Note1-Purpose & Constitution

The Association stands on a mutual basis and is to uphold prestige and safeguard the interests of its Members, for which the Association affords insurance cover and offers professional services. The liability of the Members is limited to the calls and supplementary calls set by the directors and in the event of its liquidation, any net assets of the Association are to be returned equitably to those Members insured by it during its final underwriting year.

Note2-Accounting Principle

a 　Accounting Convention
These Financial Statements have been prepared in accordance with applicable China accounting
standards and Generally Accepted Accounting Principles.

b 　Accounting Year
These Financial Statements reflect the period from Jan.1, 2003 to Dec. 31, 2003.

c 　Annual Accounting and Policy Year Accounting
The Income And Expenditure Account is prepared on an annual accounting basis and includes all the premiums for policies incepting in the year and the cost of claims and reinsurance for the current year and any adjustments relating to earlier years together with operating expenses, financial expenses and investment income. All revenue transactions appear in the Income And Expenditure Account and are allocated to a policy year or to a reserve.

Calls and premiums, reinsurance premiums, claims and claim recoverable from reinsurers or third parties are allocated to the policy years to which they relate. Both the realised and unrealised investment income and operating expenses are allocated to the current policy year.

d 　Valuation basis
The Association adopts accrual basis in accounting unless otherwise stipulated. The values of all assets except the equity investment of listed company which is stated at lower of its market value and the net asset value per share at the balance sheet date are to be recorded at historical costs at the time of acquisition.

e 　Bookkeeping base currency
The United States Dollar is the bookkeeping base currency of the Association. The Association adopts the principle of separate accounting for similar accounts. Balances of RMB accounts at the end of year shall be translated into the US Dollar at the official exchange rate prevailing on December 31,2003. The differences arising from the translation are stated as gains or losses in the Income and Expenditure Account.

f 　Cash Balance
Cash in hand, bank deposits and other monetary assets are listed separately for their different keeping place and certain purpose in bookkeeping. Their total amount in the name of cash balance is showed as a current asset in the Balance Sheet.

g 　Calls and Premiums Receivable
It refers to the accumulated amount of calls and premiums receivable due from members. The Association conducts the direct write-off method and the bad debts are charged to the reserves directly under the Directors decision when the calls and premiums are discovered to be uncollectible.

h 　Guarantee
It refers to cash balance held by domestic or overseas Banks for issuing letters of guarantee.

i 　Investments
The equity method is used when the Association has significant influence, control or co-control over the operation of the invested listed company and the cost method is used for other long-term investments. The equity investments of listed company are stated at lower of its market value and the net asset value per share at the balance sheet date.

The investment income includes all the gains and losses whether realised or unrealised. The investment income less the investment management cost is stated in the Income and Expenditure Account.

Since the policy year of 1998 developed the new cover of Hull and Machinery risks, its income has been involved the whole investments of the Association. Ensuring to share equally and separately the full benefits of investments of the Association for the Members of P&I cover and Hull and Machinery cover, the Association distributes the amount of long-term investments together with their benefits according to the actual running condition of funds for years.

j 　Liabilities Provision
Liabilities provisions and reinsurance recoveries receivable of open and closed policy years are drawn to prepare for the claims which belong to the policy years separately and their difference is charged to the Income and Expenditure Account. They are also stated in the Balance Sheet separately.

k 　Reserves
The reserves are the net assets of the Association and available to meet any deterioration in the open and closed policy years and to contribute to overspill claims, actual or potential investment losses or other certain purposes.

l 　Calls and Premiums
Calls and premiums include gross calls, supplementary premiums and release call, less return premiums. These calls and premiums are the total receivable for the whole period of cover provided by the contracts incepting during the accounting period together with any premium adjustments relating to prior accounting periods. The amount of calls and premiums less reinsurance premiums is credited to the Income and Expenditure Account.

m 　Reinsurance Premiums
The liabilities of the Association are reinsured above certain levels with other association abroad. This item shows the amount of the reinsurance premiums the Association paid to other association abroad.

n 　Claims
The claims include all claims incurred during the year, whether paid or estimated, and adjustments for claims outstanding from previous years. The estimates for known outstanding claims are based on the best estimates and judgement of the Managers of the likely final cost of individual cases based on current information. The reinsured recoveries and the claims recoveries from the third party are both as the anti-items to the claims and credited in Income and Expenditure Account.

o 　Claims Recoveries From the Third Party
It refers to the amount recovered from the third liability party, which is credited into Income and Expenditure Account as the deduction of claims.

p 　Reinsured Recoveries
The liabilities of the Association are reinsured above certain levels with other association abroad. It is the anti-item to the claims paid and credited in the Income and Expenditure Account. Accordingly the reinsurance recoveries receivable is listed as an asset in the Balance Sheet.

q 　Operating Expenses
These include management costs and costs of Board of Directors. The management costs cover the cost of providing offices, staff, communications, travel and administration. The costs of Directors include the cost of meetings of members and Board meetings, travels and other costs. It has been drawn on the ratio in accordance with the board of Director's instruction and is listed in the Income and Expenditure Account.

r 　Taxation
According to the tax policy of China, the tax charge is based on a percentage of the investment income and realised investment gains and not on the underwriting income. The investment income listed in the Income and Expenditure Account is a net amount.

s 　Related Party Disclosures
The Association has no share capital and is controlled by the Members who are also the insureds. The subsequent insurance transactions are consequently deemed to be between related parties but these are the only transactions between the Association and the Members.