NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1
DESCRIPTION OF BUSINESS AND ORGANIZATION
China Grand Resorts, Inc. (CGND) and its wholly owned subsidiaries Sun New Media Transaction Service Ltd. (SNMTS), China Focus Channel Development Co., Ltd (CFCD) and Key Proper Holdings Limited (KPH), financial statements defined herein below, collectively referred to as the Company or we" have been prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP).
(a) Organization
The Company was incorporated in the state of Nevada on September 21, 1989 under the name Fulton Ventures, Inc. On September 19, 2002, we changed our name to Asia Premium Television Group, Inc. to more accurately reflect our business at the time. In March 2007, we effected a 1,000 for 1 reverse stock split of our issued and outstanding common stock. Effective on November 16, 2009, we changed our name to China Grand Resorts Inc. to more accurately reflect our new business efforts and effected a 20 for 1 reverse split of our common stock. All shares and per share amounts in these consolidated financial statements and note thereto have been retrospectively adjusted to all periods presented to give effect to the reverse stock split.
On July 1, 2007, the Company acquired 100% interest of SNMTS, a company incorporated in Hong Kong, and its wholly owned subsidiary CFCD, a company incorporated in the Peoples Republic of China, from NextMart Inc. for $1. On December 8, 2009, the Company incorporated KPH, a company incorporated in the
Below is the organization chart:
Acquisition of commercial income rights
On August 1, 2009, the Company entered into a subscription and asset sale agreement (the Agreement) with Beijing Hua Hui Hengye Investment Ltd. (Hua Hui), an unaffiliated PRC company. Hua Hui is a PRC real estate construction and development conglomerate that specializes in constructing and developing travel, resorts, hotels, and apartment properties in popular tourist and other destinations within the PRC. Under the Agreement, we received from Hua Hui the commercial income rights to 10,000 square meters of a 17 story apartment building in the Huadun Changde International Hotels Apartment Complex (the Apartment Complex ) located in the city of Changde, Hunan Province (Project). The Project is developed by Changde Hua Hui Construction Investment Co., Ltd. (Changde Hua Hui), a 99.33% owned subsidiary of Hua Hui. Changde Hua Hui agrees to convey to us the commercial income rights to 10,000 square meters of the Project.
8
The Apartment Complex consists of a total of 215,000 square meters located on an approximately 3.6 acre piece of land. The Project is comprised of a total 128 apartments, of which we will have the commercial rights to approximately 60 apartments. The commercial income rights means the exclusive right to own and/or receive any and all income and proceeds derived from these apartments. The commercial income rights to 10,000 square meters were valued at approximately $8,777,000 by an independent valuation firm and we agreed to pay a total of $7,317,000 as consideration. In exchange, we agreed to issue to Hua Hui, 2,774,392 shares of our common stock valued at $2.4 per share (the closing price of the Companys common stock on the transaction date, August 1, 2009 after giving effect of 20 for 1 reverse split) for a total stock value of $6,658,536 and transferred to Hua Hui certain other Company assets valued at $658,241. These assets consisted of all of our shares of the GlobStream, certain assets of both Sun New Media Transaction Services Limited and China Focus Channel Development Co., Ltd, and other miscellaneous assets of ours.
