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Summary of significant accounting policies | 12 Months Ended
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Dec. 31, 2024
Summary of significant accounting policies | Note 2: Summary of Significant Accounting Policies The accompanying consolidated financial statements reflect the application of certain significant accounting policies as described in this note and elsewhere in the accompanying consolidated financial statements and notes.
· | Use of estimates
The preparation of the accompanying consolidated financial statements in conformity with GAAP requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Certain accounting estimates of the Group require a higher degree of judgment than others in their application. These include the recognition of revenue and earnings from engineering contracts over time, the valuation of goodwill, and contract assets and contract liabilities. Management continually evaluates all of its estimates and judgments based on available information and experience; however, actual results could differ from these estimates.
· | Basis of consolidation
The accompanying consolidated financial statements include the results of operations of the Company and its subsidiaries. Significant intercompany transactions and balances have been eliminated.
· | Subsidiaries
Subsidiaries are all entities over which the Group has control; has the power to appoint or remove the majority of the members of the board of directors; has the right to cast a majority of votes at the meeting of the board of directors or to govern the financial and operating policies of the investee under a statute or agreement among the shareholders or equity holders.
· | Investments in affiliates
We account for our interest in an investment using the equity method of accounting per Accounting Standards Codification (“ASC”) No. 323, “Investments - Equity Method and Joint Ventures” if we are not the primary beneficiary of a VIE or do not have a controlling interest. The investment is recorded at cost and the carrying amount is adjusted periodically to recognize our proportionate share of income or loss, additional contributions made and dividends and capital distributions received. We record the effect of any impairment or other than temporary decrease in the value of the investment. In the event a partially owned equity affiliate were to incur a loss and our cumulative proportionate share of the loss exceeded the carrying amount of the equity method investment, application of the equity method would be suspended and our proportionate share of further losses would not be recognized unless we committed to provide further financial support to the affiliate. We would resume application of the equity method once the affiliate became profitable and our proportionate share of the affiliate’s earnings equals our cumulative proportionate share of losses that were not recognized during the period the application of the equity method was suspended.
· | Non-controlling interests
For entities that are consolidated, but not 100% owned, a portion of the income or loss and equity is allocated to owners other than the Group. The aggregate of the income or loss and corresponding equity that is not owned by the Group is included within non-controlling interests in the consolidated financial statements. Non-controlling interests is presented as a separate component of equity in the consolidated balance sheets. Net income includes the net income attributable to the holders of non-controlling interests in the consolidated statements of operations and comprehensive income / (loss). Profits and losses are allocated to non-controlling interests in proportion to their relative ownership interests regardless of their basis.
· | Non-controlling interest – put option
The management evaluates all of its financial instruments, including issued put options, to determine their appropriate classification as either liabilities or equity, following the criteria's outlined in ASC 480, " Distinguishing Liabilities from Equity". The Group has determined that the put option held by non-controlling interest will be recorded as equity if the fair value of the put option becomes material.
· | Segment information
The Group reports segment information based on the “management” approach. The management approach designates the internal reporting used by management for making decisions and assessing performance as the source of the Group’s reportable segments. The Group categorizes its operations into two business segments: Trading and manufacturing, and Engineering.
· | Revenue recognition
The Company follows the revenue standard Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers. The core principle of the revenue standard is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The following five steps are applied to achieve that core principle: Step 1: Identify the contract with the customer Step 2: Identify the performance obligations in the contract Step 3: Determine the transaction price Step 4: Allocate the transaction price to the performance obligations in the contract Step 5: Recognize revenue when the company satisfies a performance obligation. Our revenue is derived from both short and long-term contracts for customers in our engineering segment, as well as short-term contracts for customers in our trading and manufacturing segment. Accounting treatment for these contracts in accordance with Accounting Standards Update (“ASU”) 2014-09 (Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customer), is as follows: Performance obligations satisfied over time (Engineering services) Recognition of performance obligations A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account in the new revenue standard. The contract transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. Engineering service projects typically span between several days to over 5 years. The majority of our long-term contracts have a single performance obligation as the promise to transfer the individual goods or services is not separately identifiable from other promises in the contracts and, therefore, is not distinct. Some contracts have multiple performance obligations, most commonly due to the contract covering multiple phases of the project life cycle. Revenues are recognized as our obligations are satisfied over time, by reference to the progress towards complete satisfaction of that performance obligation. If the Group expects the reference to progress certificates issued by the customers, with additional adjustments where necessary, depicts the Group’s performance in transferring control of goods or services promised to customers for individual projects, the Group satisfies the performance obligation over time and therefore, recognizes revenue over time in accordance with the output method for measuring progress. Under output method, revenue recognition is based on the stage of completion of the contracts, provided that the stage of contract completion and the gross billing value of contracting work can be measured reliably. The stage of completion of a contract is established by reference to the contract based on billing milestone or stage of work certified by customer. Generally, invoices are billed upon fulfilment of the measurable performance obligation. The Company evaluates the progress towards completion of the performance obligation at each phase of the contract and bills the customer in accordance with the price agreed upon on the contract. Remaining performance obligations (“RPOs”) RPOs represent the amount of revenues we expect to recognize in the future from our contract commitments on projects and are hereafter referred to as “Backlog”. Backlog includes the entire expected revenue values for subsidiary we consolidate. Backlog may not be indicative of future operating results, and projects included in Backlog may be canceled, modified or otherwise altered by customers. The following schedule shows a reconciliation of backlog representing the amount of revenue the Company expects to realize from work to be performed on uncompleted contracts in progress at December 31, 2024 and 2023, and from contractual agreements in effect at December 31, 2024, on which work has not yet begun:
|  | US$’000 |
Contract revenue on uncompleted contracts at December 31, 2022 |  |  | 523 |
New contract awards during the year |  |  | 9,044 |
Contract adjustment |  |  | 252 |
Contract revenue recognized for the year |  |  | (5,797 | )
Backlog at December 31, 2023 |  |  | 4,022 |
Contract revenue on uncompleted contracts at December 31, 2023 |  |  | 4,022 |
New contract awards during the year |  |  | 5,621 |
Contract adjustment |  |  | 30 |
Contract revenue recognized for the year |  |  | (5,834 | )
Backlog at December 31, 2024 |  |  | 3,839 |
Our backlog decreased from US$4,022,000 as of December 31, 2023 to US$3,839,000 as of December 31, 2024, representing a decrease of US$183,000. The decrease in our backlog was primarily due to the increased completion and fulfillment of existing orders by us in our existing construction projects. Nevertheless, the timing and extent to which backlog will result in direct revenue depends on many factors, including the timing of commencement of work, the rate at which we perform services, scope changes, cancellations, delays, receipt of regulatory approvals and the nature, duration, size, complexity and phase of the studies. In addition, delayed projects remain in backlog until they are canceled. As a result of these factors, our backlog is not necessarily a reliable indicator of future direct revenue and we might not realize all or any part of the direct revenue from the authorizations in backlog as of any point in time. Variable consideration Contract modifications through change orders, claims and incentives are routine in the performance of the Group’s contracts to account for changes in the contract specifications or requirements. In most instances, contract modifications are not distinct from the existing contract due to the significant integration service provided in the contract and are accounted for as a modification of the existing contract and performance obligation. Either the Group or its customers may initiate change orders, which may include changes in specifications or designs, manner of performance, facilities, equipment, materials, sites and period of completion of the work. Change orders that are unapproved as to both price and scope are evaluated as claims. The Group considers claims to be amounts in excess of approved contract prices that the Group seeks to collect from its customers or others for customer-caused delays, errors in specifications and designs, contract terminations, change orders that are either in dispute or are unapproved as to both scope and price, or other causes of unanticipated additional contract costs. In the event that customer requests a change of order (such as an upgrade of specifications, materials or additional work) before the completion of the project, the Group will negotiate and sign a subcontract with the customer, subject to mutual agreement. The subcontract has its own terms and conditions for the variable consideration and is generally integrated with the original master contract. This will normally result in an increase in additional billing to the customer and rarely a reduction in the total value of the contract. The effect of variable consideration on the transaction price of a performance obligation is recognized as an adjustment to revenue on a cumulative catch-up basis. To the extent unapproved change orders and claims reflected in transaction price (or excluded from transaction price in the case of liquidated damages) are not resolved in the Group’s favor, or to the extent incentives reflected in transaction price are not earned, there could be reductions in, or reversals of, previously recognized revenue. Performance obligations satisfied at a point-in-time (Trading and manufacturing) For revenue recognized associated with its contracts with customers over time, for which the Group has an enforceable right to receive compensation. Many of our contracts contain specific provisions that determine when the Group can bill for its work performed under these contracts. Any costs incurred or any payment received for a long-term contract, for which revenue has not been recognized due to impracticability or inability to measure the performance obligation, is recorded as a contract asset and contract liability, respectively, on the Group’s consolidated balance sheets. Revenue will be recognized when the performance obligation can be measured reliably and the criteria as stipulated under ACS 606 are met. The Group’s consolidated balance sheets present contract cost assets that represent our rights to receive payment for completed but not yet billed work and include costs incurred for contracts with customers as at financial year end less amounts received in advance from those customers at financial year end. The Group’s consolidated balance sheets present contract liabilities that contain deferred revenue that represent amounts received in advance from customers at financial year end in excess of any costs incurred on those contracts, which are in progress at year end, for which revenue has not yet been recognized. Contract assets and contract liabilities arising from the same individual contract are presented net as either a single net contract asset or single net contract liability for presentation purposes.
· | Research and development costs
Research and development costs (“R&D” costs) are expensed as incurred. The R&D costs amounted to approximately US$Nil, US$Nil and US$Nil for the years ended December 31, 2024, 2023 and 2022 respectively and were included in “Selling and administrative expenses” in the Group’s consolidated statements of operations and comprehensive income / (loss).
· | Advertising and promotional expenses
Advertising and promotional expenses (“A&P” expenses) are expensed as incurred. The A&P expenses amounted to approximately US$41,000, US$29,000 and US$9,000 for the years ended December 31, 2024, 2023 and 2022 respectively and were included in “Selling and administrative expenses” in the Group’s consolidated statements of operations and comprehensive income / (loss).
· | Income taxes
The Group follows the liability method of accounting for income tax. Under this method, deferred tax assets and liabilities are recorded for future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and are measured using the enacted tax rates and laws that are expected to be in effect when the underlying assets or liabilities are recovered or settled. The Group also evaluates whether the recorded deferred tax assets and valuation allowances can be realized and, when necessary, reduces the amounts to what is expected to be realized. The accounting guidance on accounting for uncertainty in income taxes also addresses derecognition, classification, interest and penalties on income taxes, and accounting in interim periods. The Group does not believe it has any uncertain tax positions through the periods ended December 31, 2024, 2023 and 2022 respectively which would have a material impact on the Group’s consolidated financial statements. Interest and penalties related to uncertain income tax positions are included in income tax expense on the Group’s consolidated statements of operations and comprehensive income / (loss). Interest and penalties actually incurred are charged to interest expense and the other income, respectively if applicable. The Group files tax returns in Hong Kong and the PRC. The tax returns for 2024, 2023 and 2022 are subject to examination by Hong Kong and PRC taxing authorities, commencing with the first year filed.
· | Cash and cash equivalents
Cash and cash equivalents consist of cash on hand, and bank deposits with original maturities of three months or less, all of which are unrestricted as to withdrawal. There were no cash equivalents as of December 31, 2024 and 2023.
