American Patents LLC v. Mediatek, Inc. et al

Western District of Texas, txwd-6:2018-cv-00339

Exhibit I - Lenovo's 2017-2018 Annual Report

Interested in this case?

Current View

Full Text

72 EXHIBIT I 72 Lenovo Group Limited | 2017/18 Annual Report Stock Code 992 Different is better 72 ABOUT LENOVO Lenovo (HKSE: 992) (ADR: LNVGY) is a US$45 billion Fortune 500 company with a vision to become the global leader in Intelligent Transformation through smart devices and infrastructure that create the best user experience. Lenovo manufactures one of the world's widest portfolio of connected products, including smartphones (Motorola), tablets, PCs (Thinkpad, Yoga, Lenovo Legion) and workstations as well as AR/VR devices and smart home/office solutions. Lenovo's next generation data center solutions (ThinkSystem, ThinkAgile) are creating the capacity and computing power for the connections that are changing business and society. Lenovo works to inspire the different in everyone and build a smarter future where everyone thrives. Follow us on LinkedIn, Facebook, Twitter, Instagram, Weibo, or visit us at http://www.lenovo.com. 72 Financial Highlights 4 Chairman & CEO Statement 8 Lenovo Management Team 12 Management's Discussion & Analysis 16 Corporate Governance Report 48 Audit Committee Report 102 Compensation Committee Report 110 Sustainability Overview 123 Directors' Report 138 Independent Auditor's Report 162 Consolidated Income Statement 167 Consolidated Statement of Comprehensive Income 168 Consolidated Balance Sheet 169 Consolidated Cash Flow Statement 171 Consolidated Statement of Changes in Equity 172 Notes to the Financial Statements 173 Five-Year Financial Summary 267 Corporate Information 268 72 Different protects better 72 ThinkPad X1 Carbon Tough build quality, industrial yet sexy design." Techaeris X1 Carbon, 6th Generation 72 2018 2017 Year-on-year For the year ended March 31 US$ million US$ million Change Group Results Revenue 45,350 43,035 5% Gross profit 6,272 6,106 3% Gross profit margin (%) 13.8 14.2 (0.4) pts Operating expenses (5,885) (5,434) 8% Expense-to-revenue ratio (%) 13.0 12.6 0.4 pts EBITDA1 1,325 1,581 (16)% Pre-tax income 153 490 (69)% Pre-tax income margin (%) 0.3 1.1 (0.8) pts (Loss)/profit attributable to equity holders of the Company (189) 535 N/A EPS – basic (US cents) (1.67) 4.86 N/A EPS – diluted (US cents) (1.67) 4.86 N/A Interim dividend per share (HK cents) 6.0 6.0 Nil Final dividend per share (HK cents) 2 20.5 20.5 Nil Total dividend per share (HK cents) 26.5 26.5 Nil Cash and Working Capital Bank deposits and cash and cash equivalents 1,932 2,951 (35)% Total borrowings (3,815) (3,037) 26% Net debt (1,883) (86) 2,106% Cash conversion cycle (days) (16) (10) (6) Notes: 1 Excluding "other income - net". 2 Subject to shareholders' approval at the forthcoming annual general meeting. 4 Lenovo Group Limited 2017/18 Annual Report 72 Revenue Analysis by Geography Revenue Analysis by Business Group for the year ended March 31 (US$ million) for the year ended March 31 (US$ million) 43,035 45,350 43,035 45,350 28% 25% 16% 16% 70% 71% 26% 28% 18% 16% 30% 31% 9% 10% 3% 3% 2017 2018 2017 2018 China AP EMEA AG PCSD MBG DCG Others EBITDA1 Profit/(loss) Attributable to for the year ended March 31 (US$ million) Equity Holders of the Company for the year ended March 31 (US$ million) 1,715 817 829 1,581 1,365 1,325 535 838 (128) (189) 2014 2015 2016 2017 2018 2014 2015 2016 2017 2018 Note: 1 Excluding "other income - net". 2017/18 Annual Report Lenovo Group Limited 5 72 Different travels better 72 The Miix 630 is a mobile user's dream." GottaBeMobile Lenovo Miix 630 Lenovo Miix 630 72 The tech sector continues to be highly competitive and trading conditions remain tough, but we have made progress across the year strategically, operationally and financially. We are confident that Lenovo's future will not only go forward, but also upward as we focus on doing our best every day for every one of customers around the world. Moto Z2 Play 8 72 In fiscal year 17/18, despite a highly competitive global environment, we continued in transforming Lenovo from a single PC hardware business into a multi-business company. Our vision was and is to become the global leader in intelligent transformation. A vision built on our view that Artificial Intelligence (AI) is fundamentally transforming the way we live, work and play. To fuel that vision we introduced our three- Lenovo YOGA 730 wave strategy at the start of FY16/17. The execution of this strategy has enabled us LEADERSHIP IN PCS AND TABLETS to create a sustainable leading position in In PCs and tablets, our first wave, we continue PCs and tablets; build the foundations to to maintain industry leading profitability as we grow a healthy and rounded data center drive a strategy of sustainable leadership. We business; reshape our mobile business for are focusing on where we know we can bring future success and launch multiple new smart innovation and difference to our customers as devices that go beyond our core product set. well as long term returns for shareholders. For As a company we will continue innovating example through high-growth segments such in PCs, smartphones and smart devices such as gaming and workstations – both of which as Smart Display and AR/VR as well as build passed the $1 billion revenue mark this past next generation Data Center solutions. year. Our YOGA products and heartland Think portfolio remain the industry benchmark – winning numerous awards and affording us the "Best Laptop Brand" for the second year running by Laptop Magazine. Equally our unrelenting focus on innovation continues to be applauded. Not least being recognised by the international standard in design, Reddot, with 14 awards overall – 13 for product design and the pinnacle "Best of the Best" award for ThinkPad X1 Tablet. Looking ahead, we see additional opportunities in two further high- growth segments – visuals and the thin-and- light category, as well as in upselling services. Furthermore we announced the joint venture with Fujitsu Client Computing Limited which creates a new opportunity to drive additional growth, scale and competitiveness in the PC market both in Japan and globally. Smart Display 2017/18 Annual Report Lenovo Group Limited 9 72 Chairman & CEO Statement BUILDING THE GROWTH ENGINES OF THE FUTURE In our second wave businesses we continue to make progress in line with our transformation goals. Our mobile business Moto Mods GamePad has faced challenges in what is a highly- competitive market. To address these we Our data center business has achieved have reshaped the business for growth and double-digit year-on-year revenue growth for are focused on strengthening our leading two consecutive quarters, and has improved position and profitability in Latin America; margin quarter-to-quarter for four quarters driving breakthrough in mature markets, consecutively. We have driven this momentum while maintaining healthy growth and by building dedicated data center sales and controlled investment in emerging markets. marketing capabilities; leading with new We have optimized the cost and expense Artificial Intelligence solutions, embracing structure, are refining the product lineup big data analytics and the growing Internet and are replicating the model we operate of Things (IoT); creating a new customer- in markets such as Brazil, where we are centric organizational structure; aggressively number two in the smartphone space, to reengaging our channel partners and global other markets around the world. In addition system integrators with new program and we have strengthened carrier relationships solutions; and by introducing our largest in the important US market where we also data center portfolio in history with our range the Moto Z broadly and continue new ThinkSystem and ThinkAgile brands. to own the value segment with the Moto We refined our Hyperscale business model, G that was cited as "the most important and now have design wins with six out of phone of 2017" by Android Central. More the top 10 global Hyperscale providers. We recently we have integrated our PC and have been recognized as one of the fastest smart devices group with our mobile business ramping hyper-converged company and to create a new Intelligent Devices Group expanded our software defined infrastructure (IDG). This new structure will allow us to portfolio through partnerships with Nutanix, better optimize shared platforms like global VMware, Microsoft and others. Lenovo is the supply chain and global service, as well as second largest OEM supplier to the Top500 accelerate the convergence of computing Supercomputers in the world and we remain and communications technologies to better on track to our goal of becoming the #1 connect our devices, users, applications and Supercomputing OEM by 2020. content. ThinkSystem SR860 10 Lenovo Group Limited 2017/18 Annual Report 72 INVESTING IN EMERGING TECHNOLOGIES IN SUMMARY In FY17/18 we brought many new products The tech sector continues to be highly to market. From the multi-award-winning Star competitive and trading conditions remain Wars Jedi Challenges AR headset, to a Smart tough, but we have made progress across the Display that takes the idea of smart assistant year strategically, operationally and financially. to the next level by adding a visual screen. We are confident that Lenovo's future will not We are partnering with some of the industry's only go forward, but also upward as we focus most exciting companies such as Google and on doing our best every day for every one of Disney to bring our ambitions to life. But our customers around the world. emerging technologies focus goes beyond AR/VR to look at wider "as a service" models Thank you. and big data platform opportunities. More broadly we continue to invest through our Lenovo Capital and Incubator Group (LCIG) into some of the most exciting technologies of tomorrow – with 85 companies invested in and eight independent spin offs. Yang Yuanqing Chairman and Chief Executive Officer ARTIFICIAL INTELLIGENCE DRIVING INTELLIGENT TRANSFORMATION We see a world of technology shaped by intelligence. While the potential for AI technologies across industries is still developing, Lenovo's core technologies in data center computing, PC, mobile and smart devices will make this change happen. As a business we are bringing intelligence to everything we do, from supply chain demand forecasting to customer service solutions that learn to answer the often repeated customer queries online. In the future these AI solutions will be packaged and expanded as we bring them to market for the benefit of industries such as healthcare and retail. Tiny P320 2017/18 Annual Report Lenovo Group Limited 11 72 Yang Yuanqing Gianfranco Lanci Chairman and Corporate President and Chief Executive Officer Chief Operating Officer Qiao Jian Yong Rui Senior Vice President and Senior Vice President and Chief Marketing Officer Chief Technology Officer 12 Lenovo Group Limited 2017/18 Annual Report 72 Gao Lan He Zhiqiang Senior Vice President, Senior Vice President and Human Resources President of Lenovo Capital and Incubator Group Kirk Skaugen Wong Wai Ming Laura Quatela Executive Vice President and Executive Vice President and Senior Vice President and President of the Data Center Chief Financial Officer Chief Legal Officer Group 2017/18 Annual Report Lenovo Group Limited 13 72 Not only do the Lenovo Smart Displays look more attractive, but they're also much better for privacy." Tom's Guide Lenovo Smart Display Smart Display 72 Different inspires better 72 During the fiscal year, the PC and Smart Device business returned to solid revenue growth after BUSINESS REVIEW two years of decline, and saw its profitability improved quarter-on-quarter in its latest three The Group introduced the 3-wave strategy consecutive quarters. The transformation of the at the beginning of fiscal year 2017/18 and second wave Data Center business continued after a year's strong execution, both its full to show strong results; revenue grew 44 percent year revenue and operational profit before year-on-year in fiscal quarter four, the strongest taxation returned back to growth, despite a revenue growth since System x acquisition and highly competitive environment. During the the second consecutive quarter of double-digit fiscal quarter four ended in March 31, 2018, year-on-year growth. In addition, the loss further the Group revenue continued to grow year- narrowed quarter-to-quarter for four consecutive on-year for three consecutive quarters led by quarters. While its Mobile business faced challenges continued strength in PCSD and Data Center in a highly competitive market during the year, the Groups. The first wave PC business continued Group has reshaped its strategy to significantly to deliver solid profitability and cash flow to reduce losses going forward by focusing on the Group, which provided a solid base to fuel profitable markets, continue strengthening in the growth needs of the second wave strategy Latin America and North America, and reducing in Data Center and Mobile businesses and expenses. The Group's Capital and Incubator Group investment needs for the third wave strategy in Device + Cloud strategy. Star Wars TM Jedi Challenges Revenue by Business Group (%) 3% 10% (3%) (9%) 71% (70%) 16% (18%) PCSD MBG DCG Others 16 Lenovo Group Limited 2017/18 Annual Report 72 As the world moves into the smart IoT era, Lenovo has successfully transformed from a single business focused on PC hardware into a multiple-device company with various smart devices available. Mirage Solo with Daydream continued to invest in AI (Artificial Intelligence), IoT For the fiscal year ended March 31, 2018, the (internet of things), big data, and VR/AR (virtual Group's gross profit was US$6,272 million, reality/augmented reality) to support its Device an increase of 3 percent year-on-year, while + Cloud strategy, through which these added gross margin decreased by 0.4 percentage capabilities will both develop new businesses and point year-on-year to 13.8 percent, mainly due strengthen existing ones. to increased component costs especially in memory. Operating expenses increased by 8 As the world moves into the smart IoT era, Lenovo percent year-on-year to US$5,885 million, and has successfully transformed from a single business the expense-to-revenue ratio was 13.0 percent, focused on PC hardware into a multiple-device worsened by 0.4 percentage point year-on-year. company with various smart devices available. However if the one-off items are excluded, the For one, the Group teamed up with Disney and expense- to-revenue ratio in the previous fiscal launched its first Augmented Reality device – "Star year would have been 13.6 percent versus the Wars: Jedi Challenge" – in fiscal quarter three and 12.9 percent this fiscal year, an improvement in was the clear number one AR headset vendor in operating efficiency as the Group further optimized the quarter. The Group will continue to invest in cost structure. The Group's profit before taxation the third wave of Device + Cloud and Infrastructure was US$153 million for the fiscal year under + Cloud strategy to capture next generation review. Excluding the severance expenses of opportunities offered by new technologies. US$101 million and disposal gain on Wuhan R&D Moreover, as Lenovo enhances customer centricity, property of US$61 million in the fiscal year, the there is greater emphasis on software and Group's operational profit before taxation was services the Group provides to enhance customer US$193 million, almost double the US$97 million experience. As a result the Group's software and a year ago. The new US tax legislation enacted services revenue showed strong year-on-year on December 22, 2017 effectively reduced the US growth and has exceeded a billion US dollar during corporate tax rate to 21% starting from January 1, the fiscal year under review. 2018. As a result, the Group recorded a one-time non-cash write-off charge of US$400 million on the For the fiscal year ended March 31, 2018, the deferred income tax assets, which resulted in a loss Group's consolidated revenue grew 5 percent attributable to equity holders of US$189 million year-on-year to US$45,350 million. Revenue of against a US$535 million profit recorded in the the Group's PC and Smart Device business was previous year. The Group's view is that the lowered US$32,379 million, representing a year-on-year tax rate in the US will benefit its operations there increase of 8 percent. Revenue of the Data Center over time. business increased 8 percent year-on-year to US$4,394 million. Revenue of the Mobile business decreased 6 percent year-on- year to US$7,241 million. Meanwhile, revenue of other goods and services was US$1,336 million. 2017/18 Annual Report Lenovo Group Limited 17 72 Management's Discussion & Analysis PERFORMANCE OF PRODUCT BUSINESS In driving towards a customer-centric business, GROUPS the PCSD group collaborated with the investment During the fiscal year ended March 31, 2018, companies under the LCIG (Lenovo Capital and Lenovo continued to balance between growth and Incubator Group) to make devices smarter and profitability in its PC and Smart Device business, provide convenience to customers. For example, and the transformation in Data Center started the group collaborated with an AR tracking to show positive momentum. While in Mobile technology provider under the LCIG investment business, Lenovo narrowed the loss during the year, portfolio in its AR headset. And in the Lenovo but more work needs to be done to significantly New Retail stores opened in China beginning of reduce the loss going forward. 2018, the group has partnered with several of its portfolio companies to provide over 400 different PC AND SMART DEVICE BUSINESS GROUP IoT smart products. The New Retail stores use (PCSD) AI technologies to provide retail efficiency and During the fiscal year under review, the PC market prompt service delivery which would guarantee continued to show signs of stabilization thanks customer satisfaction. to continued commercial refresh and stabilizing consumer demand. The Group continued its For the fiscal year ended March 31, 2018, revenue strategy to prioritize profitability and to drive of the Group's PCSD business was US$32,379 premium-to-market revenue growth in its PC million, representing approximately 71 percent business, which led to product mix improvements. of the Group's total revenue, an increase of 8 As a result of its strong execution, the Group percent year-on-year. Most notably, PCSD saw during the fiscal year returned to solid revenue its year-on-year revenue grow the most in fiscal growth of 8 percent year-on-year after two years quarter four, when it grew 16 percent. PCSD of decline. In addition, profitability improved revenue growth exceeded shipments growth driven quarter-on-quarter in the past three fiscal quarters by innovative products and better product mix. during the year and returned to 5 percent pre-tax The business group recorded a pre-tax profit of profit margin in fiscal quarter four despite US$1,459 million, down 2 percent year-on-year increases in component costs. In commercial PC, mainly due to the higher costs from the increased the Group continued to gain share in shipment component prices during the year. Pre-tax profit and revenue during the fiscal year, and accounted margin was 4.5 percent, down 0.5 percentage point for 60 percent of its PC unit mix versus 57 percent year-on-year. prior year, according to industry estimates. Within commercial, the Group continued to grab share in DATA CENTER BUSINESS GROUP (DCG) the Workstation segment, growing at 31 percent The Group's previous transformation investments in year-on-year in revenue. In consumer PC, the building sales capability, strengthening the channel Group continued to focus on premium segments, and product solution capabilities, started to bring in particular the Gaming PC saw around 91 percent strong positive momentum to the business during year-on-year growth in revenue during the fiscal the fiscal year under review, most notably in the year, with increased momentum in the Legion second half of the fiscal year. As a result of these gaming brand. The Gaming PC and Workstation efforts, the Group's full year revenue returned product categories each reached billion-dollar scale back to growth and losses narrowed year-on-year. in the fiscal year. The Group also had initial success Moreover, the losses improved quarter-on-quarter in its new Smart Device, the AR product "Star every quarter in the fiscal year. The revenue in Wars: Jedi Challenge", and grabbed the number second half of the fiscal year also reached the one AR headset vendor during fiscal quarter three highest level since the System x acquisition and after its release, according to industry estimates. saw 29 percent year-on-year growth. 18 Lenovo Group Limited 2017/18 Annual Report 72 YOGA 530 Within the segments, the Group during the fiscal Within the geographies, the Data Center Group year saw strong double-digit revenue growth in continued to see strong revenue year-on-year its Hyperscale business. The Hyperscale business growth in North America and EMEA (Europe, had undergone significant business transformation Middle-East and Africa) for four consecutive to improve in-house design and manufacturing quarters and profitability improvements. China capabilities, as well as improving the customer mix, also returned to growth with double-digit revenue as such the margin of this business has improved year-on-year growth in the second half of the fiscal significantly. The Hyperscale business now has year with profitability improvement. design wins with 6 out of the top 10 largest hyperscaler customers in the world. In its Software For the fiscal year ended March 31, 2018, revenue Defined Infrastructure segment, the Group saw of the Data Center business was US$4,394 million, its revenue grew triple-digit during the fiscal year increasing 8 percent year-on-year and representing as the Group's strategic partnership with leading approximately 10 percent of the Group's total hyperconverged software providers continued to revenue. The loss from the Data Center business thrive. The Group does not have the hindrance of further narrowed, more notably in the second half legacy infrastructure, making the Group the perfect of fiscal year, owing to the strong execution of the partner to lead in the transition to a software transformation strategy to lead in the transition defined infrastructure. While in High Performance to cloud enterprise solutions. Hence, the Group Computing (HPC) segment, the group solidified its recorded an operational loss before taxation number two position globally in the HPC Top 500 of US$305 million, excluding the non-cash M&A List and is fast closing the gap with the number related accounting charges during the year, which one player. The Group also won 5 HPC "Readers' was an improvement from the US$343 million loss Choice Award" at end of 2017 including best last fiscal year. HPC server and best HPC storage as a testimony of the Group's relentless pursuit of innovation, quality and reliability in its products. For one, the Group announced the ThinkSystem SD650 Direct Water Cooled Server, which helps control some of most powerful supercomputers in the world and exemplifies innovation leadership in HPC technology. 2017/18 Annual Report Lenovo Group Limited 19 72 Management's Discussion & Analysis MOBILE BUSINESS GROUP (MBG) LENOVO CAPITAL AND INCUBATOR GROUP The Group's Mobile business faced challenges in (LCIG) AND OTHERS some emerging markets, but continued to gain Lenovo Capital and Incubator Group's mission is share in its core market in Latin America, where to invest and build the Group's next-generation IT it grew 40 percent year-on-year in shipment, capabilities in AI, IoT, Big Data and VR/AR across while improved profitability during the fiscal year. various sectors such as manufacturing, healthcare Shipments in North America grew 57 percent and transportation. During the fiscal year, the year-on-year driven by initial success in mainstream Group's portfolio companies continued to support models with carrier expansion during the fiscal the core business to bring intelligence, contents year, though more work is needed to sharpen the and services to the devices. For example, the Group competitiveness in the high-end segment. partnered with one of the portfolio companies in AR tracking technology in its AR headset. Another In emerging markets, slower brand transition in is the Group's investment in facial recognition and EMEA emerging areas and the severe competition deep learning processor to help differentiate its in Asia Pacific emerging markets impacted the devices. Moreover, Lenovo continued to enhance overall shipments performance for the year under and differentiate its next-generation devices by review. Thus, the Group's worldwide smartphone partnering with leading best-in-class vendors, such shipments for the fiscal year declined by 7 percent as Google and Disney. As of the year-end under year-on-year. In China, the Group has already review, the Group has invested in 85 companies to significantly scaled back its operations there as help the Group build the next-generation smart the market there started to decline and remain solutions. crowded, but continued to refine its product and channel strategy to seek healthy growth there. The Group also made progress in its Software and Services business to enhance customer In light of the challenges in some emerging experience and provide total intelligent solution, markets, the Group has reshaped its strategy going which saw revenue grew double-digit year-on-year forward to significantly reduce losses by focusing and exceeded one billion US dollar mark during on profitable markets, simplifying business and the fiscal year under review. LCIG continued to reducing expenses going forward. gain traction as a big data solution provider, winning orders from key customers, and as an Mobile business revenue was US$7,241 million, IoT connectivity solution provider, winning new representing approximately 16 percent of the partners and customers. Group's total revenue, decreasing 6 percent year-on-year for the fiscal year ended March 31, 2018. Operational loss before taxation, excluding non-cash M&A related accounting charges, for the period under review was US$463 million, which was an improvement from the US$566 million loss previous fiscal year. 20 Lenovo Group Limited 2017/18 Annual Report 72 The Group established an AI Lab in March 2017, In Data Center business, the Group's transformation and quickly ramped up the staff to build AI actions, including investing in sales capabilities, ecosystem capabilities, and has since set up core strengthening the channel and product solution AI technologies in voice recognition, language capabilities to improve the product mix, showed understanding, machine learning, computer vision encouraging signs of improvement during the and data analytics. year under review. It resumed revenue growth year-on-year in both fiscal quarter three and four, Revenue from the LCIG, and other products such as well as improved profitability. The profitability as consumer electronic businesses from previous improvement was the result of better customer acquisitions was US$1,336 million, representing mix and more efficiency in in-house design and approximately 3 percent of the Group's total manufacturing. revenue. The smartphone market in China started to PERFORMANCE OF GEOGRAPHIES decline during the fiscal year, while competition Performance of each geography includes a remained intense. The Group has significantly combination of PCSD, DCG and MBG businesses. scaled back its smartphone operations in China The profitability figures of geographies disclosed in to be nimble, where it will use tactical strategy the following paragraphs have excluded the impact to address the market opportunities there. The of non-cash M&A related accounting charges for scale back has resulted in shipment and revenue the period under review. decline year-on-year, but the loss also narrowed significantly as a result. CHINA China accounted for 25 percent of the Group's total The PCSD business remained the profit pool revenue. In its PCSD business, the Group continued in China during the fiscal year, while the losses to improve the product mix and drive premium narrowed in DCG in the second half of fiscal year revenue growth to protect profitability, in light of and MBG's loss for the full year also narrowed. a declining China PC market during the year under As such, the Group recorded a pre-tax profit of review. The Group's innovative products including US$558 million and a pre-tax profit margin of 4.8 Millennial and Gaming PCs also helped to drive a percent, improved year-on-year. healthier consumer business. As such, the Group's PCSD revenue was flattish year-on-year against the shipment decline for the full year. The Group remained China's number one player with 36.5 percent market share in the fiscal year. 2017/18 Annual Report Lenovo Group Limited 21 72 Management's Discussion & Analysis AMERICAS (AG) The Group's Moto brand smartphones continued Americas accounted for 31 percent of the Group's to show strong growth in Latin America with 40 total revenue. In its PCSD business, the Group percent shipment growth during the fiscal year and focused on balancing between growth and enjoyed premium brand image during the period, profitability in which its revenue grew faster than which enabled the Group to protect the profitability its shipment volume in AG during the period, there. In North America, the Group successfully driven by improvement in the product mix to expanded its carrier channel to all four major U.S. protect profitability. The Group's AG PC shipment telco partners since fiscal quarter two, and as such decreased by 6 percent year-on-year mainly due saw strong shipment growth during the fiscal year. to a decline in North America as it focused on Its mainstream products such as Moto G and Moto protecting profitability. As a result, North America E delivered strong volume across the region. As PCSD profitability improved in the second half a result, the Group's smartphone shipments grew of fiscal year. And in Latin America, the Group 57 percent year on-year, far outpaced the market continued to see strength with a record market growth in North America. Nevertheless, more work share of 17.4 percent. needs to be done in the breakthrough of high-end smartphone segment in the U.S., which dragged The Group's Data Center business continued the profit performance in the region during the to show positive momentum as a result of period under review. its transformation actions. Its revenue grew by double-digit and profitability improved The Group recorded a profit before taxation of year-on-year during the fiscal year under review. US$72 million in the region and its pre-tax profit Notably, North America DCG saw revenue margin was 0.5 percent in the fiscal year under year-on-year growth for four consecutive quarters. review, against 1.2 percent in the previous fiscal The Group continued to see strength across year, mainly due to the slower progress in its different segments including the Hyperscale, breakthrough in mid to high-end smartphone Software Defined, and High Performance market. Computing segments. 22 Lenovo Group Limited 2017/18 Annual Report 72 ASIA PACIFIC (AP) EUROPE-MIDDLE EAST-AFRICA (EMEA) Asia Pacific accounted for 16 percent of the EMEA accounted for 28 percent of the Group's Group's total revenue. In its PCSD business, the total revenue. During the fiscal year under review, Group gained 1.4 percentage points of shipment the Group saw its PC business in EMEA gaining market share in PCs in Asia Pacific to 17.2 percent positive momentum with margin expansion owing during the fiscal year according to industry to its continued solid performance in Western estimates, driven by targeting high growth areas. Europe. Its PC unit shipments grew 4 percent year-on-year, and reached a record market share of The Group's transformation of its Data Center 21.2 percent. business started to bring revenue growth back in the second half of fiscal year on year-on-year basis, The Group's Data Center business saw growth owing to its previous investments in enhancing return in the region with strong revenue growth capabilities in sales, channel, and product solutions. and profitability improvement during the fiscal year. The Group had initial success in Hyperscale The Group's smartphone business in the region and won the largest Supercomputer project in faced fierce competition during the fiscal year, Europe in Germany and further expanded its High hence the Group readjusted its strategy to focus Performance Computer business footprint to on margin protection. As such, the Group saw several other mature countries in the region. smartphone shipments decline and share loss in the fiscal year. In its smartphone business, the Group adjusted its strategy to focus on the mature markets of EMEA Loss before taxation was US$134 million and in order to focus on profit protection, as such the pre-tax profit margin was negative 1.9 percent smartphone shipment in the region saw a decline during the fiscal year, a decrease from negative 0.9 during the fiscal year under review. percent of previous fiscal year, mainly due to the readjustment of smartphone strategy in the region. The Group incurred US$62 million loss before taxation in EMEA during the fiscal year under review, leading to a pre-tax profit margin of negative 0.5 percent, improved from negative 3.0 percent of previous fiscal year thanks to the improvement from PCSD and Data Center businesses. 2017/18 Annual Report Lenovo Group Limited 23 72 Management's Discussion & Analysis MATERIAL RISKS OF THE GROUP The following are key risks that the Group considers to be of great significance to the Group as it stands today. They have the potential to affect the Group's business adversely and materially. For each risk there is a description of the possible impact of the risk on the Group should it occur, and the mitigation plan to manage the risk. The Group also faces risk and uncertainties in common with other businesses. These have not been set out as key risks below. This list is likely to change over time as different risks take on larger or smaller significance. The size, complexity and spread of the business and the continually changing environment in which the Group operates also mean that the list cannot be an exhaustive list of all significant risks that could affect the Group. Risk Description Key Risk Mitigations Business Risk The Group operates in a highly competitive Continual reviews of competition and market industry which faces rapid changes in market trends. trends, consumer preferences and constantly evolving technological advances in hardware Maintain a competitive position through performance, software features and functionality. commitments to innovate and build a broad It faces aggressive product and price competition product portfolio and grow brand name to from new entrants and existing competitors. differentiate the Group and gain market share and recognition. Execution of clear strategy to protect The industry continues to experience and drive profitability in the core PC business, while consolidation. Failure to respond effectively to continuing to attack the faster growing Mobile and changes in market trends or consumer preferences Data Center businesses. through timely launches of new products, or through competitive prices against the backdrop of global slowdown in the traditional PC market could harm its competitive position. 24 Lenovo Group Limited 2017/18 Annual Report 72 Risk Description Key Risk Mitigations The Group operates globally and as such its The Group has diversified its geographic sources of results could be impacted by global and regional revenue and profit to reduce its dependency on any changes in macro-economic, geopolitical and single country or region. social conditions and regulatory environments. It vigilantly tracks and monitors the developments Adverse economic conditions may result in of the political conditions and legal and regulatory postponements or decreased spending amid changes, and maintains compliance programs. concern over weak economic conditions. In addition, they may contribute to potential supply chain volatility, causing potential product shortages. Increase uncertainty driven by growing concerns over political conditions and changes in regulatory or legal regulations in one or several countries may increase the cost of operations and expose the Group to potential liability. The Group offers products that are complex. The Group adopts a proactive quality management Failure to maintain an effective quality approach, which includes identifying risks management system, including at the Group's throughout all aspects of the business. The Group development and manufacturing facilities and its has a robust internal Quality Management System, supply chain, could have a material adverse effect (QMS) integrated within its business management on its business and operations, brand image and system. The Group is ISO 9001 certified by Bureau customers' loyalty. Veritas (BVC) and in China by the Electronics Standardization Institute, (CESI). It is committed Addressing quality issues can be expensive to maintaining a QMS to ensure it meets customer, and may result in additional warranty, repair, social, legal and environmental responsibilities. replacement and other costs and adversely affecting the Group's financial results. 2017/18 Annual Report Lenovo Group Limited 25 72 Management's Discussion & Analysis Risk Description Key Risk Mitigations Merger & Acquisition Risk As part of the Group's expansion plan, we acquire Drive a rigorous due diligence and financial companies or businesses, enter into strategic forecasting process to ensure assets are alliances and joint ventures and make investments. appropriately valued. The Group faces risk such as economy, political and regulatory uncertainty, market volatility, and other challenges associated with our acquisitions. Our due diligence process may fail to identify significant issues, resulting in an overly optimistic valuation forecasts. We may not fully realise all of the anticipated synergies/benefits, and may result in significant cost and expenses and charges to earnings. The acquisitions affects our liquidity and financial On liquidity and financial implications, see "Financial condition. We may borrow to finance the Risk" on Page 28 for mitigation plan. acquisitions. The debt financings could involve restrictive covenants that could limit the Group's capital-raising activities and operating flexibility. 26 Lenovo Group Limited 2017/18 Annual Report 72 Risk Description Key Risk Mitigations Cyber Attack and Security Risk The Group could be impacted negatively if it The Group will continue to invest in the following: sustains cyber-attacks and other data security breaches that disrupt its operations or damage its a) Continue to develop and maintain a robust reputation. cyber security culture by developing sound policies and processes and by training our The Group manages and stores various proprietary employees to follow vital data protection information and sensitive or confidential data practices relating to its operations. In addition, the Group's cloud computing business routinely processes, b) Enhanced cyber security controls and stores and transmits large amounts of data for information security, product security and its customers, including sensitive and personally privacy awareness. identifiable information. The Group may be subject to attack from hackers and other malicious c) Compliance with mandatory privacy and software programs that attempt to penetrate its security standards and protocols imposed networks and exploit any security vulnerability in by law, regulation, industry standards, or its system and products. contractual obligations. Hardware, operating system software, product d) Policies and processes to ensure hardware, software and applications that the Group operating system software, product software produces or procures from third parties may and applications that the Group produces contain "bugs" that could unexpectedly interfere or procures from third parties protects and with the operation of the system or may present responsibly uses customer data. unidentified security risk. Breaches of the Group's security measures and misappropriation of proprietary information, sensitive or confidential data about the Group and its customers could lead the Group to loss of reputation, disruption in business operations, exposure to potential litigation and liability and result in a loss of revenue and increased cost. The Group is subject to law and regulation in countries where it operates relating to the collection, use, and security of customer, consumer and employee data. The Group needs to conduct normal business activities which includes the collection, use and retention of personal data pursuant to these activities. The Group is required to notify individuals or regulators of a data security breach. 2017/18 Annual Report Lenovo Group Limited 27 72 Management's Discussion & Analysis Risk Description Key Risk Mitigations Financial Risk As the Group operates globally, significant or The Group Treasury department has put in place a prolonged economic instability or financial market financial risk management programme that focuses deterioration may materially and adversely impact on the unpredictability of financial markets and the Group's financial condition. seeks to minimize the potential adverse impact on the Group's financial performance. The Group is exposed to a variety of financial risks, such as foreign currency risk, cash flow risk, credit For more analysis, see "Notes to The Financial risk and liquidity risks. Statements" (pages 197 to 205) Due to the international nature of our business and The Group Tax department carefully monitors continuous changes in local and international tax developments in our business and in the global rules and regulations, the application of such rules tax environment in order to make sure rules and and regulations to our operations and transactions regulations are applied appropriately and risks are involves inherent uncertainty and may affect mitigated where possible. our tax position and the value of tax assets and liabilities carried in the balance sheet. Intellectual property (IP) risk The Group could suffer if it does not develop Take appropriate legal measures to protect know- and protect its own intellectual property or its how and trade secrets, apply for and enforce suppliers are not able to develop or protect patents, and register and protect trademarks and desirable technology or technology licenses. copyrights. The risks include: License IP as appropriate, and monitor its continued validity and value to the Group. • higher business costs as a result of increased licensing demands from patent holders; Obtain IP indemnification from, or otherwise transfer responsibility for IP coverage to suppliers. • loss or diminished value of intellectual property as an asset, as a result of legal Monitor, develop and execute IP litigation and findings of unenforceability and challenges to settlement strategy. title or ownership; Use Lenovo patent portfolio as appropriate to • higher legal costs to defend against claims decrease potential IP exposure. of intellectual property infringement and potential settlements or damages; • product design-around costs and negative impacts to customer or supplier relationships; • Risk of interruption of Lenovo's ability to ship products due to injunctions or exclusion orders in particular countries resulting from adverse judgments in IP infringement cases filed against Lenovo. 28 Lenovo Group Limited 2017/18 Annual Report 72 Risk Description Key Risk Mitigations Supply Risk The Group's supply chain operations could be Utilise cost and operational analysis to understand disrupted by: potential impacts. Ensure broad supplier sourcing (i.e. avoidance of sole/single sources), • Catastrophic events financial/business stability tracking and disaster recovery planning to minimize impact of regional • Unfavorable changes in business, political or catastrophes and ensure adaptation plans in place. economic factors. To focus on the Group's ongoing efforts to optimise The occurrence of any of the above in our own or the efficiency of its supply chain. our suppliers' manufacturing activities and logistic hubs could result in significant losses and harm our revenue, profitability and adversely affect our competitive position, and require substantial expenditures and recovery time in order to fully resume operations. The Group could suffer if it is not able to ensure supply of products, component parts, systems and services during period of shortage and to negotiate for favorable pricing. The shortage and increase in price could harm the business by adversely affecting product availability and profitability. 2017/18 Annual Report Lenovo Group Limited 29 72 Management's Discussion & Analysis Risk Description Key Risk Mitigations Human Capital Risk The Group faces intense competition for skilled Focus human capital initiatives and strategic and experience workers due to fast-changing workforce planning in the areas of talent acquisition, market dynamics and an increasingly diversified development, rewards, and retention to address business landscape. For ongoing success, the challenges proactively and support the business Group must continue to attract, retain and transformation in an environment of intense motivate key talent across the enterprise, and competition. ensure smooth transitions throughout the ongoing business transformation. Drive continuous improvements in competitive reward strategies and evolve compensation and The uncertainty created by changes in immigration benefits programs into a more differentiated policies will affect the Group's talent mobility and model to support an increasingly diverse business international talent acquisition strategy. landscape and employee population. Further invest in employee and leadership development programs to build employee engagement, accelerate the internal movement of top talent, and ensure strength of the leadership pipeline. Proactively review the implications of immigration laws change and carry out contingency planning to mitigate potential impacts. Once new laws and regulatory changes are implemented, we focus to prioritise these changes to align with the Group's workforce strategy. 30 Lenovo Group Limited 2017/18 Annual Report 72 ENVIRONMENT Responsible environmental stewardship is a fundamental Lenovo value. A core element of Lenovo's commitment to good environmental stewardship is complying with all applicable laws and regulations wherever we do business. Compliance is central to Lenovo's Environmental Affairs Policy, which applies to all global operations, employees and contractors performing work on behalf of Lenovo. This policy forms the foundation for Lenovo's ISO 14001-certified Environmental Management System (EMS), which includes processes for evaluating legal and voluntary requirements and ensuring compliance across Lenovo's global development and manufacturing operations for personal computers, workstations, servers, storage, mobile device hardware, and smart devices including monitors and accessories. Compliance is driven by the Global Environmental Affairs (GEA) organization and supported by a global network of Lenovo Environmental Affairs Focal Points (EAFPs), Environmentally Conscious Products Focal Points (ECPs), and external partners. Reliable, established processes with defined roles ensure that Lenovo continues to remain in compliance. The process for ensuring environmental compliance for Lenovo products and locations is shown below. Process for Establishing, Monitoring & Maintaining Compliance Product Inputs GEA and network GEA updates global Organizations integrate Inputs Regional, country, of Geo Focal specifications & requirements into product Information on changes & BU focal points Points monitor communicates identified specs, new product to activities, products monitor their areas of emerging issues requirements to impacted designs & BU operational & requirements from responsibility & provide organizations requirements Environmental FP input to GEA Inputs Standards, specs, & Industry/trade procedures reviewed seminars & and updated as required publications, by change &/or annually regulatory tracking at a minimum services, etc. Inputs Location FP updates documents Organizations integrate FPs communicate Contracted Environmental & communicates requirements into changes and provide consultancies FP monitors identified requirements operational procedures. training where needed emerging issues to impacted FP assures permitting organizations requirements met. Location 2017/18 Annual Report Lenovo Group Limited 31 72 Management's Discussion & Analysis Lenovo advances its commitment to compliance through internal and external audits of its own facilities and those of its suppliers. The environmental and health and safety management systems at both its manufacturing and development sites are subjected to internal audits. All in-house manufacturing sites are audited internally to ISO 14001 and OHSAS 18001 standards annually, and audited externally at least once every three years. Lenovo's Robust EMS Ensures Environmental Compliance FY2017/18 FY2016/17 FY2015/16 FY2014/15 FY2013/14 Total monetary value of significant environmental fines 0 0 0 0 0 Number of environmental fines paid 0 0 0 0 0 Total number of non-monetary environmental performance- related sanctions 0 0 0 0 0 Climate, environmental and sustainability risks are included in Lenovo's official Enterprise Risk Management (ERM) process. The ERM evaluation template includes environmental, social, governance and other risk categories. Annually, each business unit is required to identify risks, assess their impacts on Lenovo's strategy execution and develop risk mitigation plans. In addition, Lenovo conducts a Significant Environmental Aspect evaluation at least annually as part of Lenovo's ISO 14001 EMS. This process evaluates Lenovo's significant or material environmental aspects and includes a consideration of risks and opportunities. Under the EMS, once the significant environmental aspects are identified, objectives and targets are established along with KPIs addressing key impacts in the areas of site operations, product and global supply chain. Progress on objectives and targets is monitored and measured. Results regarding Lenovo's FY 2017/18 objectives and targets, as well as other facets of its environmental performance, will be published in the 2017/18 Sustainability Report. 32 Lenovo Group Limited 2017/18 Annual Report 72 STAKEHOLDERS Lenovo actively manages its relationships with customers, employees, suppliers, investors, regulators, members of the communities in which it operates, and other stakeholders whose actions can affect the Company's performance and value. Key mechanisms for engaging with stakeholders include: • Customer focus groups, surveys and direct customer interaction • Employee surveys and Lenovo-organized community service events • Supplier audits, conferences and quarterly business reviews • Phone conferences and meetings with industry trade groups on regulatory issues • Ongoing interactions with local communities • Responding to investor, analyst and non-governmental organization (NGO) surveys and inquiries In addition to these and other formal stakeholder interactions, Lenovo engages with individual stakeholder groups on an ad-hoc basis as needed. More information about Lenovo's sustainability programs can be found in the Sustainability Overview on pages 123 to 136 of this Annual Report. TALENT AND CULTURE We Are Lenovo The "We Are Lenovo" cultural principles of Customer Focus, Teamwork and Trust, Entrepreneurship, and Innovation are the heart of Lenovo's talent management practices. "...As we aim higher, ownership and entrepreneurship within the context of One Company are now much needed – in fact, more than ever." – Yuanqing Yang Employee Performance and Compensation Lenovo continues to leverage its performance management and compensation programs to reinforce a strong commitment and customer culture. This approach includes annual goal setting and review, calibration of individual ratings across organizations to ensure a fair assessment, and recognition of individual and team performance. The integration of customer experience metrics into the individual goal setting process and the annual incentive programs helps accelerate the transformation of Lenovo from a product to a customer centric organization. "Our transformation from product centricity to customer centricity has become relevant to every team, every individual, through clear objectives and measurements." – Yuanqing Yang A refresh of the Lenovo Compensation Philosophy in 2017/18 retained the focus on pay for performance and added more flexibility in the design of business specific programs within a consistent One Lenovo Compensation framework. This ensures that top contributors are paid competitively in light of their contributions and relevant market practices. 