On September 8, 2009, we satisfied the issuance of the 2,774,392 shares by issuing 832,318 shares to Wise Gold Investment Ltd., a British Virgin Island company acting on behalf of Hua Hui. On that same date, we also issued 1,942,074 shares of common stock to Blossom Grow Holdings Limited, a British Virgin Island company, as escrow agent under an escrow agreement by and among us the escrow agent, and Hua Hui. The escrow agent will hold the escrow shares pending completion of the Project which is expected to occur at or near the end of calendar 2010. If the escrow agent receives written instructions from the Company that the Project is completed in accordance with the terms of the Agreement, the escrow agent will release the escrow shares to Hua Hui. However, if after the projected completion date, the Project has not been completed, the escrow shares will continue to be held at escrow for one year. If after one year, the project still has not been completed, then the Company and Hua Hui will negotiate an agreement to deal with the escrow shares. On December 5, 2011 and September 2, 2012, the Company entered into Supplemental Agreements with Hua Hui and Blossom Grow Holdings Limited, pursuant to which, the escrow agent will hold the escrow shares to August 31 2013. Due to change of decoration structure and style, and the ineffective communications with the construction contractors, Hua Hui has informed us that the Project is expected to be completed during the second quarter of calendar year 2014. On December 2, 2013, the Company entered into another Supplemental Agreement with Hua Hui and Blossom Grow Holdings Limited, pursuant to which, the escrow agent will hold the escrow shares to August 31 2014. All permits concerning the Project have been acquired from governmental authorities, and the construction of the Project is 95% completed as the date of this report. During the escrow period, Hua Hui will be able to vote such shares provided it has reached an agreement with us on such matter(s). Otherwise, the escrow agent will not vote on such matter(s). As a result, Hua Hui and Mr. Menghua Liu, Hua Huis Chairman and majority shareholder and the Companys Chairman and Chief Executive Office, are deemed the beneficial owner of such shares. After giving effect to the transaction, Hua Hui became the Companys majority shareholder and beneficially owns approximately 84.8% Companys outstanding shares.
With respect to the 10,000 square meters of residential space, Changde Hua Hui performs the actual unit sales. We agreed to pay Changde Hua Hui a sales commission of 3% of the unit sales price. As of December 31, 2013, 12 units, or approximately 1,893 square meters were sold. The total sales price is approximately $707,935 (RMB4,354,797). The commercial income rights discussed above means we will receive the net proceeds from sale of the apartments. Net proceed means sales price net of project costs, selling expenses, and other expenses directly related to disposal of the apartments. Project costs are costs clearly associated with acquisition, development, and construction of a real estate project. as defined in ASC 970-605-20. In China, after a real estate project is substantially completed, a real estate development company must submit a project cost report to the local government for approval. A real estate development must book the project costs based on the amount approved by the local government. Because the Project has not been completed and the project costs have not been finalized and approved by the local government, we can not determine the net proceed due as of the date of this report. Changde Hua Hui has agreed to hold the proceeds from sale of the apartments, and deliver the net proceeds to us when the amount is fixed or determinable.
Since the Company can not be able to determine the amount of net proceed receivable at the date of this report, and based on ASC 450-30-25-1 A contingency that might result in a gain usually should not be reflected in the financial statements because to do so might be to recognize revenue before its realization. And ASC 450-30-50-1 Adequate disclose should be made of a contingency that might result in a gain, but care shall be exercised to avoid misleading implications as to the likelihood of realization., the company discloses the fact of the sale of the apartments, and the amount of the proceed receivable can not be determined at the reporting date.
Note 2-
SUMMARIES OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Presentation and Consolidation
The accompanying unaudited consolidated financial statements of China Grand Resorts, Inc. (CGND) and its wholly owned subsidiaries including Sun New Media Transaction Service Ltd. (SNMTS), China Focus Channel Development Co., Ltd (CFCD) and Key Prosper Holdings Limited (KPH), defined herein below, collectively referred to as the Company or we" have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission and in accordance with accounting principles generally accepted in the United States of America (US GAAP). Certain information and footnote disclosures normally included in the consolidated financial statements prepared in accordance with US GAAP have been condensed or omitted in accordance with such rules and regulations. The information furnished in the interim consolidated financial statements includes normal recurring adjustments and reflects all adjustments that, in the opinion of management, are necessary for a fair presentation of such consolidated financial statements. Although management believes the disclosures and information presented are adequate to make the information not misleading, it is suggested that these interim consolidated financial statements be read in conjunction with the Company's most recent audited consolidated financial statements and notes included in its annual report on Form 10-K for the fiscal year ended September 30, 2013 filed on December 30, 2013. Operating results for the three months ended December 31, 2013, are not necessarily indicative of the results that may be expected for longer periods or the entire year.
9
The Companys consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (USGAAP) and applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business.
The consolidated financial statements include the accounts of the Company and its subsidiaries, SNMTS, CFCD and KPH. All inter-company balances and transactions between the entities have been eliminated in
In preparing the consolidated financial statements, we evaluated the period from the balance sheet date through the date the financial statements were issued for material subsequent events requiring recognition or disclosure. No such events were identified for this period, except the matter of sale of the apartments disclosed in Note 12.
