed in Note 32 and the credit quality of these customers is assessed, which takes into account their financial position, past experience and other factors. The Group has a large number of customers and there is no significant concentration of credit risk. effectiveness since 1 January Tencent Holdings Limited 5,457 1:1 (3,581) For financial assets whose impairment losses are measured using ECL model, the Group assesses whether their credit risk has increased significantly since their initial recognition, and applies a three-stage impairment model to calculate their impairment allowance and recognise their ECL, as follows: 2022 RMB'Million RMB'Million 2,520 969 97,019 2024/3/28~ 216 6,752 103,410 2023/1/19~ 2026/2/24 2026/2/24 1:1 (3,581) 5,457 Hedge ratio Changes in fair value of outstanding hedging instruments since 1 January Change in value of hedged item used to determine hedge 2023 Stage 1: If the credit risk has not increased significantly since its initial recognition, the financial instrument is included in stage 1. To manage this risk, the Group only makes transactions with state-owned banks and financial institutions in the PRC and reputable international banks and financial institutions outside of the PRC, which are of high credit quality. The ECL is close to zero. Stage 3: If the financial instrument is credit-impaired, the financial instrument is included in stage 3. 00 178 Tencent Holdings Limited Notes to the Consolidated Financial Statements For the year ended 31 December 2023 4 FINANCIAL RISK MANAGEMENT (continued) 4.1 Financial risk factors (continued) The Group applies the simplified approach to provide for ECL prescribed by IFRS 9, which permits the use of the lifetime expected loss provision for all accounts receivable. In view of the sound financial position and collection history of receivables due from these counterparties and insignificant risk of default, to measure the ECL, accounts receivable have been grouped based on shared credit risk characteristics and the days past due. (b) Credit risk (continued) Credit risk of accounts receivable (continued) The expected loss rates are based on the payment profiles of revenue over 12 months before 31 December 2023 and the corresponding historical credit losses experienced within this period or probability of a receivable progressing through successive stages of delinquency to write-off. The historical loss rates are adjusted to reflect current and forward-looking information on macroeconomic factors affecting the ability of the customers to settle the receivables. The Group has identified the Gross Domestic Product ("GDP") to be the most relevant factor. Various economic scenarios are considered in generating the forward-looking adjustment. A default on accounts receivable occurs when the counterparty fails to make contractual payments within 90 days when they fall due. To measure the ECL, accounts receivable are grouped on the basis of shared credit risk characteristics, such as industry, with the objective of facilitating recognition of loss allowance on a timely basis. Accounts receivable are written off, in whole or in part, when the Group has exhausted all practical recovery efforts and has concluded that there is no reasonable expectation of recovery. Indicators that there is no reasonable expectation of recovery include, amongst others, the failure of a debtor to engage in a repayment plan with the Group, and a failure to make contractual payments for a period of greater than 3 years past due. Impairment losses on accounts receivables are presented as net impairment losses within operating profit. Subsequent recoveries of amounts previously written off are credited against the same item. Annual Report 2023 179 Maturity date (ii) Credit risk of accounts receivable (ii) Credit risk of cash and deposits Notes to the Consolidated Financial Statements For the year ended 31 December 2023 4 FINANCIAL RISK MANAGEMENT (continued) 4.1 Financial risk factors (continued) (b) Credit risk (continued) The Group considers the credit risk characteristics of different financial instruments when determining if there is significant increase in credit risk. For financial instruments with or without significant increase in credit risk, lifetime or 12-month ECL are provided respectively. The Group considers the probability of default upon initial recognition of asset and whether there has been a significant increase in credit risk on an ongoing basis throughout each of the years. To assess whether there is a significant increase in credit risk, the Group compares risk of a default occurring on the assets as at year end with the risk of default as at the date of initial recognition. In particular, the following indicators are incorporated: • internal credit rating; . external credit rating (as far as available); • actual or expected significant adverse changes in business, financial economic conditions that are expected to cause a significant change to the counterparty's ability to meet its obligations; • actual or expected significant changes in the operating results of the counterparty; and significant changes in the expected performance and behavior of the counterparty, including changes in the payment status of the counterparty. (i) Stage 2: If the credit risk has increased significantly since its initial recognition but not yet deemed to be credit-impaired, the financial instrument is included in stage 2. Notional amount Annual Report 2023 177 Carrying amount (current assets) 4 FINANCIAL RISK MANAGEMENT 4.1 Financial risk factors The Group's activities expose it to a variety of financial risks: market risk (including foreign exchange risk, price risk and interest rate risk), credit risk and liquidity risk. The Group's overall risk management strategy seeks to minimise the potential adverse effects on the financial performance of the Group. Risk management is carried out by the management of the Group. (a) Market risk (i) Foreign exchange risk The Group operates internationally and is exposed to foreign exchange risk arising from various currency exposures, primarily with respect to Hong Kong Dollars ("HKD"), USD and euro ("EUR"). Foreign exchange risk arises when future commercial transactions or recognised assets and liabilities are denominated in a currency that is not the respective functional currency of the Group's subsidiaries. The functional currency of the Company and the majority of its overseas subsidiaries is USD whereas the functional currency of the subsidiaries which operate in the Mainland of China is RMB. The Group manages its foreign exchange risk by performing regular reviews of the Group's net foreign exchange exposures. As at 31 December 2023, the Group's major monetary assets and liabilities exposed to foreign exchange risk are listed below: USD denominated RMB'Million Non-USD denominated RMB'Million As at 31 December 2023 Monetary assets, current 13,637 9,184 Monetary assets, non-current 4 1,593 Monetary liabilities, current (9,160) (3,985) Monetary liabilities, non-current (3,629) (534) 852 6,258 For the year ended 31 December 2023 Notes to the Consolidated Financial Statements 171 Annual Report 2023 Carrying amount (non-current assets) Notes to the Consolidated Financial Statements For the year ended 31 December 2023 2 SUMMARY OF MATERIAL ACCOUNTING POLICIES (continued) 3 2.26 Research and development expenses Research expenditure is recognised as an expense as incurred. Costs incurred on development projects (relating to the design and testing of new or improved products) are capitalised when capitalisation criteria are fulfilled and tests for impairment are performed annually. Other development expenditures that do not meet those criteria are recognised as expenses as incurred. Development costs previously recognised as expenses are not recognised as assets in subsequent periods. SUMMARY OF OTHER ACCOUNTING POLICIES 3.1 Inventories Inventories, mainly consisting of merchandise for sale, are primarily accounted for using the weighted average cost method and are stated at the lower of cost and net realisable value. 3.2 Investment properties Investment properties are held for long-term rental yields and are not occupied by the Group. Investment properties are carried at historical costs less accumulated depreciation and accumulated impairment charges. Historical costs include expenditures that are directly attributable to the acquisition of the items. 00 Depreciation is calculated on the straight-line method to allocate their costs net of their residual values over their estimated useful lives of 20-50 years. Investment properties' residual values and useful lives are reviewed, and adjusted if appropriate, at the end of each reporting period. 3.3 Share capital Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares are shown in equity as a deduction from the proceeds. 00 170 Tencent Holdings Limited 3 SUMMARY OF OTHER ACCOUNTING POLICIES (continued) For the year ended 31 December 2023 3.4 Offsetting financial instruments Financial assets and liabilities are offset, and the net amount is reported in the consolidated statement of financial position only when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or realise the assets and settle the liabilities simultaneously. The legally enforceable right must not be contingent on future events and must be enforceable in the normal course of business and in certain circumstances, such as default, insolvency, bankruptcy or the termination of a contract. 3.5 Interest income Interest income is calculated by applying the effective interest rate to the gross carrying amount of a financial asset except for financial assets that subsequently become credit-impaired. For credit-impaired financial assets the effective interest rate is applied to the net carrying amount of the financial asset (after deduction of the loss allowance). Interest income is presented as “Interest income" where it is mainly earned from financial assets that are held for cash management purposes. 3.6 Dividend income Dividends received from FVPL and FVOCI are recognised in "Net gains/(losses) from investments and others" in the consolidated income statement when the right to receive payment is established. This applies even if they are paid out of pre-acquisition profits, unless the dividend clearly represents a recovery of part of the cost of an investment. In this case, the dividend is recognised in other comprehensive income if it relates to an investment measured at FVOCI. Investment properties' carrying amounts are written down immediately to their recoverable amounts if their carrying amounts are greater than their estimated recoverable amounts (Note 2.10). 172 Notes to the Consolidated Financial Statements Notes to the Consolidated Financial Statements (a) Market risk (continued) (ii) Price risk The Group is exposed to equity price risk mainly arising from investments held by the Group that are classified either as FVPL (Note 26) or FVOCI (Note 27). To manage its price risk arising from the investments, the Group diversifies its investment portfolio. The investments are made either for strategic purposes, or for the purpose of achieving investment yield and balancing the Group's liquidity level simultaneously. Each investment is managed by management on a case by case basis. Sensitivity analysis is performed by management to assess the exposure of the Group's financial results to equity price risk of FVPL and FVOCI at the end of each reporting period. If prices of the respective instruments held by the Group had been 5% (31 December 2022: 5%) higher/lower as at 31 December 2023, profit for the year would have been approximately RMB10,888 million (2022: RMB11,028 million) higher/lower as a result of gains/losses on financial instruments classified as at FVPL, other comprehensive income would have been approximately RMB10,424 million (2022: RMB9,096 million) higher/lower as a result of gains/losses on financial instruments classified as at FVOCI. (iii) Interest rate risk The Group's income and operating cash flows are substantially independent of changes in market interest rates and the Group has no significant interest-bearing assets except for loans to investees and investees' shareholders, term deposits with initial terms of over three months, restricted cash and cash and cash equivalents, details of which have been disclosed in Notes 28, 31 and 33. If the interest rate of term deposits with initial terms of over three months had been 50 basis points higher/lower, the profit before income tax for the year ended 31 December 2023 would have been RMB1,076 million (2022: RMB666 million) higher/lower. If the interest rate of cash and cash equivalents had been 50 basis points higher/lower, the profit before income tax for the year ended 31 December 2023 would have been RMB862 million (2022: RMB784 million) higher/lower. 00 174 Tencent Holdings Limited Notes to the Consolidated Financial Statements For the year ended 31 December 2023 4 FINANCIAL RISK MANAGEMENT (continued) 4.1 Financial risk factors (continued) 4.1 Financial risk factors (continued) (a) Market risk (continued) The Group's exposure to changes in interest rates is also attributable to its borrowings and notes payable, details of which have been disclosed in Notes 38 and 39, representing a substantial portion of the Group's debts. Borrowings and notes payable carried at floating rates expose the Group to cash flow interest-rate risk whereas those carried at fixed rates expose the Group to fair value interest-rate risk. The Group regularly monitors its interest rate risk to identify if there are any undue exposures to significant interest rate movements and manages its cash flow interest rate risk by using interest rate swaps, whenever considered necessary. Annual Report 2023 175 Notes to the Consolidated Financial Statements For the year ended 31 December 2023 4 FINANCIAL RISK MANAGEMENT (continued) 4.1 Financial risk factors (continued) (a) Market risk (continued) (iii) Interest rate risk (continued) Tencent Holdings Limited Interest rate swaps The effects of the interest rate swaps on the Group's financial position and performance are as follows: (iii) Interest rate risk (continued) FINANCIAL RISK MANAGEMENT (continued) The Group entered into certain interest rate swap contracts to hedge its exposure arising from borrowings and senior notes carried at floating rates. Under these interest rate swap contracts, the Group agreed with the counterparties to exchange, at specified intervals, the difference between fixed contract rates and floating-rate interest amounts calculated by reference to the agreed notional amounts. These interest rate swap contracts had the economic effect of converting borrowings and senior notes from floating rates to fixed rates and were qualified for hedge accounting. Details of the Group's outstanding interest rate swap contracts as at 31 December 2023 are mainly disclosed in Note 29. For the year ended 31 December 2023 4.1 Financial risk factors (continued) 4 FINANCIAL RISK MANAGEMENT (continued) For the year ended 31 December 2023 4 (a) Market risk (continued) (i) Foreign exchange risk (continued) As at 31 December 2022 Monetary assets, non-current Monetary liabilities, current Monetary liabilities, non-current USD denominated Non-USD denominated RMB'Million RMB'Million Monetary assets, current 7,536 As at 31 December 2023, management considered that any reasonable changes in foreign exchange rates of the above currencies against the two major functional currencies would not result in a significant change in the Group's results, as the net carrying amounts of financial assets and liabilities denominated in a currency other than the respective subsidiaries' functional currencies are considered to be not significant. Accordingly, no sensitivity analysis is presented for foreign exchange risk. 13,332 Annual Report 2023 173 Notes to the Consolidated Financial Statements 4,760 1,136 (869) (3,397) (9,242) 1,490 3 (2,957) During the year ended 31 December 2023, the Group reported net exchange losses of approximately RMB383 million (2022: net exchange gains of RMB633 million) within "Finance costs" in the consolidated income statement. Other techniques, such as discounted cash flow analysis, are used to determine fair value for financial The fair value of interest rate swaps is calculated as the present value of the estimated future cash flows based on observable yield curves; and Specific valuation techniques used to value financial instruments mainly include: instruments. The group did not change any valuation techniques in determining the Level 2 and Level 3 fair values. . • For the year ended 31 December 2023 The fair value of financial instruments that are not traded in an active market is determined by using valuation techniques. These valuation techniques maximise the use of observable market data where it is available and rely as little as possible on entity specific estimates. If all significant inputs required for evaluating the fair value of a financial instrument are observable, the instrument is included in Level 2. The fair value of financial instruments traded in active markets is determined with reference to quoted market prices at the end of the reporting period. A market is regarded as active if quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service, or regulatory agency, and those prices represent actual and regularly occurring market transactions on an arm's length basis. These instruments are included in Level 1. It represented the dividend liability resulting from distribution in specie which was measured at fair value of shares of Meituan to be distributed (Note 17(b)) as at 31 December 2022. Note: 4.3 Fair value estimation (continued) 4 FINANCIAL RISK MANAGEMENT (continued) 184 Annual Report 2023 185 Tencent Holdings Limited Notes to the Consolidated Financial Statements If one or more of the significant inputs are not based on observable market data, the instrument is included in Level 3. Notes to the Consolidated Financial Statements 2022 4 (3,298) 193,608 00 216,054 RMB'Million RMB'Million RMB'Million RMB'Million 2022 For the year ended 31 December 2023 2023 Financial liabilities Financial assets Disposals/settlements Business combinations Additions and others Opening balance During the year ended 31 December 2023, there was no transfer between Level 1 and 2 for recurring fair value measurements. Transfers in and out of Level 3 measurements are set out in the following table, which presents the changes of financial instruments in Level 3 for the years ended 31 December 2023 and 2022: 4.3 Fair value estimation (continued) FINANCIAL RISK MANAGEMENT (continued) 2023 (147,965) 6,715 in specie (Note) (2,977) (8) 6,741 26 213,951 226,048 199,535 22,671 14,233 1,269 190,011 (2,985) 12,280 Other financial assets FVOCI FVPL As at 31 December 2023 RMB'Million Total Level 3 RMB'Million (2,444) RMB'Million Other financial liabilities (147,965) As at 31 December 2022 13,934 Dividends payable for distribution (3,307) (3,298) (9) Other financial liabilities 7,270 211 7,059 Other financial assets FVPL 147,965 Assets held for distribution 185,247 22,838 1,881 160,528 FVOCI 234,048 193,005 27,109 147,965 18,770 5,238 RMB'Million 40 companies in 33%-82% 210,340 Expected volatility 213,369 Investments in unlisted RMB'Million RMB'Million 2022 2023 FVPL and FVOCI 2022 to fair value Relationship of unobservable inputs Range of inputs as at 31 December Significant unobservable inputs as at 31 December Description Fair value The quantitative information about the significant unobservable inputs used in Level 3 fair value measurements of investments in unlisted companies comprises: The components of the Level 3 instruments mainly include investments in unlisted companies classified as FVPL or FVOCI, other financial assets, and other financial liabilities. Other financial liabilities included in Level 3 instruments mainly include contingent consideration payables related to certain business combinations. As these investments and instruments are not traded in an active market, the majority of their fair values have been determined using applicable valuation techniques including comparable companies approach, comparable transactions approach and option pricing approach. These valuation approaches require significant judgments, assumptions and inputs, including risk-free rates, expected volatility, and market information of recent transactions (such as recent fund- raising transactions undertaken by the investees) and other exposure, etc. 2023 The Group has a team of personnel who performs valuation on these Level 3 instruments for financial reporting purposes. The team performs valuation, or necessary updates, at least once every quarter, which coincides with the Group's quarterly reporting dates. On an annual basis, the team adopts various valuation techniques to determine the fair value of the Group's Level 3 instruments. External valuation experts may also be involved and consulted when it is necessary. 29%-83% Depends on rights and restrictions of shares held by the Group 0.04% 7.05% 0.04%-7.14% Tencent Holdings Limited 188 00 The Group will continue to monitor the estimates of the expected users' relationship periods. The results may differ from prior periods, and any change in the estimates may result in the revenue being recognised on a different basis from that in prior periods. Significant judgments are required in determining the expected users' relationship periods, including but not limited to historical users' consumption patterns, churn rates, game life-cycles, and qualitative factors such as reactivity on marketing activities and the Group's marketing strategy. The Group has adopted a policy of reassessing the expected users' relationship periods on a regular basis whenever there is any indicator of change in the estimates of the expected users' relationship periods. As mentioned in Note 2.22(a), the end users purchase certain in-game permanent virtual items provided on the Group's online platforms and the relevant revenue is recognised ratably over the respective estimates of the expected users' relationship periods. (a) The estimates of the expected users' relationship periods related to in-game permanent virtual items provided on the Group's online platforms The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are addressed below: The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. Estimates and judgments are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Risk-free rate CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS For the fair value of contingent consideration payables related to business combinations, management considered that any reasonable changes in the growth rate of net profit or expected volatility would not result in a significant change in the Group's results for the years ended 31 December 2023 and 2022. For the fair value of the Group's investments in unlisted companies, the sensitivity analysis on equity price risk is performed by management, see Note 4.1(a)(ii) for details. 4.3 Fair value estimation (continued) FINANCIAL RISK MANAGEMENT (continued) 4 For the year ended 31 December 2023 Notes to the Consolidated Financial Statements 187 Annual Report 2023 5 22,581 Valuation processes inputs and relationships to fair value (Level 3) 4 FINANCIAL RISK MANAGEMENT (continued) (146) (579) (1,220) (1,508) Changes in fair value recognised in profit or loss* 363 34 comprehensive income Changes in fair value recognised in other Currency translation differences Transfers (Note) (17,202) 753 906 (6,620) (2,911) (61) 2 14 (1,238) (7,847) 4.3 Fair value estimation (continued) 3,757 (48) For the year ended 31 December 2023 Notes to the Consolidated Financial Statements Tencent Holdings Limited 186 00 During the years ended 31 December 2023 and 2022, transfers from Level 3 to Level 1 were mainly due to the successful Initial Public Offerings ("IPO"s) of certain existing investees. Note: (148) (496) 15,175 (3,564) to balances held at the end of the reporting period recognised in profit or loss attributable *Includes unrealised losses (3,298) (2,977) 216,054 222,232 Closing balance (162) (3,678) Level 2 1,967 Inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs) (Level 3). 144,283 144,283 and accruals Accounts payable, other payables 20,806 8,360 5,548 2,375 4,523 Other financial liabilities 24,844 4,402 8,516 5,379 6,547 Lease liabilities 224,310 2 128,371 Derivatives: Other financial liabilities 8 8 and 2 years 1 year Between 2 Between 1 Less than At 31 December 2022 (c) Liquidity risk (continued) 4.1 Financial risk factors (continued) 00 46,547 FINANCIAL RISK MANAGEMENT (continued) For the year ended 31 December 2023 Notes to the Consolidated Financial Statements 181 Annual Report 2023 641,212 157,667 185,991 73,665 223,889 4 49,390 Borrowings 9,446 The Group aims to maintain sufficient cash and cash equivalents, and readily marketable securities which are classified as FVPL. Due to the dynamic nature of the underlying businesses, the Group maintains flexibility in funding by maintaining adequate balances of such. (c) Liquidity risk 4.1 Financial risk factors (continued) 4 FINANCIAL RISK MANAGEMENT (continued) For the year ended 31 December 2023 Notes to the Consolidated Financial Statements 180 Tencent Holdings Limited 00 Details of the Group's loan receivables related to financial services are included in Note 28. As at 31 December 2023, the majority of the gross carrying amount of loan receivables was classified in stage 1, and the amounts of loan receivables transferred from stage 1 to stage 2 or stage 3 were immaterial (31 December 2022: immaterial). During the year ended 31 December 2023, the impairment loss resulting from loan receivables related to financial services was immaterial (2022: immaterial). The table below analyses the Group's financial liabilities by relevant maturity groupings based on the remaining period since the end of the reporting period to the contractual maturity date (or the earliest date a financial liability may become payable in the absence of a fixed maturity date). The amounts disclosed in the table are the contractual undiscounted cash flows or the carrying amount of the financial assets to be delivered. The ECL is measured on either a 12-month or lifetime basis depending on whether a significant increase in credit risk has occurred since initial recognition. No significant changes to estimation techniques or assumptions were made during the reporting period. (iii) Credit risk of loan receivables related to financial services Credit risk (continued) (b) 4.1 Financial risk factors (continued) FINANCIAL RISK MANAGEMENT (continued) 4 For the year ended 31 December 2023 Notes to the Consolidated Financial Statements Notes to the Consolidated Financial Statements To manage credit risk arising from loan receivables related to financial services, standardised credit management procedures are performed. The Group measures credit risk using Probability of Default ("PD"), Exposure at Default ("EAD") and Loss Given Default ("LGD"). This is consistent with the general approach used for the purpose of measuring ECL under IFRS 9. ECL is the product of the PD, EAD, and LGD. and 5 years Less than Between 1 and 2 years 89 3,027 6,330 Long-term payables 217,515 144,814 40,529 13,034 19,138 1 year Notes payable At 31 December 2023 RMB'Million RMB'Million RMB'Million RMB'Million RMB'Million Total Over 5 years Between 2 and 5 years Non-derivatives: Over 5 years Total RMB'Million RMB'Million 2022 2023 As at 31 December Note: Total debts/Adjusted EBITDA ratio Adjusted EBITDA (Note) Total debts Notes payable (Note 39) RMB'Million Borrowings (Note 38) Capital refers to equity and external debts (including borrowings and notes payable). In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares, repurchase the Company's shares or raise/repay debts. The Group's objectives in managing capital are to safeguard the Group's ability to continue as a going concern and support the sustainable growth of the Group in order to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to enhance shareholders' value in the long term. 4.2 Capital risk management 4 FINANCIAL RISK MANAGEMENT (continued) For the year ended 31 December 2023 Notes to the Consolidated Financial Statements 182 Tencent Holdings Limited 746,000 168,761 The Group assesses its creditworthiness based on its business and financial risk profile and monitors its capital by regularly reviewing its total debts to adjusted earnings before interest, tax, depreciation and amortisation ("EBITDA”) (Note) ratio, being the measure of the Group's ability to pay off all of its debts which in turn reflects the Group's financial health and liquidity position. The total debts/Adjusted EBITDA ratio calculated by dividing the total debts by Adjusted EBITDA is as follows: 189,006 197,356 151,262 • Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices) (Level 2); and Quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1); • The table below analyses the Group's financial instruments carried at fair value as at 31 December 2023 by level of the inputs to valuation techniques used to measure fair value. Such inputs are categorised into three levels within a fair value hierarchy as follows: 4.3 Fair value estimation FINANCIAL RISK MANAGEMENT (continued) 4 For the year ended 31 December 2023 175,248 Notes to the Consolidated Financial Statements Annual Report 2023 Adjusted EBITDA represents operating profit less other gains/(losses), net, and adding back depreciation of property, plant and equipment, investment properties as well as right-of-use assets, amortisation of intangible assets and land use rights, and equity- settled share-based compensation expenses. 1.77 1.48 188,986 235,454 334,363 348,618 159,115 183 Level 1 70,241 9 142,964 38,953 18,868 Borrowings 6,977 423 1,264 5,290 Long-term payables 4 229,420 31,511 18,737 15,614 Notes payable Non-derivatives: RMB'Million RMB'Million RMB'Million RMB'Million 163,558 317,992 200,789 6,661 9 Other financial liabilities Derivatives: 147,965 147,965 in specie Dividends payable for distribution 125,040 125,040 Lease liabilities and accruals 10,183 480 3,901 3,835 Other financial liabilities 25,617 4,296 9,366 5,294 Accounts payable, other payables For the year ended 31 December 2023 Dealer quotes for similar instruments; Judgment is required to identify any impairment indicators existing for any of the Group's goodwill and other non- financial assets, to determine appropriate impairment approaches, i.e., fair value less costs of disposal or value in use, for impairment review purposes, and to select key assumptions applied in the adopted valuation models, including discounted cash flows and market approach. Changing the assumptions selected by management in assessing impairment could materially affect the result of the impairment test and in turn affect the Group's financial condition and results of operations. If there is a significant adverse change in the key assumptions applied, it may be necessary to take additional impairment charge to the consolidated income statement. 5 CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS (continued) The Group tests at least annually whether goodwill has suffered any impairment. Goodwill and other non-financial assets, mainly including property, plant and equipment, construction in progress, other intangible assets, investment properties, land use rights, right-of-use assets as well as investments in associates and joint ventures are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be fully recoverable. The recoverable amounts have been determined based on value-in-use calculations or fair value less costs of disposal. These calculations require the use of judgments and estimates. (c) Fair value measurement of FVPL and FVOCI The fair value assessment of FVPL and FVOCI that are measured at Level 3 fair value hierarchy requires significant estimates, which include risk-free rates, expected volatility, market information of recent transactions (such as recent fund raising transactions undertaken by the investees) and other assumptions. Changes in these assumptions and estimates could materially affect the respective fair value of these investments. (b) Recoverability of non-financial assets As mentioned in Note 2.20(e), the Group has granted share options to its employees and other qualifying participants. The directors have adopted the Binomial Model to determine the total fair value of the options granted, which is to be expensed over the respective vesting periods. Significant estimates and judgment on key parameters, such as risk-free rate, dividend yield and expected volatility, are required to be made by the directors based on historical experience and other relevant factors in applying the Binomial Model (Note 37). Changes in these estimates and judgments could materially affect the fair value of these options granted. The fair value of share options granted to employees and other qualifying participants determined using the Binomial Model was approximately HKD2,183 million (equivalent to approximately RMB1,987 million) in 2023 (2022: approximately HKD1,452 million (equivalent to approximately RMB1,211 million)). Annual Report 2023 189 (d) Share-based compensation arrangements Total revenues Annual Report 2023 155,196 100% 144,954 100% Revenues from VAS decreased by 2% to RMB69.1 billion for the fourth quarter of 2023 on a year-on-year basis. International Games revenues increased by 1% to RMB13.9 billion, or declined by 1% when excluding currency fluctuations, reflecting Supercell repositioning some of its games. PUBG Mobile saw a strong upturn in revenue, while VALORANT maintained robust growth. Domestic Games revenues declined by 3% to RMB27.0 billion due to decreased contributions from Honour of Kings and Peacekeeper Elite, partially offset by contributions from our recently launched games, such as VALORANT and Lost Ark. Social Networks revenues decreased by 2% to RMB28.2 billion, due to lower revenues from music-related and games-related live streaming services, partially mitigated by revenue growth from music subscriptions and Mini Games platform service fees. Revenues from Online Advertising were RMB29.8 billion for the fourth quarter of 2023, up 21% year-on-year, propelled by advertising demand for Video Accounts, as well as the ongoing upgrade of our advertising platform. All categories except for automotive saw a year-on-year increase in advertising spending with us, with particularly notable growth in Internet services, healthcare and consumer goods categories. Revenues from FinTech and Business Services increased by 15% year-on-year to RMB54.4 billion for the fourth quarter of 2023. FinTech Services sustained double-digit year-on-year growth due to the growth in commercial payment activities, as well as the expansion of wealth management services and consumer loan services. Business Services achieved year-on-year growth of around 20%, mainly driven by increased eCommerce technology service fees within Video Accounts, alongside moderate revenue growth in cloud services. 13 31 December 2022 Cost of revenues. Cost of revenues for the fourth quarter of 2023 decreased by 7% year-on-year to RMB77.6 billion. A rise in transaction costs, and channel and distribution costs, was more than offset by a reduction in bandwidth and server costs, and content costs. Gross profit. Gross profit for the fourth quarter of 2023 increased by 25% year-on-year to RMB77.6 billion, and gross margin increased to 50% from 43% in the same period last year. The primary drivers of the increased gross margin included the rapid growth of high-quality revenue streams, notably Video Accounts advertising, eCommerce technology service fees, and Mini Games platform service fees, and reduced contributions from lower-margin revenue streams, alongside our cost efficiency initiatives. The following table sets forth our gross profit and gross margin by line of business for the fourth quarter of 2023 and the fourth quarter of 2022: Unaudited Three months ended 31 December 2023 1% Amount Gross margin Gross Amount Management Discussion and Analysis 2,633 54,379 1,944 % of total Amount revenues Amount revenues (RMB in millions, unless specified) VAS 69,079 45% 70,417 49% Online Advertising 29,794 19% 24,660 17% FinTech and Business Services Others margin 35% 47,244 33% 1% (RMB in millions, unless specified) Online Advertising 37,090 00 14 Tencent Holdings Limited Management Discussion and Analysis Gross profit for FinTech and Business Services increased by 50% year-on-year to RMB23.9 billion for the fourth quarter of 2023. Gross margin increased to 44% from 34% in the same period last year. This was driven by margin improvement following cloud business restructuring, strong growth of high-quality revenues including Video Accounts eCommerce technology service fees, and growth of high-margin products within FinTech services. Our cost efficiency initiatives further contributed to the overall segment margin improvement. Selling and marketing expenses. Selling and marketing expenses grew by 79% to RMB11.0 billion for the fourth quarter of 2023 on a year-on-year basis, primarily driven by increased promotional and advertising efforts in support of new content releases, against a low base in the same period last year. As a percentage of revenues, selling and marketing expenses rose to 7%, up from 4% in the same period last year. General and administrative expenses. General and administrative expenses declined by 1% year-on-year to RMB27.2 billion for the fourth quarter of 2023. Net gains/(losses) from investments and others. We recorded net losses from investments and others of RMB6.7 billion for the fourth quarter of 2023, primarily due to impairment provisions against certain investees. Interest income. Interest income increased by 52% year-on-year to RMB3.9 billion for the fourth quarter of 2023, driven by growth in cash reserves and higher yields on term deposits. Gross profit for Online Advertising increased by 55% year-on-year to RMB16.9 billion for the fourth quarter of 2023. Gross margin increased to 57% from 44% in the same period last year, primarily driven by the robust growth of high-margin Video Accounts advertising revenue, as well as our efficiency efforts. Finance costs. Finance costs decreased by 3% year-on-year to RMB3.5 billion for the fourth quarter of 2023, driven by reduced foreign exchange losses, partially offset by higher interest expenses. Income tax expense. Income tax expense rose by 111% year-on-year to RMB9.7 billion for the fourth quarter of 2023, primarily driven by operating profit growth and increased provision for withholding tax. Profit attributable to equity holders of the Company. Profit attributable to equity holders of the Company decreased by 75% to RMB27.0 billion for the fourth quarter of 2023 on a year-on-year basis, primarily attributed to a RMB106.6 billion gain from the deemed disposal of Meituan in the same quarter of 2022. Non-IFRS profit attributable to equity holders of the Company increased by 44% to RMB42.7 billion for the fourth quarter of 2023. Annual Report 2023 15 Management Discussion and Analysis FOURTH QUARTER OF 2023 COMPARED TO THIRD QUARTER OF 2023 The following table sets forth the comparative figures for the fourth quarter of 2023 and the third quarter of 2023: Unaudited Three months ended 31 December Share of profit/(loss) of associates and joint ventures, net. We recorded share of profits of associates and joint ventures of RMB2.4 billion for the fourth quarter of 2023, compared to share of losses of RMB1.6 billion for the same quarter of 2022. Non-IFRS share of profits of associates and joint ventures improved to RMB4.5 billion for the fourth quarter of 2023, from RMB3.1 billion for the same quarter last year. This improvement was driven by enhanced profitability at certain domestic associates, alongside a successful game release by an overseas game studio investee. Gross profit for VAS increased by 6% year-on-year to RMB37.1 billion for the fourth quarter of 2023. Gross margin increased to 54% from 50% in the same period last year, due to higher mix of high-margin Mini Games platform service fees, and reduced contributions from low-margin music-related and games-related live streaming revenues, alongside improved cost efficiency. 43% 61,822 54% 35,073 50% % of total 16,922 57% 10,912 44% FinTech and Business Services 23,860 44% 15,858 34% Others (308) (16%) (21) (1%) Total gross profit 77,564 50% VAS 31 December 2022 12 Unaudited Three months ended 31 December 2023 2022 Restated* (RMB in millions) Revenues Cost of revenues Gross profit Selling and marketing expenses 31 December General and administrative expenses Operating profit 155,196 144,954 (77,632) (83,132) 77,564 61,822 (10,971) (6,115) Other gains/(losses), net Unaudited Three months ended The following table sets forth the comparative figures for the fourth quarter of 2023 and the fourth quarter of 2022: FOURTH QUARTER OF 2023 COMPARED TO FOURTH QUARTER OF 2022 36,431 Management Discussion and Analysis Gross profit for VAS increased by 11% year-on-year to RMB161.9 billion for the year ended 31 December 2023, and gross margin improved to 54% from 51% in the previous year. The improved gross margin was driven by a higher mix of high-margin games revenues and Mini Games platform service fees, and music subscriptions margin enhancement, together with decreased contributions from low-margin music-related and games-related live streaming revenues, and our cost efficiency improvement. Gross profit for Online Advertising increased by 47% year-on-year to RMB51.3 billion for the year ended 31 December 2023, and gross margin increased to 51% from 42% in the previous year. The increase in gross margin was primarily driven by the robust growth in high-quality revenue streams, notably from Video Accounts advertising, along with our cost control measures. Gross profit for FinTech and Business Services rose by 38% year-on-year to RMB80.6 billion for the year ended 31 December 2023, and gross margin rose to 40% from 33% last year. The higher gross margin was due to margin enhancement resulting from our cloud business restructuring, the introduction of high-margin revenues from Video Accounts eCommerce technology service fees, and increased monetisation from other business services, alongside growth of high-margin products within FinTech services. Selling and marketing expenses. Selling and marketing expenses grew by 17% year-on-year to RMB34.2 billion for the year ended 31 December 2023, driven by increased promotional and advertising efforts in support of new content releases. As a percentage of revenues, selling and marketing expenses rose to 6% for the year ended 31 December 2023, from 5% for the year ended 31 December 2022. General and administrative expenses. General and administrative expenses decreased by 3% year-on-year to RMB103.5 billion for the year ended 31 December 2023, primarily due to reduced staff costs, including share-based compensation expenses. As a percentage of revenues, general and administrative expenses decreased to 17% for 2023 from 19% for the previous year. Net gains/(losses) from investments and others. We recorded net losses from investments and others of RMB6.1 billion for the year ended 31 December 2023, primarily due to impairment provisions against certain investees, partially offset by net gains from disposals/deemed disposals of certain investees. 