2017/18 Annual Report Lenovo Group Limited 33 72 Management's Discussion & Analysis Talent Management and Succession Planning Lenovo's 2017-18 annual Organizational and Human Resource Planning (OHRP) process further reflected the Company's transformation from a product centric to customer centric organization. The focus on attracting and promoting top talent to accelerate advances in key technologies and serve new customer segments was seen across all business lines. A significant increase in AI talent was noted for Lenovo Research, as well as within product development groups across the business. Top external female senior leadership new hires within DCG were noted as key wins. "We should all feel excited about the once-in-life-time opportunities that Lenovo has, in this AI age." – Yuanqing Yang Talent Acquisition Lenovo's long-term talent acquisition strategy remains steadily focused on building the employer brand and investing in the attraction of next generation talent for future growth. Training and Development At Lenovo our commitment to developing employees begins with New Employee Orientation and continues throughout their career with the Company. Every employee is responsible for creating and maintaining an Individual Development Plan (IDP), which includes an assessment of strengths and skill gaps, and actions needed for future development and career growth. We have enhanced our management and leadership development program to provide support for managers during their leadership progression at Lenovo by offering specific training experiences at key points in their careers. Instructor-led professional development courses and forums are made available throughout the year, in addition to rich online learning resources provided on demand via our global learning management system. Besides formal training, Lenovo's 70-20-10 approach to employee development recognizes that employees learn through three distinct types of experiences: on-the-job training and assignments (70%), developmental coaching and mentoring relationships (20%), and coursework and training (10%). Lenovo also places a high priority on executive development, bringing senior leaders together once a year to share best practices, learn from external experts and drive strategic alignment across the enterprise through Global Leadership Meeting (GLT) and Lenovo Executive Accelerator Program (LEAP). BRAND BUILDING Lenovo continued to build its brand presence globally, once again being listed among Interbrand's 100 best global brands. The brand statement 'Different is better' resonates with audiences globally and is helping to establish Lenovo's unique point of view. For us 'Different is better' means that we provide distinctive technology through a global business model that is differentiated in the market by its scale and diversity. Our innovations are sought by customers who share our mindset: by consumers who want to stand out from the crowd, by businesses that are driving disruption, and by pioneers in every discipline who are seeking to tackle the world's biggest problems. We also are approaching culture with a different point of view. Campaigns like Motorola's tech/life balance campaign, which questions how users can bring control back to their smartphone relationships, helped to drive relevant conversations among consumers. Lenovo ranked in NetBase' Top 100 brand love list for its enthusiastic social community, who actively engaged online in campaigns like the retro ThinkPad launch that solidify the strong connections that consumers have to Lenovo's products. The 'Different is better' mindset is shaping our approach to every touchpoint – from service and support to talent recruitment. The brand ethos is driving us to define our advantages for employees and customers and to continue proving why Lenovo is the different and better choice. 34 Lenovo Group Limited 2017/18 Annual Report 72 FINANCIAL HIGHLIGHT RESULTS 2018 2017 For the year ended March 31 US$'000 US$'000 Revenue 45,349,943 43,034,731 Gross profit 6,272,131 6,105,516 Gross profit margin 13.8% 14.2% Operating expenses (5,885,408) (5,433,168) Operating profit 386,723 672,348 Other non-operating expenses – net (233,521) (182,421) Profit before taxation 153,202 489,927 (Loss)/profit for the year (126,775) 530,441 (Loss)/profit attributable to equity holders of the Company (189,323) 535,084 (Loss)/earnings per share attributable to equity holders of the Company (US cents) – Basic (1.67) 4.86 – Diluted (1.67) 4.86 EBITDA* 1,324,723 1,581,086 Profit before taxation excluding restructuring charges and disposal gains on properties ("Operational performance") 192,502 96,135 Dividend per ordinary share (HK cents) – Interim dividend 6.0 6.0 – Proposed final dividend 20.5 20.5 * Excluding "other income – net" 2017/18 Annual Report Lenovo Group Limited 35 72 Management's Discussion & Analysis For the year ended March 31, 2018, the Group achieved total sales of approximately US$45,350 million. Loss attributable to equity holders for the year was approximately US$189 million, as compared with profit attributable to equity holders of US$535 million reported last year. This is mainly attributable to the write off of deferred income tax assets of US$400 million, pursuant to the Tax Cuts and Jobs Act enacted by the government of United States ("US") on December 22, 2017, with the US corporate tax rate reduced for tax years beginning after December 31, 2017. Gross profit margin for the year was 0.4 points down from 14.2 percent reported last year. Basic and diluted loss per share were US1.67 cents, as compared with basic and diluted earnings per share of US4.86 cents reported last year. The Group adopts geographical segments as the reporting format. Geographical segments comprise China, AP, EMEA and AG. Analyses of sales by segment are set out in Business Review section. 2018 2017 Revenue Adjusted Revenue Adjusted from external pre-tax from external pre-tax For the year ended customers income/(loss) customers income/(loss) March 31 US$'000 US$'000 US$'000 US$'000 China 11,525,321 557,641 11,794,773 539,137 AP 7,156,293 (133,664) 7,011,595 (65,155) EMEA 12,481,897 (62,383) 11,187,313 (336,666) AG 14,186,432 71,746 13,041,050 157,452 45,349,943 433,340 43,034,731 294,768 Operating expenses analyzed by function for the years ended March 31, 2018 and 2017 are as follows: 2018 2017 For the year ended March 31 US$'000 US$'000 Other income – net 301 10,891 Selling and distribution expenses (2,833,253) (2,680,631) Administrative expenses (1,757,319) (1,851,990) Research and development expenses (1,273,729) (1,361,691) Other operating (expenses)/income – net (21,408) 450,253 (5,885,408) (5,433,168) 36 Lenovo Group Limited 2017/18 Annual Report 72 Operating expenses for the year increased by 8 percent as compared with last year. During the year, the Group recorded gain of US$61 million on monetizing the Wuhan R&D property, while in last year, the Group recorded gain of US$553 million on monetizing certain non-core assets and disposal of a joint venture. The Group announced resource actions and incurred severance costs of US$101 million (2017: US$146 million) to further enhance efficiency and competitiveness in view of industrial challenges. The Group has also reduced the advertising and promotional expenses by US$47 million compared with last year. Other income in last year mainly represented net gain on disposal of an available-for-sale financial asset of US$12 million. The Group recorded a net exchange loss of US$56 million (2017: US$111 million) for the year. Key expenses by nature comprise: 2018 2017 For the year ended March 31 US$'000 US$'000 Depreciation of property, plant and equipment and amortization of prepaid lease payments (148,177) (155,583) Amortization of intangible assets (443,809) (432,996) Employee benefit costs, including (3,222,012) (3,173,774) – long-term incentive awards (199,779) (180,892) – severance and related costs (100,775) (146,368) Rental expenses under operating leases (131,858) (123,936) Net foreign exchange loss (55,735) (110,968) Advertising and promotional expenses (842,365) (888,883) Impairment of property, plant and equipment (4,608) (7,303) Gain on disposal of property, plant and equipment, prepaid lease payments and construction-in-progress 50,937 336,172 Gain on disposal of a joint venture – 218,366 Dilution gain of interests in associates and a joint venture 2,499 14,260 Others (1,090,280) (1,108,523) (5,885,408) (5,433,168) 2017/18 Annual Report Lenovo Group Limited 37 72 Management's Discussion & Analysis Other non-operating expenses (net) for the years ended March 31, 2018 and 2017 comprise: 2018 2017 For the year ended March 31 US$'000 US$'000 Finance income 32,145 27,795 Finance costs (263,160) (231,627) Share of (losses)/profits of associates and joint ventures (2,506) 21,411 (233,521) (182,421) Finance income mainly represents interest on bank deposits. Finance costs for the year increased by 14 percent as compared with last year. This is mainly attributable to the interest expense of US$20 million in relation to the 5-Year US$500 million notes, issued in March 2017, bearing annual interest at 3.875%, and the increase in factoring cost of US$43 million, partly offset by the decrease in interest on promissory note issued to Google Inc. of US$41 million. Share of (losses)/profits of associates and joint ventures represents operating (losses)/profits arising from principal business activities of respective associates and joint ventures. FINANCIAL POSITION The Group's major balance sheet items are set out below: 2018 2017 Non-current assets US$'000 US$'000 Property, plant and equipment 1,304,751 1,236,250 Prepaid lease payments 507,628 473,090 Construction-in-progress 382,845 413,160 Intangible assets 8,514,504 8,349,145 Interests in associates and joint ventures 35,666 32,567 Deferred income tax assets 1,530,623 1,435,256 Available-for-sale financial assets 373,077 255,898 Other non-current assets 181,759 122,221 12,830,853 12,317,587 38 Lenovo Group Limited 2017/18 Annual Report 72 Property, plant and equipment Property, plant and equipment comprise mainly the Group's freehold land and buildings, leasehold improvements, plant and machinery and office equipment. Increase of 6 percent is mainly attributable to the Group's further investments in headquarters in China, plant and machinery and office equipment, partly offset by current year depreciation. Prepaid lease payments Prepaid lease payments represent the land use rights in respect of the manufacturing sites and headquarters in China. Increase of 7 percent is mainly due to the land use right acquired for the new headquarters in China. Construction-in-progress Construction-in-progress comprises mainly the Group's investments in headquarters in China, internal use software and research and development laboratories. Intangible assets Intangible assets comprise goodwill and other intangible assets including trademarks and trade names, customer relationships, patent and technology and internal use software. Interests in associates and joint ventures Interests in associates and joint ventures increased by 10 percent, which is mainly brought by additional investments during the year. Deferred income tax assets Deferred income tax assets amounted to US$1,531 million as at current year end, representing an increase of 7 percent over last year, which is mainly attributable to tax losses and temporary differences in relation to provisions and accruals arising in the normal course of business. Pursuant to the Tax Cuts and Jobs Act enacted by the government of the US on December 22, 2017, the US corporate tax rate is reduced for tax years beginning after December 31, 2017. The rate change leads to a write-off of US deferred income tax assets of approximately US$400 million for the year. Available-for-sale financial assets Available-for-sale financial assets increased by 46 percent, which is mainly attributable to additional investments during the year and exchange adjustment. Other non-current assets Other non-current assets amounted to US$182 million as at current year end, representing an increase of 49 percent over last year, which is mainly attributable to the increase of indirect tax recoverable and other construction. 2018 2017 Current assets US$'000 US$'000 Inventories 3,791,691 2,794,035 Trade receivables 4,972,722 4,468,392 Notes receivable 11,154 68,333 Derivative financial assets 24,890 53,808 Deposits, prepayments and other receivables 4,703,335 4,333,351 Income tax recoverable 227,203 199,149 Bank deposits 84,306 196,720 Cash and cash equivalents 1,848,017 2,754,599 15,663,318 14,868,387 2017/18 Annual Report Lenovo Group Limited 39 72 Management's Discussion & Analysis Inventories Inventories increased by 36 percent which is in line with the Group's business growth and more purchases in contemplation of the plan to mitigate the risks of cost increases and supply constraints of key components. Trade receivables and Notes receivable Trade receivables and notes receivable increased by 11 percent, which is in line with increase in business activities during the fourth quarter of current year. Derivative financial assets/liabilities Derivatives relate to foreign currency forward contracts that are designated as hedges for the fair value of recognized assets or liabilities or a firm commitment, or of highly probable forecast transactions. Derivatives are initially recognized at fair value on the date a derivative contract is entered into and are subsequently re-measured at their fair values. Deposits, prepayments and other receivables Majority of other receivables of the Group are amounts due from subcontractors for component parts sold in the ordinary course of business. Increase is in line with the increase in business activities and attributable to receivable arising from disposal of a subsidiary holding the Wuhan property. Total equity Total equity amounted to US$4,546 million as at current year end. The increase in total equity is mainly due to the issuance of ordinary shares of US$496 million and perpetual securities of US$150 million, and share-based compensation during the year, mainly offset by dividend paid. 2018 2017 Non-current liabilities US$'000 US$'000 Borrowings 2,648,725 2,966,692 Warranty provision 278,908 280,421 Deferred revenue 583,405 537,428 Retirement benefit obligations 413,482 370,207 Deferred income tax liabilities 230,609 221,601 Other non-current liabilities 333,332 380,557 4,488,461 4,756,906 Borrowings Borrowings (classified as non-current) decreased by US$318 million mainly attributable to the repayment of bank loans during the year. Warranty provision The Group records warranty liabilities at the time of sale for the estimated costs that will be incurred under its basic limited warranty. The specific warranty terms and conditions vary depending upon the product and the country in which it was sold, but generally includes technical support, repair parts and labour associated with warranty repair and service actions. The period ranges from one to three years. The Group revaluates its estimates on a quarterly basis to assess the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary. 40 Lenovo Group Limited 2017/18 Annual Report 72 Retirement benefit obligations The Group operates various pension schemes. The schemes are generally funded through payments to insurance companies or trustee-administered funds, determined by periodic actuarial calculations. The Group has both defined benefit and defined contribution plans. Deferred income tax liabilities Deferred income tax liabilities comprise withholding tax on undistributed earnings, tax liabilities on upward valuation of intangibles arising from business combination and accelerated tax depreciation. Other non-current liabilities Other non-current liabilities mainly comprise government incentives and grants received in advance and deferred rent for offices. The decrease of 12 percent is mainly due to the recognition of government incentives and grants as income upon fulfilment of certain conditions. 2018 2017 Current liabilities US$'000 US$'000 Trade payables 6,450,792 5,649,925 Notes payable 801,974 835,613 Derivative financial liabilities 62,694 67,285 Other payables and accruals 9,217,764 10,004,614 Provisions 858,475 873,405 Deferred revenue 732,552 586,536 Income tax payable 168,779 246,465 Borrowings 1,166,692 70,003 19,459,722 18,333,846 Trade payables and Notes payable Trade payables and notes payable increased by 12 percent, which is in line with more purchases activities during the fourth quarter of current year. Other payables and accruals Other payables and accruals comprise the allowance for billing adjustments relating primarily to allowance for future volume discounts, price protection, rebates, and customer sales returns. Majority of other payables are obligations to pay for finished goods that have been acquired in the ordinary course of business from subcontractors. The balances decreased mainly driven by the settlement of remaining deferred consideration payable to Google Inc. settled during the year. Provisions Provisions comprise warranty liabilities (due within one year), environmental restorations and restructuring provision. The decrease of 2 percent over last year is due to settlement of severance costs and partly offset by the US$101 million severance provisions during the year. Borrowings Borrowings (classified as current) amounted to US$1,166 million as at current year end. The increment in balance is mainly attributable to drawn down of short term loans during the year. 2017/18 Annual Report Lenovo Group Limited 41 72 Management's Discussion & Analysis CAPITAL EXPENDITURE The Group incurred capital expenditure of US$671 million (2017: US$803 million) during the year ended March 31, 2018, mainly for the acquisition of property, plant and equipment, prepaid lease payments, additions in construction-in-progress and intangible assets. LIQUIDITY AND FINANCIAL RESOURCES At March 31, 2018, total assets of the Group amounted to US$28,494 million (2017: US$27,186 million), which were financed by equity attributable to owners of the Company of US$3,519 million (2017: US$3,223 million), perpetual securities of US$994 million (2017: US$844 million) and other non-controlling interests (net of put option written on non-controlling interest) of US$33 million (2017: US$28 million), and total liabilities of US$23,948 million (2017: US$23,091 million). At March 31, 2018, the current ratio of the Group was 0.80 (2017: 0.81). The Group had a solid financial position. At March 31, 2018, bank deposits, cash and cash equivalents totaled US$1,932 million (2017: US$2,951 million), of which 28.8 (2017: 45.1) percent was denominated in US dollar, 45.6 (2017: 29.0) percent in Renminbi, 6.1 (2017: 6.6) percent in Euro, 7.4 (2017: 5.2) percent in Japanese Yen, and 12.1 (2017: 14.1) percent in other currencies. The Group adopts a conservative policy to invest the surplus cash generated from operations. At March 31, 2018, 99.6 (2017: 78.5) percent of cash are bank deposits, and 0.4 (2017: 21.5) percent of cash are investments in liquid money market funds of investment grade. Although the Group has consistently maintained a very liquid position, banking facilities have nevertheless been put in place for contingency purposes. The Group entered into a 5-Year loan facility agreement with syndicated banks for US$1,200 million, comprising US$800 million as revolving loan facility and US$400 million as term loan facility, on December 18, 2013. The term loan facility has been prepaid. As at March 31, 2018, the revolving loan facility was utilized to the extent of US$800 million (2017: not utilized). The outstanding US$800 million was re- financed and prepaid in April 2018 by a 5-Year revolving loan facility with syndicated banks of US$1,500 million signed on March 28, 2018. In addition, on May 26, 2015, the Group entered into a 5-Year revolving loan facility agreement with a bank for US$300 million. The facility was utilized to the extent of US$300 million as at March 31, 2018 (2017: not utilized). On May 8, 2014, the Group completed the issuance of 5-Year US$1.5 billion notes bearing annual interest at 4.7% due in May 2019 ("Note 2019"); and on June 10, 2015, the Group completed the issuance of 5-Year RMB4 billion notes bearing annual interest at 4.95% due in June 2020 ("Note 2020"). The proceeds have been used for general corporate purposes including working capital and acquisition activities. On March 16, 2017, the Group completed the issuance of 5-Year US$500 million notes bearing annual interest at 3.875% due in March 2022 ("Note 2022"); and completed the issuance of US$850 million perpetual securities in the form of cumulative preferred shares bearing annual dividend at 5.375%, with a performance guarantee from the Company. Moreover, on April 6, 2017, the Group completed the issuance of an additional US$150 million perpetual securities under the same terms. The proceeds have been used for repayment of the outstanding amount under the promissory note issued to Google Inc. and for general corporate purposes including working capital. 42 Lenovo Group Limited 2017/18 Annual Report 72 On March 29, 2018, the Group completed the issuance of 5-Year US$750 million notes bearing annual interest at 4.75% due in March 2023 ("Note 2023"). The proceeds were majorly used to repurchase the principal amount of US$714 million of the Note 2019, and for general corporate purpose including working capital. The Group has also arranged other short-term credit facilities. At March 31, 2018, the Group's other total available credit facilities amounted to US$11,232 million (2017: US$10,710 million), of which US$1,730 million (2017: US$1,584 million) was in trade lines, US$796 million (2017: US$293 million) in short-term and revolving money market facilities and US$8,706 million (2017: US$8,833 million) in forward foreign exchange contracts. At March 31, 2018, the amounts drawn down were US$1,090 million (2017: US$1,086 million) in trade lines, US$8,645 million (2017: US$8,216 million) being used for the forward foreign exchange contracts, and US$70 million (2017: US$70 million) in short-term bank loans. At March 31, 2018, the Group did not have any term bank loan (2017: US$398 million), and the Group's outstanding borrowings represented by short-term bank loans of US$1,166 million (2017: US$70 million) and notes of US$2,649 million (2017: US$2,569 million). When compared with total equity of US$4,546 million (2017: US$4,095 million), the Group's gearing ratio was 0.84 (2017: 0.74). The net debt position of the Group at March 31, 2018 is US$1,883 million (2017: US$86 million). The Group is confident that all the facilities on hand can meet the funding requirements of the Group's operations and business development. The Group adopts a consistent hedging policy for business transactions to reduce the risk of currency fluctuation arising from daily operations. At March 31, 2018, the Group had commitments in respect of outstanding forward foreign exchange contracts amounting to US$8,654 million (2017: US$8,216 million). The Group's forward foreign exchange contracts are either used to hedge a percentage of future transactions which are highly probable, or used as fair value hedges for identified assets and liabilities. CONTINGENT LIABILITIES The Group, in the ordinary course of its business, is involved in various claims, suits, investigations, and legal proceedings that arise from time to time. Although the Group does not expect that the outcome in any of these legal proceedings, individually or collectively, will have a material adverse effect on its financial position or results of operations, litigation is inherently unpredictable. Therefore, the Group could incur judgments or enter into settlements of claims that could adversely affect its operating results or cash flows in a particular period. HUMAN RESOURCES At March 31, 2018, the Group had a headcount of more than 54,000 worldwide. The Group implements remuneration policy, bonus, employee share purchase plan and long-term incentive scheme with reference to the performance of the Group and individual employees. The Group also provides benefits such as insurance, medical and retirement funds to employees to sustain competitiveness of the Group. The Company has launched an employee share purchase plan ("Plan") in October 2016. The purpose of the Plan is to facilitate and encourage Lenovo share ownership by the general employee population. Under the Plan, eligible employees will be awarded one matching restricted share unit for every four ordinary shares of the Company purchased through qualified employee contributions. The matching restricted share units are subject to a vesting schedule of up to two years. Executive and non-executive directors and senior management of the Company are not eligible to participate in the Plan. 2017/18 Annual Report Lenovo Group Limited 43 72 Management's Discussion & Analysis FUTURE PROSPECTS The Group's strong execution in its transformation started to show positive results with revenue and operational profit before taxation resumed growth during the fiscal year. Lenovo has a clear vision to drive sustainable, profitable growth going forward. Although the markets the Group participates in remain fiercely competitive, management is confident in its ability to successfully execute the strategy and weather the competition. At the same time, Lenovo continues to invest in emerging technologies and merge smart technologies into its core business. And as the market moves into the smart IoT era, Lenovo sees PC, smartphone and IoT devices as one device portal from which the users can move seamlessly from one to another through the cloud and using smarter tools that make tasks easier. As such, the Group has formed the "Intelligent Devices Group", combining PCSD and MBG together, to speed the convergence of computing and communication technologies in products, to optimize shared platforms such as global supply chain and global service, and to accelerate the smart device + cloud services platform in providing intelligent services to users. Under the new "Intelligent Devices Group", Lenovo will have the structure and business model to be more customer centric, offering customer one-stop solutions to their computing needs right at the edge of the network. The Group will continue to leverage its excellence in branding, operational efficiency and supply chain management to bring best-in-class devices to customers. Moreover, the Group aims to expand business through services or subscriptions model, offering customer a total solution when purchasing devices. The Group remains confident in its core PC business, and aims to grow premium to market in revenue without compromising on profitability. Lenovo will leverage industry consolidation opportunities, and drive growth in the high-growth segments such as gaming PCs and workstations. The Group's iconic commercial brand, ThinkPad, celebrated its 25th anniversary with 125 million units shipped since its launch, will continue to drive growth in the ongoing commercial PC refresh. With Smart Devices, Lenovo continues to invest in and develop next-generation smart capabilities, and has now entered the go-to-market phase to bring more innovative products to the market, i.e. Mirage Solo standalone VR headset with Google's Daydream launched in early May 2018, as well as AI-enabled devices in smart home and smart office coming soon. With smartphone, the Group will continue to strengthen its core markets in Latin America and North America, focus on profitable markets, and cut expenses to significantly reduce the loss in this business. The Group's long-term vision is to build an ecosystem around its devices and generate a healthy business model that comprises of a mixture of hardware, software and services revenues. 44 Lenovo Group Limited 2017/18 Annual Report 72 In the Data Center business, the Group's transformation has been well executed and starting to see positive results in steering the business into a world-class next-generation IT solution provider. The next- generation IT products and solutions such as software defined solutions, high-performance computing and hyperscale now represent a much larger mix of the DCG revenue in fiscal quarter four. The Group will continue to drive growth in these segments, as well as profitability improvement for overall DCG business. Lenovo also seeks to strengthen various industrial solutions such as those for 5G Telecom and IoT. In Hyperscale, the Group continues to leverage its world-class in-house design and manufacturing capabilities, and bring compelling offerings to the global hyperscalers. And in software defined data center, the Group will continue to partner with the best-in-class software vendors to give customers the flexibility. In high-performance computing, Lenovo aims to further narrow the gap with the number one vendor in the global Top 500 HPC List. And in the customer-centric model, the Group will also strengthen its attach rates in storage, networking, and services; so as to offer a more compelling total solution and build a long-term business relationship with customers. The Group will continue to build on its solid foundation with its strong organizational structure and product portfolio, while also enhancing its sales capabilities, strengthening channel management, and driving growth in high-growth segments. The Group now has the most compelling products in its history under the ThinkSystem and ThinkAgile brands to drive profitable growth in the future, coupled with the fast time-to-market product rollout, industry-leading product reliability and the increasingly capable sales force. The Group continues to invest in AI, IoT, Big Data and VR/AR with sizable investments over time. With that, the Group is building capabilities in Device + Cloud and Infrastructure + Cloud in order to capture the growth in the smart IoT era. The Group has incorporated its AI core capabilities, such as voice recognition, language understanding and machine learning to strengthen its supercomputer, edge computing, and cloud computing capabilities. Thomson Reuters named Lenovo a Top 100 Global Tech Leader in 2018 for its outstanding performance in the areas of innovation, environmental impact and corporate social responsibility, demonstrating Lenovo's innovation capabilities and focus on sustainability. And most recently, Laptop Magazine named Lenovo the Best Laptop Brand 2018 for the second year, as well as won 14 iF Annual Design Awards for products like "Star Wars: Jedi Challenge" and Mirage Solo VR headset. Looking forward, market conditions remain challenging in the short term. However, the Group now has a stronger organization with sharper customer focus and more compelling business model across all its businesses. Coupled with strong execution, the Group remains confident it can build leading positions in every business the Group enters and drive profitable growth that, in turn, creates better value for shareholders. 2017/18 Annual Report Lenovo Group Limited 45 72 This is one business laptop you'll need to consider." LAPTOP ThinkPad X1 Yoga ThinkPad X1 Yoga 72 Different collaborates better 72 Corporate Governance 01 04 Accountability and Corporate Governance Audit Principles and How the Board fulfils its oversight Structure responsibilities • Compliance with Corporate • Financial Reporting Governance Code • Risk Management and Internal Control • Governance Structure • External Auditor 02 05 Leadership Investor Relations How the Board leads How we maintain relations with from the front our investors • Board Roles • Communications with Investors • Board Composition • Market Recognitions • Appointment and Election • Index Recognition • Directors' Securities Transactions 06 • Induction and Continuous Professional Shareholders Development How we communicate with our • Remuneration of Directors and Senior shareholders and their rights Management • Company Secretary • Communications with Shareholders 03 • Shareholders' Rights Effectiveness How the Board Operates • Shareholding Structure 07 Key Shareholders Information • Board's Responsibilities and Delegation • Board Process • Board Activities • Board Committees • Board and Board Committees' Effectiveness Review 48 Lenovo Group Limited 2017/18 Annual Report 72 CORPORATE GOVERNANCE PRINCIPLES The Board also appointed Mr. William O. Grabe AND STRUCTURE ("Mr. Grabe") as the lead independent director (the The board of directors (the "Board") and the "Lead Independent Director") with broad authority management of Lenovo Group Limited (the and responsibility. Among other responsibilities, the "Company", together with its subsidiaries, the Lead Independent Director chairs the Nomination "Group") strive to attain and uphold a high and Governance Committee meeting and/or the standard of corporate governance and to maintain Board meeting when considering (i) the combined sound and well-established corporate governance roles of Chairman and CEO; and (ii) assessment practices for the interest sake of shareholders of the performance of Chairman and/or CEO. The and other stakeholders including customers, Lead Independent Director also calls and chairs suppliers, employees and the general public. The meeting(s) with all independent non-executive Company abides strictly by the governing laws and directors without management and executive regulations of the jurisdictions where it operates director present at least once a year on such and observes the applicable guidelines and rules matters as are deemed appropriate. Accordingly, issued by regulatory authorities. It regularly the Board believes that the current Board structure undertakes review of its corporate governance with combined roles of Chairman and CEO, the system to ensure it is in line with international and appointment of Lead Independent Director and local best practices. a vast majority of independent non-executive directors provide an effective balance on power Compliance with Corporate Governance Code and authorizations between the Board and the Throughout the year ended March 31, 2018, the management of the Company. Company has complied with the code provisions of the Corporate Governance Code and Corporate Apart from the foregoing, the Company met the Governance Report (the "CG Code") set out in recommended best practices in the CG Code as Appendix 14 to the Rules Governing the Listing disclosed in the respective sections of this report. of Securities on The Stock Exchange of Hong Particularly, the Company published quarterly Kong Limited (the "Stock Exchange") (the financial results and business reviews in addition "Listing Rules"), and where appropriate, met the to interim and annual results. Quarterly financial recommended best practices in the CG Code, with results enhanced the shareholders' ability to assess the exception that the roles of the chairman of the the performance, financial position and prospects Board (the "Chairman") and the chief executive of the Company. The quarterly financial results officer of the Company (the "CEO") have not been were also prepared using the accounting standards segregated as required by code provision A.2.1 of consistent with the policies applied to the interim the CG Code. and annual financial statements. Since November 3, 2011, Mr. Yang Yuanqing ("Mr. Yang") has been performing both the roles as the Chairman and the CEO. The Board has recently reviewed the organization human resources planning of the Company and is of the opinion that it is appropriate and in the best interests of the Company at the present stage for Mr. Yang to continue to hold both the positions as it would help to maintain the continuity of the strategy execution and stability of the operations of the Company. The Board comprising a vast majority of independent non-executive directors meets regularly on a quarterly basis to review the operations of the Company led by Mr. Yang. 2017/18 Annual Report Lenovo Group Limited 49 72 Corporate Governance Report The Board has established a clear governance structure and the overall approach has been designed to support and work within our organizational structure to meet the challenges of the future. Governance Structure Audit Committee Internal Audit More details, Pages 102 to 109 Compensation Committee SHAREHOLDERS More details, Pages 110 to 122 AND OTHER BOARD OF STAKEHOLDERS DIRECTORS More details, Pages 51 to 71 More details, Pages 93 to 99 Nomination and Governance Committee More details, Pages 73 to 76 Lenovo Executive Committee* Chief Executive Officer Senior * a management committee comprising the CEO and certain More details, Page 51 Management members of the senior management KEY MATTERS RESERVED TO THE BOARD DECISION The Board has adopted a schedule of key CEO, LENOVO EXECUTIVE matters relating to the strategy, finance and COMMITTEE AND DELEGATED governance which are for decision by the Board. The table on page 65 sets out these key matters AUTHORITIES reserved by the Board for decision. CEO who manages the business in line with the strategy agreed by the Board and is accountable to it. Details of the responsibilities of CEO are set out on page 51. The CEO is supported by the Lenovo Executive Committee which helps to BOARD COMMITTEES implement strategy and manage operational STRUCTURE performance. The CEO has also established authority framework adopted by the The Board has delegated authority for Group through which he delegates certain its key governance functions to three management decisions to specific individuals main committees with the responsibilities and management. outlined on page 72. Details of the activities and decisions taken by these committees during the year are shown in the relevant committees reports. 50 Lenovo Group Limited 2017/18 Annual Report 72 LEADERSHIP Board Roles As of the date of this annual report, there are eleven Board members consisting of one executive director, two non-executive directors and eight independent non-executive directors. The Board has a coherent framework with clearly defined responsibilities and accountabilities designed to safeguard and enhance long-term shareholder values and provide a robust platform to realise the strategy of the Group. A summary of responsibilities of leadership of the Company and those of the Lead Independent Director is given in the diagram below. CHAIRMAN NON-EXECUTIVE LEAD INDEPENDENT CHIEF EXECUTIVE Mr. Yang Yuanqing DIRECTORS DIRECTOR OFFICER Independent non-executive Mr. William O. Grabe Mr. Yang Yuanqing directors: • leads the Board in the Dr. Tian Suning determination of its strategy Mr. Nicholas C. Allen • chairs the Nomination and • formulates and recommends and in the achievement of its Mr. Nobuyuki Idei Governance Committee the strategy of the Group to objectives the Board Mr. William O. Grabe meeting and/or the Board • provides leadership and Mr. William Tudor Brown meeting when considering • executes the strategy agreed manages the Board to ensure Ms. Ma Xuezheng (i) the combined roles of by the Board Chairman and CEO; and (ii) that all directors are properly Mr. Yang Chih-Yuan Jerry briefed on issues arising at assessment of the performance • makes and implements Mr. Gordon Robert of Chairman and/or CEO operational decisions and Board meetings and receive Halyburton Orr adequate, complete and manages the business day-to- • calls and chairs meeting(s) day reliable information in a timely Non-executive directors: with all independent non- manner Mr. Zhu Linan executive directors at least • leads the business and the Mr. Zhao John Huan once a year on such matters management team • approves the Board's agenda, taking full account of the as are deemed appropriate issues and concerns of Board • participate in Board meetings and provides feedbacks to members. Board agendas are to bring an independent Chairman and/or CEO judgement to bear on issues of structured to allow adequate strategy, policy, performance, • serves a key role in the Board and sufficient time for the accountability, resources, key evaluation process discussion of the items on the appointments and standards agenda, in particular, strategic of conduct • responds directly to matters • take the lead where potential shareholders and other conflicts of interests arise stakeholders' questions and • facilitates and encourages comments that are directed to active engagement of Board • scrutinise the Group's performance in achieving the Lead Independent Director members, particularly on or to the independent non- agreed corporate goals and matters of the Group's strategy objectives, and monitor executive directors as a group, or other major proposals, by performance reporting when appropriate drawing on directors' skills, • make a positive contribution experience and knowledge to the development of the • if requested by major Group's strategy and policies shareholders, ensures that he • ensures good corporate is available, when appropriate, through independent, governance practices and constructive and informed for consultation and direct procedures are established comments communication and effective communication • engage with senior with shareholders and other • performs other duties as the management and other stakeholders relevant parties, such as the Board may designate external or internal auditors as well as the Company's legal department, to ensure that the various concerns and issues relevant to the management and oversight of the business and operations of the Company and the Group are properly addressed 2017/18 Annual Report Lenovo Group Limited 51 72 Corporate Governance Report Board Composition The structure, size and composition (including, for example, gender, age, and length of service) of the Board will be reviewed from time to time by the Nomination and Governance Committee to ensure that the Board has a balance of skills and expertise for providing effective leadership to the Company and meeting the needs of the Group. The Board diversity mix is shown below while the detailed biographies and snapshot of the Board's experience are set out on pages 142 to 145 of this annual report. DESIGNATION GENDER 9% 9% 18% 73% 91% Executive director Male Non-executive director Female Independent non-executive director AGE GROUP AREAS OF EXPERIENCE 18% 100% 73% 55% 55% 27% 27% 45-55 Global operations 56-65 Accounting/Internal controls over 65 Equity investment/Financial IT industry 52 Lenovo Group Limited 2017/18 Annual Report 72 Key Features of the Board Composition Diversity The Board adopted a Board diversity policy (the "Board Diversity Policy") which relates to the selection of candidates for the Board. A summary of the Board Diversity Policy including the views and measurable objectives is set out on page 54 of this report. Independence The current composition of the Board exceeds the requirements under rule 3.10A of the Listing Rules, as more than half of its members are independent non-executive directors, thus exhibiting a strong independent element which enhances independent judgement. Mr. Grabe, an independent non-executive director of the Company was appointed as Lead Independent Director for enhancing corporate governance of the Company. The roles and responsibilities of the Lead Independent Director are set out on page 51 of this report. The Company has maintained on its website and Hong Kong Exchanges and Clearing Limited's website (the "HKEx's website") an updated list of its directors identifying their roles and functions and whether they are independent non-executive directors. Independent non-executive directors are also identified as such in all corporate communications that disclose the names of directors of the Company. Professional qualification Mr. Nicholas C. Allen, an independent non-executive director of the Company, has the appropriate professional qualifications, or accounting or related financial management expertise, as required under the Listing Rules. Relationship among Mr. Zhu Linan and Mr. Zhao John Huan, non-executive directors of the directors Company, also serve on the board of directors of Legend Holdings Corporation, which company held approximately 29.102% of the total number of shares in issue of the Company as of March 31, 2018 according to the interest as recorded in the register maintained under the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong) (the "SFO"). The details are set out on page 99 of this report. To the best knowledge of the Board members, there is no other relationship among the members of the Board as of the date of this annual report except for the relationships (including financial, business, family, and other material and relevant relationships) as mentioned in this report and in the biographies of directors set out on pages 142 to 145 of this annual report. 2017/18 Annual Report Lenovo Group Limited 53 72 Corporate Governance Report Appointment and Election Diversity The Board values diversity as a factor in selecting candidates to serve on the Board, and believes that the diversity which exists in its composition provides significant benefits to the Board and the Company. The Board believes that a key success factor of an effective Board is that it comprises a range and balance of skills, experience, knowledge and independence, with individuals that work as a team. The Board Diversity Policy which relates to the selection of candidates for the Board was adopted to ensure that diversity in its broadest sense continues to remain a feature of the Board. All Board appointments are made on merit, in the context of the skills and experience the Board as a whole requires being effective. The details of the appointment process can be found on page 55 of this report. The Nomination and Governance Committee has been delegated with the responsibilities for the review of the Board Diversity Policy on an annual basis. During the fiscal year 2017/18, the Nomination and Governance Committee reviewed the below measurable objectives and the progress in achieving these objectives: Measurable Objectives Progress for Achieving Objectives Objective 1 Consider candidates for appointment • On-going search for appropriate as independent non-executive candidates to be appointed as directors from a wide pool of independent non-executive directors backgrounds, skills, experience and • In the ordinary course of the Board perspectives that would complement succession process the existing Board Objective 2 Report annually against the objectives • The Board evaluation process includes and other initiatives taking place an assessment of the Board's diversity within the Company which promote helping to objectively consider the diversity Board composition and effectiveness • FY2018/19 and ongoing Objective 3 Report annually on the outcome of • Make use of the Board evaluation the composition and structure of process as an important means of the Board as well as any issues and monitoring the progress challenges the Board is facing when • Remain committed to getting the considering the diverse make-up of right balance of the composition the Company of the Board and work towards understanding and managing some of the challenges we face in the global information technology sector, particularly in internet, mobile, software and clouds areas • FY2018/19 and ongoing 54 Lenovo Group Limited 2017/18 Annual Report 72 Appointment process The Board recognises the need to ensure the Board and senior management are always well resourced, with the suitable people in terms of skills and experience to deliver the Group's strategy. There is a formal and transparent procedure for the appointment of new directors to the Board, the primary responsibility of which has been delegated to the Nomination and Governance Committee. The Nomination and Governance Committee is composed of the Chairman and three independent non- executive directors. This composition ensures that any decisions made are impartial and are in the best interest of the Company. The Nomination and Governance Committee's assessment of the candidates includes, but is not limited to, consideration of the relevant knowledge and diversity of backgrounds, skills, experience and perspectives that would complement the existing Board. The Nomination and Governance Committee also ensures that candidates satisfy the requisite skills and core competencies to be deemed fit and proper, and to be appointed as director. The nomination process involves the following six stages: Recommendation to the Board for approval Final deliberation by Nomination and Governance Committee Meeting with candidates Evaluation of suitability of candidates Identification of candidates Evaluation of the Board composition and establishment of desired criteria for prospective directors 2017/18 Annual Report Lenovo Group Limited 55 72 Corporate Governance Report Succession The Nomination and Governance Committee regularly reviews the structure, size and composition (including the skills, knowledge and experience) required of the Board and makes recommendations to the Board as appropriate. The Board has satisfied itself that the appropriate plan has been in place for orderly succession to the Board as well as procedures to ensure an appropriate balance of skills on the Board and its committees. The Board and the Nomination and Governance Committee have regularly discussed and reviewed Board composition and succession planning during the year and this will continue in the fiscal year 2018/19. Tenure In accordance with the articles of association of the Company (the "Articles of Association"), all BOARD TENURE directors are subject to retirement by rotation. At each annual general meeting, one-third of 18% the directors for the time being shall retire from 46% office. The retiring directors shall be eligible for re- election. New appointments either to fill a casual vacancy or as an addition to the Board are subject to re-election by shareholders of the Company at the next following annual general meeting of the Company. The chart beside this paragraph shows the tenure of the Board members as of March 31, 2018. 36% All non-executive directors (including independent non-executive directors) have entered into letters of appointment with the Company for a term below 5 years of three years. Their terms of appointment shall 5-10 years be subject to retirement from office by rotation and re-election at the annual general meeting in over 10 years accordance with the Articles of Association. The Company agreed that the independence of directors is an important principle of the Company. In line with the best practices on corporate governance, the Board adopted the principle that each term of an independent non-executive director of the Company shall not be more than three years and shall, subject to re-election by shareholders at any subsequent annual general meeting of the Company, be renewable for additional three-year terms up to a total of nine years. At the recommendation of the Nomination and Governance Committee, the Board may invite an independent non-executive director to serve for an additional three-year term extending up to a total of twelve years subject to re-election at any subsequent annual general meeting of the Company. 