· | Restricted cash
Restricted cash represents cash deposits retained with banks in the PRC for issuance of performance bonds and guarantees to the customers and cash deposited by the Group into separate accounts and designated as collateral for standby letters of credit in the same amount in accordance with contractual agreements.
· | Accounts Receivable, net
The Group does not charge interest to its customers and carries its customer receivables at their face amounts net of expected credit losses. As is common practice in the industry, the Group classifies all accounts receivable as current assets. The Group grants trade credit, on a non-collateralized basis, to its customers and is subject to potential credit risk related to changes in business and overall economic activity. The Group analyzes specific accounts receivable balances, historical bad debts, customer credit-worthiness, current economic trends and changes in customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. In the event that a customer balance is deemed to be uncollectible, the account balance is written-off against the allowance for doubtful accounts.
· | Inventories
Inventories are measured using the first-in, first-out method and are stated at the lower of cost or net realizable value. Cost of finished goods comprise direct material, direct production costs and an allocated portion of production overhead costs based on normal operating capacity. Allowance is made for obsolete, slow moving or defective items, where appropriate.
· | Property, plant and equipment
Property, plant and equipment is carried at cost. Major modifications or refurbishments which extend the useful life of the assets are capitalized and depreciated over the adjusted remaining useful life of the assets. Upon retirement or disposition of property, plant and equipment, the cost and related accumulated depreciation are removed and any resulting gain or loss is recognized in consolidated income from operations. The cost of maintenance and repairs is charged to expense as incurred. Property, plant and equipment is reviewed for impairment and tested for recoverability whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the carrying value of property, plant and equipment exceeds its fair value, an impairment charge would be recorded in the consolidated statement of operations. Depreciation of property, plant and equipment are computed using the straight-line method over the assets’ estimated useful lives as follows:
|  | Expected useful life
Office premises |  | 47 to 51 years
Leasehold improvements |  | Over terms of the leases or the useful lives whichever is less
Furniture, fixtures and office equipment |  | 3 to 5 years
Motor vehicles |  | 4 years
Testing equipment |  | 3 years
· | Impairment of long lived assets
Long-lived assets such as property, plant and equipment with finite lives are evaluated for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be fully recoverable or that the useful life is shorter than the Group had originally estimated. When these events occur, the Group evaluates the impairment for the long-lived assets by comparing the carrying value of the assets to an estimate of future undiscounted cash flows expected to be generated from the use of the assets and their eventual disposition. If the sum of the expected future undiscounted cash flows is less than the carrying value of the assets, the Group recognizes an impairment loss based on the excess of the carrying value of the assets over the fair value of the assets. There was no impairment of long lived assets during 2024, 2023 and 2022, respectively.
· | Long-term investment
The Group has elected to apply the measurement alternative to equity securities without readily determinable fair values. As such, the Group’s non-marketable equity securities are measured at cost, less any impairment, and are adjusted for changes in fair value resulting from observable transactions for identical or similar investments of the investee.
· | Leases arrangements
In the ordinary course of business, the Group enters into a variety of operating lease arrangements. Operating right-of-use leases are included in operating lease right-of-use assets, current portion of long-term operating lease obligations and long-term operating lease obligations, net of current maturities on the Group’s consolidated balance sheets, as appropriate. Operating lease right-of-use assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most of the Group’s leases do not provide an implicit rate to calculate present value, the Group determines this rate by estimating the Group’s incremental borrowing rate, utilizing the borrowing rates associated with the Group’s various debt instruments. The operating lease right-of-use asset also includes any lease payments made and initial direct costs incurred and excludes lease incentives. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.
· | Goodwill
Goodwill is not amortized. The Group performs either a qualitative or quantitative assessment to review goodwill for impairment on an annual basis. This assessment is performed at the beginning of the fourth quarter, or when circumstances change, such as a significant adverse change in the business climate or the decision to sell a business, both of which would indicate that impairment may have occurred. A qualitative assessment considers financial, industry, segment and macroeconomic factors, if the qualitative assessment indicates a potential for impairment, a quantitative assessment is performed to determine if impairment exists. The quantitative assessment begins with a comparison of the fair value of the reporting unit with its carrying value. If the carrying amount of the reporting unit exceeds its fair value, an impairment loss would be recognized in an amount equal to that excess, limited to the total amount of the goodwill allocated to the reporting unit. If the carrying value of goodwill exceeds its implied fair value, an impairment charge would be recorded in the consolidated statements of operations and comprehensive income / (loss). As a result of the annual qualitative review process in 2024 and 2023, the Group determined it was not necessary to perform a quantitative assessment.
· | Foreign currency translation
The assets and liabilities of the Group’s subsidiaries denominated in currencies other than U.S. dollars are translated into U.S. dollars using the applicable exchange rates at the consolidated balance sheet date. For consolidated statements of operations and comprehensive income/(loss)’ items, amounts denominated in currencies other than U.S. dollars were translated into U.S. dollars using the average exchange rate during the period. Equity accounts were translated at their historical exchange rates. Net gains and losses resulting from translation of foreign currency on consolidated financial statements are included in the consolidated statements of shareholders’ equity as accumulated other comprehensive income. Foreign currency transaction gains and losses are reflected in the consolidated statements of operations and comprehensive income / (loss).
· | Comprehensive income
We account for comprehensive income in accordance with ASC 220, “Comprehensive Income”, which specifies the computation, presentation and disclosure requirements for comprehensive income. Comprehensive income consists of net income and foreign currency translation adjustments, primarily from fluctuations in foreign currency exchange rates of our foreign subsidiaries with a functional currency other than the U.S. dollar.