00 10 Tencent Holdings Limited Management Discussion and Analysis Interest income. Interest income increased by 61% year-on-year to RMB13.8 billion for the year ended 31 December 2023, driven by increased cash reserves and improved yields on term deposits. Finance costs. Finance costs rose by 31% year-on-year to RMB12.3 billion for the year ended 31 December 2023. This increase was driven by higher interest expenses, as well as the recognition of foreign exchange losses this year, in contrast to gains in the previous year. Share of profit/(loss) of associates and joint ventures, net. We recorded share of profits of associates and joint ventures of RMB5.8 billion for 2023, versus share of losses of RMB16.1 billion for the previous year. Non-IFRS share of profits of associates and joint ventures increased to RMB13 billion for 2023 from RMB2.4 billion for the previous year. This improvement was attributable to enhanced profitability in certain associates, underpinned by their revenue growth and efficiency improvements, as well as a successful game release by an overseas game studio investee. Income tax expense. Income tax expense increased by 101% year-on-year to RMB43.3 billion for the year ended 31 December 2023, driven by operating profit growth, a higher provision for withholding tax, and deferred tax adjustments at an overseas subsidiary. Profit attributable to equity holders of the Company. Profit attributable to equity holders of the Company decreased by 39% year-on-year to RMB115.2 billion for the year ended 31 December 2023. This decline was primarily due to a RMB106.6 billion gain from the deemed disposal of Meituan recognised in the fourth quarter of 2022. Non-IFRS profit attributable to equity holders of the Company increased by 36% to RMB157.7 billion for the year ended 31 December 2023. Annual Report 2023 11 Management Discussion and Analysis (27,175) 31 December 2023 (27,314) 770* (4,575) 27,850 106,904 27,025 106,268 825 636 27,850 106,904 (9,658) 49,135 42,681 29,711 * Certain items have been reclassified from above to below the operating profit line, and the comparative figures for prior periods have been restated accordingly. Please refer to Note 2.2 in the notes to the consolidated financial statements for details. 00 30 September Tencent Holdings Limited Management Discussion and Analysis Revenues. Revenues increased by 7% year-on-year to RMB155.2 billion for the fourth quarter of 2023. The following table sets forth our revenues by line of business for the fourth quarter of 2023 and the fourth quarter of 2022: 36,424* Non-IFRS profit attributable to equity holders of the Company Non-IFRS operating profit Non-controlling interests 41,401 29,163* Net gains/(losses) from investments and others (6,730) 85,084* Interest income 3,917 2,582* Finance costs (3,543) (3,658) Share of profit/(loss) of associates and joint ventures, net 2,463 (1,692) Profit before income tax 37,508 111,479 Income tax expense Profit for the period Attributable to: Equity holders of the Company 1,983 2023 (14,832) (RMB in millions) 164,037 214,381 44,002 55,824 53,983 EBITDA 32,772 32,703 8,731 7,142 Equity-settled share-based compensation 7,904 Amortisation of intangible assets 6,720 6,397 1,718 1,550 1,544 Depreciation of right-of-use assets 21,724 19,908 5,160 and land use rights 4,810 5,511 5,604 34% 39% 34% Interest and related expenses 3,015 3,061 2,826 11,885 9,985 Net cash/(debt) (c) 5,477 54,740 Annual Report 2023 Certain items have been reclassified from above to below the operating profit line, and the comparative figures for prior periods have been restated accordingly. Please refer to Note 2.2 in the notes to the consolidated financial statements for details. 188,986 235,454 49,606 61,301 59,494 Adjusted EBITDA 24,949 21,073 19 40% 5,117 Depreciation of property, plant and equipment and The following table reconciles our operating profit to our EBITDA and Adjusted EBITDA for the periods presented: Management Discussion and Analysis Tencent Holdings Limited 18 Capital expenditures consist of additions (excluding business combinations) to property, plant and equipment, construction in progress, investment properties, land use rights and intangible assets (excluding long-form video and music content, game licences and other content). (d) Net cash/(debt) represents period end balance and is calculated as cash and cash equivalents, plus term deposits and others, minus borrowings and notes payable. (c) Adjusted EBITDA margin is calculated by dividing Adjusted EBITDA by revenues. (b) Unaudited Three months ended EBITDA is calculated as operating profit minus other gains/(losses), net, and adding back depreciation of property, plant and equipment, investment properties as well as right-of-use assets, and amortisation of intangible assets and land use rights. Adjusted EBITDA is calculated as EBITDA plus equity-settled share-based compensation expenses. Note: 18,014 23,893 5,651 8,005 7,524 Capital expenditures (d) (14,832) 54,740 2023 Restated* (a) investment properties Year ended 2023 (8,006)* (4,701) (770)* (2,026)* (1,983) Other (gains)/losses, net Adjustments: 110,827* 160,074 29,163* 31 December 44,348* Operating profit (RMB in millions, unless specified) 2022 Restated* Restated* 2023 2022 31 December 31 December 31 December 30 September 2023 Restated* 41,401 38% 49,135 188,986 3,509* Finance costs (3,543) (2,784) Share of profit/(loss) of associates and joint ventures, net 2,463 2,098 Profit before income tax 37,508 47,789 3,917 Income tax expense (11,008) Profit for the period 27,850 36,781 Attributable to: Equity holders of the Company Non-controlling interests Non-IFRS operating profit Non-IFRS profit attributable to equity holders of the Company 27,025 (9,658) 36,182 Interest income (6,730) Revenues Adjusted EBITDA margin (b) Cost of revenues Selling and marketing expenses General and administrative expenses Other gains/(losses), net Operating profit 155,196 154,625 (77,632) 618* (78,102) 76,523 (10,971) (7,912) (27,175) (26,289) 1,983 2,026* 41,401 44,348* Net gains/(losses) from investments and others 77,564 825 Gross profit 27,850 31 December Unaudited Three months ended 30 September Year ended 31 December 31 December 31 December 2023 2023 2022 2023 OTHER FINANCIAL INFORMATION 2022 EBITDA (a) 53,983 55,824 44,002 214,381 164,037 Adjusted EBITDA (a) 59,494 235,454 599 (RMB in millions, unless specified) Profit attributable to equity holders of the Company. Profit attributable to equity holders of the Company decreased by 25% to RMB27.0 billion for the fourth quarter of 2023 on a quarter-on-quarter basis. Non-IFRS profit attributable to equity holders of the Company decreased by 5% to RMB42.7 billion for the fourth quarter of 2023. 61,301 General and administrative expenses. General and administrative expenses increased by 3% to RMB27.2 billion for the fourth quarter of 2023 on a quarter-on-quarter basis. 36,781 Share of profit/(loss) of associates and joint ventures, net. We recorded share of profits of associates and joint ventures of RMB2.4 billion for the fourth quarter of 2023, compared to share of profits of RMB2.1 billion for the previous quarter. Non-IFRS share of profits of associates and joint ventures was RMB4.5 billion for the fourth quarter of 2023, compared to share of profits of RMB4.8 billion for the previous quarter. 51,668* 42,681 44,921 Certain items have been reclassified from above to below the operating profit line, and the comparative figures for prior periods have been restated accordingly. Please refer to Note 2.2 in the notes to the consolidated financial statements for details. 00 16 Tencent Holdings Limited Management Discussion and Analysis Revenues. Revenues for the fourth quarter of 2023 remained broadly stable at RMB155.2 billion on a quarter-on-quarter basis. 49,606 Revenues from Online Advertising increased by 16% to RMB29.8 billion, due to the ongoing upgrade of our advertising platform, which facilitated increased revenue for Video Accounts, our mobile ad network, and Weixin Moments, amongst other inventories. Revenues from VAS decreased by 9% to RMB69.1 billion. International Games revenues were RMB13.9 billion, up 5% quarter-on-quarter, mainly driven by revenue growth from PUBG Mobile and Clash of Clans. Domestic Games revenues were RMB27.0 billion, down 18% quarter-on-quarter, due to seasonally lower revenue accruals in the fourth quarter. Social Networks revenues decreased by 5% to RMB28.2 billion due to lower revenue accruals from app-based game virtual item sales. 17 Annual Report 2023 Selling and marketing expenses. Selling and marketing expenses grew by 39% to RMB11.0 billion for the fourth quarter of 2023 on a quarter-on-quarter basis, reflecting increased promotional and advertising efforts for games, including newly released and upcoming game releases. Gross profit for FinTech and Business Services increased by 12% to RMB23.9 billion, and gross margin improved to 44% from 41% in the third quarter of 2023, driven by seasonally higher cloud services revenues with margin improvement, as well as increased contributions from high-margin Video Accounts eCommerce technology service fees and other business services. Management Discussion and Analysis Gross profit for VAS decreased by 12% to RMB37.1 billion, and gross margin decreased to 54% from 56% in the third quarter of 2023. The lower gross margin was due to a seasonally lower mix of high-margin games revenues. Gross profit. Gross profit was RMB77.6 billion for the fourth quarter of 2023, up 1% quarter-on-quarter. Gross margin increased to 50% from 49% in the third quarter of 2023. Revenues from FinTech and Business Services increased by 4% to RMB54.4 billion, supported by seasonally higher cloud services revenues due to more project deployments toward the year end, alongside increased revenues from wealth management services and payment activities. Cost of revenues. Cost of revenues were RMB77.6 billion for the fourth quarter of 2023, down 1% quarter-on-quarter. Gross profit for Online Advertising rose by 26% to RMB16.9 billion, and gross margin rose to 57% from 52% in the third quarter of 2023. The improvement in gross margin was due to strong revenue growth driven by our advertising platform upgrade together with seasonally higher eCommerce activities, outpacing the growth in segment operating costs. Amortisation charges of intangible assets are mainly in respect of media content including long-form video and music content, game licenses, and other content. During the year ended 31 December 2023, amortisation of media content was approximately RMB30,088 million (2022: RMB28,893 million). (c) Note: (continued) 7 EXPENSES BY NATURE (continued) For the year ended 31 December 2023 Notes to the Consolidated Financial Statements Annual Report 2023 197 During the year ended 31 December 2023, employee benefits expenses included the share-based compensation expenses of approximately RMB22,782 million (2022: RMB26,248 million), which contained those incurred for employees related to SSV & CPP of approximately RMB63 million (2022: RMB73 million). No significant development expenses had been capitalised for the years ended 31 December 2023 and 2022. During the year ended 31 December 2023, the Group had incurred expenses for the purpose of research and development of approximately RMB64,078 million (2022: RMB61,401 million), which mainly comprised employee benefits expenses of approximately RMB52,416 million (2022: RMB50,000 million). (a) Transaction costs primarily consist of bank handling fees, channel and distribution costs. 9 (d) 5 2 18 23 32 57 146 (b) 32 8 During the year ended 31 December 2023, amortisation of intangible assets included the amortisation of intangible assets arising from acquisitions of approximately RMB5,019 million (2022: RMB5,197 million). 155 6,147 6,477 8,006 4,701 (3,113) (2,589) (2,995) 11,119 10,285 RMB'Million RMB'Million 2022 Restated (a) Note: Others Tenpay-related fine (Note (a)) Subsidies and tax rebates OTHER GAINS/(LOSSES), NET During the year ended 31 December 2023, except as disclosed in Note 8(a), non-recurring compliance-related costs and expenses incurred for certain litigation settlements in total were approximately RMB18 million (2022: RMB205 million), of which approximately RMB1 million (2022: RMB20 million) were included in "Other gains/(losses), net". During the year ended 31 December 2023, expenses incurred related to SSV & CPP (excluding share-based compensation expenses) were approximately RMB998 million (2022: RMB726 million). (e) 2023 107,675 - Other services 2022 2023 Content costs (excluding amortisation of intangible assets) Employee benefits expenses (Note (b) and Note 15) Transaction costs (Note (a)) For the year ended 31 December 2023 Notes to the Consolidated Financial Statements EXPENSES BY NATURE 7 196 Tencent Holdings Limited 00 As at 31 December 2023 and 2022, total capitalised contract costs to obtain or fulfil contracts with customers were immaterial. 66,541 66,988 108 155 5,558 5,334 1,549 1,802 Amortisation RMB'Million Note: RMB'Million 124,282 - Due diligence service - Tax advisory - Non-audit services - Audit and audit-related services Auditor's remuneration 18,764 22,836 Promotion and advertising expenses 30,719 24,248 Bandwidth and server custody fees (excluding depreciation of right-of-use assets) 28,444 26,305 right-of-use assets Depreciation of property, plant and equipment, investment properties and Amortisation of intangible assets (Note (c) and Note 22) 32,695 32,623 67,306 62,696 111,182 134,864 Depreciation RMB'Million 238,746 Others. The "Others" business segment consists of the financials of investment in, production of and distribution of, films and television programmes for third parties, copyrights licensing, merchandise sales and various other activities. The chief operating decision-makers assess the performance of the operating segments mainly based on segment revenue and gross profit of each operating segment. Revenues and cost of revenues are directly attributable to our operating segments, whereas other income and expenses, such as selling and marketing expenses, general and administrative expenses, interest income and finance costs (net), are managed centrally at group level due to the coherent nature of our businesses; therefore, they are not included in the measure of the operating segments' performance. Other gains/losses (net), net gains/(losses) from investments and others, share of profit/loss of associates and joint ventures (net) and income tax expense are not allocated to individual operating segment either. There were no material inter-segment sales during the years ended 31 December 2023 and 2022. The revenues from external customers reported to the chief operating decision-makers are measured in a manner consistent with that applied in the consolidated income statement. Other information, together with the segment information, provided to the chief operating decision-makers, is measured in a manner consistent with that applied in these consolidated financial statements. There was no segment assets or segment liabilities information provided to the chief operating decision-makers. Annual Report 2023 191 Notes to the Consolidated Financial Statements For the year ended 31 December 2023 6 SEGMENT INFORMATION AND REVENUES (continued) (a) Description of segments and principal activities (continued) The segment information provided to the chief operating decision-makers for the reportable segments for the years ended 31 December 2023 and 2022 is as follows: 00 Year ended 31 December 2023 FinTech and Online VAS Advertising Business Services Others Total RMB'Million FinTech and Business Services; and RMB'Million RMB'Million Online Advertising; The Group has the following reportable segments for the years ended 31 December 2023 and 2022: Notes to the Consolidated Financial Statements For the year ended 31 December 2023 5 CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS (continued) (d) Share-based compensation arrangements (continued) The Group has to estimate the expected yearly percentage of grantees that will stay within the Group at the end of vesting periods of the options and awarded shares (the “Expected Retention Rate") in order to determine the amount of share-based compensation expenses charged to the consolidated income statement. Where the final retention rate is different from the initial estimate, such differences will impact the share-based compensation expenses in subsequent periods. As at 31 December 2023, the Expected Retention Rate of the Group's wholly- owned subsidiaries was assessed to be not lower than approximately 89% (31 December 2022: not lower than 89%). (e) Income taxes The Group is subject to income taxes in numerous jurisdictions. Significant judgment is required in determining the worldwide provision for income taxes. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact current income tax and deferred income tax in the period in which such determination is made. (f) Scope of consolidation Consolidation is required only if control exists. The Group controls an investee when it has all the following: (i) power over the investee; (ii) exposure, or rights, to variable returns from its involvement with the investee; and (iii) the ability to use its power over the investee to affect the amount of the Group's returns. Power results from rights that can be straightforward through voting rights or complicated in contractual arrangements. Variable returns normally encompass financial benefits and risks, but in certain cases, they also include operational values specific to the Group. These three factors cannot be considered in isolation by the Group in its assessment of control over an investee. Where the factors of control are not apparent, significant judgment is applied in the assessment, which is based on an overall analysis of all of the relevant facts and circumstances. The Group is required to reassess whether it controls the investee if facts and circumstances indicate a change to one or more of the three factors of control. 00 190 Tencent Holdings Limited Notes to the Consolidated Financial Statements 6 SEGMENT INFORMATION AND REVENUES (a) Description of segments and principal activities For the year ended 31 December 2023 Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-makers. The chief operating decision-makers mainly include chief executive officer and president of the Company. They review the Group's internal reporting in order to assess performance, allocate resources, and determine the operating segments based on these reports. VAS; Cost of revenues RMB'Million Segment revenues FinTech and VAS Online Advertising Business Services Others Total RMB'Million RMB'Million RMB'Million RMB'Million RMB'Million Segment revenues 287,565 82,729 177,064 7,194 554,552 Gross profit/(loss) 145,647 35,009 58,374 (284) Year ended 31 December 2022 59,326 30,217 158 298,375 101,482 203,763 5,395 609,015 Gross profit/(loss) 161,919 51,344 80,636 (790) 293,109 Cost of revenues Depreciation 5,239 6,025 8,713 59 20,036 Amortisation 19,468 8,661 1,930 59,697 52,018 FinTech and Business Services 546 948 342 309 (6,090) 116,287 Note: (a) The net disposal and deemed disposal gains of approximately RMB4,283 million recognised during the year ended 31 December 2023 comprised the following: (5,124) aggregate net gains of approximately RMB1,574 million (2022: RMB18,914 million) on disposals and partial disposals of investee companies of the Group; aggregate net losses of approximately RMB1,295 million on dilution of the Group's equity interests in certain associates due to new equity interests being issued by these associates (2022: net gains of approximately RMB2,793 million on dilution of the Group's equity interests in certain associates and a joint venture). These investee companies are principally engaged in eCommerce, manufacture and sales of electric vehicles, and other Internet-related businesses. Annual Report 2023 199 2023 2022 RMB'Million RMB'Million Revenue from contracts with customers - VAS aggregate net gains of approximately RMB4,004 million (2022: RMB151,000 million) on deemed disposals of investee companies of the Group; and (2,952) (633) (165) 2022 Restated RMB'Million RMB'Million Net gains on disposals and deemed disposals of investee companies (Note (a)) Net fair value losses on FVPL (Note (b)) 4,283 172,707 (1,954) (7,117) Impairment provisions for investments in associates (Note 23(c)) (6,847) (25,689) Impairment reversals/(provisions) for investments in joint ventures and others Impairment provisions for goodwill and other intangible assets 752 (1,849) arising from acquisitions (Note 22) Net fair value losses on other financial instruments (Note (c)) Donations (Note (d)) Dividend income Others (95) (17,265) 298,375 287,565 Games 179,860 SEGMENT INFORMATION AND REVENUES (continued) (c) Assets and liabilities related to contracts with customers The Group has recognised the following liabilities related to contracts with customers under "Deferred revenue": Contract liabilities: VAS As at 31 December 2023 2022 RMB'Million RMB'Million 62,890 62,478 Online Advertising 1,335 2,152 FinTech and Business Services Others 6,733 6,082 172 182 Note: 6 2023 For the year ended 31 December 2023 194 Tencent Holdings Limited 170,715 Social networks 118,515 116,850 - Online Advertising 101,482 82,729 Social and others advertising 91,164 72,020 Media advertising 10,318 10,709 - FinTech and Business Services 203,763 177,064 - Others 5,395 7,194 609,015 554,552 Notes to the Consolidated Financial Statements 9 For the year ended 31 December 2023 Notes to the Consolidated Financial Statements 22,141 19,320 8,422 200 1,569 29,511 The reconciliation of gross profit to profit before income tax is shown in the consolidated income statement. 192 Tencent Holdings Limited Notes to the Consolidated Financial Statements For the year ended 31 December 2023 6 SEGMENT INFORMATION AND REVENUES (continued) (a) Description of segments and principal activities (continued) The Company is domiciled in the Cayman Islands while the Group mainly operates its businesses in the Mainland of China. During the years ended 31 December 2023 and 2022, breakdown of the total revenues by geographical location is as follows: Revenues - The Mainland of China - Others 2023 2022 RMB'Million RMB'Million 550,779 50 502,534 9,467 Contract liabilities Online Advertising VAS at the beginning of the year: Revenue recognised that was included in the contract liabilities balance RMB'Million RMB'Million 2022 2023 The following table shows the extent of the revenue recognised in the current reporting period which relates to carried- forward contract liabilities: Revenue recognised in relation to contract liabilities (ii) Note: (continued) (c) Assets and liabilities related to contracts with customers (continued) 6 SEGMENT INFORMATION AND REVENUES (continued) For the year ended 31 December 2023 Notes to the Consolidated Financial Statements 195 Annual Report 2023 Contract liabilities mainly comprised unamortised virtual items, prepaid subscription fees, prepaid tokens or cards, Internet traffic and other support to be offered to certain investee companies in the future periods measured at their fair value on the inception dates, and customer loyalty incentives. 70,894 71,130 (i) Others 58,236 554,552 45,835 Others 23,375 15,778 1,577,246 1,578,131 As at 31 December 2023, the total non-current assets other than financial instruments and deferred income tax assets located in the Mainland of China and other regions amounted to RMB361,619 million (31 December 2022: RMB352,703 million) and RMB201,821 million (31 December 2022: RMB192,413 million), respectively. Annual Report 2023 193 Notes to the Consolidated Financial Statements For the year ended 31 December 2023 6 SEGMENT INFORMATION AND REVENUES (continued) (a) Description of segments and principal activities (continued) All the revenues derived from any single external customer were less than 10% of the Group's total revenues during the years ended 31 December 2023 and 2022. (b) Disaggregation of revenue from contracts with customers In the following table, revenue of the Group from contracts with customers is disaggregated by revenue source. The table also includes a reconciliation to the segment information (Note 6(a)). 00 In July 2023, Tenpay received a notice from the People's Bank of China regarding its decision to impose a fine amounted to approximately RMB2.99 billion for its past regulatory breaches in relation to the provision of payment services in the Mainland of China. The amount was paid in July 2023. 00 198 Tencent Holdings Limited 64,123 609,015 - Europe 110,224 The Group also conducts operations in the North America, Europe and other regions, and holds investments (including investments in associates, investments in joint ventures, FVPL, FVOCI and assets held for distribution) in various territories. The geographical information on the total assets is as follows: Operating assets - The Mainland of China - Others Investments As at 31 December 2023 2022 RMB'Million RMB'Million 550,635 482,401 324,947 275,755 The Mainland of China and Hong Kong 393,836 560,835 - North America 110,106 91,636 - Asia excluding the Mainland of China and Hong Kong 105,891 NET GAINS/(LOSSES) FROM INVESTMENTS AND OTHERS 155,524 209 Weighted average number of ordinary shares in issue excluding shares held for share award schemes and treasury shares (million shares) 9,455 9,528 Basic EPS (RMB per share) 12.186 19.757 (b) Diluted The share options and awarded shares granted by the Company have potential dilutive effect on the EPS. Diluted EPS is calculated by adjusting the weighted average number of ordinary shares outstanding by the assumption of the conversion of all potential dilutive ordinary shares arising from share options and awarded shares granted by the Company (collectively forming the denominator for computing the diluted EPS), which is determined under the treasury stock method. In addition, the profit attributable to equity holders of the Company (numerator) has been adjusted by the effect of the share-based awards granted by the Company's non wholly-owned subsidiaries and associates, excluding those which have anti-dilutive effect on the Group's diluted EPS. Profit attributable to equity holders of the Company (RMB'Million) Dilution effect arising from share-based awards granted by non wholly-owned subsidiaries and associates (RMB'Million) Profit attributable to equity holders of the Company for the calculation of diluted EPS (RMB'Million) Weighted average number of ordinary shares in issue excluding shares held for share award schemes and treasury shares (million shares) Adjustments for share options and awarded shares (million shares) Weighted average number of ordinary shares for the calculation of diluted EPS (million shares) Diluted EPS (RMB per share) 2023 2022 115,216 188,243 (986) (740) 114,230 187,503 9,455 155 9,528 167 9,610 188,243 115,216 Profit attributable to equity holders of the Company (RMB'Million) 2022 Category Tax rate Value-added tax ("VAT") 6-13% Basis of levy Sales value of goods sold and services fee income, offset by VAT on purchases Taxable advertising income Cultural construction fee 3% (Note (i)) City construction tax 7% Net VAT payable amount Educational surcharge 5% 9,695 Net VAT payable amount (i) Effective from 1 July 2019 to 31 December 2024, the rate of cultural construction fee has been reduced by 50% in certain regions, while during the period from 1 January 2020 to 31 December 2021, this fee was fully exempted. (c) OECD Pillar Two model rules The Organisation for Economic Co-operation and Development ("OECD") published Pillar Two model rules in December 2021, with the effect that a jurisdiction may enact domestic tax laws ("Pillar Two legislation") to implement the Pillar Two model rules on a globally agreed common approach. Pillar Two legislation applies to a member of a multinational group within the scope of the Pillar Two model rules, which the Group is reasonably expected to fall into. It imposes a top-up tax on profits arising in a jurisdiction whenever the effective tax rate determined by the Pillar Two model rules on a jurisdictional basis is below a minimum rate of 15%. The Group has reviewed its corporate structure in light of the introduction of Pillar Two model rules in various jurisdictions and engaged external tax specialists in assessing its tax exposure. As at 31 December 2023, the Group mainly operates in the Mainland of China and Hong Kong, in which exposures to Pillar Two income taxes might exist in the future although the legislation is not yet substantively enacted or enacted. Besides, certain subsidiaries of the Company are located in jurisdictions mainly including Luxembourg, Netherlands and Ireland where Pillar Two legislation had been enacted or substantively enacted, but not yet in effect; it is estimated that the Group's income tax would not be materially different should those legislation had been in effect for the year ended 31 December 2023. Since none of the Pillar Two legislation relevant to the Group has come into effect, the Group does not recognise any relevant current tax or deferred tax for the year ended 31 December 2023. 00 204 Tencent Holdings Limited Notes to the Consolidated Financial Statements For the year ended 31 December 2023 14 EARNINGS PER SHARE (a) Basic Basic earnings per share ("EPS") is calculated by dividing the profit attributable to equity holders of the Company by the weighted average number of ordinary shares in issue (excluding shares held for share award schemes and treasury shares) during the year. 2023 Note: 11.887 19.341 Annual Report 2023 10.0 12.0% Effective from 1 January 2022, additional employee benefits had been provided by the Group to certain employees, including (i) commercial health insurance benefits to certain eligible employees who have completed a required period of service; and (ii) one-off retirement cash bonus upon the retirement of qualified employees. The financial impacts relating to these additional benefits for the year ended 31 December 2023 and 2022 were not material. 00 206 Tencent Holdings Limited Notes to the Consolidated Financial Statements For the year ended 31 December 2023 15 EMPLOYEE BENEFITS EXPENSES (continued) (a) Senior management's emoluments Senior management includes directors, chief executive officer ("CEO"), president and other senior executives. The aggregate compensation paid/payable to senior management for employee services (excluding the compensation paid/payable to (i) the then executive director of the Company during the period from 1 January 2023 to 17 May 2023, and (ii) a director and the CEO of the Company, details of which have been reflected in Note 16(a)), is as follows: 2023 RMB'000 2022 RMB'000 Salaries, bonuses, allowances and benefits in kind 0.25 -1.5% 567,622 Contributions to pension plans 720 772 Share-based compensation expenses 4,042,105 4,835,839 4,610,447 5,272,111 The emoluments of the above senior management fell within the following bands: Emolument bands Number of individuals 2023 2022 HKD8,000,000 ~ HKD50,000,000 435,500 The operations of the Group are also mainly subject to the following taxes in the PRC: 5.0-10.0% Percentage 205 Notes to the Consolidated Financial Statements For the year ended 31 December 2023 15 EMPLOYEE BENEFITS EXPENSES Wages, salaries and bonuses Share-based compensation expenses Contributions to pension plans (Note) Welfare, medical and other expenses (Note) Note: 2023 2022 RMB'Million RMB'Million 71,225 12.0 20.0% 70,213 26,248 7,299 7,108 6,241 7,473 128 140 107,675 111,182 The majority of the Group's contributions to pension plans are related to the local employees in the PRC. All local employees of the subsidiaries in the PRC participate in employee social security plans established in the PRC, which cover pension, medical and other welfare benefits. The plans are organised and administered by the governmental authorities. Except for the contributions made to these social security plans, the Group has no other material commitments owing to the employees. According to the relevant regulations, the portion of premium and welfare benefit contributions that should be borne by the companies within the Group as required by the above social security plans are principally determined based on percentages of the basic salaries of employees, subject to certain ceilings imposed. These contributions are paid to the respective labour and social welfare authorities and are expensed as incurred. The applicable percentages used to provide for these social security plans for the years ended 31 December 2023 and 2022 are listed below: Pension insurance Medical insurance Unemployment insurance Housing fund 22,782 (b) Value-added tax and other taxes 13 TAXATION (continued) For the year ended 31 December 2023 RMB'Million 5,400 400 (16,379) 250 5,800 (16,129) (a) During the year ended 31 December 2023, it represented the Group's share of its associates and joint ventures' post-acquisition profit or loss, including share of their impairment provisions for investee companies, goodwill and other intangible assets arising from acquisitions of approximately RMB1,933 million (2022: RMB3,201 million), amortisation of intangible assets arising from acquisitions of approximately RMB5,250 million (2022: RMB6,621 million), share-based compensation expenses of approximately RMB4,984 million (2022: RMB7,063 million), non- recurring compliance-related adjustment gains of approximately RMB1 million (2022: losses of RMB1,920 million) and other net gains from investee companies of approximately RMB4,925 million (2022: RMB314 million). (b) Details of the Group's impairment provisions/reversals for investments in associates and joint ventures are included in Notes 9, 23 and 24. 13 TAXATION (a) Income tax expense Income tax expense is recognised based on management's best knowledge of the income tax rates expected for the financial year. (i) Cayman Islands and British Virgin Islands corporate income tax The Group was not subject to any taxation in the Cayman Islands and the British Virgin Islands for the years ended 31 December 2023 and 2022. RMB'Million (ii) Hong Kong profits tax had been provided for at the rate of 16.5% on the estimated assessable profits for the years ended 31 December 2023 and 2022. Annual Report 2023 201 Notes to the Consolidated Financial Statements For the year ended 31 December 2023 13 TAXATION (continued) (a) Income tax expense (continued) (iii) PRC CIT PRC CIT had been provided for at applicable tax rates under the relevant regulations of the PRC after considering the available preferential tax benefits from refunds and allowances, and on the estimated assessable profit of entities within the Group established in the Mainland of China for the years ended 31 December 2023 and 2022. The general PRC CIT rate was 25% in 2023 and 2022. Certain subsidiaries of the Company in the Mainland of China were approved as High and New Technology Enterprise, and they were subject to a preferential corporate income tax rate of 15% for the years ended 31 December 2023 and 2022. Moreover, according to announcement and circular issued by relevant government authorities, a subsidiary which was qualified as a national key software enterprise was subject to a preferential corporate income tax rate of 10%. In addition, certain subsidiaries of the Company were entitled to other tax concessions, mainly including the preferential tax rate of 15% applicable to some subsidiaries located in certain areas of the Mainland of China upon fulfilment of certain requirements of the respective local governments. (iv) Corporate income tax in other jurisdictions Income tax on profit arising from other jurisdictions, including the United States, Europe, Asia and South America, had been calculated on the estimated assessable profit for the year at the respective rates prevailing in the relevant jurisdictions, which were not higher than 35%. Hong Kong profits tax (v) Withholding tax 2022 Share of profit/(loss) of associates, net (Note 23) Share of profit/(loss) of joint ventures, net (Note 24) Notes to the Consolidated Financial Statements For the year ended 31 December 2023 9 NET GAINS/(LOSSES) FROM INVESTMENTS AND OTHERS (continued) Note: (continued) (b) During the year ended 31 December 2023, the net fair value losses on FVPL mainly comprised net losses of approximately RMB2,886 million as a result of changes in valuations of certain investee companies (2022: RMB7,737 million). (c) During the year ended 31 December 2023, the net fair value losses on other financial instruments mainly included net losses of approximately RMB152 million, as a result of changes in valuations of investment-related financial instruments (2022: RMB586 million). (d) During the year ended 31 December 2023, donations mainly included approximately RMB2,792 million for SSV & CPP of the Group (2022: RMB5,037 million). 10 INTEREST INCOME Interest income mainly represents interest income from bank deposits, including bank balance and term deposits. 11 FINANCE COSTS 2023 Interest and related expenses Exchange losses/(gains), net 2022 RMB'Million RMB'Million 11,885 383 9,985 (633) 12,268 9,352 Interest and related expenses mainly arose from the borrowings, notes payable and lease liabilities as disclosed in Notes 38, 39 and 20, respectively. 00 200 Tencent Holdings Limited Notes to the Consolidated Financial Statements For the year ended 31 December 2023 12 SHARE OF PROFIT/(LOSS) OF ASSOCIATES AND JOINT VENTURES, NET 2023 1 According to applicable tax regulations prevailing in the PRC, dividends distributed by a company established in the Mainland of China to a foreign investor with respect to profit derived after 1 January 2008 are generally subject to a 10% withholding tax. If a foreign investor is incorporated in Hong Kong, under the double taxation arrangement between the Mainland of China and Hong Kong, the relevant withholding tax rate applicable to such foreign investor will be reduced from 10% to 5% subject to the fulfilment of certain Dividends distributed from certain jurisdictions that the Group's entities operate in are also subject to withholding tax at respective applicable tax rates. 56,588 Effects of different tax rates applicable to different subsidiaries of the Group (13,971) (45,335) Effects of tax holiday and preferential tax benefits on assessable profits of subsidiaries incorporated in the Mainland of China (4,400) (4,641) Income not subject to tax (433) (84) Expenses not deductible for tax purposes 2,918 2,532 38,881 Withholding tax on earnings expected to be remitted by subsidiaries 10,300 4,350 Unrecognised deferred income tax assets 9,983 7,992 Others Income tax expense (2) 114 43,276 21,516 Annual Report 2023 203 Notes to the Consolidated Financial Statements (Note 30) conditions. Tax calculated at a tax rate of 25% 16,129 00 202 Tencent Holdings Limited Notes to the Consolidated Financial Statements 13 TAXATION (continued) (a) Income tax expense (continued) The income tax expense of the Group is analysed as follows: Current income tax Deferred income tax (Note 30) For the year ended 31 December 2023 2023 2022 RMB'Million RMB'Million 226,354 32,720 10,556 (2,909) 43,276 21,516 The taxation on the Group's profit before income tax differs from the theoretical amount that would arise using the tax rate of 25% (2022: 25%) for the year ended 31 December 2023, being the general tax rate of the major subsidiaries of the Group before enjoying preferential tax treatments, as follows: 2023 2022 RMB'Million RMB'Million Profit before income tax 161,324 210,225 Share of (profit)/loss of associates and joint ventures, net (5,800) 24,425 HKD50,000,001 ~ HKD200,000,000 Training expenses Number of individuals 52,478 40,316 9,000 2,690 472 Lau Chi Ping Martin (Note (ii)) 42,923 4 HKD200,000,001 ~ HKD400,000,000 4 HKD400,000,001 ~ HKD800,000,000 HKD800,000,001 ~ HKD1,200,000,000 HKD1,200,000,001 ~ HKD2,000,000,000 2 1 1 Annual Report 2023 207 1 - 3 3 312 Notes to the Consolidated Financial Statements For the year ended 31 December 2023 15 EMPLOYEE BENEFITS EXPENSES (continued) (b) Five highest paid individuals The five individuals whose emoluments were the highest in the Group did not include any director for the year ended 31 December 2023 (2022: did not include any director). All of these individuals have not received any emolument from the Group as an inducement to join the Group during the years ended 31 December 2023 and 2022. The emoluments paid/payable to the five (2022: five) individuals during the years are as follows: Salaries Bonuses Contributions to pension plans Li Dong Sheng 58 816 3,935 119,897 58 60,190 76 43,723 9,481 6,369 Charles St Leger Searle Jacobus Petrus (Koos) Bekker Zhang Xiu Lan 2,745 1,929 816 3,858 3,042 816 Ke Yang 6,632 5,545 1,087 Yang Siu Shun 7,326 6,239 1,087 lan Charles Stone 3,119 Share-based compensation expenses Allowances and benefits in kind 2023 RMB'000 16 BENEFITS AND INTERESTS OF DIRECTORS (a) Directors' and the chief executive's emoluments The remuneration of every director and the CEO is set out below: During the year ended 31 December 2023: Contributions Share-based Allowances to pension compensation and benefits Name of director Fees Salaries Bonuses plans expenses in kind Total RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 (Note (i)) Ma Huateng (CEO) 1,275 For the year ended 31 December 2023 Notes to the Consolidated Financial Statements 1 1 2022 RMB'000 36,100 1,091,373 23,091 2,391,324 35,339 1,105,178 16,336 3,013,520 193 217 3,542,081 The emoluments of the above five individuals (2022: five) fell within the following bands: Emolument bands HKD431,500,001 ~ HKD432,000,000 Annual Report 2023 HKD502,500,001 ~ HKD503,000,000 HKD1,049,500,001 ~ HKD1,050,000,000 HKD1,421,000,001 ~ HKD1,421,500,000 HKD1,504,000,001 ~ HKD1,504,500,000 HKD1,530,000,001 ~ HKD1,530,500,000 00 208 Tencent Holdings Limited 4,170,590 76 2023 2022 1 2 - - IIN 2 1 HKD536,500,001 ~ HKD537,000,000 HKD561,000,001 ~ HKD561,500,000 6,791 34,723 (87,407) 11 1 33 94 Additions 2,471 48 9,186 25 1,207 13,360 Disposals (124) (3) 471 (3) 1 61,914 Net book amount 13,112 46,077 1,055 75 1,595 Business combinations 61,914 Opening net book amount 13,112 46,077 1,055 75 1,595 Year ended 31 December 2022 (30) (160) Depreciation 103,343 2,966 155 4,981 131,603 Accumulated depreciation and impairment 20,158 (5,651) (1,822) (85) (2,782) (77,753) Currency translation differences 26 (67,413) Cost At 31 December 2022 53,978 (1,135) (19,549) (393) (29) (607) (21,713) Currency translation differences 84 483 Closing net book amount 14,533 35,967 1,152 69 2,257 (355) (292) (58) Currency translation differences 15,557 Closing net book amount 117 7 2 72 34,748 36 (36) 109 10 (1) 65 245 Currency translation differences 970 64 1,893 (2,491) (110) (2,052) (76,172) (6,582) Accumulated depreciation and impairment 140,394 4,319 175 3,012 110,811 22,077 Cost 62 53,232 Net book amount Currency translation differences 15,557 970 Cost 17,767 102,278 2,545 137 3,860 At 1 January 2022 126,587 (4,597) (55,909) (1,487) (61) (2,264) (64,318) Accumulated depreciation and impairment RMB'Million Total Motor Leasehold vehicles improvements RMB'Million RMB'Million 64 1,893 53,232 Annual Report 2023 213 Notes to the Consolidated Financial Statements For the year ended 31 December 2023 18 PROPERTY, PLANT AND EQUIPMENT (continued) 00 Buildings RMB'Million 59 Computer and other operating equipment RMB'Million RMB'Million Furniture and office equipment 34,748 At 31 December 2023 20,436 37 Tencent Holdings Limited 210 00 (i) Allowances and benefits in kind include leave pay, insurance premium and club membership. Note: 247,407 114 175,521 128 50,630 14,456 6,558 Charles St Leger Searle Jacobus Petrus (Koos) Bekker 572 274 298 Zhang Xiu Lan 3,512 Notes to the Consolidated Financial Statements 2,708 16 BENEFITS AND INTERESTS OF DIRECTORS (continued) Note: (continued) (32) 211 Annual Report 2023 No significant transactions, arrangements and contracts in relation to the Group's business to which the Company was a party and in which a director of the Company had a material interest, whether directly or indirectly, subsisted at the end of the year or at any time during the year. (e) Directors' material interests in transactions, arrangements or contracts No loans, quasi-loans and other dealings in favour of directors, their controlled bodies corporate and connected entities subsisted at the end of the year or at any time during the year. (d) Information about loans, quasi-loans and other dealings in favour of directors, their controlled bodies and connected entities No consideration provided to or receivable by third parties for making available directors' services subsisted at the end of the year or at any time during the year. (c) Consideration provided to third parties for making available directors' services No director's termination benefit subsisted at the end of the year or at any time during the year. (b) Directors' termination benefits No director received any emolument from the Group as an inducement to join or leave the Group or compensation for loss of office. Except as stated in Note (iii) above, no director waived or has agreed to waive any emoluments during the years ended 31 December 2023 and 2022. 