(b) Going Concern and Management Plan
As of December 31, 2013, the Company had an accumulated deficit totaling $11,433,958 and negative working capital $1,341,994. The Company suffered a loss of $44,364 for the three months ended December 31, 2013 and $210,830 for the year ended September 30, 2013. In view of the matters described above, the appropriateness of the going concern basis is dependent upon continuing operations of the Company, which in turn is dependent upon the Company's ability to raise additional capital, obtain financing and succeed in its future operations. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
As a result of the transaction with Hua Hui as discussed in Note (1), we received the commercial income rights of the Project.
The Company is actively pursuing additional capital in an effort to fund its ongoing capital requirements, as well as seeking agreements with potential strategic partners to develop a new business strategy, other than its ownership of the commercial income rights to the Project.
(c) Use of estimates
The preparation of the financial statements in conformity with US GAAP requires management of the Company to make a number of estimates and assumptions relating to the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the years presented. Actual results could differ from those estimates. The Company bases its estimates on historical experience and various other factors believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Significant accounting estimates reflected in the Company's consolidated financial statements include allowance for doubtful accounts, estimated useful lives and contingent liabilities.
(d) Cash
Cash consists of cash on hand and at banks which are unrestricted as to withdrawal or use. Management believes that the banks which hold the Companys cash are of high credit quality
(e) Foreign currency translation
The Company uses United States dollars (U.S. Dollar or USD or $) for financial reporting purposes. The subsidiaries within the Company maintain their books and records in their respective functional currency, Chinese Renminbi (RMB) and Hong Kong dollars (HK$), being the lawful currency in the PRC and Hong Kong, respectively. Assets and liabilities of the subsidiaries are translated from RMB or HK$ into U.S. Dollars using the applicable exchange rates prevailing at the balance sheet date. Items on the statements of operations and cash flows are translated at average exchange rates during the reporting period. Equity accounts are translated at historical rates. Adjustments resulting from the translation of the Companys financial statements are recorded as accumulated other comprehensive income.
The exchange rates used to translate amounts in RMB and HK$ into U.S. Dollars for the purposes of preparing the consolidated financial statements are as follows:
10
|
|
|
|
|
|
|
2013
|
|
2012
|
|
|
|
|
|
December 31,
|
|
RMB6.1140=$1
|
|
RMB6.2855 = $1
|
|
|
HK$7.7592= $1
|
|
HK$7.7519= $1
|
|
|
|
|
|
Three Months ended
|
|
|
|
|
December 31,
|
|
RMB6.1289=$1
|
|
RMB6.3133 = $1
|
|
|
HK$7.7610= $1
|
|
HK$7.7531= $1
|
There is no assurance that the RMB amounts could have been, or could be, converted into U.S. dollars at the above rates.
(f) Property and equipment
Property and equipment are recorded at cost less accumulated depreciation and amortization. Expenditures for major additions and betterments that extend the useful lives of property and equipment are capitalized, upon being placed in service. Expenditures for maintenance and repairs are charged to general and administrative expense as incurred. Depreciation of property and equipment is computed by the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized on a straight-line basis over the estimated useful life.
Upon sale or retirement of property, plant and equipment, the related cost and accumulated depreciation are removed from the accounts and any gain or loss is reflect in operation.
The estimated useful lives of the assets are as follows:
|
|
|
Computer software
|
|
3 years
|
Office equipment
|
|
2-5 years
|
(g) Impairment of long-lived assets
Long-lived assets, including intangible assets with definite lives and property, plant and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset.
Based on the Companys assessment, there have been no events or changes in circumstances that would indicate any impairment of long-lived assets as of December 31, 2013 and 2012.
(h) Fair value measurements
ASC Topic 820, Fair Value Measurement and Disclosures, defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. This topic also establishes a fair value hierarchy which requires classification based on observable and unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure fair value:
|
|
Level 1-
|
Quoted prices in active markets for identical assets or liabilities.
|
Level 2-
|
Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by
|
Level 3-
|
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
|
Determining which category an asset or liability falls within the hierarchy requires significant judgment. The Company evaluates its hierarchy disclosures each quarter.