· | Ordinary share
On November 22, 2011, the Company filed Amended and Restated Memorandum and Articles of Association with the Registry of Corporate Affairs of the BVI Financial Services Commission that on November 29, 2011 became effective as of the filing date to amend the Company’s ordinary shares of US$0.01 par value capital stock to no par value capital stock. Treasury stock is accounted for using the cost method. When treasury stock is reissued, the value is computed and recorded using a weighted-average basis. On October 8, 2019, the Company had stock split in the form of bonus shares at the rate of one ordinary share for every two ordinary shares held, creating 1,030,950 new shares of common stock. On March 3, 2021, the Company had stock split in the form of bonus shares at the rate of two ordinary shares for every three ordinary shares held, creating 2,061,900 new shares of common stock. The effect of the above stock splits have been reflected retroactively in the financial statements and net income per ordinary share computations.
· | Net income per ordinary share
The Group computes net income per ordinary share using the treasury stock method. Under the treasury stock method, basic earnings per share attributable to Euro Tech Holdings Company Limited are computed by dividing net income attributable to Euro Tech Holdings Company Limited by the weighted average number of ordinary shares outstanding during the period. The Group reports both basic earnings per share, which is based on the weighted average number of ordinary shares outstanding, and diluted earnings per share, which is based on the weighted average number of ordinary shares outstanding and all dilutive potential ordinary shares outstanding. Outstanding stock options are the only dilutive potential shares of the Company.
· | Stock-based compensation
The Group determines compensation expense for stock-based awards based on the estimated fair values at the grant date and recognizes the related compensation expense over the vesting period. The Group uses the straight-line amortization method to recognize compensation expense related to stock-based awards that have only service conditions. This method recognizes stock compensation expense on a straight-line basis over the requisite service period for the entire award.
· | Related parties
Related parties are affiliates of the Group; entities for which investments are accounted for by the equity method by the Group; trusts for the benefit of employees, such as pension and profit-sharing trusts that are managed by or under the trusteeship of management; principal owners of the Group; its management; members of the immediate families of principal owners of the Group and its management; and other parties with which the Group may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. Another party also is a related party if it can significantly influence the management or operating policies of the transacting parties or if it has an ownership interest in one of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests.
· | Concentration
Financial instruments that potentially subject the Group to a concentration of credit risk consist principally of cash and cash equivalents and accounts receivable, net. The Group maintains substantially all of its cash and cash equivalent balances with large financial institutions which are believed to be high quality institutions. The Group is subject to a concentration of risk because it derives a significant portion of its revenues from a few customers. The Group’s top customers accounting for more than 5% of the Group’s revenue generated approximately 47%, 41% and 33% of consolidated revenues for the years ended December 31, 2024, 2023 and 2022, respectively. The Group grants trade credit under contractual payment terms, generally without collateral, to its customers, which include high credit quality electric utilities, general contractors, owners and managers of industrial properties and government departments. Consequently, the Group is subject to potential credit risk related to changes in business and economic factors. At December 31, 2024, Nil (2023: three) of the Group’s customers individually exceeded 10.0% of accounts receivable, net. The Group believes the terms and conditions in its contracts, billing and collection policies are adequate to minimize the potential credit risk.
· | Finance costs
Interest relating to loans repaid is expensed in the period the repayment occurs.
· | Warranties
The suppliers of the Group offer a standard one-year warranty to end customers of the Group. In certain contracts, a specific percentage is designated as warranty, and management has retained it as a “retainer fee” for potential warranty claims within an effective period subsequent to project completion. In the event that a warranty claim is made, the amount will be deducted from the retainer fee accordingly. This balance remains on the balance sheet in contract liabilities, until the expiration of the warranty period, after which it will be recognized as revenue if it has not been fully utilized. Historically, claims on warranties have been insignificant.
· | Contract Assets and Contract Liabilities
Projects with performance obligations recognized over time that have revenue recognized to date in excess of cumulative billings are reported on consolidated balance sheets as “Contract assets”. Provisions for estimated losses of contract assets on uncompleted contracts are made in the period in which such losses are determined. Contract liabilities on uncompleted contracts are the amounts of cash collected from clients, billings to clients on contracts in advance of work performed and revenue recognized. The majority of these amounts are expected to be earned within 12 months and are classified as current liabilities.
· | Shipping and handling costs
Amounts billed to customers related to shipping and handling are classified as revenues, and the Group’s shipping and handling costs are included in cost of revenues.
· | Retirement plan costs
Contributions to retirement plans (which are defined contribution plans) are charged to general and administrative expenses in the accompanying statements of operation as the related employee service are provided.
· | Statutory reserves
The Group is required to make appropriation to reserve funds, comprising the statutory reserve fund and statutory staff welfare fund, based on after-tax net income determined with generally accepted accounting principles of the PRC (“PRC GAAP”). Appropriations to the statutory reserve fund is required to be at least 10% of the after tax net income determined in accordance with PRC GAAP until the reserve fund is equal to 50% of the entities’ registered capital.
· | Fair value measurements
The Company applies the provisions of ASC 820-10, “Fair Value Measurements”, for fair value measurements of financial assets and financial liabilities and for fair value measurements of non-financial items that are recognized or disclosed at fair value in the financial statements. The Group uses the three-tier hierarchy of fair value measurement, which prioritizes the inputs used in measuring fair value based upon their degree of availability in external active markets. These tiers include: Level 1 (the highest priority), defined as observable inputs, such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3 (the lowest priority), defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. As of December 31, 2024 and 2023, the Group determined that the carrying values of cash and cash equivalents, restricted cash, accounts receivable, net, prepayments and other current assets, contract assets, bank borrowings, accounts payable, contract liabilities, other payables and accrued expenses approximate their fair values because of the short-term nature of these instruments. The Group has also determined that the fair value of non-controlling interest - put option is immaterial as of December 31, 2024, and is immaterial for 2023.