843,658 options previously granted were voluntarily waived by a former executive director in January 2024. During the year ended 31 December 2023, no options were granted to any executive director of the Company (2022: Nil), and no options previously granted were voluntarily waived by executive directors, except for voluntary waiver of 843,658 options held by a former executive director which did not take place during his term of directorship (2022: 2,530,972 options previously granted were voluntarily waived by an executive director), while 74,542 awarded shares were granted to five independent non-executive directors of the Company (2022: 58,398 awarded shares were granted to five independent non-executive directors of the Company). (v) (iv) (iii) (ii) The emoluments were received by Mr Lau Chi Ping Martin in his capacity as a director of the Company during the period from 1 January 2023 to 17 May 2023. For the year ended 31 December 2023 (a) Directors' and the chief executive's emoluments (continued) 804 Ke Yang 6,350 Bonuses RMB'000 RMB'000 RMB'000 plans expenses RMB'000 RMB'000 in kind RMB'000 Total RMB'000 (Note (i)) Ma Huateng (CEO) 1,254 7,103 30,194 128 15 38,694 Lau Chi Ping Martin 1,254 7,353 Salaries Fees Name of director to pension compensation and benefits 5,278 1,072 Yang Siu Shun 7,035 5,963 1,072 lan Charles Stone 3,785 2,981 Notes to the Consolidated Financial Statements 804 187,459 99 Notes to the Consolidated Financial Statements For the year ended 31 December 2023 16 BENEFITS AND INTERESTS OF DIRECTORS (continued) (a) Directors' and the chief executive's emoluments (continued) During the year ended 31 December 2022: Contributions Share-based Allowances Li Dong Sheng For the year ended 31 December 2023 17 DIVIDENDS (a) Final dividends 31 9 1 8 13 Business combinations 53,978 2,257 69 69 1,152 35,967 14,533 Opening net book amount Year ended 31 December 2023 53,978 2,257 69 1,152 Additions 1,922 16,515 193 (4) Impairment provisions (19,895) (834) (40) (376) (17,715) (930) Depreciation 35,967 (133) (3) (9) (100) (4) Disposals 19,170 503 37 37 (17) 158,317 14,533 128 Total Leasehold Motor vehicles improvements and office equipment operating equipment Buildings RMB'Million Furniture Computer and other 18 PROPERTY, PLANT AND EQUIPMENT For the year ended 31 December 2023 Notes to the Consolidated Financial Statements Tencent Holdings Limited 212 00 Dividends payable for distribution in specie was approximately RMB115.8 billion right before the Share Certificate Dispatch Date, measured at fair value using the market price of the Meituan Shares to be distributed. Fair value changes on the dividends payable amounted to approximately RMB30.0 billion from 1 January 2023 to the Share Certificate Dispatch Date were recognised in equity as a result of the changes in the fair value of the Meituan Shares to be distributed. Upon the dispatch of the share certificates of the Meituan Shares to be distributed, the assets held for distribution (Note 34) and dividends payable for distribution in specie were derecognised and the cumulative fair value losses of assets held for distribution amounted to approximately RMB19.0 billion were transferred from other reserves to retained earnings. On 16 November 2022, the Board resolved to declare a distribution of a special interim dividend by the Company in the form of a distribution in specie of approximately 948 million Class B ordinary shares of Meituan to the shareholders. The share certificates of the relevant shares of Meituan ("Meituan Shares") in respect of the distribution to qualifying shareholders were dispatched to qualifying shareholders on 24 March 2023 (the "Share Certificate Dispatch Date"). (b) Settlement of special interim dividend by way of distribution in specie A final dividend in respect of the year ended 31 December 2023 of HKD3.40 per share (2022: HKD2.40 per share) was proposed pursuant to a resolution passed by the Board on 20 March 2024 and subject to the approval of the shareholders at the 2024 annual general meeting of the Company to be held on 14 May 2024 or any adjournment thereof. This proposed dividend is not reflected as dividend payable in the consolidated financial statements. The final dividends amounting to HKD22,762 million (2022: HKD15,260 million) were paid during the year ended 31 December 2023. RMB'Million RMB'Million RMB'Million RMB'Million RMB'Million At 1 January 2023 58 (1) 8 37 26 Currency translation differences (77,753) (2,782) (85) Net book amount (1,822) (5,651) Accumulated depreciation and impairment 131,603 4,981 155 2,966 103,343 20,158 Cost (67,413) 8 11 128 (23,101) (10,035) (108,045) (5,971) (7,515) (154,667) Currency translation differences (2,667) (34) (69) (304) (72) (3,146) Net book amount 116,731 4,110 31,010 6,277 6,850 Business combinations 161,802 2,361 7,590 Accumulated amortisation and impairment 31,010 116,731 Opening net book amount Year ended 31 December 2023 161,802 2,361 7,590 4,110 319,615 9,948 13,865 22 INTANGIBLE ASSETS Tencent Holdings Limited 218 00 As at 31 December 2023, construction in progress mainly comprised office buildings and data centers under construction located in the PRC. 9,229 Notes to the Consolidated Financial Statements 13,583 18 (4) (175) 1 5 (2,055) 1 727 For the year ended 31 December 2023 software and 139,124 14,179 142,499 Cost At 1 January 2023 RMB'Million Computer RMB'Million RMB'Million Others Trademarks Media content RMB'Million RMB'Million technology Goodwill RMB'Million Total (2,623) 194 Additions Cost 146,966 14,935 167,888 14,591 10,253 354,633 Accumulated amortisation and impairment (23,106) (11,031) (130,672) (6,960) (8,049) (179,818) Currency translation differences 2,360 (11) 58 219 Annual Report 2023 177,727 2,193 7,664 At 31 December 2023 37,757 126,220 Net book amount 2,912 (11) 33 541 3,893 177,727 2,193 7,664 (989) (30,088) (1,001) Amortisation (3,772) (1) (545) (1,347) (2,383) Disposals and others 32,127 122 31,298 707 (41) 14,233 (32,623) (5) 37,757 3,893 126,220 Closing net book amount 6,058 61 Impairment provisions 337 23 5,027 Currency translation differences (98) (3) (90) 610 5,363 185 5,923 (532) (546) (10) (9) 2 15 17,179 18,046 The land use rights mainly represented prepaid operating lease payments in respect of land in the Mainland of China with remaining lease periods of 25 to 47 years. Annual Report 2023 215 Notes to the Consolidated Financial Statements For the year ended 31 December 2023 (162) 20 LEASES (EXCLUDING LAND USE RIGHTS) 00 Movement of right-of-use assets (excluding land use rights, disclosed in Note 19) is analysed as follows: Opening net book amount Business combinations Additions Depreciation Reduction (Note) Impairment provisions Currency translation differences Closing net book amount Note: 2023 2022 (a) Amounts recognised in the consolidated statement of financial position (201) 858 36 Net book amount 7,129 35,967 1,152 69 2,257 53,978 During the year ended 31 December 2023, depreciation of RMB16,630 million (2022: RMB18,856 million), RMB405 million (2022: RMB349 million) and RMB2,860 million (2022: RMB2,508 million) were charged to "Cost of revenues", "Selling and marketing expenses" and "General and administrative expenses”, respectively. 214 Tencent Holdings Limited 19 LAND USE RIGHTS Opening net book amount Additions Reduction (Note) Disposals Amortisation Impairment provisions Currency translation differences Closing net book amount Note: Notes to the Consolidated Financial Statements For the year ended 31 December 2023 It represented the return from the government due to actual occupancy area adjustments. 2023 2022 RMB'Million RMB'Million 329 18,046 17,728 RMB'Million RMB'Million 14,533 47 6,720 1,011 1,060 Interest expense (included in finance costs) Expense relating to short-term leases not included in lease liabilities (included in cost of revenues and expenses) 1,595 1,741 Expense relating to variable lease payments not included in lease liabilities (included in cost of revenues and expenses) 4,687 5,577 Some leases of computer and other operating equipment contain variable lease payments. Variable payments are used for a variety of reasons, including managing cash outflows and minimising the fixed costs. Variable lease payments that depend on usage of bandwidth are recognised in profit or loss in the period in which the conditions that trigger those payments occur. Variable lease payments relating to computer and other operating equipment leases during the year ended 31 December 2023 were considered to be insignificant. The total cash outflow in financing activities for leases during the year ended 31 December 2023 was approximately RMB7,589 million (2022: RMB6,871 million), including principal elements of lease payments of approximately RMB6,652 million (2022: RMB5,969 million) and related interest paid of approximately RMB937 million (2022: RMB902 million), respectively. Annual Report 2023 217 Notes to the Consolidated Financial Statements For the year ended 31 December 2023 21 CONSTRUCTION IN PROGRESS Opening net book amount Additions Transfer to property, plant and equipment Business combinations Currency translation differences Closing net book amount 2023 2022 RMB'Million RMB'Million 9,229 22,524 6,397 30 Disposal 3,320 (b) Amounts recognised in consolidated income statement and consolidated statement of cash flows The consolidated income statement included the following amounts relating to leases (excluding the amortisation of land use rights, disclosed in Note 19): 20 LEASES (EXCLUDING LAND USE RIGHTS) (continued) For the year ended 31 December 2023 Notes to the Consolidated Financial Statements 216 Tencent Holdings Limited The reduction of right-of-use assets during the years ended 31 December 2023 and 2022 mainly arose from early termination and modification of lease contracts. 22,524 20,464 Depreciation charge of right-of-use assets 438 (543) (2,512) (6,722) (6,398) 8,715 6,535 34 20,468 171 (3) Buildings 268 2023 3,370 Computer and other operating equipment Others 2,927 3,436 2022 RMB'Million RMB'Million (370) Listed entities (Note) 250,491 117,715 103,724 6,184 5,811 351,594 Unlisted entities 329,534 208,614 66,375 (784) (373) 2023 income 31 December operation RMB'Million Revenues RMB'Million Liabilities RMB'Million RMB'Million Assets (1,154) Total RMB'Million RMB'Million in listed Profit/(loss) from of stakes Fair value The Group's share of the results, the revenues, the aggregated assets (including goodwill) and liabilities of its associates, as well as the fair value of its stakes in the associates which are listed entities, are shown in aggregate as follows: continuing comprehensive comprehensive income RMB'Million associates as at Other 580,025 264,090 170,099 309,742 186,634 The associates of the Group have been accounted for by using equity method based on the financial information of the associates prepared under the accounting policies generally consistent with those of the Group. (16,379) 2,417 (13,962) Note: As at 31 December 2023 and 2022, stakes in the associates which are listed entities consisted of directly and indirectly held listed equity interests. Annual Report 2023 225 Notes to the Consolidated Financial Statements For the year ended 31 December 2023 23 INVESTMENTS IN ASSOCIATES (continued) Management had assessed the level of influence that the Group was able to exercise on certain associates with the respective shareholding below 20% and certain associates with shareholding over 50% (voting power is below 50%), with total carrying amounts of RMB148,749 million and RMB18,960 million as at 31 December 2023, respectively (31 December 2022: RMB142,323 million and RMB19,615 million, respectively). Management had determined that it had significant influence thereon through the board of directors representation or other arrangements made, but it had no control or joint control over such investees since the Group had no power to direct or jointly direct relevant activities due to other arrangements made. Consequently, these investments had been classified as associates. There were no material contingent liabilities relating to the Group's interests in the associates. 555,785 326,329 24 INVESTMENTS IN JOINT VENTURES (11,785) 5,400 (743) 4,657 2022 Listed entities (Note) 230,845 105,310 126,405 (4,594) 2,990 (1,604) Unlisted entities 324,940 204,432 60,229 (573) 23 INVESTMENTS IN ASSOCIATES (continued) (25,689) Notes to the Consolidated Financial Statements Additions (Note (a)) Transfers (Note (b)) 246,043 316,574 7,696 12,713 4,408 (54,438) Dilution (losses)/gains on deemed disposal (1,295) 2,763 Share of profit/(loss) of associates, net (Note 12) 5,400 (16,379) Share of other comprehensive income of associates At beginning of the year (743) RMB'Million 2022 As at 31 December 2023, the Group's investments in joint ventures of RMB7,969 million (31 December 2022: RMB6,672 million) mainly comprised an investee company that is a special purpose vehicle of which the Group has a majority stake for the investment in one of the telecommunication carriers in the PRC and other joint venture initiatives in entertainment-related businesses. Movement of investments in associates is analysed as follows: 23 INVESTMENTS IN ASSOCIATES (continued) Notes to the Consolidated Financial Statements 246,043 253,696 120,508 120,920 125,535 132,776 RMB'Million RMB'Million 2022 For the year ended 31 December 2023 2023 RMB'Million 2,417 Share of other changes in net assets of associates Dividends Disposals 4,674 Note: (continued) (b) During the year ended 31 December 2023, the Group's transfers mainly comprised the following: (i) investment in an associate of approximately RMB2,304 million transferred from FVPL due to conversion of the redeemable instruments into ordinary shares upon its IPO in January 2023; and this investment with a carrying amount of approximately RMB2,293 million was transferred from investment in an associate to FVOCI due to resignation of the board representative in March 2023; (ii) except as described above, investment in associates with an aggregate amount of approximately RMB7,968 million transferred from FVPL due to conversion of the redeemable instruments into ordinary shares; and (iii) investments in associates with an aggregate amount of approximately RMB1,317 million transferred to FVPL due to resignation of board representatives. (c) Both external and internal sources of information of associates are considered in assessing whether there is any indicator that the investments may be impaired, including but not limited to information about financial position and business performance of the associates, and a significant or prolonged decline in the fair value of an investment below its carrying amount is also objective evidence of impairment. The Group carries out impairment assessments on those investments with impairment indicators, and the respective recoverable amounts of investments are determined with reference to the higher of fair value less costs of disposal and value in use. In respect of the recoverable amount using value in use, the discounted cash flows calculations are based on cash flow projections estimated by management and the key assumptions adopted in these cash flow projections include revenue growth rates, terminal growth rates and discount rates. In respect of the recoverable amount based on fair value less costs of disposal, the amount is calculated with reference to their respective market prices for listed investments, or using certain key valuation assumptions including the selection of comparable companies, recent market transactions, liquidity discounts adopted for lack of marketability for unlisted investments. During the year ended 31 December 2023, an aggregate impairment loss of approximately RMB6,847 million (2022: RMB25,689 million) had been recognised for associates with impairment indicators, and the majority of these associates' recoverable amounts were determined using fair value less costs of disposal where the respective fair values had been determined according to the principle set out in Note 4.3. 00 224 Tencent Holdings Limited 23 INVESTMENTS IN ASSOCIATES (continued) For the year ended 31 December 2023 Notes to the Consolidated Financial Statements 223 7,009 (5,235) (724) (2,544) (3,853) Impairment provisions, net (Note (c) and Note 9) Currency translation differences (6,847) For the year ended 31 December 2023 2,139 At end of the year 253,696 246,043 Note: (a) During the year ended 31 December 2023, the Group's additions mainly comprised new investments and additional investments in certain investee companies, which are principally engaged in games development, streaming media and other Internet-related businesses. Annual Report 2023 5,650 Share of profit amounting to RMB400 million was recognised during the year ended 31 December 2023 (2022: RMB250 million) (Note 12). 202,757 00 187,502 Treasury investments and others 8,952 6,140 211,145 206,085 Included in current assets: Investments in listed entities 1 2 Treasury investments and others 14,902 27,961 14,903 27,963 190,698 226,048 Investments in unlisted entities 11,495 Annual Report 2023 227 Notes to the Consolidated Financial Statements For the year ended 31 December 2023 25 FINANCIAL INSTRUMENTS BY CATEGORY (continued) The Group's exposure to various risks associated with the financial instruments is discussed in Note 4. The maximum exposure to credit risk at the end of the reporting period is the carrying amount of each class of financial assets mentioned above. 26 FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS 00 FVPL include the following: Included in non-current assets: As at 31 December 2023 2022 RMB'Million RMB'Million Investments in listed entities 12,443 648,524 234,048 Notes to the Consolidated Financial Statements (1,954) (7,117) (50,303) (22,926) 3,342 16,128 226,048 234,048 During the year ended 31 December 2023, the Group's additions and transfers mainly comprised the following: (i) new investments and additional investments with an aggregate amount of approximately RMB53,276 million in treasury investments, investee companies which are principally engaged in digital payment, games development and eCommerce, and others; and (ii) except as described in Note 23(b), transfers mainly comprised certain investments with an aggregate amount of approximately RMB6,442 million designated as FVOCI due to the conversion of preference shares into ordinary shares upon their IPOs. Management had assessed the level of influence that the Group was able to exercise on certain FVPL with shareholding exceeding 20%. Since these investments were either held in the form of redeemable instruments or interests in limited partnerships without significant influence, these investments had been classified as FVPL. Annual Report 2023 229 45,206 228 Tencent Holdings Limited 40,915 234,048 For the year ended 31 December 2023 26 FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS (continued) Movement of FVPL is analysed as follows: At beginning of the year Additions and transfers (Note (a)) Changes in fair value (Note 9) Disposals and others Currency translation differences At end of the year Note: (a) 2023 2022 RMB'Million RMB'Million 2023 537,896 147,965 Dividends payable for distribution in specie (Note 17(b)) Accounts receivable (Note 32) 46,606 45,467 Cash and cash equivalents (Note 33(a)) 172,320 156,739 Restricted cash (Note 33(b)) 3,818 2,783 Other financial assets (Note 29) 1,735 995 Financial assets at fair value: FVPL (Note 26) 226,048 133,112 234,048 215,284 39,643 226 Tencent Holdings Limited Notes to the Consolidated Financial Statements For the year ended 31 December 2023 25 FINANCIAL INSTRUMENTS BY CATEGORY As at 31 December 2023, the financial instruments of the Group are analysed as follows: Financial assets Financial assets at amortised cost: Deposits and other receivables As at 31 December 2023 2022 RMB'Million RMB'Million 46,985 Term deposits (Note 31) FVOCI (Note 27) 213,951 185,247 6,204 Accounts payable (Note 42) 100,948 92,381 Lease liabilities 22,622 24,778 Other payables and accruals 43,335 32,659 Financial liabilities at fair value: Other financial liabilities (Note 41) 2,985 3,307 Financial liabilities measured according to IFRIC 17: 10,354 Other financial liabilities (Note 41) 6,867 9,034 Assets held for distribution (Note 34) 147,965 Other financial assets (Note 29) 6,741 7,270 933,488 953,269 During the year ended 31 December 2023, an aggregate impairment reversal of approximately RMB752 million (2022: impairment provision of RMB3 million) for the carrying amounts of the investments in joint ventures, based on the respective assessed recoverable amounts which were determined using fair value less costs of disposal, was recognised due to favourable events or changes in circumstances that indicated the reduction in impairment. Financial liabilities Borrowings (Note 38) 197,356 175,248 Notes payable (Note 39) 151,262 159,115 Long-term payables Financial liabilities at amortised cost: As at 31 December (12,358) 00 5,398 9,275 36,289 8,241 112,173 Opening net book amount Year ended 31 December 2022 171,376 5,398 9,275 36,289 8,241 112,173 Net book amount (6,051) 171,376 Business combinations 11,152 836 Amortisation (2,822) (8) (8) (2,803) (3) Disposals (157) 23,025 22,292 688 Additions 17,419 563 900 3,968 45 (1,640) (466) (4,899) RMB'Million For the year ended 31 December 2023 22 INTANGIBLE ASSETS (continued) 00 Computer software and Media Goodwill technology content Trademarks Others Total 222 Tencent Holdings Limited Notes to the Consolidated Financial Statements RMB'Million RMB'Million RMB'Million RMB'Million RMB'Million Currency translation differences (114,044) (3,799) (3,256) (88,359) (4,355) (14,275) (83) Accumulated amortisation and impairment 9,354 12,977 125,114 12,679 131,347 Cost At 1 January 2022 291,471 (28,893) (446) (1,051) 22 INTANGIBLE ASSETS (continued) Notes to the Consolidated Financial Statements 220 Tencent Holdings Limited 161,802 2,361 7,590 31,010 4,110 116,731 Net book amount (3,146) (72) (304) (69) (34) During the year ended 31 December 2023, amortisation of RMB30,217 million (2022: RMB29,511 million) and RMB2,406 million (2022: RMB3,184 million) were charged to "Cost of revenues" and "General and administrative expenses", respectively. During the year ended 31 December 2023, impairment losses of RMB95 million (2022: RMB17,265 million) on goodwill and other intangible assets arising from acquisitions were charged to the consolidated income statement under "Net gains/(losses) from investments and others", and RMB3 million (2022: RMB141 million) were charged to "Cost of revenues". Impairment tests for goodwill Goodwill was allocated to VAS segment with RMB121,437 million (31 December 2022: RMB112,120 million), Online Advertising segment with RMB434 million (31 December 2022: RMB468 million), FinTech and Business Services segment with RMB1,432 million (31 December 2022: RMB1,226 million) and Others segment with RMB2,917 million (31 December 2022: RMB2,917 million). Investments in associates 23 INVESTMENTS IN ASSOCIATES Management had not identified any reasonably possible change in key assumptions that could cause carrying amounts of the above CGUs (or groups of CGUs) to exceed their recoverable amounts. For goodwill attributable to the Group's online music business and online literature business within VAS segment, FinTech and Business Services segment and television series and film production businesses within Others segment, value in use was calculated using discounted cash flows. The valuations were based on five-year financial projections plus a terminal value related to cash flows beyond the projection period extrapolated at an estimated terminal growth rate of generally not more than 5% (2022: not more than 5%). Pre-tax discount rates of not more than 22% (2022: not more than 22%) were applied, which reflected assessment of time value and specific risks relating to the industries that the Group operates in. Management leveraged their experiences in the industries and provided forecast based on past performance and their anticipation of future business and market developments. Key parameters applied in the financial projections for impairment review purpose also included revenue growth rates, on a compound annual basis, of not more than 25% (2022: not more than 25%). Impairment tests for goodwill (continued) 22 INTANGIBLE ASSETS (continued) For the year ended 31 December 2023 (2,667) Notes to the Consolidated Financial Statements Annual Report 2023 For goodwill attributable to the Group's online game business within VAS segment, the recoverable amount was determined using fair value less costs of disposal where the fair value was determined as Level 3 according to the principle set out in Note 4.3. Fair value less costs of disposal was primarily determined based on ratios of EV (enterprise value) divided by EBITDA of several comparable public companies (range: 11-19x) (2022: range: 13-21x) multiplied by the EBITDA of the related CGU (or group of CGUS) and liquidity discounted for lack of marketability at a range of 10% to 20% (2022: 10% to 20%). The comparable public companies were chosen based on factors such as industry similarity, company size, profitability and financial risks etc. The key assumptions used for the calculation of the recoverable amounts of the CGUs (or groups of CGUs) under impairment testing are as follows: (1,111) - Listed entities - Unlisted entities The Group carries out its impairment testing on goodwill by comparing the recoverable amounts of CGUS or groups of CGUS to their carrying amounts. For the purpose of goodwill impairment review, the recoverable amount of a CGU (or group of CGUS) is the higher of its fair value less costs of disposal and its value in use. 221 Currency translation differences For the year ended 31 December 2023 85 116,731 Closing net book amount (32,695) (154,667) 142 397 49 4,110 2,232 (17,406) (2,671) (1,608) (240) (4,061) (8,826) Impairment provisions Currency translation differences 31,010 2,905 2,361 (7,515) (5,971) (108,045) (10,035) (23,101) Accumulated amortisation and impairment 319,615 9,948 13,865 139,124 14,179 142,499 7,590 Cost 161,802 At 31 December 2022 38,246 (140) Currency translation differences (32) 197 276 10,578 441 9,718 3,655 Notes to the Consolidated Financial Statements 235 Annual Report 2023 10,493 3,802 At 31 December 2022 (Restated) For the year ended 31 December 2023 and FVOCI Note: (140) subsidiaries combinations Right-of- tax Accelerated Deemed disposals of Changes in fair value of FVPL in business be remitted by earnings anticipated to Withholding tax on the Intangible assets acquired Deferred income tax liabilities on temporary differences arising from The movements of deferred income tax liabilities before offsetting are as follows: The Group only recognises deferred income tax assets for unused cumulative tax losses if it is probable that future taxable profits will be available to utilise those tax losses. Management will continue to assess the recognition of deferred income tax assets in future reporting periods. As at 31 December 2023, the Group did not recognise deferred income tax assets of RMB12,903 million (31 December 2022: RMB7,343 million) in respect of unused cumulative tax losses amounting to RMB68,715 million (31 December 2022: RMB39,683 million). The majority of these unused tax losses were originated from subsidiaries located in the Mainland of China and will expire from 2024 to 2033. 30 DEFERRED INCOME TAXES (continued) financial instruments 3,070 459 At 1 January 2022 (Restated) 3,070 Adjustment on Amendments to IAS 12 (Note 2.2) 30,844 8,620 228 12,022 8,267 1,707 At 31 December 2021 35,643 7,717 3,358 9,946 3,498 RMB'Million 8,267 1,707 12,022 3,298 459 changes in equity Credited to consolidated statement of 3,522 1,335 504 (1,726) 1,958 1,451 income statement Credited/(charged) to consolidated 50 28 22 Business combinations 33,914 8,620 Transfer upon disposal and deemed disposal of RMB'Million 99 investees RMB'Million 7 (80) (4) (235) Currency translation differences 512 512 412 financial instruments deemed disposal of Transfer upon disposal and (850) (850) of changes in equity Charged to consolidated statement 6,550 6,550 Withholding tax paid (8,274) (29) (44) 11,124 At 31 December 2023 acquired tax on the Intangible assets Deferred income tax liabilities on temporary differences arising from Withholding 30 DEFERRED INCOME TAXES (continued) For the year ended 31 December 2023 Notes to the Consolidated Financial Statements Tencent Holdings Limited 236 00 (24,261) (221) (2,939) (1,616) (1,376) (4,146) (8,795) (5,168) (242) RMB'Million 535 (120) (3,430) IAS 12 (Note 2.2) Adjustment on Amendments to (17,096) (275) (10) (2,405) (1,256) (3,425) (5,041) (4,684) At 31 December 2022 RMB'Million RMB'Million Total Others use assets RMB'Million RMB'Million depreciation (3,430) 794 At 1 January 2023 (Restated) (5,041) (301) (10,300) 1,162 income statement Credited/(charged) to consolidated (1,431) (1) (5) (12) 213,951 (2) (1,411) Business combinations (20,526) (275) (3,440) (2,405) (1,256) (3,425) (4,684) At 31 December 2023 (368) (13) 453 366 29,301 28,336 Included in current assets: RMB term deposits USD term deposits Other currencies 119,990 49,412 65,798 55,248 195 116 185,983 104,776 215,284 Other currencies 27,970 28,848 RMB term deposits (1,256) (2,405) (3,440) (275) (20,526) Note: As at 31 December 2023, the Group recognised the relevant deferred income tax liabilities of RMB8,795 million (31 December 2022: RMB5,041 million) on earnings anticipated to be remitted by certain subsidiaries in the foreseeable future. No withholding tax had been provided for the earnings of approximately RMB43,162 million (31 December 2022: RMB107,316 million) expected to be retained by the PRC subsidiaries and not to be remitted to a foreign investor in the foreseeable future based on several factors, including management's estimation of overseas funding requirements. Annual Report 2023 237 133,112 Notes to the Consolidated Financial Statements 31 TERM DEPOSITS An analysis of the Group's term deposits by currency is as follows: As at 31 December 2023 RMB'Million 2022 RMB'Million Included in non-current assets: For the year ended 31 December 2023 Term deposits with initial terms of over three months were neither past due nor impaired. As at 31 December 2023 and 2022, the carrying amounts of the term deposits with initial terms of over three months approximated their fair values. 00 238 The majority of the Group's accounts receivable were denominated in RMB. As at 31 December 2023 2022 RMB'Million RMB'Million 24,259 25,279 Over 90 days 11,708 6,163 6,545 4,476 4,396 46,606 45,467 Annual Report 2023 239 9,247 (3,425) ~ 31 - 60 days Tencent Holdings Limited 32 ACCOUNTS RECEIVABLE Notes to the Consolidated Financial Statements For the year ended 31 December 2023 As at 31 December 2023 2022 RMB'Million 61 - 90 days RMB'Million 54,355 52,003 (7,749) (6,536) 46,606 45,467 Accounts receivable and their ageing analysis, based on recognition date, are as follows: 0-30 days Accounts receivable from contracts with agents/customers Loss allowance 45 (5,041) At 31 December 2022 (Restated) 1,994 22,838 22,671 159,861 189,286 RMB'Million RMB'Million 2022 2023 As at 31 December (a) Note: At end of the year Currency translation differences Disposals Changes in fair value Additions and transfers (Note (a)) 2,548 Credited/(charged) to consolidated income statement 1,389 23 14 4 17 Currency translation differences (45) (45) financial instruments At beginning of the year Transfer upon disposal and deemed disposal of (368) changes in equity Charged to consolidated statement of (2,282) (2,435) (473) (595) (168) (368) Movement of FVOCI is analysed as follows: Treasury investments Equity investments in unlisted entities 3,250 3,250 Charged to consolidated statement of changes in equity (1,028) (1,028) Transfer upon disposal and deemed disposal of Withholding tax paid financial instruments 372 Currency translation differences (81) (15) (80) (16) (69) (261) 372 (4,684) (613) earnings anticipated to Equity investments in listed entities 00 FVOCI include the following: 27 FINANCIAL ASSETS AT FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME For the year ended 31 December 2023 Notes to the Consolidated Financial Statements (120) (20,988) (86) Business combinations (1,258) Credited/(charged) to consolidated income statement 3,080 (4,350) 138 (293) 1,266 (1,258) in business be remitted by Running royalty fees for online games (Note (b)) Deemed 234 Tencent Holdings Limited Notes to the Consolidated Financial Statements For the year ended 31 December 2023 30 DEFERRED INCOME TAXES (continued) The movements of deferred income tax assets before offsetting are as follows: Deferred income tax assets on temporary differences arising from Accelerated amortisation Share-based of intangible Accrued assets Tax losses RMB'Million RMB'Million expenses RMB'Million Lease liabilities RMB'Million 00 17,720 (20,526) 38,246 3,250 3,250 Withholding taxes paid Credited/(charged) to consolidated statement of changes in equity 459 (1,028) (569) payments and others RMB'Million Transfer upon disposal and deemed disposal of (140) 372 232 Currency translation differences 441 (261) 180 At 31 December 2022 (Restated) financial instruments 2,909 Total (Note) (18,227) (22,919) - to be recovered within 12 months - to be recovered after more than 12 months Gross deferred income tax liabilities: 29,882 29,017 Net deferred income tax assets (8,364) (6,626) Set-off of deferred income tax assets pursuant to set-off provisions 38,246 35,643 13,556 12,541 24,690 23,102 47 6 34 7 At 31 December 2022 9,718 3,655 10,493 372 10,578 34,816 Adjustment on Amendments to IAS 12 (Note 2.2) RMB'Million 3,430 At 1 January 2023 (Restated) 9,718 3,655 10,493 3,802 10,578 38,246 Business combinations 3,430 - to be recovered within 12 months (613) Credited/(charged) to consolidated income statement (Note 13(a)) liabilities net RMB'Million RMB'Million RMB'Million At 31 December 2022 34,816 (17,096) 17,720 Adjustment on Amendments to IAS 12 (Note 2.2) 3,430 (3,430) At 1 January 2023 (Restated) 38,246 (20,526) 17,720 Business combinations assets income tax, Deferred Deferred income tax (1,342) (2,299) (24,261) (20,526) Set-off of deferred income tax liabilities pursuant to set-off provisions 6,626 8,364 Net deferred income tax liabilities 47 (17,635) Annual Report 2023 233 Notes to the Consolidated Financial Statements For the year ended 31 December 2023 30 DEFERRED INCOME TAXES (continued) The movements of the deferred income tax assets/liabilities before offsetting are as follows: Deferred income tax (12,162) 3,522 (1,431) Charged to consolidated income statement (Note 13(a)) (24,261) 11,382 At 31 December 2021 30,844 (17,918) 12,926 Adjustment on Amendments to IAS 12 (Note 2.2) 3,070 (3,070) At 1 January 2022 (Restated) 33,914 (20,988) 12,926 Business combinations 50 (1,258) (1,208) 35,643 At 31 December 2023 (197) (242) (2,282) (8,274) (10,556) Withholding taxes paid 6,550 6,550 Charged to consolidated statement of changes in equity (1,384) (368) (1,218) Transfer upon disposal and deemed disposal of financial instruments (45) 512 467 Currency translation differences 45 (850) ― to be recovered after more than 12 months 2023 Restated RMB'Million RMB'Million As at 31 December 28 PREPAYMENTS, DEPOSITS AND OTHER ASSETS For the year ended 31 December 2023 Notes to the Consolidated Financial Statements 230 Tencent Holdings Limited During the year ended 31 December 2023, except as described in Note 23(b)(i) and Note 26(a)(ii), the Group's additions and transfers mainly comprised certain new investments and additional investments with an aggregate amount of approximately RMB8,454 million in investee companies which are principally engaged in eCommerce, FinTech services and other Internet- related businesses. 185,247 213,951 12,025 5,311 (9,191) (8,074) (148,169) 12,419 80,325 19,048 250,257 2023 2022 RMB'Million RMB'Million Included in current assets: 36,752 28,439 8,099 7,182 Others 464 517 185,247 6,133 Prepayments for capital transactions 4,796 3,667 Loans to investees and investees' shareholders (Note (a)) 17,260 13,872 Prepayments for media content and game licences Included in non-current assets: 3,201 Prepayments and prepaid expenses RMB'Million 2022 RMB'Million RMB'Million RMB'Million Total Others Right-of- use assets depreciation investees RMB'Million RMB'Million RMB'Million RMB'Million and FVOCI subsidiaries combinations tax disposals of Accelerated RMB'Million At 31 December 2021 (6,425) (3,926) 2023 185,247 (3,072) (3,655) (963) (2,827) (3,926) (6,425) RMB'Million At 1 January 2022 (Restated) (3,070) IAS 12 (Note 2.2) Adjustment on Amendments to (17,918) (120) (3,655) (963) (2,827) (3,070) 24,393 Receivables related to financial services (Note (c)) 18,824 6,741 302 3,252 Others 6,968 3,489 Interest rate swap (Note) Measured at fair value: 995 1,735 Treasury investments RMB'Million RMB'Million 2022 2023 As at 31 December Measured at amortised cost: 7,270 8,476 8,265 Included in: As at 1 January As at 31 December 2023 Gross deferred income tax assets: Deferred income tax assets/liabilities are analysed as follows: Deferred income taxes are calculated in full on temporary differences under the liability method using the tax rates which are expected to apply at the time of reversal of the temporary differences. 30 DEFERRED INCOME TAXES For the year ended 31 December 2023 Notes to the Consolidated Financial Statements 00 232 Tencent Holdings Limited 8,265 8,476 1,278 5,949 6,987 2,527 Note: Non-current assets Current assets The Group's outstanding interest rate swap contracts were measured at fair value and used to hedge the exposure arising from certain borrowings and senior notes carried at floating rates. As at 31 December 2023, the aggregate notional principal amounts of these outstanding interest rate swap contracts were USD13,698 million (equivalent to approximately RMB97,019 million) (31 December 2022: USD14,848 million (equivalent to approximately RMB103,410 million)). 29 OTHER FINANCIAL ASSETS As at 31 December 2023 and 2022, the carrying amounts of prepayments, deposits and other assets (excluding prepayments and refundable VAT) approximated their fair values. As at 31 December 2023, loss allowance subject to the ECL model made against the gross amounts of deposits and other assets amounted to RMB2,761 million (31 December 2022: RMB2,863 million). 1,033 Dividend and other investment-related receivables. 1,524 1,596 Refundable VAT 1,258 1,715 Lease and other deposits 832 1,233 Loans to investees and investees' shareholders (Note (a)) 6,504 9,101 Interest receivables 15,939 16,172 Running royalty fees for online games (Note (b)) 15,807 3,113 Changes in fair value of FVPL Others 9,195 Loan receivables related to the Group's financial services are initially measured at fair value. Given the business models in which the loan receivables are held, they were subsequently measured at amortised cost. During the year ended 31 December 2023, the impairment loss on loan receivables related to financial services was immaterial. (c) Note: (continued) 28 PREPAYMENTS, DEPOSITS AND OTHER ASSETS (continued) For the year ended 31 December 2023 Notes to the Consolidated Financial Statements 231 Annual Report 2023 9,033 Running royalty fees for online games comprised prepaid royalty fees, unamortised running royalty fees and deferred Online Service Fees. As at 31 December 2023, the balances of loans to investees and investees' shareholders were mainly repayable within a period of one to seven years (included in non-current assets), or within one year (included in current assets), and were interest-bearing (b) (a) Note: 113,437 116,850 76,685 88,411 at rates of not higher than 18.0% per annum (31 December 2022: not higher than 10.0% per annum). The loan arrangements are in line with the Group's overall business strategy. 