The carrying values of cash and cash equivalents, other receivables, other payables, shareholders payables and related party payable approximate fair values due to their short maturities.
There was no asset or liability measured at fair value on a non-recurring basis as of December 31, 2013 and 2012.
11
(i) Income taxes
The Company follows the liability method of accounting for income taxes in accordance with ASC 740 Income Taxes. Under this method, future tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax balances. Future tax assets and liabilities are measured using enacted or substantially enacted tax rates expected to apply to the taxable income in the years in which those differences are expected to be recovered or settled. The effect on future tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the date of enactment or substantive enactment. The tax loss arising from PRC can be carried forward for five years. Agreed tax losses by respective local tax authorities can be offset against future taxable profits of the respective companies. A valuation allowance is provided for deferred tax assets if it is more likely than not that the Company will not realize the future benefit, or if the future deductibility is uncertain. It is uncertain for the Company that the operating result in PRC will have profit and it is more likely than not that the Company will not realize the future benefit. Therefore, there was no deferred tax asset as of December 31, 2013 and 2012, respectively.
(j) Revenue recognition
In accordance with FASB ASC 605, "Revenue Recognition", we recognize revenue when the earnings process is complete, both title and the risks and rewards of ownership are transferred or services have been rendered and accepted, the selling price is fixed or determinable, and collectability is reasonably assured.
(k) Loss per share
Basic earnings (loss) per share is computed on the basis of the weighted-average number of shares of the Companys common stock outstanding during the fiscal years. Diluted earnings (loss) per share is computed on the basis of the weighted-average number of shares of the common stock plus any (loss) effect of dilutive potential common shares outstanding during the year using the if-converted method. As the Company has a loss, presenting diluted net loss per share is considered anti-dilutive and not included in the consolidated statements of operations.
(l) Nonmonetary transactions
The Company accounts for nonmonetary transactions based on the fair value of the assets (or services) involved in accordance with the requirements of FASB ASC Topic 845, Nonmonetary Transactions.
(m) Comprehensive income
Comprehensive income is defined as the change in equity of a company during the period from transactions and other events and circumstances excluding transactions resulting from investments from owners and distributions to owners.
Accumulated other comprehensive income (loss) and comprehensive income (loss) consist of changes in unrealized gains and losses on foreign currency translation. This comprehensive income is not included in the computation of income tax expense or benefit.
(n) Commitments and contingencies
The Company is subject to lawsuits, investigations and other claims related to operations, product, taxing authorities, environmental and other matters out of the normal course of business, and is required to assess the likelihood of any adverse judgments or outcomes to these matters, as well as potential ranges of probable losses and fees. A determination of the amount of reserves and disclosures required, if any, for these contingencies are made after considerable analysis of each individual issue. The Company accrues for contingent liabilities when an assessment of the risk of loss is probable and can be reasonably estimated. The Company discloses contingent liabilities when the risk of loss is reasonably possible or probable.
(o) Pension and employee benefits
Full time employees of the Companys PRC subsidiary participate in a government mandated multi-employer defined contribution plan pursuant to which certain pension benefits, medical care, unemployment insurance, employee housing fund and other welfare benefits are provided to employees. The PRC labor regulations require the Company to accrue for these benefits based on certain percentages of the employees salaries. Cost for the pension and employee benefits for the three months ended December 31, 2013 and 2012 were $8,241 and $6,149, respectively.
12
(p) Recently issued accounting standards
In July 2013, the FASB issued ASU 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carry forward, a Similar Tax Loss, or a Tax Credit Carry forward Exists. This standard requires that an unrecognized tax benefits, or a portion of an unrecognized tax benefit be presented on a reduction to a deferred tax asset for an NOL carry forward, a similar tax loss, or a tax credit carry forward with certain exceptions to this rule. If certain exception conditions exists, an entity should present an unrecognized tax benefit in the financial statements as a liability and should not net the unrecognized tax benefit with a deferred tax asset. This standard is effective for fiscal years and interim periods within those years beginning after December 15, 2013. The Company does not expect the adoption of the new provisions to have a material impact on our financial condition or results of operations.