· | Recent accounting pronouncements
Changes to GAAP are typically established by the Financial Accounting Standards Board (“FASB”) in the form of accounting standards updates (“ASUs”) to the FASB’s ASC. The Group considers the applicability and impact of all ASUs. The Group, based on its assessment, determined that any recently issued or proposed ASUs not listed below are either not applicable to the Group or may have minimal impact on its consolidated financial statements. Recently adopted accounting pronouncements In September 2022, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (ASU) No. 2022-04 that requires additional qualitative and quantitative disclosures surrounding supplier finance programs intended to help investors better consider the effect of these programs on a company’s working capital, liquidity, and cash flows over time. This update is effective for fiscal years beginning after December 15, 2022, including interim periods, except for the disclosure of roll forward information, which is effective for fiscal years beginning after December 15, 2023. Early adoption is permitted. The Company adopted this ASU on October 1, 2023, and it did not have a significant impact on our CFS. In June 2022, the FASB issued ASU 2022-03 Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions (“ASU 2022-03”), which (1) clarifies the guidance in ASC 820 on the FV measurement of an equity security that is subject to a contractual sale restriction and (2) requires specific disclosures related to such an equity security. Under current guidance, stakeholders have observed diversity in practice related to whether contractual sale restrictions should be considered in the measurement of the FV of equity securities that are subject to such restrictions. To reduce the diversity in practice and increase the comparability of reported financial information, ASU 2022-03 clarifies this guidance and amends the illustrative example. ASU No. 2022-03 is effective for fiscal years beginning after December 15, 2023, with early adoption permitted. The Company is currently evaluating the extent of the impact of this ASU but does not expect the adoption of this standard to have a significant impact on our CFS. In March 2022, the FASB issued ASU No. 2022-02, Troubled Debt Restructurings and Vintage Disclosures. ASU 2022-02 eliminates the accounting guidance on troubled debt restructurings for creditors in ASC Topic 310 and amends the guidance on “vintage disclosures” to require disclosure of current-period gross write-offs by year of origination. ASU 2022-02 also updates the requirements for accounting for credit losses under ASC Topic 326 and adds enhanced disclosures for creditors with respect to loan re-financings and restructurings for borrowers experiencing financial difficulty. ASU 2022-02 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company adopted this ASU on October 1, 2023, and it did not have a significant impact on our CFS. In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments — Credit Losses, which changes the accounting for recognizing impairments of financial assets. Under the new guidance, credit losses for certain types of financial instruments will be estimated based on expected losses. The new guidance also modifies the impairment models for available-for-sale debt securities and for purchased financial assets with credit deterioration since their origination. In March 2020, the FASB issued ASU No. 2020-04 providing optional expedients and exceptions to account for the effects of reference rate reform to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued. The optional guidance, which became effective March 12, 2020, could be applied through December 31, 2022. In December 2022, the FASB issued No 2022-06 extending the sunset date of the relief provided under ASU No. 2020-04 to December 31, 2024. The Company has various contracts that reference LIBOR and is assessing how this standard may be applied to specific contract modifications through March 31, 2025. On March 28, 2023, the FASB issued ASU No. 2023-01, Leases (Topic 842): Common Control Arrangements. ASU 2023-01 is designed to clarify the accounting for leasehold improvements associated with common control leases, thereby reducing diversity in practice. The new standard was effective for the Company for its fiscal year beginning October 1, 2023, with early adoption permitted. The Company is currently evaluating the impact of adopting the standard on its CFS. Recently issued accounting pronouncements not yet adopted In November 2023, the FASB issued ASU 2023-07, “Segment Reporting (Topic 280)” (“ASU 2023-07”). The amendments in ASU 2023-07 improve financial reporting by requiring disclosure of incremental segment information on an annual and interim basis for all public entities to enable investors to develop more decision useful financial analyses. Topic 280 requires a public entity to report a measure of segment profit or loss that the chief operating decision maker (CODM) uses to assess segment performance and make decisions about allocating resources. Topic 280 also requires other specified segment items and amounts, such as depreciation, amortization, and depletion expense, to be disclosed under certain circumstances. The amendments in ASU 202307 do not change or remove those disclosure requirements. The amendments in ASU 2023-07 also do not change how a public entity identifies its operating segments, aggregates those operating segments, or applies the quantitative thresholds to determine its reportable segments. The amendments in ASU 2023-07 are effective for years beginning after December 15, 2023 and interim periods within fiscal years beginning after December 15, 2024, adopted retroactively. Management expect the guidance will not have a significant impact on our CFS. In December 2023, the FASB issued ASU 2023-09, Improvement to Income Tax Disclosure. This standard requires more transparency about income tax information through improvements to income tax disclosures primarily related to the rate reconciliation and income taxes paid information. This standard also includes certain other amendments to improve the effectiveness of income tax disclosures. ASU 2023-09 is effective for public business entities, for annual periods beginning after December 15, 2024. For entities other than public business entities, the amendments are effective for annual periods beginning after December 15, 2025. The Company is in the process of evaluation the impact of adopting this new guidance on our CFS. The Group has reviewed all recently issued, but not yet effective, accounting pronouncements and does not believe the future adoption of any such pronouncements may be expected to cause a material impact on its financial condition or the results of its operations.
· | Reclassification
Certain reclassifications have been made to prior year amounts to conform with the current year presentation.
ZHEJIANG TIANLAN |
Summary of significant accounting policies |
2. | Summary of significant accounting policies
(a) | Basis of presentation
The accompanying consolidated financial statements are presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”).
(b) | Basis of consolidation
The accompanying consolidated financial statements include the results of operations of the Company and its subsidiaries. Significant intercompany transactions and balances have been eliminated.
(c) | Subsidiaries
Subsidiaries are all entities over which the Group has control; has the power to appoint or remove the majority of the members of the board of directors; has the right to cast a majority of votes at the meeting of the board of directors or to govern the financial and operating policies of the investee under a statute or agreement among the shareholders or equity holders.