27,824 Tencent Holdings Limited (4,594) PRC Currency Investments in 36 OTHER RESERVES (continued) For the year ended 31 December 2023 Notes to the Consolidated Financial Statements 245 Annual Report 2023 (33,219) 2,419 11,221 6,923 Share-based 5,071 (45,025) (36,172) Balance at 31 December 2023 (29,991) (29,991) assets held for distribution Losses from changes in fair value of (3,515) (3,515) Other fair value losses, net 11,480 (9) 22,344 11,480 Capital reserves translation 8,004 4,929 (23,903) 14,743 102,223 (32,684) Balance at 1 January 2022 (Note (d)) (Note (c)) (Note (b)) (Note (a)) Total RMB'Million associates and RMB'Million reserves RMB'Million RMB'Million RMB'Million RMB'Million RMB'Million RMB'Million reserves differences joint ventures FVOCI compensation statutory Others (9) Currency translation differences (701) (1,349) Dilution of interests in subsidiaries 117 of non-controlling interests Changes in put option liabilities in respect (Note (e)) arising from business combinations 95 95 1,449 Recognition of put option liabilities to non-controlling interests Profit appropriations to statutory reserves Acquisition of additional equity interests in non wholly-owned subsidiaries Transfer of equity interests of subsidiaries - Employee share award schemes - Employee share option schemes Value of employee services: associates and joint ventures disposal and deemed disposal of income to retained earnings upon Transfer of share of other comprehensive joint ventures to profit or loss upon disposal and deemed disposal net assets of associates and associates and joint ventures Transfer of share of other changes in Share of other changes in net assets of net of tax Tax benefit from share-based payments Net gains from changes in fair value of FVOCI Share of other comprehensive income of 9,650 912 912 (1,349) 117 (4,594) 95 1,449 21 21 1,583 1,583 73 73 ི 66 (118) 700 (701) 66 (118) 9,650 and joint ventures and deemed disposal of associates income to profit or loss upon disposal Transfer of share of other comprehensive associates and joint ventures 589 73,901 Transfer of losses on disposal and deemed disposal of financial instruments to 246 (40,914) 5,934 9,544 6,011 (6,409) 18,426 (42,530) (31,890) (6,102) (6,102) 5,345 Tencent Holdings Limited 5,345 (129) 17,494 (129) 2,337 (146,500) 1,082 1,082 (929) 727 (175) 179 992 17,494 36 OTHER RESERVES (continued) Note: Notes to the Consolidated Financial Statements Tencent Holdings Limited 248 00 The Company allowed certain of the grantees under the Post-IPO Option Scheme II, the Post-IPO Option Scheme IV and the 2023 Share Option Scheme to surrender their rights to receive a portion of the underlying shares (with equivalent fair value) to set off against the exercise consideration and/or individual income tax payable when they exercised their options. In respect of the 2023 Share Option Scheme, the Board may, at its discretion, grant options to any qualifying participant to subscribe for shares in the Company, subject to the terms and conditions stipulated therein. The exercise price must be in compliance with the requirements under the Listing Rules. In addition, the option vesting period is determined by the Board provided that it is not later than the last day of a 10-year period after the date of grant of option. The Post-IPO Option Scheme IV had been terminated upon the completion of the transfer of the outstanding share options of the Post-IPO Option Scheme IV to the 2023 Share Option Scheme in accordance with the circular of the Company dated 24 April 2023. The Pre-IPO Option Scheme, the Post-IPO Option Scheme I, the Post-IPO Option Scheme II and the Post-IPO Option Scheme III expired on 31 December 2011, 23 March 2014, 16 May 2017 and 13 May 2019, respectively. Upon the expiry of these schemes, no further options would be granted under these schemes, but the options granted prior to such expiry continued to be valid and exercisable in accordance with provisions of the schemes. As at 31 December 2023, there were no outstanding share options exercisable under the Pre-IPO Option Scheme, the Post-IPO Option Scheme I and the Post-IPO Option Scheme III. The Company had adopted six share option schemes, namely, the Pre-IPO Option Scheme, the Post-IPO Option Scheme I, the Post-IPO Option Scheme II, the Post-IPO Option Scheme III, the Post-IPO Option Scheme IV and the 2023 Share Option Scheme. (a) Share option schemes 37 SHARE-BASED PAYMENTS For the year ended 31 December 2023 Notes to the Consolidated Financial Statements 247 Annual Report 2023 During the year ended 31 December 2023, the Group had granted put option to a non-controlling shareholder of a non wholly- owned subsidiary, and the non-controlling shareholder shall have the right to request the Group to purchase remaining equity interests when certain conditions are met. The put price was determined based on the financial performance of the non wholly- owned subsidiary in the future periods, not exceeding a certain amount as stated in the respective agreement. Accordingly, the put option liability of approximately USD644 million (equivalent to approximately RMB4.5 billion) was initially recognised at the present value of the estimated future cash outflows. (e) Share-based compensation reserve arises from share option schemes and share award schemes adopted by certain subsidiaries of the Group (Note 37(d)). With approvals obtained from respective boards of directors of these companies, the Reserve Fund can be used to offset accumulated deficit or to increase capital. (d) In addition, in accordance with the Law of the PRC on Enterprises with Foreign Investments and the stipulated provisions of the articles of association of wholly-owned foreign subsidiaries in the PRC, appropriation from net profit (after offsetting accumulated losses brought forward from prior years) should be made by these companies to their respective Reserve Fund. The percentage of net profit to be appropriated to the Reserve Fund is not less than 10% of the net profit. When the balance of the Reserve Fund reaches 50% of the registered capital, further transfer needs not be made. In accordance with the Companies Laws of the PRC and the stipulated provisions of the articles of association of subsidiaries with limited liabilities in the PRC, appropriation of net profit (after offsetting accumulated losses from prior years) should be made by these companies to their respective Statutory Surplus Reserve Funds and Discretionary Reserve Funds before distributions are made to the owners. The percentage of appropriation to Statutory Surplus Reserve Fund is 10%. The amount to be transferred to the Discretionary Reserve Fund is determined by the equity owners of these companies. When the balance of the Statutory Surplus Reserve Fund reaches 50% of the registered capital, further transfer needs not be made. Both the Statutory Surplus Reserve Fund and Discretionary Reserves Fund can be capitalised as capital of an enterprise, provided that the remaining Statutory Surplus Reserve Fund shall not be less than 25% of the registered capital. Gains and losses on certain investments, including changes in fair value, are recognised in other comprehensive income. These changes are accumulated within FVOCI reserve in equity. When the relevant investments are derecognised, amounts from this reserve are transferred to retained earnings for equity instruments or to profit or loss for debt instruments. (c) (b) The capital reserve mainly arises from transactions undertaken with non-controlling interests. (a) For the year ended 31 December 2023 5 4,680 5 1,425 Recognition of put option liabilities 179 to non-controlling interests Transfer of equity interests of subsidiaries 992 non wholly-owned subsidiaries Tax benefit from share-based payments - Employee share award schemes - Employee share option schemes Value of employee services: Transfer to profit or loss upon disposal of FVOCI associates and joint ventures arising from business combinations disposal and deemed disposal of Transfer of share of other comprehensive disposal and deemed disposal joint ventures to profit or loss upon net assets of associates and Transfer of share of other changes in 7,009 7,838 7,009 associates and joint ventures Share of other changes in net assets of 7,838 retained earnings, net of tax income to retained earnings upon (175) Changes in put option liabilities in respect of non-controlling interests 110 110 11 7 (5,541) 2,337 7 (5,541) (146,500) 11 Balance at 31 December 2022 assets held for distribution Net losses from changes in fair value of Other fair value gains, net Currency translation differences and joint ventures and deemed disposal of associates income to profit or loss upon disposal Transfer of share of other comprehensive associates and joint ventures Share of other comprehensive income of value of FVOCI Net losses from changes in fair Profit appropriations to statutory reserves (929) Dilution of interests in subsidiaries 727 1,425 4,680 17,846 17,846 - --- -17, 828 8,820,561 net of withholding individual income tax (Note (a)) 1,687 56,324 (4,226) (1,868) 62,418 9,568,738,935 RMB'Million RMB'Million Total Employee share award schemes: award schemes premium capital RMB'Million RMB'Million shares* for share Treasury Share Share paid ordinary Shares held Number of issued and fully - proceeds from shares issued, - value of employee services shares RMB'Million - value of employee services - shares purchased/withheld for share award 17,267 (5,350) (4,740) 37,989 9,482,992,820 1,155 1,183 (28) At 31 December 2023 (4,740) (4,740) (40,244) 1,868 (42,112) (140,815,700) 2,071 (2,071) and transferred to the grantees (Note (d)) Repurchase and cancellation of shares (Note (e)) Repurchase of shares (to be cancelled) (Note (e)) Transfer of equity interests of subsidiaries to non-controlling interests - shares vested from share award schemes 46,249,024 - shares allotted for share award schemes (Note (c)) (4,378) (4,378) schemes (Note (b)) 17,267 28 828 1,687 Employee share option schemes: 27,899 At 1 January 2023 35 SHARE CAPITAL, SHARE PREMIUM, TREASURY SHARES AND SHARES HELD FOR SHARE AWARD SCHEMES Some online advertising customers and agents are usually granted with a credit period within 30 to 90 days immediately following the month-end in which the relevant obligations under the relevant contracted advertising orders are delivered. Third party platform providers usually settle the amounts due by them within 60 days. Other customers, mainly including content production related customers and FinTech and cloud customers, are usually granted with a credit period within 90 days. 45,467 46,606 6,051 5,400 3,550 2,609 5,658 7,849 13,787 14,045 16,421 The Group applies the simplified approach prescribed by IFRS 9, which requires expected lifetime losses to be recognised from initial recognition of the assets. The provision matrix is determined based on historical observed default rates over the expected life of the receivables with similar credit risk characteristics and is adjusted for forward-looking estimates. The historical observed default rates are updated and changes in the forward-looking estimates are analysed at year end. For the years ended 31 December 2023 and 2022, information about the impairment of accounts receivable and the Group's exposure to credit risk and foreign exchange risk can be found in Note 4.1. 16,703 RMB'Million 2022 2023 As at 31 December Content production related customers Others Third party platform providers Online advertising customers and agents FinTech and cloud customers The carrying amounts of accounts receivable of the Group's major agents/customers are as follows: 32 ACCOUNTS RECEIVABLE (continued) For the year ended 31 December 2023 Notes to the Consolidated Financial Statements RMB'Million As at 31 December 2023 and 2022, the carrying amounts of the accounts receivable approximated their fair values. 00 240 For the year ended 31 December 2023 Notes to the Consolidated Financial Statements Annual Report 2023 241 These assets were distributed to the qualifying shareholders of the Company on 24 March 2023. As at 31 December 2022, assets held for distribution represented the Meituan Shares to be distributed under the distribution in specie held by the Group as the interim dividend declared on 16 November 2022. Fair value losses amounted to approximately RMB30.0 billion from 1 January 2023 to the Share Certificate Dispatch Date were recorded in other comprehensive income as a result of the changes in the fair value of the Meituan Shares to be distributed. 34 ASSETS HELD FOR DISTRIBUTION As at 31 December 2023, restricted deposits held at banks of RMB3,818 million (31 December 2022: RMB2,783 million) were mainly denominated in RMB, the majority of which were reserves provided for certain licensed business under regulatory requirements. (b) Restricted cash Approximately RMB85,673 million (31 December 2022: RMB96,849 million) within the total balance of the Group's cash and cash equivalents was denominated in RMB. 156,739 172,320 51,972 45,079 Term deposits and highly liquid investments with initial terms within three months 104,767 127,241 Bank balances and cash RMB'Million RMB'Million 2022 2023 As at 31 December For the year ended 31 December 2023 Notes to the Consolidated Financial Statements (a) Cash and cash equivalents 33 BANK BALANCES AND CASH Tencent Holdings Limited As at 31 December 2023 and 2022, the authorised share capital of the Company comprised 50,000,000,000 ordinary shares with par value of HKD0.00002 per share. Notes to the Consolidated Financial Statements 00 Notes to the Consolidated Financial Statements reserves Capital Currency Investments in For the year ended 31 December 2023 Notes to the Consolidated Financial Statements OTHER RESERVES 36 244 00 During the year ended 31 December 2023, the Company repurchased 152,205,700 of its own shares from the market, out of which, 17,830,000 had not been cancelled as at 31 December 2023 and had been subsequently cancelled in January 2024 (2022: the Company repurchased 107,083,000 of its own shares from the market, out of which, 6,440,000 had not been cancelled as at 31 December 2022 and had been subsequently cancelled in January 2023). The shares were repurchased at prices ranging from HKD263.80 to HKD393.80 per share, with an average price of HKD324.78 per share. (e) associates and During the year ended 31 December 2023, the Share Scheme Trust transferred 47,931,238 ordinary shares of the Company (2022: 53,951,167 ordinary shares) to the share awardees upon vesting of the awarded shares (Note 37(b)). During the year ended 31 December 2023, the Company allotted 46,249,024 ordinary shares (2022: 54,196,641 ordinary shares) to the Share Scheme Trust for the purpose of granting awarded shares to the participants under the share award schemes. During the year ended 31 December 2023, the Share Scheme Trust purchased and withheld 13,976,126 ordinary shares (2022: withheld 9,341,643 ordinary shares) of the Company for an amount of approximately HKD4,839 million (equivalent to approximately RMB4,378 million) (2022: HKD3,408 million (equivalent to approximately RMB2,882 million)), which had been deducted from the equity. (c) (b) During the year ended 31 December 2023, 13,148,354 options (2022: 6,806,825 options) with exercise prices ranging from HKD126.57 to HKD343.96 (2022: HKD135.50 to HKD386.60) per share were exercised, while the right to receive 4,327,793 shares (2022: Nil) was surrendered by certain grantees to set off against the exercise consideration and individual income tax payable by the grantees when they exercised their options. (a) Note: 35 SHARE CAPITAL, SHARE PREMIUM, TREASURY SHARES AND SHARES HELD FOR SHARE AWARD SCHEMES (continued) For the year ended 31 December 2023 Notes to the Consolidated Financial Statements 243 Annual Report 2023 (d) translation PRC statutory Share-based compensation instruments to retained earnings, deemed disposal of financial Transfer of losses on disposal and (40,914) 5,934 9,544 6,011 (6,409) 18,426 (42,530) (31,890) Balance at 1 January 2023 (Note (d)) Total RMB'Million Others RMB'Million reserves RMB'Million RMB'Million (Note (c)) (Note (b)) (Note (a)) RMB'Million RMB'Million RMB'Million RMB'Million reserves differences joint ventures FVOCI As at 31 December 2023, the total number of issued ordinary shares of the Company included 91,783,469 shares (31 December 2022: 79,489,557 shares) held for the share award schemes. 242 Tencent Holdings Limited 56,324 (1,868) 2,055 -value of employee services Employee share option schemes: 62,487 (4,843) 67,330 9,608,378,469 At 1 January 2022 RMB'Million Total shares award schemes RMB'Million RMB'Million - shares issued (Note (a)) Employee share award schemes: RMB'Million premium capital shares* for share Treasury Share Share paid ordinary Shares held Number of issued and fully 35 SHARE CAPITAL, SHARE PREMIUM, TREASURY SHARES AND SHARES HELD FOR SHARE AWARD SCHEMES (continued) For the year ended 31 December 2023 RMB'Million 6,806,825 995 2,055 62,418 2,915 617 2,298 9,568,738,935 At 31 December 2022 non-controlling interests Transfer of equity interests of subsidiaries to (1,868) (28,010) 2,882 (1,868) (28,010) (100,643,000) Repurchase and cancellation of shares (Note (e)) Repurchase of shares (to be cancelled) (Note (e)) (2,882) - shares vested from share award schemes and transferred to the grantees (Note (d)) 54,196,641 award schemes (Note (c)) - shares allotted for share (2,882) (2,882) 20,632 20,632 award schemes (Note (b)) - value of employee services -shares withheld for share 995 (4,226) 37 SHARE-BASED PAYMENTS (continued) Acquisition of additional equity interests in (i) of options At 1 January 2022 HKD191.64 35,146,117 HKD402.75 81,689,281 116,835,398 Granted HKD353.22 12,778,815 12,778,815 Exercised HKD146.28 (5,862,075) Lapsed/forfeited/waived HKD135.50 (22,176) HKD279.99 HKD557.65 Total Number (944,750) (6,806,825) At 31 December 2022 HKD200.77 29,261,866 HKD391.24 Exercisable as at 31 December 2022 HKD200.73 29,152,491 HKD382.60 43,255,764 72,408,255 Note: As a result of the distribution in specie of Meituan Shares, pursuant to the scheme rules of the Post-IPO Option Scheme II and the Post-IPO Option Scheme IV, adjustments had been made to the exercise prices of the outstanding share options thereunder as at 5 January 2023, and were reflected in the average exercise prices of related outstanding share options listed above. Annual Report 2023 249 (a) Share option schemes (continued) (3,361,436) (3,383,612) Number of options 90,161,910 119,423,776 Number of options Post-IPO Option Scheme IV Average exercise price For the year ended 31 December 2023 Movements in the number of share options outstanding and their related weighted average exercise prices are as follows: Post-IPO Option Scheme II Post-IPO Option Scheme IV Average Number Average exercise price of options exercise price 2023 Share Option Scheme Number Average of options exercise price Total Number of options Number of options At 1 January 2023 (Note) HKD177.28 29,261,866 Granted HKD354.26 90,161,910 HKD375.60 3,659,925 HKD334.04 119,423,776 Movements in share options Exercised Post-IPO Option Scheme II Average exercise price 13,561,932 17,221,857 HKD356.48 52,857,824 70,066,776 17,208,952 HKD353.11 105,292,749 122,611,076 17,318,327 HKD185.65 Exercisable as at 31 December 2023 HKD185.65 HKD262.55 (752,225) HKD250.65 (454,440) (13,148,354) HKD453.51 (276,898) HKD376.26 (607,455) (886,203) HKD355.55 (92,792,712) HKD355.55 92,792,712 Transferred HKD165.15 (11,941,689) (1,850) HKD143.33 Lapsed/forfeited At 31 December 2023 1.60% 3.48% SOFR + 0.50% ~ 0.55% Included in non-current liabilities: 39 NOTES PAYABLE The Group had complied with all of the financial covenants of its borrowing facilities for the years ended 31 December 2023 and 2022. As at 31 December 2023 and 2022, the carrying amounts of borrowings approximated their fair values. The Group had entered into interest rate swap contracts to hedge its exposure arising from certain long-term bank borrowings carried at floating rates. The Group's outstanding interest rate swap contracts as at 31 December 2023 and 2022 are detailed in Note 29. 1.50% 4.80% RMB6,007 USD2,600 (per annum) RMB7,160 RMB bank borrowings Interest rate (per annum) (Million) Non-current portion of long-term USD notes payable (Million) Amount Interest rate Amount USD bank borrowings Included in current liabilities: 148,669 As at 31 December 31 December 2022 (Million) Amount 31 December 2022 31 December 2023 The aggregate principal amounts of notes payable and applicable interest rates are as follows: Note: 39 NOTES PAYABLE (continued) Notes to the Consolidated Financial Statements Current portion of long-term USD notes payable 257 159,115 151,262 10,446 14,161 137,101 RMB'Million RMB'Million 2022 2023 Annual Report 2023 31 December 2023 EUR2 (b) The zero interest rate of JPY borrowings was due to the special interest exemption for COVID-19 by Tokyo Metropolitan Government. Following the IBOR benchmark reform, all the borrowings the Group held which referenced to USD LIBOR, had been transitioned to SOFR-referenced in July 2023. 1.00% -2.54% EUR3 1.00% -2.54% Interest rate (per annum) EUR bank borrowings TIBOR + 1.70% JPY36 The long-term bank borrowings are repayable as follows: TIBOR + 1.70% JPY bank borrowings 0.00% 1.86% JPY1,250 0.00% 1.86% JPY894 JPY bank borrowings 1.41% USD60 USD bank borrowings JPY21 The aggregate principal amounts of short-term bank borrowings and applicable interest rates are as follows: Within 1 year Between 2 and 5 years For the year ended 31 December 2023 Notes to the Consolidated Financial Statements Note: (continued) 38 BORROWINGS (continued) 169,267 171,795 3 2 130,487 Between 1 and 2 years 114,174 41,643 15,976 RMB'Million RMB'Million 2022 2023 As at 31 December 256 Tencent Holdings Limited Over 5 years 5,599 33,178 Amount 151,262 Interest rate (per annum) 12,169 4,682 5,459 306 85 1,007 1,227 3,072 5,398 9,067 RMB'Million 2022 2023 As at 31 December (a) Note: Current liabilities Non-current liabilities Included in: Others RMB'Million Contingent consideration As at 31 December 2022 259 Annual Report 2023 It comprised redemption liabilities arising from put option arrangements made with non-controlling shareholders of acquired subsidiaries of approximately RMB10,354 million (31 December 2022: RMB6,204 million). 9,511 13,339 3,937 4,558 5,574 8,781 2023 9,511 3,307 2,985 71 3,236 2,966 19 6,204 10,354 RMB'Million RMB'Million 13,339 Measured at fair value: Redemption liabilities (Note (a)) Measured at amortised cost: 2022 As at 31 December 2023 More than 5 years Between 2 and 5 years Between 1 and 2 years Within 1 year The notes payable are repayable as follows: The Group had entered into interest rate swap contracts to hedge its exposure arising from its senior notes carried at floating rates. The Group's outstanding interest rate swap contracts as at 31 December 2023 and 2022 are detailed in Note 29. Following the IBOR benchmark reform, the notes payable the Group held which referenced to USD LIBOR, had been transitioned to Term SOFR-referenced in July 2023. RMB'Million 1.375% 4.700% 1.375% -4.700% USD20,700 USD notes payable LIBOR +0.605% ~ 0.910% CAS+0.910% USD1,250 Term SOFR + USD750 USD notes payable USD21,700 RMB'Million 14,161 10,446 41 OTHER FINANCIAL LIABILITIES Others Payables relating to capital transaction Cash-settled share-based compensation payables (Note 37(d)) Payables relating to media content and running royalty fee for online games For the year ended 31 December 2023 Notes to the Consolidated Financial Statements 40 LONG-TERM PAYABLES Tencent Holdings Limited 258 00 As at 31 December 2023, the fair value of the notes payable amounted to approximately RMB131,247 million (31 December 2022: RMB134,516 million). The respective fair value was assessed based on the active market prices of these notes at the reporting date or by making reference to similar instruments traded in the observable market. All of these notes payable issued by the Group were unsecured. 159,115 LIBOR + 0.80% ~ 0.95% 115,998 100,340 18,758 28,275 13,913 8,486 (Million) USD20,998 For the year ended 31 December 2023 USD 17,750 (b) Share award schemes 37 SHARE-BASED PAYMENTS (continued) For the year ended 31 December 2023 Notes to the Consolidated Financial Statements 251 Annual Report 2023 The expected volatility, measured as the standard deviation of expected share price returns, is determined based on the average daily trading price volatility of the shares of the Company. Note: 34% As disclosed in the circular of the Company dated 24 April 2023, upon the completion of the transfer of the shares held by the trustee for the purpose of satisfying the outstanding share awards under the 2013 Share Award Scheme and the 2019 Share Award Scheme to the trustee administering the 2023 Share Award Scheme, the 2013 Share Award Scheme and the 2019 Share Award Scheme would be terminated. The transfer had been completed during the year ended 31 December 2023. As at 31 December 2023, the 2023 Share Award Scheme was the only effective share award scheme of the Company which was administered by the independent trustee appointed by the Group. The vesting period of the awarded shares is determined by the Board. 2.11% 2.56% 0.25% HKD341.90 2.82% 3.98% 0.31% 36%~ 37% Expected volatility (Note) Dividend yield Risk-free rate Weighted average share price at the grant date 2022 2023 Other than the exercise price mentioned above, significant judgments on parameters, such as risk-free rate, dividend yield and expected volatility, were required to be made by the directors in applying the Binomial Model, which are summarised as below. The directors of the Company had used the Binomial Model to determine the fair value of the options as at the respective grant dates, which was to be expensed over the relevant vesting period. The weighted average fair value of options granted during the year ended 31 December 2023 was HKD126.73 per share (equivalent to approximately RMB115.38 per share) (2022: HKD113.60 per share (equivalent to approximately RMB94.75 per share)). HKD342.95 For the year ended 31 December 2023 Movements in the number of awarded shares for the years ended 31 December 2023 and 2022 are as follows: Granted (Note) As a result of the distribution in specie of Meituan Shares, pursuant to the scheme rules of the 2013 Share Award Scheme and the 2019 Share Award Scheme, adjustments had been made to the number of shares subject to share awards which remained unvested as at 5 January 2023. The number of awarded shares granted during the year ended 31 December 2023 included a total of 6,186,967 additional awarded shares which were awarded pursuant to such adjustments. Note: 13,767 38,955 Vested but not transferred as at the end of the year 123,861,178 132,989,249 (47,931,238) (53,951,167) (8,677,008) At beginning of the year (7,545,346) 64,604,655 121,314,396 123,861,178 2022 2023 Number of awarded shares At end of the year Vested and transferred Lapsed/forfeited 65,174,957 During the year ended 31 December 2023, 74,542 awarded shares were granted to five independent non- executive directors of the Company (2022: 58,398 awarded shares were granted to five independent non-executive directors of the Company). Fair value of options (a) Share option schemes (continued) HKD126.57~HKD143.33 7 years commencing from 2022 2023 Range of exercise price Expiry Date 31 December 31 December Number of share options 4,234,341 Details of the expiry dates, exercise prices and the respective numbers of share options which remained outstanding as at 31 December 2023 and 2022 are as follows: (ii) During the year ended 31 December 2023, 13,148,354 options (2022: 6,806,825 options) were exercised and the right to receive 4,327,793 shares (2022: Nil) was surrendered by certain grantees to set off against the exercise consideration and individual income tax payable by the grantees when they exercised their options. The weighted average price of the shares at the time these options were exercised was HKD338.98 per share (equivalent to approximately RMB301.28 per share) (2022: HKD305.94 per share (equivalent to approximately RMB269.73 per share)). During the year ended 31 December 2023, no options were granted to any director of the Company (2022: Nil). (i) Movements in share options (continued) (a) Share option schemes (continued) 37 SHARE-BASED PAYMENTS (continued) For the year ended 31 December 2023 Notes to the Consolidated Financial Statements SOFR+ CAS + 0.80% 0.95% Outstanding share options (iii) the date of grant of options 20,358,477 37 SHARE-BASED PAYMENTS (continued) Notes to the Consolidated Financial Statements Tencent Holdings Limited 250 00 The outstanding share options as of 31 December 2023 were divided into one to four tranches at their grant dates. The first tranche can be exercised after a specified period ranging from one month to five years from the grant date, and then the remaining tranches will become exercisable in each subsequent year. 119,423,776 122,611,076 5,876,352 HKD185.65~HKD256.06 HKD526.97~HKD533.39 9,092,271 HKD433.25~HKD511.83 22,143,949 25,754,058 HKD355.51~HKD387.16 48,748,226 61,529,918 HKD276.01~HKD348.04 28,870,121 9,394,340 00 6,032,799 Notes to the Consolidated Financial Statements Annual Report 2023 175,248 197,356 11,580 41,537 15 3 4 4 255 4 1 19 16 5,572 15,936 100 5,981 7,046 18,415 1 163,668 Notes to the Consolidated Financial Statements Note: USD bank borrowings 252 Tencent Holdings Limited 2.80% 4.80% (per annum) RMB22,514 2.45% 4.60% RMB46,015 RMB bank borrowings (Million) For the year ended 31 December 2023 (per annum) Interest rate Amount Interest rate Amount 31 December 2022 31 December 2023 The aggregate principal amounts of long-term bank borrowings and applicable interest rates are as follows: (a) 00 (Million) 155,819 38 BORROWINGS (continued) 3 Tencent Holdings Limited 254 00 The Group has to estimate the Expected Retention Rate in order to determine the amount of share-based compensation expenses charged to the consolidated income statement. As at 31 December 2023, the Expected Retention Rate of the Group's wholly-owned subsidiaries was assessed to be not lower than approximately 89% (31 December 2022: not lower than 89%). (e) Expected Retention Rate of grantees Certain subsidiaries of the Company operate their own share-based compensation plans (share options and/ or share award schemes). Their exercise prices of the share options, as well as the vesting periods of the share options and awarded shares are determined by the respective board of directors of these subsidiaries at their sole discretion and in accordance with the relevant rules. The share options or awarded shares of the subsidiaries granted are normally vested by several tranches. Participants of some subsidiaries have the right to request the Group to repurchase their vested equity interests of the respective subsidiaries (the "Repurchase Transaction"). The Group has discretion to settle the Repurchase Transaction either by using equity instruments of the Company or by cash. For the Repurchase Transaction which the Group has settlement options, the directors of the Company are currently of the view that some of them would be settled by equity instruments of the Company. As a result, they are accounted for using the equity-settled share-based payment method. For some of them to be settled in cash, they are accounted for using cash-settled share-based payment method. (d) Share options and share award schemes adopted by subsidiaries 37 SHARE-BASED PAYMENTS (continued) Notes to the Consolidated Financial Statements 253 Annual Report 2023 The related share-based compensation expenses incurred for the years ended 31 December 2023 and 2022 were insignificant to the Group. For aligning the interests of key employees with the Group, the Group established several employees' investment plans in the form of limited liability partnerships (the “EISS”) among which the five EISS approved/established in 2014, 2015, 2016, 2017 and 2021 are in effect as at 31 December 2023. According to the terms of the EISS, the Board may, at its absolute discretion, invite any qualifying participants of the Group, excluding any director of the Company, to participate in the EISS by subscribing for the partnership interest at cash consideration. The participating employees are entitled to the economic benefits generated by the EISS, if any, after a specified vesting period under the respective EISs, ranging from four to seven years. Wholly-owned subsidiaries of the Company acting as general partner of these EISS administer and in essence, control the EISs. These EISS are therefore consolidated by the Company as structured entities. (c) Employee investment schemes The outstanding awarded shares as of 31 December 2023 were divided into one to seven tranches as at their grant dates. The first tranche can be exercised immediately or after a specified period ranging from one month to seven years from the grant date, and the remaining tranches will become exercisable in each subsequent year. The weighted average fair value of awarded shares granted during the year ended 31 December 2023 was HKD342.27 per share (equivalent to approximately RMB310.79 per share) (2022: HKD326.30 per share (equivalent to approximately RMB277.69 per share)). The fair value of the awarded shares was calculated based on the market price of the Company's shares at the respective grant date, which was to be expensed over the relevant vesting period. The expected dividends during the vesting period had been taken into account when assessing the fair value of these awarded shares. (b) Share award schemes (continued) 7 37 SHARE-BASED PAYMENTS (continued) For the year ended 31 December 2023 38 BORROWINGS Notes to the Consolidated Financial Statements For the year ended 31 December 2023 Included in non-current liabilities: 3 For the year ended 31 December 2023 2 45 26 22,514 141,090 RMB'Million 9 109,782 46,000 2022 Non-current portion of long-term USD bank borrowings, unsecured (Note (a)) Non-current portion of long-term RMB bank borrowings, unsecured (Note (a)) Non-current portion of long-term JPY bank borrowings, unsecured (Note (a)) Non-current portion of long-term JPY bank borrowings, secured (Note (a)) Non-current portion of long-term EUR bank borrowings, secured (Note (a)) Non-current portion of long-term EUR bank borrowings, unsecured (Note (a)) RMB'Million USD bank borrowings, unsecured (Note (b)) RMB bank borrowings, unsecured (Note (b)) RMB bank borrowings, secured (Note (b)) Current portion of long-term USD bank borrowings, unsecured (Note (a)) Current portion of long-term JPY bank borrowings, unsecured (Note (a)) Current portion of long-term JPY bank borrowings, secured (Note (a)) Current portion of long-term EUR bank borrowings, unsecured (Note (a)) Current portion of long-term EUR bank borrowings, secured (Note (a)) Current portion of long-term RMB bank borrowings, unsecured (Note (a)) Included in current liabilities: 2023 As at 31 December 6 RMB'Million 46 COMMITMENTS For the year ended 31 December 2023 (a) Capital commitments Capital commitments as at 31 December 2023 and 2022 are analysed as follows: 264 Tencent Holdings Limited Contracted: Notes to the Consolidated Financial Statements As at 31 December 2023 2022 RMB'Million 3,444 4,480 4,821 Capital investments in investees 9,685 12,623 Purchase of other capital assets 158 17,609 Contracted: The Group's commitments under agreements mainly for bandwidth, online game licensing, media content and other technical services, which are contracted but not provided in the consolidated financial statements, are as follows: (b) Other commitments 00 17,602 Construction/purchase of buildings and purchase of land use rights It mainly resulted from the reclassification from non-current to current and assets/liabilities acquired from business combinations. (273) (14,832) 44,080 13,430 (19,837) As at 31 December 18,940 Exchange impacts 7,506 3,326 (12,492) (883) (12,564) (15,380) Note: Other non-cash movements (Note) (5,734) 5,597 (9,563) 9,485 1,851 Net debt as at 31 December 2022 156,739 162,792 (11,580) (163,668) (10,446) (148,669) 2,066 2023 43 RMB'Million Notes to the Consolidated Financial Statements For the year ended 31 December 2023 48 FINANCIAL POSITION AND RESERVE MOVEMENT OF THE COMPANY (a) Financial position of the Company As at 31 December 2023 2022 RMB'Million RMB'Million ASSETS Non-current assets Intangible assets Notes to the Consolidated Financial Statements 42 207,615 215,342 Investments in associates 399 440 Financial assets at fair value through other comprehensive income Contribution to Share Scheme Trust 951 1,944 15 Amounts due from subsidiaries Current assets (18,733) Investments in subsidiaries Tencent Holdings Limited 266 00 RMB'Million Not later than one year 11,404 13,037 Later than one year and not later than five years 12,801 14,124 Later than five years 5,103 5,427 29,308 32,588 47 RELATED PARTY TRANSACTIONS Except as disclosed in Note 15(a) (Senior management's emoluments), Note 15(b) (Five highest paid individuals), Note 16 (Benefits and interests of directors), Note 28 (Loans to investees and investees' shareholders) and Note 37 (Share- based payments) to the consolidated financial statements, other significant transactions carried out between the Group and its related parties during the years are presented as follows. These related party transactions were carried out in the normal course of business and at terms negotiated between the Group and the respective related parties. Annual Report 2023 265 Notes to the Consolidated Financial Statements For the year ended 31 December 2023 47 RELATED PARTY TRANSACTIONS (continued) (a) Significant transactions with related parties The Group has commercial arrangements with certain associates and joint ventures to provide Online Advertising services, FinTech and Business Services, and other services, the revenue from which, for the year ended 31 December 2023, amounted to RMB7,286 million, RMB42,141 million and RMB2,740 million, respectively (2022: RMB5,819 million, RMB39,200 million and RMB2,577 million, respectively). The Group has commercial arrangements with certain associates and joint ventures to purchase online game licenses and related services, media content and related services, FinTech and Business Services and others, the costs and expenses of which, for the year ended 31 December 2023, amounted to RMB3,082 million, RMB4,752 million, RMB2,222 million and RMB1,532 million, respectively (2022: RMB1,734 million, RMB4,226 million, RMB3,710 million and RMB1,030 million, respectively). (b) Year end balances with related parties As at 31 December 2023, accounts receivable and other receivables from related parties were RMB9,891 million and RMB493 million, respectively (31 December 2022: RMB10,755 million and RMB186 million, respectively). As at 31 December 2023, accounts payable and other payables to related parties were RMB2,681 million and RMB144 million, respectively (31 December 2022: RMB1,530 million and RMB64 million, respectively). The Group has certain business co-operation arrangements with certain associates, which are engaged in various Internet businesses including eCommerce, Online-To-Offline platforms, and FinTech services, in respect of the provision of various services such as FinTech services, business services and online advertising to these associates. As at 31 December 2023, contract liabilities arising from these business co-operation arrangements were RMB1,373 million (31 December 2022: RMB1,959 million). The Group has entered into certain contracts for purchasing services or content with certain associates or joint ventures. As at 31 December 2023, commitments in respect of these agreements amounted to RMB4,433 million. Other than the transactions and balances disclosed above or elsewhere in the consolidated financial statements, the Group had no other material transactions with related parties during the years ended 31 December 2023 and 2022, and no other material balances with related parties as at 31 December 2023 and 2022. 