56 Lenovo Group Limited 2017/18 Annual Report 72 Independence The independent non-executive directors do not Independence Assessment participate in the day-to-day management of the Company and do not engage in any business Before and on appointment dealing or other relationships with the Group (other than in situations permitted by the applicable • Nomination and Governance Committee regulations) in order to ensure that they remain will evaluate the suitability of the truly capable of exercising independent judgement candidates, including an assessment of their independence and act in the best interests of the Company and its shareholders. • Upon his/her appointment, he/she is required to confirm with the Stock Exchange Each of the independent non-executive directors his/her independence having regard to the has made a confirmation of independence pursuant criteria under rule 3.13 of the Listing Rules to rule 3.13 of the Listing Rules. On May 23, 2018, Ongoing process the Nomination and Governance Committee conducted an annual review of the independence • Each of the independent non-executive of all independent non-executive directors of the directors is required to inform the Stock Exchange and the Company as soon as Company for the year ended March 31, 2018. Having practicable if there is any change in his/her taken into account the factors as set out in rule 3.13 own personal particulars that may affect of the Listing Rules in assessing the independence his/her independence of independent non-executive directors, the Nomination and Governance Committee (with • The independent non-executive directors the relevant committee member abstaining are required to confirm with the Company whether he/she has any financial, business, from voting on the resolutions concerning his family or other material/relevant relationship own independence) concluded that all of the with each other on a semi-annual basis independent non-executive directors satisfied the criteria of independence as set out in the Listing • All directors have continuing duty to update Rules. the Company on any changes to their other appointments which will be reviewed by the Company In addition, the Nomination and Governance Committee affirmed that all independent non- Annual assessment executive directors of the Company provided a • Each of the independent non-executive strong independent element on the Board, were directors is required to confirm with the free from any business or other relationship which Company his/her independence having could materially interfere with the exercise of their regard to the criteria under rule 3.13 of the judgement, and remained independent for the year Listing Rules ended March 31, 2018. • Nomination and Governance Committee assesses and reviews the independence of independent non-executive directors annually 2017/18 Annual Report Lenovo Group Limited 57 72 Corporate Governance Report Conflicts of interest Directors have a statutory duty to avoid situations in which they have or may have interests that conflict with those of the Company. The Board has a set procedure and guidance to deal with the actual or potential conflicts of interest of directors as follows: • The Board deals with each appointment on its individual merit and takes into consideration all the circumstances. • Prior to taking additional responsibilities or external appointments, directors are obliged to ensure that they will be able to meet the time commitment expected of them in their role at the Company and do not have any potential conflicts that may arise when taking up a position with another company. • Decisions regarding transactions with directors and their related parties are always dealt with by other directors, such as matter regarding the remuneration of executive director is handled by the Compensation Committee. • Under the Articles of Association, directors are also required to declare their direct or indirect interests, if any, in any proposal, transaction, arrangement or contract that is significant in relation to the Company's business and the director's interest or his/her associate's interest or the interest of the entity connected with the director is material. All potential conflicts of interest will be recorded, which are reviewed on an annual basis by the Nomination and Governance Committee to ensure that the procedures are working effectively. DIRECTORSHIP WITH OTHER Commitments LISTED PUBLIC COMPANIES All directors are committed to devote sufficient time and attention to the affairs of the Company. 9% Directors are given guidelines on their time 0% commitments to the affairs of the Company and corresponding confirmations were received from the directors in their letters of appointment. Directors have also disclosed to the Company the number and nature of offices held in Hong Kong or overseas listed public companies or organisations and other significant commitments, with the identity of the public companies or organisations. Directors are reminded to notify the Company in a timely manner and bi-annually confirm to the 91% Company of any changes of such information. The chart beside shows the number of directorship of 0-2 the directors with other listed public companies as 3-5 at March 31, 2018. 6-10 58 Lenovo Group Limited 2017/18 Annual Report 72 With respect to those directors who stand for election or re-election at the forthcoming annual general meeting, all of their directorships held in listed public companies in the past three years are also set out in the document accompanying the notice of the forthcoming annual general meeting. Share ownership The Board has adopted stock ownership guidelines for non-employee directors. The Board believes that share ownership aligns the interests of its directors with the long-term interests of the shareholders and further promotes the Company's commitment to sound corporate governance. In general, these guidelines require non-employee directors to maintain a certain level of equity awards granted to them for so long as he/she is a director of the Company. Directors' Securities Transactions The Company has adopted the Model Code for Securities Transactions by Directors of Listed Issuers (the "Model Code") set out in Appendix 10 to the Listing Rules from time to time and devised based on the principles of the Model Code a comprehensive and operative company policy to govern securities transactions by directors and designated senior management of the Company. All directors of the Company have confirmed, after specific enquiry, their compliance with the required standard during the year ended March 31, 2018. The Company has also adopted its own trading in securities policy applicable to designated senior management of the Company which is on terms no less exacting than the required standard as set out in the Model Code. 2017/18 Annual Report Lenovo Group Limited 59 72 Corporate Governance Report Induction and Continuous Professional Development The Company is aware of the requirement to regularly review and agree with each director their training needs. Keeping up-to-date with key business developments is essential for directors to maintain and enhance their effectiveness. Continuous DIRECTOR'S Induction professional program + development > ROLES AND RESPONSIBILITIES program Induction program For new director Upon joining the Company, directors are provided with a bespoke induction program to further their understanding of the nature of the Company, its business and the markets in which it operates, and also enhance their knowledge of the Group, its operation and staff. Induction program is tailored to each new director, depending on the experience and background of the director. Normally, a comprehensive, formal and tailored induction program covering amongst other things: MEETING WITH ATTENDING CHAIRMAN, BRIEFING AND ATTENDING RECEIVING ATTENDING DIRECTORS AND A PRESENTATION CONTINUOUS DIRECTOR'S BRIEFING / WIDE RANGE OF FROM SENIOR PROFESSIONAL INDUCTION TRAINING BY SENIOR EXECUTIVES AND DEVELOPMENT HANDBOOK EXTERNAL LAWYER MANAGEMENT VISIT TO BUSINESS PROGRAM FROM ACROSS THE OPERATIONS BUSINESS to ensure the director to ensure that the to ensure that the is fully aware of the to ensure that the to ensure the director keeps abreast director has a proper responsibilities as a director has a proper director has a proper of new laws, regulations understanding of the director under statute understanding of the understanding of the or developments operations, business and common law, the culture of the Board operations of the Group in business that are and governance policies Listing Rules, applicable and the operations of and its development relevant to the roles of the Company legal requirements the Group as a director of the and other regulatory Company requirements On Appointment Following Appointment 60 Lenovo Group Limited 2017/18 Annual Report 72 For new Board committee members Directors to be appointed to the Board committee are provided with an induction handbook which is designed to provide Board committee members with information regarding the roles of a committee member, making the most of their time on the committee, meeting annual agendas, and general information about the respective Board committee of the Company. Continuous professional development program As part of the continuous professional development program, the Board members from time to time receive presentations from senior executives in the business on matters of significance. Financial plans, including budgets and forecasts, are regularly discussed at Board meetings. The Company would arrange appropriate visits and seminars covering the Group's operations, the industry and governance matters for directors to facilitate their understanding of the Group's businesses and have a better awareness of the risks associated with the Group's operations. During the year ended March 31, 2018, the trainings and activities for the Board were set out below: Site Visit In order to enhance greater interaction between Board members and senior management, the Company arranged directors to attend the Global Leadership Team ("GLT") annual meeting in Shenzhen, China. The GLT meeting presented an excellent opportunity for Lenovo's leaders on the one hand to work together, share ideas, identify challenges and, most importantly, develop solutions; and on the other hand, to build cross-functional networking. Taking this opportunity of GLT meeting, directors and senior management also visited the headquarter of Tencent Holdings Limited in Shenzhen to understand its operations and the latest internet technology and business development. On October 31 2017, directors visited NTT DoCoMo R&D Center in Yokosuka Research Park. This R&D Center is a hub for intelligent manufacturing activities in mobile and telecommunications. During the visit, directors and management were provided with demonstrations on mobile access including 5G (Fifth-Generation Mobile Communications System) and approach to AI (Artificial Intelligence). These arrangements provided the Board an excellent opportunity of understanding development on 5G and AI which were very relevant to Lenovo's business strategies. 2017/18 Annual Report Lenovo Group Limited 61 72 Corporate Governance Report During the third quarter Board meeting in Silicon Valley, home to the world's leading technology startups, the Company invited a number of top end startups to demonstrate to directors their most advanced technologies in various areas such as big data intelligence, quantum computing, telecommunication technology and foods technology. These startups demos provided directors an insight into new technologies, innovations and business opportunities. Industry Congress Lenovo operates in an industry which is rapidly changing in terms of market trends, consumer preferences and technologies. In order to keep directors updated with the latest technologies and products development in the industry, the Company has made arrangements for directors to attend Consumer Electronics Show ("CES") and Mobile World Congress (the "MWC") in Las Vegas and Barcelona respectively. During the visits, directors were given the best product reviews, product demos and displays that showcased the technologies of the Company and also those of other players in the market. These events provided excellent opportunities for directors not only to acquire the most advanced technological knowledge in the market, but also to meet with the senior management of the Company and other innovators, builders, technologists and customers there. 62 Lenovo Group Limited 2017/18 Annual Report 72 Experts Briefing and Seminar The Company has arranged in-house seminars for directors to keep them abreast of the affairs relating to the Company. The directors are also encouraged to attend relevant external professional programs at the Company's expense to keep abreast of issues facing the changing business environment within which the Group operates. During the year, the Company arranged experts briefing and in-house seminar for directors on topics relating to New US Administration, Artificial Intelligence, Super-Computing and DCG technologies. Mr. Andrew Ng, a computer scientist in Artificial Intelligence and Mr. Ryota Kanai, a scientist in Artificial Intelligence and Deep Learning and formerly a Professor at Stanford University and Neuroscience and formerly an Associate Professor at University the Director of the Stanford Artificial Intelligence Lab, was invited of Sussex in Neuroscience, gave directors a presentation on to be a guest speaker to give directors an update of the latest Artificial Intelligence and Neuroscience in Japan. technology development in Artificial Intelligence. Regulatory Updates Directors are updated on a continuing basis by the Company Secretary on any new regulations and guidelines, as well as any amendments thereto issued by the Stock Exchange and other regulatory authorities, particularly the effects of such new or amended regulations and guidelines on directors specifically, and the Company and the Group. In addition, director's induction handbook which contains organization structure, Board policies, corporate rules and policies, and other legal reference information will be updated regularly and made available on internal electronic platform of the Company for directors' review. The Board considers the aforementioned training attended and/or participated in by the directors, and the continuing legal updates provided to the directors, as adequate to enhance the directors' skills and knowledge to carry out their duties as directors. All directors are required to provide the Company with their training records on an annual basis and such records are maintained by the Company Secretary for regular review by the Nomination and Governance Committee. The Nomination and Governance Committee will, on a continuing basis, evaluate and determine the training and development needs of the directors, particularly on relevant new laws and regulations and essential practices for effective corporate governance, to enable the directors to sustain their active participation in Board deliberations and effectively discharge their duties. 2017/18 Annual Report Lenovo Group Limited 63 72 Corporate Governance Report In addition to directors' attendance at meetings and review of relevant materials provided by senior management during the year, the professional trainings attended by the directors are set out as follows: Type of training Visiting Attending the place of experts briefing/ operations, seminar/ Reading Company's conference regulatory facilities relevant to updates/ and meeting the Company's Company with local business or Name of directors policies management director's duties Executive director Mr. Yang Yuanqing √ √ √ Non-executive directors Mr. Zhu Linan √ – √ Mr. Zhao John Huan √ √ √ Independent non-executive directors Dr. Tian Suning √ √ √ Mr. Nicholas C. Allen √ √ √ Mr. Nobuyuki Idei √ √ √ Mr. William O. Grabe √ √ √ Mr. William Tudor Brown √ √ √ Ms. Ma Xuezheng √ √ √ Mr. Yang Chih-Yuan Jerry √ √ √ Mr. Gordon Robert Halyburton Orr √ √ √ Remuneration of Directors and Senior Management A formal and transparent procedure for fixing the remuneration packages of directors and senior management is in place. Details of remuneration policies, remuneration payable to senior management and other relevant information are set out in the Compensation Committee Report of this annual report on pages 110 to 122. Company Secretary The Company Secretary, Mr. Mok Chung Fu, Eric is responsible for facilitating the Board process, as well as communications among Board members with shareholders and management. During the year, the Company Secretary undertook appropriate professional training to update his skills and knowledge. 64 Lenovo Group Limited 2017/18 Annual Report 72 EFFECTIVENESS Board's Responsibilities and Delegation The Group is controlled through the Board who is responsible for steering the success of the Group by overseeing the overall strategy and directing and supervising its affairs in a responsible and effective manner. The Board also sets the Group's core values and adopts proper standards to ensure that the Company operates with integrity and complies with the relevant rules and regulations. The Company has a formal schedule of matters specifically reserved to the Board and those delegated to management. The management is responsible for the daily operations and administration function of the Group under the leadership of the CEO. The Board has given clear directions to management as to the matters that must be approved by the Board before decisions are made on behalf of the Company or entering into any commitments on behalf of the Group. The types of decisions to be delegated by the Board to management include implementation of the strategy and direction determined by the Board, operation of the Group's businesses, preparation of financial statements and operating budgets, and compliance with applicable laws and regulations. These arrangements will be reviewed periodically to ensure that they remain appropriate to the Company's needs. A list of senior management and their biographies are set out on pages 145 to 147 of this annual report. Key Matters Reserved for Board Approval Group strategy and management Financial • formulation of the Group's strategy and long • approval of the Group's financial statements term objectives and results announcements • approval of changes to capital structure • recommendation on appointment or • approval of major capital and equity reappointment of external auditor transactions • recommendation or declaration of dividend • approval of major disposals and acquisitions • monitoring the Group's businesses against plan and budget Board membership and committees Corporate governance and sustainability • appointment to the Board • review the performance of Board and its • setting of terms of reference of Board committees committees • approval of shareholder communications, circular and notices of meetings • review sustainability practices and approval of sustainability report of the Group • review and approval of certain Group's policies, for example, Board Diversity Policy, Continuous Disclosures Policy and Shareholders Communication Policy 2017/18 Annual Report Lenovo Group Limited 65 72 Corporate Governance Report Board Process The Board recognises the importance of providing timely and appropriate information to directors so as to enable them to make informed decisions and to perform their duties and responsibilities effectively. Regular Board The Board meets at Meeting agenda Dispatch Board Meeting least 4 times a year and notice papers to directors Meeting dates at approximately are set 2 years in quarterly intervals • Finalized by • Agenda and advance the Chairman in supporting • To review financial consultation with documents 7 days, • To facilitate performance, Board members with updated maximum strategy and • Notice of not less financial figures attendance operations than 30 days be 3 days (or other given reasonable period) prior to the meeting Minutes of Board meeting recorded in sufficient detail the matters considered by the Board and decisions reached, including any concerns raised by directors or dissenting views BOARD expressed. MEETING Minutes of Board meeting were circulated to the respective Board members for comment where appropriate and duly kept in minute book for inspection by any director. Other Board Convene Board Dispatch Board papers to directors Meeting Meeting • Generally, not less than 3 days (or other • To consider ad • Notice of not less reasonable period) before the meeting hoc matters than 7 days (or • If appropriate, one-on-one briefing offered to other reasonable each director prior to the meeting period) be given 66 Lenovo Group Limited 2017/18 Annual Report 72 Other Key Features of Board Process Timely updates and The directors are supplied in a timely manner with all relevant discussion documentation and financial information to assist them in the discharge of their duties. Monthly updates of the financial performance of the Company are furnished to the Board between regular Board Meetings. In addition to standing agenda items, there may be discussions on "deep-dive" topics. During the year "deep-dive" presentations included the Group's specific strategy and business in a specific market. In addition to the quarterly regular Board meetings, Board meetings focusing on the Group's strategy will be held on the day before each regular Board meeting starting from the fiscal year 2018/19. During the year, two Board meetings on strategy were held. Senior management are invited to attend Board meetings, where appropriate, to report on matters relating to their areas of responsibility, and also to brief and present details to the directors on recommendations submitted for the Board's consideration. Additional information or clarification may be required to be furnished, particularly with respect to complex and technical issues tabled to the Board. The Company has established continuous disclosure policy (the "Continuous Disclosure Policy") and its implementation guideline on monitoring, reporting and disseminating inside information. The critical concerns of the Group's operations and developments are communicated and addressed to the Board in a timely manner. Executive sessions As a good corporate governance practices, separate executive sessions were arranged for (i) the Chairman to meet with non- executive directors in the absence of management; and (ii) the Lead Independent Director to meet with other independent non-executive directors in the absence of executive director and management to discuss matters relating to any issue or other matters such persons would like to raise. To enhance communication with and contribution from all the directors, the Chairman meets with each non-executive director on a one-on-one basis at least once a year. As a follow up action item from FY2017/18 Board evaluation, the Company has started to arrange one-on-one meeting at least once a year for (1) the Lead Independent Director to meet with each independent non-executive director; and (2) the Committee Chairman to meet with each Committee member. 2017/18 Annual Report Lenovo Group Limited 67 72 Corporate Governance Report Other Key Features of Board Process Professional advices All directors have direct access to the Chief Legal Officer and the Company Secretary of the Company who are responsible for advising the Board on corporate governance and compliance issues. Written procedures are in place for directors to seek, at the Company's expense, independent professional advice in performing directors' duties. No request was made by any director for such advice during the year. Access to information All directors were provided with a tablet and a notebook to gain access to meeting materials of the Board and Board committees meetings through an electronic platform. Communication with senior To enhance the communication between directors and senior management management and have an understanding of management planning, directors are invited to attend Lenovo's GLT event and participate in small group discussions with relevant senior management. Indemnification and As permitted by the Articles of Association, a director or a former insurance director of the Company may be indemnified out of the Company's assets against any liability incurred by the director to a person other than the Company or an associated company of the Company that attaches to such director in his or her capacity as a director of the Company, to the extent permitted by law. Such permitted indemnity provision has been in force since the adoption of the new Articles of Association of the Company on July 2, 2014. The Company has arranged appropriate insurance to cover the liabilities of the directors arising from corporate activities. The insurance coverage is reviewed on an annual basis. 68 Lenovo Group Limited 2017/18 Annual Report 72 Board Activities Board activities are structured to assist the Board in achieving its goal to support and advise senior management on the delivery of the Group's strategy within a transparent governance framework. The diagram below shows the key areas of focus for the Board, which appear as items on the Board's agenda at relevant times throughout the financial year. Concentrated discussion of these items assists the Board in making the most appropriate decision based on the long-term opportunities for the business. FINANCIAL AND STRATEGY OPERATIONAL PERFORMANCE AND RISKS • CEO and Chief Financial Officer reports • Discussion of main strategic issues relating to technologies and other • Financial and operational updates commercial, geographic and structural • Annual budget areas • Treasury items • Review of processes and controls for strategic and operational risks • Customer experience GOVERNANCE AND OTHERS SUSTAINABILITY • Review and discussion of the practices of • Employee engagement survey governance and sustainability matters • Ad hoc projects • Board and Board Committees' effectiveness review • Board diversity and succession planning • Board Committees' reports 2017/18 Annual Report Lenovo Group Limited 69 72 Corporate Governance Report Main activities during FY2017/18 During the fiscal year 2017/18, a total of eight Board meetings were held, of which four Board meetings were primarily to review quarterly business performance and strategy execution, two Board meetings were for reviewing specific strategy in the geography, business or other relevant areas and the remaining two were for approving ad hoc projects. Given the geographical spread of the Group's businesses, in addition to the meetings in Hong Kong and the United States, the Company also held a meeting in Tokyo with a particular focus on discussing the 5G challenges to and opportunities in the core businesses which also provided an opportunity for directors to visit NTT DoCoMo R&D Center. Offsite Board meetings give the Board further insights into the businesses of the Group. The below chart shows how the Board allocated its agenda time during the year. THE BOARD Allocation of agenda time 19% 23% FY2017/18 FY2016/17 Financial and operational 19% 23% performance Strategic matters 29% 42% Governance, sustainability, training and Board Committee's 29% 15% reports 29% 29% Others matters (including Ad hoc projects and human 23% 20% resources matters) Directors are expected to attend all meetings of the Board and the Committees on which they serve and to devote sufficient time to the Company to perform their duties. Where directors are unable to attend a meeting they receive papers for that meeting giving them the opportunity to raise any issues with the Chairman in advance of the meeting. At each scheduled meeting the Board receives updates from the CEO and Chief Financial Officer on the financial and operational performance of the Group and any specific developments in their areas of the businesses for which they are directly responsible and of which the Board should be aware. Chairpersons of the respective Board committees would also report on matters discussed and/or approved at the relevant Board committees' meetings held prior to the Board meetings. Meetings are structured so as to allow for consideration and debate of all matters. 70 Lenovo Group Limited 2017/18 Annual Report 72 The main matters and areas that the Board reviewed and considered at its eight meetings during the year were as follows: FINANCIAL AND OPERATIONAL STRATEGIC MATTERS PERFORMANCE The Board continued to focus on overseeing the Throughout the year, the Board received and execution of the strategy. discussed: The Board: • reports from the CEO and the Chief Financial Officer on performance of operations of different • received updates on Lenovo new launched business groups products and technology outlook • information on the financial performance of the • received updates on Lenovo Capital and Group Incubator Group • approved FY2018/19 annual budget and • received regular business developments reports operating plan • approved FY2017/18 financial results and the • received updates on strategy in different respective results announcements and reports business groups • declared/recommended the declaration of • held a strategy meeting, focusing on the 5G dividends (Fifth-Generation Mobile Communications • reviewed updates on capital market System) and Customer Experience • approved annual caps for the NEC continuing • held a strategy meeting focusing on DCG connected transactions for the coming three transformation and planning of the 3 core financial years businesses • approved the formation of a funding committee for executing funding activities to raise funds for a determined aggregate amount GOVERNANCE AND SUSTAINABILITY OTHERS The Board dealt with governance and sustainability Talents and Employee Survey matters, including: The SVP of HR updated the Board during the year • received reports from the three Board on: committees • organization human resources planning • approved and recommended the re-appointment • results of the Lenovo-Listens Survey 2017, an of external auditor employee engagement survey • discussed the Board matrix and the recommendations following the Board evaluation Ad hoc projects • received updates on sustainability and also discussed and approved FY2016/17 sustainability The Board reviewed and approved: report and approved rules relating to Lenovo • the acquisition of equity interests in joint venture supply chain and UK Anti-Slavery Disclosure and specified corporations and sale of property Statement and equity interests in specified corporation • received the directors' professional trainings • the subscription agreement in connection with • received update on US Tax Reform impact and the issue of new shares and bonus warrants of approved the publication of an announcement to the Company inform shareholders and potential investors 2017/18 Annual Report Lenovo Group Limited 71 72 Corporate Governance Report Board Committees As at the date of this annual report, the Company has preserved three Board committees (the "Board Committees") with defined terms of reference (which are posted on the Company's website and HKEx's website) – Audit Committee, Compensation Committee, and Nomination and Governance Committee. The terms of reference of the Audit Committee, Compensation Committee, and Nomination and Governance Committee reference those set out in the CG Code prevailing from time to time. AUDIT COMMITTEE Chairman Mr. Nicholas C. Allen Members Ms. Ma Xuezheng Mr. William Tudor Brown BOARD OF DIRECTORS Mr. Gordon Robert Halyburton Orr Chairman and Executive Director Key responsibilities Mr. Yang Yuanqing (CEO) • Assist the Board in carrying out its oversight responsibilities in relation to financial reporting, risk management and internal control, and in maintaining a relationship with Non-executive Directors the external auditor Mr. Zhu Linan Mr. Zhao John Huan COMPENSATION COMMITTEE Independent Non-executive Directors Chairman Dr. Tian Suning Ms. Ma Xuezheng Mr. Nicholas C. Allen Members Mr. William O. Grabe Mr. Nobuyuki Idei Mr. William Tudor Brown Mr. William O. Grabe (Lead Independent Director) Mr. Gordon Robert Halyburton Orr Mr. William Tudor Brown Mr. Zhao John Huan Ms. Ma Xuezheng Key responsibilities Mr. Yang Chih-Yuan Jerry • Assist the Board to assess and make Mr. Gordon Robert Halyburton Orr recommendation on the compensation policy; and to determine the compensation level and package for the Chairman of the Board, CEO, Key Responsibilities other directors and senior management • Set strategy, mission and values • Provide leadership of the Company and direction for management NOMINATION AND • Collective responsibility and accountability to GOVERNANCE COMMITTEE shareholders for the long term success of the Chairman Group Mr. Yang Yuanqing • Review the performance of management and Members Mr. Nobuyuki Idei the operating and financial performance of Mr. William O. Grabe the Group Dr. Tian Suning Key responsibilities • Assist the Board in overseeing Board organization, succession planning, and developing the corporate governance principles and policy and responsible for the assessment of the performance of the Chairman of the Board and/or the CEO and the independence of independent non-executive directors 72 Lenovo Group Limited 2017/18 Annual Report 72 The Board may also establish committees on an ad hoc basis to approve specific projects as deemed necessary. Should the need arise, the Board will authorize an independent board committee comprising the independent non-executive directors to review, approve and monitor connected transactions (including continuing connected transactions) that should be approved by the Board. All Board Committees follow the same principles and procedures as those of the Board and are provided with sufficient resources to perform their duties. The Board Committees will report to the Board on a regular basis, including their decisions or recommendations to the Board, unless there are legal or regulatory restrictions on their ability to do so. The member list of the Board Committees is also posted on the Company's website and HKEx's website. Audit Committee The Audit Committee is delegated by the Board to perform its duties within its terms of reference. Details of the Audit Committee, including its membership, responsibilities and main activities during the fiscal year 2017/18, are summarized in the Audit Committee Report as stated on pages 102 to 109 of this annual report. Compensation Committee The Compensation Committee is delegated by the Board to perform its duties within its terms of reference. Details of the Compensation Committee, including its membership, responsibilities and work done during the fiscal year 2017/18, are summarized in the Compensation Committee Report as stated on pages 110 to 122 of this annual report. Nomination and Governance Committee Membership The Nomination and Governance Committee (defined as "Committee" in this section) of the Board of the Company as at the date of this annual report is comprised of four members, a majority of whom are independent non-executive directors of the Company. The members who held office during the year and up to the date of this annual report are: Chairman Mr. Yang Yuanqing Chairman, CEO and executive director Member Mr. Nobuyuki Idei Independent non-executive director Independent non-executive director and Member Mr. William O. Grabe Lead Independent Director Member Dr. Tian Suning Independent non-executive director More information on the skills and experience of the members of the Committee may be found in the directors' biographies set out on pages 142 to 145 of this annual report. 2017/18 Annual Report Lenovo Group Limited 73 72 Corporate Governance Report Responsibilities The Committee is delegated by the Board with responsibility to review the composition of the Board and Board Committees to ensure they are properly constituted and balanced in terms of skills, experience and diversity. In addition to this, it is also responsible for: • making recommendation to the Board on succession planning for directors and CEO; • assessment of the performance of the Chairman and/or CEO and making proposals to the Compensation Committee; • monitoring corporate governance issues and developments to ensure that the Company is in line with the international best practices; • reviewing and determining the director induction and continuous professional development programs; and • reviewing and monitoring the annual Board and Board Committees' evaluation and the progress of the implementation actions. Key Features • The Committee's terms of reference which clearly deal with its membership, authority, duties and frequency of meetings are published on the Company's website and HKEx's website. • The Committee is provided with sufficient resources to perform its duties. • The Committee is authorised to obtain outside legal or other independent professional advice in performing its duties at the Company's expense. No request was made by any member for such advice during the year. • Chief Legal Officer and Company Secretary are invited to attend the Committee meetings in order to provide insight and enhance the Committee's awareness of corporate governance issues and developments. • The chairman of the Committee being also the Chairman and CEO, is required to excuse himself from the agenda items relating to succession planning of the Chairman and/or CEO and the assessment of performance of the Chairman and/or CEO. 74 Lenovo Group Limited 2017/18 Annual Report 72 Main Activities During FY2017/18 In the fiscal year ended March 31, 2018, the Committee held two meetings. The attendance record of the Committee's members is set out on page 77 in this report and the chart below shows how the Committee allocated its time during the fiscal year 2017/18. NOMINATION AND GOVERNANCE COMMITTEE Allocation of agenda time 7% 5% FY2017/18 FY2016/17 15% 20% Board and Board Committees' 5% 3% compositions Assessment of the performance 20% 36% of the Chairman and CEO Corporate Governance 53% 32% Board and Board Committees' 15% 12% evaluation Others 7% 17% 53% The main matters and areas that the Committee reviewed and considered during the year were as follows: Board and Board Committees' • Reviewed and recommended to the Board on the structure, size compositions and composition of the Board including the diversity and balance of skills, knowledge and experience of the directors. • Reviewed and discussed the progress against Board diversity targets. Assessment of the performance • Assessed the performance of the Chairman and CEO for the fiscal of the Chairman and CEO year 2016/17 and provided recommendation to the Compensation Committee. • Reviewed the arrangement of same person acting as Chairman and CEO. 2017/18 Annual Report Lenovo Group Limited 75 72 Corporate Governance Report Corporate Governance • Reviewed corporate governance disclosures in 2016/17 annual report and 2017/18 interim report. • Reviewed and assessed the independence of independent non- executive directors and affirmed the Committee's view over their independence. • Reviewed and discussed the continuous professional development programs for the directors of the Company. • Reviewed the policies and practices on corporate governance, and the compliance with legal and regulatory requirements of the Group. Board and Board Committees' • Discussed and approved the Board evaluation proposal for the evaluation fiscal year 2017/18. • Reviewed report on the results of the Board evaluation for the fiscal year 2017/18 and discussed and proposed actions to be taken. 76 Lenovo Group Limited 2017/18 Annual Report 72 Board and Board Committees Meetings During the year ended March 31, 2018, the overall attendance rate of directors at Board and Board Committees meetings was 94% (2016/17: 95%). The individual attendance records of each director at the meetings of the annual general meeting, general meeting, Board, Audit Committee, Compensation Committee, and Nomination and Governance Committee during the year ended March 31, 2018 are set out below: Meetings attended/held General Nomination Meeting and Annual held on Audit Compensation Governance General November 10, Board Committee Committee Committee Meeting 2017 Name of directors (Notes 1 & 2) (Notes 1 & 4) (Note 1) (Notes 1 & 5) (Notes 3 & 4) Executive director Mr. Yang Yuanqing 8/8 – – 2/2 1/1 1/1 (Chairman & CEO) Non-executive directors Mr. Zhu Linan 7/8 – – – 0/1 0/1 Mr. Zhao John Huan 7/8 – 4/4 – 0/1 0/1 Independent non-executive directors Dr. Tian Suning 6/8 – – 2/2 0/1 0/1 Mr. Nicholas C. Allen 8/8 4/4 – – 1/1 1/1 Mr. Nobuyuki Idei 8/8 – – 2/2 1/1 0/1 Mr. William O. Grabe 8/8 – 4/4 2/2 1/1 0/1 (Lead Independent Director) Mr. William Tudor Brown 8/8 4/4 4/4 – 1/1 0/1 Ms. Ma Xuezheng 8/8 4/4 4/4 – 1/1 0/1 Mr. Yang Chih-Yuan Jerry 5/8 – – – 0/1 0/1 Mr. Gordon Robert Halyburton Orr 7/8 4/4 4/4 – 0/1 1/1 Notes: (1) The attendance figure represents actual attendance/the number of meetings a director is entitled to attend. (2) The Board held four regular meetings, two strategic meetings and two ad hoc projects meetings during the year. (3) The Company held the annual general meeting on July 6, 2017. (4) Representatives of the external auditor participated in every Audit Committee meeting and the annual general meeting held during the year. (5) For corporate governance reasons, Mr. Yang Yuanqing was required to excuse himself from the agenda item relating to assessment of the performance of the Chairman and CEO of the Nomination and Governance Committee meeting to avoid conflict of interest. 2017/18 Annual Report Lenovo Group Limited 77 72 Corporate Governance Report Board and Board Committees' Effectiveness Review The Board is aware of the importance of continually assessing its own performance in support of the leadership of the Group. The Board has a formal process, led by the Nomination and Governance Committee, for the evaluation of the performance of the Board and Board Committees, to ensure that they continue to act effectively and efficiently and to fulfill their respective duties. The process involves the following ways: Succession Planning Re-election Evaluation by Shareholders Succession Planning The Board is ultimately responsible for succession planning for directorships and key management roles. During the year, the Board and the Nomination and Governance Committee have discussed and reviewed Board composition and succession planning to ensure that the successors for key roles are identified and their performance are also assessed. 78 Lenovo Group Limited 2017/18 Annual Report 72 Evaluation The Board believes that the evaluation is helpful and provides a valuable opportunity for continuous improvement. The objectives of the evaluation were to build on the improvements made since the last evaluation, thereby improving the collective contribution of the Board as a whole and also the competence and effectiveness of each individual director. Mr. Grabe, the Lead Independent Director, is delegated with authority to take a key role in the Board evaluation process. Mr. Grabe, in consultation with the Chairman and supported by the Chief Legal Officer and the Company Secretary, will compile and circulate a comprehensive questionnaire for completion by all directors, the aim of which is to evaluate the performance and effectiveness of the Board and its committees. The evaluation covered: • Board processes and their effectiveness • Time management of Board meetings • Board composition and dynamics • Strategic and operational oversight • Succession planning • Board support • Communications with shareholders and stakeholders Evaluation process The evaluation process involves the following three stages: Stage 1 Stage 2 Stage 3 DETERMINE DISCUSS AND REVIEW ACTION PLAN THE SCOPE THE RESULTS AGREED • Board and its Committees • Preparing the draft results report • Following review of the results, • Discussing the draft results the Board drew conclusions and report between the Lead agreed proposed implementation Independent Director and the or action plan chairpersons of Audit Committee DETERMINE and Compensation Committee MONITOR AND THE APPROACH • Review of the results report by FOLLOW-UP • Conducted by completing a the Nomination and Governance MEETINGS Committee • Monitoring the progress of the comprehensive questionnaire • Finalizing the results report implementation or action taken semi-annually • Reporting to the Board in a manner that did not identify • Reporting back to the Board on individuals' specific responses, the progress by Nomination and ensuring that these responses Governance Committee could be as open, frank and informative as possible 2017/18 Annual Report Lenovo Group Limited 79 72 Corporate Governance Report Evaluation results A consolidated report of the outputs from the evaluation will be prepared by Nomination and Governance Committee for review and consideration by the Board. The results of the evaluation and the implementation or action plan will be thoroughly discussed at a Board meeting. Re-election by Shareholders Pursuant to the Articles of Association, one-third of the directors for the time being shall retire from office at each annual general meeting. The retiring directors shall be eligible for re-election. New appointments either to fill a casual vacancy or as an addition to the Board are also subject to re-election by shareholders at the next following annual general meeting of the Company. The Nomination and Governance Committee has conducted a review of each director seeking re-election. The sufficient biographical and other information on those directors seeking re-election are provided in the annual report and the circular to enable shareholders to make an informed decision. ACCOUNTABILITY AND AUDIT Financial Reporting The Board acknowledges its responsibility for presenting a balanced, clear and comprehensive assessment of the Group's performance, position and prospects. The Board is also responsible for the preparation of financial statements for each financial year which gives a true and fair view of the state of affairs of the Group on going concern basis while the external auditor's responsibilities to shareholders are set out in the Independent Auditor's Report on pages 162 to 166 of this annual report. The practices of the Company on the timeline for publication of financial results and the related reports are set out below: Annual Results • Announced within 2 months • Published the annual report within 14 days following the annual results announcement Interim Results • Announced within 1.5 months • Published the interim report within 14 days following the interim results announcement Quarterly Results • Announced within 7 weeks 80 Lenovo Group Limited 2017/18 Annual Report 72 Risk Management and Internal Control At Lenovo, risk is defined as a potential action, event or circumstance that could impact the Company's ability, favorably or unfavorably, to meet its strategic goals. Risk is an inherent part of the Company and needs to be understood and managed properly to provide a foundation for the Company's sustained growth. In line with the commitment to deliver sustainable value, Lenovo adopts a holistic risk management and internal control framework to proactively manage risks. This framework is put into effect by Lenovo's Board of Directors and the Audit Committee to support the Board in monitoring risk exposures, the design and operating effectiveness of the underlying risk management and internal control systems. Board • Has overall responsibility for the Lenovo's risk management and internal control systems. • Oversees and monitors the overall effectiveness of the risk management system and internal audit function through the Audit Committee. Audit Committee • Supports the Board in reviewing and monitoring the performance of the risk management and internal control systems. • Reviews the process for identifying, assessing and reporting key risks and control issues of the Company. • Reviews the adequacy and efficiency of the Company's internal audit function. • Reviews the enterprise risk management approach. • Reviews risks raised during annual risk registration exercise, and other risks and concerns. • Approves Company's risk tolerance 2017/18 Annual Report Lenovo Group Limited 81 72 Corporate Governance Report Internal Audit • Supports the Audit Committee in reviewing the effectiveness of internal control system. • Capitalizes on the audit processes to independently assess the effectiveness of established system of controls. • Independent investigations regarding certain allegations of fraud and violations of Lenovo's Code of Conduct (the "Code") and other company policies. Senior Management • Provides leadership and guidance for the balance of risk and return. • Designs, implements and reviews Lenovo's risk management framework. • Ensures that salient risks are highlighted to the Audit Committee, along with the status of actions taken to manage these risks. Enterprise Risk Management • Responsible to design, implement, review and update Lenovo (ERM) ERM framework. • Coordinates the risk identification and assessment process, highlights identified risks to the Audit Committee, along with the status of actions taken to manage these risks. • Risk projects. Business Functions • ERM Risk Champions are appointed in each function where risk ownership is established • Identify risk, assess and initiate control and mitigation measures in their areas of responsibility • Establish group-wide policies and guidelines where appropriate • Quarterly management disclosure and certification process trigger reporting of unusual items, occurring in the ordinary course of our business, which raise significant financial or business risks This risk management and internal control framework is in place to improve communication of identified risks with management, measure the impact of the identified risks and facilitate implementation of coordinated mitigating measures. 82 Lenovo Group Limited 2017/18 Annual Report 72 Internal Control For many years, the Company has had an integrated approach for internal control which is consistent with the Committee of Sponsoring Organizations of the Treadway Commission (COSO) internal control framework. Monitoring: Control Environment: The internal control process The internal organizational is continually monitored. environment driven by the Modifications are made to management operating improve internal control philosophy, risk appetite, activities as a result of the integrity, and ethical values. monitoring process. Control Activities: Policies and procedures are implemented to ensure organizational objectives and risk-mitigation activities are effectively implemented. Information and Risk Assessment: Communication: Risks are identified and the likely Relevant information is impact on the organization is communicated in an acceptable assessed. format and timely fashion to enable the organization to meet its objectives. Within this framework, management is responsible for setting the appropriate tone from the top, performing risk assessments, and owning the design, implementation and maintenance of internal control. Other teams such as Finance, Legal, and Human Resources provide assistance and expertise to management to assist it in undertaking its responsibilities. The Board and its Audit Committee oversee the actions of management and monitor the effectiveness of the established controls, assisted by assurance provided by the external and internal auditors. Lenovo's internal control framework is designed to manage rather than eliminate the risk of failure to achieve business objectives, and as such, provides reasonable (rather than absolute) assurance against material misstatement or loss. Management of internal control Essential to this internal control system are well defined policies and procedures that are properly documented and communicated to employees. The corporate policies form the basis of all the Company's major guidelines and procedures and set forth the control standards required for the functioning of the Company's business entities. The policies address legal, regulatory, and operational topics, including, for example, intellectual property, data privacy, employee health and safety, delegation of authority, information security, and business continuity. 