(d) | Revenue recognition
Our revenue is derived from long-term contracts for customers, as well as short-term contracts for customers. Accounting treatment for these contracts in accordance with Accounting Standards Update (“ASU”) 2014-09 (Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers), is as follows: Performance obligations satisfied over time (Design, installation and operation management services) Recognition of performance obligations A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account in the new revenue standard. The contract transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. Engineering projects typically span between 12 to 36 months. The majority of our contracts have a single performance obligation as the promise to transfer the individual goods or services is not separately identifiable from other promises in the contracts and, therefore, not distinct. Some contracts have multiple performance obligations, most commonly due to the contract covering multiple phases of the project life cycle (design, installation and operation management services). Revenues are recognized as our obligations are satisfied over time, using the ratio of project costs incurred to estimated total costs for each contract because of the continuous transfer of control to the customer as all of the work is performed at the customer’s site and, therefore, the customer controls the asset as it is being installed. This continuous transfer of control to the customer is further supported by clauses in the contract that allow the customer to unilaterally terminate the contract for convenience, pay the Group for costs incurred plus a reasonable profit and take control of any work in process. This cost-to-cost measure is used because management considers it to be the best available measure of progress on these contracts. Contract costs include all direct material, labor, subcontract and other costs. Items excluded from cost-to-cost Pre-contract costs are generally not material and are charged to expense as incurred, but in certain cases pre-contract recognition may be deferred if specific probability criteria are met. Variable consideration Contract modifications through change orders, claims and incentives are routine in the performance of the Group’s contracts to account for changes in the contract specifications or requirements. In most instances, contract modifications are not distinct from the existing contract due to the significant integration of services provided in the contract and are accounted for as a modification of the existing contract and performance obligation. Either the Group or its customers may initiate change orders, which may include changes in specifications or designs, manner of performance, facilities, equipment, materials, sites and period of completion of the work. Change orders that are unapproved as to both price and scope are evaluated as claims. The Group considers claims to be amounts in excess of approved contract prices that the Group seeks to collect from its customers or others for customer-caused delays, errors in specifications and designs, contract terminations, change orders that are either in dispute or are unapproved as to both scope and price, or other causes of unanticipated additional contract costs. The Group estimates variable consideration for a performance obligation at the most likely amount to which the Group expects to be entitled (or the most likely amount the Group expects to incur in the case of liquidated damages), utilizing estimation methods that best predict the amount of consideration to which the Group will be entitled (or will incur in the case of liquidated damages). The Group includes variable consideration in the estimated transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur or when the uncertainty associated with the variable consideration is resolved. The Group’s estimates of variable consideration and determination of whether to include estimated amounts in transaction price are based largely on an assessment of its anticipated performance and all information (historical, current and forecasted) that is reasonably available to the Group. The effect of variable consideration on the transaction price of a performance obligation is recognized as an adjustment to revenue on a cumulative catch-up basis. To the extent unapproved change orders and claims reflected in transaction price (or excluded from transaction price in the case of liquidated damages) are not resolved in the Group’s favor, or to the extent incentives reflected in transaction price are not earned, there could be reductions in, or reversals of, previously recognized revenue.
(e) | Research and development costs
Research and development costs (“R&D” costs) are expensed as incurred. The R&D costs amounted to approximately RMB27,371,000, RMB20,452,000 and RMB29,115,000 for the years ended December 31, 2024, 2023 and 2022 respectively and were included in “Selling and administrative expenses” in the Group’s consolidated statements of operations.
(f) | Income tax
The Group follows the liability method of accounting for income tax. Under this method, deferred tax assets and liabilities are recorded for future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and are measured using the enacted tax rates and laws that are expected to be in effect when the underlying assets or liabilities are recovered or settled. The Group also evaluates whether the recorded deferred tax assets and valuation allowances can be realized and, when necessary, reduces the amounts to what is expected to be realized. The accounting guidance on accounting for uncertainty in income taxes also addresses derecognition, classification, interest and penalties on income taxes, and accounting in interim periods. The Group does not believe it has any uncertain tax positions through the periods ended December 31, 2023, 2022 and 2021 respectively which would have a material impact on the Group’s consolidated financial statements. The Group files tax returns in the PRC. The tax returns for 2023, 2022 and 2021 are subject to examination by the PRC taxing authorities, commencing with the first year filed.
(g) | Cash and cash equivalents
Cash and cash equivalents consist of bank deposits with original maturities of three months or less, all of which are unrestricted as to withdrawal and uninsured. There were no cash equivalents as of December 31, 2024 and 2023.
(h) | Accounts receivable and allowance for doubtful accounts
The Group does not charge interest to its customers and carries its customer receivables at their face amounts, less an allowance for doubtful accounts. As is common practice in the industry, the Group classifies all accounts receivable as current assets. The Group grants trade credit, on a non-collateralized basis, to its customers and is subject to potential credit risk related to changes in business and overall economic activity. The Group analyzes specific accounts receivable balances, historical bad debts, customer credit-worthiness, current economic trends and changes in customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. In the event that a customer balance is deemed to be uncollectible, the account balance is written-off against the allowance for doubtful accounts.
(i) | Classification of contract assets, net and liabilities
For revenue recognized associated with its contracts with customers over time, for which the Group has an enforceable right to receive compensation. Many of our contracts contain specific provisions that determine when the Group can bill for its work performed under these contracts. Any revenue earned on a contract that has not yet been billed to the customer is recorded as a contract asset on the Group’s consolidated balance sheets. The Group’s consolidated balance sheets present contract liabilities that contain deferred revenue that represent any costs incurred on contracts in process for which revenue has not yet been recognized.