In March 2013, the FASB issued guidance on when foreign currency translation adjustments should be released to net income. When a parent entity ceases to have a controlling financial interest in a subsidiary or group of assets that is a business within a foreign entity, the parent is required to release any related cumulative translation adjustment into net income. Accordingly, the cumulative translation adjustment should be released into net income only if the sale or transfer results in the complete or substantially complete liquidation of the foreign entity in which the subsidiary or group of assets had resided. The guidance is effective prospectively beginning January 1, 2014. It is not expected to have a material impact in the financial statements.
Note 3
CONCENTRATION OF CREDIT RISK
As at December 31, 2013 and 2012, approximately 99% of the Companys cash represented cash balances deposited with banks located in the PRC. According to existing PRC laws and regulations, remittance of these cash balances out of the PRC is subject to various restrictions imposed by the PRC government. Remittance of these cash balances out of the PRC is subject to various restrictions imposed by the PRC government.
The Company does not have any off-balance-sheet credit exposure as a result of its customers.
Note 4
PROPERTY AND EQUIPMENT, NET
The following is a summary of property and equipment, at cost, less accumulated depreciation:
|
|
|
|
|
|
|
|
|
December 31,
|
|
September 30,
|
|
|
|
2013
|
|
2013
|
|
|
|
(unaudited)
|
|
|
Computer software
|
|
$
|
-
|
$
|
1,741
|
Office equipment
|
|
|
19,388
|
|
21,984
|
Sub total
|
|
|
19,388
|
|
23,725
|
Less: accumulated depreciation
|
|
|
(17,472)
|
|
(20,907)
|
Total property and equipment, net
|
|
$
|
1,916
|
$
|
2,818
|
NOTE 5
OTHER PAYABLES
Other payables consist of the following:
|
|
|
|
|
|
|
|
|
December 31,
|
|
September 30,
|
|
|
|
2013
|
|
2013
|
|
|
|
(unaudited)
|
|
|
Professional Fees
|
|
$
|
8,000
|
$
|
20,000
|
Office expenses
|
|
|
16,692
|
|
13,161
|
Total other payables
|
|
$
|
24,692
|
$
|
33,161
|
NOTE 6
RELATED PART TRANSACTIONS
Loans from related parties consist of the following
13
|
|
|
|
|
|
|
|
|
December 31,
|
|
September 30,
|
|
|
|
2013
|
|
2013
|
|
|
|
(unaudited)
|
|
|
Redrock Capital Venture Limited (a)
|
|
$
|
100,281
|
$
|
100,281
|
Beijing Hua Hui Hengye Investment Limited (b)
|
|
|
1,233,375
|
|
1,180,232
|
Total
|
|
$
|
1,333,656
|
$
|
1,280,513
|
(a) From June 2009 through December 2009, we received loans from Redrock Capital Venture Limited (Redrock) for working capital purpose. The loans are unsecured, due on demand, and without formal writing loan agreements. The loans amounted to $100,280 as of December 31, 2009 and remained the same amount as of December 31, 2013. Redrock is currently a minority shareholder of the Company.
(b) Commencing in October 2009, we began receiving loans from time to time from Hua Hui, our largest shareholder, for working capital purposes. As of December 31, 2013, the amount due to Hua Hui is $1,233,375 which is due on demand and bears interest at the prevailing rate charged by the PRC Central Bank. The loans that we received from Hua Hui in the three months ended December 31, 2013 and 2012 amounted to $38,374 and $64,248, respectively. The interest accrued for the three months ended December 31, 2013 amounted to approximately $14,769 and the effective interest rate of the loans was 5.59%. The interest accrued for the three months ended December 31, 2012 amounted to approximately $12,536 and the effective interest rate of the loans was 5.55%.
Note 7
CAPITAL STOCK
(a) Common Stock
On September 8, 2009, pursuant to the transaction with Beijing Hua Hui on August 1, 2009, the Company issued 832,318 shares of its common stock to Wise Gold Investment Ltd., a British Virgin Island company acting on behalf of Hua Hui. In addition, on that same date, it issued 1,942,074 shares of common stock to Blossom Grow Holdings Limited, a British Virgin Island company, as escrow agent under an escrow agreement by and among the Company, the escrow agent, and Hua Hui.