2017/18 Annual Report Lenovo Group Limited 83 72 Corporate Governance Report Additionally, Lenovo has a strong corporate culture based on good business ethics and accountability. Lenovo's Code, which applies to all employees, forms the basis of Lenovo's commitment to conducting all business with uncompromising integrity and ethical behavior. The Code also helps employees determine when to ask for advice, and how to obtain it. All Lenovo employees are required to comply with the Code, which is available in multiple languages and is accessible on the Company's website and internal intranet, and to participate in regular training to reinforce the Company's commitment to compliance and conducting business with integrity. Lenovo regards any violation of the Code as a serious matter and is committed to investigating all reported concerns. Furthermore, in keeping with best practices, Lenovo has developed and implemented numerous policies to reinforce the Code and provide specific guidance to employees regarding compliance with rules and laws related to bribery and corruption. These policies include an Anti-Bribery and Anti-Corruption Policy, a Conflict of Interest Policy, and a policy with specific guidance on accepting or receiving gifts, entertainment, travel or corporate hospitality. Along with establishing guidelines, principles and values, Lenovo recognizes that an environment where employees feel free to bring concerns to management is also required to make the Company's internal control system successful. Lenovo provides employees with multiple confidential methods to raise concerns and Lenovo's corporate policy on reporting unlawful or inappropriate conduct makes it clear that all reports will be kept anonymous and confidential to the extent possible. Most importantly, Lenovo incorporates an anti-retaliation policy within the Code itself. If an employee seeks advice, raises a concern relating to a potential compliance issue, reports suspected misconduct, or cooperates with an investigation, Lenovo will not tolerate any form of retaliation or harassment against that employee. Another feature of Lenovo's internal control system is the execution of key control self-testing by management to reasonably assure that internal controls are working as intended and that necessary actions have been taken to address control weaknesses. Specific employees with controls knowledge and expertise have been identified within the business to further assist management with designing, executing, and monitoring controls. The Group Controller oversees controls related activities of these individuals across organizations and process owners. This comprehensive internal control framework established by the Company covers all activities and transactions. Management performs periodic enterprise wide risk assessments and continuously monitors and reports progress of action plans to address these key risks. Management also assesses business risks when formulating corporate strategies, and tracks and reports on the implementation of strategic initiatives, business plans, budgets and financial results regularly to the Board. Additionally, as part of Lenovo's commitment to financial integrity, all relevant senior executives regularly verify the accuracy and completeness of the quarterly financial statements and confirm compliance with key internal controls. To assist the Audit Committee in its oversight and monitoring activities, the Company maintains an independent, worldwide Internal Audit function. Internal Audit provides objective assurance to the Audit Committee that the system of internal controls is effective and operating as intended. The mission of Internal Audit is to provide the Board and Lenovo management with: • Independent and objective assessment of Lenovo's system of internal controls; • Guidance to Lenovo stakeholders for improving risk management; • Proactive support to improve Lenovo's control posture; and • Independent investigations regarding certain allegations of fraud and violations of the Code and other company policies. 84 Lenovo Group Limited 2017/18 Annual Report 72 To enable it to fulfill its mission, Internal Audit has unrestricted access to all corporate operations, records, data files, computer programs, property, and personnel. To preserve the independence of the Internal Audit function, the Head of Internal Audit reports directly to the Audit Committee on all audit matters and to the Chief Financial Officer on administrative matters. The Head of Internal Audit is authorized to communicate directly with the Chairman of the Board, the Chairman of the Audit Committee and other Board members as deemed necessary. To help ensure the quality of the Internal Audit function and provide assurance that the Internal Audit function is in conformity with the standards of the Institute of Internal Auditors, Internal Audit has implemented a comprehensive and continuous quality assurance program covering all Internal Audit activities. In addition, the Audit Committee periodically commissions an independent, external quality assurance review of the Internal Audit function. In selecting the audits to perform each year, Internal Audit performs a risk assessment using information collected from process owners, the enterprise risk management team, senior executives, the external auditor and the Board along with an analysis of prior audit issues and other data. Internal Audit develops an audit plan that prioritizes areas with significant risks or deemed to be strategic in nature to the business. The audit plan is reviewed by the Audit Committee, which is also given quarterly updates on the performance of the plan and key findings. As necessary throughout the year, the audit plan will be modified to reflect emerging risks or changes to business plans. Ad hoc reviews of areas of concern identified by management or the Audit Committee may also be performed. During the last year, Internal Audit issued multiple reports covering all significant operational and financial units worldwide. In keeping with best practices, Internal Audit regularly monitors the status of management action plans resulting from audit findings to ensure completion and reports progress each quarter to the Audit Committee. Audit Committee reporting also includes identified key control issues to provide the Audit Committee full visibility to the status of Lenovo's control environment. Furthermore, Internal Audit is responsible for investigating certain allegations of potential violations of the Code, or any other company policies as appropriate. Internal Audit partners with Legal, Ethics and Compliance, Human Resources, and other subject matter experts where necessary to ensure the appropriate expertise when performing these investigations. Management and the Audit Committee are informed of the results of these investigations, any resulting required actions, and status updates on actions. Inside information Regarding procedures and internal controls for the handling and dissemination of inside information, the Company: (i) is aware of its obligations under the SFO and the Listing Rules and the overriding principle that inside information should be announced immediately if it is the subject to the requirements and the safe harbors as provided in SFO; (ii) conducts its affairs with close regard to the applicable laws and regulations prevailing in Hong Kong; (iii) has included in the Code a strict prohibition on the unauthorized use of non-public or inside information; (iv) has established a Continuous Disclosures Policy along with its guidance notes for monitoring, reporting and disseminating inside information to our shareholders, investors, analysts and media. These policy and guidance notes also identify who are the Company's authorized spokespersons and their responsibilities for communications with stakeholders; and (v) has communicated to all relevant staff regarding the implementation of the Continuous Disclosures Policy and the relevant trainings are also provided. 2017/18 Annual Report Lenovo Group Limited 85 72 Corporate Governance Report Control effectiveness The Board, through the Audit Committee of the Company, conducts a continuous review of the effectiveness of the internal control system operating in the Company and considers it to be adequate and effective. The review covers all material controls, including financial, operational, information technology, and compliance controls, and risk management functions. The Board is not aware of any significant areas of concern which may affect the shareholders. The Board is satisfied that the Company has fully complied with the code provisions on internal controls as set forth in the CG Code. Enterprise Risk Management Lenovo's ERM framework is effected by Lenovo's Board of Directors and management team, and is applied in strategy setting and across all major functions of the Company. It involves:– • The ERM team, who is responsible to design, implement, review, and update Lenovo ERM framework. • All Lenovo major functions, where risk ownership is established via the appointment of ERM Champions in each function. Lenovo recognizes that risk management is the responsibility of everyone within Lenovo, and that risk is best managed when business functions take responsibility and are accountable for risks. Rather than being a separate and standalone process, risk management is therefore incorporated as part of Lenovo annual strategic planning process across all major functions of the Company. During strategy planning, all business functions are required to identify material risks that may impact their strategy objectives. They also identify, assess and evaluate operational risks. Many aspects of risks are considered, including and not limited to:– • Business continuity • Financial impact • Reputational risk • Safety and health • External regulations • Social responsibility Plans to mitigate the identified risks are, at the same time, developed for implementation, to continuously deliver sustainable value. With this practical and effective framework, risk management features are integrated into each function. Critical and major risks of the business functions, especially in view of the changing business environment, are identified and assessed based on risk assessment matrix that helps to rank the risks and prioritize risk management effort to determine the appropriate risk mitigation plans. 86 Lenovo Group Limited 2017/18 Annual Report 72 Risk Rating Matrix 4 Extreme H H VH VH IMPACT 3 High M M H H 2 Moderate L L M M 1 Low L L L L Risk Rating Remote Unlikely Possible Almost Certain VH Very High 1 2 3 4 H High LIKELIHOOD M Moderate L Low The risks are monitored and reviewed by each business function as well as at the group level. And at least annually, the ERM team coordinates the risk identification and assessment process and the identified risks are highlighted to the Audit Committee, along with the status of actions taken to manage these risks. Risk ERM Team Audit Board of Champions Committee Directors • Identify risks • Risk registration • Review risks • Assess • Report risks to Audit Committee • Raise concerns • Manage • Risk projects • Approve risk tolerance • Monitor • Engage actuarial work • Review • Recommend risk tolerance Details of some of these risks may be found under "Material Risks of the Group" on Page 24. This framework will continue to be strengthened to create a robust and holistic risk management culture to safeguard the value of the Company. At the enterprise level, Lenovo's risk tolerance is also reviewed periodically, and changes are approved by the Audit Committee. The ERM team engages actuarial studies to quantify risks, and the Company's risk tolerance is adjusted when appropriate. The risk tolerance represents the amount of risk the Company is willing to undertake in the pursuit of its strategic and business objectives. Where necessary, ERM employs risk transfer strategies through insurance management. ERM also initiates risk projects to improve risk awareness. 2017/18 Annual Report Lenovo Group Limited 87 72 Corporate Governance Report External Auditor Independence of external auditor The Group's external auditor is PricewaterhouseCoopers ("PwC"), who is remunerated mainly for its audit services provided to the Group. The Company has adopted a policy on engagement of the external auditor for non-audit services, under which the external auditor is required to comply with the independence requirements under the Code of Ethics for Professional Accountants issued by the Hong Kong Institute of Certified Public Accountants. The external auditor may provide certain non-audit services to the Group given that these do not involve any management or decision making functions for and on behalf of the Group; do not perform any self-assessments; and do not act in an advocacy role for the Group. The engagement of the external auditor for permitted and approved non-audit services shall be approved by the Audit Committee if the value of such non-audit services is equal to or above US$320,000. During the year, PwC provided audit and non-audit services to the Group. Remuneration of external auditor The fees paid or payable to PwC for audit and non-audit services for the financial year ended March 31, 2018 and the comparative figures for the financial year ended March 31, 2017 are as follows: 2018 2017 Nature of services US$ million US$ million Audit services 8.4 7.7 Non-audit services – Tax 1.4 1.8 – IT 1.9 1.9 – Advisory 0.1 0.4 – Other services 0.5 0.9 Total 12.3 12.7 88 Lenovo Group Limited 2017/18 Annual Report 72 INVESTOR RELATIONS Lenovo puts great emphasis on promoting open, transparent, efficient and consistent communications with shareholders, investors and equity analysts. The investor relations team is committed to maintain interactive communications with the capital market and offering all necessary information, data and services in a timely and accurate manner. The team also proactively responds to major issues the capital market concerns about in order to help the investment community to better understand the Company's strategy, operations and latest development. Communications with Investors During the fiscal year 2017/18, the Company maintained comprehensive and effective communications with its investors and analysts through multiple channels including investor conferences, roadshows, company visits, one-on-one meetings, teleconferences, IR website, social media, new product newsletters and email alerts on Lenovo events. The senior management team presented its annual and quarterly earnings results through webcast, conference calls, social media and face-to-face meetings to communicate with international and domestic shareholders, investors and analysts. The frequent communication enhanced the understanding of the capital market on the business strategy, development tactics and competitive edges of the Company. Lenovo Transform June 20, 2017 | New York City Lenovo organized its inaugural Tech World Transform event to explore how technologies like artificial intelligence and next generation infrastructure are impacting the industry and our customers, and introduced a range of new solutions that will better enable our customers to achieve success in the age of digital transformation. During the event, Lenovo showcased how new data center solutions bring the simplicity of cloud, speed insights to decisions, and enable new levels of flexibility in infrastructure, and Lenovo also shared its vision for the future of personal computing including the office of the future, smart office, AR/VR, and PC as a service (PCaaS). The visitors could also test out the newest products along with product experts who are designing the next generations of our famed ThinkPad. 2017/18 Annual Report Lenovo Group Limited 89 72 Corporate Governance Report Lenovo Tech World July 20, 2017 | Shanghai, China Lenovo organized its third Tech World event in Shanghai in 2017 after the success of the events in Beijing and San Francisco in previous years. With the theme "A world powered by AI", the innovation summit shared Lenovo's vision for the future of AI and showed how AI can make life better. Lenovo believe an intelligent future makes people's lives better, and that starts with smart devices. Cloud enabled devices – such as PCs, tablets, smartphones, smart speakers, smart TV and AR/VR – bring content, services and experiences in a new way. Lenovo hosted global equity analysts and investors to the Tech World event. A roundtable dinner for top management of the Data Center Group to meet with sell-side analysts was organized during the Tech World event. IR breakouts were arranged and the attending analysts and investors had the opportunity to have face-to-face interactions with the Company's C-suite management team and leaders of the Company's different business units, helping the attendees to have more thorough understanding of the Company's strategy and future plans of the businesses. Most of the attendees found the event very useful and it well positioned Lenovo's leadership in the global tech industry. 90 Lenovo Group Limited 2017/18 Annual Report 72 Plant Visits During the fiscal year, the Company continued to cooperate with different securities houses in organizing trips to the Company's brand experience center in Beijing, so as to help the investor community better understand the Company's strategy and operating environment through a different perspective. Social Media The Company and the investor relations team have been devoting in leveraging various social media platforms to blast out updates on results announcements and key company events, with an aim to have multi-point engagement via social media with the Company's stakeholders. The team also proactively pushed out updates and key event news wrap up, e.g. Lenovo Tech World, CES, MWC and results announcements, to provide an one-stop snapshot to the investors. During the fiscal year, the followers of and mentions to the Company's social media platforms have continued to increase. Please follow Lenovo at: Investor Conferences To maintain active communications with institutional investors around the world, the senior management team proactively participated in the following investor conferences held by major international investment banks. Investor Conferences Attended FY2017/18 Date Conference Location June 2017 JP Morgan Global China Summit 2017 Beijing Sept 2017 Credit Suisse Annual Asian Technology Conference Taipei Sept 2017 CLSA Investors' Forum Hong Kong Nov 2017 BofAML 2017 China Conference Beijing Nov 2017 Daiwa Investment Conference Hong Kong Nov 2017 UBS Global Technology Conference San Francisco Mar 2018 Daiwa Investment Conference Tokyo Mar 2018 BofAML 2018 Asia Pacific TMT Conference Taipei Mar 2018 Credit Suisse Asian Investment Conference Hong Kong 2017/18 Annual Report Lenovo Group Limited 91 72 Corporate Governance Report Kirk Skaugen, President of the Data Center Group, was invited as the keynote speaker at Credit Suisse 18th Annual Asia Technology Conference in September and UBS Global Technology Conference in November 2017. Kirk presented the three wave strategy and the solid progress in our transformation, and updated the investors with our improving results and latest development across the different business groups. He also highlighted the way forward for Data Center Group and our competitive edges. Market Recognitions Lenovo has devoted continuous effort in investor relations and the Company was well-recognized by the investment community. Forbes 2017 Global Top Regarded Companies 2000 Zhitong Finance 2017 Golden Hong Kong Equities Lenovo was named one of the "Global 2000 – Top Awards – The Best Value TMT Company Award Regarded Companies" by the Forbes. Lenovo won the awards of "The Best Value TMT The award is based on the results of an Company" co-organized by the PRC leading independent survey and the companies receiving financial media Zhitong Finance and Tonghuashun the highest total scores are awarded as the Best Finance. The judging included results from online Regarded Companies within the Global 2000 list. polling and a review by a judging panel made up of The evaluation was based on the dimensions renowned securities firms and economists. "Trustworthiness/Honesty", "Social Conduct", "Company as an Employer" and "Performance of the Product/Services". HKIRA Investor Relations Awards HKMA Best Annual Reports Awards Lenovo has received the "Certificate of Excellence" Lenovo's fiscal year 2016/17 annual report with the from the Investor Relations Awards organized by theme "Different is Better" has won the "Excellence the Hong Kong Investor Relations Association Award for H Share & Red Chip Entries" by The ("HKIRA"). Hong Kong Management Association (HKMA). Such award fully demonstrates our leading international best practices of our Annual Report. 92 Lenovo Group Limited 2017/18 Annual Report 72 Index Recognition Lenovo has always been well recognized by the capital market and the Company is currently a constituent stock of the following indexes: • Global Compact 100 • Hang Seng China-Affiliated Corporations Index • Hang Seng China (Hong Kong-listed) 100 Index • Hang Seng Commerce & Industry Index • Hang Seng Composite Index • Hang Seng Composite Industry Index – Information Technology • Hang Seng Composite LargeCap Index • Hang Seng Corporate Sustainability Index • Hang Seng Corporate Sustainability Benchmark Index • Hang Seng (Mainland and HK) Corporate Sustainability Index • Hang Seng Equal Weighted Index • Hang Seng Global Composite Index • Hang Seng High Dividend Yield Index • Hang Seng Internet & Information Technology Index • Hang Seng IT Hardware Index • Hang Seng SCHK High Dividend Low Volatility Index • Hang Seng Stock Connect Hong Kong Index • MSCI China Index • MSCI China Information Technology Index SHAREHOLDERS Communications with Shareholders The Company is committed to safeguard shareholders' interests and believes that effective communication with shareholders and other stakeholders is essential for enhancing investor relations and investor understanding of the business performance and strategies of the Group. To achieve this, the Company has established the shareholders communication policy (the "Shareholders Communication Policy") setting out various formal channels of communication with shareholders and other stakeholders for ensuring fair disclosure and comprehensive and transparent reporting of the Company's performance and activities. The Nomination and Governance Committee of the Company reviews the Shareholders Communication Policy on a regular basis to ensure its effectiveness. COMMUNICATION CHANNELS WITH SHAREHOLDERS AND OTHER STAKEHOLDERS Teleconferences Publication of Shareholders' Investment Company's and webcasts financial reports, meetings community website for analysts and announcements, communications media briefings circulars and press such as roadshow, releases site visits and annual analyst roundtable 2017/18 Annual Report Lenovo Group Limited 93 72 Corporate Governance Report Constructive use of the general meetings The annual general meeting and other general meetings of the Company are the primary forum for communication by the Company with its shareholders and for shareholders' participation. The Board encourages shareholders to participate in general meetings as it provides a valuable opportunity to discuss the Company, its corporate governance and other important matters. Notice of the annual general meeting and related papers are sent to shareholders at least 20 clear business days prior to the date of the annual general meeting. The information sent to shareholders includes a summary of the business to be covered at the annual general meeting, where a separate resolution is prepared for each substantive matter. The Company arranges a question and answer session in the annual general meeting for shareholders and media to communicate directly with Chairman and senior management. The Company also arranges a product display at the annual general meeting venue to update shareholders on the latest products strategy of the Company, if practicable. 2017 Annual General Meeting The annual general meeting of the Company held on July 6, 2017 (the "2017 Annual General Meeting") was attended by, among others, the CEO, Chief Financial Officer, chairpersons of the Audit Committee, Compensation Committee and Nomination and Governance Committee or his/her delegates, the Lead Independent Director and representatives of the external auditor PwC to answer questions raised by shareholders at the meeting. 94 Lenovo Group Limited 2017/18 Annual Report 72 Separate resolutions were proposed on each issue, including the re-election of individual retiring directors. The matters resolved and the percentages of votes cast in favour of the resolutions are summarised below: Matters Being Voted Upon Percentage of Affirmative Votes Received and considered the audited consolidated financial statements and the reports of the directors and the independent 99.99% auditor for the year ended March 31, 2017 Declaration of a final dividend for the issued shares of the 99.99% Company for the year ended March 31, 2017 99.44% to 99.99% Re-election of retiring directors and authorization of the Board to with respect to each fix directors' fees individual resolution Re-appointment of PwC as auditor and authorization of the Board 99.86% to fix auditor's remuneration Approval of granting the general mandate to the directors to allot, issue and deal with additional shares not exceeding 20% of the 73.18% aggregate number of shares in issue of the Company Approval of granting the general mandate to the directors to buy back shares not exceeding 10% of the aggregate number of shares 99.84% in issue of the Company Approval of extending the general mandate to the directors to 73.46% issue new shares by adding the number of shares bought back Approval of The Lenovo Group Limited Matching Share Plan and The Lenovo Group Limited Matching Share Plan Subplan for 82.93% California State Securities Law Compliance 2017/18 Annual Report Lenovo Group Limited 95 72 Corporate Governance Report General Meeting During the year, the Company convened and held a general meeting on November 10, 2017 (the "2017 General Meeting") to consider and approve the subscription agreement, the specific mandate for the allotment and issue of the subscription shares, the warrant shares and the bonus warrants, the whitewash waiver, the relevant management participation and the authorization to Directors signing all necessary documents to give effect to the foregoing. which meeting was attended by the CEO, Chief Financial Officer, members of the independent board committee and representatives from the independent financial advisor to independent shareholders of the Company. Separate resolutions were proposed on each issue. The matters resolved and the percentages of votes cast in favour of the resolutions are summarised below: Matters Being Voted Upon Percentage of Affirmative Votes Approval of the subscription agreement and the transactions 62.94% contemplated thereby Approval of specific mandate for the allotment and issue of the 62.87% subscription shares, the warrant shares and the bonus warrants Approval of the whitewash waiver 62.87% Approval of relevant management participation 62.54% Approval of granting authorization to Directors signing all 62.94% necessary documents to give effect to the foregoing All of the resolutions proposed at the 2017 Annual General Meeting and the 2017 General Meeting were decided by way of poll voting. Procedures for conducting the polls were explained by the Chairman at the commencement of these meetings. The polls were conducted by Tricor Abacus Limited, the Company's share registrar, as scrutineer and the details of poll voting results were posted on the Company's website (www.lenovo.com/hk/publication) and HKEx's website (www.hkex.com.hk) on July 6, 2017 and November 10, 2017 respectively. 96 Lenovo Group Limited 2017/18 Annual Report 72 2018 Annual General Meeting All shareholders are encouraged to attend and participate in the Company's 2018 annual general meeting. Details of the proposed resolutions for the 2018 annual general meeting are set out in the circular which will be dispatched to the Company's shareholders with this annual report. Shareholders' Rights Procedures for convening a general meeting Shareholder(s) representing at least 5% of the total voting rights of the Company of all the shareholders having a right to vote at general meetings may, in accordance with the requirements and procedures set out in the Companies Ordinance (Chapter 622 of the Laws of Hong Kong) (the "Companies Ordinance"), request the Board to convene a general meeting by requisition, by stating the general nature of the business to be dealt at a general meeting and depositing the signed requisition at the registered office of the Company for the attention of the Company Secretary in hard copy form. Procedures for putting forward proposals at an annual general meeting (a) Shareholder(s) representing at least 2.5% of the total voting rights of all the shareholders of the Company having a right to vote on the resolution at the annual general meeting; or (b) at least 50 shareholders having a right to vote on the resolution at the annual general meeting may, in accordance with the requirements and procedures set out in the Companies Ordinance, requisition for the circulation of resolutions to be moved at annual general meetings and circulation of statements of not more than 1,000 words with respect to the matter referred to in the proposed resolution. Such written request must (i) state the resolution and be signed by all the requisitionists in one or more documents in like form; and (ii) be deposited in hard copy form at the registered office of the Company for the attention of the Company Secretary not less than six weeks before the annual general meeting; or if later, the time at which notice is given of that annual general meeting. The detailed procedures for shareholders to convene and put forward proposals at an annual general meeting or general meeting, including proposing a person other than a retiring director for election as a director are set out in the Corporate Governance section of the Company's website. Shareholders may send their enquiries requiring the Board's attention to the Company at the registered address of the Company. Constitutional documents Rights of the shareholders are also provided under the Articles of Association. During the year under review, there are no changes in the Articles of Association. An up to date consolidated version of the Articles of Association is available on the Company's website and the HKEx's website. 2017/18 Annual Report Lenovo Group Limited 97 72 Corporate Governance Report Shareholding Structure Shareholding as recorded in the register of members of the Company as of March 31, 2018 According to the register of members of the Company as of March 31, 2018, there were 912 registered shareholders of whom 98.14% had their registered addresses in Hong Kong. However, the actual number of investors in the ordinary shares of the Company (the "Shares") may be larger than that as a substantial portion of the Shares are held through nominees, custodian houses and HKSCC Nominees Limited. (i) Details of registered shareholders by domicile as of March 31, 2018 are as follows: Percentage of the total Number of Percentage of Number of number of Domicile shareholders shareholders shares held shares in issue Canada 2 0.22% 50,000 0.00% China 7 0.77% 1,128,000 0.01% Hong Kong 895 98.14% 12,013,533,614 99.99% Macau 2 0.22% 40,000 0.00% Malaysia 2 0.22% 20,000 0.00% Philippines 1 0.11% 2,000 0.00% United Kingdom 3 0.33% 18,000 0.00% Total 912 100.00% 12,014,791,614 100.00% (ii) Details of registered shareholders by size of shareholding as of March 31, 2018 are as follows: Percentage of the total Number of Percentage of Number of number of Size of shareholding shareholders shareholders shares held shares in issue 1-2,000 251 27.52% 346,446 0.00% 2,001-10,000 412 45.18% 2,858,000 0.02% 10,001-100,000 218 23.90% 7,319,665 0.06% 100,001-1,000,000 26 2.85% 8,288,000 0.07% 1,000,001 and above 5 0.55% 11,995,979,503 99.84% Total 912 100.00% 12,014,791,614 100.00% Remarks: (i) A board lot size comprises 2,000 Shares. (ii) According to the addresses registered/shown on the register of members of the Company. (iii) 73.10% of all the issued Shares were held through HKSCC Nominees Limited. 98 Lenovo Group Limited 2017/18 Annual Report 72 Shareholding structure according to the interest disclosed under the Securities and Futures Ordinance as of March 31, 2018 SHAREHOLDING STRUCTURE AS OF MARCH 31, 2018 29.102% 5.832% 64.877% 0.189% Legend Holdings Corporation Mr. Yang Yuanqing Other directors Public Remarks: (i) The approximate percentage of shareholding is calculated based on the aggregate long positions held in the total number of shares in issue of the Company (other than the positions held in or pursuant to equity derivatives) by the relevant holder or group of holders as recorded in the registers maintained under the SFO. (ii) The approximate percentage of shareholding is calculated on the basis of 12,014,791,614 Shares of the Company in issue as of March 31, 2018. 2017/18 Annual Report Lenovo Group Limited 99 72 Corporate Governance Report KEY SHAREHOLDERS INFORMATION Listing Information Lenovo Group Limited's Shares are listed on the Stock Exchange of Hong Kong. In addition, the Shares are traded in the United States through an American Depositary Receipt (ADR) Level 1 Programme. Market Capitalization and Public Float As at March 31, 2018, the market capitalization of listed shares of the Company was approximately HK$48.18 billion based on the total number of 12,014,791,614 issued Shares of the Company and the closing price of HK$4.01 per share. The daily average number of traded Shares was approximately 53.56 million Shares over an approximate free float of 7,795 million Shares in the fiscal year 2017/18. The highest closing price for the Shares was HK$5.4 per share on April 7, 2017 and the lowest was HK$3.82 per share on February 13, 2018. Ordinary Shares (as of March 31, 2018) Listing Hong Kong Stock Exchange Stock code 992 Board lot size 2,000 Shares Ordinary shares outstanding as of March 31, 2018 12,014,791,614 Shares Free float 7,795 million Shares Market capitalization as of March 31, 2018 HK$48.18 billion (Approx. US$6.18 billion) Lenovo's share price Apr 1, 2017 to Mar 31, 2018 7 6 5 4 3 2 Apr-17 Jun-17 Aug-17 Oct-17 Dec-17 Feb-18 Lenovo Share Price 100 Lenovo Group Limited 2017/18 Annual Report 72 American Depositary Receipts Level I Program Ordinary share to ADR 20:1 Stock code LNVGY Basic Loss per Share Basic loss per share for the year ended March 31, 2018 (1.67) U.S. cents Dividend per Share Dividend per ordinary share for the year ended March 31, 2018 – Interim 6.0 HK cents – Final1 20.5 HK cents Financial Calendar 2017/2018 (Hong Kong Time) First Quarter Results Announcement August 18, 2017 Interim Results Announcement November 2, 2017 Third Quarter Results Announcement February 1, 2018 Annual Results Announcement May 24, 2018 Annual General Meeting July 5, 2018 The investor relations team values and is eager to hear suggestions and comments from shareholders and investors. For enquiries from institutional investors and equity analysts please contact ir@lenovo.com. Note: 1 Subject to shareholders' approval at the forthcoming annual general meeting. 2017/18 Annual Report Lenovo Group Limited 101 72 THE AUDIT COMMITTEE The audit committee (the "Audit Committee") of the board of directors (the "Board") of Lenovo Group Limited (the "Company") has been established since 1999 and as at the date of this annual report, is comprised of four members, all of whom including the Audit Committee chairman are independent non-executive directors. The members who held office during the year and up to the date of this annual report are: Chairman Mr. Nicholas C. Allen Independent non-executive director Member Ms. Ma Xuezheng Independent non-executive director Member Mr. William Tudor Brown Independent non-executive director Member Mr. Gordon Robert Halyburton Orr Independent non-executive director The chairman, Mr. Allen has appropriate professional qualifications being a fellow of the Institute of Chartered Accountants in England and Wales and a member of Hong Kong Institute of Certified Public Accountants, and experience in accounting or related financial management expertise as required under the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the "Listing Rules"). More information on the skills and experience of the members of Audit Committee may be found in the directors' biographies set out on pages 142 to 145 of this annual report. RESPONSIBILITIES The Audit Committee is delegated by the Board with responsibility to provide an independent review of the financial reporting, and assess the effectiveness of risk management and internal control systems. It also reviews the adequacy of the Company's internal audit function and manages the Company's relationship with PricewaterhouseCoopers ("PwC"), the external auditor. The main responsibilities of the Audit Committee can be grouped into below different areas of competency: FINANCIAL REPORTING • The quality and acceptability of accounting policies and practices • The clarity of the disclosures and compliance with financial reporting standards • Material areas in which significant judgements have been applied RISK MANAGEMENT AND INTERNAL CONTROL • Effectiveness of risk management and internal control systems • Internal audit plan and scope of the internal audit work AUDIT • Analysis of main areas of risk • Adequacy and efficiency of internal audit function COMMITTEE Main areas of oversight EXTERNAL AUDIT • Appointment or re-appointment and their remuneration • Scope and status of the audit work • Areas of key audit focus • Independence and performance of external auditor OTHERS • Tax and treasury matters • Key litigation and legal exposures • Compliance with ethical rules and concerns 102 Lenovo Group Limited 2017/18 Annual Report 72 Key Features • The Audit Committee's terms of reference which clearly deal with its membership, authority, duties and frequency of meetings are published on the websites of the Company and Hong Kong Exchanges and Clearing Limited. • The Audit Committee meets with external auditor, Chief Financial Officer, Chief Legal Officer, Chief Auditor and management of the accounting and financial reporting functions of the Company at least four times a year at quarterly intervals and is provided with sufficient resources to perform its duties. • The Audit Committee is authorised to obtain outside legal or other independent professional advice in performing its duties at the Company's expense. No request was made by any member for such advice during the year. • Other management from the business is also invited to attend certain meetings from time to time in order to provide insight and enhance the Audit Committee's awareness of key issues and developments. • Separate executive sessions were arranged for the Audit Committee to meet with external auditor, Chief Auditor and Chief Legal Officer in the absence of management to discuss matters relating to any issues arising from the audit and any other matters such persons would like to raise. • External auditor, Chief Auditor and Chief Legal Officer have direct access to the Audit Committee should they wish to raise any concerns outside formal meetings. • In addition to standing agenda items, the Audit Committee may also request to discuss on particular "deep-dive" topics. • The chairman will report back to the Board after each of the Audit Committee meeting on its decisions or recommendations. 2017/18 Annual Report Lenovo Group Limited 103 72 Audit Committee Report MAIN ACTIVITIES DURING FY2017/18 The work of the Audit Committee follows an agreed annual work plan and principally falls under three main areas: financial reporting; risk management and internal control; the oversight of external audit and the management of the Company's relationship with PwC, the external auditor. The timetable of the Audit Committee for the fiscal year 2017/18 is set out in the below diagram. MAY AUGUST/JANUARY NOVEMBER SPECIFIC ITEMS • Annual results, including • Quarterly results, • Interim results, including review of: including review of: review of: – reports to the Audit – reports to the Audit – reports to the Audit Committee from Chief Committee from Chief Committee from Chief Financial Officer, Chief Financial Officer, Chief Financial Officer, Chief Auditor and external auditor Auditor and external Auditor and external – draft annual report auditor auditor incorporating directors' – draft results announcement – draft interim report report, corporate • Review of the Ethics and – draft results announcement governance report and Compliance program financial statements • Meeting with external of the Group including auditor in the absence of – draft results announcement the whistleblowing management • Review and assess of arrangements • Meeting with Chief Auditor enterprise risk management • Recommendations and Chief Legal Officer in • Review of the performance to the Board on the the absence of management and independence of external quarterly results and related results • Recommendations to auditor the Board on the interim announcement • Review of annual agenda of results, interim report the Audit Committee and related results • Meeting with external announcement auditor in the absence of management • Meeting with Chief Auditor and Chief Legal Officer in the absence of management • Recommendations to the Board on: – the annual results, annual report and related results announcement – re-appointment of external auditor FINANCIAL RISK EXTERNAL AUDIT OTHERS STANDING ITEMS REPORTING MANAGEMENT AND INTERNAL CONTROL • Key accounting items • Internal audit planning • Audit plan • Minutes of previous • Key assumptions, methodology/approach • Scope and status of meeting judgements and • Summary of internal the audit work • Reports on actions estimates audit and investigations taken or status of • Area of key audit • Key litigation and legal • Non-audit services focus follow-up items exposures provided by the external arose from previous • Significant accounting auditor meetings matters • Internal control of the • Discuss on particular Group including key "deep-dive" topics control issues 104 Lenovo Group Limited 2017/18 Annual Report 72 In the fiscal year ended March 31, 2018, the Audit Committee held four meetings, with all members in attendance at each meeting. The attendance record of the Audit Committee's members is set out in the Corporate Governance Report on page 77 and the chart below shows how the Audit Committee allocated its time during the fiscal year 2017/18. AUDIT COMMITTEE Allocation of agenda time FY2017/18 FY2016/17 32% 32% Financial reporting 32% 32% Risk management and internal 23% 23% control External audit 13% 13% Others (including compliance, 32% 32% tax and treasury matters) 13% 23% At each meeting, the Audit Committee received reports and presentations on key financial reporting, internal control and audit matters from management who attend the meetings to report on significant issues and respond to queries raised by the Audit Committee. The main matters and areas that the Audit Committee reviewed and considered at its four meetings during the year and how the Audit Committee discharges its responsibilities were as follows: Financial Reporting With the support of the external auditor, the Audit Committee assessed whether suitable accounting policies had been adopted, whether management had made appropriate estimates and judgements and whether disclosures were in compliance with the financial reporting standards. The Audit Committee: • Reviewed and recommended to the Board for approval the audited financial results of the Company and its subsidiaries (collectively, the "Group") for the year ended March 31, 2017 together with the related annual results announcement and the annual report incorporating the directors' report and corporate governance report after discussion with the management and external auditor; • Reviewed and recommended to the Board for approval the unaudited interim financial results of the Group for the six months ended September 30, 2017 together with the related interim results announcement and the interim report after discussion with the management and external auditor; • Reviewed and recommended to the Board for approval the unaudited financial results of the Group for the three months ended June 30, 2017 and for the nine months ended December 31, 2017 together with its respective results announcements after discussion with the management and external auditor; 2017/18 Annual Report Lenovo Group Limited 105 72 Audit Committee Report • Received reports from and met with external auditor and internal auditor to discuss the scope of their review and findings; and • Reviewed and discussed with management on significant judgements and key assumptions together with presentational and disclosure issues associated with accounting standards and interpretive guidance affecting the Group's financial statements and financial results announcements; items reviewed and discussed included (a) net current liabilities position and deferred income tax assets; (b) the accounting treatment for business realignment plan; (c) the accounting treatment for disposals; (d) the accounting treatment on the Group's goodwill; and (e) the accounting provisions and treatments for indirect tax receivables, inventories, and employees benefit plans. Risk Management and Internal Control To discharge the responsibility of reviewing and monitoring the effectiveness of the Group's risk management and internal control systems, the Audit Committee received regular reports from the Chief Auditor and if required from management including legal and other business units. At each meeting, the Audit Committee reviewed the process for identifying, assessing and reporting key risks and control issues of the Group. The Audit Committee: • Discussed the yearly internal audit plan of the Group to ensure adequate scope, coverage over the activities of the Group and the resource requirements of internal audit to carry out its functions and also reviewed the results of the internal audit work quarterly; • Reviewed the effectiveness of the internal control system (including the adequacy of resources, staff qualification and experience, training programmes and budget of the Group's internal audit, accounting and financial reporting function) operating in the Group and reviewed the corrective actions taken by management; • Reviewed the enterprise risk management (the "ERM") of the Group including Group ERM approach, risk management status and conclusion, risk registration results for fiscal year 2017/18, top 5 risks from 2010 to 2017, and risk management updates; • Reviewed the management letter point status of the Group and reviewed the actions/processes undertaken by the Group; • Reviewed the legal framework, requirements and actions taken/to be taken by the Group regarding the new cyber-security law in China; and • Approved and adopted the internal audit charter for the Group. External Audit To discharge the responsibility of overseeing the Board's relationship with the external auditor and monitoring the external auditor's performance, objectivity and independence and also the effectiveness of the audit process, the Audit Committee: • Reviewed and considered the external auditor's statutory audit scope and results for the fiscal year 2016/17, including their plan and the terms of engagement, and the letter of representation to be given by the Board in respect of the financial year ended March 31, 2017; 106 Lenovo Group Limited 2017/18 Annual Report 72 • Reviewed and considered the external auditor's audit plan and scope for the fiscal year 2017/18; • Reviewed the results of the audit and the reports submitted by external auditor, which summarised matters arising from their audit on the Group during the year ended March 31, 2018, together with management's responses and/or comments to the findings; • Assessed the external auditor's independence and objectivity including a review of the non-audit services provided by the external auditor; and • Evaluated the performance of PwC and recommended to the Board for approval of the re-appointment of PwC as the external auditor of the Group for the year ended March 31, 2018. Others During the fiscal year 2017/18, the Audit Committee also: • Reviewed the succession planning of the finance organization of the Group; • Received and reviewed the reports from Chief Legal Officer regarding key litigation and other legal matters of the Group; • Reviewed the Ethics and Compliance program including the whistleblowing procedure of the Group for employees to raise concerns about possible improprieties in financial reporting, internal control or other matters, and the enhancements to this program; • Reviewed an update from Lenovo Capital and Incubator Group; • Reviewed and approved the Audit Committee report for incorporating into the annual report for the fiscal year 2016/17; and • Reviewed and approved the annual agenda of the Audit Committee for the fiscal year 2017/18. 2017/18 Annual Report Lenovo Group Limited 107 72 Audit Committee Report REVIEW OF FINANCIAL RESULTS At the meeting held on May 23, 2018, the Audit Committee: • reviewed the key accounting judgements and policies adopted by the Group and confirmed that these are appropriate. The significant areas of judgement identified by the Audit Committee, in conjunction with management and the external auditor, together with a number of other areas that the Audit Committee deemed to be significant in the context of the consolidated financial statements of the Group for the year ended March 31, 2018 are set out in the Independent Auditor's Report on pages 162 to 166; • after discussion with management and the external auditor, and having considered the Group's financial position, the Audit Committee satisfied that the Group and the Company had adequate resources to continue in operational existence for the foreseeable future and confirmed to the Board that it was appropriate for the consolidated financial statements of the Group for the year ended March 31, 2018 to be prepared on a going concern basis; and • reviewed the consolidated financial statement of the Group for the year ended March 31, 2018 in conjunction with the narrative sections of this annual report. The Audit Committee satisfied that, taken as a whole, this annual report was present a balanced, clear and comprehensible assessment of the Group's performance, position and prospects. Based on the reviews and discussions referred to above, the Audit Committee recommended to the Board the approval of the audited consolidated financial statements of the Group for the year ended March 31, 2018 together with the related annual results announcement and this annual report incorporating the directors' report and corporate governance report. REVIEW OF RISK MANAGEMENT AND INTERNAL CONTROL SYSTEMS The Group's internal control system covers every activity and transaction. Within this framework, management performs periodic enterprise wide risk assessments and continuously monitors and reports the progress of actions plans to address the key risks. Further information about the risk management and internal control framework and control processes are set out in the Corporate Governance Report on pages 81 to 87. Based on the information and confirmation received from management, external auditor and internal auditor, the Audit Committee concluded that for the year ended March 31, 2018, the Group's risk management and internal control systems were adequate and effective. The Audit Committee also confirmed that the Group had, in the fiscal year 2017/18, satisfactorily complied with the code provisions on risk management and internal control as set forth in the Corporate Governance Code and Corporate Governance Report in Appendix 14 to the Listing Rules. 