(j) | Inventories
Inventories are measured using the weighted average method and are stated at the lower of cost or net realizable value. Cost of finished goods comprise direct material, direct production costs and an allocated portion of production overhead costs based on normal operating capacity.
(k) | Property, plant and equipment and land use right, net
Property, plant and equipment is carried at cost. Major modifications or refurbishments which extend the useful life of the assets are capitalized and depreciated over the adjusted remaining useful life of the assets. Upon retirement or disposition of property, plant and equipment, the cost and related accumulated depreciation are removed and any resulting gain or loss is recognized in consolidated income from operations. The cost of maintenance and repairs is charged to expense as incurred. Property, plant and equipment is reviewed for impairment and tested for recoverability whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the carrying value of property, plant and equipment exceeds its fair value, an impairment charge would be recorded in the consolidated statement of operations. Land in the PRC is owned by the PRC government. The government in the PRC, according to PRC Law, may sell the right to use the land for a specific period of time. Thus, all of the Group’s land purchases in the PRC are considered to be leasehold land and are classified as land use right. Depreciation of property, plant and equipment and amortization of land use right are computed using the straight-line method over the assets’ estimated useful lives as follows:
| Land use right | Over terms of the leases
| Buildings and leasehold improvements | 11 to 50 years, with 5% residual value
| Furniture, fixtures and office equipment | 5 years, with 5% residual value
| Motor vehicles | 5 years, with 5% residual value
| Plant and machineries | 5 to 10 years, with 5% residual value
(l) | Intangible assets, net
| The Group is currently amortizing its acquired intangible assets, consisted of patents and others, with finite-lived over periods generally ranging between three to twenty years.
(m) | Impairment of long lived assets
Long-lived assets such as property, plant and equipment and intangible assets with finite lives are evaluated for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be fully recoverable or that the useful life is shorter than the Group had originally estimated. When these events occur, the Group evaluates the impairment for the long-lived assets by comparing the carrying value of the assets to an estimate of future undiscounted cash flows expected to be generated from the use of the assets and their eventual disposition. If the sum of the expected future undiscounted cash flows is less than the carrying value of the assets, the Group recognizes an impairment loss based on the excess of the carrying value of the assets over the fair value of the assets. The impairment of long-lived assets amounted to approximately RMB Nil, RMB Nil and RMB Nil for the years ended December 31, 2024, 2023 and 2022 respectively and were included in “Selling and administrative expenses” in the Group’s consolidated statements of operations.
(n) | Government grant income
Government grant income consists of receipt of funds to subsidize the investment cost of technical development in China. No present or future obligation arises from the receipt of such amount. Government grants are recognized in the consolidated balance sheet initially when there is reasonable assurance that they will be received and that the Group will comply with the conditions attaching to them. Grants that compensate the Group for expenses incurred are recognized as income in the consolidated statement of operations on a systematic basis in the same periods in which the expenses are incurred. Grants that compensate the Group for the cost of an asset are deducted from the carrying amount of the asset and consequently are effectively recognized in the consolidated statements of operations over the useful life of the asset by way of reduced depreciation expenses.
(o) | Leases arrangements
The Group adopted ASU No. 2016-02, Leases (Topic 842). The Group leases certain equipment under finance leases. The economic substance of the leases is a financing transaction for acquisition of the equipment. Accordingly, the right-of-use assets for these leases are included on the Group’s consolidated balance sheets in property, plant and equipment, net of accumulated depreciation, amortization and impairment losses, with a corresponding amount recorded in current portion of long-term finance lease obligations. The finance lease assets are amortized over the life of the lease or, if shorter, the life of the leased asset, on a straight-line basis and included in depreciation expense. The financing component associated with finance lease obligations is included in interest expense. Generally, for the Group’s finance leases an implicit rate to calculate present value is provided in the lease agreement, however if a rate in not provided the Group determines this rate by estimating the Group’s incremental borrowing rate, utilizing the borrowing rates associated with the Group’s various debt instruments. The Group determines if an arrangement is a lease at inception. Lease liabilities are the Group’s obligation to make lease payments arising from a lease and are measured on a discounted basis.
(p) | Share capital
Paid in capital refers to the registered capital paid up by the shareholders of the Company. At December 31, 2024, there were 82,572,000 shares (2023: 82,572,000 shares) issued.
(q) | Use of estimates
The preparation of the accompanying consolidated financial statements in conformity with GAAP requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Certain accounting estimates of the Group require a higher degree of judgment than others in their application. These include the recognition of revenue and earnings from contracts over time, contract assets, net and contract liabilities. Management continually evaluates all of its estimates and judgments based on available information and experience; however, actual results could differ from these estimates.
(r) | Related parties
Entities are considered to be related to the Group if the parties, directly or indirectly, through one or more intermediaries, control, are controlled by, or are under common control with the Group. Related parties also include principal owners of the Group, its management, members of the immediate families of principal owners of the Group and its management and other parties with which the Group may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. A party which can significantly influence the management or operating policies of the transacting parties or if it has an ownership interest in one of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests is also a related party.
(s) | Net income per ordinary share
The Group computes net income per ordinary share using the treasury stock method. Under the treasury stock method, basic earnings per share attributable to Zhejiang Tianlan Environmental Protection Technology Company Limited are computed by dividing net income attributable to Zhejiang Tianlan Environmental Protection Technology Company Limited by the weighted average number of ordinary shares outstanding during the period.
(t) | Warranties
The suppliers of the Group offer a standard one-year warranty to end customer of the Group. The Group only provides labour service to repair or replace parts. The Group does not maintain a general warranty reserve because historically labour costs for such repair or replacement have been de minimis.
(u) | Shipping and handling costs
Amounts billed to customers related to shipping and handling are classified as revenues, and the Group’s shipping and handling costs are included in cost of revenues.