2022 (163,668) Cash paid (14,161) 44 BUSINESS COMBINATIONS For the year ended 31 December 2023 Notes to the Consolidated Financial Statements Tencent Holdings Limited 260 00 Others primarily consist of deposits from third parties, reserve for platform services, sundry payables and other accruals. Note: 61,139 Annual Report 2023 261 (145,590) During the year ended 31 December 2023, the Group completed the acquisition of a game company by acquiring 67% of its equity interest at a cash consideration of approximately USD0.9 billion (equivalent to approximately RMB6.5 billion), which was accounted for as a subsidiary of the Group upon the completion of the transaction. (136,936) 113,320 167,966 Net debt as at 1 January 2022 54,740 (137,101) (14,161) (155,819) (41,537) 231,038 172,320 Net cash as at 31 December 2023 740 (19,003) 13,773 Goodwill of approximately RMB5.6 billion was recognised as a result of the transaction. It was mainly attributable to the operating synergies and economies of scale expected to be derived from combining the operations. None of the goodwill was expected to be deductible for income tax purpose. RMB'Million The related transaction costs of the transaction recognised in the Group's consolidated income statement were not material. Prepayments, deposits and other receivables The Group's revenue for the year ended 31 December 2023 would be increased by not more than 5% and results for the year ended 31 December 2023 would not be materially different should the transaction had occurred on 1 January 2023. Note: 6,481 5,617 (3,192) 4,056 (92) (227) Goodwill Non-controlling interests The following table summarises the purchase consideration, the fair value of assets acquired, liabilities assumed and the non-controlling interest as at the acquisition date. Total identifiable net assets Other payables and accruals (858) Deferred income tax liabilities 279 Other assets 138 Cash and cash equivalents 4,816 Recognised amounts of identifiable assets acquired and liabilities assumed: Intangible assets 6,481 6,481 Total consideration: Other liabilities (13,844) 15,597 (15,629) RMB'Million RMB'Million 1 year due after due within Notes payable Notes payable Borrowings due after 1 year Borrowings due within 1 year and others equivalents deposits RMB'Million Term (c) Net cash/(debt) reconciliation (continued) 45 NOTE TO CONSOLIDATED STATEMENT OF CASH FLOWS (continued) For the year ended 31 December 2023 Notes to the Consolidated Financial Statements Annual Report 2023 263 (14,832) 54,740 Net cash/(debt) (148,669) (137,101) Notes payable - repayable after one year (10,446) Cash and cash RMB'Million RMB'Million 1 year RMB'Million 843 Other non-cash movements (Note) (1,989) (2,205) (12) (2,537) (94) 1,506 1,353 Exchange impacts 70,821 10,141 (5,211) (14,234) 65,897 14,228 Cash flows (14,832) (148,669) (10,446) (163,668) (11,580) 162,792 156,739 Net debt as at 1 January 2023 RMB'Million Total Notes payable - repayable within one year Cash and cash equivalents 269 Total assets 7,750 2,119 Net fair value losses on FVPL and other financial instruments 27,538 6,095 joint ventures and others Impairment provisions for investments in associates, investments in 16,129 (5,800) Share of (profit)/loss of associates and joint ventures, net 24,949 21,073 Net impairment of intangible assets, land use rights, right-of-use assets, Equity-settled share-based compensation expenses 11,885 Interest and related expenses (8,592) (13,808) (108) (126) Net gains on disposals of intangible assets, land use rights, property, plant and equipment, construction in progress and right-of-use assets Interest income 32,772 32,703 Amortisation of intangible assets and land use rights 28,444 26,305 9,985 right-of-use assets investment properties and property, plant and equipment 17,428 (322) (4,851) 1,349 (6,518) 8,044 (5,840) 5,469 (1,201) 1,882 4,336 (1,010) Tencent Holdings Limited 134 262 Cash generated from operations Deferred revenue Other tax liabilities Other payables and accruals Accounts payable Prepayments, deposits and other receivables Inventories Accounts receivable Changes in working capital: (633) 383 Exchange losses/(gains), net 00 Depreciation of property, plant and equipment, investment properties and (948) (546) 17,621 8,617 54,011 (20,586) 32,169 (18,963) 18,963 (29,991) (1,020) (1,848) 64,252 (5,279) reserves RMB'Million 506 171,971 (12,950) (130,156) (11,750) 11,750 (6,102) 55 (794) 17,621 8,617 49 SUBSEQUENT EVENTS There were no material subsequent events during the period from 31 December 2023 to the approval date of these financial statements by the Board on 20 March 2024. Annual Report 2023 3,708 Other Retained earnings RMB'Million At 31 December 2022 Dividend income (172,707) (4,283) Net gains on disposals and deemed disposals of investee companies 21,516 43,276 Income tax expense 188,709 118,048 RMB'Million RMB'Million 2022 2023 Adjustments for: Profit for the year (a) Reconciliation of net profit to cash generated from operations: 45 NOTE TO CONSOLIDATED STATEMENT OF CASH FLOWS For the year ended 31 December 2023 Cash flows Cash dividends Dividends under distribution in specie Transfer of losses on settlement of assets held for distribution to retained earnings Net losses from changes in fair value of assets held for distribution Net gains from changes in the fair value of financial assets at fair value through other comprehensive income Currency translation differences 2,239 Assets held for distribution 3,821 256,691 Treasury shares (4,740) (1,868) Shares held for share award schemes (5,350) (4,226) Other reserves (b) (5,279) 8,617 Retained earnings (b) 64,252 17,621 62,418 Total equity 82,562 LIABILITIES Non-current liabilities Notes payable 131,465 Other financial liabilities 67 143,134 153 131,532 143,287 Current liabilities Amounts due to subsidiaries 86,872 50,111 37,989 RMB'Million 209,008 217,783 74,986 45,516 178 177 1,654 754 147,965 76,818 194,412 285,826 Share premium 412,195 267 Notes to the Consolidated Financial Statements For the year ended 31 December 2023 48 FINANCIAL POSITION AND RESERVE MOVEMENT OF THE COMPANY (continued) (a) Financial position of the Company (continued) 00 EQUITY Share capital As at December 31 2023 2022 RMB'Million Annual Report 2023 25,944 Other payables and accruals 3,150 Profit for the year (155,819) Borrowings repayable after one year (11,580) (41,537) Borrowings - repayable within one year 162,792 231,038 Term deposits and others 156,739 172,320 Cash and cash equivalents At 1 January 2022 RMB'Million 2022 2023 As at 31 December Net cash/(debt) This section sets out an analysis of net cash/(debt) and the movements in net cash/(debt) for each of the years presented. (c) Net cash/(debt) reconciliation Major non-cash transactions during the year ended 31 December 2023 were the settlement of dividend declared to be distributed in specie of Meituan Shares (Note 17(b) and Note 34). (b) Major non-cash transactions 45 NOTE TO CONSOLIDATED STATEMENT OF CASH FLOWS (continued) For the year ended 31 December 2023 Notes to the Consolidated Financial Statements 173,760 RMB'Million At 31 December 2023 Currency translation differences through other comprehensive income 1,991 Notes payable 14,161 10,446 Dividends payable for distribution in specie 147,965 67,422 186,346 Total liabilities Total equity and liabilities 198,954 329,633 285,826 412,195 268 Tencent Holdings Limited Notes to the Consolidated Financial Statements For the year ended 31 December 2023 48 FINANCIAL POSITION AND RESERVE MOVEMENT OF THE COMPANY (continued) (b) Reserve movement of the Company At 1 January 2023 Profit for the year Cash dividends Dividends under distribution in specie Transfer of losses on settlement of assets held for distribution to retained earnings Losses from changes in fair value of assets held for distribution Net losses from changes in the fair value of financial assets at fair value (6,637) (20,243) 76,595 Purchase consideration payables for investee companies RMB'Million 2022 2023 As at 31 December 92,381 100,948 3,077 RMB'Million 2,784 528 1,512 3,099 87,612 94,537 RMB'Million RMB'Million 180 Staff costs and welfare accruals 30,747 27,664 Interests payable 1,718 1,655 Purchase of land use rights, buildings and construction related costs 1,022 1,496 Prepayments received from customers and others 669 816 Others (Note) 27,318 4,157 4,574 General and administrative expenses accruals 4,584 7,096 Selling and marketing expense accruals 2022 2,620 2023 43 OTHER PAYABLES AND ACCRUALS As at 31 December 18,147 Notes to the Consolidated Financial Statements For the year ended 31 December 2023 42 ACCOUNTS PAYABLE 3,451 0-30 days 31 - 60 days 61 - 90 days Over 90 days Accounts payable and their ageing analysis, based on invoice date, are as follows: mergers and acquisitions monthly active user accounts Meituan, a company controlled through weighted voting rights and incorporated in the Cayman Islands with limited liability, whose Class B ordinary shares are listed on the Stock Exchange the approximately 948 million Class B ordinary shares in the share capital of Meituan with a par value of USD0.00001 each, of which the Group completed the distribution on 24 March 2023 players who are aged under 18 276 Tencent Holdings Limited Term Definition Definition "Model Code" 00 the Rules Governing the Listing of Securities on the Stock Exchange the lawful currency of Japan information technology initial public offering intellectual property for the purpose of preparing financial and operating information, International Games refers to our games business other than our Domestic Games business Instant Messaging International Financial Reporting Standards as issued by the International Accounting Standards Board risk management and internal control department of the Company "Minor(s)" "Meituan Shares" "Meituan" "MAU" "M&A" London InterBank Offered Rate the investment committee of the Company For the year ended 31 December 2023 "Listing Rules" "IA" "HUYA" “Hong Kong” "HKD" "Hangzhou Tencent Information" "Hainan Network" "Guian New Area Tencent Cyber" "Guangzhou Tencent Technology" "Guangzhou Tencent Computer" "Group" "Grant Date" "FPO" Annual Report 2023 277 "ESG Reporting Guide" "EPS" "Employee Participant(s)" "Eligible Person(s)" the website of the Company at www.tencent.com the corporate governance committee of the Company the Internal Control Integrated Framework issued by the Committee of Sponsoring Organisations Tencent Cyber (Shenzhen) Company Limited Tencent Cyber (Tianjin) Company Limited daily active user accounts "IAS" for the purpose of preparing financial and operating information, Domestic Games refers to our games business in the PRC, excluding Hong Kong, the Macao Special Administrative Region and Taiwan, China 00 274 Tencent Holdings Limited Term Definition Definition earnings before interest, tax, depreciation and amortisation "NASDAQ❞ any person(s) eligible to participate in the respective Share Award Schemes earnings per share "LIBOR" "JPY" "IT" "IPO" "IP" "Investment Committee" "International Games" "IM" "IFRS" "IC" Definition Term Definition 275 Annual Report 2023 International Accounting Standards internal audit department of the Company the environmental, social and governance reporting guide as set out in Appendix C2 to the Listing Rules financial technology Follow-on Public Offering in relation to any Awarded Share, the date on which the Awarded Share is, was or is to be granted the Company and its subsidiaries Guangzhou Tencent Computer System Company Limited director(s) or employee(s) of any member of the Group (including person(s) who is/are granted options under the Post-IPO Option Scheme II, the Post-IPO Option Scheme IV and the 2023 Share Option Scheme or awards under the Share Award Schemes as an inducement to enter into employment contracts with these companies (as the case may be)) Guangzhou Tencent Technology Company Limited Hainan Tencent Network Information Technology Company Limited Hangzhou Tencent Information Technology Company Limited the lawful currency of Hong Kong the Hong Kong Special Administrative Region, the PRC HUYA Inc., a non wholly-owned subsidiary of the Company which is incorporated in the Cayman Islands with limited liability and the shares of which are listed on the New York Stock Exchange Guian New Area Tencent Cyber Company Limited "Nomination Committee' research and development "Post-IPO Option Scheme I" 278 Tencent Holdings Limited Term Definition Definition "SKT CFC" "SKT Co-operation Committee' "SOFR" "SSV & CPP" "Stock Exchange" "Supercell" "TCS CFC" "TCS Co-operation Committee" "Tencent Beijing" "Tencent Chengdu" "Tencent Computer" the co-operation framework contract dated 28 February 2004 entered into between Cyber Tianjin and Shiji Kaixuan the co-operation committee established under the SKT CFC Secured Overnight Financing Rate Sustainable Social Value and Common Prosperity Programmes The Stock Exchange of Hong Kong Limited Supercell Oy, a non wholly-owned subsidiary of the Company which is a private company incorporated in Finland 00 the co-operation framework contract dated 28 February 2004 entered into between Tencent Technology and Tencent Computer Shenzhen Shiji Kaixuan Technology Company Limited Shenzhen Tencent Tianyou Technology Company Limited Definition Term Definition "Service Provider(s)" "SFO" "Shanghai Tencent Information" "Share(s)" "Share Award Schemes" "Share Subdivision" "Shenzhen Tencent Information" person(s) who, or entity(ies) which, provide services to the Group on a continuing or recurring basis in their ordinary and usual course of business which are in the interests of the long term growth of the Group, including independent contractor(s), consultant(s), adviser(s), agent(s) and supplier(s), with reference to, among other things, research and development, engineering or technical contribution, the design or development or distribution of products/services provided by the Group, or otherwise will contribute significantly to the growth of the Group's financial or business performance for research and development, product commercialisation, marketing, innovation upgrading, strategic/commercial planning on corporate image and investor relations in investment environment of the Group, as determined by the Board in its sole and absolute discretion the Securities and Futures Ordinance (Cap. 571 of the Laws of Hong Kong) as amended, supplemented or otherwise modified from time to time Shanghai Tencent Information Technology Company Limited ordinary share(s) of HKD0.00002 each in the share capital of the Company (or of such other nominal amount as shall result from a sub-division, consolidation, reclassification or reconstruction of the share capital of the Company from time to time) the 2013 Share Award Scheme, the 2019 Share Award Scheme and the 2023 Share Award Scheme with effect from 15 May 2014, each existing issued and unissued share of HKD0.0001 each in the share capital of the Company was subdivided into five subdivided shares of HKD0.00002 each, after passing of an ordinary resolution at the annual general meeting of the Company held on 14 May 2014 and granting by the Stock Exchange of the listing of, and permission to deal in, the subdivided shares Shenzhen Tencent Information Technology Company Limited Shenzhen Tencent Network Information Technology Company Limited "Shenzhen Tencent Network" "Shenzhen Tencent Tianyou" "Shiji Kaixuan" "PC" the co-operation committee established under the TCS CFC Tencent Technology (Chengdu) Company Limited the People's Republic of China the Post-IPO Share Option Scheme adopted by the Company on 17 May 2017 the Post-IPO Share Option Scheme adopted by the Company on 13 May 2009 the Post-IPO Share Option Scheme adopted by the Company on 16 May 2007 the Post-IPO Share Option Scheme adopted by the Company on 24 March 2004 personal computer the nomination committee of the Company NASDAQ Global Select Market the Model Code for Securities Transactions by Directors of Listed Issuers set out in Appendix C3 to the Listing Rules "Selected Participant(s)" "RMB" "Remuneration Committee" "Related Entity" "R&D" "PUBG" "Pre-IPO Option Scheme" "PRC CIT" "PRC" or "China" "Post-IPO Option Scheme IV" "Post-IPO Option Scheme III" "Post-IPO Option Scheme II" PRC corporate income tax as defined in the "Corporate Income Tax Law of the People's Republic of China" Tencent Technology (Beijing) Company Limited the Pre-IPO Share Option Scheme adopted by the Company on 27 July 2001 Tencent Holdings Limited, a limited liability company organised and existing under the laws of the Cayman Islands and the Shares of which are listed on the Stock Exchange Shenzhen Tencent Computer Systems Company Limited "Tencent Enterprise Management" Shenzhen Tencent Enterprise Management Limited "Tencent Shanghai" Tencent Technology (Shanghai) Company Limited "Tencent Technology" "Tencent Wuhan" "Tenpay" "Term SOFR" "TIBOR" Tencent Technology (Shenzhen) Company Limited Tencent Technology (Wuhan) Company Limited Tenpay Payment Technology Co., Ltd., a member of the Group operating in the Mainland of China and engaging in the provision of payment services the term SOFR reference rate administered by CME Group Benchmark Administration Limited for the relevant period published by CME Group Benchmark Administration Limited Tokyo InterBank Offered Rate Annual Report 2023 279 any Eligible Person(s) selected by the Board to participate in the respective Share Award Schemes the lawful currency of the PRC the remuneration committee of the Company a holding company (as defined in the Listing Rules), a fellow subsidiary ("subsidiary" as defined in the Listing Rules) or an associated company of the Company PlayerUnknown's Battlegrounds Chongqing Tencent Information Technology Company Limited "FinTech" credit adjustment spread, which is a fixed spread adjustment incorporated to bridge the gap between LIBOR and SOFR in order to minimise the economic impact of the transfer from a LIBOR-based debt to a SOFR-based debt USD5,000,000 Established in the PRC, Tencent Technology (Shanghai) Company Limited by the Group (%) Principal activities and place of operation Proportion of equity interest held issued/paid-in capital Place of establishment and nature of legal entity Name Particulars of 50 SUBSIDIARIES AND CONTROLLED STRUCTURED ENTITIES (continued) For the year ended 31 December 2023 Notes to the Consolidated Financial Statements Tencent Holdings Limited 270 00 Development of softwares in the PRC 100% USD30,000,000 in the PRC Provision of value-added services 100% (Note (a)) RMB10,000,000 in the PRC (Note (a)) Provision of value-added services 100% RMB1,216,500,000 100% Development of softwares and provision wholly foreign owned enterprise of information technology services China Literature Limited limited liability company the corporate governance code as set out in Appendix C1 to the Listing Rules online games in the United States United States, Development and operation of 99.72% USD1,310 Established in the Riot Games, Inc. Design and production of advertisement in the PRC 100% RMB5,000,000 Established in the PRC, limited liability company Established in the PRC, limited liability company Established in the PRC, wholly foreign owned enterprise Established in the PRC, limited liability company integration services in the PRC Provision of information system 100% (Note (a)) RMB1,042,500,000 Established in the PRC, limited liability company Tencent Cloud Computing (Beijing) Company Limited of information technology services in the PRC Development of softwares and provision 100% USD220,000,000 Established in the PRC, wholly foreign owned enterprise Tencent Technology (Chengdu) Company Limited in the PRC Beijing Tencent Culture Media Company Limited Tencent Cyber (Shenzhen) Company Limited Beijing Starsinhand Technology Company Limited Beijing BIZCOM Technology Company Limited RMB11,000,000 Established in the PRC, limited liability company Shenzhen Shiji Kaixuan Technology Company Limited information technology services in the PRC owned enterprise wholly foreign Development of softwares and provision of 100% USD2,000,000 Established in the PRC, Tencent Technology in the PRC Internet advertisement services 100% (Note (a)) 100% RMB65,000,000 Established in the PRC, limited liability company Tencent Computer by the Group (%) Principal activities and place of operation capital Proportion of equity interest held issued/paid-in Place of establishment and nature of legal entity Name Particulars of The following is a list of material subsidiaries of the Company as at 31 December 2023: 50 SUBSIDIARIES AND CONTROLLED STRUCTURED ENTITIES Provision of value-added services and Established in the Provision of Internet advertisement services in the PRC in the PRC Provision of value-added services 100% (Note (a)) RMB10,290,000 Established in the PRC, limited liability company Nanjing Wang Dian Technology Company Limited provision of information technology services in the PRC owned enterprise wholly foreign Development and sale of softwares and 100% USD1,000,000 Established in the PRC, (Note (a)) Tencent Technology (Beijing) Company Limited 100% USD100 Established in the British Virgin Islands, limited liability company Tencent Asset Management Limited in the PRC information technology services owned enterprise wholly foreign Development of softwares and provision of 100% USD90,000,000 Established in the PRC, Tencent Cyber (Tianjin) Company Limited Asset management in Hong Kong USD102,339 Notes to the Consolidated Financial Statements Cayman Islands, Definition In this annual report, unless the context otherwise requires, the following expressions shall have the following meanings: Term Definition "2007 Share Award Scheme" "2013 Share Award Scheme" "2019 Share Award Scheme" Tencent Holdings Limited "2023 Share Award Scheme' "2024 AGM" "Adoption Date |" "Adoption Date II" "Adoption Date III" "Adoption Date IV" "AI" "Articles of Association" "2023 Share Option Scheme" 272 00 During the year ended 31 December 2023, the Company contributed approximately RMB4,378 million (2022: RMB2,882 million) to the Share Scheme Trust for financing its acquisition of the Company's shares. (c) (d) As described in Note 1, the Company does not have legal ownership in equity of these structured entities or their subsidiaries. Nevertheless, under certain contractual agreements entered into with the registered owners of these structured entities, the Company and its other legally owned subsidiaries control these companies by way of controlling the voting rights, governing their financial and operating policies, appointing or removing the majority of the members of their controlling authorities, and casting the majority of votes at meetings of such authorities. In addition, such contractual agreements also transfer the risks and rewards of these companies to the Company and/or its other legally owned subsidiaries. As a result, they are presented as controlled structured entities of the Company. In September 2020, TME issued two tranches of senior notes with an aggregate principal amount of USD800 million due in 5 years to 10 years, with interest rates ranging from 1.375% to 2.000%. As at 31 December 2023, the principal amount and net book balance of its notes payable were USD800 million and USD796 million respectively. The directors of the Company considered that none of the non wholly-owned subsidiaries has non-controlling interests that are material to the Group, therefore, no summarised financial information of these non wholly-owned subsidiaries is presented separately. All subsidiaries' undertakings are included in the consolidation. The proportion of the voting rights in the subsidiary's undertakings held directly by the parent company does not differ from its proportion of ordinary shares held. The parent company does not have any shareholdings in the preference shares of subsidiary's undertakings included in the Group. (e) Significant restrictions (f) As at 31 December 2023, cash and cash equivalents, term deposits and restricted cash of the Group, amounting to RMB231,391 million were held in the Mainland of China and they are subject to local exchange control and other financial and treasury regulations. The local exchange control, and other financial and treasury regulations provide for restrictions, on payment of dividends, share repurchase and offshore investments, other than through normal activities. Consolidation of structured entities As mentioned in Note (a) above and Note 37(c), the Company has consolidated the operating entities within the Group without any legal interests and the EISS where wholly-owned subsidiaries of the Company act as general partner. In addition, due to the implementation of the share award schemes of the Group mentioned in Note 37(b), the Company has also set up a structured entity ("Share Scheme Trust”), and its particulars are as follows: Structured entity Share Scheme Trust Principal activities Administering and holding the Company's shares acquired for share award schemes which are set up for the benefits of eligible persons of the schemes As the Company has the power to govern the financial and operating policies of the Share Scheme Trust and can derive benefits from the contributions of the eligible persons who are awarded with the shares by the schemes, the directors of the Company consider that it is appropriate to consolidate the Share Scheme Trust. "Audit Committee" the share award scheme adopted by the Company on Adoption Date I, as amended the share award scheme adopted by the Company on Adoption Date II, as amended the share award scheme adopted by the Company on Adoption Date III, as amended "CG Code' " "Chongqing Tencent Information" "Company" "Company Website" "Corporate Governance Committee" "COSO Framework" "Cyber Shenzhen" "Cyber Tianjin❞ "DAU" "Domestic Games" "EBITDA" PricewaterhouseCoopers, the auditor of the Company the share(s) of the Company awarded under the Share Award Schemes Beijing BIZCOM Technology Company Limited Beijing Starsinhand Technology Company Limited the board of directors of the Company "CAS" (b) "Board" "Beijing BIZCOM" the share award scheme adopted by the Company on Adoption Date IV, as amended from time to time the share option scheme adopted by the Company on 17 May 2023, as amended from time to time the annual general meeting of the Company to be held on 14 May 2024 or any adjournment thereof 13 December 2007, being the date on which the Company adopted the 2007 Share Award Scheme 13 November 2013, being the date on which the Company adopted the 2013 Share Award Scheme 25 November 2019, being the date on which the Company adopted the 2019 Share Award Scheme 17 May 2023, being the date on which the Company adopted the 2023 Share Award Scheme artificial intelligence the third amended and restated articles of association of the Company adopted by special resolution passed on 18 May 2022 the audit committee of the Company Annual Report 2023 273 Definition Term Definition "Auditor" "Awarded Share(s)" "Beijing Starsinhand" 57.03%* (a) 50 SUBSIDIARIES AND CONTROLLED STRUCTURED ENTITIES (continued) RMB5,000,000 Established in the PRC, limited liability company Shenzhen Tencent Culture Media Company Limited mobile games in Finland Development and operation of 81.22% Established in Finland, limited liability company Supercell Oy 100% limited liability company Cayman Islands, Provision of online music 53.09%* USD280,753 Established in the limited liability company Note: TME (Note (b)) entertainment services in the PRC Design and production of advertisement EUR2,500 Shenzhen Tencent Tianyou Technology Company Limited Guangzhou Tencent Notes to the Consolidated Financial Statements in the PRC 271 Annual Report 2023 on an outstanding basis in the PRC Development of softwares and provision 100% RMB70,000,000 of information technology services Technology Company Limited For the year ended 31 December 2023 in the PRC Provision of online literature services in the PRC Provision of value-added services 100% (Note (a)) RMB50,000,000 Established in the PRC, limited liability company Established in the PRC, wholly foreign owned enterprise "Wang Dian" a trust deed entered into between the Company and the Trustee (as restated, supplemented and amended from time to time) in respect of the appointment of the Trustee for the administration of the 2019 Share Award Scheme a trust deed entered into between the Company and the Trustee (as restated, supplemented and amended from time to time) in respect of the appointment of the Trustee for the administration of the 2013 Share Award Scheme Product/Service provided to business customers Tencent Music Entertainment Group, a non wholly-owned subsidiary of the Company which is incorporated in the Cayman Islands with limited liability and the shares of which are listed on the New York Stock Exchange and the Stock Exchange "WFOES" "VAS" Definition "United States" "Trustee" "Trust Deed IV" "Trust Deed III" "Trust Deed II" "ToB" "TME" an independent trustee appointed by the Company for managing the Share Award Schemes "USD" the United States of America Wanchai, Hong Kong value-added services Definition Weixin Official Account for Investor Relations: Tencent_IR Telephone 852-21795122 No. 1 Queen's Road East 29/F., Three Pacific Place Tencent Holdings Limited Hong Kong Office 86-755-86013388 Telephone Zipcode : 518054 the lawful currency of the United States Nanshan District, Shenzhen, the PRC Tencent Group Head Office Website: www.tencent.com Tencent 腾讯 280 Tencent Holdings Limited 00 Wuhan Tencent Information Technology Company Limited "Wuhan Tencent Information" Tencent Technology, Cyber Tianjin, Tencent Beijing, Shenzhen Tencent Information, Tencent Chengdu, Chongqing Tencent Information, Shanghai Tencent Information, Tencent Shanghai, Tencent Wuhan, Hainan Network, Guangzhou Tencent Technology, Shenzhen Tencent Network, Guian New Area Tencent Cyber, Cyber Shenzhen, Wuhan Tencent Information, Guangzhou Tencent Computer and Hangzhou Tencent Information Nanjing Wang Dian Technology Company Limited Tencent Binhai Towers, No. 33 Haitian 2nd Road a trust deed entered into between the Company and the Trustee (as restated, supplemented and amended from time to time) in respect of the appointment of the Trustee for the administration of the 2023 Share Award Scheme Term Profit for the period 21% 25% 74% Net margin 20% (Restated)* Certain items have been reclassified from above to below the operating profit line, and the comparative figures for prior periods have been restated accordingly. Please refer to Note 2.2 in the notes to the consolidated financial statements for details. Operating margin 3.124 10.977 - diluted 11.173 - basic EPS (RMB per share) 3.042 Annual Report 2023 21 Management Discussion and Analysis companies reported compensation Income tax SSV & provisions/ of intangible investee Share-based As Impairment Amortisation losses from Net (gains)/ Adjustments Year ended 31 December 2023 29,711 (3,672) 90 206 326 1,241 5,680 29,163 Operating profit (Restated)* (RMB in millions, unless specified) (f) (b) (a) Non-IFRS effects Others CPP (reversals) assets 14 assets 36,424 7,217 1,600 23,693 2,420 (107,928) 7,124 106,268 to equity holders Profit attributable 30,556 (3,717) 206 1,600 23,700 2,601 (107,955) Profit for the period companies (reversals) Others Net (gains)/ Adjustments Year ended 31 December 2022 27% 32% 16.320 losses from 16.678 Net margin 26% Operating margin 11.887 - diluted 12.186 19% Amortisation Impairment As Non-IFRS effects Others CPP (reversals) assets companies compensation reported Income tax SSV & provisions/ of intangible investee Share-based - basic EPS (RMB per share) 157,688 (2,872) 191,886 3,013 998 5,019 22,782 160,074 Operating profit (RMB in millions, unless specified) (g) (e) (d) (b) (a) Non-IFRS effects Profit for the year CPP 118,048 (6,170) 3,012 3,790 8,004 9,462 (6,024) 27,100 115,216 to equity holders Profit attributable 161,734 (3,104) 3,012 3,790 8,123 10,269 27,766 reported compensation Income tax SSV & (55) 6,512 27,025 to equity holders Profit attributable 43,833 2,719 (829) 1,594 5,705 2,960 (94) 6,646 27,850 1 5,650 1,594 1 28% 32% 4.443 4.537 18% Net margin 27% Operating margin 2.807 - diluted 2.873 - basic EPS (RMB per share) 42,681 (765) 49,135 1 437 1,564 of intangible investee Share-based As Impairment Amortisation losses from Net (gains)/ Adjustments Unaudited three months ended 31 December 2023 The following tables set forth the reconciliations of the Group's non-IFRS financial measures for the fourth quarter of 2023 and 2022, the third quarter of 2023, as well as the years ended 31 December 2023 and 2022 to the nearest measures prepared in accordance with IFRS: The Company's management believes that the non-IFRS financial measures provide investors with useful supplementary information to assess the performance of the Group's core operations by excluding certain non-cash items and certain impact of investment-related transactions. In addition, non-IFRS adjustments include relevant non-IFRS adjustments for the Group's major associates based on available published financials of the relevant major associates, or estimates made by the Company's management based on available information, certain expectations, assumptions and premises. To supplement the consolidated results of the Group prepared in accordance with IFRS, certain additional non-IFRS financial measures (in terms of operating profit, operating margin, profit for the period, net margin, profit attributable to equity holders of the Company, basic EPS and diluted EPS) have been presented in this annual report. These unaudited non-IFRS financial measures should be considered in addition to, not as a substitute for, measures of the Group's financial performance prepared in accordance with IFRS. In addition, these non-IFRS financial measures may be defined differently from similar terms used by other companies. NON-IFRS FINANCIAL MEASURES Management Discussion and Analysis provisions/ 00 SSV & reported compensation 5,732 41,401 Operating profit (RMB in millions, unless specified) (e) (d) (b) (a) Non-IFRS effects Others CPP (reversals) assets companies Income tax 20 20 Tencent Holdings Limited 3.752 - diluted 3.828 - basic EPS (RMB per share) 44,921 (579) 301 309 2,458 (583) 6,833 36,182 to equity holders Profit attributable Operating margin (Restated)* 45,837 29% 24% provisions/ of intangible investee Share-based As Impairment Amortisation losses from Net (gains)/ Adjustments Unaudited three months ended 31 December 2022 30% 33% 4.657 4.753 Net margin (a) (640) 346 compensation reported Income tax SSV & provisions/ of intangible investee As Share-based Impairment Amortisation losses from Net (gains)/ Adjustments Unaudited three months ended 30 September 2023 Management Discussion and Analysis companies 301 assets CPP 2,666 (565) 6,948 36,781 Profit for the period 51,668 231 1,434 5,655 44,348 Operating profit (Restated)* (RMB in millions, unless specified) (d) Non-IFRS effects (reversals) (b) 106,904 (RMB in millions, unless specified) May 1,759,793,152.00 354.40 390.80 4,640,000 April 7,740,000 1,755,093,825.00 393.80 4,620,000 March 2,873,963,974.54 329.00 384.80 362.80 345.40 306.00 2,514,634,060.00 24,280,000 September 314.80 333.80 12,380,000 August 320.20 352.40 10,859,200 July 7,971,702,166.14 311.40 361.00 23,493,400 June 7,853,100 January paid HKD HKD BORROWINGS AND NOTES PAYABLE Particulars of the Company's material subsidiaries as at 31 December 2023 are set out in Note 50 to the consolidated financial statements. SUBSIDIARIES Details of the movements in the share capital of the Company during the year are set out in Note 35 to the consolidated financial statements. SHARE CAPITAL A fair review of the business of the Group, comprising a discussion and analysis of the Group's performance during the year, an indication of likely future development in the business of the Group and the proposed dividend for the year ended 31 December 2023 are set out in the "Chairman's Statement" on pages 4 to 6 of this annual report. Particulars of important events affecting the Group that have occurred since the end of the financial year 2023 are set out in Note 49 to the consolidated financial statements. An analysis using financial key performance indicators is set out in the "Management Discussion and Analysis" on pages 7 to 25 of this annual report. Discussions on the Group's environmental policies and performance, and an account of the Group's key relationships with its stakeholders are set out in the standalone “Environmental, Social and Governance Report”. Details regarding the Group's compliance with the relevant laws and regulations which have a significant impact on the Group are also set out in the standalone “Environmental, Social and Governance Report" and the "Corporate Governance Report" on pages 85 to 118 of this annual report. A description of the principal risks and uncertainties facing the Group is set out in the "Corporate Governance Report" on pages 85 to 118 of this annual report. BUSINESS REVIEW AND DIVIDEND Details of the movements in property, plant and equipment of the Group during the year are set out in Note 18 to the consolidated financial statements. PROPERTY, PLANT AND EQUIPMENT Directors' Report Tencent Holdings Limited 26 00 Details of the movements in the reserves of the Group and the Company during the year are set out in the consolidated statement of changes in equity on pages 133 to 136, Note 35, Note 36 and Note 48 to the consolidated financial statements respectively. As at 31 December 2023, the Company had distributable reserves amounting to RMB86,872 million (2022: RMB82,562 million). Particulars of the Group's borrowings and notes payable are set out in Note 38 and Note 39 to the consolidated financial statements respectively. 334.80 Annual Report 2023 Directors' Report HKD price paid Aggregate consideration Lowest Highest price paid purchased Month of purchase in 2023 No. of Shares Purchase consideration per Share During the year ended 31 December 2023, the Company repurchased a total of 152,205,700 Shares on the Stock Exchange for an aggregate consideration of approximately HKD49.4 billion before expenses. The repurchased Shares were subsequently cancelled. The repurchase was effected for the enhancement of shareholder value in the long term. Details of the Shares repurchased are as follows: PURCHASE, SALE OR REDEMPTION OF THE COMPANY'S LISTED SECURITIES A summary of the condensed consolidated results and financial positions of the Group is set out on page 3 of this annual report. FINANCIAL SUMMARY The donations made by the Group in the year were RMB2,952 million. DONATION 27 296.60 3,643,776,854.48 4,017,450,018.00 7,628,303,223.00 October (f) Before the end of 2027 up to 75.3 3.8 78.5 to 94.1 Research and development to strengthen technologies and products genres and improve content quality eSports partners to expand content Before the end of 2027 up to 51.9 31.4 94.1 to 125.5 Investment in content ecosystem and USD'Million USD'Million 31.4 to 47.1 USD'Million 3.6 Before the end of 2027 29 Annual Report 2023 As at 31 December 2023, the remaining USD171.1 million of the net proceeds from the FPO was placed with banks. Before the end of 2027 up to 65.2 28.4 15.7 to 94.1 General corporate purposes service offerings Before the end of 2027 up to 17.2 2.1 15.7 to 31.4 Expanding and enhancing product and potential strategic investments and merger and acquisition opportunities up to 40.0 The Company may pay dividends out of share premium, retained earnings and any other reserves provided that immediately following the payment of such dividends, the Company will be in a position to pay off its debts as they fall due in the ordinary course of business. the unutilised amount 2023 Total: 10,043,448,981.00 263.80 325.60 33,370,000 December 3,611,667,996.00 313.80 332.40 11,170,000 November 3,612,873,698.00 295.40 317.00 11,800,000 152,205,700 2023 49,432,707,948.16 28 timeline for utilising 31 December amount as at Expected Unutilised utilised during the year ended Actual amount 31 December use of proceeds from the FPO Intended In April 2019, HUYA launched its FPO of 18,400,000 American depositary shares ("ADS") representing 18,400,000 of its Class A ordinary shares (including 13,600,000 ADSS sold by HUYA and 4,800,000 ADSS sold by the selling shareholder) at a public offering price of USD24.00 per ADS. The net proceeds from the FPO amounted to approximately USD313.8 million and are intended to be applied in accordance with the proposed application as set out in the FPO prospectus of HUYA dated 10 April 2019. Up to 31 December 2023, USD142.7 million of the net proceeds from the FPO were utilised according to the intentions previously disclosed by HUYA. Details of the use of proceeds are as follows: HUYA Directors' Report The use of proceeds from the FPO of HUYA, our non wholly-owned subsidiary, is set out below: USE OF PROCEEDS FROM FPO OF A NON WHOLLY-OWNED SUBSIDIARY Tencent Holdings Limited Save as disclosed above and in Note 35 to the consolidated financial statements, neither the Company nor any of its subsidiaries has purchased, sold or redeemed any of the Company's listed securities during the year ended 31 December 2023. RESERVES Overseas expansion opportunities and The results of the Group for the year are set out in the consolidated statement of comprehensive income on page 129 of this annual report. (c) Including net (gains)/losses on deemed disposals/disposals of investee companies, fair value changes arising from investee companies, and other expenses in relation to equity transactions of investee companies Including put options granted to employees of investee companies on their shares and shares to be issued under investee companies' share-based incentive plans which can be acquired by the Group, and other incentives (b) (a) Note: Amortisation of intangible assets resulting from acquisitions Management Discussion and Analysis 00 Certain items have been reclassified from above to below the operating profit line, and the comparative figures for prior periods have been restated accordingly. Please refer to Note 2.2 in the notes to the consolidated financial statements for details. 21% 26% 34% Net margin 22 Tencent Holdings Limited (d) (e) (f) Annual Report 2023 Including those held via special purpose vehicles, on an attributable basis. 