Effective on November 16, 2009, we effected a 20 for 1 reverse split of our issued and outstanding common stock. This reverse stock split already gave retroactive effect in the computation of basis and diluted EPS for all period presented accordingly.
As of December 31, 2013 and 2012, the Company had 3,272,311 and 3,272,311 shares issued and outstanding respectively.
(b) Warrants/options
On June 28, 2009, pursuant to the Acquisition Agreement made and entered into by the Company and GlobStream, the Company issued warrants to Mr. Luo Wenjun for the option to purchase 7,782 shares of common stock with an exercise price of $3 per share and an expiration after March 23, 2019.
These Warrants may be exercised, in whole or in part, by the Holder during the Exercise Period by (i) the presentation and surrender of this Warrant to the Company along with a duly executed Notice of Exercise specifying the number of Warrant Shares to be purchased, and (ii) delivery of payment to the Company of the Exercise Price for the number of Warrant Shares specified in the Notice of Exercise.
As of December 31, 2013, the Company had 7,782 common stock warrants outstanding.
(c) 2001 stock plan
In 2001, the Board of Directors adopted a Stock Plan (Plan). Under the terms and conditions of the Plan, the Board of Directors is empowered to grant stock options to employees, consultants, officers and directors of the Company. Additionally, the Board will determine at the time of granting the vesting provision and whether the options will be qualified as Incentive Stock Options under Section 422 of the Internal Revenue Code (Section 422 provides certain tax advantages to the employee recipients). The Plan was approved by the shareholders of the Company on September 15, 2001. The total number of shares of common stock available under the Plan may not exceed 100. As of December 31, 2013, no options were granted under the Plan.
14
NOTE 8
RENTAL EXPENSE
In December 2009, we relocated our office to a new location in Beijing consisting of 192.70 square meters. The new Beijing office lease is from December 11, 2009 to December 10, 2011 and provides for monthly lease payment of $5,333 with two months period of free rent. In August 2011, we renewed this lease agreement from December 11, 2011 to December 12, 2012. The monthly lease payment is $6,253. Currently, Hua Hui, our majority shareholder, provides an office to us at no cost. However, Hua Hui may charge us rent in the future. We have not reach an agreement as of the date of this filing.
Rental expenses for the three months ended December 31, 2013 and 2012 was $0 and $12,790, respectively.
NOTE 9
INCOME TAXES
The entities within the Company file separate tax returns in the respective tax jurisdictions that they operate.
British Virgin Islands
Key Prosper Holdings Limited incorporated in the British Virgin Islands as exempted company is not subject to any income tax in the British Virgin Islands
Hong Kong
SNMTS is generally subject to Hong Kong income tax on its taxable income derived from trade or businesses carried out in Hong Kong at 16.5% for the three months ended December 31, 2013 and 2012. However, as SNMTS has not generated any revenue or income, no provision for Hong Kong income tax has been made. As SNMTS has yet commenced operations, the expenses incurred are not deductible and no loss carry forward was thus resulted.
PRC
CFCD established in the PRC was subject to the PRC Enterprise Income Tax (EIT) at 33% prior to January 1, 2008.
The PRC Enterprise Income Tax Law, among other things, imposes a unified income tax rate of 25% for both domestic and foreign invested enterprises registered in the PRC. The New EIT Law provides a grandfathering on tax holidays which were granted under the then effective tax laws and regulations. The NEW EIT Law also imposes a withholding tax of 10% unless reduced by a tax treaty, for dividends distributed by a PRC-resident enterprise to its immediate holding company outside the PRC for earnings accumulated beginning on January 1, 2008 and undistributed earnings generated prior to January 1, 2008 are exempt from such withholding tax. As the PRC subsidiary is loss status, the Company has not provided for withholding taxes of its PRC subsidiary as of December 31, 2013 and 2012.
According to the PRC Tax Administration and Collection Law, the statute of limitations is three years if the underpayment of taxes is due to computational or other errors made by the taxpayer or the withholding agent. The statute of limitations extends five years under special circumstances. In the case of transfer pricing issues, the statute of limitations is 10 years.