108 Lenovo Group Limited 2017/18 Annual Report 72 RECOMMENDATION FOR RE-APPOINTMENT OF THE EXTERNAL AUDITOR The Audit Committee recognizes the importance of maintaining the independence of the external auditor. Consistent with its terms of reference, the Audit Committee has evaluated PwC's qualifications, performance, and independence, including that of the lead audit partner. The Company has established a policy pursuant to which non-audit services, provided by the external auditor must be pre-approved by the Audit Committee. This policy is more fully described in the Corporate Governance Report on page 88. The Audit Committee has concluded that provision of the non-audit services described in that section was compatible with maintaining the independence of PwC. In addition, PwC has provided the Audit Committee an independence statement confirming that for the year ended March 31, 2018 and thereafter to the date of this annual report, they are independent of the Group in accordance with the independence requirements of the Hong Kong Institute of Certified Public Accountants. Based on the review and discussions referred to above, the Audit Committee was satisfied with the external auditor's work, its independence and objectivity, and therefore recommended to the Board the re-appointment of PwC as the Group's external auditor for the financial year ending March 31, 2019 for shareholders' approval at the forthcoming annual general meeting to be held on July 5, 2018. PRIORITIES FOR FY2018/19 Looking ahead, the priorities of the Audit Committee for the fiscal year 2018/19 are: • To stay focused on financial accounting and reporting, audit quality, risk management and internal control. • To remain vigilant on the impacts of the economic conditions on the Group. Members of the Audit Committee Mr. Nicholas C. Allen (Chairman) Ms. Ma Xuezheng Mr. William Tudor Brown Mr. Gordon Robert Halyburton Orr 2017/18 Annual Report Lenovo Group Limited 109 72 THE COMPENSATION COMMITTEE The compensation committee (the "Committee") of the board of directors (the "Board") of Lenovo Group Limited (the "Company") as of the date of this annual report is comprised of five members, all of whom are non-executive directors of the Company (the "Non-executive Directors") and majority of whom including the Committee chairman are independent non-executive directors of the Company (the "Independent Non-executive Directors"). The members who held office during the year and up to the date of this annual report are: Chairman Ms. Ma Xuezheng Independent Non-executive Director Member Mr. William O. Grabe Independent Non-executive Director and Lead Independent Director Member Mr. William Tudor Brown Independent Non-executive Director Member Mr. Gordon Robert Halyburton Orr Independent Non-executive Director Member Mr. Zhao John Huan Non-executive Director More information on the skills and experience of the members of the Committee may be found in the directors' biographies set out on pages 142 to 145 of this annual report. RESPONSIBILITIES The Committee is delegated by the Board with the responsibility to (i) review the Company's structure and aggregate value of compensation programs for the chairman of the Board ("Chairman"), chief executive officer ("CEO"), other directors and senior management; (ii) establish a formal and transparent procedure for developing policy on compensation; (iii) determine the compensation level and package paid to the Chairman, CEO, other directors and senior management; and (iv) review the recommendation from independent consultant on the compensation of Non-executive Directors. 110 Lenovo Group Limited 2017/18 Annual Report 72 Key Features The Committee's terms of reference which clearly deal with its membership, authority, duties and frequency of meetings are published on the websites of the Company and Hong Kong Exchanges and Clearing Limited. The Committee meets with management and external independent professional adviser at least four times a year at quarterly intervals and is provided with sufficient resources to perform its duties. The Committee is authorised to obtain outside independent professional advice in performing its duties at the Company's expense. The Committee shall ensure that no director is involved in deciding his or her own individual compensation. Separate executive session was arranged for the Committee to meet with its independent consultant in the absence of executive director and management to discuss matters relating to any issues and any other matters such persons would like to raise. The chairman will report back to the Board after each of the Committee meeting regarding decisions or recommendations. SUMMARY OF WORK IN 2017/18 In the fiscal year ended March 31, 2018, the Committee held four meetings, with all members in attendance at each meeting. The attendance record of the Committee's members is set out in the Corporate Governance Report on page 77. The main matters and areas that the Committee reviewed and considered at its four meetings during the year were as follows: Review of Company and Market Information • Reviewed overall compensation strategy; • Reviewed the market positioning for the compensation of CEO and senior management including pay levels and pay mix; • Reviewed pay efficiency to support understanding of pay affordability and sustainability for entire company; • Reviewed the Company's retention policy and its effectiveness; • Reviewed the compensation and remuneration trends and regulatory developments in technology industry; • Reviewed updates on long-term incentives ("LTI") spend versus budget; • Reviewed the holding power and share ownership positions of both senior management and Non- executive Directors; 2017/18 Annual Report Lenovo Group Limited 111 72 Compensation Committee Report • Reviewed the analysis and recommendations from an independent consultant on the FY2017/18 Non- executive Directors' compensation package; Compensation Program • Reviewed the CEO pay and performance evaluation process; • Reviewed and approved 2016/17 bonus, LTI and FY2017/18 proposed target compensation for Chairman and CEO; • Reviewed and approved FY16/17 bonus, Top Executive LTI and FY2017/18 proposed target compensation for senior management; • Reviewed and approved the 3x3 Bonus Plan; • Reviewed and approved the FY2018/19 LTI budget; Others • Reviewed the Compensation Committee Report for incorporating into the annual report for the fiscal year 2016/17; and • Reviewed and approved the annual agenda of the Committee for the fiscal year 2017/18. COMPENSATION POLICY Overall Principles Lenovo recognizes the importance of attracting and retaining top-caliber talent and is strongly committed to effective corporate governance. Consistent with this philosophy, the Company has a formal, transparent and performance-driven compensation policy covering its directors, senior management and general employees. Generally, Lenovo's compensation serves to support the Company's business strategy, assist in the attraction and retention of top talent, reinforce the Company's pay-for-performance culture, as well as reflecting market practices of other leading international IT enterprises, with particular focus on Lenovo's closest competitors. The Committee makes regular reviews of Lenovo's compensation practices to ensure they reflect the five overall principles and objectives as presented below. Balance short and Pay competitiveness long-term focus, against peer companies, ensuring alignment with enabling the Company to shareholder value creation Pay for Performance: recognize contribution of Strong linkage between key talent financial success, individual performance Flexibility to adjust and employee reward effective Support to diverse businesses corporate governance and talent markets practices 112 Lenovo Group Limited 2017/18 Annual Report 72 Non-executive Directors The Committee regularly reviews the compensation of Non-executive Directors to ensure its appropriateness considering the Non-executive Directors' time commitment, workload, job requirements and responsibilities versus Lenovo's peer companies and the broader market. Details of the current package and the review carried out in this fiscal year are set out in the section headed "Remuneration Reviews" below. Chairman/CEO and Senior Management To ensure Lenovo's compensation for the Chairman/CEO and senior management reflect the policy and principles described above, the Committee considers a number of relevant factors in the determination of their compensation. Such factors include: salaries and total compensation paid by peer companies, job responsibilities and scopes, the Company's business performance and individual performance. The compensation structure of Lenovo's Chairman/CEO and senior management consists of base salaries, allowances, performance-based bonuses, LTI, retirement benefits, and benefits-in-kind. These components and their mix are described below. The Chairman/CEO pay mix chart reflects FY2017/18 emoluments disclosed in note 11 to the financial statements. The senior management pay mix chart reflects average FY2017/18 emoluments including LTI that were awarded in June 2017. CHAIRMAN/CEO PAY MIX SENIOR MANAGEMENT PAY MIX (Average) 12% 24% 6% 63% 12% 82% Fixed Compensation Fixed Compensation Performance Bonus Performance Bonus LTI LTI 2017/18 Annual Report Lenovo Group Limited 113 72 Compensation Committee Report Fixed Compensation Fixed compensation includes base salary, allowances and benefits-in-kind (e.g. medical, dental and life insurance, etc.). Base salary and allowances are set and reviewed annually for each position, reflecting competitive market positioning for comparable positions, market practices, as well as the Company's performance and individual contribution to the business. Allowances are provided to facilitate temporary and permanent staff relocations. Benefits-in-kind are reviewed regularly taking into consideration relevant industry and local market practices. Performance Bonus The Chairman/CEO and senior management are eligible to receive performance bonuses. The amounts paid under the plan are based on the performance of the Company, using selected financial and non- financial metrics, its subsidiaries, relevant performance groups and/or geographies as appropriate, as well as individual performance. Long-Term Incentive Program ("LTI Program") The Company operates a LTI Program which was adopted by the Company in 2005 and amended in 2008 and 2016 respectively. The purpose of the LTI Program is to attract, retain, reward and motivate executive and Non-executive Directors, senior management and selected top-performing employees of the Company and its subsidiaries, while reinforcing direct alignment with shareholders. Under the LTI Program, the Company maintains two types of equity-based compensation vehicles: (i) share appreciation rights, and (ii) restricted share units. These vehicles are described in more detail below. (i) Share Appreciation Rights ("SARs") SARs entitle the holder to receive the appreciation in value of the Company's share price above a predetermined level. SARs are typically subject to a vesting schedule of up to four years. (ii) Restricted Share Units ("RSUs") RSU is equivalent to the value of one ordinary share of the Company. Once vested, RSU is converted to an ordinary share, or its cash equivalent. RSUs are typically subject to a vesting schedule of up to four years. Dividends are typically not paid on RSUs. The Company reserves the right to settle any awards under the LTI Program in cash or in ordinary shares at its discretion. The Company has created and funded a trust to pay shares to eligible recipients. In the case of SARs, shares are due after exercise by the recipient. In the case of RSUs, shares are due after the employee satisfies any vesting conditions. The number of units awarded under the LTI Program is set and reviewed annually, reflecting competitive market positioning, market practices, especially those among Lenovo's competitors, as well as the Company's performance and each individual's actual and expected contribution to the business. In certain circumstances, awards under the LTI Program may be made to support the attraction of new hires. Award levels and mix may vary by individual, role and level. In fiscal year 2017/18, the Company did not issue any new shares under this program, and the program is currently operated through purchasing existing shares from the market. 114 Lenovo Group Limited 2017/18 Annual Report 72 Retirement Benefits The Company operates a number of retirement schemes for its employees, including executive directors and senior management. These schemes are reviewed regularly and are intended to deliver benefit levels that are consistent with local market practices. Details of the retirement schemes are set out in the directors' report on pages 151 to 154. General Employees As at March 31, 2018, the Group had a headcount of more than 54,000 worldwide. Lenovo believes that employees are its most important strategic resource and recognizes that each employee must be valued as an individual and treated fairly and equitably. Lenovo's compensation philosophy supports this value and targets compensation competitively within the relevant competitive market, with significant opportunity for increased pay based on performance. Through the compensation program, Lenovo seeks to identify and reward exceptional performance in ways that sends clear messages about the Company's priorities and values. EMPLOYEE COMPENSATION Fixed Performance Long-Term Compensation Bonus Incentive Program PACKAGE Similar to senior management, employees at Lenovo are eligible for fixed compensation including base salary, allowances and benefits-in-kind. Eligible employees would also receive performance bonus based on individual and company performance. In addition, selected top-performing employees are eligible to participate in the LTI Program. 2017/18 Annual Report Lenovo Group Limited 115 72 Compensation Committee Report REMUNERATION REVIEWS The Committee regularly reviews the Company's compensation programs to ensure alignment with its stated objectives as well as competitiveness in the talent market. Typically, reviews for base salary, performance bonus, and LTI award are conducted on a annual basis. Non-executive Directors' fees are reviewed for alignment with market practice on an annual basis as well. Fiscal Year 2017-18 Non-executive Directors Review In May 2017, the Committee engaged an independent international compensation consulting firm to conduct an analysis of the compensation package of the Non-executive Directors to ensure its appropriateness considering the Non-executive Directors' time commitment, workload, job requirements and responsibilities versus Lenovo's peer companies and the broader market. Overall, both cash retainer and annual LTI award remained constant at US$92,500 and US$200,000*, respectively. Final recommendations as subsequently approved by the Board (comprising executive director of the Company only) based on the delegation from shareholders of the Company are summarized in the table below: Compensation Element 2017/18 2016/17 Cash Retainer $92,500 USD $92,500 USD LTI Award $200,000 USD $200,000 USD Total Remuneration $292,500 USD $292,500 USD * The LTI award consists of SARs and RSUs, which can be settled in either Lenovo shares or cash equivalent upon exercise. SARs and RSUs are subject to a three-year vesting period and are otherwise subject to the same terms and conditions of the SAR and RSU schemes described above. Consistent with prior practice, the chairman of the Audit Committee of the Company received an additional cash payment equal to US$27,500 (approximately HK$214,500), while the chairman of the Compensation Committee of the Company received an additional cash payment equal to US$20,000 (approximately HK$156,000), and the Lead Independent Director received an additional cash payment equal to US$35,000 (approximately HK$273,000) per year. Further details of the compensation of the Non-executive Directors are included in note 11 to the financial statements. SAR and RSU awards outstanding for Non-executive Directors as of March 31, 2018 under this scheme are presented in the "Long-Term Incentive Scheme" section of this report. Fiscal Year 2017-18 Chairman/CEO and Senior Management Review Fixed Compensation As a part of its annual review process, the Committee had reviewed and approved base pay for the Chairman/CEO and senior management in May 2017, effective July 1, 2017. Base salary for the Chairman/CEO remained constant at RMB8,808,815 (approximately US$1,402,407 (Note: the translation of RMB into USD is based on the exchange rate of RMB1.00 to USD0.159205 and is for information purposes only) (actual pay delivered in local currency)). Base salaries for senior management were increased by an average of 3.8% to account for changes in role, scope and market pay levels and in consideration of individual performance and contributions. 116 Lenovo Group Limited 2017/18 Annual Report 72 Performance Bonus Chairman/CEO and senior management's fiscal year 2017/18 performance bonus payouts were approved in the May 2017 Committee meeting. Final bonus payouts for Chairman/CEO and senior management were determined based on overall pre-tax income, total revenue, customer experience as well as individual performance. Total Customer Individual Overall PTI Revenue Experience Performance Approved performance bonus payments for the fiscal year 2017/18 will be delivered in June 2018. LTI Program The most recent full cycle of LTI awards including both SARs and RSUs was made in June 2017. Selected executives, including the Chairman/CEO and senior management, received LTI awards based on Company's and individual's performance during fiscal year 2016/17. The next cycle of LTI awards including SARs and RSUs is expected to be in June 2018. Employee Share Purchase Plan (ESPP) The Company has launched an employee share purchase plan ("Plan") in October 2016. The purpose of the Plan is to facilitate and encourage Lenovo share ownership by the general employee population. Under the Plan, eligible employees are awarded one matching restricted share unit for every four ordinary shares of the Company purchased through qualified employee contributions. The matching restricted share units are subject to a vesting schedule of up to two years. Executive and Non-executive Director and senior management of the Company are not eligible to participate in the Plan. For fiscal year 2017/18, the Company did not issue any new shares under this plan, and the plan is currently operated through purchasing existing shares from the market. 2017/18 Annual Report Lenovo Group Limited 117 72 Compensation Committee Report Remuneration of Senior Management The remuneration of senior management fell within the following bands for the year ended March 31, 2018: Number of senior Remuneration bands management US$1,408,641 to US$1,472,669 1 US$2,689,224 to US$2,753,252 1 US$2,817,282 to US$2,881,310 2 US$3,905,778 to US$3,969,806 1 US$5,122,331 to US$5,186,359 1 US$7,107,234 to US$7,171,262 1 US$11,205,099 to US$11,269,127 1 Emoluments of Directors for FY2017/18 and Five Highest Paid Individuals Details of the emoluments of directors and the five highest paid individuals are set out in note 11 to the financial statements. Fiscal Year 2017-18 Employees Review Fixed Compensation Each year, management conducts a market review to ensure fixed compensation changes are aligned and competitive with market trends. The review incorporates input from several external survey providers and formal assessments of individual performance. Any approved market-based merit increases were effective from July 1, 2017. Performance Bonus Performance bonus for general employees is based on individual performance and performance of their respective business unit or "Performance Groups". For fiscal year 2017/18, there were a total of approximately 85 different Performance Groups within the Company each with its unique performance metrics and targets, which consist of a financial component and a customer experience component. For the fiscal year 2017/18 performance bonus, mid-year progress payment was made in December 2017, and full payment based on annual business outcomes will be trued-up in June 2018 based on approved final bonus funding. Individual Final Bonus Bonus Target X Performance Group Score X Performance Modifier = Payout Performance Group scores may range from 0% to 320% based on final results against targets. Individual Performance Modifiers range from 0% to 150% and are linked to the employee Performance Ratings and progress against established Key Performance Indicators (KPIs). 118 Lenovo Group Limited 2017/18 Annual Report 72 LTI Program For fiscal year 2017/18, 20.1% of eligible employees (excluding executive directors) received an award under the LTI Program. These awards were granted in June 2017. LONG-TERM INCENTIVE PROGRAM The Company implemented the LTI Program to attract, retain, reward and motivate executive and Non- executive Directors, senior management and selected top-performing employees of the Company and its subsidiaries. The movements in the share awards of the Executive and Non-executive Directors during the fiscal year are as follows: Number of units Lapsed/ Total nullified As at outstanding Fiscal Effective As at April 1, Awarded Vested Exercised during March 31, as at year of price 2017 during during during the year 2018 March 31, Vesting period Name Award type award (HK$) (Unvested) the year the year the year (Note 1) (unvested) 2018 (mm.dd.yyyy) Mr. Yang Yuanqing SAR 10/11 4.92 – – – – 11,030,219 – – 02.21.2012 – 02.21.2015 SAR 11/12 6.80 – – – – – – 11,132,358 02.13.2013 – 02.13.2016 SAR 12/13 8.22 – – – – – – 14,059,573 02.04.2014 – 02.04.2017 SAR 13/14 9.815 7,260,028 – 3,630,017 – – 3,630,011 14,520,062 06.03.2015 – 06.03.2018 SAR 15/16 12.29 9,527,748 – 3,175,916 – – 6,351,832 12,703,664 06.01.2016 – 06.01.2019 SAR 16/17 4.90 126,972,471 – 63,486,236 – – 63,486,235 126,972,471 06.01.2017 – 06.01.2019 SAR 17/18 4.95 – 45,893,773 – – – 45,893,773 45,893,773 06.01.2018 – 06.01.2020 RSU 13/14 9.815 2,664,793 – 1,332,397 – – 1,332,396 1,332,396 06.03.2015 – 06.03.2018 RSU 15/16 12.29 3,661,513 – 1,220,505 – – 2,441,008 2,441,008 06.01.2016 – 06.01.2019 RSU 17/18 4.95 – 11,895,664 – – – 11,895,664 11,895,664 06.01.2018 – 06.01.2020 Mr. Zhu Linan SAR 12/13 6.36 – – – – – – 91,438 07.03.2013 – 07.03.2015 SAR 13/14 7.88 – – – – – – 242,723 08.16.2014 – 08.16.2016 SAR 14/15 11.48 91,962 – 91,962 – – – 275,884 08.15.2015 – 08.15.2017 SAR 15/16 7.49 269,313 – 134,657 – – 134,656 403,970 08.14.2016 – 08.14.2018 SAR 16/17 5.38 615,761 – 205,254 – – 410,507 615,761 08.19.2017 – 08.19.2019 SAR 17/18 4.74 – 955,316 – – – 955,316 955,316 08.21.2018 – 08.21.2020 RSU 14/15 11.48 22,503 – 22,503 – – – – 08.15.2015 – 08.15.2017 RSU 15/16 7.49 68,998 – 34,499 – – 34,499 34,499 08.14.2016 – 08.14.2018 RSU 16/17 5.38 144,088 – 48,029 – – 96,059 96,059 08.19.2017 – 08.19.2019 RSU 17/18 4.74 – 165,079 – – – 165,079 165,079 08.21.2018 – 08.21.2020 Mr. Zhao John Huan SAR 11/12 5.78 – – – – – – 103,913 11.03.2012 – 11.03.2014 SAR 12/13 6.36 – – – – – – 274,316 07.03.2013 – 07.03.2015 SAR 13/14 7.88 – – – – – – 364,084 08.16.2014 – 08.16.2016 SAR 14/15 11.48 91,962 – 91,962 – – – 275,884 08.15.2015 – 08.15.2017 SAR 15/16 7.49 269,313 – 134,657 – – 134,656 403,970 08.14.2016 – 08.14.2018 SAR 16/17 5.38 615,761 – 205,254 – – 410,507 615,761 08.19.2017 – 08.19.2019 SAR 17/18 4.74 – 955,316 – – – 955,316 955,316 08.21.2018 – 08.21.2020 RSU 14/15 11.48 22,503 – 22,503 – – – – 08.15.2015 – 08.15.2017 RSU 15/16 7.49 68,998 – 34,499 – – 34,499 34,499 08.14.2016 – 08.14.2018 RSU 16/17 5.38 144,088 – 48,029 – – 96,059 96,059 08.19.2017 – 08.19.2019 RSU 17/18 4.74 – 165,079 – – – 165,079 165,079 08.21.2018 – 08.21.2020 2017/18 Annual Report Lenovo Group Limited 119 72 Compensation Committee Report Number of units Lapsed/ Total nullified As at outstanding Fiscal Effective As at April 1, Awarded Vested Exercised during March 31, as at year of price 2017 during during during the year 2018 March 31, Vesting period Name Award type award (HK$) (Unvested) the year the year the year (Note 1) (unvested) 2018 (mm.dd.yyyy) Dr. Tian Suning SAR 11/12 4.56 – – – – – – 323,000 08.19.2012 – 08.19.2014 SAR 12/13 6.36 – – – – – – 274,316 07.03.2013 – 07.03.2015 SAR 13/14 7.88 – – – – – – 364,084 08.16.2014 – 08.16.2016 SAR 14/15 11.48 91,962 – 91,962 – – – 275,884 08.15.2015 – 08.15.2017 SAR 15/16 7.49 269,313 – 134,657 – – 134,656 403,970 08.14.2016 – 08.14.2018 SAR 16/17 5.38 615,761 – 205,254 – – 410,507 615,761 08.19.2017 – 08.19.2019 SAR 17/18 4.74 – 955,316 – – – 955,316 955,316 08.21.2018 – 08.21.2020 RSU 14/15 11.48 22,503 – 22,503 – – – – 08.15.2015 – 08.15.2017 RSU 15/16 7.49 68,998 – 34,499 – – 34,499 34,499 08.14.2016 – 08.14.2018 RSU 16/17 5.38 144,088 – 48,029 – – 96,059 96,059 08.19.2017 – 08.19.2019 RSU 17/18 4.74 – 165,079 – – – 165,079 165,079 08.21.2018 – 08.21.2020 Mr. Nicholas SAR 10/11 4.59 – – – 237,001 223,146 – – 08.20.2011 – 08.20.2013 C. Allen SAR 11/12 4.56 – – – – – – 323,000 08.19.2012 – 08.19.2014 SAR 12/13 6.36 – – – – – – 274,316 07.03.2013 – 07.03.2015 SAR 13/14 7.88 – – – – – – 364,084 08.16.2014 – 08.16.2016 SAR 14/15 11.48 91,962 – 91,962 – – – 275,884 08.15.2015 – 08.15.2017 SAR 15/16 7.49 269,313 – 134,656 – – 134,657 403,970 08.14.2016 – 08.14.2018 SAR 16/17 5.38 615,761 – 205,253 – – 410,508 615,761 08.19.2017 – 08.19.2019 SAR 17/18 4.74 – 955,316 – – – 955,316 955,316 08.21.2018 – 08.21.2020 RSU 14/15 11.48 22,503 – 22,503 – – – – 08.15.2015 – 08.15.2017 RSU 15/16 7.49 68,998 – 34,499 – – 34,499 34,499 08.14.2016 – 08.14.2018 RSU 16/17 5.38 144,088 – 48,029 – – 96,059 96,059 08.19.2017 – 08.19.2019 RSU 17/18 4.74 – 165,079 – – – 165,079 165,079 08.21.2018 – 08.21.2020 Mr. Nobuyuki Idei SAR 11/12 5.23 – – – – – – 144,085 09.28.2012 – 09.28.2014 SAR 12/13 6.36 – – – – – – 274,316 07.03.2013 – 07.03.2015 SAR 13/14 7.88 – – – – – – 364,084 08.16.2014 – 08.16.2016 SAR 14/15 11.48 91,962 – 91,962 – – – 275,884 08.15.2015 – 08.15.2017 SAR 15/16 7.49 269,313 – 134,657 – – 134,656 403,970 08.14.2016 – 08.14.2018 SAR 16/17 5.38 615,761 – 205,254 – – 410,507 615,761 08.19.2017 – 08.19.2019 SAR 17/18 4.74 – 955,316 – – – 955,316 955,316 08.21.2018 – 08.21.2020 RSU 14/15 11.48 22,503 – 22,503 – – – – 08.15.2015 – 08.15.2017 RSU 15/16 7.49 68,999 – 34,499 – – 34,500 34,500 08.14.2016 – 08.14.2018 RSU 16/17 5.38 144,088 – 48,029 – – 96,059 96,059 08.19.2017 – 08.19.2019 RSU 17/18 4.74 – 165,079 – – – 165,079 165,079 08.21.2018 – 08.21.2020 120 Lenovo Group Limited 2017/18 Annual Report 72 Number of units Lapsed/ Total nullified As at outstanding Fiscal Effective As at April 1, Awarded Vested Exercised during March 31, as at year of price 2017 during during during the year 2018 March 31, Vesting period Name Award type award (HK$) (Unvested) the year the year the year (Note 1) (unvested) 2018 (mm.dd.yyyy) Mr. William SAR 10/11 4.59 – – – 237,001 213,092 – – 08.20.2011 – 08.20.2013 O. Grabe SAR 11/12 4.56 – – – – – – 323,000 08.19.2012 – 08.19.2014 SAR 12/13 6.36 – – – – – – 274,316 07.03.2013 – 07.03.2015 SAR 13/14 7.88 – – – – – – 364,084 08.16.2014 – 08.16.2016 SAR 14/15 11.48 91,962 – 91,962 – – – 275,884 08.15.2015 – 08.15.2017 SAR 15/16 7.49 269,313 – 134,656 – – 134,657 403,970 08.14.2016 – 08.14.2018 SAR 16/17 5.38 615,761 – 205,253 – – 410,508 615,761 08.19.2017 – 08.19.2019 SAR 17/18 4.74 – 955,316 – – – 955,316 955,316 08.21.2018 – 08.21.2020 RSU 14/15 11.48 22,503 – 22,503 – – – – 08.15.2015 – 08.15.2017 RSU 15/16 7.49 68,999 – 34,499 – – 34,500 34,500 08.14.2016 – 08.14.2018 RSU 16/17 5.38 144,088 – 48,029 – – 96,059 96,059 08.19.2017 – 08.19.2019 RSU 17/18 4.74 – 165,079 – – – 165,079 165,079 08.21.2018 – 08.21.2020 RSU (Deferral) 17/18 4.95 – 50,190 50,190 – – – – Note 2 RSU (Deferral) 17/18 5.01 – 49,666 49,666 – – – – Note 2 RSU (Deferral) 17/18 4.58 – 54,287 54,287 – – – – Note 2 RSU (Deferral) 17/18 4.58 – 54,414 54,414 – – – – Note 2 Mr. William SAR 12/13 8.07 – – – – – – 53,476 01.31.2014 – 01.31.2016 Tudor Brown SAR 13/14 7.88 – – – – – – 364,084 08.16.2014 – 08.16.2016 SAR 14/15 11.48 91,962 – 91,962 – – – 275,884 08.15.2015 – 08.15.2017 SAR 15/16 7.49 269,313 – 134,657 – – 134,656 403,970 08.14.2016 – 08.14.2018 SAR 16/17 5.38 615,761 – 205,254 – – 410,507 615,761 08.19.2017 – 08.19.2019 SAR 17/18 4.74 – 955,316 – – – 955,316 955,316 08.21.2018 – 08.21.2020 RSU 14/15 11.48 22,503 – 22,503 – – – – 08.15.2015 – 08.15.2017 RSU 15/16 7.49 68,999 – 34,499 – – 34,500 34,500 08.14.2016 – 08.14.2018 RSU 16/17 5.38 144,088 – 48,029 – – 96,059 96,059 08.19.2017 – 08.19.2019 RSU 17/18 4.74 – 165,079 – – – 165,079 165,079 08.21.2018 – 08.21.2020 Ms. Ma Xuezheng SAR 11/12 4.56 – – – – – – 107,666 08.19.2012 – 08.19.2014 SAR 12/13 6.36 – – – – – – 182,877 07.03.2013 – 07.03.2015 SAR 13/14 7.88 – – – – – – 364,084 08.16.2014 – 08.16.2016 SAR 14/15 11.48 91,962 – 91,962 – – – 275,884 08.15.2015 – 08.15.2017 SAR 15/16 7.49 269,313 – 134,657 – – 134,656 403,970 08.14.2016 – 08.14.2018 SAR 16/17 5.38 615,761 – 205,254 – – 410,507 615,761 08.19.2017 – 08.19.2019 SAR 17/18 4.74 – 955,316 – – – 955,316 955,316 08.21.2018 – 08.21.2020 RSU 14/15 11.48 22,503 – 22,503 – – – – 08.15.2015 – 08.15.2017 RSU 15/16 7.49 68,998 – 34,499 – – 34,499 34,499 08.14.2016 – 08.14.2018 RSU 16/17 5.38 144,088 – 48,029 – – 96,059 96,059 08.19.2017 – 08.19.2019 RSU 17/18 4.74 – 165,079 – – – 165,079 165,079 08.21.2018 – 08.21.2020 2017/18 Annual Report Lenovo Group Limited 121 72 Compensation Committee Report Number of units Lapsed/ Total nullified As at outstanding Fiscal Effective As at April 1, Awarded Vested Exercised during March 31, as at year of price 2017 during during during the year 2018 March 31, Vesting period Name Award type award (HK$) (Unvested) the year the year the year (Note 1) (unvested) 2018 (mm.dd.yyyy) Mr. Yang Chih-Yuan SAR 12/13 8.63 – – – – – – 24,593 02.20.2014 – 02.20.2016 Jerry SAR 13/14 7.88 – – – – – – 245,757 08.16.2014 – 08.16.2016 SAR 14/15 11.48 62,075 – 62,075 – – – 186,221 08.15.2015 – 08.15.2017 SAR 14/15 11.07 12,402 – 12,402 – – – 37,202 11.16.2015 – 11.16.2017 SAR 15/16 7.49 269,313 – 134,657 – – 134,656 403,970 08.14.2016 – 08.14.2018 SAR 16/17 5.38 615,761 – 205,254 – – 410,507 615,761 08.19.2017 – 08.19.2019 SAR 17/18 4.74 – 955,316 – – – 955,316 955,316 08.21.2018 – 08.21.2020 RSU 14/15 11.48 15,190 – 15,190 – – – – 08.15.2015 – 08.15.2017 RSU 14/15 11.07 3,035 – 3,035 – – – – 11.06.2015 – 11.06.2017 RSU 15/16 7.49 68,999 – 34,498 – – 34,501 34,501 08.14.2016 – 08.14.2018 RSU 16/17 5.38 144,088 – 48,029 – – 96,059 96,059 08.19.2017 – 08.19.2019 RSU 17/18 4.74 – 165,079 – – – 165,079 165,079 08.21.2018 – 08.21.2020 Mr. Gordon Robert SAR 15/16 7.25 149,405 – 74,702 – – 74,703 224,107 09.18.2016 – 09.18.2022 Halyburton Orr SAR 16/17 5.38 615,761 – 205,254 – – 410,507 615,761 08.19.2017 – 08.19.2023 SAR 17/18 4.74 – 955,316 – – – 955,316 955,316 08.21.2018 – 08.21.2020 RSU 15/16 7.25 38,278 – 19,139 – – 19,139 19,139 09.18.2016 – 09.18.2018 RSU 16/17 5.38 144,088 – 48,029 – – 96,059 96,059 08.19.2017 – 08.19.2019 RSU 17/18 4.74 – 165,079 – – – 165,079 165,079 08.21.2018 – 08.21.2020 Note 1: These units were nullified in accordance with the operation of the SAR plan rules. Note 2: Proceeds in respect of quarterly deferral grants to be paid only at point of termination from the board of directors or unforeseen emergency. OTHER SHAREHOLDER ORIENTED FEATURES Share Ownership Guidelines Lenovo maintains share ownership guidelines for selected executives, including the Chairman/CEO and senior management. The guidelines help to align executives with shareholders and focus executives on the long-term performance of Lenovo by requiring certain levels of share ownership. The guidelines (expressed as a multiple of base salary) vary by role and level and are expected to be achieved within 5 years of becoming an eligible executive. If the guidelines are not achieved, executives are required to retain a minimum portion of vested shares delivered through Lenovo's incentive plans until the guidelines are met. The guidelines are then expected to be maintained throughout the executives' remaining employment. As of fiscal year end, 96% of executives covered by the guidelines have achieved the targeted level of ownership, and with the upcoming annual LTI grant in June 2018, 100% of executives covered by the guidelines will achieve the targeted level of ownership. Additionally, the Non-executive Directors are subject to similar guidelines and are in full compliance. Claw Back Policy Lenovo maintains a claw back policy for selected executives, including the Chairman/CEO and senior management. The policy states that in the event of a restatement of the Company's previously issued financial statements as a result of errors, omission, fraud or non-compliance, the Board may, in its discretion, attempt to recover all or a portion of compensation, with respect to any fiscal year in which the Company's financial results are negatively affected by such restatement. Members of the Compensation Committee Ms. Ma Xuezheng (Chairman) Mr. William O. Grabe Mr. William Tudor Brown Mr. Gordon Robert Halyburton Orr Mr. Zhao John Huan 122 Lenovo Group Limited 2017/18 Annual Report 72 SUSTAINABILITY Sustainability is a system of core beliefs, and also a management discipline – one with increasingly sophisticated tools and processes for measuring corporate performance. At Lenovo, we're proud to both uphold the values of sustainability, and be recognized by professionals worldwide as a sustainability leader. The global community has honored our achievements in workplace equality, emissions control, resource use, corporate social responsibility, and supply chain management. Lenovo was one of three companies to receive the highest score overall in the 2017 Hang Seng Corporate Sustainability Index, demonstrating the company's excellence in sustainability performance. Excellence in sustainability starts at the top, with the support and endorsement of the Chairman and CEO Yuanqing Yang. Our commitment is systematized across the organization with our board-approved Enterprise Risk Management (ERM) framework, and through our Sustainability Materiality Assessment, which guides our sustainability reporting. Every year, our annual Sustainability Report provides a full accounting of the company's environmental and social responsibility performance. Lenovo is one of the largest advanced-manufacturing enterprises globally. As such, our commitment to sustainability helps elevate the discipline and opportunity for all. Lenovo uses its ERM framework and process to regularly evaluate and address sustainability and corporate social responsibility risks. This same process is used by the Company's Board of Directors and management team across all major functions of the Company. Lenovo's corporate governance framework includes a Corporate Sustainability Policy, signed by Chairman and CEO Yuanqing Yang, which outlines the social, environmental and economic principles that guide the Company's operation. The policy is available at www.lenovo.com/sustainability. In August 2017, the Board of Directors was presented an annual update on Lenovo's sustainability and corporate responsibility risks. The update included a review of Lenovo's Sustainability Report and the Company's anti-slavery and human trafficking statement, and the Board approved both. The Board also received an update on Lenovo's ESG Risk Management and Compliance programs, a progress report on Lenovo's climate change commitments and a request for continued support of Lenovo's climate and renewable energy investments. Lenovo's annual Sustainability Report provides a full accounting of the Company's environmental and social responsibility performance for the previous fiscal year. The scope of the report is determined by a Sustainability Materiality Assessment, a process where Lenovo evaluates and determines its significant, or material, sustainability topics. Lenovo has continued its role as a signatory to the United Nations Global Compact, a public-private strategic policy initiative for businesses committed to aligning operations and strategies with ten universally accepted principles in the areas of human rights, labor, environment and anti-corruption. In addition, many of Lenovo's initiatives align with the United Nations Sustainable Development Goals (SDGs), which are detailed in our latest Sustainability Report. 2017/18 Annual Report Lenovo Group Limited 123 72 Sustainability Overview Lenovo is committed to ethical corporate citizenship and sustainability practices in all of its activities. This steadfast commitment is critical for the future of the Company and is expected by the Company's customers and the communities with which the Company interacts. A selection of Lenovo's FY 2017/18 sustainability achievements is summarized below. More information can be found in Lenovo's Sustainability Report available at www.lenovo.com/sustainability. Key Recognitions from the Global Community: • 2017 CDP (formerly Carbon Disclosure Project) Climate Change Leadership Level – Lenovo scored A-, "Leadership Level," on CDP's climate and supply chain climate questionnaires assessing progress toward environmental stewardship through climate change mitigation and adaptation • Corporate Knights 2018 Global 100 Most Sustainable Corporations in the World Index – Lenovo was the highest ranked company in its industry • 2017 Hang Seng Corporate Sustainability Index – Lenovo was one of three companies to receive the highest score overall • Corporate Equality Index 2017 – Lenovo received a perfect score of 100 percent on corporate policies and practices related to LGBT workplace equality, earning distinction as "Best Places to Work for LGBT Equality" • Thomson Reuters 2018 Top 100 Global Tech Leader – Lenovo scored particularly well on CSR strategy, emissions and resource use • Gartner 2017 Supply Chain Top 25 • Working Mother 100 Best Companies ETHICS AND COMPLIANCE Trust and integrity are key cultural foundations for Lenovo. Lenovo promotes a culture that demands the highest ethical standards of business conduct and a commitment to compliance with all laws and regulations wherever it operates. Its policies and programs align with its objective to operate ethically in all Lenovo business activities. Lenovo has an Ethics and Compliance Office (ECO) that works in partnership with its business units across the globe to ensure they operate within the letter and spirit of its legal and ethical obligations. Led by Lenovo's Chief Ethics and Compliance Officer, ECO plays a critical role in providing the resources and information employees need to make well-informed choices and decisions. The ECO's mission, in part, is to continually review and assess Lenovo's internal policies and procedures. The ECO conducts in-person training sessions and provides communications to our business teams to improve employee education on ethics and compliance issues. Additionally, the ECO maintains and monitors confidential reporting lines that employees and third parties may use to report misconduct. The ECO also leads Lenovo's efforts to conduct ethics and reputational due diligence on Lenovo business partners. 124 Lenovo Group Limited 2017/18 Annual Report 72 An integral part of its ethics and compliance program is Lenovo's Code of Conduct that applies to all employees worldwide. The Code establishes clear expectations for employee compliance with policies related to lawful and ethical business conduct and behavior. The Code is available in seven languages and is accessible on Lenovo's website along with other corporate policies at www.lenovo.com/csr_resources. Each newly hired Lenovo employee receives training and information about its ethics and compliance program. All employees are required to participate in subsequent mandatory training sessions held on a regular basis. Lenovo expects the highest standards of ethical conduct from its employees and has a clear nonretaliation policy that protects employees All new hires at Lenovo undergo training on Lenovo's Code of Conduct who seek guidance on ethical or compliance issues or report any information pertaining to potential violations of law, Company policy or the Code of Conduct in locations where it is legal to do so. Lenovo provides formal, confidential mechanisms for reporting such concerns, all of which are addressed and tracked to resolution. Privacy Lenovo recognizes that privacy is of great importance to individuals everywhere – customers, website visitors, product users, employees...everyone. This is why the Company has established as a core Lenovo value the responsible use and protection of personal and other information under the Company's care. To ensure adherence to Lenovo privacy policies, principles and processes, the Company maintains a global Privacy Program led by the Legal Department and a cross-functional Privacy Working Group that is comprised of key partners drawn from Information Security, Product Security, Product Development, Marketing, E-Commerce, Service and Repair, Human Resources and other groups. Key projects of the Privacy Program include: • Frontline engagement with Lenovo's business teams on privacy due diligence and application of key privacy principles • Internal and external privacy policies development and governance • Pre-launch privacy review processes for products, software, websites, marketing programs, internal applications, and vendor relationships • Employee privacy awareness and training initiatives • Contractual support • Tracking and application of legal requirements and industry best practices • Privacy audit and assessment • Incident response planning and processes Questions or concerns about Lenovo's privacy policies and programs can be addressed to privacy@lenovo.com. 2017/18 Annual Report Lenovo Group Limited 125 72 Sustainability Overview PRODUCT RESPONSIBILITY Lenovo is committed to providing high-quality products that are not only safe to operate but are also safe throughout their lifecycle. Corporate strategies, policies and guidelines have been designed to support this commitment. Lenovo strives to ensure that our products meet all applicable legal requirements as well as voluntary safety and ergonomics practices to which Lenovo subscribes wherever our products are sold. See Lenovo's product safety priorities below. Lenovo's Quality Policy forms the foundation of its Quality Management System, which is ISO (International Organization for Standardization) 9001:2015 certified. To maintain the highest level of quality in its products, Lenovo employs an active, closed-loop process whereby feedback mechanisms provide quick resolution to customer issues. When product issues are discovered, Lenovo performs a root cause analysis and feeds the results back into manufacturing, development and test organizations to ensure similar issues do not arise with current or future products. Select suppliers Comply with applicable legal who demonstrate requirements and voluntary similar commitments safety and ergonomics practices to safety to which Lenovo subscribes Lenovo's Continually Product Safety improve product safety Investigate product Priorities processes safety incidents and take prompt remedial actions Provide customers with labeling, to protect customers instructions, and other information and employees to safely use Lenovo products 126 Lenovo Group Limited 2017/18 Annual Report 72 MANUFACTURING AND SUPPLY CHAIN OPERATIONS Manufacturing Operations Lenovo's manufacturing business model combines both Company-owned manufacturing capabilities with original design manufacturer (ODM) partnerships and joint-venture manufacturing. This hybrid model provides a competitive advantage which enables us to bring new innovations to market more efficiently while ensuring greater control over both product development and supply chain operations. Lenovo's manufacturing operation is global, which allows us to tailor our products to regional markets. All Lenovo global manufacturing locations are ISO 9001 (Quality), ISO 14001 (Environmental) and OHSAS 18001 (Health and Safety) certified. As required by these globally accepted standards, objectives and targets are implemented annually at each Lenovo manufacturing facility to ensure continual improvement and a safe and healthy work environment for our employees. In addition, Lenovo encourages its suppliers to achieve OHSAS 18001 certification through voluntary initiatives. Occupational Health and Safety Providing a safe and healthy working environment for all Lenovo employees is essential to the Company's productivity and values. The Company's Global Occupation Health and Safety (OHS) organization has established world-class standards for employee workplace safety through our Occupational Safety and Health Management System that delivers health and safety programs and processes throughout our global manufacturing footprint. We accomplish this through education, prevention, checks and controls that are vital to achieving the Company's objectives for innovation, productivity and continual improvement. New facilities are quickly and fully integrated into our system and measured to our demanding health and safety standards. All Lenovo global manufacturing locations are OHSAS 18001 certified by Bureau Veritas, a leading independent certification body. Countries with health & safety-certified (OHSAS 18001) Lenovo manufacturing locations Brazil China India Japan Mexico U.S.A. Lenovo is committed to continually improving the sustainability performance of its manufacturing organizations, and utilizes programs and tools of the Responsible Business Alliance (RBA) for guidance. Lenovo ensures compliance with the RBA Code of Conduct by conducting regular occupational health, safety and environmental assessments at all internal global manufacturing locations and key outsourced manufacturing suppliers to provide high levels of regulatory and external management systems compliance. 2017/18 Annual Report Lenovo Group Limited 127 72 Sustainability Overview Supply Chain Operations Lenovo expects its suppliers to not only provide the highest quality parts, products and services, but also to conduct business ethically, responsibly and sustainably. Our top 100 suppliers, which constitute most of our procurement spend, are measured across 25 key sustainability indicators. First and foremost, suppliers are contractually required through purchase order terms and conditions and other formal agreements to comply with all legal, regulatory and various additional sustainability requirements. They are required to implement and maintain documented quality and environmental management systems that meet ISO 9001/14001 requirements, follow all laws regarding environmental and workplace conditions, comply with restricted materials requirements and provide necessary declarations. Lenovo implements the RBA Code of Conduct contractually with our suppliers. Lenovo's own Supplier Code of Conduct is also contractually executed with suppliers and incorporates the RBA code as a component. The RBA code covers elements of labor, environmental and health concerns. In particular, it addresses child labor, forced labor, working hours, overtime, time off, recruitment fees and flow-down of requirements upstream to all levels. Lenovo strives to directly validate compliance of 95 percent of its Tier 1 suppliers and 50 percent of its Tier 2 suppliers by procurement spend with formal self-assessments and independent third-party audits. Regarding supplier environmental impacts, Lenovo's Corporate Environmental Standards policy requires the procurement team to identify areas of environmental risk based on specific criteria and then conduct prescribed actions to ensure risk is mitigated. Suppliers with the highest risk are audited before use and on a regular schedule. Additionally, suppliers are required to report their policy goals, GHG emissions, water usage, waste generation and renewable energy use annually and are tracked on their reduction efforts. Lenovo recognizes the importance of concerns regarding the sourcing of materials containing tin, tantalum, tungsten and gold (3T/G), and cobalt. When sourced from regions experiencing political and social conflict, which may include the Democratic Republic of the Congo or surrounding countries, these materials are referred to as "conflict minerals." We fully support the efforts of the RBA, the Responsible Minerals Assurance Process (RMAP), NGOs and governmental bodies to solve this complex issue, and have supported these efforts with our RBA membership dues since 2006 and direct participation in RBA programs. Also, Lenovo has formally joined the Responsible Minerals Initiative (RMI) to focus on conflict materials beyond 3T/G. 128 Lenovo Group Limited 2017/18 Annual Report 72 Lenovo's activities regarding conflict minerals include: An industry-leading Conflict Minerals Policy validated by independent third-party review, as well as a specific Cobalt Policy Engaging suppliers through formal contracts and directly validating their due diligence efforts via independent third-party RBA audits Participating in RMAP conflict mineral conferences and smelter work groups Holding regular education sessions for employees, publishing quarterly newsletters and providing supplier training as needed Extensively employing the RBA Conflict Minerals Reporting Template (CMRT) for Reasonable Country of Origin Inquiry (RCOI) efforts across 95 percent of our procurement spend and our supply chain Utilizing RMAP to audit and certify smelters as being conflict-free compliant Reporting the program status to Lenovo's Chief Sustainability Executive Publicly reporting our conflict minerals report, the smelters and refiners in our supply chain and their country of location and our list of suppliers 2017/18 Annual Report Lenovo Group Limited 129 72 Sustainability Overview Supplier Diversity The aims of Lenovo's Supplier Diversity Program are to expand our diverse supplier base, strengthen economic development and create a competitive advantage for all involved. Diverse suppliers are a natural part of our business strategy and these suppliers are an integral part of our productivity, quality, service and innovation. Through our Supplier Diversity Program we are committed to maximizing the inclusion of diverse suppliers in our business relationships by identifying opportunities, developing and incubating relationships, creating processes that encourage diverse supplier integration, and building on the Company's already strong culture of inclusion – The Lenovo Way. To increase diversity in our business relationships, Lenovo seeks to include the following suppliers: HUB Zone business Woman-owned Minority-owned Service-disabled veteran-owned Supplier LGBT-owned Diversity Small disadvantaged business Veteran-owned Persons with a disability-owned Small business Lenovo partners with a variety of national and regional organizations, such as the National Minority Supplier Development Council (NMSDC) and the Women's Business Enterprise National Council (WBENC), to facilitate supplier identification and program development. Lenovo currently conducts more than US$120 million in business annually with small and/or certified diverse suppliers in the United States. For more information, please visit our Supplier Diversity website at www.lenovo.com/supplierdiversity. THE ENVIRONMENT Lenovo's long-term, comprehensive approach to environmental management encompasses everything from site operations and product design to recycling and product end-of-life management. Lenovo's Environmental Affairs Policy, which applies to all operations and forms the foundation of Lenovo's Environmental Management System (EMS), provides the backbone for Lenovo's strategy. The Environmental Affairs Policy is available at www.lenovo.com/environment. Lenovo's approach to managing environmental risk and ensuring compliance is described in the Management Discussion & Analysis section on page 31. Lenovo also acts to ensure compliance in its supply chain with a risk-based approach to supplier auditing, including required audits for those organizations whose operations potentially present significant environmental risks. Lenovo also requires that its suppliers comply with the RBA Code of Conduct and verify this compliance through third-party audits. Regarding Lenovo's own Supplier Code of Conduct, compliance is enforced contractually. 130 Lenovo Group Limited 2017/18 Annual Report 72 Climate Change Climate change has been identified as a significant environmental risk and opportunity for Lenovo and is evaluated as part of the processes described below. 1) As part of Lenovo's Enterprise Risk Management system process, at least annually climate change risks are evaluated and incorporated as needed into a prioritized list of overall risks to the Company. 