4 The fair value of our shareholdings in listed investee companies (excluding subsidiaries) amounted to RMB550.7 billion as at 31 December 2023 (31 December 2022: RMB585.1 billion), and the carrying book value of our unlisted investments was RMB337.3 billion as at 31 December 2023 (31 December 2022: RMB333.4 billion). None of the carrying value of any of our investments (including listed equity investments) constituted 5% or more of our total assets as at 31 December 2023. We manage our investment portfolio with a primary objective to strengthen our leading position in core businesses and complement our "Connection" strategy in various industries, particularly in social and digital content, retail and FinTech sectors. We also invest in healthcare, cloud and Al, transportation and other sectors. Changes in respective items in the consolidated statement of financial position have been disclosed in the notes to the consolidated financial statements in this annual report. financial assets at fair value through profit or loss and through other comprehensive income (including assets held for distribution). investments in associates and joint ventures which are accounted for by using equity method; and As at 31 December 2023, our investment portfolio amounted to approximately RMB701,664 million (31 December 2022: RMB819,975 million) as recorded in the consolidated statement of financial position under various categories including: INVESTMENTS HELD Income tax effects of non-IFRS adjustments (g) Primarily non-recurring compliance-related costs and expenses incurred for certain litigation settlements of the Group and/or arising from investee companies Mainly including donations and expenses incurred for the Group's SSV & CPP initiatives Mainly including impairment provisions/(reversals) for associates, joint ventures, goodwill and other intangible assets arising from acquisitions 20% (Restated)* Operating margin 11.835 2,125 5,763 48,004 11,818 33,311 188,709 Profit for the year 143,203 205 726 5,197 26,248 110,827 Operating profit (Restated)* The Board has recommended the payment of a final dividend of HKD3.40 per Share for the year ended 31 December 2023. The dividend is expected to be payable on 31 May 2024 to the shareholders whose names appear on the register of members of the Company on 22 May 2024. The total final dividend proposed for the year is HKD3.40 per Share. (5,839) 23 119,193 to equity holders 12.138 19.341 - diluted 19.757 - basic EPS (RMB per share) 115,649 (5,499) 2,125 5,763 46,326 10,880 (164,840) 32,651 188,243 Profit attributable Management Discussion and Analysis (164,698) Losses from our investment portfolio amounted to RMB2,686 million for the year ended 31 December 2023, compared to gains of RMB99,823 million in previous year. Details of our return from investment portfolio are as follows: 54,740 (153,318) (151,262) (197,702) (197,356) 387,451 403,358 240,975 231,038 146,476 172,320 (RMB in millions) 2023 2023 Unaudited 30 September 36,431 31 December Management Discussion and Analysis For the fourth quarter of 2023, the Group generated free cash flow of RMB34.2 billion. This was a result of net cash flow generated from operating activities of RMB54.0 billion, partially offset by payments for capital expenditures of RMB9.3 billion, payments for media content of RMB7.7 billion, and payments for lease liabilities of RMB2.8 billion. RESULTS AND APPROPRIATIONS There were no material changes in our significant investment portfolio during the year ended 31 December 2023 that need to be disclosed under paragraph 32 of Appendix D2 to the Listing Rules. The analysis of the Group's revenues and contribution to results by business segments and the Group's revenues by geographical area of operations is set out in Note 6 to the consolidated financial statements. The principal activity of the Company is investment holding. The activities of the material subsidiaries are set out in Note 50 to the consolidated financial statements. PRINCIPAL ACTIVITIES The directors have pleasure in presenting their report together with the audited financial statements for the year ended 31 December 2023. Directors' Report Annual Report 2023 As at 31 December 2023, the Group's equity share in an investee company at a carrying amount of approximately RMB3.1 billion was charged to a bank syndicate (as part of the collateral) against a loan extended to such investee company. CHARGES The Group had no material contingent liabilities outstanding as at 31 December 2023. The Group assesses its creditworthiness based on its business and financial risk profile and monitors its capital by regularly reviewing its total debts to Adjusted EBITDA ratio, being the measure of the Group's ability to pay off all of its debts which in turn reflects the Group's financial health and liquidity position. Details are set out in Note 4.2 to the consolidated financial statements. As at 31 December 2023, the Group held some floating rate debts, including borrowings and senior notes, whose cash flows are hedged by using interest rate swaps. The effects of the interest rate swaps on the Group's financial position and performance are set out in Note 4.1 to the consolidated financial statements. As at 31 December 2023, the Group's total debts comprised borrowings and notes payable. Particulars of the Group's borrowings and notes payable are set out in Note 38 and Note 39 to the consolidated financial statements respectively. As at 31 December 2023, bank balances and cash of the Group were mainly denominated in RMB and primarily held by subsidiaries in the Mainland of China whose functional currencies are RMB. The Group considers that any reasonable changes in foreign exchange rates of currencies against major functional currencies would not result in a significant change in the Group's results, as the net carrying amounts of financial assets and liabilities denominated in a currency other than the respective subsidiaries' functional currencies are considered to be not significant. Details are set out in Note 4.1 to the consolidated financial statements. As at 31 December 2023, the Group had net cash of RMB54.7 billion, compared to net cash of RMB36.4 billion as at 30 September 2023. The sequential improvement was primarily driven by free cash flow generation, partially offset by cash used for share repurchases and net cash outflows related to strategic investments. Audited 25 RMB'Million intangible assets from acquisitions Impairment provision for investee companies, goodwill and other (7,703) (2,106) 172,707 4,283 (6,190) Net gains on disposals and deemed disposals of investee companies 546 Dividend income RMB'Million 2022 2023 Performance of Principal Investment 948 (Classified by nature) Net fair value losses Share of profit/(loss) of associates and joint ventures, net 24 00 Net cash Notes payable (44,803) Borrowings Cash and cash equivalents Term deposits and others Our cash and debt positions as at 31 December 2023 and 30 September 2023 were as follows: Tencent Holdings Limited We continue to closely monitor the performance of our investment portfolio, strategically make investments, and explore opportunities in monetising some of the existing investments if appropriate opportunities in the market arise. (5,197) (5,019) Amortisation of intangible assets resulting from acquisitions (16,129) LIQUIDITY AND FINANCIAL RESOURCES 5,800 8 Jul 2019 3,000 3,000 306.21 8 Jul 2021 to 7 Jul 2026 (Note 4) 305.79 3,001 3,001 304.61 304.61 3,003 3,001 3,001 during 27,729 710,896 29,039 12,094 3,003 669,763 306.21 445,027 8 Jul 2020 to 7 Jul 2026 (Note 3) 40,675 11,166 438,259 305.79 486,839 14,083 490,100 301.46 46,236 9,870 during 1 January 8 Jul 2019 As at forfeited Exercised Granted As at Lapsed/ Directors' Report Number of share options Tencent Holdings Limited 34 00 287.49 46,236 288.46 21,866 24,369 46,235 15 Aug 2020 to 22 Aug 2026 (Note 7) 288.89 43,732 48,737 92,469 23 Aug 2019 15 Aug 2020 to 22 Aug 2026 (Note 10) 288.46 9,870 23 Aug 2019 4 Apr 2024 to 3 Apr 2026 (Note 6) 332.87 6 Jul 2021 to 5 Jul 2025 (Note 5) 17,500,000 647 6 Jul 2018 331.57 2,013 2,013 332.47 2,013 2,013 6 Jul 2020 to 5 Jul 2025 (Note 4) 332.87 2,024 2,024 6 Jul 2018 (Note 16) and 15) (Note 20) HKD Exercise period/Performance targets price 2023 the year the year (Note 13) the year (Notes 14 2023 Date of grant Exercise during 31 December during during 31 December 647 320.01 4,532 332.47 4 Apr 2019 320.45 1,447,427 1,447,427 320.78 1,447,425 1,447,425 4 Apr 2020 to 3 Apr 2026 (Note 3) 321.04 2,894,848 2,894,848 4 Apr 2019 4 Apr 2020 to 3 Apr 2026 (Note 1) 321.04 169,028 24,538 193,566 4 Apr 2019 24 Aug 2019 to 23 Aug 2025 (Note 2) 302.78 17,780 17,780 24 Aug 2018 331.40 4,534 4,534 331.57 4,533 4,533 4,532 Exercise 471.92 2023 12,232 21 Aug 2020 469.87 877 877 470.04 877 877 470.14 877 877 5 Jul 2022 to 9 Jul 2027 (Note 8) 471.92 876 876 10 Jul 2020 469.87 298,302 23,830 322,132 470.14 307,657 14,429 322,086 307,590 14,426 322,016 472.04 5 Jul 2021 to 9 Jul 2027 (Note 8) 294,687 12,232 13,799 444.32 12,233 during HKD (Note 13) (Notes 14 Exercise period/Performance targets price 2023 the year the year the year 2023 Date of grant Exercise during 31 December during during 1 January As at forfeited Exercised Granted As at Lapsed/ Number of share options Directors' Report 35 Annual Report 2023 444.07 12,233 15 Jul 2021 to 20 Aug 2027 (Note 9) Date of grant 308,486 365.53 20 Mar 2020 329.92 37,170 37,170 15 Dec 2020 to 7 Jan 2027 (Note 10) 330.89 74,340 74,340 8 Jan 2020 289.77 17,582 17,582 15 Nov 2020 to 1 Dec 2026 (Note 10) 290.39 82 82 2 Dec 2019 (Note 16) and 15) (Note 20) HKD (Note 13) (Notes 14 Exercise period/Performance targets price 2023 the year the year the year 100,253 10 Jul 2020 1,272 305.66 16,614 16,614 366.70 16,613 16,613 15 May 2021 to 21 May 2027 (Note 10) 367.16 16,613 16,613 22 May 2020 303.74 1,770,490 1,770,490 304.23 1,746,159 1,746,159 305.49 1,746,159 1,746,159 20 Mar 2021 to 19 Mar 2027 (Note 8) 305.66 1,697,498 1,697,498 20 Mar 2020 305.64 183,107 4,730 187,837 21 Jan 2021 to 19 Mar 2027 (Note 9) 98,981 1 January 9 April 2019 to forfeited 29 March 2028 30 March 2022 to 532.06 843,658 843,658 30 March 2021 303.74 1,099,954 1,099,954 (Note 1) 304.23 1,099,954 1,099,954 19 March 2027 305.49 1,099,954 1,099,954 20 March 2021 to 305.66 1,099,953 1,099,953 20 March 2020 (Note 1) 320.45 876,645 876,645 3 April 2026 320.78 876,645 (Notes 1 and 7) 876,645 Total: 3,750,000 As at Lapsed/ Number of share options Details of movements of share options granted to Employee Participants of the Group (including Mr Lau Chi Ping Martin) during the year ended 31 December 2023 are as follows: Directors' Report Tencent Holdings Limited 32 00 As at 31 December 2023, there were no outstanding share options granted to any director of the Company. 8. Such options were voluntarily waived by Mr Lau Chi Ping Martin in January 2024. 7. Details of movements of share options granted to Mr Lau Chi Ping Martin during the year ended 31 December 2023 were included in the following section on details of movements of share options granted to Employee Participants of the Group. 6. No options were cancelled or lapsed during the period from 1 January 2023 to 17 May 2023. 5. As a result of the distribution in specie of Meituan Shares, pursuant to the scheme rules of the Post-IPO Option Scheme II and the Post-IPO Option Scheme IV, adjustments had been made to the exercise prices of the share options which remained outstanding as at 5 January 2023 (Meituan ex-dividend date). The adjusted exercise prices of the share options are reflected above. Please refer to the announcement of the Company dated 9 January 2023 for details. 4. The weighted average closing price immediately before the date on which the options were exercised was HKD373.8 per Share. 3. In relation to the exercise of 750,000 share options out of 3,750,000 share options, 489,211 Shares were issued. The automatic deduction of 260,789 Shares represents the consideration payable for the exercise of 750,000 share options. For options granted with exercisable date determined based on the grant date of options, the first 25% of the total options shall be vested and can be exercised 1 year after the grant date, and each 25% of the total options will be vested and become exercisable in each subsequent year. 2. 1. Note: Directors' Report 31 Annual Report 2023 17,215,853 20,965,853 Granted 4 April 2020 to 1,753,290 Exercise period price 2023 period period 2023 Date of grant Name of director Exercise 17 May during the during the 1 January As at Exercised Granted As at Number of share options As at 17 May 2023, there were a total of 17,215,853 outstanding share options granted to Mr Lau Chi Ping Martin, details of which are as follows: Directors' Report Tencent Holdings Limited 30 30 The total number of options available for grant under the scheme mandate of the Post-IPO Option Scheme IV as at 1 January 2023 was 277,023,785 and such scheme was terminated on 17 May 2023. The total number of options available for grant under the scheme mandate of the 2023 Share Option Scheme as at the date of adoption (17 May 2023) and 31 December 2023 were 287,638,307 and 274,076,375, respectively. The total number of options available for grant under the Service Providers sub-limit of the 2023 Share Option Scheme as at the date of adoption (17 May 2023) and 31 December 2023 were both 958,794. The Company has adopted six share option schemes, namely, the Pre-IPO Option Scheme, the Post-IPO Option Scheme I, the Post-IPO Option Scheme II, the Post-IPO Option Scheme III, the Post-IPO Option Scheme IV and the 2023 Share Option Scheme. The Pre-IPO Option Scheme, the Post-IPO Option Scheme I, the Post-IPO Option Scheme II and the Post-IPO Option Scheme III expired on 31 December 2011, 23 March 2014, 16 May 2017 and 13 May 2019, respectively. As at 31 December 2023, there were no outstanding share options exercisable under the Pre-IPO Option Scheme, the Post-IPO Option Scheme | and the Post-IPO Option Scheme III. The Post-IPO Option Scheme IV was terminated on 17 May 2023. Please refer to the circular of the Company dated 24 April 2023 for details. In respect of the 2023 Share Option Scheme, the Board may, at its discretion, grant options to any qualifying participant to subscribe for Shares, subject to the terms and conditions stipulated therein. The exercise price must be in compliance with the requirements under the Listing Rules. In addition, the option vesting period is determined by the Board provided that it is not later than the last day of a 10-year period after the date of grant of options. SHARE OPTION SCHEMES Directors' Report 00 (Note 20) (Note 3) 321.04 HKD Lau Chi Ping Martin 1,753,290 4 April 2019 (Note 1) 8 April 2025 357.86 803,950 803,950 358.11 2,411,850 2,411,850 9 April 2018 (Note 1) 23 March 2024 24 March 2018 to 185.65 5,250,000 (Note 1) 20 March 2023 21 March 2017 to 126.57 5,250,000 24 March 2017 17 May 2023) with effect from (Note 2) (ceased to be a director 3,750,000 3,750,000 21 March 2016 (Note 4) As at Exercised As at 26,390 24 May 2018 357.86 4,984,470 4,984,470 9 Apr 2019 to 8 Apr 2025 (Note 3) 358.11 14,851,089 14,851,089 9 Apr 2018 9 Apr 2019 to 8 Apr 2025 (Note 2) 358.11 191,555 191,555 9 Apr 2018 9 Apr 2019 to 8 Apr 2025 (Note 1) 358.11 1,861,700 9,800 1,871,500 9 Apr 2018 16 Jan 2019 to 15 Jan 2025 (Note 2) 387.16 97,915 97,915 16 Jan 2018 23 Nov 2018 to 22 Nov 2024 (Note 2) 368.46 31,430 26,390 39,760 355.51 22 Jun 2018 Exercised Granted As at Lapsed/ Number of share options Directors' Report 33 Annual Report 2023 332.47 983,323 10,755 53,641 1,047,719 6 Jul 2019 to 5 Jul 2025 (Note 3) 332.87 1,980,404 21,820 85,195 2,087,419 6 Jul 2018 22 Jun 2019 to 21 Jun 2025 (Note 2) 348.04 70,525 70,525 22 Jun 2018 22 Jun 2019 to 21 Jun 2025 (Note 1) 348.04 13,055 13,055 24 May 2019 to 23 May 2025 (Note 2) forfeited 71,190 230.87 6 Jul 2017 to 5 Jul 2023 (Note 3) 143.33 1,850 314,991 316,841 6 Jul 2016 21 Mar 2017 to 20 Mar 2023 (Note 3) 126.57 3,917,500 3,917,500 21 Mar 2016 (Note 16) and 15) Exercise period/Performance targets (Note 20) HKD (Note 13) (Notes 14 price 2023 the year the year the year 2023 Date of grant Exercise during 31 December during during 1 January 24 Mar 2017 23 Nov 2017 826,650 690,152 4,548 560 5,108 10 Jul 2019 to 9 Jul 2024 (Note 4) 230.89 3,728 560 4,288 10 Jul 2017 10 Jul 2018 to 9 Jul 2024 (Note 3) 230.87 3,031,874 19,073 777,784 3,828,731 10 Jul 2017 10 Jul 2018 to 9 Jul 2024 (Note 2) 230.87 4,469 4,469 10 Jul 2017 24 Mar 2018 to 23 Mar 2024 (Note 3) 185.65 16,628,175 7,572,700 24,200,875 24 Mar 2017 24 Mar 2018 to 23 Mar 2024 (Note 1) 185.65 136,498 and 15) 17,500,000 21 Aug 2020 786,077 2,866 1,101 790,044 24 Mar 2022 342.87 6,827 2,126 8,953 343.21 8,772 178 8,950 343.22 6,827 2,126 8,953 5 Jul 2022 to 23 Mar 2029 (Note 8) 8,769 78 100 8,947 24 Mar 2022 343.84 27 Jan 2023 to 23 Mar 2029 (Note 9) 790,206 2,928 7,474 343.06 4,595 2,891 7,486 15 Feb 2023 to 23 Mar 2029 (Note 8) 343.77 4,583 2,889 7,472 24 Mar 2022 433.25 342.81 3,094 343.06 3,094 3,094 15 Feb 2023 to 23 Mar 2029 (Note 10) 343.77 3,094 3,094 24 Mar 2022 343.20 787,278 3,094 2,890 5,232 434.78 48,057 1,918,080 5 Jul 2022 to 13 Jul 2028 (Note 8) 478.17 1,874,281 43,508 1,917,789 14 Jul 2021 (Note 16) and 15) (Note 20) HKD (Note 13) (Notes 14 Exercise period/Performance targets price 2023 the year the year the year 2023 Date of grant Exercise 1,870,023 477.46 1,918,365 62,649 5,231 5,231 15 Oct 2022 to 15 Nov 2028 (Note 10) 435.86 5,231 5,231 16 Nov 2021 433.54 57,633 57,633 436.86 5,232 57,632 15 Sep 2022 to 15 Nov 2028 (Note 10) 437.83 57,632 57,632 16 Nov 2021 476.09 1,856,034 62,659 1,918,693 476.52 1,855,716 57,632 4,584 342.81 7,487 36,883 36,883 17 Aug 2023 15 Apr 2024 to 22 Mar 2030 (Notes 8 and 11) 375.60 3,071,143 3,071,143 23 Mar 2023 15 Jan 2024 to 22 Mar 2030 (Notes 9 and 11) 375.60 588,526 256 588,782 23 Mar 2023 276.01 1,301,252 69,883 1,371,135 276.81 1,301,030 69,870 1,370,900 277.42 334.04 15 Jun 2024 to 17 Aug 2030 (Notes 9 and 12) 17 Aug 2023 60,862 39 Annual Report 2023 886,203 122,611,076 119,423,776 17,221,857 13,148,354 Total: 15 Sep 2024 to 17 Aug 2030 (Notes 8 and 12) 334.04 11,557,350 11,557,350 17 Aug 2023 15 Jul 2024 to 17 Aug 2030 (Notes 8 and 12) 1,300,846 334.04 - 19,434 1,884,286 17 Aug 2023 15 Jul 2024 to 17 Aug 2030 (Notes 9 and 12) 334.04 22,551 22,551 17 Aug 2023 15 Jun 2024 to 17 Aug 2030 (Notes 10 and 12) 334.04 60,862 1,864,852 69,857 1,370,703 15 Jul 2023 to 17 Aug 2029 (Note 8) the year the year the year (Notes 14 2023 Exercise during 31 December during during 1 January Date of grant As at 2023 forfeited Granted As at Lapsed/ Directors' Report Number of share options Tencent Holdings Limited 38 00 342.50 4,595 2,892 Exercised during 31 December price (Note 13) 277.91 1,269,908 22,476 78,148 1,370,532 18 Aug 2022 341.94 1,399,357 1,399,357 342.49 1,399,356 Exercise period/Performance targets 1,399,356 1,399,355 1,399,355 24 Mar 2023 to 23 Mar 2029 (Note 8) 343.61 1,399,354 1,399,354 24 Mar 2022 (Note 16) and 15) (Note 20) HKD 342.79 during 343.96 1 January 494.94 35,069 35,069 15 Dec 2021 to 22 Dec 2027 (Note 10) 495.23 35,069 35,069 23 Dec 2020 494.94 7,014 7,014 15 Dec 2021 to 22 Dec 2027 (Note 9) 495.23 7,014 7,014 23 Dec 2020 508.53 4,207 4,207 510.57 4,206 4,206 511.54 35,069 35,069 494.22 30 Mar 2021 during 31 December during during 1 January As at forfeited Exercised Granted As at Lapsed/ Directors' Report 4,206 Number of share options 36 00 533.13 518,537 6,663 525,200 8 Feb 2022 to 29 Mar 2028 (Note 9) 533.39 518,344 6,654 524,998 Tencent Holdings Limited 4,206 15 Nov 2021 to 22 Nov 2027 (Note 8) 511.83 443.08 490 752 1,242 444.01 489 751 1,240 15 Aug 2021 to 20 Aug 2027 (Note 8) 444.32 488 1,243 751 21 Aug 2020 443.08 3,512 3,512 444.01 3,512 3,512 15 Aug 2021 to 20 Aug 2027 (Note 10) 444.32 3,511 3,511 1,239 Exercise 753 442.82 4,206 4,206 23 Nov 2020 510.71 during 2,952 511.59 2,952 2,952 15 Oct 2021 to 22 Nov 2027 (Note 10) 511.83 490 2,951 23 Nov 2020 511.59 7,510 7,853 15,363 15 Oct 2021 to 22 Nov 2027 (Note 9) 511.83 46,501 7,852 54,353 23 Nov 2020 2,951 Date of grant 2,952 the year 528.40 2,174 771 529.08 2,173 771 5 Jul 2021 to 9 Jun 2028 (Note 8) 529.18 2,173 771 끼끼끼끼 771 2,945 2,944 2,944 10 Jun 2021 532.06 1,810,622 1,810,622 532.29 966,961 966,961 533.07 966,958 2,945 966,958 2,174 10 Jun 2021 2023 As at forfeited Exercised Granted As at Lapsed/ Number of share options Directors' Report 37 Annual Report 2023 526.97 527.29 46,683 50,537 528.51 3,854 46,682 50,536 15 May 2022 to 9 Jun 2028 (Note 10) (Note 16) 529.15 3,853 46,681 3,854 30 Mar 2022 to 29 Mar 2028 (Note 8) 50,534 966,958 531.71 25,085 25,085 532.35 25,084 25,084 533.13 25,083 25,083 8 Feb 2022 to 29 Mar 2028 (Note 8) 533.39 30 Mar 2021 25,083 (Note 16) and 15) (Note 20) HKD Exercise period/Performance targets price 2023 the year the year (Note 13) 533.39 (Notes 14 30 Mar 2021 1,444 25,083 533.39 966,958 30 Mar 2021 1,444 532.24 763 763 532.35 763 533.13 762 762 15 Feb 2022 to 29 Mar 2028 (Note 8) 763 533.39 1,444 1,444 533.13 15 Feb 2022 to 29 Mar 2028 (Note 10) 1,445 1,445 532.24 30 Mar 2021 761 761 The total number of unexercised outstanding Shares (i.e. the total number of Shares available for issue) under the Post-IPO Option Scheme Il as at the date of this annual report is 16,619,375, representing approximately 0.18% of the issued Shares as at the date of this annual report. The total number of Shares available for issue under the 2023 Share Option Scheme as at the date of this annual report is 378,388,424, representing approximately 4.01% of the issued Shares as at the date of this annual report. 00 3. Annual Report 2023 2. Directors' Report 1. 44 Note: Tencent Holdings Limited 45 The Post-IPO Option Scheme II expired on 16 May 2017 and no further options will be granted under the scheme. Directors' Report To recognise the contributions and to attract, motivate and retain eligible persons (including any director) of the Group Details of the movements in the share options of the Company during the year are set out in Note 37 to the consolidated financial statements. SHARE AWARD SCHEMES The Company has adopted four share award schemes, namely, the 2007 Share Award Scheme, the 2013 Share Award Scheme, the 2019 Share Award Scheme and the 2023 Share Award Scheme, among which the 2007 Share Award Scheme expired on 13 December 2022 and the 2023 Share Award Scheme was adopted on 17 May 2023. All the outstanding unvested share awards under the 2013 Share Award Scheme and the 2019 Share Award Scheme had been transferred to the 2023 Share Award Scheme. As disclosed in the circular of the Company dated 24 April 2023, upon the completion of the transfer of the shares held by the Trustee for the purpose of satisfying the outstanding share awards under the 2013 Share Award Scheme and the 2019 Share Award Scheme to the Trustee administering the 2023 Share Award Scheme, the 2013 Share Award Scheme and the 2019 Share Award Scheme would be terminated. The transfer had been completed during the year ended 31 December 2023. As at 31 December 2023, the 2023 Share Award Scheme was the only effective share award scheme of the Company. As at 31 December 2023, there were no outstanding share awards under the 2007 Share Award Scheme. 2013 Share Award Scheme 2019 Share Award Scheme 2023 Share Award Scheme 1. Purposes 2. Duration and termination It shall be valid and effective unless and until being terminated on the earlier of: (i) the 15th anniversary date of the Adoption Date III; and (ii) such date of early termination as determined by the Board provided that such termination does not affect any subsisting rights of any Selected Participant. It shall expire on 17 May 2033, subject to early termination in accordance with the scheme rules (i.e. the remaining life of the scheme as at the date of this annual report is approximately 9 years and 2 months). It shall be valid and effective unless and until being terminated on the earlier of: (i) the 15th anniversary date of the Adoption Date II; and (ii) such date of early termination as determined by the Board provided that such termination does not affect any subsisting rights of any Selected Participant. MOVEMENTS IN THE SHARE OPTIONS The Post-IPO Option Scheme IV had been terminated upon the completion of the transfer of the outstanding share options of the Post-IPO Option Scheme IV to the 2023 Share Option Scheme in accordance with the circular of the Company dated 24 April 2023. The option period is determined by the Board provided that it shall expire not later than the last day of the 10-year period after the date of grant of the options. There is no minimum period for which an option must be held before it can be exercised. The exercise price must be at least the higher of: (i) the closing price of the securities as stated in the Stock Exchange's daily quotations sheet on the date of grant, which must be a business day; (ii) the average closing price of the securities as stated in the Stock Exchange's daily quotations sheets for the five business days immediately preceding the date of grant; and (iii) the nominal value of the Share. 2023 Share Option Scheme It shall be valid and effective unless and until being terminated on the earlier of: (i) the 10th anniversary date of the Adoption Date IV; and (ii) such date of early termination as determined by the Board provided that such termination does not affect any subsisting rights of any Selected Participant. For any 12-month period up to and including the date of grant, the aggregate number of Shares issued and to be issued in respect of all options or awards granted to any Eligible Person (excluding any lapsed options or awards) under the share scheme(s) of the Company shall not exceed 1% of the issued Shares from time to time, unless such grant is separately approved by the shareholders of the Company. Vesting period The total vesting period of options granted ranges from approximately 24 to 83 months. The total vesting period of options granted ranges from approximately 22 to 72 months. The total vesting period of options granted ranges from approximately 22 to 72 months. 43 Directors' Report Details It expired on 16 May 2017. 7. 8. Exercise price 9. Remaining life of the scheme Post-IPO Option Scheme II Options granted must be accepted within 28 days of the date of grant, upon payment of HKD1 per grant. The exercise price must be at least the higher of: (i) the closing price of the securities as stated in the Stock Exchange's daily quotations sheet on the date of grant, which must be a business day; (ii) the average closing price of the securities as stated in the Stock Exchange's daily quotations sheets for the five business days immediately preceding the date of grant; and (iii) the nominal value of the Share. Post-IPO Option Scheme IV Options granted must be accepted within 28 days of the date of grant, upon payment of HKD1 per grant. The exercise price must be at least the higher of: (i) the closing price of the securities as stated in the Stock Exchange's daily quotations sheet on the date of grant, which must be a business day; (ii) the average closing price of the securities as stated in the Stock Exchange's daily quotations sheets for the five business days immediately preceding the date of grant; and (iii) the nominal value of the Share. 2023 Share Option Scheme Options granted must be accepted within 28 days of the date of grant. Acceptance of offer 00 Directors' Report Tencent Holdings Limited 1% of the issued Shares at the Adoption Date II (i.e. 92,979,085 Shares (after the effect of the Share Subdivision)) 1% of the issued Shares at the Adoption Date III (i.e. 95,523,658 Shares) For any 12-month period up to and including the date of grant, the aggregate number of Shares issued and to be issued in respect of all options or awards granted to any Eligible Person (excluding any lapsed options or awards) under the share scheme(s) of the Company shall not exceed 1% of the issued Shares from time to time, unless such grant is separately approved by the shareholders of the Company. 6. Operation The Board may, from time to time, at its absolute discretion select any Eligible Person to be a Selected Participant and grant to such Selected Participant Awarded Shares. The Board may at any time at its discretion, in respect of each Selected Participant, cause to be paid the relevant amount from the Company's resources or any subsidiary's resources into an account for the purchase and/or subscription of the Awarded Shares after the Grant Date. The Board may, from time to time, at its absolute discretion select any Eligible Person to be a Selected Participant and grant to such Selected Participant Awarded Shares. The Board may at any time at its discretion, in respect of each Selected Participant, cause to be paid the relevant amount from the Company's resources or any subsidiary's resources into an account for the purchase and/or subscription of the Awarded Shares after the Grant Date. The Board may, from time to time, at its absolute discretion select any Eligible Person to be a Selected Participant and grant to such Selected Participant Awarded Shares. The Board may at any time at its discretion, in respect of each Selected Participant, cause to be paid the relevant amount from the Company's resources or any subsidiary's resources into an account for the purchase and/or subscription of the Awarded Shares after the Grant Date. Maximum entitlement of each participant 00 Tencent Holdings Limited 7. Restrictions 2013 Share Award Scheme 2019 Share Award Scheme 2023 Share Award Scheme No award may be made by the Board to any Selected Participant: (i) where the Company has information that must be disclosed under Rule 13.09 of the Listing Rules or where the Company reasonably believes there is inside information which must be disclosed under Part XIVA of the SFO, until such inside information has been published on the websites of the Stock Exchange and the Company; (ii) after any inside information in relation to the securities of the Company has occurred or has become the subject of a decision, until such inside information has been published; (iii) within the period commencing 60 days (in the case of yearly results), or 30 days (in the case of results for half-year, quarterly or other interim period) immediately preceding the earlier of (1) the date of a meeting of the Board (as such date is first notified to the Stock Exchange) for the approval of the Company's results for any year, half-year, quarterly or other interim period (whether or No award may be made by the Board to any Selected Participant: (i) where the Company has information that must be disclosed under Rule 13.09 of the Listing Rules or where the Company reasonably believes there is inside information which must be disclosed under Part XIVA of the SFO, until such inside information has been published on the websites of the Stock Exchange and the Company; (ii) after any inside information in relation to the securities of the Company has occurred or has become the subject of a decision, until such inside information has been published; (iii) within the period commencing 60 days (in the case of yearly results), or 30 days (in the case of results for half-year, quarterly or other interim period) immediately preceding the earlier of (1) the date of a meeting of the Board (as such date is first notified to the Stock Exchange) for the approval of the Company's results for any year, half-year, quarterly or other interim period (whether or No award may be granted by the Board to any Selected Participant: (i) where the Company has information that must be disclosed under Rule 13.09 of the Listing Rules or where the Company reasonably believes there is inside information which must be disclosed under Part XIVA of the SFO, until (and including) the trading date after such inside information has been published on the websites of the Stock Exchange and the Company; (ii) after any inside information in relation to the securities of the Company has occurred or has become the subject of a decision, until such inside information has been published; (iii) within the period commencing 60 days (in the case of yearly results), or 30 days (in the case of results for half-year, quarterly or other interim period) immediately preceding the earlier of (1) the date of a meeting of the Board (as such date is first notified to the Stock Exchange) for the approval of the Company's results for any year, half-year, quarterly or other interim period (whether or Annual Report 2023 49 The option period is determined by the Board provided that it shall expire not later than the last day of the 7-year period after the date of grant of the options. There is no minimum period for which an option must be held before it can be exercised. 48 46 5. 2019 Share Award Scheme 3. Eligible Persons 2013 Share Award Scheme Directors' Report 2019 Share Award Scheme 2023 Share Award Scheme Any employee (whether full time or part time), executives or officers, directors (including executive, non-executive and independent non-executive directors) of any member of the Group, any invested entity or any business partner and any consultant, adviser or agent of any member of the Group, any invested entity or any business partner, who have contributed or will contribute to the growth and development of the Group or any invested entity Any employee (whether full time or part time), executives or officers, directors (including executive, non-executive and independent non-executive directors) of any member of the Group, any invested entity or any business partner and any consultant, adviser or agent of any member of the Group, any invested entity or any business partner, who have contributed or will contribute to the growth and development of the Group or any invested entity Any Employee Participant, any director or employee of a Related Entity, and any Service Provider 4. Scheme limit 3% of the issued Shares as at the Adoption Date II (i.e. 278,937,260 Shares (after the effect of the Share Subdivision)) 2% of the issued Shares as at the Adoption Date III (i.e. 191,047,317 Shares) 2023 Share Award Scheme 4.5% of the issued Shares as at the Adoption Date IV (i.e. 431,457,460 Shares), among Date IV (i.e. 335,578,024 Shares) and the number of existing Shares to be used for satisfying the awards to be granted under the 2023 Share Award Scheme shall be no more than 1% of the issued Shares as at the Adoption Date IV (i.e. 95,879,435 Shares) Annual Report 2023 47 Directors' Report 2013 Share Award Scheme I which the total number of new Shares which may be issued in respect of all awards to be granted under the 2023 Share Award Scheme shall be no more than 3.5% of the issued Shares as at the Adoption 1% of the issued Shares from time to time within any 12-month period up to the date of the latest grant Annual Report 2023 The option period is determined by the Board provided that it shall expire not later than the last day of the 7-year period after the date of grant of the options. There is no minimum period for which an option must be held before it can be exercised. The first 33.33% (one-third) of the total options shall be vested and can be exercised on the dates as specified in the relevant grant letters, and each 33.33% (one-third) of the total options will be vested and become exercisable in each subsequent year. The closing price immediately before the date on which the options were granted on 23 March 2023 was HKD347.2 per Share. 00 40 40 Tencent Holdings Limited Directors' Report 12. The first 50% of the total options shall be vested and can be exercised on the dates as specified in the relevant grant letters, and the remaining 50% of the total options will be vested and become exercisable in the subsequent year. The closing price immediately before the date on which the options were granted on 17 August 2023 was HKD328.8 per Share. 14. 15. The weighted average closing price immediately before the date on which the options were exercised (without taking into account the exercise of options by Mr Lau Chi Ping Martin during the period from 1 January 2023 to 17 May 2023) was HKD329.57 per Share. The average fair value of the options granted on 23 March 2023 was HKD132.11 per Share at the date of grant. The average fair value of the options granted on 17 August 2023 was HKD125.28 per Share at the date of grant. 16. 17. As a result of the distribution in specie of Meituan Shares, pursuant to the scheme rules of the Post-IPO Option Scheme II and the Post-IPO Option Scheme IV, adjustments had been made to the exercise prices of the share options which remained outstanding as at 5 January 2023 (Meituan ex-dividend date). The adjusted exercise prices of the share options are reflected above. Please refer to the announcement of the Company dated 9 January 2023 for details. 13. No options granted to the Employee Participants were cancelled during the year ended 31 December 2023. The first 25% of the total options shall be vested and can be exercised on the dates as specified in the relevant grant letters, and each 25% of the total options will be vested and become exercisable in each subsequent year. 10. Post-IPO Option Scheme IV Directors' Report Note: 1. 2. 3. 4. 5. 11. 6. For options granted with exercisable date determined based on the grant date of options, the first 50% of the total options shall be vested and can be exercised 1 year after the grant date, and the remaining 50% of the total options will be vested and become exercisable in the subsequent year. For options granted with exercisable date determined based on the grant date of options, the first 33.33% (one-third) of the total options shall be vested and can be exercised 1 year after the grant date, and each 33.33% (one-third) of the total options will be vested and become exercisable in each subsequent year. For options granted with exercisable date determined based on the grant date of options, the first 25% of the total options shall be vested and can be exercised 1 year after the grant date, and each 25% of the total options will be vested and become exercisable in each subsequent year. For options granted with exercisable date determined based on the grant date of options, the first 25% of the total options shall be vested and can be exercised 3 years after the grant date, and each 25% of the total options will be vested and become exercisable in each subsequent year. For options granted with exercisable date determined based on the grant date of options, 100% of the total options shall be vested and can be exercised 5 years after the grant date. Subject to the satisfaction of certain conditions, the first 25% of the total options shall be vested and can be exercised on the dates as specified in the relevant grant letters, and each 25% of the total options will be vested and become exercisable in each subsequent year. 8. 9. 7. 18. For options granted with exercisable date determined based on the grant date of options, the first 25% of the total options shall be vested and can be exercised 2 years after the grant date, and each 25% of the total options will be vested and become exercisable in each subsequent year. 19. Any employee (whether full time or part time), executive or officer, director (including executive, non-executive and independent non- executive directors) of any member of the Group or any invested entity, and any consultant, adviser or agent of any member of the Board, who have contributed or will contribute to the growth and development of the Group or any invested entity Any Employee Participant, any director or employee of a Related Entity, and any Service Provider The maximum number of Shares in respect of which options may be granted under the Post- IPO Option Scheme II shall be 444,518,270 Shares (after the effect of the Share Subdivision), 5% of the relevant class of securities of the Company in issue as at 16 May 2007 (Note 1). The maximum number of Shares in respect of which options may be granted under the Post- IPO Option Scheme IV shall be 379,099,339 Shares, 4% of the relevant class of securities of the Company in issue as at 17 May 2017. The maximum number of Shares in respect of which options may be granted under the 2023 Share Option Scheme shall be 287,638,307 Shares, 3% of the relevant class of securities of the Company in issue as at 17 May 2023. 00 42 Any employee (whether full time or part time), executive or officer, director (including executive, non-executive and independent non- executive directors) of any member of the Group or any invested entity, which is any entity in which the Group holds an equity interest, and any consultant, adviser or agent of any member of the Board, who have contributed or will contribute to the growth and development of the Group or any invested entity Tencent Holdings Limited Maximum entitlement of each participant 5. Option period 6. Directors' Report Post-IPO Option Scheme II None of the participants has been granted with options and awards in excess of the 1% individual limit. 1% of the issued Shares from time to time within any 12-month period up to the date of the latest grant Details To recognise the contribution that certain individuals have made to the Group, to attract the best available personnel and to promote the success of the Group's business 4. Post-IPO Option Scheme IV Details of the valuation of share options of the Company during the year ended 31 December 2023, including the accounting standard and policy adopted for the share option schemes, are set out in Note 37 and Note 2.20 to the consolidated financial statements. 20. 2023 Share Option Scheme All of the grants made during the year ended 31 December 2023 were made without any performance targets. 21 21. Annual Report 2023 41 Directors' Report SUMMARY OF THE SHARE OPTION SCHEMES Please refer to the Definition section for the description of Employee Participants. 1. Post-IPO Option Scheme II Purposes 2. Qualifying participants Scheme limit Details 3. 1,892 23 March 2023 24 March 2026 7,088 24 March 2023 to 2,362 9,000 24 March 2022 30 March 2025 10,998 270 3,786 30 March 2022 to 450 10,998 15 April 2024 to 23,495 (Notes 2 and 3) Total: 19,040 10,998 952 7,495 Annual Report 2023 55 Directors' Report Number of Awarded Shares 5,408 As at Granted 15 April 2027 30 March 2021 Total: 20 March 2021 to Additional 800 4,200 12,600 24 March 2023 to 24 March 2026 23 March 2023 19,552 19,552 15 April 2024 to 15 April 2027 (Notes 2 and 3) 37,246 19,552 20 March 2024 1,862 42,971 Ke Yang 23 August 2019 1,542 77 1,619 23 August 2020 to 23 August 2023 20 March 2020 3,090 155 1,622 1,623 15,689 Vested Note: 1 January 16,038 Grand Total: 125,609 74,542 6,281 51,415 155,017 16,000 1. As a result of the distribution in specie of Meituan Shares, pursuant to the scheme rules of the 2013 Share Award Scheme and the 2019 Share Award Scheme, adjustments had been made to the number of Shares subject to share awards which remained unvested as at 5 January 2023 (Meituan ex-dividend date). The number of additional Awarded Shares awarded pursuant to the adjustments is shown above. Please refer to the announcement of the Company dated 9 January 2023 for details. 2. The closing price immediately before the date on which the Awarded Shares were granted on 23 March 2023 was HKD347.2 per Share. 3. 1,678 The fair value of the Awarded Shares granted on 23 March 2023 was HKD375.6 per Share at the date of grant. The weighted average closing price of the Shares immediately before the dates on which the awards were vested in 2023 was HKD351.25 per Share. 5. No Awarded Shares granted to the directors were lapsed or cancelled during the year ended 31 December 2023. 6. All of the grants made during the year ended 31 December 2023 were made without any performance targets. 00 56 Tencent Holdings Limited Directors' Report Details of movements of Awarded Shares of the Group (excluding directors of the Company) during the year ended 31 December 2023 are as follows: Number of Awarded Shares Lapsed/ As at 4. As at 320 6,398 during Awarded during 31 December Name of director Date of grant 2023 the year Shares the year 2023 Vesting period (Note 1) (Note 4) 10,998 Zhang Xiulan 6,398 320 1,678 5,040 18 August 2023 to 18 August 2026 23 March 2023 10,998 10,998 15 April 2024 to 15 April 2027 (Notes 2 and 3) Total: 18 August 2022 24 March 2022 00 3,378 900 4,725 14,175 24 March 2023 to 24 March 2026 23 March 2023 21,996 21,996 15 April 2024 to 15 April 2027 (Notes 2 and 3) Total: 41,949 21,996 18,000 2,098 48,341 Li Dong Sheng 4 April 2019 2,190 110 2,300 4 April 2020 to 20 March 2020 4,378 219 2,297 4 April 2023 2,300 20 March 2021 to 20 March 2024 17,702 30 March 2021 24 March 2022 30 March 2022 to Date of grant 2023 the year Shares the year 2023 Vesting period (Note 1) (Note 4) lan Charles Stone 4 April 2019 4,378 219 30 March 2025 4,597 4 April 2023 20 March 2020 8,756 438 4,595 4,599 20 March 2021 to 20 March 2024 30 March 2021 10,815 541 3,785 7,571 4 April 2020 to 6,762 30 March 2022 to 30 March 2025 5,408 1,892 Awarded during 31 December Name of director Date of grant 2023 the year Shares the year 2023 Vesting period (Note 1) (Note 4) Yang Siu Shun during 4 April 2019 193 4,056 4 April 2020 to 4 April 2023 20 March 2020 7,726 386 4,055 4,057 20 March 2021 to 20 March 2024 30 March 2021 9,657 483 59 3,863 270 1 January Vested 3,786 30 March 2022 to 30 March 2025 24 March 2022 9,000 450 2,362 7,088 24 March 2023 to 24 March 2026 23 March 2023 10,998 10,998 15 April 2024 to 15 April 2027 As at (Notes 2 and 3) 20,976 10,998 1,049 8,851 24,172 Granted 54 Tencent Holdings Limited Number of Awarded Shares Directors' Report As at Granted Additional Total: Additional 7,099 Year of grant 15 Jan 2024 to 4,982,360 347.2 375.6 15 Jan 2025 23 Mar 2023 15 Jan 2024 to 230,778 347.2 375.6 15 Jan 2026 23 Mar 2023 15 Jan 2024 to 37,512 347.2 375.6 15 Jan 2027 23 Mar 2023 15 Jan 2025 to 67,615 347.2 375.6 15 Jan 2027 23 Mar 2023 15 Mar 2024 to 12,173 347.2 23 Mar 2023 of awards at the date of grant per Share HKD immediately before date of grant HKD 347.2 47,879,823 7,545,346 132,834,232 Annual Report 2023 57 Directors' Report Note: 1. The Awarded Shares can either be vested immediately or over a period of up to 7 years. 