(v) | Finance costs
Interest relating to loans repaid is expensed in the period the repayment occurs.
(w) | Concentrations
Financial instruments that potentially subject the Group to a concentration of credit risk consist principally of cash and cash equivalents and accounts receivable, net. The Group maintains substantially all of its cash and cash equivalent balances with large financial institutions which are believed to be high quality institutions. The Group is subject to a concentration of risk because it derives a significant portion of its revenues from a few customers. The Group’s top five customers accounted for approximately 42%, 38%, and 35% of consolidated revenues for the years ended December 31, 2024, 2023 and 2022, respectively. For the years ended December 31, 2024, 2023 and 2022, one customer accounted for 16%, 22% and 14% of annual revenues, respectively. The Group grants trade credit under contractual payment terms, generally without collateral, to its customers, which include high credit quality electric utilities, general contractors, owners and managers of industrial properties. Consequently, the Group is subject to potential credit risk related to changes in business and economic factors. At December 31, 2024 and 2023, none of the Group’s customers individually exceeded 10.0% of accounts receivable. The Group believes the terms and conditions in its contracts, billing and collection policies are adequate to minimize the potential credit risk.
(x) | Statutory reserve
The Group is required to make appropriation to reserve, comprising the PRC statutory reserve, based on after-tax net income determined with generally accepted accounting principles of the PRC (“PRC GAAP”). Appropriations to the PRC statutory reserve are required to be at least 10% of the after tax net income determined in accordance with PRC GAAP until the reserve is equal to 50% of the entities’ registered capital.
(y) | Fair value measurements
ASC 820 provides guidance on how to measure fair value for financial reporting purpose. The Group uses the three-tier hierarchy of fair value measurement, which prioritizes the inputs used in measuring fair value based upon their degree of availability in external active markets. These tiers include: Level 1 (the highest priority), defined as observable inputs, such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3 (the lowest priority), defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. As of December 31, 2024 and 2023, the Group determined that the carrying values of cash, and cash equivalents, accounts receivable, net, prepayments and other current assets, contract assets, bank borrowings, accounts payable, other payables and accrued expenses and contract liabilities approximate their fair values because of the short-term nature of these instruments.
(z) | Short-term and long-term investments
The Group has elected to apply the measurement alternative to equity securities without readily determinable fair values. As such, the Group’s non-marketable equity securities are measured at cost, less any impairment, and are adjusted for changes in fair value resulting from observable transactions for identical or similar investments of the investee.
(aa) | Recent accounting pronouncements
Changes to GAAP are typically established by the Financial Accounting Standards Board (“FASB”) in the form of accounting standards updates (“ASUs”) to the FASB’s ASC. The Group considers the applicability and impact of all ASUs. The Group, based on its assessment, determined that any recently issued or proposed ASUs not listed below are either not applicable to the Group or may have minimal impact on its consolidated financial statements. Recently adopted accounting pronouncements In June 2016, the FASB issued ASU 2016-13, “Financial Instruments—Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments”. The new standard requires the measurement and recognition of expected credit losses using the current expected credit loss model for financial assets held at amortized cost, which includes the Group’s accounts receivable, contract assets and non-current assets. It replaces the existing incurred loss impairment model with an expected loss methodology. The recorded credit losses are adjusted each period for changes in expected lifetime credit losses. The standard requires a cumulative effect adjustment to the consolidated balance sheet as of the beginning of the first reporting period in which the guidance is effective. ASC 326, Financial Instruments — Credit Losses is effective for public companies for annual reporting periods, and interim periods within those years beginning after December 15, 2019. For all other entities, it is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The standard is effective for the Group from January 1, 2023. The Group is in the process determining the impact of the adoption of this standard on its consolidated financial statements. In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes”, which simplifies the accounting for income taxes. This guidance became effective for the first quarter of 2021 on a prospective basis. The implementation of ASU 2019-12 in the year ended December 31, 2021, did not have a material impact on the Group’s consolidated financial statements. In October 2021, the FASB issued ASU 2021-08, “Business Combinations (Topic 805)”. ASU 2021-08 creates an exception to the general recognition and measurement principle for contract assets and contract liabilities from contracts with customers acquired in a business combination. Under this exception, an acquirer applies ASC 606 to recognize and measure contract assets and contract liabilities on the acquisition date. ASC 805 generally requires the acquirer in a business combination to recognize and measure the assets it acquires and the liabilities it assumes at fair value on the acquisition date. The ASU 2021-08 will become effective for fiscal years beginning after December 15, 2022. The adoption of this ASU is not expected to have a material impact on the Group’s consolidated financial statements. Recently issued accounting pronouncements not yet adopted In December 2022, the FASB issued ASU 2022-06, “Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848”. This ASU defers the sunset date of Topic 848, which provides relief to entities affected by reference rate reform. The ASU defers the sunset date of Topic 848 from December 31, 2022, to December 31, 2025. The standard is effective immediately and the Group adopted the standard in December 2022 with no financial impact. The Group is currently assessing the impact ASU 2020-04, for which this ASU 2022-06 relates, will have on its consolidated financial statements. The Group has reviewed all recently issued, but not yet effective, accounting pronouncements and does not believe the future adoption of any such pronouncements may be expected to cause a material impact on its financial condition or the results of its operations.
(ab) | Non-controlling interests
For entities that are consolidated, but not 100% owned, a portion of the income or loss and equity is allocated to owners other than the Group. The aggregate of the income or loss and corresponding equity that is not owned by the Group is included within non-controlling interests in the consolidated financial statements. Non-controlling interests is presented as a separate component of equity in the consolidated balance sheets. Net income includes the net income attributable to the holders of non-controlling interests in the consolidated statements of operations and comprehensive income / (loss). Profits and losses are allocated to non-controlling interests in proportion to their relative ownership interests regardless of their basis.

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