2) As part of Lenovo's ISO 14001 Environmental Management System (EMS), at least annually environmental risks including climate change are evaluated and assigned a quantified score for use in establishing objectives and targets under the EMS. 3) Climate change is also considered as part of Lenovo's Sustainability Reporting Materiality Assessment process. The foundation of Lenovo's climate change strategy is Lenovo's Climate and Energy Policy, which supports the conclusions as presented by the Fifth Assessment Report (AR5) of the Intergovernmental Panel on Climate Change (IPCC) – "Climate Change 2014." Lenovo concurs with the findings and agrees that specific actions are needed to stabilize atmospheric greenhouse gas (GHG) levels and hold global average temperatures to acceptable increases. The actions supported by Lenovo include reducing global emissions by 40-to-70 percent between 2010 and 2050 and attaining zero emissions by 2100. These actions align with the global scientific community's generally accepted recommendations for maintaining global warming below two degrees Celsius over the 21st century relative to pre-industrial levels. Lenovo's climate change strategy receives input from the very highest levels of our organization. Lenovo's Executive Committee and Board of Directors directed Lenovo to establish a second-generation Scope 1 and 2 GHG emissions reductions goal. This new goal was officially released in FY15/16 and calls upon Lenovo to reduce our Scope 1 and 2 GHG emissions by 40 percent by 2020 relative to our FY09/10 adjusted baseline. This second-generation target for GHG emission reductions aligns with our customers' and investors' expectations and follows the latest scientific findings of climate science. In support of this goal, in May 2015 the Lenovo Board of Directors recommended that Lenovo achieve 30 megawatts of direct renewable generation by 2020. LENOVO GLOBAL GHG EMISSION TARGET 40% reduction compared to FY 2009/10 baseline 2009 2020 2017/18 Annual Report Lenovo Group Limited 131 72 Sustainability Overview While we have demonstrated good progress during the early stages of GHG reduction and renewable energy commitments, we are keenly aware there is still much to be done. In light of growth, we realize that accomplishing our goals moving forward will be a significant challenge. With a continued focus on energy efficiency, Lenovo's global teams continue to work to identify and implement energy reduction, renewable energy and carbon offset opportunities that provide the most cost-effective path to meeting our second- generation targets. In FY17/18, Lenovo started assessing a path forward for our third-generation targets after 2020. We are reviewing and evaluating the Science Based Targets initiative's methodology to determine the best approach for Lenovo to support science based reduction pathways for limiting global temperature rise. In addition to our work to address these high-level corporate goals, Lenovo also has established more detailed climate change-related goals as part of Lenovo's EMS. For FY 2017/18, Lenovo had the following global targets in place related to climate change: • New products must show improved energy efficiency relative to the previous generation of the product. • Ensure select products are compliant with preferred voluntary energy standards. • Continue to support external development of product carbon footprint (PCF) methodologies and standards. • Ensure product carbon footprints are published for all new Lenovo products. • Begin calculating PCFs for a representative sample of newly released servers by January 31, 2018. • Specified organizations will establish global action plans to reduce combined Scope 1 and Scope 2 GHG emissions by 40 percent by March 31, 2020, relative to FY 2009/10. The plan will be reviewed and updated annually, at a minimum. • Achieve a four percent reduction in our global CO2e emissions by the end of FY 2017/18 relative to previous fiscal year. • Require climate change reduction targets for at least 75 percent of Lenovo direct suppliers. • Engage with global transportation carriers to ensure they have climate change reduction targets and/ or programs. Results of Lenovo's programs to address these targets will be reported in Lenovo's FY 2017/18 Sustainability Report. In addition, Lenovo responded to the 2017 CDP climate change survey and received an A-, placing Lenovo in the leadership category. Lenovo's annual climate change report, including a climate change risk and opportunities analysis, is publicly available at www.cdp.net. For additional details on Lenovo's GHG emissions inventory and management, see Lenovo's climate change web pages at www.lenovo.com/climate and Sustainability Reports at www.lenovo.com/sustainability. 132 Lenovo Group Limited 2017/18 Annual Report 72 Transport and Packaging Lenovo considers transport and packaging to be among its significant environmental aspects. Emissions arise from different types of transportation and distribution activities throughout Lenovo's value chain, including emissions from product transport and the business travel of Lenovo employees. Lenovo works closely with its partners to ship products in the most environmentally responsible manner, supports green logistics initiatives such as Green Freight Asia, and encourages employees to utilize technology to reduce travel. New packaging made from bamboo Packaging can affect transportation emissions in addition and sugar cane fiber is 100 percent to the environmental impacts of resource use and disposal. biodegradable and lighter than previous Lenovo continually improves its packaging to reduce size and packaging materials weight and utilize more environmentally friendly materials as part of its Environmentally Conscious Product Program. Company-wide transport and packaging objectives and targets are established annually and published in Lenovo's Sustainability Report, along with results of the reporting year's objectives and targets. Waste and Water Lenovo is committed to reducing and recycling waste and conserving water. Lenovo tracks waste metrics and works to identify and implement opportunities to reduce waste quantities. Lenovo operations generate minimal quantities of hazardous waste. Lenovo tracks and monitors water consumption and discharge in its operations even though it does not have any wet processes; water is used only for human consumption and sanitation. Lenovo developed a water risk map for Lenovo's sites in a scope of our EMS. Details on performance relative to waste and water are available in Lenovo's Sustainability Report. For additional details on Lenovo's waste and water inventory, see Lenovo's Sustainability Reports and website: www.lenovo.com/waterandwaste. Lenovo's waste and water data are all third-party verified by Bureau Veritas to a reasonable level of assurance. Please see verification statements at www.lenovo.com/waterandwaste. Environmentally Conscious Products Program Lenovo's Environmentally Conscious Products Program is included in its EMS and incorporates an expectation for continual improvement. Lenovo's commitment to product environmental leadership is reflected in its environmental policy which includes product-specific commitments related to responsible materials usage, energy efficiency and recycling. Lenovo's product environmental standards and specifications require the designers of all Lenovo IT products to consider certain environmentally conscious design practices to facilitate and encourage reuse and recycling and to minimize resource consumption. Lenovo's priority is to use environmentally preferable materials whenever applicable. Lenovo continues to drive innovation in the use of recycled content materials, and in FY2017/18 we released our first product made with closed-loop post-consumer recycled content (CL-PCR), the V410z All-in-One desktop. This product includes 12 percent net by weight post-consumer recycled content sourced from waste electronic and electrical equipment (WEEE) materials. This was followed by the release of the ThinkVision T22v-10 monitor with 45 percent net by weight CL-PCR. Lenovo is working to increase our use of CL-PCR to help close the loop on product lifecycles. 2017/18 Annual Report Lenovo Group Limited 133 72 Sustainability Overview Take Back and Recycling Includes developing and Lenovo offers product take-back and recycling Product offering tools such as programs for both consumer and business Lenovo Efficiency Mode energy customers in most major markets where it does (LEM), which helps servers efficiency operate at peak efficiency business, with many of those programs free to the when the OS is running consumer. For business customers, Lenovo's Asset Recovery Service (ARS) provides customizable Includes identifying solutions including computer take-back, data Product hotspots for targeted destruction, refurbishment and recycling services. emissions reductions on carbon high-volume mainstream footprint OUR PEOPLE products in each Lenovo believes its employees are its most valuable business unit strategic assets and that a strong company Includes refining culture is a key differentiator. Lenovo is a global Product packaging design to company with an incredible amount of diversity. packaging increase pallet density Because of our diversity, it makes good business sense to honor our employees' differences and Includes efforts to steadily Environmentally increase the percentage leverage their life experiences to better serve our preferred of recycled plastic used customers. Lenovo goes beyond diversity with a materials in manufacturing Lenovo focus on creating an inclusive environment with the products intended outcome of each employee feeling valued, respected, and a sense of belonging. The foundation of our respect for employees is our commitment to non-discrimination and a work environment free from harassment regardless of race, color, religion, gender, gender identity or expression, national origin, ethnicity, sexual orientation, sex, age, disability, veteran status or any other characteristic protected by law. Lenovo's "Commitment to Diversity and Non-discrimination" policy documents and formalizes Lenovo's commitments to ensuring equal opportunity and maintaining a diverse workforce. We are also an Affirmative Action – Equal Opportunity Employer in the United States. Lenovo's employee-related standards, policies and benefits are designed to be best-in-class, attracting and retaining top talent and enabling them to achieve their full potential. 134 Lenovo Group Limited 2017/18 Annual Report 72 A well-trained and educated workforce is particularly important to Lenovo, since we operate in a technology industry that is continually changing and innovating. As such, training and education is a key focus area to ensure that our business is successful. Being a successful employer and hiring/retaining employees is critical to Lenovo's business success. Our human resource efforts and initiatives are designed to ensure that Lenovo is a desirable place to work. Our ability to hire, train and retain employees successfully ensures that we are making the correct investments in our human capital. Lenovo measures its employment success across five key elements: compensation and benefits; work-life balance; performance and recognition; development and career opportunities; and retention. In 2017 we made substantial changes to our recognition and rewards programs to more closely align them with our strategic goals. We also implemented more classes and career development initiatives for employees to enhance career development. Lenovo understands that an unhealthy or dangerous workplace could have significant negative implications for its employees, the quality of its products, and the Company's standing as a legally compliant and responsible corporate citizen. With this in mind, Lenovo's Occupational Health and Safety (OHS) organization is committed to ensuring the implementation of an effective health and safety management system. Please see the Manufacturing and Supply Chain Operations section for more information. SOCIAL INVESTMENTS Through generous support of science, technology, engineering and math (STEM) education initiatives and diversity, Lenovo is making a difference in our communities. Most notably, Lenovo aims to increase access to technology for diverse populations through partnerships with organizations like the Boys & Girls Clubs of America, the Smithsonian Center for Learning and Digital Access and NAF, the nonprofit that leads the Lenovo Scholar Network. Now in its fourth year, the Lenovo Scholar Network offers more than 5,000 students at 118 public high schools across the United States the opportunity to learn to develop mobile applications. Lenovo and NAF created the annual Mobile App Development Competition in 2014 to engage underserved high school students in STEM, while also providing entrepreneurial and technology skills needed to pursue careers in computer science, programming and engineering. In the 2017-18 school year, more than 80 percent of schools that joined the competition are offering mobile app development to students for the very first time. In addition to STEM education, Lenovo engages with local communities and provides relief in times of natural disasters. Following the unprecedented natural disasters of 2017, Lenovo donated more than $1M USD in disaster aid and recovery for impacted communities. 2017/18 Annual Report Lenovo Group Limited 135 72 Sustainability Overview Employee Engagement in the Community In addition to its philanthropic initiatives, Lenovo empowers employees to give back to their communities through volunteerism. The company grants employees in North America 32 hours of annual paid time off for volunteerism, and offers a 50 percent match for their charitable donations. Since 2005, North America employees have volunteered over 100,000 hours, and Lenovo and its employees have contributed almost $20 million to charitable causes. In April 2017, Lenovo launched its first-ever global service event, engaging 2,000 employees around Global Week of Service Project in China the world in local volunteerism. Employees gave more than 10,000 hours in volunteer service focused on STEM education and the environment. For more information about social investments, please see Lenovo's Sustainability Report. 136 Lenovo Group Limited 2017/18 Annual Report 72 DIRECTORS' REPORT Directors' Report 138 Independent Auditor's Report 162 Consolidated Income Statement 167 Consolidated Statement of Comprehensive Income 168 Consolidated Balance Sheet 169 Consolidated Cash Flow Statement 171 Consolidated Statement of Changes in Equity 172 Notes to the Financial Statements 173 Five-Year Financial Summary 267 Corporate Information 268 2017/18 Annual Report Lenovo Group Limited 137 72 Directors' Report The directors of Lenovo Group Limited (the "Company") submit their report together with the audited consolidated financial statements of the Company and its subsidiaries (collectively the "Group") for the year ended March 31, 2018. PRINCIPAL BUSINESS AND GEOGRAPHICAL ANALYSIS OF OPERATIONS The principal activity of the Company is investment holding. The activities of its principal subsidiaries are set out in note 37 to the financial statements. Details of the analyses of the Group's performance for the year by operating segment are set out in note 5 to the financial statements. BUSINESS REVIEW A discussion and analysis of the activities as required by Schedule 5 to the Companies Ordinance (Chapter 622 of the Laws of Hong Kong), including a fair review of the business and a discussion of the principal risks and uncertainties facing the Group, particulars of important events affecting the Group that have occurred since the end of the financial year 2017, and an indication of likely future development in the Group's business, can be found in the "Five-Year Financial Summary", "Chairman & CEO Statement", "Management's Discussion & Analysis" and "Sustainability Overview" sections of this annual report. These discussions form part of this directors' report. RESULTS AND APPROPRIATIONS The results of the Group for the year are set out in the consolidated income statement on page 167 of this annual report. The state of affairs of the Group and of the Company as at March 31, 2018 is set out in the consolidated balance sheet on pages 169 and 170 of this annual report and the Company balance sheet in note 31(a) to the financial statements respectively. The consolidated cash flows of the Group for the year are set out in the statement on page 171 of this annual report. An interim dividend of HK6.0 cents (2017: HK6.0 cents) per share, amounting to a total of approximately HK$666.5 million (approximately US$85.4 million) (2017: approximately HK$666.5 million (approximately US$85.9 million)), was paid to shareholders during the year. The Board has resolved to recommend the payment of a final dividend of HK20.5 cents per share for the year ended March 31, 2018 (2017: HK20.5 cents). Subject to shareholders' approval at the forthcoming annual general meeting of the Company to be held on July 5, 2018 ("AGM"), the proposed final dividend will be payable on July 18, 2018 to the shareholders whose names appear on the register of members of the Company on July 12, 2018. For the purposes of determining shareholders' eligibility to attend and vote at the AGM, and entitlement to the proposed final dividend, the register of members of the Company will be closed. Details of such closures are set out below: (i) For determining shareholders' eligibility to attend and vote at the AGM: Latest time to lodge transfer documents for registration 4:30 p.m. on June 26, 2018 Closure of register of members From June 27 to July 5, 2018 Record date June 27, 2018 138 Lenovo Group Limited 2017/18 Annual Report 72 RESULTS AND APPROPRIATIONS (continued) (ii) For determining shareholders' entitlement to the proposed final dividend: Latest time to lodge transfer documents for registration 4:30 p.m. on July 11, 2018 Closure of register of members July 12, 2018 Record date July 12, 2018 During the above closure periods, no transfer of shares will be registered. To be eligible to attend and vote at the AGM, and to qualify for the proposed final dividend, all properly completed transfer documents accompanied by the relevant share certificates must be lodged for registration with the Company's share registrar, Tricor Abacus Limited, at Level 22, Hopewell Centre, 183 Queen's Road East, Hong Kong not later than the aforementioned latest times. FIVE-YEAR FINANCIAL SUMMARY A summary of the results for the year and of the assets and liabilities of the Group as at March 31, 2018 and for the last four financial years are set out on page 267 of this annual report. DISTRIBUTABLE RESERVES As at March 31, 2018, the distributable reserves of the Company amounted to US$776,657,000 (2017: US$713,824,000). BANK BORROWINGS Particulars of bank borrowings as at March 31, 2018 are set out in note 27 to the financial statements. DONATIONS Charitable and other donations made by the Group during the year amounted to US$1,788,000 (2017: US$2,150,000). SHARE CAPITAL Pursuant to the subscription agreement dated September 29, 2017 (the "Subscription Agreement") entered into between the Company as issuer and Union Star Limited as subscriber (the "Subscriber"), the Company allotted and issued 906,136,890 shares to the Subscriber at a subscription price of HK$4.31 per share on November 17, 2017 (the "Share Issuance"). Upon completion of the Share Issuance, the Company has 12,014,791,614 shares in issue. Save for the Share Issuance, no shares were issued during the year. Details of movement of share capital of the Company during the year are set out in note 29 to the financial statements. DEBENTURES ISSUED The Company issued US$750,000,000 4.750% notes due 2023 on March 29, 2018 under the medium term note programme established by the Company on February 15, 2018. The notes were listed on The Stock Exchange of Hong Kong Limited (the "Stock Exchange"). Details of the notes are set out in note 27 to the financial statements. The proceeds of the issues amounting to about US$750,000,000, save for the repurchase of the Company's outstanding US$1,500,000,000 4.700% notes due 2019, the remaining was used for the Company's working capital and general corporate purposes. 2017/18 Annual Report Lenovo Group Limited 139 72 Directors' Report EQUITY-LINKED AGREEMENTS Pursuant to the Subscription Agreement, the Company issued and the Subscriber subscribed for 90,613,689 units of bonus warrants (the "Bonus Warrants") at the initial exercise price of HK$5.17 per Bonus Warrant on November 17, 2017. The exercise in full of the subscription rights attaching to the Bonus Warrants will result in the issue of 90,613,689 shares of the Company. As at March 31, 2018, all the units of Bonus Warrants remained outstanding. For further details of the Bonus Warrants, please refer to note 12 to the financial statements, and also the Company's announcements dated September 29, 2017 and November 17, 2017 and circular dated October 16, 2017 in relation to, among other things, issuance of the Bonus Warrants. Save as disclosed above and the "Long-Term Incentive Program" and the "Employee Share Purchase Plan" as disclosed in the Compensation Committee Report and note 29 to the financial statements, no equity- linked agreements were entered into by the Company during the year or subsisted at the end of the year. SUBSIDIARIES, ASSOCIATES AND JOINT VENTURES Particulars of the Company's principal subsidiaries, associates and joint ventures as at March 31, 2018 are set out in notes 37 and 18 to the financial statements respectively. MANAGEMENT CONTRACTS No contracts concerning the management and administration of the whole or any substantial part of the business of the Company were entered into or existed during the year. MAJOR CUSTOMERS AND SUPPLIERS During the year, the Group sold less than 11% of its goods and services to its five largest customers. The percentages of purchases for the year attributable to the Group's major suppliers are as follows: The largest supplier 14% Five largest suppliers combined 52% None of the directors of the Company, their close associates or any shareholder (which to the knowledge of the directors own more than 5% of the number of issued shares of the Company) had an interest in the major suppliers noted above. PURCHASE, SALE OR REDEMPTION OF THE COMPANY'S LISTED SECURITIES During the year ended March 31, 2018, neither the Company nor any of its subsidiaries purchased, sold or redeemed any of the Company's listed securities, except that the respective trustee of the long-term incentive program and the employee share purchase plan of the Company purchased a total of 106,257,377 shares from the market for award to employees upon vesting. Details of these program and plan are set out under sections headed "Long-Term Incentive Program" and "Employee Share Purchase Plan" in the Compensation Committee Report on page 114 and page 117 respectively of this annual report. 140 Lenovo Group Limited 2017/18 Annual Report 72 DIRECTORS The directors during the year and up to the date of this report are: Chairman and Executive Director Mr. Yang Yuanqing Non-executive Directors Mr. Zhu Linan Mr. Zhao John Huan Independent Non-executive Directors Dr. Tian Suning Mr. Nicholas C. Allen Mr. Nobuyuki Idei Mr. William O. Grabe Mr. William Tudor Brown Ms. Ma Xuezheng Mr. Yang Chih-Yuan Jerry Mr. Gordon Robert Halyburton Orr In accordance with article 107 of the Company's articles of association, Mr. Yang Yuanqing, Mr. Zhao John Huan, Mr. Nicholas C. Allen and Mr. William Tudor Brown will retire by rotation at the AGM and, being eligible, have offered themselves for re-election. The Company has received from each of the independent non-executive directors an annual confirmation of his/her independence pursuant to rule 3.13 of the Rules Governing the Listing of Securities on the Stock Exchange (the "Listing Rules"). The Nomination and Governance Committee has duly reviewed the independence of each of these directors. The Company considered that all independent non-executive directors meet the independence guidelines set out in rule 3.13 of the Listing Rules and are independent in accordance with the terms of the guidelines. The list of directors who have served on the boards of directors of the subsidiaries of the Company during the year ended March 31, 2018 or during the period from April 1, 2017 to the date of this report is available on the Company's website (http://www.lenovo.com/ww/lenovo/list_direct.html). BIOGRAPHY OF DIRECTORS AND SENIOR MANAGEMENT Honorary Chairman Mr. Liu Chuanzhi, 74, has been the Honorary Chairman and Senior Advisor of the Company since November 3, 2011. Mr. Liu is the founder of the Group and held the positions of executive director, non- executive director and chairman of the Board at different times from 1993 until his resignation from the Board on November 3, 2011. As our Honorary Chairman, Mr. Liu is not a director or an officer of the Company or of any subsidiary of the Company, and does not have any management role in the Company or any of its subsidiaries. He obtained his graduate certificate from the Radar Navigation Department of People's Liberation Army Institute of Telecommunication Engineering () (now known as Xidian University) in China in 1967 and has substantial experiences in corporate management. Mr. Liu is the chairman of the board and executive director of Legend Holdings Corporation (HKSE listed), a company holding substantial interests in the issued shares of the Company. 2017/18 Annual Report Lenovo Group Limited 141 72 Directors' Report BIOGRAPHY OF DIRECTORS AND SENIOR MANAGEMENT (continued) Biography of directors Chairman and executive director Mr. Yang Yuanqing, 53, is the Chairman of the Board, Chief Executive Officer and an executive director of the Company. He is also a director and a shareholder of Sureinvest Holdings Limited which holds interests in the issued shares of the Company. Mr. Yang assumed the duties of chief executive officer of the Company on February 5, 2009. Prior to that, he was the chairman of the Board from April 30, 2005. Before taking up the office as chairman, Mr. Yang was the chief executive officer and has been an executive director of the Company since December 16, 1997. Mr. Yang has nearly 30 years of experience in IT industry. Under his leadership, Lenovo has been China's best-selling PC brand since 1997 and is the leading PC vendor, one of the major players in global smartphone and x86 server markets. Mr. Yang holds a master's degree from the Department of Computer Science at the University of Science and Technology of China. Mr. Yang is currently a director of Baidu, Inc. (NASDAQ listed). Mr. Yang is also a guest professor at the University of Science and Technology of China and a member of the International Advisory Council of Brookings Institute. Non-executive directors Mr. Zhu Linan, 55, has been a non-executive director of the Company since April 30, 2005. Mr. Zhu graduated with a master's degree in electronic engineering from Shanghai Jiao Tong University and has more than 20 years of management experience. He was previously a senior vice president of the Group. Mr. Zhu is currently an executive director, president and member of executive committee of Legend Holdings Corporation (HKSE listed), a company holding substantial interests in the issued shares of the Company and he also serves as director of its various members. He is a non-executive director of CAR Inc. (HKSE listed). He was previously a non-executive director of Peak Sport Products Co., Limited (HKSE listed). Mr. Zhao John Huan, 55, has been a non-executive director of the Company since November 3, 2011. Mr. Zhao holds a master's degree in business administration from the Kellogg School of Management at Northwestern University, dual master's degrees in electric engineering and physics from Northern Illinois University and a bachelor's degree in physics from Nanjing University. He is currently an executive director, executive vice president and member of executive committee of Legend Holdings Corporation (HKSE listed), a company having substantial interests in the issued shares of the Company and the chairman and president of Hony Capital Limited. In addition, he currently holds the following positions: non-executive director of China Glass Holdings Limited, the chairman of the board, executive director and chief executive officer of Best Food Holding Company Limited, chairman of the board and non-executive director of Hospital Corporation of China Limited (all HKSE listed) and the deputy chairman of Shanghai Environment Group Co., Ltd. and a non-executive director of Shanghai Jin Jiang International Hotels Development Co., Ltd. (both listed on the Shanghai Stock Exchange), a non-executive director of Zoomlion Heavy Industry Science and Technology Co., Ltd. (HKSE and Shenzhen Stock Exchange listed). Mr. Zhao was previously a director of Wumart Stores, Inc., New China Life Insurance Company Ltd., CSPC Pharmaceutical Group Limited and Chinasoft International Limited (all HKSE listed), Fiat Industrial S.p.A. (MTA Italian Stock Exchange listed) and the deputy chairman of Shanghai Chengtou Holding Co., Ltd. (Shanghai Stock Exchange listed). 142 Lenovo Group Limited 2017/18 Annual Report 72 BIOGRAPHY OF DIRECTORS AND SENIOR MANAGEMENT (continued) Biography of directors (continued) Independent non-executive directors Dr. Tian Suning, 54, has been an independent non-executive director of the Company since August 2, 2007. He is the founder and chairman of a Chinese focused private equity fund China Broadband Capital Partners, L.P.. He is currently an independent director of Shanghai Pudong Development Bank Co., Ltd. (Shanghai Stock Exchange listed) and an executive chairman of the holding company of AsiaInfo. He is also an independent non-executive director of Taikang Insurance Group Inc. (formerly Taikang Life Insurance Company Ltd.). From 1993 till 1999, he was co-founder and chief executive officer of AsiaInfo Holdings LLC (formerly listed on NASDAQ). He was previously a non-executive director of Huayi Tencent Entertainment Company Limited (formerly known as China Jiuhao Health Industry Corporation Limited) (HKSE listed), an independent non-executive director of MasterCard Incorporated (NYSE listed) and a vice chairman of PCCW Ltd. (HKSE listed) between 2005 and 2007. Dr. Tian holds a Ph.D. in natural resource management from Texas Tech University and a M.S. degree in ecology from Chinese Academy of Sciences. Mr. Nicholas C. Allen, 63, has been an independent non-executive director of the Company since November 6, 2009. Mr. Allen received a bachelor of arts degree in economics/social studies from Manchester University, United Kingdom. He is a fellow of the Institute of Chartered Accountants in England and Wales and a member of the Hong Kong Institute of Certified Public Accountants. Mr. Allen has extensive experience in accounting and auditing and was a partner of PricewaterhouseCoopers until his retirement in June 2007. Mr. Allen is an independent non-executive director and the chairman of the board of directors of Link Real Estate Investment Trust (HKSE listed) and an independent non-executive director of CLP Holdings Limited (HKSE listed). He was previously an independent non-executive director of Hysan Development Company Limited (HKSE listed) and VinaLand Limited (London Stock Exchange AIM listed). Mr. Nobuyuki Idei, 80, has been an independent non-executive director of the Company since September 28, 2011. Mr. Idei is the founder and chief executive officer of Quantum Leaps Corporation, an executive advisory company. Until retiring in June 2005, for more than a decade, Mr. Idei held a wide variety of leadership positions at Sony Corporation (Tokyo Stock Exchange, Osaka Securities Exchange, NYSE and London Stock Exchange listed), including chairman and group chief executive officer. He was also the chairman of Sony's advisory board from June 2005 to June 2012. Mr. Idei currently serves on the boards of directors of FreeBit Co., Ltd. and Monex Group, Inc. (both Tokyo Stock Exchange listed) and Stripe International Inc.. Mr. Idei is also the chairman of the National Conference on Fostering Beautiful Forests in Japan. Mr. Idei holds a bachelor's degree in political science and economics from Waseda University in Tokyo. He has served on the boards of directors of Nestlé S.A., Electrolux, General Motors Company, Accenture plc and Baidu, Inc. and also served in a number of other advisory positions including as counselor to the Bank of Japan, vice chairman of Nippon Keidanren (Japan Business Federation) and chairman of the IT Strategy Council, an advisory committee to Japan's Prime Minister. Mr. William O. Grabe, 80, has been an independent non-executive director of the Company since February 8, 2012 and was appointed as the lead independent director of the Company on May 23, 2013. Before that, he was a non-executive director of the Company since May 17, 2005. Mr. Grabe is currently a director of the following listed companies: Gartner Inc. and QTS Realty Trust, Inc. (both NYSE listed). He was previously an independent director of Compuware Corporation and a director of Covisint Corporation. Mr. Grabe is an advisory director of General Atlantic LLC. He formerly served as a managing director of General Atlantic LLC and has been associated with General Atlantic Group since 1992. Prior to that, he served as a corporate vice president and officer of IBM. 2017/18 Annual Report Lenovo Group Limited 143 72 Directors' Report BIOGRAPHY OF DIRECTORS AND SENIOR MANAGEMENT (continued) Biography of directors (continued) Independent non-executive directors (continued) Mr. William Tudor Brown, 59, has been an independent non-executive director of the Company since January 30, 2013. Mr. Brown is a Chartered Engineer and holds an MA (Cantab) Degree in electrical sciences from Cambridge University. He is a fellow of the Institution of Engineering and Technology and a fellow of the Royal Academy of Engineering. He was awarded as Member of the Order of the British Empire (MBE) on June 15, 2013. Mr. Brown was one of the founders of ARM Holdings plc ("ARM") (London Stock Exchange and NASDAQ listed). During the years with ARM, he held a broad range of leadership positions including engineering director, chief technical officer, executive vice president for global development, chief operating officer and president. He had responsibility for developing high-level relationships with industry partners and governmental agencies and for regional development. He also served as a director of ARM from October 2001 to May 3, 2012. Before joining ARM, he was the principal engineer at Acorn Computers Ltd., working exclusively on the ARM research & development programme since 1984. Mr. Brown is currently an independent non-executive director of Semiconductor Manufacturing International Corporation (HKSE listed) and a director of Marvell Technology Group Ltd. (NASDAQ listed). He was previously an independent non-executive director of P2i Limited and Xperi Corporation (NASDAQ listed). He also served on the UK Government Asia Task Force until May 2012. Ms. Ma Xuezheng, 65, was re-designated as an independent non-executive director of the Company on November 7, 2013. Prior to that, she was a non-executive Vice Chairman of the Company since 2007. Before becoming a non-executive director, she was an executive director and the chief financial officer of the Company at different times between 1997 and 2007 and held directorship in various subsidiaries of the Company. She is currently managing partner of Boyu Capital Advisory Company Limited and a non-executive director of the Securities and Futures Commission following her resignation from the Main Board and GEM Listing Committees of the HKSE on November 14, 2013. In addition, she is also a non-executive director of Unilever N.V. (NYSE and Euronext Amsterdam listed) and Unilever PLC (NYSE and London Stock Exchange listed). She was formerly a non-executive director of Wumart Stores, Inc. and STELUX Holdings International Limited (HKSE listed) and an independent non-executive director of Standard Chartered Bank (Hong Kong) Limited. Ms. Ma holds a bachelor of arts degree from Capital Normal University. Mr. Yang Chih-Yuan Jerry, 49, has been an independent non-executive director of the Company since November 6, 2014. Prior to that, he was the board observer of the Company since February 20, 2013. He holds a master's degree and a bachelor's degree of science in electrical engineering from Stanford University, where he is serving on the University's Board of Trustees beginning in October 2017. He was previously on Stanford's Board of Trustees from 2005 through 2015 including being a vice chair. Mr. Yang co-founded Yahoo! Inc. (NASDAQ listed) and served as its chief executive officer from June 2007 to January 2009. He also served as a member of the board of directors of Yahoo! Inc. until January 17, 2012. During such appointment, Mr. Yang focused on corporate strategy and technology vision. Mr. Yang was also instrumental in building strategic business partnerships, international joint ventures and recruiting key talent. Mr. Yang also served as a director of Yahoo! Japan Corporation (Tokyo Stock Exchange listed) from January 1996 to January 2012, an independent director of Cisco Systems, Inc. (NASDAQ listed) from July 2000 to November 2012. Mr. Yang is currently an independent director of Workday Inc. and Alibaba Group Holding Limited (both NYSE listed). 144 Lenovo Group Limited 2017/18 Annual Report 72 BIOGRAPHY OF DIRECTORS AND SENIOR MANAGEMENT (continued) Biography of directors (continued) Independent non-executive directors (continued) Mr. Gordon Robert Halyburton Orr, 55, was re-designated as an independent non-executive director of the Company on September 1, 2016. Prior to that, he was a non-executive director of the Company since 2015. He holds a Master of Arts degree in Engineering Science from Oxford University, United Kingdom and a Master of Business Administration degree from Harvard University. Mr. Orr joined McKinsey & Company ("McKinsey") in 1986 and held a broad range of senior positions in McKinsey until his retirement in August 2015. During the years with McKinsey, he was Greater China Managing Partner and subsequently Senior Partner (1999-2015), Managing Partner of McKinsey Asia (2008- 2014) and Member of McKinsey's global Operating Committee (2008-2015). He also served on McKinsey's Global Shareholder's Board (2003-2015) and chaired the Governance and Risk Committee. In the past 20 years, Mr. Orr has served a broad range of clients in Asia, with primary focus on China and technology related sectors across Asia. Mr. Orr is currently an independent non-executive director of Swire Pacific Limited (HKSE listed). He is also a board member of the China-Britain Business Council. Biography of senior management Mr. Gianfranco Lanci, 63, joined the Group in April 2012 and is currently the Corporate President and Chief Operating Officer of the Company responsible for the principal operations of all the Group's five geographies, and the Intelligent Device Group, which includes the Company's PC, Smart Devices and Mobile Device businesses. Before taking up the office as Corporate President, Mr. Lanci was Chief Operating Officer and Executive Vice President of the Company and President of the PC Group, EMEA and AP. Mr. Lanci has substantial experience across the PC business, including leadership roles at Texas Instruments and Acer. He was appointed as President of Acer Inc. in 2005 and in 2008 became Chief Executive Officer and President. Under his leadership, he led Acer to the number two position globally and number one in EMEA while recording record profitability for three consecutive years. He holds a degree in engineering from the Politecnico of Turin. Ms. Gao Lan, 52, joined the Group in 2009 and is currently the Senior Vice President of Human Resources of the Company, responsible for human resources, organizational development, global talent, compensation and benefits, as well as nurturing the Company's culture. Prior to this, Ms. Gao held several Vice President roles leading the HR functions of many teams, including Emerging Markets Group, APLA & China Geography, People & Organization Capability and HR Strategy & Operations. Before joining the Group, Ms. Gao held senior positions in HR in various multinational companies. Ms. Gao holds a bachelor degree of science from Nankai University, a master degree of philosophy from Cambridge University in the UK, studied human resource management at the Western Management Institute of Beijing and completed the Leadership Excellence for Business HR Program at Stanford University in the US. Mr. He Zhiqiang, 55, joined the Group in 1986 and is currently the Senior Vice President of the Company and President of Lenovo Capital and Incubator Group. This group is responsible for driving innovation through investment in startups, spinning off new businesses and exploring new technologies. Prior to that, Mr. He held various leadership positions in the Group including the President of the Ecosystem and Cloud Services Business Group and was the Chief Technology Officer overseeing Lenovo's Research & Technology initiatives and systems. Mr. He holds a bachelor's degree in computer communication from Beijing University of Posts and Telecommunications and a master's degree in computer engineering from the Institute of Computing Technology of the Chinese Academy of Sciences. 2017/18 Annual Report Lenovo Group Limited 145 72 Directors' Report BIOGRAPHY OF DIRECTORS AND SENIOR MANAGEMENT (continued) Biography of senior management (continued) Ms. Qiao Jian, 50, joined the Group in 1990 and is currently the Senior Vice President and Chief Marketing Officer of the Company, overseeing Lenovo's global brand, marketing, communications and customer engagement efforts. Before that, Ms. Qiao was Co-President of the Mobile Business Group focusing on Lenovo's Mobile business in China. Prior to that, Ms. Qiao was the Senior Vice President of Human Resources. Ms. Qiao held various senior positions in the Group including Senior Vice President of Strategy and Planning and Vice President of Human Resources in China – both before and after the acquisition of IBM's PC Division. Ms. Qiao has extensive experience in strategy, marketing and branding and human resources. She holds a bachelor's degree in management science from Fudan University and holds an EMBA from the China Europe International Business School. Ms. Laura G. Quatela, 60, joined the Group in October 2016 as a Senior Vice President and the Chief Legal Officer responsible for the Group's legal, IP, litigation, corporate governance and government relations matters globally. Before joining the Group, Ms. Quatela had a 15-year career with Eastman Kodak Company ("Kodak") holding a broad range of leadership positions including Chief Intellectual Property Officer, General Counsel, Senior Vice President, Co-Chief Operating Officer and President of the company. She had responsibility for heading Kodak's OLED business, licensing technology and patents and leading Kodak's consumer film, photographic paper, retail photo kiosk and event imaging businesses. Prior to joining Kodak, Ms. Quatela worked for Clover Capital Management, Inc., SASIB Railway GRS, and Bausch & Lomb. In private law practice, she was a defense litigator specializing in mass tort cases. Ms. Quatela is a graduate of Denison University, B.A., International Politics and Case Western Reserve University School of Law, J.D., where she sponsors the Women in Law and Leadership Conference and was inducted into the Society of Benchers. Ms. Quatela is conversant in Mandarin. Dr. Yong Rui, 48, joined the Group in November 2016 as a Senior Vice President and Chief Technology Officer of the Company, overseeing Lenovo's corporate technical strategy, research and development directions, and the Lenovo Research organization. Before joining the Group, Dr. Rui had an 18-year career with Microsoft, where he held various leadership roles in R&D strategy, basic research, technology incubation and product development, most recently as Deputy Managing Director of Microsoft Research Asia. Dr. Rui is a world-class technologist in computer science, and a Fellow of the ACM, IEEE, IAPR, and SPIE. He received his BS from Southeast University, his MS from Tsinghua University, and his PhD from University of Illinois at Urbana-Champaign (UIUC). Mr. Kirk Skaugen, 47, joined the Group in November 2016 as an Executive Vice President of the Company and the President of the Data Center Group. In this capacity he leads the end-to-end data center business including strategic planning, architecture, hardware and software engineering, supply chain and procurement, quality, customer service, and the sales and marketing across Lenovo DCG's five geographies. Mr. Skaugen worked at Intel for 24 years where in his most recent positions he led the Data Center Group and Client Computing Group as senior vice president. Within the Data Center Group at both Intel and now Lenovo, his responsibilities included server, storage, cloud and hyperscale computing, high performance computing, networking, communications infrastructure and Internet of Things businesses. As head of Client Computing, Mr. Skaugen was responsible for Intel's largest revenue and profit contributor including Intel's PC, tablet, and phone businesses. He has also served as general manager of Intel's Asia Pacific Solutions Group responsible for software, system integrator and CIO relationships across the Asia region. Mr. Skaugen holds a bachelor of science in electrical engineering from Purdue University. 146 Lenovo Group Limited 2017/18 Annual Report 72 BIOGRAPHY OF DIRECTORS AND SENIOR MANAGEMENT (continued) Biography of senior management (continued) Mr. Wong Wai Ming, 60, is currently the Executive Vice President and the Chief Financial Officer of the Company. He was previously an investment banker for more than 15 years and also held senior management positions in listed companies in Hong Kong. He was an independent non-executive director of the Company from March 30, 1999 until his appointment to the position of Chief Financial Officer in 2007. Mr. Wong is a member of the Hong Kong Institute of Certified Public Accountants and the Institute of Chartered Accountants in England and Wales and holds a bachelor's degree in management sciences from the Victoria University of Manchester in the United Kingdom. DIRECTORS' SERVICE CONTRACTS There is no service contract, which is not determinable by the Company within one year without payment of compensation (other than statutory compensation), in respect of any director proposed for re-election at the AGM. DIRECTORS' MATERIAL INTERESTS IN TRANSACTIONS, ARRANGEMENTS OR CONTRACTS No other transactions, arrangements or contracts that is significant in relation to the Group's business to which the Company, its holding company, any of its subsidiaries or fellow subsidiaries was a party and in which a director of the Company or his or her connected entities had a material interest, whether directly or indirectly, subsisted at the end of the year or at any time during the year. DIRECTORS' INDEMNITIES AND INSURANCE As permitted by the articles of association of the Company, a director or a former director of the Company may be indemnified out of the Company's assets against any liability incurred by the director to a person other than the Company or an associated company of the Company that attaches to such director in his or her capacity as a director of the Company, to the extent permitted by law. Such permitted indemnity provision is in force throughout the year and up to the date of this report. The Company has also taken out and maintained directors' and officers' liability insurance throughout the year, which provides appropriate cover for certain legal actions brought against its directors and officers. 2017/18 Annual Report Lenovo Group Limited 147 72 Directors' Report DIRECTORS' INTERESTS As at March 31, 2018, the interests and short positions of the directors and chief executive of the Company in the shares, underlying shares and debentures of the Company or its associated corporations (within the meaning of Part XV of the Securities and Futures Ordinance ("SFO")) as recorded in the register maintained by the Company under section 352 of the SFO or as otherwise notified to the Company and the Stock Exchange pursuant to the Model Code for Securities Transactions by Directors of Listed Issuers (the "Model Code") in the Listing Rules were as follows: (i) Interests in the shares and underlying shares of the Company Capacity and number of shares/underlying shares held Aggregate Approximate Interests in shares/ Personal Corporate long percentage of Name of director underlying shares interests interests position interests Mr. Yang Yuanqing Ordinary shares 77,906,291 622,804,000 700,710,291 (Note 2) Share awards 240,950,969 – 240,950,969 941,661,260 7.84% Mr. Zhu Linan Ordinary shares 2,886,713 – 2,886,713 Share awards 2,880,729 – 2,880,729 5,767,442 0.05% Mr. Zhao John Huan Ordinary shares 442,148 – 442,148 Share awards 3,288,881 – 3,288,881 3,731,029 0.03% Dr. Tian Suning Ordinary shares 956,223 – 956,223 Share awards 3,507,968 – 3,507,968 4,464,191 0.04% Mr. Nicholas C. Allen Ordinary shares 838,351 – 838,351 Share awards 3,507,969 – 3,507,969 4,346,320 0.04% Mr. Nobuyuki Idei Ordinary shares 470,618 – 470,618 Share awards 3,329,054 – 3,329,054 3,799,672 0.03% Mr. William O. Grabe Ordinary shares 2,472,765 744,281 3,217,046 Share awards 3,507,969 – 3,507,969 6,725,015 0.06% Mr. William Tudor Ordinary shares 369,541 – 369,541 Brown Share awards 2,964,129 – 2,964,129 3,333,670 0.03% Ms. Ma Xuezheng Ordinary shares 10,942,996 2,240,000 13,182,996 Share awards 3,201,195 – 3,201,195 16,384,191 0.14% Mr. Yang Chih-Yuan Ordinary shares 261,057 – 261,057 Jerry Share awards 2,764,459 – 2,764,459 3,025,516 0.03% Mr. Gordon Robert Ordinary shares 88,624 – 88,624 Halyburton Orr Share awards 2,075,461 – 2,075,461 2,164,085 0.02% 148 Lenovo Group Limited 2017/18 Annual Report 72 DIRECTORS' INTERESTS (continued) (ii) Interests in shares and underlying shares of the associated corporations of the Company Number and class of shares/ Approximate Name of underlying shares/ percentage Name of associated Long position/ Capacity/ registered capital of interests director corporations short position nature of interests held (Note 3) Mr. Yang SHAREit Technology Long position Personal interests 5,500,000 15.98% Yuanqing Holdings Inc. held as beneficial series A owner preferred shares Long position Personal interests registered capital 3.00% held as beneficial of RMB2,400,000 (Note 4) owner) Long position Personal interests registered capital 6.00% held as beneficial of RMB1,097,144 (Note 4) owner Long position Personal interests registered capital 5.33% held as beneficial of RMB3,200,000 (Note 4) owner Long position Personal interests registered capital 4.80% held as beneficial of RMB2,584,615 (Note 4) owner Notes: 1. Share awards represent underlying shares convertible into ordinary shares. Details of share awards are set out under the section headed "Long-Term Incentive Program" in the Compensation Committee Report. 2. The shares are held by Sureinvest Holdings Limited in which Mr. Yang Yuanqing holds more than one-third of the voting power at its general meetings. Therefore, Mr. Yang is taken to have an interest in 622,804,000 shares under the SFO and such interest is also reported under the below section headed "Substantial Shareholders' and Other Persons' Interests". 