2. The Awarded Shares can either be vested immediately or over a period of up to 4 years. 3. For Employee Participants, the weighted average closing price of the Shares immediately before the dates on which the awards were vested in 2023 was HKD351.29 per Share. 4. 375.6 For Service Providers, the weighted average closing price of the Shares immediately before the dates on which the awards were vested in 2023 was HKD338.91 per Share. The following grants were made during the year ended 31 December 2023: Date of grant Employee Participants Vesting period Number of Shares granted Closing price of Shares immediately before date of grant HKD Fair value of awards at the date of grant per Share H HKD 23 Mar 2023 15 Apr 2024 to 1,084,932 5. 15 Mar 2025 23 Mar 2023 15 Mar 2024 to 375.6 347.2 3,665 15 Oct 2023 to 23 Mar 2023 15 Nov 2026 375.6 347.2 21,958 15 Nov 2024 to 23 Mar 2023 15 Nov 2026 375.6 15 Oct 2025 347.2 15 Nov 2023 to 23 Mar 2023 15 Nov 2025 375.6 347.2 83,432 15 Nov 2023 to 23 Mar 2023 15 Nov 2024 375.6 347.2 8,757 Name of director 3,120 123,735,569 58,343,146 6,180,686 23 Mar 2023 346 179,521 347.2 375.6 15 Mar 2026 23 Mar 2023 15 Mar 2024 to 64,589 347.2 375.6 15 Mar 2027 23 Mar 2023 15 Mar 2025 to 32,900 23 Mar 2023 to 347.2 15 Mar 2027 23 Mar 2023 15 Nov 2023 to Annual Report 2023 15 Oct 2024 375.6 347.2 5,392 23 Mar 2023 to 23 Mar 2023 15 Jan 2025 375.6 347.2 375.6 Grand Total: 745,538 12,437 Sub-total: 22,649,015 1,094,919 1,132,452 1,875,930 23,000,456 Other Employee Participants 2016 7,099 Note 1 2017 30,921 1,546 32,467 Notes 1 and 5 Note 1 50,475 2,523 46,537 850 5,611 Note 1 2019 4,947,368 246,131 4,940,631 151,183 101,685 Note 1 2020 2018 10,002,214 Note 1 837,904 1 January 2023 during Awarded during forfeited during As at 31 December Vesting period/ the year Shares the year the year 2023 16,222,500 Note 1 6,520,941 257,015 (Note 11) Employee Participants (Note 3) Top five highest paid employees (Note 10) 2019 15,450,000 772,500 2021 7,199,015 359,952 1,038,026 2023 1,094,919 Performance targets (Note 9) Vested 497,669 644,205 17,126 856 11,649 6,333 Note 2 2021 109,279 5,463 43,407 71,335 Note 2 2022 399,358 2020 19,966 5,865 307,426 Note 2 2023 437,041 70,025 6,572 360,444 Notes 2 and 5 Total: 529,362 437,041 26,465 234,893 106,033 5,885,905 Note 2 180 2021 36,869,360 1,842,047 16,562,512 2022 48,649,755 2,431,853 15,308,366 2023 56,811,186 2,992,582 3,969,773 2,631,618 19,517,277 Note 1 3,150,081 32,623,161 Note 1 954,972 52,863,632 Notes 1 and 5 Note 1 3,779 Sub-total: 56,811,186 5,021,769 45,769,000 7,532,909 109,088,238 Total: 123,206,207 57,906,105 6,154,221 47,644,930 7,532,909 132,088,694 Service Providers (Note 4) 2019 3,599 100,557,192 during 31 December 375.6 during 347.2 375.6 15 Dec 2024 23 Mar 2023 15 Dec 2023 to 293,027 347.2 375.6 15 Dec 2025 23 Mar 2023 15 Dec 2023 to 13,146 347.2 375.6 15 Dec 2026 15,092 15 Dec 2023 to 23 Mar 2023 15 Apr 2027 Restrictions (continued) 7. Directors' Report 00 23 Mar 2023 15 Apr 2025 15 Apr 2024 to 23 Mar 2023 911 375.6 15 Apr 2026 23 Mar 2023 15 Apr 2024 to 2,287,189 347.2 375.6 347.2 15 Dec 2024 to 39,833 347.2 15 Feb 2025 to 5,992 347.2 375.6 15 Feb 2027 00 58 23 Mar 2023 Tencent Holdings Limited Employee Participants Vesting period Number of Shares granted Directors' Report Closing price of Shares Fair value Awarded Date of grant 50 15 Feb 2027 347.2 375.6 15 Dec 2026 23 Mar 2023 15 Feb 2024 to 18,064 347.2 375.6 375.6 15 Feb 2025 163,354 347.2 375.6 15 Feb 2026 23 Mar 2023 15 Feb 2024 to 6,439 15 Feb 2024 to 50 23 Mar 2023 2019 Share Award Scheme 1. Note: Directors' Report Tencent Holdings Limited 52 00 It shall expire on 17 May 2033, subject to early termination in accordance with the scheme rules (i.e. the remaining life of the scheme as at the date of this annual report is approximately 9 years and 2 months). The 2019 Share Award Scheme had been terminated upon the completion of the transfer of the shares held by the Trustee for the purpose of satisfying the outstanding share awards under the 2019 Share Award Scheme to the Trustee administering the 2023 Share Award Scheme in accordance with the circular of the Company dated 24 April 2023. The 2013 Share Award Scheme had been terminated upon the completion of the transfer of the shares held by the Trustee for the purpose of satisfying the outstanding share awards under the 2013 Share Award Scheme to the Trustee administering the 2023 Share Award Scheme in accordance with the circular of the Company dated 24 April 2023. the scheme 11. Remaining life of The Trustee shall not exercise any voting rights in respect of any Shares held pursuant to the Trust Deed IV or as nominee. The Trustee shall not exercise any voting rights in respect of any Shares held pursuant to the Trust Deed III or as nominee. The Trustee shall not exercise any voting rights in respect of any Shares held pursuant to the Trust Deed II or as nominee. 2. 3. The total number of awards available for grant under the scheme mandate of the 2013 Share Award Scheme as at 1 January 2023 was 13,790,025 and such scheme was terminated during the year ended 31 December 2023. The total number of awards available for grant under the scheme mandate of the 2019 Share Award Scheme as at 1 January 2023 was 31,752,436 and such scheme was terminated during the year ended 31 December 2023. As at 2013 Share Award Scheme 1 January Vested Additional Granted As at Not applicable Number of Awarded Shares Directors' Report 53 Annual Report 2023 The total number of Shares that may be issued in respect of options and awards granted under all share schemes of the Company during the year ended 31 December 2023 divided by the weighted average number of Shares in issue for the year was 0.73%. The total number of Shares available for issue under the 2023 Share Award Scheme as at the date of this annual report is 335,745,161, representing approximately 3.56% of the issued Shares as at the date of this annual report. During the year, a total of 55,069,585 Shares were issued to option holders who exercised their share options granted under the Post-IPO Option Scheme II, the Post-IPO Option Scheme IV and the 2023 Share Option Scheme, and pursuant to the Share Award Schemes. The total number of awards available for grant under the scheme mandate of the 2023 Share Award Scheme as at the Adoption Date IV and 31 December 2023 were 431,457,460 and 383,287,393 respectively. The total number of awards (to be satisfied by new Shares) available for grant under the Service Providers sub-limit of the 2023 Share Award Scheme as at the Adoption Date IV and 31 December 2023 were both 958,794. As at 31 December 2023, there were a total of 155,017 outstanding Awarded Shares granted to the directors of the Company, details of which are as follows: Subject to the satisfaction of all vesting conditions as prescribed in the 2023 Share Award Scheme, the Selected Participants will be entitled to receive the Awarded Shares. During the year, a total of 156,911, 9,923,573 and 48,337,204 Awarded Shares were granted under the 2013 Share Award Scheme, the 2019 Share Award Scheme and the 2023 Share Award Scheme respectively and out of which, 74,542 Awarded Shares were granted to the independent non-executive directors of the Company under the 2019 Share Award Scheme. In addition, a total of 6,186,967 additional Awarded Shares were awarded pursuant to adjustments made as a result of the distribution in specie of Meituan Shares and out of which, 6,281 Awarded Shares were awarded to the independent non- executive directors of the Company. Details of the movements in the Share Award Schemes during the year are set out in Note 37 to the consolidated financial statements. in serious misconduct Subject to the satisfaction of all vesting conditions as prescribed in the 2013 Share Award Scheme, the Selected Participants will be entitled to receive the Awarded Shares. The vesting of the Awarded Shares is subject to the Selected Participant remaining at all times after the Grant Date and on the date of vesting, an Eligible Person, subject to the rules of the 2013 Share Award Scheme. The Awarded Shares can either be vested immediately or up to a period of approximately 84 months, subject to a vesting schedule as determined by the Board on the date of grant. Vesting and clawback/lapse 2023 Share Award Scheme 2019 Share Award Scheme Directors' Report 8. The vesting of the Awarded Shares is subject to the Selected Participant remaining at all times after the Grant Date and on the date of vesting, an Eligible Person, subject to the rules of the 2019 Share Award Scheme. The Awarded Shares can either be vested immediately or up to a period of approximately 60 months, subject to a vesting schedule as determined by the Board on the date of grant. Tencent Holdings Limited authorities has not been from any applicable regulatory not required under the Listing Rules); and (2) the deadline for the Company to publish its quarterly, interim or annual results announcement for any such period, and ending on the date of such announcement; or (iv) in any other circumstances where dealings by Selected Participant (including directors of the Company) are prohibited under the Listing Rules, the SFO or any other applicable laws or regulations or where the requisite approval not required under the Listing Rules); and (2) the deadline for the Company to publish its quarterly, interim or annual results announcement for any such period, and ending on the date of such announcement; or (iv) in any other circumstances where dealings by Selected Participant (including directors of the Company) are prohibited under the Listing Rules, the SFO or any other applicable laws or regulations or where the requisite approval from any applicable regulatory authorities has not been granted. or malfeasance, or has conducted any unlawful acts which prejudiced the interest and reputation of the Group, the awards granted shall be clawed back and shall lapse accordingly. not required under the Listing Rules); and (2) the deadline for the Company to publish its quarterly, interim or annual results announcement for any such period, and ending on the date of such announcement; or (iv) in any other circumstances where dealings by Selected Participant (including directors of the Company) are prohibited under the Listing Rules, the SFO or any other applicable laws or regulations or where the requisite approval from any applicable regulatory authorities has not been granted. 2023 Share Award Scheme granted. Subject to the satisfaction of all vesting conditions as prescribed in the 2019 Share Award Scheme, the Selected Participants will be entitled to receive the Awarded Shares. 2013 Share Award Scheme Where a grantee's service or employment with the Group has been terminated by the Group by reason of, among others, dishonesty or serious misconduct, incompetence or negligence in the performance of his/her duties, the grantee having been convicted of any criminal offence involving his/ her integrity or honesty, the grantee will cease to be an Eligible Person and the awards granted will automatically lapse. 2023 Share Award Scheme Not applicable Voting rights The vesting of the Awarded Shares is subject to the Selected Participant remaining at all times after the Grant Date and on the date of vesting, an Eligible Person, subject to the rules of the 2023 Share Award Scheme. The Awarded Shares can be vested up to a period of approximately 84 months, subject to a vesting schedule as determined by the Board on the date of grant. Where a grantee is involved 10. Not applicable 9. 2019 Share Award Scheme Purchase price 2013 Share Award Scheme clawback/lapse (continued) Vesting and 8. Directors' Report 51 Annual Report 2023 15 Jul 2027 332.8 17 Aug 2023 15 Jun 2024 to 30,295 328.8 328.8 332.8 15 Jun 2025 15 Jun 2026 15 Jun 2024 to 430,983 328.8 332.8 17 Aug 2023 15 Jun 2025 to 7,334 332.8 3,635 328.8 17 Aug 2023 15 Jul 2025 to Closing price of Shares 15 Jul 2027 60 15 Jun 2027 Tencent Holdings Limited Date of grant Employee Participants Vesting period Number of Shares granted Fair value immediately before date of grant HKD 17 Aug 2023 of awards at the date of grant per Share HKD 15 Jul 2024 to 580,826 328.8 332.8 15 Jul 2026 17 Aug 2023 15 Jul 2024 to 28,331,934 328.8 332.8 17 Aug 2023 17 Aug 2023 23 Mar 2023 8,922 57,906,105 Service Providers 23 Mar 2023 15 Apr 2024 to 66,106 347.2 375.6 15 Apr 2025 15 Apr 2024 to 2,314 Total: 347.2 15 Apr 2027 23 Mar 2023 15 Dec 2023 to 20,188 347.2 375.6 15 Dec 2026 23 Mar 2023 15 Feb 2024 to 60 375.6 15 May 2024 to 332.8 3,702,166 328.8 332.8 15 May 2025 17 Aug 2023 15 May 2024 to 316,492 328.8 332.8 15 May 2026 17 Aug 2023 328.8 15 May 2025 to 328.8 332.8 15 May 2027 17 Aug 2023 15 Sep 2028 12,000,000 328.8 332.8 17 Aug 2023 17 Aug 2023 28,129 00 1 Apr 2024 to 332.8 31,093 328.8 332.8 1 Apr 2027 17 Aug 2023 1 Jul 2024 to 15,253 328.8 332.8 1 Jul 2027 30,423 17 Aug 2023 173,070 328.8 332.8 15 Apr 2025 17 Aug 2023 15 Apr 2024 to 400,687 328.8 332.8 15 Apr 2026 15 Apr 2024 to 17 Aug 2023 17 Aug 2023 375.6 Directors' Report Date of grant Employee Participants Closing price of Shares Fair value of awards Number of Vesting period Shares granted 1 Oct 2026 immediately before date of grant HKD 23 Mar 2023 1 Jan 2024 to 80,390 347.2 375.6 1 Jan 2027 23 Mar 2023 1 Oct 2023 to 76,521 347.2 at the date of grant per Share HKD 15 Jul 2025 15 Apr 2024 to 328.8 17 Aug 2023 15 Aug 2024 to 447,887 328.8 332.8 15 Aug 2026 17 Aug 2023 15 Aug 2024 to 5,662 328.8 15 Aug 2025 332.8 17 Aug 2023 15 Aug 2025 to 29,328 328.8 332.8 15 Aug 2027 17 Aug 2023 15 Jul 2024 to 1,470,297 328.8 15 Aug 2027 16,795 332.8 24,834 332.8 15 Apr 2027 17 Aug 2023 15 Apr 2025 to 25,547 328.8 332.8 15 Apr 2027 17 Aug 2023 15 Apr 2025 to 328.8 2,964 332.8 15 Apr 2028 17 Aug 2023 15 Apr 2026 to 2,964 328.8 332.8 15 Apr 2029 17 Aug 2023 15 Aug 2024 to 328.8 347.2 Directors' Report 15 Feb 2027 Disclosures herein with respect to the top five highest paid employees consist of the number of Awarded Shares to be satisfied by existing Shares only. The number of Awarded Shares granted to the top five highest paid employees to be satisfied by Shares to be issued are included under the "Other Employee Participants" category. As a result of the distribution in specie of Meituan Shares, pursuant to the scheme rules of the 2013 Share Award Scheme and the 2019 Share Award Scheme, adjustments had been made to the number of Shares subject to share awards which remained unvested as at 5 January 2023 (Meituan ex-dividend date). The number of additional Awarded Shares awarded pursuant to the adjustments is shown above. Please refer to the announcement of the Company dated 9 January 2023 for details. 12. Please refer to the Definition section for the description of Employee Participants and Service Providers. Annual Report 2023 63 Directors' Report DIRECTORS AND SENIOR MANAGEMENT All of the grants made during the year ended 31 December 2023 were made without any performance targets. The directors and senior management of the Company during the year and up to the date of this annual report were: Ma Huateng (Chairman) Lau Chi Ping Martin (ceased to be a director with effect from 17 May 2023) Non-Executive Directors Jacobus Petrus (Koos) Bekker Charles St Leger Searle Independent Non-Executive Directors Li Dong Sheng lan Charles Stone Executive Directors Yang Siu Shun Details of the valuation of share awards of the Company during the year ended 31 December 2023, including the accounting standard and policy adopted for the Share Award Schemes, are set out in Note 37 and Note 2.20 to the consolidated financial statements. 10. 17 Aug 2023 64,980 328.8 332.8 Total: 437,041 Grand Total: 58,343,146 11. 00 Tencent Holdings Limited Directors' Report 6. No Awarded Shares granted to the Employee Participants or the Service Providers were cancelled during the year ended 31 December 2023. 7. None of the participants has been granted with options and awards in excess of the 1% individual limit. None of the Service Providers has been granted with options and awards in any 12-month period in excess of 0.1% of the Shares in issue. 8. 9. 62 17 Aug 2023 Ke Yang The Company has received from each independent non-executive director an annual confirmation of his/her independence and the Board considers them independent. 67 Directors' Report BIOGRAPHICAL DETAILS OF SENIOR MANAGEMENT Lau Chi Ping Martin, age 50, President, joined the Company in 2005 as the Chief Strategy and Investment Officer and was responsible for corporate strategies, investments, mergers and acquisitions and investor relations. In 2006, Mr Lau was promoted to President of the Company to manage the day-to-day operations of the Company. In 2007, Mr Lau was appointed as an executive director of the Company until his retirement by rotation on 17 May 2023. Prior to joining the Company, Mr Lau was an executive director at Goldman Sachs (Asia) L.L.C.'s investment banking division and the Chief Operating Officer of its Telecom, Media and Technology Group. Prior to that, he worked at McKinsey & Company, Inc. as a management consultant. Mr Lau received a Bachelor of Science degree in Electrical Engineering from University of Michigan, a Master of Science degree in Electrical Engineering from Stanford University and an MBA degree from Kellogg Graduate School of Management, Northwestern University. Mr Lau currently serves as a director or corporate representative of certain subsidiaries of the Company. Xu Chenye, age 52, Chief Information Officer, oversees the strategic planning and development for the website properties and communities, and customer relations of the Company. Mr Xu is one of the core founders and has been employed by the Group since 1999. Prior to that, Mr Xu had experiences in software system design, network administration as well as marketing and sales management in his previous position at Shenzhen Data Telecommunications Bureau. Mr Xu received a Bachelor of Science degree in Computer Science from Shenzhen University in 1993 and a Master of Science degree in Computer Science from Nanjing University in 1996. Mr Xu currently serves as a director or officer of certain subsidiaries of the Company. Ren Yuxin, age 48, Chief Operating Officer and President of Platform & Content Group and Interactive Entertainment Group, joined the Company in 2000 and had served as the General Manager for the Value-Added Services Development Division and General Manager for the Interactive Entertainment Business Division. Since September 2005, Mr Ren has been responsible for the research and development, operations, marketing and sales of gaming products for the Interactive Entertainment Business. Since May 2012, Mr Ren has been appointed as Chief Operating Officer and is now in charge of the overall operation of the Platform & Content Group and the Interactive Entertainment Group. Prior to joining the Company, Mr Ren worked at Huawei Technologies Co., Ltd. Mr Ren received a Bachelor of Science degree in Computer Science and Engineering from University of Electronic Science and Technology of China in 1998 and an EMBA degree from China Europe International Business School (CEIBS) in 2008. Zhang Xiaolong, age 54, Senior Executive Vice President and President of Weixin Group, joined the Company in March 2005 and had served as the General Manager for the Guangzhou R&D Division and led the QQ Mail team to be the top mail service provider in China. Later he was promoted to Corporate Vice President and since September 2012, Mr Zhang has been appointed as Senior Vice President in charge of the product and team management of Weixin/WeChat and QQ Mail. He is also responsible for the management and review of major innovation projects. In May 2014, Mr Zhang was promoted to Senior Executive Vice President in charge of the Weixin Group. Prior to joining the Company, Mr Zhang developed Foxmail independently in 1997 as the first generation of Internet software developer in China. He joined Boda China as Corporate Vice President in 2000, responsible for corporate mail developing. Mr Zhang received a Master's degree in Telecommunications from Huazhong University of Science and Technology in 1994. 00 Annual Report 2023 68 Directors' Report James Gordon Mitchell, age 50, Chief Strategy Officer and Senior Executive Vice President, joined the Company in 2011. He is responsible for various functions, including the Company's strategic planning and implementation, investor relations, mergers and acquisitions and investment activities. Prior to joining the Company, Mr Mitchell had worked in investment banking for 16 years. Most recently, Mr Mitchell was a managing director at Goldman Sachs in New York, leading the bank's Communications, Media and Entertainment research team, which analysed Internet, entertainment and media companies globally. Mr Mitchell received a degree from Oxford University and holds a Chartered Financial Analyst Certification. Mr Mitchell currently serves as a chairman and/or a director of certain subsidiaries of the Company. Tong Tao Sang, age 50, Senior Executive Vice President and President of Cloud and Smart Industries Group, is leading the Industrial Internet strategy and the enterprise businesses for Tencent. Mr Tong manages the security labs, the multi-media lab, and Youtu Al lab, and he is one of the co-chairs of Tencent's technology council. Mr Tong joined the Company as a technical architect in 2005, and had previously led QQ, Qzone, QQshow, and their advertising and value-added services. Mr Tong received a Bachelor of Science degree in Computer Engineering from University of Michigan, Ann Arbor and a Master of Science degree in Electrical Engineering from Stanford University. Mr Tong currently serves as a director of certain subsidiaries of the Company. Lu Shan, age 49, Senior Executive Vice President and President of Technology and Engineering Group, joined the Company in 2000 and had served as the General Manager for the IM Product Division, Vice President for the Platform Research and Development System and Senior Vice President for the Operations Platform System. Since March 2008, Mr Lu has been in charge of management of the Operations Platform System of the Company. Since May 2012, Mr Lu has been in charge of management of the Technology and Engineering Group. Prior to joining the Company, he worked for Shenzhen Liming Network Systems Limited. Mr Lu received a Bachelor of Science degree in Computer Science and Technology from University of Science and Technology of China (USTC) in 1998. Mr Lu currently serves as a director or officer of certain subsidiaries of the Company. Ma Xiaoyi, age 50, Senior Vice President, joined the Company in 2007 and has been responsible for international publishing of Tencent Games, establishing and maintaining long-term business partnerships and cooperation for the Company since November 2008. Prior to joining the Company, Mr Ma served as the General Manager of the games division of OPTIC Communication Co., Ltd. Prior to that, Mr Ma worked as the General Manager in Shanghai EasyService Technology Development Ltd. Mr Ma graduated from Shanghai Jiaotong University in 1997, and received an EMBA degree from Fudan University in 2008. Mr Ma currently serves as a director of certain subsidiaries of the Company. Annual Report 2023 69 375.6 Tencent Holdings Limited In accordance with Article 87 of the Articles of Association, Mr Charles St Leger Searle and Professor Ke Yang will retire at the 2024 AGM and, being eligible, will offer themselves for re-election. Zhang Xiulan, age 60, has been an independent non-executive director since August 2022. Professor Zhang is currently a consultant at the University of California, San Francisco. She was previously the Dean of the School of Social Development and Public Policy, Beijing Normal University. She was also a member of the 11th and 12th Beijing Municipal Committee of the Chinese People's Political Consultative Conference and a member of the Healthcare Reform Advisory Committee of the State Council. Professor Zhang has led over 40 research projects, including national level priority social science projects, and projects funded by the Ministry of Science and Technology and the Ministry of Education. In expert capacity, Professor Zhang has also provided expert consultation to government on policy making, including the 11th National Five-Year Plan, the "Five Guarantees Regulations", the Adjustment Mechanism for Urban Minimum Living Standard, Urban and Rural Medical Assistance Policy, Social Assistance System and others. In addition, Professor Zhang has also worked on mandates from the State Council Healthcare Restructuring Office, Ministry of Education, Ministry of Health, Ford Foundation, European Union, World Bank, World Health Organization, UNICEF, Save the Children Foundation and other organizations. Professor Zhang received her Bachelor's Degree in Physical Geography, and Master's Degree in Economic Geography from the Beijing Normal University in 1985 and 1988, respectively. After graduation, she joined the "China Society", a newspaper published by the Ministry of Civil Affairs as an Editor. In 1999, she received her Doctor of Philosophy in Social Welfare from the University of California at Berkeley with her research focused on social protection, social policy, social welfare and healthcare. In the same year, Professor Zhang founded the first Institute of Social Development and Public Policy in China at the Beijing Normal University, which subsequently became the School of Social Development and Public Policy. Directors' Report 00 64 Tencent Holdings Limited Directors' Report BIOGRAPHICAL DETAILS AND OTHER INFORMATION OF DIRECTORS Ma Huateng, age 52, is an executive director, Chairman of the Board and Chief Executive Officer of the Company. Mr Ma has overall responsibilities for strategic planning and positioning and management of the Group. Mr Ma is one of the core founders and has been employed by the Group since 1999. Prior to his current employment, Mr Ma was in charge of research and development for Internet paging system development at China Motion Telecom Development Limited, a supplier of telecommunications services and products in China. Mr Ma was a deputy to the 12th and 13th National People's Congress. Mr Ma has a Bachelor of Science degree specialising in Computer and its Application obtained in 1993 from Shenzhen University and more than 30 years of experience in the telecommunications and Internet industries. He is a director of Advance Data Services Limited, which has an interest in the shares of the Company which would fall to be disclosed to the Company under the provisions of Divisions 2 and 3 of Part XV of the SFO. Mr Ma also serves as a director of certain subsidiaries of the Company. Jacobus Petrus (Koos) Bekker, age 71, has been a non-executive director since November 2012. Koos led the founding team of the M-Net/MultiChoice pay-television business in 1985. He was also a founder director of MTN in cellular telephony. Koos headed the MIH group in its international and Internet expansions until 1997, when he became chief executive of Naspers, which is listed on the Johannesburg Stock Exchange. He serves on the boards of other companies within the group and associates, as well as other bodies. In April 2015, he became non-executive chair. On 14 August 2019, he was appointed as non-executive chair of Prosus N.V., which is listed on Euronext Amsterdam and on the Johannesburg Stock Exchange. Academic qualifications include BA Hons and honorary doctorate in commerce (Stellenbosch University), LLB (University of the Witwatersrand) and MBA (Columbia University, New York). Charles St Leger Searle, age 60, has been a non-executive director since June 2001. Mr Searle is currently the Chief Executive Officer of Naspers Internet Listed Assets. He serves on the board of a number of companies associated with the Naspers Group, and was a director of VK Company Limited (now known as VK International Public Joint-Stock Company) that is listed on the Moscow Exchange and was delisted on the London Stock Exchange on 12 September 2023 until his resignation on 4 March 2022. Prior to joining the Naspers Group, he held positions at Cable & Wireless plc and at Deloitte & Touche in London and Sydney. Mr Searle is a member of the Institute of Chartered Accountants in Australia and New Zealand. Mr Searle has more than 30 years of international experience in the telecommunications and Internet industries. Mr Searle also serves as a director of certain subsidiaries of the Company. Ke Yang, age 68, has been an independent non-executive director since August 2019. Professor Ke is currently the Director of Laboratory of Genetics of Peking University Cancer Hospital and an international member of the United States National Academy of Medicine. Professor Ke is also the President of the Peking University Health Science Center Alumni Association, Vice-president of China Medical Women's Association, and Vice-president of Cancer Foundation of China. Professor Ke's research focus is on the upper gastrointestinal tumors, including the cloning of gastric cancer related genes and the functional study of such genes. Together with her team, she has also established the population cohort in esophageal cancer high incidence regions in China, studied the etiology of esophageal cancer, and evaluated the effects and economic efficacy of early screening of the disease. She has published more than 100 papers and had registered patents and been granted awards at national and provincial levels for technological and educational achievements. Professor Ke was a member of the 11th and 12th National Committee of the Chinese People's Political Consultative Conference, an executive Vice-president of Peking University and of the Peking University Health Science Center (formerly known as Beijing Medical College), a member of the Committee of Academic Degrees of the State Council, a member of the Healthcare Reform Advisory Committee of the State Council, the Chairperson of the Working Committee for Graduate Medical and Pharmaceutical Education of the Office of Academic Degrees of the State Council, Vice-president of the 24th and 25th Chinese Medical Association, Vice-chairperson of the Steering Committee of Clinical Medicine of the Committee of Academic Degrees of the State Council, Vice-president of the Peking University Alumni Association, and President of the Health Professional Education Committee of the Chinese Association of Higher Education. Professor Ke graduated from the Peking University Health Science Center in 1982. From 1985 to 1988, Professor Ke worked at the National Cancer Institute of the National Institutes of Health of the United States as a postdoctoral fellow. Professor Ke is currently an independent non-executive director of Keymed Biosciences Inc. which is publicly listed on the Stock Exchange. Li Dong Sheng, age 66, has been an independent non-executive director since April 2004. Mr Li is the Chairman and Chief Executive Officer of TCL Technology Group Corporation that is listed on the Shenzhen Stock Exchange, and the strategic development consultant of TCL Electronics Holdings Limited that is listed on the Stock Exchange, both of which produce consumer electronic products. Mr Li graduated from South China University of Technology in 1982 with a Bachelor degree in radio technology and has more than 29 years of experience in the information technology field. Mr Li was the Chairman and an executive director of TCL Electronics Holdings Limited, that is listed on the Stock Exchange, up to 9 August 2021. 65 Directors' Report lan Charles Stone, age 73, has been an independent non-executive director since April 2004. Mr Stone is currently an independent advisor on Technology, Media and Telecoms after retiring from PCCW in Hong Kong in 2011. His career in the last 34 years has been primarily in leading mobile telecoms businesses, and new wireless and Internet technology, during which time he held senior roles in PCCW, SmarTone, First Pacific, Hong Kong Telecom and CSL, as Chief Executive or at Director level, primarily in Hong Kong, and also in London and Manila. Since 2011, Mr Stone has provided telecoms advisory services to telecom companies and investors in Hong Kong (China), the Mainland of China, South East Asia and the Middle East and has more than 53 years of experience in the telecom and mobile industries. Mr Stone was an independent director of Summit Healthcare Acquisition Corp. that was listed on NASDAQ, up to 16 March 2023. Mr Stone is a fellow member of The Hong Kong Institute of Directors. Yang Siu Shun, age 68, has been an independent non-executive director since July 2016. Mr Yang is currently serving as a Member of the 14th National Committee of the Chinese People's Political Consultative Conference, a Justice of the Peace in Hong Kong, a Steward of the Hong Kong Jockey Club, and an independent non-executive director of Industrial and Commercial Bank of China Limited which is publicly listed on the Stock Exchange and the Shanghai Stock Exchange. Mr Yang is also an independent non-executive director of Man Wah Holdings Limited and Xinyi Glass Holdings Limited, both of these companies are publicly listed on the Stock Exchange. Mr Yang retired from PricewaterhouseCoopers ("PwC") on 30 June 2015. Before his retirement, he served as the Chairman and Senior Partner of PwC Hong Kong, the Executive Chairman and Senior Partner of PwC China and Hong Kong, one of the five members of the Global Network Leadership Team of PwC and the PwC Asia Pacific Chairman. Mr Yang served as a Board Member and the Audit Committee Chairman of The Hang Seng University of Hong Kong (formerly known as Hang Seng Management College), up to 30 September 2018 and the Deputy Chairman of the Council of Hong Kong Metropolitan University ("HKMU”) (formerly known as The Open University of Hong Kong), up to 19 June 2019. Mr Yang also served as a Member of the Exchange Fund Advisory Committee of the Hong Kong Monetary Authority, up to 31 August 2021. Mr Yang graduated from the London School of Economics and Political Science in 1978 and was awarded the degree of Honorary Doctor of Social Sciences by HKMU in 2019. Mr Yang is a Fellow Member of the Institute of Chartered Accountants in England and Wales, the Hong Kong Institute of Certified Public Accountants and the Chartered Institute of Management Accountants. 00 99 66 Tencent Holdings Limited Annual Report 2023 15 May 2027 Zhang Xiulan 328.8 23 Mar 2023 15 Jan 2024 to 12,353 347.2 375.6 15 Jan 2026 23 Mar 2023 15 Jan 2024 to 375.6 18,183 375.6 15 Jan 2027 23 Mar 2023 15 Mar 2024 to 5,166 347.2 375.6 15 Mar 2025 347.2 23 Mar 2023 347.2 15 Jan 2024 to Annual Report 2023 332.8 61 Directors' Report Closing price of Shares Fair value of awards 6,863 Number of Date of grant Vesting period Shares granted date of grant HKD at the date of grant per Share HKD Service Providers 23 Mar 2023 immediately before 15 Mar 2024 to 15 Jan 2025 38,635 15 Jul 2024 to 328.8 332.8 15 Jul 2027 17 Aug 2023 15 Jun 2024 to 328.8 332.8 15 Jun 2026 17 Aug 2023 15 Jun 2024 to 23,493 328.8 332.8 15 Jun 2027 17 Aug 2023 25,338 15 May 2024 to 15,969 17 Aug 2023 15 Jul 2026 31,831 332.8 347.2 375.6 15 Mar 2027 17 Aug 2023 15 Apr 2024 to 4,399 328.8 15 Apr 2027 17 Aug 2023 15 Aug 2024 to 332.8 328.8 328.8 63,484 15 Jul 2024 to 17 Aug 2023 7,316 332.8 15 Aug 2027 0.0002% 00 0.0004% 17,716 Personal* (Note 6) Zhang Xiulan (Note 5) 40,369 Pursuant to the technical consultancy services agreement dated 28 February 2004 entered into between Tencent Technology, as consultant, and Shiji Kaixuan, Tencent Technology shall provide specified technical consultancy services to Shiji Kaixuan against payment of an annual consultancy service fee determined by the SKT Co-operation Committee within a range of percentages of Shiji Kaixuan's annual revenues. During the year, no consultancy service was transacted under such arrangements, save as disclosed elsewhere in this section. Ke Yang (Note 4) 0.0005% 45,401 Personal* Yang Siu Shun 0.004% 72 (Note 3) Personal* Tencent Holdings Limited Pursuant to the co-operation framework agreement entered into between each of the New OPCOS and the relevant WFOES, the parties shall cooperate in the provision of communications services. For each agreement, the WFOES shall allow the New OPCOS to use its and its affiliates' assets and provide services to the New OPCOs. The New OPCOS shall transfer all of its Surplus Cash to the WFOES and its affiliates as consideration. Co-operation committees have also been established according to these agreements. During the year, (i) revenue sharing amounting to approximately RMB627 and RMB0.041 million were paid or payable by Wang Dian to Tencent Technology and Tencent Beijing respectively; (ii) revenue sharing amounting to approximately RMB311 and RMB85 million were paid or payable by Beijing BIZCOM to Tencent Technology and Shenzhen Tencent Information respectively; (iii) revenue sharing amounting to approximately RMB44,952 million, RMB505 million, RMB4 million, RMB50,351 million, RMB2,300 million, RMB117 million, RMB241 million, RMB99 million, RMB37 million, RMB4,245 million, RMB571 million and RMB6 million were paid or payable by Shenzhen Tencent Tianyou to Tencent Technology, Cyber Tianjin, Tencent Beijing, Tencent Chengdu, Tencent Shanghai, Tencent Wuhan, Chongqing Tencent Information, Shenzhen Tencent Information, Hainan Network, Shenzhen Tencent Network, Cyber Shenzhen and Wuhan Tencent Information respectively. Note: 359,250 11. 73 Annual Report 2023 Interests of beneficial owner As at 31 December 2023, the total number of issued Shares was 9,482,992,820. 7. The interest comprises 1,678 Shares and 16,038 underlying Shares in respect of the Awarded Shares granted pursuant to the 2019 Share Award Scheme and all the outstanding unvested Awarded Shares granted under such scheme were transferred to the 2023 Share Award Scheme. Details of the Awarded Shares granted to this director are set out above under "Share Award Schemes". 6. The interest comprises 16,874 Shares and 23,495 underlying Shares in respect of the Awarded Shares granted pursuant to the 2013 Share Award Scheme and the 2019 Share Award Scheme, and all the outstanding unvested Awarded Shares granted under these two schemes were transferred to the 2023 Share Award Scheme. Details of the Awarded Shares granted to this director are set out above under "Share Award Schemes". 5. The interest comprises 2,430 Shares and 42,971 underlying Shares in respect of the Awarded Shares granted pursuant to the 2013 Share Award Scheme and the 2019 Share Award Scheme, and all the outstanding unvested Awarded Shares granted under these two schemes were transferred to the 2023 Share Award Scheme. Details of the Awarded Shares granted to this director are set out above under "Share Award Schemes". 4. The interest comprises 310,909 Shares and 48,341 underlying Shares in respect of the Awarded Shares granted pursuant to the 2013 Share Award Scheme and the 2019 Share Award Scheme, and all the outstanding unvested Awarded Shares granted under these two schemes were transferred to the 2023 Share Award Scheme. Details of the Awarded Shares granted to this director are set out above under "Share Award Schemes". 3. The interest comprises 33,828 Shares and 24,172 underlying Shares in respect of the Awarded Shares granted pursuant to the 2013 Share Award Scheme and the 2019 Share Award Scheme, and all the outstanding unvested Awarded Shares granted under these two schemes were transferred to the 2023 Share Award Scheme. Details of the Awarded Shares granted to this director are set out above under "Share Award Schemes". Advance Data Services Limited, a British Virgin Islands company wholly-owned by Mr Ma Huateng, holds 709,859,700 Shares directly and 95,000,000 Shares indirectly through its wholly-owned subsidiary, Ma Huateng Global Foundation. 2. 