There is no state of limitations in the case of tax evasions. Accordingly, the income tax returns of China Grand Resorts, Inc. for the three months ended December 31, 2013 and 2012 are open to examination by the PRC state and local tax authorities.
As of December 31, 2013 and 2012, the Company did not have any significant temporary differences and carry forwards that may result in deferred tax. The Company has analyzed the tax positions taken or expected to be taken in its tax filing and has concluded it has no material liability related to uncertain tax positions or unrecognized tax benefits. The Company does not anticipate any significant increases or decreases to its liability for unrecognized tax benefits within the next 12 months.
NOTE 10
NON-MONETARY TRANSACTION
On August 1, 2009, we entered into a subscription and asset sale agreement with Hua Hui. Under the terms of the Agreement, we received from Hua Hui the commercial income rights to 10,000 square meters to a 17 story apartment building in the Huadun Changde International Hotels Apartment Complex located in the city of Changde, Hunan Province (Project). The Project is currently under development by Changde Hua Hui. In exchange, we agreed to issue to Hua Hui 2,774,392 shares of our common stock. As additional consideration, we transferred to Hua Hui all of our shares of the GlobStream Technology Inc., certain assets of both SNMTS and CFCD and certain assets of the Company.
15
According to ASC 845-10-S99, transfers of non-monetary assets to a company by its promoters or shareholders in exchange for stock prior to or at the time of the entitys initial public offering normally should be recorded at the transferors' historical cost basis determined under GAAP. In this transaction, Hua Hui became the controlling shareholder of the Company after it transferred the commercial income rights to the Company. Therefore, the accounting principles in ASC 845-10-S99 were followed and the Company recorded the rights at its historical cost basis, which was internally developed and had zero basis.
According to ASC 845-10-30, the accounting for non-monetary transactions should be based on the fair values of the assets (or services) involved, which is the same basis as that used in monetary transactions. Thus, the cost of a non-monetary asset acquired in exchange for another non-monetary asset is the fair value of the asset surrendered to obtain it, and a gain or loss shall be recognized on the exchange. The fair value of the asset received shall be used to measure the cost if it is more clearly evident than the fair value of the asset surrendered. Similarly, a non-monetary asset received in a nonreciprocal transfer shall be recorded at the fair value of the asset received. A transfer of a non-monetary asset to a stockholder or to another entity in a nonreciprocal transfer shall be recorded at the fair value of the asset transferred and a gain or loss shall be recognized on the disposition of the asset. We recorded the disposal of the subsidiaries and assets at fair value. As the result of the transaction with Hua Hui, we experienced a loss on disposal of the above mentioned assets of $1,345,688 in fiscal year 2009.
Note 11
COMMITMENTS AND CONTINGENCIES
Economic and Political Risks
The Company faces a number of risks and challenges not typically associated with companies in North America and Western Europe, since its assets exist solely in the PRC, and its revenues are derived from its operations therein. The PRC is a developing country with an early stage market economic system, overshadowed by the state. Its political and economic systems are very different from the more developed countries and are in a state of change. The PRC also faces many social, economic and political challenges that may produce major shocks and instabilities and even crises, in both its domestic arena and in its relationships with other countries, including the United States. Such shocks, instabilities and crises may in turn significantly and negatively affect the Company's performance.
Note 12
SUBSEQUENT EVENT
As of February 19, 2014, 12 units, or approximately 1,893 square meters were sold. The total sales price is approximately$707,935 (RMB4,354,797). The commercial income rights discussed above means we will receive the net proceeds from sale of the apartments. Net proceed means sales price net of project costs, selling expenses, and other expenses directly related to disposal of the apartments. Project costs are costs clearly associated with acquisition, development, and construction of a real estate project. As defined in ASC 970-605-20. In China, after a real estate project is substantially completed, a real estate development company must submit a project cost report to the local government for approval. A real estate development must book the project costs based on the amount approved by the local government. Because the Project has not been completed and the project costs has not been finalized and approved by the local government, we can not determine the net proceed amount as of the date of this report. Changde Hua Hui agrees to hold the proceeds from sale of the apartments, and deliver the net proceeds to us when the amount is fixed or determinable.
16