3. The approximate percentage of interests is based on the shares comprising the interests held as a percentage of the total number of shares in issue of the associated corporation of the same class immediately after the relevant event and as recorded in the register maintained under section 352 of the SFO. 4. Mr. Yang Yuanqing holds the interests of RMB2,400,000 (being 3%), RMB1,097,144 (being 6%), RMB3,200,000 (being 5.33%) and RMB2,584,615 (being 4.8%) in the registered capital in,, and respectively. Save as disclosed above, as at March 31, 2018, none of the directors or chief executive of the Company or their associates had any interests or short positions in the shares, underlying shares or debentures of the Company or its associated corporations (within the meaning of Part XV of the SFO) as recorded in the register maintained by the Company under section 352 of the SFO or as otherwise notified to the Company and the Stock Exchange pursuant to the Model Code. 2017/18 Annual Report Lenovo Group Limited 149 72 Directors' Report DIRECTORS' RIGHTS TO ACQUIRE SHARES OR DEBENTURES Under the long-term incentive program of the Company, the Board or the trustee of the program shall select the employees (including but not limited to the directors) of the Group for participation in the program, and determine the number of shares to be awarded. Details of the movements in the share awards for the year ended March 31, 2018 are set out under the section headed "Long-Term Incentive Scheme" in the Compensation Committee Report and in the note 29 to the financial statements. Save as disclosed in the sections headed "Directors' Interests" of this report, and "Long-Term Incentive Program" of the Compensation Committee Report, at no time during the year ended March 31, 2018 was the Company or a specified undertaking of the Company a party to any arrangements to enable the directors of the Company to acquire benefits by means of acquisition of shares in, or debentures of, the Company or any other body corporate. SUBSTANTIAL SHAREHOLDERS' AND OTHER PERSONS' INTERESTS As at March 31, 2018, the following persons (other than the directors and chief executive of the Company as disclosed above) had interests or short positions in the shares and/or underlying shares of the Company as recorded in the register required to be kept under section 336 of the SFO: Capacity and number of shares/ underlying shares held Aggregate long and short Approximate Long position/ Beneficial Corporate positions percentage of Name Short position owner interests (Note 1) interests Legend Holdings Corporation Long position 2,867,636,724 628,919,317 3,496,556,041 29.10% (Note 2) Right Lane Limited Long position 388,819,317 240,100,000 628,919,317 5.23% Red Eagle Group (PTC) Limited Long position – 996,750,579 996,750,579 8.30% (Notes 3 & 5) Harvest Star Limited Long position – 996,750,579 996,750,579 8.30% (Notes 4 & 5) Union Star Limited Long position 996,750,579 – 996,750,579 8.30% Sureinvest Holdings Limited Long position 622,804,000 – 622,804,000 5.18% (Note 6) BlackRock, Inc. Long position – 808,036,109 808,036,109 6.73% Short position – 24,348,000 24,348,000 0.20% 150 Lenovo Group Limited 2017/18 Annual Report 72 SUBSTANTIAL SHAREHOLDERS' AND OTHER PERSONS' INTERESTS (continued) Notes: 1. The interests or short positions include underlying shares as follows:– Long position Short position Convertible instruments Cash settled unlisted Cash settled unlisted Name unlisted equity derivatives equity derivatives equity derivatives BlackRock, Inc. – 1,268,000 13,650,000 Red Eagle Group (PTC) Limited 90,613,689 – – Harvest Star Limited 90,613,689 – – Union Star Limited 90,613,689 – – 2. Out of 628,919,317 shares, 388,819,317 shares are directly held by Right Lane Limited ("Right Lane"), a direct wholly-owned subsidiary of Legend Holdings Corporation, and 240,100,000 shares are indirectly held by Right Lane through its wholly-owned subsidiary, Legion Elite Limited. 3. These shares/underlying shares of the Company are indirectly held by Harvest Star Limited through Union Star Limited ("Union Star"). 4. These shares/underlying shares of the Company are immediately held through Union Star. 5. The interests represent 906,136,890 shares and 90,613,689 units of bonus warrants issued to Union Star under the Subscription Agreement and as disclosed in the Company's announcements dated September 29, 2017 and November 17, 2017 and circular dated October 16, 2017. 6. Mr. Yang Yuanqing holds more than one-third of the voting power at general meetings of Sureinvest Holdings Limited ("Sureinvest"). Accordingly, Mr. Yang is deemed to have interests in those 622,804,000 shares of the Company held by Sureinvest under the SFO. This interest is also included as corporate interests of Mr. Yang in the above section headed "Directors' Interests". Save as disclosed above, as at March 31, 2018, no other persons (other than the directors and chief executive of the Company, whose interests are set out in the above section headed "Directors' Interests") had any interests or short positions in the shares or underlying shares of the Company as recorded in the register required to be kept by the Company under section 336 of the SFO. RETIREMENT SCHEME ARRANGEMENTS The Company contributes toward retirement income protection for its employees through the provision of defined benefit pension plans, defined contribution plans, and/or contributions to various public retirement schemes in certain jurisdictions. These benefits form an important part of the Company's total compensation and benefits program that is designed to attract and retain highly skilled and talented employees. Defined Benefit Pensions Plans Chinese Mainland – Retirement Schemes The Group participates in respective local municipal government retirement schemes in the mainland of China ("Chinese Mainland") whereby it is required to make an annual contribution of no more than 20% of three times the monthly average salaries as set out by the local municipal government each year. The local municipal governments undertake to assume the retirement benefit obligations of all retirees of the qualified employees in the Chinese Mainland. In July 2006, the Group has established a supplemental retirement program for its employees in Chinese Mainland. This is a defined contribution plan, with voluntary employee participation. In addition to the above, the Group has defined benefit and/or defined contribution plans that cover substantially all regular employees, and supplemental retirement plans that cover certain executives. Information on the principal pension plans sponsored by the Group is summarized in this section. 2017/18 Annual Report Lenovo Group Limited 151 72 Directors' Report RETIREMENT SCHEME ARRANGEMENTS (continued) Defined Benefit Pensions Plans (continued) United States of America ("US") – Lenovo Pension Plan The Company provides US regular, full-time and part-time employees who were employed by IBM prior to being hired by the Company and who were members of the IBM Personal Pension Plan ("PPP") with non- contributory defined benefit pension benefits via the Lenovo Pension Plan. As of December 31, 2015, the plan was frozen. The Lenovo Pension Plan consists of a tax-qualified plan and a non-tax-qualified (non-qualified) plan. The qualified plan is funded by Company contributions to an irrevocable trust fund, which is held for the sole benefit of participants and beneficiaries. The non-qualified plan, which provides benefits in excess of US Internal Revenue Service limitations for tax-qualified plans, is unfunded. Pension benefits are calculated using a five year average final pay formula that determines benefits based on a participant's salary and years of service, including prior service with IBM. The benefit is reduced by the amount of the IBM PPP benefit accrued to May 1, 2005, which will be paid by IBM's trust. For the year ended March 31, 2018, an amount of US$2,951,891 was charged to the income statement with respect to the qualified and non-qualified plans. The principal results of the most recent actuarial valuation of the plan at March 31, 2018 were the following: • The actuarial valuation was prepared by Fidelity. The actuaries involved are fully qualified under the requirements of US law. • The actuarial method used was the Projected Unit Credit Cost method and the principal actuarial assumptions were: – Discount rate: 3.25% – Expected return on plan assets: 3.25% – Future salary increases: N/A • The qualified plan was 59% funded at the actuarial valuation date. • There was a net liability of US$41,044,503 under the qualified plan for this reason at the actuarial valuation date. Japan – Pension Plan The Company operates a hybrid plan that consists of a defined contribution up to the annual tax- deductible limit plus a cash balance plan with contributions of 7% of pay. The plan is funded by Company contributions to a qualified pension fund, which is held for the sole benefit of participants and beneficiaries. For the year ended March 31, 2018, an amount of Yen 1,033,275,560 was charged to the income statement with respect to this plan. The principal results of the most recent actuarial valuation of the plan at March 31, 2018 were the following: • The actuarial valuation was prepared by JP Actuary Consulting Co., Ltd. The actuaries involved are fully qualified under the requirements of Japanese law. • The actuarial method used was the Projected Unit Credit Cost method and the principal actuarial assumptions were: – Discount rate: 0.50% – Expected return on plan assets: 0.50% – Future salary increases: Age-group based • The plan was 64% funded at the actuarial valuation date. • There was a net liability of Yen 9,259,710,090 under this plan at the actuarial valuation date. 152 Lenovo Group Limited 2017/18 Annual Report 72 RETIREMENT SCHEME ARRANGEMENTS (continued) Defined Benefit Pensions Plans (continued) Germany – Pension Plan The Company operates a hybrid plan that provides a defined contribution for some participants and a final pay defined benefit for other participants, depending on which former IBM plan they were in. The Company also operates a defined benefit plan for Motorola Mobility employees. Employees hired by IBM before January 1, 1992 have a defined benefit based on a final pay formula. Employees hired from 1992 to 1999 have a combination of a defined benefit based on a final pay formula and a defined contribution plan with employee required contributions of 7% of pay above the social security ceiling and a 100% company match. Employees hired in or after 2000 have a combination of a cash balance plan with an employer contribution of 2.95% of pay below the social security ceiling, and a voluntary defined contribution plan where employees can contribute specific amounts through salary sacrifice. Employees of Motorola Mobility have a defined benefit based on a final pay formula. The plan is partially funded by Company and employee contributions to an insured support fund with DBV-Winterthur up to the maximum tax-deductible limits. In line with standard practice in Germany, the remainder is unfunded (book reserve). For the year ended March 31, 2018, an amount of EURO3,633,097 was charged to the income statement with respect to this plan. The principal results of the most actuarial valuation of the plan at March 31, 2018 were the following: • The actuarial valuation was prepared by Kern, Mauch & Kollegen (Motorola Mobility valuation prepared by WillisTowersWatson). The actuaries involved are fully qualified under German law. • The actuarial method used was the Projected Unit Credit Cost method and the principal actuarial assumptions were: – Discount rate: 1.25% – Future salary increases: Age-group based – Future pension increases: 2.00% • The plans were 28% funded at the actuarial valuation date. • There was a net liability of EURO150,765,554 under this plan at the actuarial valuation date. Defined Contribution Plans United States of America ("US") – Lenovo Savings Plan U.S. regular, full-time and part-time employees of Lenovo (United States) Inc., including employees of Motorola Mobility LLC, are eligible to participate in the Lenovo Savings Plan, which is a tax-qualified defined contribution plan under section 401(k) of the Internal Revenue Code. The Motorola Mobility 401(k) Plan merged into the Lenovo Savings Plan effective December 31, 2015. The Company matches 100% of the employee's contribution up to the first 6% of the employee's eligible compensation. Employee contributions are voluntary. All contributions, including the Company match, are made in cash, in accordance with the participants' investment elections. The Company match is immediately vested. 2017/18 Annual Report Lenovo Group Limited 153 72 Directors' Report RETIREMENT SCHEME ARRANGEMENTS (continued) Defined Contribution Plans (continued) US Lenovo Executive Deferred Compensation Plan The Company also maintains an unfunded, non-qualified, defined contribution plan, the Lenovo Executive Deferred Compensation Plan, which allows eligible executives to defer compensation, and to receive Company matching contributions, with respect to amounts in excess of Internal Revenue Service limits for tax-qualified plans. Compensation deferred under the plan, as well as Company matching contributions are recorded as liabilities. Deferred compensation amounts may be directed by participants into an account that replicates the return that would be received had the amounts been invested in similar Lenovo Savings Plan investment options. Company matching contributions, are directed to participant accounts and fluctuate based on changes in the stock prices of the underlying investment portfolio. United Kingdom ("UK") – Lenovo Stakeholders Plan UK regular, full-time, part-time and fixed term Lenovo contract employees are eligible to participate in the Lenovo Stakeholders Plan, which is a tax-qualified defined contribution "stakeholder" plan. The Company contributes 8.7% of an employee's eligible salary to the employee's pension account each year and the employer contributions are dependent on employee contributing no less than 3% of their salary to the same fund. Canada – Defined Contribution Pension Plan Canadian regular, full-time and part-time employees are eligible to participate in the Defined Contribution Pension Plan, which is a tax-qualified defined contribution plan. The Company contributes 4% of the employee's eligible compensation, in addition the Company matches 50% of the employee's contribution up to the first 4% of the employee's eligible compensation. All contributions are made in cash, in accordance with the participants' investment elections. Employee contributions are voluntary. Hong Kong – Mandatory Provident Fund The Group operates a Mandatory Provident Fund Scheme for all qualified employees employed in Hong Kong. They are required to contribute 5% of their compensation (subject to the ceiling under the requirements set out in the Mandatory Provident Fund legislation). The employer's contribution will increase from 5% to 7.5% and 10% respectively after completion of five and ten years of service by the relevant employees. 154 Lenovo Group Limited 2017/18 Annual Report 72 CONTINUING CONNECTED TRANSACTIONS During the year, the Group conducted certain continuing connected transactions with certain connected persons (as defined in the Listing Rules) which are required to be disclosed pursuant to rules 14A.49 and 14A.71 of the Listing Rules. (i) Continuing connected transactions with NEC Corporation and its associates During the year, the Group conducted the following continuing connected transactions with NEC Corporation and its associates, details of which are set out as follows: Lenovo NEC Holdings B.V. ("JVCo", together with its subsidiaries the "JVCo Group"), is a joint venture company held as to 66.6% by the Company (through Lenovo International Coöperatief U.A. (formerly known as Lenovo (International) B.V.), an indirect wholly-owned subsidiary of the Company and 33.4% by NEC Corporation ("NEC", together with its subsidiaries the "NEC Group") to own and operate their respective personal computer businesses in Japan pursuant to the Business Combination Agreement entered into between the Company and amongst others, NEC dated January 27, 2011 and became effective on July 1, 2011 (the "Closing Date") and amended on October 7, 2014. Based on the annual results announcement for the year ended March 31, 2017 which was published by the Company on May 25, 2017, the profits of the JVCo were more than 5% of those of the Company for the same period, and thus the Company was no longer able to rely on the insignificant subsidiary exception set out in Rule 14A.09(1) of the Listing Rules for the continuing connected transactions contemplated under various agreements entered into between the Company, NEC or other members of the NEC Group, the JVCo or other members of the JVCo Group (the "CCT Agreements") in respect of the provision of certain services and products to or by the JVCo Group to facilitate the operation of its personal computer business in Japan (the "CCTs"). On May 25, 2017, the annual caps for the CCTs were set for the period from May 25, 2017 to March 31, 2018 and for the two financial years ending March 31, 2019 and 2020 (the "Revised Annual Caps") given the established business relationship between the Company and NEC and the mutual business development needs and goals. It was contemplated that the term of the CCT Agreements be automatically renewed for an additional year until a prescribed date or unless either party gives notice to the other of its intention to terminate such agreements (the "Automatic Renewal"). 2017/18 Annual Report Lenovo Group Limited 155 72 Directors' Report CONTINUING CONNECTED TRANSACTIONS (continued) (i) Continuing connected transactions with NEC Corporation and its associates (continued) Details of the CCT Agreements are set out below: Supply Agreement Date: February 28, 2011 and amended on October 7, 2014 Parties: NEC and NEC Embedded Products, Ltd. ("NECP") (formerly known as NEC Personal Products, Ltd.), a wholly-owned subsidiary of NEC (whose rights and obligations were transferred to NEC Personal Computers, Ltd. ("NECPC"), a member of the JVCo Group, on and following the Closing Date) Services provided/received: The supply of certain "NEC" branded personal computer products to NEC. Term: Commenced from July 1, 2011 and continued until July 1, 2016, subject to Automatic Renewal thereafter. Revised Annual Cap(Note): 25/5/2017 – 31/3/2018: JPY122,897 million (US$1,106,073,000) 1/4/2018 – 31/3/2019: JPY147,476 million (US$1,327,284,000) 1/4/2019 – 31/3/2020: JPY147,476 million (US$1,327,284,000) NEC Fielding Agreement Date: January 15, 2004 Parties: NEC Fielding, Ltd., a subsidiary of NEC, and NECP (whose rights and obligations were transferred to NECPC, a member of the JVCo Group, on and following the Closing Date) Services provided/received: NEC Fielding, Ltd. agreed to provide maintenance and other ancillary services for certain equipment sold or leased and used by the NECPC following the Closing Date. Term: The initial term ended on March 31, 2004 and had been automatically renewed for an additional one-year term until July 1, 2016, subject to Automatic Renewal thereafter. Revised Annual Cap(Note): 25/5/2017 – 31/3/2018: JPY2,370 million (US$21,330,000) 1/4/2018 – 31/3/2019: JPY3,009 million (US$27,081,000) 1/4/2019 – 31/3/2020: JPY3,009 million (US$27,081,000) 156 Lenovo Group Limited 2017/18 Annual Report 72 CONTINUING CONNECTED TRANSACTIONS (continued) (i) Continuing connected transactions with NEC Corporation and its associates (continued) NESIC Agreement Date: August 18, 2003 Parties: NEC Networks & System Integration Corporation ("NESIC"), an associate of NEC, and NECP (whose rights and obligations were transferred to NECPC, a member of the JVCo Group, on and following the Closing Date) Services provided/received: NESIC agreed to provide NECPC with operation and maintenance services for intranet and other internal communication systems of NECPC following the Closing Date. Term: The initial term ended on March 31, 2004 and had been automatically renewed for an additional one-year term until July 1, 2016, subject to Automatic Renewal thereafter. Revised Annual Cap(Note): 25/5/2017 – 31/3/2018: JPY113 million (US$1,017,000) 1/4/2018 – 31/3/2019: JPY121 million (US$1,089,000) 1/4/2019 – 31/3/2020: JPY121 million (US$1,089,000) NEC Newco Brand Licence Agreement and Ancillary Agreements Date: July 1, 2011 and amended on October 7, 2014 Parties: NEC and NECPC (a member of the JVCo Group on and following the Closing Date) Services provided/received: NEC agreed to grant NECPC, JV Co and Lenovo (Japan) Ltd (a member of JVCo Group) a licence to use certain rights in connection with the letters and the mark "NEC" at royalty payable to NEC by NECPC. Revised Term: Commenced from July 1, 2011 to June 30, 2018 and is subject to Automatic Renewal until up to June 30, 2026. Revised Annual Cap(Note): 25/5/2017 – 31/3/2018: JPY253 million (US$2,277,000) 1/4/2018 – 31/3/2019: JPY349 million (US$3,141,000) 1/4/2019 – 31/3/2020: JPY368 million (US$3,312,000) 2017/18 Annual Report Lenovo Group Limited 157 72 Directors' Report CONTINUING CONNECTED TRANSACTIONS (continued) (i) Continuing connected transactions with NEC Corporation and its associates (continued) Transitional Services Agreement Date: May 30, 2011 Parties: The Company and NEC Services provided/received: Services to be provided by NEC Group to JVCo Group and vice versa including business infrastructure related services, development & production services, sales related services, maintenance & support services, real estate services and information technology services. Revised Term: Commenced from July 1, 2011 and expired after June 30, 2016 but extended to June 30, 2017, subject to Automatic Renewal thereafter. Revised Annual Cap(Note): Annual fees for services provided to JVCo Group by NEC Group (payable to NEC): 25/5/2017 – 31/3/2018: JPY13,516 million (US$121,644,000) 1/4/2018 – 31/3/2019: JPY18,343 million (US$165,087,000) 1/4/2019 – 31/3/2020: JPY18,343 million (US$165,087,000) Annual fees for services provided to NEC Group by JVCo Group (payable from NEC): 25/5/2017 – 31/3/2018: JPY775 million (US$6,975,000) 1/4/2018 – 31/3/2019: JPY1,128 million (US$10,152,000) 1/4/2019 – 31/3/2020: JPY1,179 million (US$10,611,000) Note: The translation of Japanese yen into United States dollars is based on the exchange rate of JPY1.00 to US$0.0090 for information purposes only. Full details of the above continuing connected transactions are set out in the announcements and circulars published by the Company on January 27, 2011, April 21, 2011, May 11, 2011, January 20, 2014, February 24, 2014, October 7, 2014 and May 25, 2017 and on the websites of Hong Kong Exchanges and Clearing Limited and the Company. 158 Lenovo Group Limited 2017/18 Annual Report 72 CONTINUING CONNECTED TRANSACTIONS (continued) (ii) Continuing connected transactions with Compal Electronics, Inc. and it associates During the year, the Group also engaged in certain other continuing connected transactions as set out below, which were subject to annual review and reporting requirements: In 2012, the Company and Compal Electronics, Inc. ("Compal", together with its affiliates the "Compal Group") set up a joint venture company, LC Future Center Limited ("LCFC") which is owned as to 51% by the Company and 49% by Compal. As LCFC is a non-wholly owned subsidiary of the Company and Compal is a substantial shareholder of LCFC, Compal has therefore become a connected person of the Company at subsidiary level under the Listing Rules. The Group and the Compal Group had, prior to the setting up of LCFC, entered into master agreements in relation to (i) the supply of components from the Group to the Compal Group; and (ii) the purchase of products and services from the Compal Group by the Group (together the "Existing CCT Agreements"). Details of these Existing CCT Agreements are set out in the announcements published by the Company on May 22, 2015, September 9, 2015, April 1, 2016, March 31, 2017 and March 29, 2018 and on the websites of the Company and Hong Kong Exchanges and Clearing Limited. Details of the Existing CCT Agreements are set out below: OEM Components Purchase Agreement Date: June 20, 2006 Parties: Lenovo (Singapore) Pte. Ltd., a wholly-owned subsidiary of the Company and Compal Services provided/received: The Group shall supply certain components (including but not limited to, electronic components and/or assemblies specified by Compal) to the Compal Group. Annual cap: (i) 22/5/2015 – 31/3/2016 (ii) 1/4/2016 – 31/3/2017 (iii) 1/4/2017 – 31/3/2018 (iv) 1/4/2018 – 31/3/2019 The estimated value of the transactions will not exceed US$16,000 million in aggregate under the Existing CCT Agreements or will not exceed US$8,000 million under OEM Components Purchase Agreement for each of the above period. 2017/18 Annual Report Lenovo Group Limited 159 72 Directors' Report CONTINUING CONNECTED TRANSACTIONS (continued) (ii) Continuing connected transactions with Compal Electronics, Inc. and it associates (continued) System Purchase Agreement Date: January 19, 2006 Parties: Lenovo (Singapore) Pte. Ltd. (whose rights and obligations were assigned to Lenovo PC HK Limited pursuant to an assignment and novation agreement) and Compal Services provided/received: The Compal Group shall supply to the Group: (i) certain products, including but not limited to, (a) computer system units and the associated documentation, packaging, software packages; (b) any component when separately purchased from the system unit; (c) other materials, such as hard drives, memory cards and modems; and (d) other related computer and mobile products; and (ii) certain services, including but not limited to, activities, tasks and work items related to the manufacture and support of the products. Annual cap: (i) 22/5/2015 – 31/3/2016 (ii) 1/4/2016 – 31/3/2017 (iii) 1/4/2017 – 31/3/2018 (iv) 1/4/2018 – 31/3/2019 The estimated value of the transactions will not exceed US$16,000 million in aggregate under the Existing CCT Agreements or will not exceed US$8,000 million under System Purchase Agreement for each of the above period. The Existing CCT Agreements were entered into by the Company prior to Compal becoming a connected person of the Company and do not have a fixed period as required under rule 14A.52 of the Listing Rules. The Stock Exchange has granted a waiver from strict compliance with rule 14A.52 of the Listing Rules so as to allow the duration of each of the Existing CCT Agreements to exceed three years. In accordance with rule 14A.55 of the Listing Rules, the independent non-executive directors of the Company reviewed the continuing connected transactions as mentioned above and confirmed that the transactions were entered into: (i) in the ordinary and usual course of business of the Group; (ii) on normal commercial terms or better; and (iii) according to the relevant agreement governing them on terms that are fair and reasonable and in the interests of the shareholders of the Group as a whole. 160 Lenovo Group Limited 2017/18 Annual Report 72 CONTINUING CONNECTED TRANSACTIONS (continued) Pursuant to rule 14A.56 of the Listing Rules, the Company's external auditor, PricewaterhouseCoopers ("PwC") was engaged to report on the Group's continuing connected transactions in accordance with Hong Kong Standard on Assurance Engagements 3000 (Revised) "Assurance Engagements Other Than Audits or Reviews of Historical Financial Information" and with reference to Practice Note 740 "Auditor's Letter on Continuing Connected Transactions under the Hong Kong Listing Rules" issued by the Hong Kong Institute of Certified Public Accountants. PwC has issued an unqualified letter containing findings and conclusions in respect of the continuing connected transactions disclosed by the Group in the paragraph above in accordance with rule 14A.56 of the Listing Rules. A copy of the auditor's letter has been provided by the Company to the Stock Exchange. SIGNIFICANT RELATED PARTY TRANSACTIONS During the year, the Group entered into certain transactions with parties regarded as "related parties" under applicable accounting principles. Details of the significant related party transactions undertaken in the normal course of business are set out in note 32 to the financial statements. None of these transactions constitutes a discloseable connected transaction as defined under the Listing Rules. AUDITOR The financial statements for the year have been audited by PwC who retire and, being eligible, offer themselves for re-appointment. PUBLIC FLOAT Based on the information that is publicly available to the Company and within the knowledge of the directors of the Company, as at the date of this report, there is sufficient public float of more than 25% of the Company's total number of issued shares as required under the Listing Rules. On behalf of the Board Yang Yuanqing Chairman and Chief Executive Officer May 24, 2018 2017/18 Annual Report Lenovo Group Limited 161 72 Independent Auditor's Report INDEPENDENT AUDITOR'S REPORT TO THE MEMBERS OF LENOVO GROUP LIMITED (incorporated in Hong Kong with limited liability) OPINION What we have audited The consolidated financial statements of Lenovo Group Limited (the "Company") and its subsidiaries (the"Group") set out on pages 167 to 266, which comprise: • the consolidated balance sheet as at March 31, 2018; • the consolidated income statement for the year then ended; • the consolidated statement of comprehensive income for the year then ended; • the consolidated statement of changes in equity for the year then ended; • the consolidated cash flow statement for the year then ended; and • the notes to the consolidated financial statements, which include a summary of significant accounting policies. Our opinion In our opinion, the consolidated financial statements give a true and fair view of the consolidated financial position of the Group as at March 31, 2018, and of its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with Hong Kong Financial Reporting Standards ("HKFRSs") issued by the Hong Kong Institute of Certified Public Accountants ("HKICPA") and have been properly prepared in compliance with the Hong Kong Companies Ordinance. BASIS FOR OPINION We conducted our audit in accordance with Hong Kong Standards on Auditing ("HKSAs") issued by the HKICPA. Our responsibilities under those standards are further described in the Auditor's Responsibilities for the Audit of the Consolidated Financial Statements section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Independence We are independent of the Group in accordance with the HKICPA's Code of Ethics for Professional Accountants ("the Code"), and we have fulfilled our other ethical responsibilities in accordance with the Code. KEY AUDIT MATTERS Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated financial statements of the current period. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. 162 Lenovo Group Limited 2017/18 Annual Report 72 KEY AUDIT MATTERS (continued) Key audit matters identified in our audit are summarised as follows: • Impairment assessment of goodwill and other intangible assets with indefinite useful lives • Recognition of deferred income tax assets How our audit addressed the Key Audit Matter Key Audit Matter Impairment assessment of goodwill and other intangible assets with indefinite useful lives Refer to notes 4(a) and 17 to the consolidated Our procedures included: financial statements As at March 31, 2018, the Group had goodwill • We assessed management's and other intangible assets with indefinite identification of CGUs based on the useful lives totalling US$6,362 million, for Group's accounting policies and our which management is required to perform understanding of the Group's business. annual impairment assessment. • We assessed the value in use calculation For the purpose of assessing impairment, methodology adopted by management. these assets were allocated to cash generating units ("CGUs"), and the • We assessed the reasonableness of key recoverable amount of each CGU was assumptions such as revenue growth determined by management based on rates, operating margins and discount value in use calculations using cash flow rates with reference to the business and projections. In carrying out the impairment industry circumstances. assessments, significant management judgements were used to appropriately • We reconciled input data to supporting identify CGUs and to determine the key evidence, such as approved forecasts of assumptions, including revenue growth future profits and strategic plans. rates, operating margins and discount rates. Management has concluded that there is no • We considered the reasonableness impairment in respect of the goodwill and of the forecasts of future profits and other intangible assets with indefinite useful strategic plans by comparing them lives. against past results achieved. We focused on this area because the value • We assessed management's sensitivity in use calculations required significant analysis around the key assumptions, management judgements with respect to to ascertain the extent to which revenue growth rates, operating margins and adverse changes, both individually discount rates. or in aggregate, might impact on the outcome of the impairment assessment of the goodwill and other intangible assets with indefinite useful lives. We found the judgements made by management in relation to the impairment assessment to be supportable based on the available evidence. 2017/18 Annual Report Lenovo Group Limited 163 72 Independent Auditor's Report KEY AUDIT MATTERS (continued) How our audit addressed the Key Audit Matter Key Audit Matter Recognition of deferred income tax assets Refer to notes 4(b) and 20 to the Our procedures included: consolidated financial statements As at March 31, 2018, the Group had deferred • We evaluated management's income tax assets of US$1,531 million. assessment as to whether there will Management has applied tax rates that have be sufficient taxable profits in future been enacted or substantively enacted by the periods by reference to forecasts of balance sheet date in determining deferred future profits and strategic plans and income tax assets, including applying the future reversals of taxable temporary new corporate tax rate in the United States differences to support the recognition which is effective from January 1, 2018. The of deferred income tax assets. recognition of the deferred income tax assets involves significant management judgements • We assessed the underlying as to the likelihood of their realization that is assumptions used in management's dependent on a number of factors, including approved forecasts of future profits whether there will be sufficient taxable such as revenue growth rates and profits, or reversals of taxable temporary operating margins by comparison to differences in future periods and tax plans. historical results and future strategic and tax plans and with reference to the Management has performed its assessment business and industry circumstances. on the recognition of these deferred income tax assets and considers that the realization • We tested management's of these assets is probable as at March 31, reconciliations of forecast profits to 2018. forecast taxable profits to supporting evidence on a sample basis. We focused on this area because of the inherent uncertainties involved in forecasting • We tested and agreed available future taxable profits and future reversals of tax losses, including the respective taxable temporary differences. expiry periods to tax returns and tax correspondence of the relevant subsidiaries. • We tested the calculation of deferred income tax assets by reference to tax rates enacted or substantively enacted by the balance sheet date. We found the judgements made by management in relation to recognition of deferred income tax assets to be supportable based on the available evidence. 164 Lenovo Group Limited 2017/18 Annual Report 72 OTHER INFORMATION The directors of the Company are responsible for the other information. The other information comprises all of the information included in the annual report other than the consolidated financial statements and our auditor's report thereon. Our opinion on the consolidated financial statements does not cover the other information and we do not express any form of assurance conclusion thereon. In connection with our audit of the consolidated financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. RESPONSIBILITIES OF DIRECTORS AND AUDIT COMMITTEE FOR THE CONSOLIDATED FINANCIAL STATEMENTS The directors of the Company are responsible for the preparation of the consolidated financial statements that give a true and fair view in accordance with HKFRSs issued by the HKICPA and the Hong Kong Companies Ordinance, and for such internal control as the directors determine is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. In preparing the consolidated financial statements, the directors are responsible for assessing the Group's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or to cease operations, or have no realistic alternative but to do so. The Audit Committee is responsible for overseeing the Group's financial reporting process. AUDITOR'S RESPONSIBILITIES FOR THE AUDIT OF THE CONSOLIDATED FINANCIAL STATEMENTS Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion. We report our opinion solely to you, as a body, in accordance with Section 405 of the Hong Kong Companies Ordinance and for no other purpose. We do not assume responsibility towards or accept liability to any other person for the contents of this report. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with HKSAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements. As part of an audit in accordance with HKSAs, we exercise professional judgment and maintain professional scepticism throughout the audit. We also: • Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. • Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group's internal control. • Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the directors. 2017/18 Annual Report Lenovo Group Limited 165 72 Independent Auditor's Report AUDITOR'S RESPONSIBILITIES FOR THE AUDIT OF THE CONSOLIDATED FINANCIAL STATEMENTS (continued) • Conclude on the appropriateness of the directors' use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group's ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor's report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor's report. However, future events or conditions may cause the Group to cease to continue as a going concern. • Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation. • Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion. We communicate with the Audit Committee regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide the Audit Committee with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. From the matters communicated with the Audit Committee, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor's report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. The engagement partner on the audit resulting in this independent auditor's report is Cheng Woon Yin Michael. PricewaterhouseCoopers Certified Public Accountants Hong Kong, May 24, 2018 166 Lenovo Group Limited 2017/18 Annual Report 72 Consolidated Income Statement For the year ended March 31, 2018 2018 2017 Note US$'000 US$'000 Revenue 5 45,349,943 43,034,731 Cost of sales (39,077,812) (36,929,215) Gross profit 6,272,131 6,105,516 Other income – net 6 301 10,891 Selling and distribution expenses (2,833,253) (2,680,631) Administrative expenses (1,757,319) (1,851,990) Research and development expenses (1,273,729) (1,361,691) Other operating (expenses)/income – net (21,408) 450,253 Operating profit 7 386,723 672,348 Finance income 8(a) 32,145 27,795 Finance costs 8(b) (263,160) (231,627) Share of (losses)/profits of associates and joint ventures 18 (2,506) 21,411 Profit before taxation 153,202 489,927 Taxation 9 (279,977) 40,514 (Loss)/profit for the year (126,775) 530,441 (Loss)/profit attributable to: Equity holders of the Company (189,323) 535,084 Perpetual securities holders 53,680 1,872 Other non-controlling interests 8,868 (6,515) (126,775) 530,441 (Loss)/earnings per share attributable to equity holders of the Company Basic 12(a) US(1.67) cents US4.86 cents Diluted 12(b) US(1.67) cents US4.86 cents Dividends 13 399,284 378,375 2017/18 Annual Report Lenovo Group Limited 167 72 Consolidated Statement of Comprehensive Income For the year ended March 31, 2018 2018 2017 Note US$'000 US$'000 (Loss)/profit for the year (126,775) 530,441 Other comprehensive (loss)/income: Item that will not be reclassified to profit or loss Remeasurements of post-employment benefit obligations, net of taxes 9, 36 (19,797) 42,390 Items that have been reclassified or may be subsequently reclassified to profit or loss Fair value change on available-for-sale financial assets, net of taxes 9, 21 224 8,713 Investment revaluation reserve reclassified to consolidated income statement on disposal of available-for-sale financial assets 9 – (12,640) Fair value change on cash flow hedges from foreign exchange forward contracts, net of taxes 9 – Fair value (loss)/gain, net of taxes (233,651) 96,993 – Reclassified to consolidated income statement 222,073 (13,993) Currency translation differences 288,711 (85,423) Other comprehensive income for the year 257,560 36,040 Total comprehensive income for the year 130,785 566,481 Total comprehensive income/(loss) attributable to: Equity holders of the Company 68,237 571,124 Perpetual securities holders 53,680 1,872 Other non-controlling interests 8,868 (6,515) 130,785 566,481 168 Lenovo Group Limited 2017/18 Annual Report 72 Consolidated Balance Sheet At March 31, 2018 2018 2017 Note US$'000 US$'000 Non-current assets Property, plant and equipment 14 1,304,751 1,236,250 Prepaid lease payments 15 507,628 473,090 Construction-in-progress 16 382,845 413,160 Intangible assets 17 8,514,504 8,349,145 Interests in associates and joint ventures 18 35,666 32,567 Deferred income tax assets 20 1,530,623 1,435,256 Available-for-sale financial assets 21 373,077 255,898 Other non-current assets 181,759 122,221 12,830,853 12,317,587 Current assets Inventories 22 3,791,691 2,794,035 Trade receivables 23(a) 4,972,722 4,468,392 Notes receivable 23(b) 11,154 68,333 Derivative financial assets 24,890 53,808 Deposits, prepayments and other receivables 23(c) 4,703,335 4,333,351 Income tax recoverable 227,203 199,149 Bank deposits 24 84,306 196,720 Cash and cash equivalents 24 1,848,017 2,754,599 15,663,318 14,868,387 Total assets 28,494,171 27,185,974 2017/18 Annual Report Lenovo Group Limited 169 72 Consolidated Balance Sheet At March 31, 2018 2018 2017 Note US$'000 US$'000 Share capital 29 3,185,923 2,689,882 Reserves 332,697 533,719 Equity attributable to owners of the Company 3,518,620 3,223,601 Perpetual securities 30 993,670 843,677 Other non-controlling interests 246,598 240,844 Put option written on non-controlling interest 26(a)(iii) (212,900) (212,900) Total equity 4,545,988 4,095,222 Non-current liabilities Borrowings 27 2,648,725 2,966,692 Warranty provision 26(b) 278,908 280,421 Deferred revenue 583,405 537,428 Retirement benefit obligations 36 413,482 370,207 Deferred income tax liabilities 20 230,609 221,601 Other non-current liabilities 28 333,332 380,557 4,488,461 4,756,906 Current liabilities Trade payables 25(a) 6,450,792 5,649,925 Notes payable 25(b) 801,974 835,613 Derivative financial liabilities 62,694 67,285 Other payables and accruals 26(a) 9,217,764 10,004,614 Provisions 26(b) 858,475 873,405 Deferred revenue 732,552 586,536 Income tax payable 168,779 246,465 Borrowings 27 1,166,692 70,003 19,459,722 18,333,846 Total liabilities 23,948,183 23,090,752 Total equity and liabilities 28,494,171 27,185,974 On behalf of the Board Yang Yuanqing Ma Xuezheng Chairman and Chief Executive Officer Director 170 Lenovo Group Limited 2017/18 Annual Report 72 Consolidated Cash Flow Statement For the year ended March 31, 2018 2018 2017 Note US$'000 US$'000 Cash flows from operating activities Net cash (used in)/generated from operations 35 (61,991) 2,697,332 Interest paid (243,584) (173,659) Tax paid (450,718) (403,851) Net cash (used in)/generated from operating activities (756,293) 2,119,822 Cash flows from investing activities Purchase of property, plant and equipment (217,849) (117,873) Purchase of prepaid lease payments (10,908) (175,570) Sale of property, plant and equipment, prepaid lease payments and construction-in-progress 40,525 411,872 Interests acquired in an associate and joint ventures (2,205) (11,024) Net proceeds from disposal of a joint venture 160,564 78,497 Payment for construction-in-progress (285,447) (345,685) Payment for intangible assets (156,390) (164,326) Purchase of available-for-sale financial assets (100,466) (124,110) Net proceeds from disposal of available-for-sale financial assets 165 11,897 Repayment of contingent/deferred considerations (686,301) (983,335) Decrease/(increase) in bank deposits 112,414 (44,384) Dividends received 286 38,674 Interest received 32,145 27,795 Net cash used in investing activities (1,113,467) (1,397,572) Cash flows from financing activities Net proceeds from issue of ordinary shares 12(b) 496,041 – Acquisition of additional interest in a subsidiary – (20,439) Contribution to employee share trusts (61,211) (119,042) Dividends paid (380,750) (376,898) Dividends paid to other non-controlling interests (4,937) – Distribution to perpetual securities holders (53,312) – Issue of perpetual securities 149,625 841,805 Capital contribution from other non-controlling interests 1,823 6,023 Proceeds from borrowings 7,425,740 3,223,391 Repayments of borrowings (6,724,406) (3,905,564) Issue of notes 749,119 495,821 Repayment of notes (723,389) – Net cash generated from financing activities 874,343 145,097 (Decrease)/increase in cash and cash equivalents (995,417) 867,347 Effect of foreign exchange rate changes 88,835 (39,628) Cash and cash equivalents at the beginning of the year 2,754,599 1,926,880 Cash and cash equivalents at the end of the year 24 1,848,017 2,754,599 2017/18 Annual Report Lenovo Group Limited 171 72 Consolidated Statement of Changes in Equity For the year ended March 31, 2018 Attributable to equity holders of the Company Put option Other written Investment Employee Share-based non- on non- Share revaluation share compensation Hedging Exchange Other Retained Perpetual controlling controlling capital reserve trusts reserve reserve reserve reserve earnings securities interests interest Total US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 At April 1, 2016 2,689,882 962 (52,897) 13,161 (88,328) (1,141,195) 83,363 1,495,252 – 238,949 (212,900) 3,026,249 Profit/(loss) for the year – – – – – – – 535,084 1,872 (6,515) – 530,441 Other comprehensive (loss)/income – (3,927) – – 83,000 (85,423) – 42,390 – – – 36,040 Total comprehensive (loss)/income for the year – (3,927) – – 83,000 (85,423) – 577,474 1,872 (6,515) – 566,481 Transfer to statutory reserve – – – – – – 2,214 (2,214) – – – – Vesting of shares under long-term incentive program – – 60,711 (72,368) – – – – – – – (11,657) Share-based compensation – – – 182,700 – – – – – – – 182,700 Contribution to employee share trusts – – (119,042) – – – – – – – – (119,042) Change in ownership interest in a subsidiary – – – – – – (22,826) – – 2,387 – (20,439) Issue of perpetual securities (Note 30) – – – – – – – – 841,805 – – 841,805 Capital contribution from other non-controlling interests – – – – – – – – – 6,023 – 6,023 Dividends paid – – – – – – – (376,898) – – – (376,898) At March 31, 2017 2,689,882 (2,965) (111,228) 123,493 (5,328) (1,226,618) 62,751 1,693,614 843,677 240,844 (212,900) 4,095,222 At April 1, 2017 2,689,882 (2,965) (111,228) 123,493 (5,328) (1,226,618) 62,751 1,693,614 843,677 240,844 (212,900) 4,095,222 (Loss)/profit for the year – – – – – – – (189,323) 53,680 8,868 – (126,775) Other comprehensive – 224 – – (11,578) 288,711 – (19,797) – – – 257,560 income/(loss) Total comprehensive – 224 – – (11,578) 288,711 – (209,120) 53,680 8,868 – 130,785 income/(loss) for the year Transfer to statutory reserve – – – – – – 15,097 (15,097) – – – – Vesting of shares under – – 70,737 (91,528) – – – – – – – (20,791) long-term incentive program Deferred tax charge in relation to – – – (2,196) – – – – – – – (2,196) long-term incentive program Share-based compensation – – – 202,088 – – – – – – – 202,088 Contribution to employee share trusts – – (61,211) – – – – – – – – (61,211) Issue of perpetual securities – – – – – – – – 149,625 – – 149,625 (Note 30) Issue of ordinary shares 496,041 – – – – – – – – – – 496,041 Issue of bonus warrants – – – – – – (6,399) – – – – (6,399) Capital contribution from – – – – – – – – – 1,823 – 1,823 other non-controlling interests Dividends paid – – – – – – – (380,750) – – – (380,750) Dividends paid to other – – – – – – – – – (4,937) – (4,937) non-controlling interests Distribution to perpetual – – – – – – – – (53,312) – – (53,312) securities holders (Note 30) At March 31, 2018 3,185,923 (2,741) (101,702) 231,857 (16,906) (937,907) 71,449 1,088,647 993,670 246,598 (212,900) 4,545,988 172 Lenovo Group Limited 2017/18 Annual Report 72 Notes to the Financial Statements 1 GENERAL INFORMATION AND BASIS OF PREPARATION Lenovo Group Limited (the "Company") and its subsidiaries (together, the "Group") develop, manufacture and market reliable, high-quality, secure and easy-to-use technology products and services. Its product lines include legendary Think-branded commercial personal computers and Idea-branded consumer personal computers, as well as servers, workstations, and a family of mobile internet devices, including tablets and smartphones. The Company is a limited liability company incorporated in Hong Kong. The address of its registered office is 23rd Floor, Lincoln House, Taikoo Place, 979 King's Road, Quarry Bay, Hong Kong. The Company has its primary listing on The Stock Exchange of Hong Kong Limited. The financial statements have been prepared in accordance with Hong Kong Financial Reporting Standards ("HKFRS"). The financial statements have been prepared under the historical cost convention except that certain financial assets and financial liabilities are stated at fair values, as explained in the significant accounting policies set out below. The preparation of financial statements in conformity with HKFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgment in the process of applying the Group's accounting policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the financial statements are disclosed in Note 4. Changes in accounting policies and disclosures The Group has adopted the following new amendments to existing standards that are mandatory for the year ended March 31, 2018 which the Group considers are appropriate and relevant to its operations: – Amendments to HKAS 7, Disclosure initiative – Amendments to HKAS 12, Recognition of deferred tax assets for unrealised losses The adoption of these newly effective amendments to existing standards does not result in substantial changes to the Group's accounting policies or financial results. The amendments to HKAS 7 require disclosure of changes in liabilities arising from financing activities, see note 35(a). 2017/18 Annual Report Lenovo Group Limited 173 72 Notes to the Financial Statements 1 GENERAL INFORMATION AND BASIS OF PREPARATION (continued) Changes in accounting policies and disclosures (continued) At the date of approval of these financial statements, the following new standards and amendments to existing standards, which are considered appropriate and relevant to the Group's operations, have been issued but are not effective for the year ended March 31, 2018 and have not been early adopted: Effective for annual periods beginning on or after HKFRS 9, Financial instruments January 1, 2018 HKFRS 15, Revenue from contracts with customers January 1, 2018 HKFRS 16, Leases January 1, 2019 HKFRS 17, Insurance contracts January 1, 2021 HK (IFRIC) – Int 22, Foreign currency transactions and advance consideration January 1, 2018 HK (IFRIC) – Int 23, Uncertainty over income tax treatments January 1, 2019 Amendments to HKFRS 2, Share-based payment January 1, 2018 Amendments to HKFRS 10 and HKAS 28, Consolidated financial statements and investments in associates Date to be determined Among the above, the three new standards are of higher relevancy to the Group's operations. The following describes the key changes that may impact the consolidated financial statements of the Group. HKFRS 9, Financial instruments The new standard addresses the classification, measurement and de-recognition of financial assets and financial liabilities, introduces new rules for hedge accounting and a new impairment model for financial assets. HKFRS 9 retains but simplifies the mixed measurement model and establishes three primary measurement categories for financial assets: amortized cost, fair value through other comprehensive income ("FVOCI") and fair value through profit or loss. The basis of classification depends on the entity's business model and the contractual cash flow characteristics of the financial asset. Investments in equity instruments are required to be measured at fair value through profit or loss with the irrevocable option at inception to present changes in fair value in other comprehensive income in which case the accumulated fair value changes in other comprehensive income will not be recycled to the profit or loss in the future. For financial liabilities there were no changes to classification and measurement, except for the recognition of changes in own credit risk in other comprehensive income for liabilities designated at fair value through profit or loss. The new impairment model requires the recognition of impairment provisions based on expected credit losses (ECL) rather than only incurred credit losses as is the case under HKAS 39. Under the new hedge accounting rules, more hedge relationships might be eligible for hedge accounting, as the standard introduces a more principles-based approach. Under HKFRS 9, trade receivables of the Group are likely to be classified as FVOCI instruments with earlier recognition of loss is expected, and amount of relevant impairment provision may be revised when ECL is referenced. The Group currently holds certain investments in equity instruments which are classified as FVOCI instruments. Gains or losses realised on the sale of financial assets at FVOCI will no longer be transferred to profit or loss on sale, but instead reclassified below the line from the FVOCI reserve to retained earnings. 