1. Directors' Report 240,000 Lin Ching-Hua, age 51, Senior Vice President, joined the Company in 2013 and has been responsible for the exploration and development of the Company's Advertising and Smart Retail businesses. He also oversees strategic development of the Company and drives the Group's strategic upgrade and business collaboration. In 2020, Mr Lin was promoted to Senior Vice President. Prior to joining the Company, Mr Lin was a partner at McKinsey & Company and the managing partner of its Taiwan office. Mr Lin received a Bachelor of Sociology degree from National Taiwan University and a Master of Business Administration degree from Harvard University. Mr Lin currently serves as a director or officer of certain subsidiaries of the Company. Personal* Family* A permitted indemnity provision for the benefit of the directors of the Company is currently in force and was in force throughout the financial year. The Company has taken out and maintained directors and officers liability insurance which provides appropriate cover for, among others, directors of the Company. PERMITTED INDEMNITY PROVISION Save as disclosed in this annual report, no transaction, arrangement or contract of significance in relation to the Group's business to which the Company or any of its subsidiaries was a party and in which a director of the Company or an entity connected with a director of the Company had a material interest, whether directly or indirectly, subsisted at the end of the year or at any time during the year. DIRECTORS' INTERESTS IN TRANSACTIONS, ARRANGEMENTS OR CONTRACTS None of the directors who are proposed for re-election at the 2024 AGM has a service contract with the Company which is not determinable by the Company within one year without payment of compensation, other than statutory compensation. Each of Mr Ma Huateng and Mr Lau Chi Ping Martin (Mr Lau ceased to be a director with effect from 17 May 2023) has entered into a service contract with the Company for a term of three years from 1 January 2022 to 31 December 2024. The term of their service contracts can be renewed upon expiry and the Company may terminate their service contracts by three months' written notice. DIRECTORS' SERVICE CONTRACTS Directors' Report Tencent Holdings Limited 70 70 00 Yeung Kwok On, age 62, Senior Management Adviser, joined the Company in 2008. He supports and facilitates organisational innovation and leadership development within the Company and its key strategic partners. Mr Yeung also serves as Dean of TencentX, a corporate learning platform that has approximately 700 entrepreneur alumni. Prior to joining the Company, Mr Yeung, as a professor, had taught at University of Michigan and China Europe International Business School and also served as Chief HR Officer of Acer Group from 1998 to 2002. Mr Yeung received a Bachelor's and a Master's degree from The University of Hong Kong and a Doctoral degree from University of Michigan. Xi Dan, age 48, Senior Vice President, joined the Company in 2002 and has been responsible for overseeing the Company's talent development and functional management since May 2008. Prior to joining the Company, Mr Xi was responsible for HR management in ZTE Corporation and has more than 28 years of experience in IT and Internet industries. Mr Xi received a Bachelor of Science degree in Applied Computer Science from Shenzhen University in 1996 and an MBA degree from Tsinghua University in 2005. Mr Xi currently serves as a director or officer of certain subsidiaries of the Company. Guo Kaitian, age 51, Senior Vice President, joined the Company in 2002 and has been responsible for overseeing the Company's functional divisions of legal affairs, administration, infrastructure, procurement, public strategy, information security and corporate social responsibility. Mr Guo received a Bachelor of Law degree from Zhongnan University of Economics and Law in 1996. Mr Guo currently serves as a director or officer of certain members of the Group. John Shek Hon Lo, age 55, Chief Financial Officer and Senior Vice President, joined the Company in 2004 and was appointed as Chief Financial Officer in May 2012. Prior to joining the Company, Mr Lo worked at PricewaterhouseCoopers. He is a Fellow of the CPA Australia, a Fellow of the Hong Kong Institute of Certified Public Accountants, a Fellow of the Chartered Institute of Management Accountants and a Fellow of the Association of Chartered Certified Accountants. Mr Lo received a Bachelor of Business degree in Accounting from Curtin University and an EMBA degree from Kellogg Graduate School of Management, Northwestern University and The Hong Kong University of Science and Technology. Mr Lo currently serves as a director of a subsidiary of the Company. Directors' Report 79 10. DIRECTORS' RIGHTS TO ACQUIRE SHARES OR DEBENTURES Save as disclosed in this annual report, neither the Company nor any of its subsidiaries was a party to any arrangements to enable directors of the Company to acquire benefits by means of the acquisition of shares in, or debentures of, the Company or any other body corporate at any time during the year or at the end of the year. Annual Report 2023 71 lan Charles Stone (Note 2) 0.0006% 58,000 8.49% 804,859,700 (Note 7) Approximate % of shareholding Number of Shares/ underlying Shares held 119,250 Personal* Li Dong Sheng Corporate (Note 1) Nature of interest Ma Huateng Name of director (A) Long position in the shares and underlying shares of the Company As at 31 December 2023, the interests and short positions of the directors and the chief executive of the Company in the shares, underlying shares and debentures of the Company or its associated corporations (within the meaning of Part XV of the SFO) which (a) were required to be notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests and short positions which they have taken, or are deemed to have taken, under such provisions of the SFO); or (b) were required, pursuant to section 352 of the SFO, to be recorded in the register required to be kept by the Company; or (c) were required, pursuant to the Model Code, to be notified to the Company and the Stock Exchange were as follows: DIRECTORS' INTERESTS IN SECURITIES Directors' Report Annual Report 2023 Pursuant to the information consultancy services agreement dated 28 February 2004 entered into between Tencent Technology, as consultant, and Tencent Computer, Tencent Technology shall provide specified information consultancy services to Tencent Computer against payment of an annual consultancy service fee determined by the TCS Co-operation Committee within a range of percentages of Tencent Computer's annual revenues. During the year, no consultancy service was transacted under such arrangements, save as disclosed elsewhere in this section. Interests of spouse or child under 18 as beneficial owner Directors' Report For a summary of the major terms of the Structure Contracts, please refer to the sections headed “Our History and Structure" and "Structure Contracts" in the IPO prospectus. During the year ended 31 December 2023, there was no material change in the Structure Contracts and/or the circumstances under which they were adopted, and none of the Structure Contracts has been unwound as none of the restrictions that led to the adoption of Structure Contracts has been removed. 74 Tencent Holdings Limited Directors' Report Requirements related to Structure Contracts (other than relevant foreign ownership restrictions) as at 31 December 2023 Requirements related to Structure Contracts (other than relevant foreign ownership restrictions) include the Notice on Further Strengthening the Administration of Pre-examination and Approval of Online Games and the Examination and Approval of Imported Online Games (關於貫徹落實國務院《“三定”規定》和中央編辦有關解釋,進一步加強網絡遊戲前置審批和進 □&¥(the "Circular 13") jointly issued by PRC General Administration of Press and Publication, the National Copyright Administration and the National Office of Combating Pornography and Illegal Publications in September 2009, which provides that foreign investors are not permitted to invest in online game-operating businesses in the PRC via wholly-owned, equity joint venture or co-operative joint venture investments and further expressly prohibits foreign investors from gaining control over or participating in domestic online game operators through indirect ways such as establishing other joint venture companies or entering into contractual or technical arrangements with the Chinese licence holders. However, the Circular 13 does not provide any interpretation of the term "foreign investors" or make a distinction between foreign online game companies and companies under a corporate structure similar to the Group. Thus, it is unclear whether National Press and Publication Administration (National Copyright Administration) will deem the Group's structure and operations to be in violation of these provisions. In the view of the Company's PRC legal advisers, the arrangement of the Structure Contracts does not violate applicable existing PRC laws and regulations as the businesses involving value-added telecommunication services, online and mobile games, online advertising and other Internet and wireless portals in the PRC are operated by OPCOS that hold the necessary licenses for the existing lines of businesses. Current PRC laws and regulations limit foreign investment in businesses providing value-added telecommunications services in China. As foreign-invested enterprises, the WFOES do not have licences to provide Internet content or information services and other telecommunications value-added services. Accordingly, the value-added telecommunications business of the Group has been conducted through Tencent Computer, Shiji Kaixuan, Wang Dian, Beijing BIZCOM, Beijing Starsinhand and Shenzhen Tencent Tianyou (Wang Dian, Beijing BIZCOM, Beijing Starsinhand and Shenzhen Tencent Tianyou are referred herein as the "New OPCOS", and together with Tencent Computer and Shiji Kaixuan, the "OPCOs") by themselves or through their subsidiaries under the Structure Contracts (as defined in the section "Our History and Structure - Structure Contracts" of the IPO prospectus of the Company). As a result of the Structure Contracts, the Group is able to recognise and receive the economic benefit of the business and operations of the OPCOs. The Structure Contracts are also designed to provide the Company with effective control over and (to the extent permitted by PRC law) the right to acquire the equity interests in and/or assets of the OPCOS. However, the Company's PRC legal advisers also advised that there are substantial uncertainties regarding the interpretation and application of the currently applicable PRC laws, rules and regulations. Accordingly, the PRC regulatory authorities and PRC courts may in the future take a view that is contrary to the position of the Company's PRC legal advisers concerning the Structure Contracts. Annual Report 2023 75 Directors' Report Particulars of the OPCOS Set out below is the registered owners and business activities of the OPCOS which had entered into transactions with the Group during the year ended 31 December 2023: Registered owners Name of the operating companies 9. as at 31 December 2023 It is uncertain whether any new PRC laws, rules or regulations relating to Structure Contracts will be adopted or if adopted, what they would provide. On 15 March 2019, the Standing Committee of National People's Congress promulgated Law of Foreign Investment which became effective on 1 January 2020 (the "2019 Law of Foreign Investment"). While the 2019 Law of Foreign Investment does not define Structure Contracts as a form of foreign investment explicitly, the Company cannot assure that future laws and regulations will not provide for Structure Contracts as a form of foreign investment. Therefore, there can be no assurance that the Company's control over OPCOs through Structure Contracts will not be deemed as foreign investment in the future. If the Structure Contracts were to be deemed as a method of foreign investment under any future laws, regulations and rules, and if any of the Company's business operations were to fall under the "negative list" for foreign investment, the Company would need to take further actions in order to comply with these laws, regulations and rules, which may materially and adversely affect its current corporate structure, business, financial condition and results of operations. Business activities The reasons for using Structure Contracts CONNECTED TRANSACTIONS Directors' Report (B) Long position in the shares of associated corporations of the Company Name of director Ma Huateng Name of associated corporation Nature of interest Number of shares and class of shares held Tencent Computer Personal Reference is made to the waiver granted by the Stock Exchange regarding the compliance with the applicable disclosure, reporting and shareholders' approval requirements under Chapter 14A of the Listing Rules when the Company was listed in June 2004. RMB35,285,705 Shiji Kaixuan Personal RMB5,971,427 Approximate % of shareholding 54.29% 54.29% (registered capital) Save as disclosed above, none of the directors or chief executive of the Company and their associates, had interests or short positions in any shares, underlying shares or debentures of the Company and its associated corporations as at 31 December 2023. (registered capital) Tencent Computer Tencent Enterprise Management Shiji Kaixuan The Company's independent non-executive directors had also confirmed that no dividends or other distributions had been made by the OPCOS to the holders of their equity interests and the terms of any new Structure Contracts entered into, renewed and/or cloned during the relevant financial period are fair and reasonable so far as the Group was concerned and in the interests of the Company's shareholders as a whole. To this extent, similar Structure Contracts were entered into relating to the New OPCOS. Directors' Report 76 Tencent Holdings Limited 00 The Company's independent non-executive directors had reviewed the Structure Contracts and confirmed that the transactions carried out during the financial year had been entered into in accordance with the relevant provisions of the Structure Contracts and, had been operated so as to transfer by the date of this annual report the Surplus Cash (as defined in the section "Our History and Structure - Structure Contracts" of the IPO prospectus of the Company) of each of the OPCOS as at 31 December 2023 to Tencent Technology, Cyber Tianjin (formerly known as Shidai Zhaoyang Technology (Shenzhen) Company Limited in the IPO prospectus of the Company), Tencent Beijing, Shenzhen Tencent Information, Tencent Chengdu, Chongqing Tencent Information, Shanghai Tencent Information, Tencent Shanghai, Tencent Wuhan, Hainan Network, Guangzhou Tencent Technology, Shenzhen Tencent Network, Guian New Area Tencent Cyber, Cyber Shenzhen, Wuhan Tencent Information, Guangzhou Tencent Computer and Hangzhou Tencent Information. Review of the transactions carried out under the Structure Contracts during the financial year The above OPCOs are significant to the Group as they hold relevant licences to provide Internet information services and other value-added telecommunications services. The aggregate gross revenue and net asset value of the above OPCOS that are subject to the Structure Contracts amounted to approximately RMB310 billion for the year ended 31 December 2023 and approximately RMB27 billion as at 31 December 2023 respectively. Ultimate registered owners being Mr Ma Huateng and Mr Xu Chenye, both being founders, and a management team member, each ultimately interested in 60%, 35% and 5% respectively of Tencent Enterprise Management. Shiji Kaixuan The Auditor had carried out procedures on the transactions conducted pursuant to the Structure Contracts and had provided a letter to the Board confirming that such transactions had been approved by the Board and had been entered into, in all material respects, in accordance with the relevant Structure Contracts and had been operated so as to transfer the Surplus Cash of the OPCOS as at 31 December 2023 to the WFOES and that no dividends or other distributions had been made by the OPCOS to the holders of their equity interests. Shenzhen Tencent Tianyou* Beijing BIZCOM Wang Dian Provision of value-added services in the PRC Provision of value-added services in the PRC Provision of value-added services in the PRC Provision of Internet advertisement services in the PRC Tencent Computer Provision of value-added services and Internet advertisement services in the PRC 54.29% by Ma Huateng 22.85% by Zhang Zhidong 11.43% by Xu Chenye 11.43% by Chen Yidan Shiji Kaixuan Beijing Starsinhand Transactions carried out during the year ended 31 December 2023, which have been eliminated in the consolidated financial statements of the Group, are set out as follows: Provision of value-added services in the PRC Pursuant to the TCS CFC, the parties shall co-operate in the provision of communications services. Tencent Technology and its affiliates shall allow Tencent Computer to use its and its affiliates' assets and provide services to Tencent Computer. Tencent Computer shall transfer all of its Surplus Cash to Tencent Technology and its affiliates as consideration. The parties also established the TCS Co-operation Committee according to this agreement. During the year, revenue sharing amounting to approximately RMB142,015 million, RMB822 million, RMB23,566 million, RMB1,069 million, RMB15,936 million, RMB2, 113 million, RMB3, 189 million, RMB2 million, RMB1,757 million, RMB628 million, RMB0.027 million, RMB55 million, RMB583 million, RMB1,986 million, RMB157 million and RMB2 million were paid or payable by Tencent Computer to Tencent Technology, Cyber Tianjin, Tencent Beijing, Tencent Chengdu, Tencent Shanghai, Tencent Wuhan, Chongqing Tencent Information, Shenzhen Tencent Information, Hainan Network, Guangzhou Tencent Technology, Shenzhen Tencent Network, Guian New Area Tencent Cyber, Cyber Shenzhen, Wuhan Tencent Information, Guangzhou Tencent Computer and Hangzhou Tencent Information respectively. Tencent Holdings Limited 54.29% by Ma Huateng 22.85% by Zhang Zhidong 11.43% by Xu Chenye 11.43% by Chen Yidan 1. 78 Pursuant to the trademark licence agreement dated 28 February 2004 entered into between Tencent Technology, as licensor, and Shiji Kaixuan, as licensee, Tencent Technology shall grant to Shiji Kaixuan a non-exclusive licence to use specified trademarks against payment of annual royalties determined as a percentage of Shiji Kaixuan's annual revenues (which may be adjusted pursuant to the agreement or the SKT CFC). During the year, no trademark licence was transacted under such arrangements, save as disclosed elsewhere in this section. 8. Pursuant to the trademark licence agreement dated 28 February 2004 entered into between Tencent Technology, as licensor, and Tencent Computer, as licensee, Tencent Technology shall grant to Tencent Computer a non-exclusive licence to use specified trademarks against payment of annual royalties determined as a percentage of Tencent Computer's annual revenues (which may be adjusted pursuant to the agreement or the TCS CFC). During the year, no trademark licence was transacted under such arrangements, save as disclosed elsewhere in this section. 7. Pursuant to the domain name licence agreement dated 28 February 2004 entered into between Tencent Technology, as licensor, and Shiji Kaixuan, as licensee, Tencent Technology shall grant to Shiji Kaixuan a non-exclusive licence to use specified domain names against payment of annual royalties determined as a percentage of Shiji Kaixuan's annual revenues (which may be adjusted pursuant to the agreement or the SKT CFC). During the year, no domain name licence was transacted under such arrangements, save as disclosed elsewhere in this section. 6. 00 5. Pursuant to the IP transfer agreement dated 28 February 2004 entered into between Cyber Tianjin and Shiji Kaixuan, Shiji Kaixuan shall assign to Cyber Tianjin its principal present and future IP rights, free from encumbrance (except for licences granted in the ordinary course of Shiji Kaixuan's business) in consideration of Cyber Tianjin's undertaking to provide certain technology and information services to Shiji Kaixuan. During the year, no IP transfer was transacted under such arrangements, save as disclosed elsewhere in this section. 4. 2. Pursuant to the amended and restated IP transfer agreement dated 28 February 2004 entered into between Tencent Technology and Tencent Computer, Tencent Computer shall assign to Tencent Technology its principal present and future IP rights, free from encumbrances (except for licences granted in the ordinary course of Tencent Computer's business) in consideration of Tencent Technology's undertaking to provide certain technology and information services to Tencent Computer. During the year, no IP transfer was transacted under such arrangements, save as disclosed elsewhere in this section. 3. Directors' Report Pursuant to the SKT CFC, the parties shall co-operate in the provision of communications services. Cyber Tianjin and its affiliates shall allow Shiji Kaixuan to use its and its affiliates' assets and provide services to Shiji Kaixuan. Shiji Kaixuan shall transfer all of its Surplus Cash to Cyber Tianjin and its affiliates as consideration. The parties also established the SKT Co-operation Committee according to this agreement. During the year, no services were transacted under such arrangements, save as disclosed elsewhere in this section. Pursuant to the domain name licence agreement dated 28 February 2004 entered into between Tencent Technology, as licensor, and Tencent Computer, as licensee, Tencent Technology shall grant to Tencent Computer a non-exclusive licence to use specified domain names against payment of annual royalties determined by the TCS Co-operation Committee within a range of percentages of Tencent Computer's annual revenues. During the year, no domain name licence was transacted under such arrangements, save as disclosed elsewhere in this section. Annual Report 2023 77 The Group is committed to minimising the impact on the environment from our business activities and the details of such efforts are set out in the section headed "Environmental Protection" in the standalone "Environmental, Social and Governance Report". As far as the Board is aware, the Group has complied with the relevant laws and regulations that have a significant impact on the Group in all material respects. ENVIRONMENT AND COMPLIANCE WITH LAWS The Audit Committee, together with the Auditor, has reviewed the Group's audited consolidated financial statements for the year ended 31 December 2023. The Audit Committee has also reviewed the accounting principles and practices adopted by the Group and discussed auditing, risk management, internal control and financial reporting matters. AUDIT COMMITTEE None of the directors, their close associates or any shareholder (which to the knowledge of the directors owns more than 5% of the number of issued Shares) had an interest in any of the major customers or suppliers noted above. No contracts concerning the management and administration of the whole or any substantial part of the business of the Company were entered into or existed during the year. MAJOR CUSTOMERS AND SUPPLIERS MANAGEMENT CONTRACTS Directors' Report 81 Annual Report 2023 00 Save as disclosed above, the Company had not been notified of any other persons (other than the directors or chief executive of the Company) who, as at 31 December 2023, had interests or short positions in the Shares and underlying Shares as recorded in the register required to be kept under section 336 of the SFO. For the year ended 31 December 2023, the five largest customers of the Group accounted for approximately 7.49% of the Group's total revenues while the largest customer of the Group accounted for approximately 3.87% of the Group's total revenues. In addition, for the year ended 31 December 2023, the five largest suppliers of the Group accounted for approximately 20.42% of the Group's total purchases while the largest supplier of the Group accounted for approximately 6.54% of the Group's total purchases. 82 The total remuneration cost incurred by the Group for the year ended 31 December 2023 was RMB107,675 million (2022: RMB111,182 million). Directors' Report As at 31 December 2023, the total number of issued Shares was 9,482,992,820. (A) Entitlement to Attend and Vote at the 2024 AGM CLOSURE OF REGISTER OF MEMBERS Directors' Report 83 Annual Report 2023 As at the date of this annual report, based on information that is publicly available to the Company and within the knowledge of its directors, the directors confirm that the Company has maintained during the year the amount of public float as required under the Listing Rules. SUFFICIENCY OF PUBLIC FLOAT The remuneration policy and package of the Group's employees are periodically reviewed. Apart from pension funds and in- house training programmes, discretionary bonuses, share awards and share options may be awarded to employees according to the assessment of individual performance. As at 31 December 2023, the Group had 105,417 employees (2022: 108,436). The number of employees employed by the Group varies from time to time depending on needs and employees are remunerated based on industry practice. EMPLOYEE AND REMUNERATION POLICIES There is no provision for pre-emptive rights under the Articles of Association, or the laws of the Cayman Islands, which would oblige the Company to offer new Shares on a pro rata basis to existing shareholders of the Company. PRE-EMPTIVE RIGHTS The Company has adopted a code of conduct regarding directors' securities transactions on terms no less exacting than the required standard set out in the Model Code. The directors of the Company have complied with such code of conduct throughout the accounting year covered by this annual report. ADOPTION OF CODE OF CONDUCT REGARDING DIRECTORS' SECURITIES TRANSACTIONS Tencent Holdings Limited 3. Long/ short position in the shares of the Company 2. Number of As at 31 December 2023, the following persons, other than the directors or chief executive of the Company, had interests or short positions in the Shares or underlying Shares which would fall to be disclosed to the Company under the provisions of Divisions 2 and 3 of Part XV of the SFO as recorded in the register required to be kept by the Company under section 336 of the SFO, or who was, directly or indirectly, interested in 5% or more of the Shares: INTERESTS OF SUBSTANTIAL SHAREHOLDERS Directors' Report Tencent Holdings Limited 80 00 The Group entered into certain transactions with “related parties" as defined under applicable accounting standards during the financial year ended 31 December 2023 which were disclosed in Note 15(a) (Senior management's emoluments), Note 15(b) (Five highest paid individuals), Note 16 (Benefits and interests of directors), Note 28 (Loans to investees and investees' shareholders), Note 37 (Share-based payments) and Note 47 (Related party transactions) to the consolidated financial statements. Save as the related parties transactions involving payment of remuneration to certain directors of the Group which constitute continuing connected transactions fully exempt from the connected transaction requirements under Rule 14A.76(1) or Rule 14A.95 of the Listing Rules, no related parties transactions disclosed in the consolidated financial statements constitutes a connected transaction as defined under Chapter 14A of the Listing Rules. Other connected transactions For details of the risks associated with the Structure Contracts, please refer to the section headed "Risk factors - Risks relating to our structure" in the IPO prospectus. Due to the legal constraints in relation to foreign investment in the telecommunications value-added services industry in the PRC, a number of agreements have been entered into between members of the Group whereby the Company and the WFOEs derive substantially all their revenues from transactions with the OPCOs. The recognition of revenues outlined in these intra-group contracts could be challenged by tax authorities and any adjustment in tax treatment could have a material and adverse impact on the taxable profitability of the Group. As advised by the Company's PRC legal advisers, it is unlikely that the tax treatment of revenues will be challenged by the PRC tax authorities, provided that the transactions under these intra-group contracts represent bona fide transactions conducted on an arm's length basis. The Company will take all necessary actions to ensure and monitor that relevant transactions are to be conducted on an arm's length basis to minimise the risks of adjustment in tax treatment. The WFOES have been structured and located in order to benefit from preferential tax treatments offered to companies located in designated economic zones and/or operating software-related businesses. Although the relevant governmental authority has granted such preferential tax treatment to certain WFOES and OPCOS, there can be no assurance that the conditions under which these treatments are provided will always be present. The relevant WFOES and OPCOS would use their reasonable endeavours to take all necessary actions, including but not limited to maintaining or acquiring their status as "High and New Technology Enterprise" or "National Key Software Enterprise", in order to continue to enjoy the reduced income tax rate and the other tax concessions. Due to regulatory limitations restricting foreign investment in businesses providing value-added telecommunications services in China, the Company conducts some of its business in the PRC through the OPCOs. These contractual arrangements may not be as effective in providing control as direct ownership. Pursuant to the Structure Contracts, the arbitration tribunal is entitled to decide compensation for the equity interests or property ownership of OPCOS, decide to implement enforceable remedy (including mandatorily requiring OPCOS to transfer the equity interests of OPCOS to the WFOES, etc.) or order the bankruptcy of OPCOS. Prior to the formation of the arbitration tribunal, the courts of the places where the major assets of OPCOS are situated are entitled to implement interim remedies to ensure the enforcement of the future decisions of the arbitration tribunals. The risks associated with Structure Contracts and the actions taken by the Company to mitigate the risks Directors' Report Name of shareholder Advance Data Services Limited holds 709,859,700 Shares directly and 95,000,000 Shares indirectly through its wholly-owned subsidiary, Ma Huateng Global Foundation. As Advance Data Services Limited is wholly-owned by Mr Ma Huateng, Mr Ma has an interest in these Shares as disclosed under the section of "Directors' Interests in Securities". Long/short position Shares/ underlying Shares held MIH Internet Holdings B.V. is controlled by Naspers Limited and held through its non wholly-owned subsidiary, Prosus N.V. MIH Internet Holdings B.V. is a wholly-owned subsidiary of Prosus N.V. As such, Naspers Limited, Prosus N.V. and MIH Internet Holdings B.V. are deemed to be interested in the same block of 2,366,821,000 Shares under Part XV of the SFO. 1. Note: 8.49% 804,859,700 Corporate (Note 2) Long position Advance Data Services Limited 24.96% 2,366,821,000 Corporate (Note 1) Long position MIH Internet Holdings B.V. (Note 3) Approximate % of shareholding Nature of interest/capacity For the purpose of determining the shareholders' entitlement to attend and vote at the 2024 AGM, the register of members of the Company will be closed from Thursday, 9 May 2024 to Tuesday, 14 May 2024, both days inclusive, during which period no transfer of Shares will be registered. In order to be entitled to attend and vote at the 2024 AGM, all duly completed transfer forms accompanied by the relevant share certificates must be lodged with the Company's branch share registrar, Computershare Hong Kong Investor Services Limited, at Shops 1712-1716, 17th Floor, Hopewell Centre, 183 Queen's Road East, Wan Chai, Hong Kong for registration not later than 4:30 p.m. on Wednesday, 8 May 2024. For the purpose of determining the shareholders' entitlement to the proposed final dividend, the register of members of the Company will be closed from Tuesday, 21 May 2024 to Wednesday, 22 May 2024, both days inclusive, during which period no transfer of Shares will be registered. In order to qualify for the proposed final dividend, all duly completed transfer forms accompanied by the relevant share certificates must be lodged with the Company's branch share registrar, Computershare Hong Kong Investor Services Limited, at Shops 1712-1716, 17th Floor, Hopewell Centre, 183 Queen's Road East, Wan Chai, Hong Kong for registration not later than 4:30 p.m. on Monday, 20 May 2024. AUDITOR All directors have full and timely access to all relevant information as well as the advice and services of the Company's general counsel and the company secretary, with a view to ensuring that Board procedures and all applicable rules and regulations are followed. All directors may also obtain independent professional advice at the Company's expense for carrying out their functions. Corporate Governance Report Tencent Holdings Limited 88 00 The major work of these committees during the year 2023 is set out on pages 95 to 102. The terms of reference of the Remuneration Committee were revised in January 2023 taking into account the roles and responsibilities of the Remuneration Committee set out under the new requirements in Chapter 17 of the Listing Rules which took effect in January 2023, and were further revised in March 2024 to align with the revised structure of the appendices to the Listing Rules which took effect from 31 December 2023. reviews and approves matters relating to share schemes under Chapter 17 of the Listing Rules. ensures that no director or any of his associates is involved in deciding his own remuneration; and ensures that these remuneration proposals are aligned to corporate goals and objectives; reviews and approves proposals about the policy and structure of remuneration of directors and senior management team; Remuneration Committee The terms of reference of the Nomination Committee were revised in March 2024 to align with the revised structure of the appendices to the Listing Rules which took effect from 31 December 2023. reviews and monitors the implementation of the board diversity policy and the board nomination policy of the Company. assesses the independence of independent non-executive directors and the perspectives, skills and experience that such director can bring to the Board; and reviews and makes recommendations to the Board on individuals nominated to be directors by shareholders; identifies suitable and qualified individuals and makes recommendations to the Board as to new Board members, by taking into account the individual's experience, knowledge, skills, gender and background, as well as the Listing Rules requirements; reviews and monitors the structure, size, composition and diversity of the Board in light of the Company's strategy; Nomination Committee ensures compliance with the Listing Rules and any other relevant laws and regulations on any mergers, acquisitions and disposals. identifies, considers and makes recommendations on mergers, acquisitions and disposals; and Investment Committee Corporate Governance Report 87 Annual Report 2023 We believe education and training are important for maintaining an effective Board. New directors undergo an orientation programme designed to provide a thorough understanding of the Group's operations and businesses, and also receive a handbook outlining their responsibilities under the Listing Rules and applicable laws. Existing directors are provided with tailored training programmes covering topics such as best practices in corporate governance, legal and regulatory trends and, given the nature of our business, emerging technologies and products. Directors also regularly meet with the senior management team to understand the Group's businesses, governance policies and regulatory environment. During the year ended 31 December 2023, the Company arranged training on topics relating to corporate governance, legal and regulatory updates and product trends which are relevant to the Group's businesses. The table below summarises the participation of each of the directors in continuous professional development during the year ended 31 December 2023: The terms of reference of the Corporate Governance Committee were revised in March 2024 to align with the revised structure of the appendices to the Listing Rules which took effect from 31 December 2023. Name of director Ma Huateng 89 Annual Report 2023 Mr Lau Chi Ping Martin ceased to be an executive director with effect from the conclusion of the annual general meeting of the Company held on 17 May 2023 (the "2023 AGM"). 2 Attended training/seminar/conference arranged by the Company or other external parties or read relevant materials. 1 V V V V V √ development¹ professional continuous Participated in Zhang Xiulan Ke Yang Yang Siu Shun lan Charles Stone Li Dong Sheng Independent non-executive directors Charles St Leger Searle Jacobus Petrus (Koos) Bekker Non-executive directors Lau Chi Ping Martin² Executive directors (B) Entitlement to the Proposed Final Dividend reviews and monitors the training and continuous professional development of the directors and senior management team. reviews the Company's compliance with the CG Code and disclosure in the Corporate Governance Report and the ESG Report; appoints the Chief Executive Officer, who reports to the Board, and ensures that succession is planned; retains full and effective control over the Group and monitors management with regard to the implementation of the approved annual business plan and budget; approves the annual business plan and budget proposed by management; The Board has defined the business and governance issues for which it needs to be responsible, and these matters are reviewed periodically to ensure that the Company maintains effective and up-to-date corporate governance practices. In this regard, the Board: Corporate Governance Report 85 Annual Report 2023 The Board's fundamental responsibility is to exercise its best judgment and to act in the best interests of the Company and its shareholders. The Board oversees management's efforts to promote the Company's success while operating in an effective and responsible manner. The Board also formulates the Company's overall business strategy and monitors management's execution of such strategy. Responsibilities BOARD OF DIRECTORS The Company promotes the values of "Integrity, Proactivity, Collaboration, Creativity" as its guiding principles for the Company's long-term sustainable development. The essence of the Company's vision and mission of “Value for Users, Tech for Good" is to use the power of technology to better care for the people; and the creation of social value is a journey where the Company transforms the abstract concept of kindness and care into executable strategies, action plans, products, and operations. The Company promotes the integration of its corporate values into the Company's operations through policies and initiatives, including without limitation advocating a workplace culture of diversity, equity, and inclusion and focusing on long- term creation of sustainable social value by driving innovation in technologies, products and models, and providing solutions to social challenges. For further information of the Company's corporate culture, please refer to the "Environmental, Social and Governance Report 2023" published by the Company. CORPORATE CULTURE The Board continues to monitor and review the Company's corporate governance practices and makes necessary changes when appropriate. The Company's corporate governance practices are based on the code provisions as set out in the CG Code. The Board believes that throughout the year ended 31 December 2023, the Company complied with the applicable code provisions set out in the CG Code, except for the deviation from code provisions B.2.2 regarding the retirement and re-election of directors and C.2.1 regarding the segregation of the roles of chairman and chief executive. The reasons for the deviations are further explained in the sub-sections headed “Chairman and Chief Executive Officer" and "Appointments, Re-election and Removal" below. CORPORATE GOVERNANCE PRACTICES Maintaining the highest standards of corporate governance and ethical business practices are core values of the Group. The Board views effective corporate governance practices as a priority of the Group, with the aim of providing our investors with a thorough understanding of the Group's management and how such management oversees and manages different businesses of the Group. Our belief is that investors will realise significant long-term value when the Group's businesses are conducted in an open and responsible manner. Ethical business practices go hand in hand with strong corporate governance, and we believe that running our businesses in an ethical manner will lead to public trust and will ultimately create shareholder value for the Group. Corporate Governance Report Tencent Holdings Limited 84 00 Hong Kong, 20 March 2024 Chairman Ma Huateng On behalf of the Board The financial statements have been audited by PricewaterhouseCoopers who will retire and, being eligible, offer themselves for re-appointment at the 2024 AGM. approves the Company's financial statements and interim and annual reports; reviews the Company's ESG strategy and makes recommendations to the Board; and determines the Group's communication policy; ensures that the Group has appropriate risk management, internal control, internal audit and regulatory compliance procedures in place and that it communicates adequately with shareholders and stakeholders; reviews and monitors the progress made against ESG-related goals and targets; reviews and monitors the evaluation and management of issues related to the Company's Environmental, Social and Governance ("ESG") matters; reviews the shareholders communication policy and makes recommendations to the Board where appropriate to enhance effective communications between the Company and its shareholders; develops, reviews and monitors the code of conduct and compliance manual (if any) applicable to employees and directors; reviews and monitors the Company's policies and practices on its compliance with legal and regulatory requirements; reviews the Company's corporate governance and makes recommendations to the Board; Corporate Governance Committee oversees the Group's anti-money laundering and sanctions compliance system. • oversees the risks undertaken by the Company including determining the level of risk the Company expects and is able to take; and reviews the work done by the Company's management with respect to risk management and internal control systems; exercises oversight of the Company's financial reporting system; reviews the Company's financial information; handles the relationship with the Company's external auditor; Audit Committee The Company's governance structure of these committees can be summarised as follows: Corporate Governance Report Tencent Holdings Limited 86 To better serve the long-term interests of our stakeholders, the Board delegates certain matters requiring particular time, attention and expertise to its committees. The Board has determined that these matters are better dealt with by the committees as they require independent oversight and specialist input. As such, the Board has established five committees to assist the Board: Audit Committee, Corporate Governance Committee, Investment Committee, Nomination Committee and Remuneration Committee. Each of the committees has its terms of reference which clearly specifies its powers and authorities. All committees report back to the Board and make recommendations to the Board if necessary. The Board delegates the responsibility of day-to-day business and operations to the Company's senior management team, which includes its chief officers, the president and executive vice-presidents. The senior management team meets once every two weeks or as frequently as necessary to formulate policies and make recommendations to the Board. The senior management team administers, enforces, interprets and supervises compliance with the internal rules and operational procedures of the Company as well as its subsidiaries and conducts regular reviews, recommends and advises on appropriate amendments to such rules and procedures. The senior management team reports to the Board on a regular basis and communicates with the Board whenever required. regularly evaluates its own performance and effectiveness. considers and, if appropriate, declares the payment of dividends to shareholders; and defines levels of delegation in respect of specific matters, with required authority to Board committees and management; monitors non-financial aspects pertaining to the businesses of the Group; establishes Board committees with clear terms of reference and responsibilities as appropriate; • determines directors' selection, orientation and evaluation; determines the Group's mission, provides its strategic direction and is responsible for the approval of strategic plans;