174 Lenovo Group Limited 2017/18 Annual Report 72 1 GENERAL INFORMATION AND BASIS OF PREPARATION (continued) HKFRS 9, Financial instruments (continued) The Group has assessed the effects of applying the new standard on the consolidated financial statements and has not identified any material impact to the Group. The Group will apply the new rules retrospectively from April 1, 2018, with the practical expedients permitted under the standard. Comparatives for 2017 will not be restated, except in relation to changes in the fair value of foreign exchange forward contracts attributable to forward points, which will be recognised in the costs of hedging reserve. HKFRS 15, Revenue from contracts with customers This standard will replace HKAS 18 which covers contracts for goods and services and HKAS 11 which covers construction contracts. The new standard is based on the principle that revenue is recognized when control of a good or service transfers to a customer. The standard permits either a full retrospective or a modified retrospective approach for the adoption. Under HKFRS 15, revenue arising from channel sales of the Group may subject to a different timing of recognition, which may impact the amount of revenue recognized by the Group for a given period. The Group has assessed the effects of the applying the new standard on the consolidated financial statements and has not identified any material impact to the Group. The Group intends to adopt the standard using the modified retrospective approach which means that the cumulative impact of the adoption will be recognised in retained earnings as of April 1, 2018 and that comparatives will not be restated. HKFRS 16, Leases HKFRS 16 requires almost all leases of lessees to be recognized on the balance sheet, as the distinction between operating and finance leases is removed. The accounting for lessors will not significantly change. Under the new standard, the right to use the leased item and the duty to pay rent are recognized as an asset and a financial liability respectively. The only exceptions are short-term and low-value leases. The standard will affect primarily the accounting for operating leases of the Group. The standard permits either a full retrospective or a modified retrospective approach for the adoption. At March 31, 2018, the Group had operating lease commitments of US$521 million. Upon adoption of HKFRS 16 the majority of operating lease commitments will be recognized in the consolidated balance sheet as lease liabilities and right-of-use assets. The lease liabilities would subsequently be measured at amortized cost and the right-of-use asset will be depreciated on a straight-line basis during the lease term. The Group does not intend to adopt the standard before its effective date. The Group intends to apply the simplified transition approach and will not restate comparative amounts for the year prior to first adoption. Based on the assessment performed, the Group is in the opinion that the adoption of above new standards and amendments to standards will not result in a significant effect on its consolidated financial statements. 2017/18 Annual Report Lenovo Group Limited 175 72 Notes to the Financial Statements 2 SIGNIFICANT ACCOUNTING POLICIES The significant accounting policies adopted in the preparation of these financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. (a) Principles of consolidation and equity accounting (i) Subsidiaries The consolidated financial statements include the financial statements of the Company and all of its subsidiaries made up to March 31. Subsidiaries are all entities (including structured entities) over which the Group has control. The Group controls an entity when the Group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power to direct the activities of the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are deconsolidated from the date that control ceases. The acquisition method of accounting is used to account for business combinations by the Group (refer to (ii)) Intra-group transactions, balances, income and expenses on transactions are eliminated. Profits and losses resulting from intra-group transactions that are recognized in assets are also eliminated. Adjustments have been made to the financial statements of subsidiaries when necessary to align their accounting policies to ensure consistency with the policies adopted by the Group. For subsidiaries which adopted December 31 as their financial year end date for statutory reporting purposes, their financial statements for the years ended March 31, 2017 and 2018 have been used for the preparation of the Group's consolidated financial statements. (ii) Business combinations The Group applies the acquisition method to account for business combinations. The consideration transferred for the acquisition of a subsidiary is the fair values of the assets transferred, the liabilities incurred to the former owners of the acquiree and the equity interests issued by the Group. The consideration transferred includes the fair value of any asset or liability resulting from a contingent consideration arrangement. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. The Group recognizes any non-controlling interest in the acquiree on an acquisition-by-acquisition basis, either at fair value or at the non-controlling interest's proportionate share of the recognized amounts of acquiree's identifiable net assets. Acquisition-related costs are expensed as incurred. 176 Lenovo Group Limited 2017/18 Annual Report 72 2 SIGNIFICANT ACCOUNTING POLICIES (continued) (a) Principles of consolidation and equity accounting (continued) (ii) Business combinations (continued) If the business combination is achieved in stages, the acquirer's previously held equity interest in the acquiree is re-measured to fair value at the acquisition date; any gains or losses arising from such re-measurement are recognized in profit or loss. Any contingent consideration to be transferred by the Group is recognized at fair value at the acquisition date. Subsequent changes to the fair value of the contingent consideration that is deemed to be an asset or liability is recognized in the consolidated income statement. Contingent consideration that is classified as equity is not re-measured, and its subsequent settlement is accounted for within equity. Goodwill is initially measured as the excess of the aggregate of the consideration transferred, the amount of any non-controlling interest in the acquiree and, in a business combination achieved in stages the acquisition-date fair value of any previous equity interest in the acquiree over the net identifiable assets acquired and liabilities assumed (Note 2(g)(i)). If it is less than the fair value of the net assets of the subsidiary acquired, the difference is recognized directly in the consolidated income statement. (iii) Changes in ownership interests The Group treats transactions with non-controlling interests that do not result in a loss of control as transactions with equity owners of the Group. A change in ownership interest results in an adjustment between the carrying amounts of the controlling and non-controlling interests to reflect their relative interests in the subsidiary. Any difference between the amount of the adjustment to non-controlling interests and any consideration paid or received is recognized in a separate reserve within equity attributable to owners of the Company. When the Group ceases to consolidate or equity account for an investment because of a loss of control, joint control or significant influence, any retained interest in the entity is remeasured to its fair value with the change in carrying amount recognized in profit or loss. This fair value becomes the initial carrying amount for the purposes of subsequently accounting for the retained interest as an associate, joint venture or financial asset. In addition, any amounts previously recognized in other comprehensive income in respect of that entity are accounted for as if the Group had directly disposed of the related assets or liabilities. This may mean that amounts previously recognized in other comprehensive income are reclassified to profit or loss or transferred to another category of equity as specified/ permitted by applicable HKFRSs. If the ownership interest in a joint venture or an associate is reduced but joint control or significant influence is retained, only a proportionate share of the amounts previously recognized in other comprehensive income are reclassified to profit or loss where appropriate. 2017/18 Annual Report Lenovo Group Limited 177 72 Notes to the Financial Statements 2 SIGNIFICANT ACCOUNTING POLICIES (continued) (a) Principles of consolidation and equity accounting (continued) (iii) Changes in ownership interests (continued) The potential cash payments related to put options issued by the Group over the equity of a subsidiary are accounted for as financial liabilities. The amount that may become payable under the option on exercise is initially recognized at fair value as a written put option liability with a corresponding charge directly to equity. A written put option liability is subsequently re-measured as a result of the change in the expected performance at each balance sheet date, with any resulting gain or loss recognized in the consolidated income statement. In the event that the option expires unexercised, the written put option liability is derecognized with a corresponding adjustment to equity. (iv) Disposal of subsidiaries When the Group ceases to have control, any retained interest in the entity is re-measured to its fair value at the date when control is lost, with the change in carrying amount recognized in the consolidated income statement. The fair value is the initial carrying amount for the purposes of subsequent accounting for the retained interest as an associate, joint venture or financial asset. In addition, any amounts previously recognized as other comprehensive income/expense in respect of that entity are accounted for as if the Group had directly disposed of the related assets or liabilities. This may mean that amounts previously recognized as other comprehensive income/expense are reclassified to the consolidated income statement. (v) Separate financial statements Investments in subsidiaries in the Company's balance sheet are accounted for at cost less impairment. The results of subsidiaries are accounted for by the Company on the basis of dividends received and receivable. Impairment testing of the investments in subsidiaries is required upon receiving dividends from these investments if the dividend exceeds the total comprehensive income of the subsidiary in the period the dividend is declared or if the carrying amount of the investment in the separate financial statements exceeds the carrying amount in the consolidated financial statements of the investee's net assets including goodwill. (b) Associates and joint arrangements Associates are entities over which the Group has significant influence but not control, generally accompanying a shareholding of between 20% and 50% of the voting rights. Investments in joint arrangements are classified as either joint operations or joint ventures depending on the contractual rights and obligations of each investor, rather than the legal structures of the joint arrangements. The Group has assessed the nature of its joint arrangements and applied HKFRS 11 in preparing the consolidated financial statements. 178 Lenovo Group Limited 2017/18 Annual Report 72 2 SIGNIFICANT ACCOUNTING POLICIES (continued) (b) Associates and joint arrangements (continued) Associates and joint ventures Interests in associates and joint ventures are accounted for using the equity method of accounting and are initially recognized at cost. The Group's interests in associates and joint ventures include goodwill identified on acquisition, net of any accumulated impairment losses. The Group's share of its associates' and joint ventures' post-acquisition profits or losses is recognized in the consolidated income statement, and its share of post-acquisition movements in other comprehensive income/expense is recognized as other comprehensive income/expense with a corresponding adjustment to the carrying amount of the investment. When the Group's share of losses in an associate or a joint venture equals or exceeds its interest in the associate or the joint venture including any other unsecured receivables, the Group does not recognize further losses, unless it has incurred legal or constructive obligations or made payments on behalf of the associate or the joint venture. The Group determines at each reporting date whether there is any objective evidence that the investment in the associate and joint venture is impaired. If this is the case, the Group calculates the amount of impairment as the difference between the recoverable amount of the associate or joint venture and its carrying value and recognizes the amount adjacent to share of profit/(loss) of associates and joint ventures in the consolidated income statement. Profits and losses resulting from upstream and downstream transactions between the Group and its associates or joint ventures are recognized in the Group's financial statements only to the extent of unrelated investor's interests in the associates or the joint ventures. Unrealized losses are eliminated unless the transaction provides evidence of an impairment of the assets transferred. Accounting policies of associates and joint ventures have been changed where necessary to ensure consistency with the policies adopted by the Group. For associates and joint ventures which adopted December 31 as their financial year end date for statutory reporting purposes, their financial statements for the years ended March 31, 2017 and 2018 have been used for the preparation of the Group's consolidated financial statements. Joint operation Joint operations arise where the investors have rights to the assets and obligations for the liabilities of an arrangement. Investments in joint operations are accounted for such that each joint operator recognizes its assets (including its share of any assets jointly held), its liabilities (including its share of any liabilities incurred jointly), its revenue (including its share of revenue from the sale of the output by the joint operation) and its expenses (including its share of any expenses incurred jointly). Each joint operator accounts for the assets and liabilities, as well as revenues and expenses, relating to its interest in the joint operation in accordance with the applicable standards. 2017/18 Annual Report Lenovo Group Limited 179 72 Notes to the Financial Statements 2 SIGNIFICANT ACCOUNTING POLICIES (continued) (c) Segment reporting Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief operating decision-maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the Lenovo Executive Committee (the "LEC") that makes strategic decisions. (d) Translation of foreign currencies (i) Items included in the financial statements of each of the Group's entities are measured using the currency of the primary economic environment in which the entity operates (the "functional currency"). The financial statements of the Company and of the Group are presented in United States dollars, which is the Company's functional and the Group's presentation currency. (ii) Foreign currency transactions are translated into the functional currency using the exchange rates at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation of monetary assets and liabilities denominated in foreign currencies at year end exchange rates are generally recognized in the income statement. They are deferred in equity if they are relate to qualifying cash flow hedges and qualifying net investment hedges or are attributable to part of the net investment in a foreign operation. All foreign exchange gains and losses that relate to monetary assets and liabilities denominated in foreign currency are presented in the income statement within "Other operating (expenses)/income – net". Changes in the fair value of monetary securities denominated in foreign currency classified as available-for-sale are analyzed between translation differences resulting from changes in the amortized cost of the security and other changes in the carrying amount of the security. Translation differences related to changes in the amortized cost are recognized in the income statement, and other changes in the carrying amount are recognized as other comprehensive income/expense and included in the investment revaluation reserve in equity. Non-monetary items that are measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined. Translation differences on financial assets and liabilities carried at fair value are as part of the fair value gain or loss. For example, translation differences on non-monetary assets and liabilities such as equities held at fair value through profit or loss are recognized in profit or loss as part of the fair value gain or loss and translation differences on non-monetary assets such as equities classified as available-for-sale financial assets are recognized as other comprehensive income/expense and included in the investment revaluation reserve in equity. 180 Lenovo Group Limited 2017/18 Annual Report 72 2 SIGNIFICANT ACCOUNTING POLICIES (continued) (d) Translation of foreign currencies (continued) (iii) The results and financial position of all the group entities that have a functional currency different from the Group's presentation currency are translated into the presentation currency as follows: – assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet; – income and expenses for each income statement are translated at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the rates on the dates of the transactions); and – all resulting exchange differences are recognized as other comprehensive income/ expense. Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate. Exchange differences arising are recognized as other comprehensive income/expense and included in the exchange reserve in equity. (iv) On the disposal of a foreign operation (that is, a disposal of the Group's entire interest in a foreign operation, or a disposal involving loss of control over a subsidiary, loss of joint control of a joint venture, or loss of significant influence over an associate that includes a foreign operation), all of the exchange differences accumulated in equity in respect of that operation attributable to the equity holders of the Company are reclassified to the consolidated income statement. In the case of a partial disposal that does not result in the Group losing control over a subsidiary that includes a foreign operation, the proportionate share of accumulated exchange differences are re-attributed to non-controlling interests and are not recognized in the consolidated income statement. For all other partial disposals (that is, reductions in the Group's ownership interest in an associate or a joint venture that do not result in the Group losing influence or joint control), the proportionate share of the accumulated exchange differences is reclassified to the consolidated income statement. 2017/18 Annual Report Lenovo Group Limited 181 72 Notes to the Financial Statements 2 SIGNIFICANT ACCOUNTING POLICIES (continued) (e) Property, plant and equipment Property, plant and equipment are stated at historical cost less accumulated depreciation and accumulated impairment losses. Subsequent costs are included in the asset's carrying amount or recognized as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. The carrying amount of any component accounted for as a separate asset is derecognized when replaced. All other repairs and maintenance are charged in the income statement during the financial period in which they are incurred. Freehold land and buildings comprise mainly factories and office premises. All freehold lands are located outside Hong Kong and are not depreciated. Depreciation of buildings, buildings related equipment and leasehold improvements is calculated using the straight-line method to allocate their costs to their estimated residual values over the unexpired periods of the leases or their expected useful lives to the Group ranging from 10 to 50 years whichever is shorter. Depreciation on other property, plant and equipment is calculated using the straight-line method to allocate their costs to their estimated residual values over their estimated useful lives to the Group. The principal annual rates used for this purpose are: Plant and machinery Tooling equipment 50% – 100% Other machinery 14% – 20% Furniture and fixtures 20% – 25% Office equipment 20% – 33% Motor vehicles 20% The assets' residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date. An asset's carrying amount is written down immediately to its recoverable amount if the asset's carrying amount is greater than its estimated recoverable amount (Note 2(h)). Gain or loss on disposal of property, plant and equipment is the difference between the net sales proceeds and the carrying amount of the relevant asset, and is recognized within "Other operating (expenses)/income – net" in the income statement. 182 Lenovo Group Limited 2017/18 Annual Report 72 2 SIGNIFICANT ACCOUNTING POLICIES (continued) (f) Construction-in-progress Construction-in-progress represents buildings, plant and machinery and internal use software under construction and pending installation and is stated at historical cost, less any accumulated impairment losses. Historical cost comprises all direct and indirect costs of acquisition or construction or installation of buildings, plant and machinery or internal use software as well as interest expenses and exchange differences on the related funds borrowed during the construction, installation and testing periods and prior to the date when the assets were available for use. No depreciation or amortization is provided for on construction-in-progress. On completion, the carrying values of the buildings, plant and machinery or internal use software are transferred from construction-in-progress to property, plant and equipment or intangible assets. Gain on disposal of construction-in-progress is the difference between the net sales proceeds and the carrying amount of the relevant assets, and is recognized within "Other operating (expenses)/income – net" in the income statement. (g) Intangible assets (i) Goodwill Goodwill represents the excess of the consideration of an acquisition transferred over the Group's interests in the fair value of the acquiree's identifiable assets acquired and liabilities assumed at the acquisition date. Goodwill on acquisitions of subsidiaries is included in intangible assets. Goodwill on acquisitions of associates and joint ventures is included in interests in associates and joint ventures. For the purpose of impairment testing, goodwill acquired in a business combination is allocated to each of the cash-generating units ("CGU"), or groups of CGUs, that is expected to benefit from the synergies of the combination. Each unit or group of units to which the goodwill is allocated represents the lowest level within the entity at which the goodwill is monitored for internal management purposes. Goodwill is monitored at the operating segment level. Goodwill impairment reviews are undertaken annually or more frequently if events or changes in circumstances indicate a potential impairment. The carrying value of goodwill is compared to the recoverable amount, which is the higher of value in use and the fair value less costs to sell. Any impairment is recognized immediately as an expense and is not subsequently reversed. (ii) Trademarks and trade names Separately acquired trademarks and trade names are shown at historical cost. Trademarks and trade names acquired in a business combination are recognized at fair value at the acquisition date. Trademarks and trade names that have an indefinite useful life are tested annually for impairment and carried at cost less accumulated impairment losses. (iii) Customer relationships Customer relationships acquired in a business combination are recognized at fair value at the acquisition date. Customer relations have a definite useful life and are carried at cost less accumulated amortization. Amortization is calculated using the straight-line method over their estimated useful lives. The estimated useful lives for customer relationships at the balance sheet date are not more than 15 years. 2017/18 Annual Report Lenovo Group Limited 183 72 Notes to the Financial Statements 2 SIGNIFICANT ACCOUNTING POLICIES (continued) (g) Intangible assets (continued) (iv) Internal use software Acquired computer software licenses are capitalized on the basis of the costs incurred to acquire and bring to use the specific software. Development costs that are directly attributable to the design and testing of identifiable and unique software controlled by the Group are recognized as intangible assets when the following criteria are met: – it is technically feasible to complete the software so that it will be available for use; – management intends to complete the software and use or sell it; – there is an ability to use or sell the software; – it can be demonstrated how the software will generate probable future economic benefits; – adequate technical, financial and other resources to complete the development and to use or sell the software are available; and – the expenditure attributable to the software during its development can be reliably measured. Development costs include the employee costs incurred as a result of developing software and an appropriate portion of relevant overheads. Other development expenditures that do not meet these criteria are recognized as an expense as incurred. Development costs previously recognized as an expense are not recognized as an asset in a subsequent period. Costs associated with maintaining computer software are recognized as an expense as incurred. Acquired computer software licenses costs and computer software development costs are amortized using the straight-line method over their estimated useful lives of not more than 8 years. (v) Patents and technology Expenditure on acquired patents and technology is capitalized at historical cost upon acquisition and amortized using the straight-line method over their estimated useful lives of not more than 10 years. 184 Lenovo Group Limited 2017/18 Annual Report 72 2 SIGNIFICANT ACCOUNTING POLICIES (continued) (h) Impairment of non-financial assets Assets that have an indefinite useful life or are not yet available for use are not subject to depreciation or amortization and are tested annually for impairment. Assets that are subject to depreciation or amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized for the amount by which the asset's carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset's fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest level for which there are separately identifiable cash flows (cash-generating units). Non-financial assets other than goodwill that suffered impairment are reviewed for possible reversal of the impairment at each reporting date. (i) Financial assets Classification The Group classifies its financial assets into: (i) at fair value through profit or loss, (ii) loans and receivables; and (iii) available-for-sale. The classification depends on the purpose for which the financial assets were acquired. Management determines the classification of its financial assets at initial recognition. (i) Financial assets at fair value through profit or loss Financial assets at fair value through profit or loss are financial assets held for trading, and those designated at fair value through profit or loss at inception. A financial asset is classified in this category if acquired principally for the purpose of selling in the short term or if so designated by management. Derivatives are also categorized as held for trading unless they are designated as hedges (Note 2(k)). Assets in this category are classified as current assets if expected to be settled within 12 months; otherwise, they are classified as non-current. (ii) Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets, except for maturities greater than 12 months after the balance sheet date which are classified as non-current assets. Loans and receivables comprise trade, notes and other receivables, deposits, bank deposits and cash and cash equivalents in the balance sheet (Note 2(n) and 2(o)). (iii) Available-for-sale financial assets Available-for-sale financial assets are non-derivatives that are either designated in this category or not classified in any of the other categories. They are included in non-current assets unless mature or management intends to dispose of them within 12 months of the balance sheet date. 2017/18 Annual Report Lenovo Group Limited 185 72 Notes to the Financial Statements 2 SIGNIFICANT ACCOUNTING POLICIES (continued) (i) Financial assets (continued) Recognition and measurement Regular way purchases and sales of financial assets are recognized on the trade-date, the date on which the Group commits to purchase or sell the asset. Financial assets not carried at fair value through profit or loss are initially recognized at fair value plus transaction costs. Financial assets carried at fair value through profit or loss are initially recognized at fair value, and transaction costs are expensed in the income statement. Financial assets are derecognized when the rights to receive cash flows from the investments have expired or have been transferred and the Group has transferred substantially all risks and rewards of ownership. Available-for-sale financial assets and financial assets at fair value through profit or loss are subsequently carried at fair value. Loans and receivables are subsequently carried at amortized cost using the effective interest method. Gains or losses arising from changes in the fair value are recognized as follows: • for financial assets at fair value through profit or loss – in profit or loss within other income or other expenses. • for available-for-sale financial assets that are monetary securities denominated in a foreign currency – translation differences related to changes in the amortized cost of the security are recognized in income statement and other changes in the carrying amount are recognized in other comprehensive income or loss. • for other monetary and non-monetary securities classified as available-for-sale – in other comprehensive income or loss. Dividends on financial assets at fair value through profit or loss and available-for-sale financial assets are recognized in profit or loss as other income when the Group's right to receive payments is established. Interest income from financial assets at fair value through profit or loss and available-for-sale financial assets is recognized in the income statement as other income. Details on how the fair value of financial instruments is determined are disclosed in note 3(d). Offsetting financial instruments Financial assets and liabilities are offset and the net amount reported in the balance sheet when there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis or realize the asset and settle the liability simultaneously. The legally enforceable right must not be contingent on future events and must be enforceable in the normal course of business and in the event of default, insolvency or bankruptcy of the company or the counterparty. 186 Lenovo Group Limited 2017/18 Annual Report 72 2 SIGNIFICANT ACCOUNTING POLICIES (continued) (j) Impairment of financial assets (i) Assets carried at amortized cost The Group assesses at each balance sheet date whether there is objective evidence that a financial asset or a group of financial assets is impaired. A financial asset or a group of financial assets is impaired and impairment losses are incurred only if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a 'loss event') and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. Evidence of impairment may include indications that the debtors or a group of debtors is experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganization, and where observable data indicate that there is a measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults. For loans and receivables category, the amount of the loss is measured as the difference between the asset's carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset's original effective interest rate. The asset's carrying amount is reduced and the amount of the loss is recognized in the income statement. If a loan or held-to-maturity investment has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate determined under the contract. As a practical expedient, the Group may measure impairment on the basis of an instrument's fair value using an observable market price. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized (such as improvement in the debtor's credit rating), the reversal of the previously recognized impairment loss is recognized in the income statement. (ii) Assets classified as available-for-sale The Group assesses at each balance sheet date whether there is objective evidence that a financial asset or a group of financial assets is impaired. For debt securities, the Group uses the criteria referred to in (i) above. If, in a subsequent period, the fair value of a debt instrument increases and the increase can be objectively related to an event occurring after the impairment loss was recognized in the income statement, the impairment loss is reversed through the income statement. For equity investments, a significant or prolonged decline in the fair value of the security below its cost is also evidence that the assets are impaired. If any such evidence exists, the cumulative losses, measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognized in the income statement, is removed from equity and recognized in the income statement. Impairment losses recognized in the income statement on equity instruments are not reversed through the income statement. 2017/18 Annual Report Lenovo Group Limited 187 72 Notes to the Financial Statements 2 SIGNIFICANT ACCOUNTING POLICIES (continued) (k) Derivative financial instruments and hedging activities Derivatives are initially recognized at fair value on the date a derivative contract is entered into and are subsequently re-measured at their fair values. The method of recognizing the resulting gain or loss depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. The Group designates certain derivatives as either: (i) hedges of the fair value of recognized assets or liabilities or a firm commitment (fair value hedge) or (ii) hedges of highly probable forecast transactions (cash flow hedges). The Group documents at the inception of the transaction the relationship between hedging instruments and hedged items, as well as its risk management objectives and strategy for undertaking various hedging transactions. The Group also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items. The full fair value of a hedging derivative is classified as a non-current asset or liability when the remaining maturity of the hedged item is more than 12 months, and as a current asset or liability when the remaining maturity of the hedged item is less than 12 months. Trading derivatives are classified as a current asset or liability. (i) Fair value hedge Changes in the fair value of derivatives that are designated and qualified as fair value hedges are recorded in the income statement, together with any changes in the fair value of the hedged asset or liability that are attributable to the hedged risk. (ii) Cash flow hedge The effective portion of changes in the fair value of derivatives that are designated and qualified as cash flow hedges is recognized as other comprehensive income/expense. The gain or loss relating to the ineffective portion is recognized immediately in the income statement. Amounts accumulated in equity are reclassified to the income statement in the periods when the hedged item affects profit or loss (for example, when the forecast sale or purchase that is hedged takes place). The gain or loss relating to the effective portion of interest rate swaps hedging variable rate borrowings is recognized in the income statement within "Finance costs". The gain or loss relating to the ineffective portion is recognized in the income statement within "Other operating (expenses)/income – net". When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gains or losses on the hedging instrument that has been recognized as other comprehensive income from the period when the hedge was effective shall remain separately in equity until the forecast transaction occurs. When a forecast transaction is no longer expected to occur, the cumulative gains or losses on the hedging instrument that has been recognized as other comprehensive income from the period when the hedge was effective shall be reclassified from equity to the income statement immediately. (iii) Derivatives that do not qualify for hedge accounting Certain derivative instruments do not qualify for hedge accounting. Changes in the fair value of any derivative instruments that do not qualify for hedge accounting are recognized immediately in the income statement. 188 Lenovo Group Limited 2017/18 Annual Report 72 2 SIGNIFICANT ACCOUNTING POLICIES (continued) (l) Financial guarantee contracts Financial guarantee contracts are recognized as a financial liability at the time the guarantee is issued. The liability is initially measured at fair value and subsequently at the higher of the amount determined in accordance with HKAS 37 Provisions, Contingent Liabilities and Contingent Assets and the amount initially recognized less cumulative amortization, where appropriate. The fair value of financial guarantees is determined as the present value of the difference in net cash flows between the contractual payments under the debt instrument and the payments that would be required without the guarantee, or the estimated amount that would be payable to a third party for assuming the obligations. Where guarantees in relation to loans or other payables of associates are provided for no compensation, the fair values are accounted for as contributions and recognized as part of the cost of the investment. (m) Inventories Inventories are stated at the lower of cost and net realizable value. Cost is determined on a weighted average basis. The cost of finished goods (except for trading products) and work-in-progress comprises direct materials, direct labour and an attributable proportion of production overheads. For trading products, cost represents invoiced value on purchases, less purchase returns and discounts. Net realizable value is determined on the basis of anticipated sales proceeds less estimated selling expenses. (n) Trade and other receivables Trade receivables are amounts due from customers for merchandise sold or services performed in the ordinary course of business. Majority of other receivables are amounts due from subcontractors for part components sold in the ordinary course of business. Trade and other receivables are recognized initially at fair value and subsequently measured at amortized cost using the effective interest method, less provision for impairment. See Note 2(i) for further information about the Group's accounting for trade receivables and Note 2(j) for a description of the Group's impairment policies. If collection of trade and other receivables is expected in one year or less (or in the normal operating cycle of the business if longer), they are classified as current assets. If not, they are presented as non-current assets. (o) Cash and cash equivalents For the purposes of the cash flow statement, cash and cash equivalents mainly comprise cash on hand, deposits held at call with banks, other short-term highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value, and bank overdrafts. Bank overdrafts are shown within borrowings in current liabilities on the balance sheet. 2017/18 Annual Report Lenovo Group Limited 189 72 Notes to the Financial Statements 2 SIGNIFICANT ACCOUNTING POLICIES (continued) (p) Share capital Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds. Where any group company purchases the Company's equity share capital (treasury shares), the consideration paid, including any directly attributable incremental costs (net of income taxes), is deducted from equity attributable to the Company's equity holders until the shares are cancelled or reissued. Where such shares are subsequently reissued, any consideration received (net of any directly attributable incremental transaction costs and the related income tax effects) is included in equity attributable to the Company's equity holders. (q) Borrowings and borrowing costs Borrowings are recognized initially at fair value, net of transaction costs incurred. Transaction costs are incremental costs that are directly attributable to the acquisition, issue or disposal of a financial asset or financial liability, including fees and commissions paid to agents, advisers, brokers and dealers, levies by regulatory agencies and securities exchanges, and transfer taxes and duties. Borrowings are subsequently stated at amortized cost; any difference between the proceeds (net of transaction costs) and the redemption value is recognized in the income statement over the period of the borrowings using the effective interest method. Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the balance sheet date. General and specific borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets, until such time as the assets are substantially ready for their intended use or sale. All other borrowing costs are recognized in profit or loss in the period in which they are incurred. (r) Trade and other payables Trade payables are obligations to pay for part components or services that have been acquired in the ordinary course of business from suppliers. Majority of other payables are obligations to pay for finished goods that have been acquired in the ordinary course of business from subcontractors. Trade and other payables are recognized initially at fair value and subsequently measured at amortized cost using the effective interest method. Trade and other payables are classified as current liabilities if payment is due within one year or less (or in the normal operating cycle of the business if longer). If not, they are presented as non-current liabilities. 190 Lenovo Group Limited 2017/18 Annual Report 72 2 SIGNIFICANT ACCOUNTING POLICIES (continued) (s) Provisions Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognized even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small. Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in the provision due to passage of time is recognized as interest expense. (i) Warranty provision The Group records warranty liabilities at the time of sale for the estimated costs that will be incurred under its basic limited warranty. The specific warranty terms and conditions vary depending upon the product and the country in which it was sold, but generally includes technical support, repair parts and labor associated with warranty repair and service actions. The period ranges from one to three years. The Group reevaluates its estimates on a quarterly basis to assess the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary. (ii) Other provisions Provisions for environmental restoration, restructuring costs and legal claims are recognized when: the Group has a present legal or constructive obligation as a result of past events; it is probable that an outflow of resources will be required to settle the obligation; and the amount has been reliably estimated. Restructuring costs provision comprises lease termination penalties and employee termination payments. Provisions are not recognized for future operating losses. (t) Current and deferred income tax The tax expense for the period comprises current and deferred income tax. The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the balance sheet date in the countries where the Company and its subsidiaries, joint ventures and associates operate and generate taxable income. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. It establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities. Deferred income tax is recognized, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. However, deferred tax liabilities are not recognized if they arise from the initial recognition of goodwill; deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantively enacted by the balance sheet date and are expected to apply when the related deferred income tax asset is realized or the deferred income tax liability is settled. 2017/18 Annual Report Lenovo Group Limited 191 72 Notes to the Financial Statements 2 SIGNIFICANT ACCOUNTING POLICIES (continued) (t) Current and deferred income tax (continued) Deferred income tax assets are recognized to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilized. Deferred income tax is provided on temporary differences arising on investments in subsidiaries, joint ventures and associates, except for deferred income tax liability where the timing of the reversal of the temporary difference is controlled by the Group and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income tax assets and liabilities relate to income taxes levied by the same tax authority on either the taxable entity or different taxable entities where there is an intention to settle the balances on a net basis. (u) Contingent liabilities A contingent liability is a possible obligation that arises from past events and whose existence will only be confirmed by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the Group. It can also be a present obligation arising from past events that is not recognized because it is not probable that outflow of economic resources will be required or the amount of obligation cannot be measured reliably. A contingent liability is not recognized but is disclosed in the notes to the financial statements. When a change in the probability of an outflow occurs so that the outflow is probable, it will then be recognized as a provision. (v) Revenue Revenue is measured at the fair value of the consideration received or receivable for the sale of goods and services in the normal course of the Group's activities. (i) Sale of goods and services Revenue from sale of hardware, software and peripherals, services and mobile devices is recognized, net of value-added tax, an allowance for estimated returns, rebates and discounts, when both ownership and risk of loss are effectively transferred to customer, generally when there is a persuasive evidence that a sales arrangement exists, the price is fixed or determinable, collectability is reasonably assured and delivery has occurred. The Group enters into different shipping terms with customers. Delivery is generally considered as occurred once the goods are shipped. For certain transactions, the Group defers the recognition of revenue and cost of shipped products until the goods are delivered to designated locations. Revenue from extended warranty contracts is deferred and amortized as earned over the contract period, ranging from one to four years. Revenue associated with undelivered elements is deferred and recorded when delivery occurs. Revenue from provision of systems integration service and information technology technical service is recognized over the term of contract or when services are rendered. 192 Lenovo Group Limited 2017/18 Annual Report 72 2 SIGNIFICANT ACCOUNTING POLICIES (continued) (v) Revenue (continued) (ii) Interest income Interest income is recognized using the effective interest method. When a receivable is impaired, the Group reduces the carrying amount to its recoverable amount, being the estimated future cash flow discounted at the original effective interest rate of the instrument, and continues unwinding the discount as interest income. Interest income on impaired receivables is recognized using the original effective interest rate. (iii) Dividend income Dividend income is recognized when the right to receive payment is established. (w) Non-base manufacturing costs Non-base manufacturing costs are costs that are periodic in nature as opposed to product specific. They are typically incurred after the physical completion of the product and include items such as outbound freight for in-country finished goods shipments, warranty costs, engineering charges, storage and warehousing costs, and contribute to bringing inventories to their present location and condition. Non-base manufacturing costs enter into the calculation of gross margin but are not inventoriable costs. (x) Employee benefits (i) Pension obligations The Group operates various pension schemes. The schemes are generally funded through payments to insurance companies or trustee-administered funds, determined by periodic actuarial calculations. The Group has both defined benefit and defined contribution plans. A defined benefit plan is a pension plan which defines an amount of pension benefit that an employee will receive on retirement, usually dependent on one or more factors such as age, years of service and compensation. The liability recognized in the balance sheet in respect of defined benefit pension plans is the present value of the defined benefit obligation at the balance sheet date less the fair value of plan assets. Significant portion of the defined benefit obligation is calculated annually by independent actuaries using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rates of high-quality corporate bonds that are denominated in the currency in which the benefits will be paid, and that have terms to maturity approximating to the terms of the related pension obligation. In countries where there is no deep market in such bonds, the market rates on government bonds are used. The net interest cost is calculated by applying the discount rate to the net balance of the defined benefit obligation and the fair value of plan assets. This cost is included in employee benefit expense in the income statement. Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are recognized as other comprehensive income/expense in the year in which they arise. They are included in retained earnings in the statement of changes in equity and in the balance sheet. 2017/18 Annual Report Lenovo Group Limited 193 72 Notes to the Financial Statements 2 SIGNIFICANT ACCOUNTING POLICIES (continued) (x) Employee benefits (continued) (i) Pension obligations (continued) Past service costs are recognized immediately in the income statement. Changes in the present value of the defined benefit obligation resulting from plan amendments or curtailments are recognized immediately in profit or loss as past service costs. A defined contribution plan is a pension plan under which the Group pays fixed contributions into a separate entity. The Group pays contributions to publicly or privately administered pension insurance plans on a mandatory, contractual or voluntary basis. The Group has no legal or constructive obligations to pay further contributions if the fund does not hold sufficient assets to pay all employees the benefits relating to employee service in the current and prior periods. The contributions are recognized as employee benefit expense when they are due and are reduced by employer's portion of voluntary contributions forfeited by those employees who leave the scheme prior to vesting fully. Prepaid contributions are recognized as an asset to the extent that a cash refund or a reduction in the future payments is available. The Group's contributions to local municipal government retirement schemes in connection with retirement benefit schemes in the Mainland of China ("Chinese Mainland") are expensed as incurred. The local municipal governments in the Chinese Mainland assume the retirement benefit obligations of the qualified employees. (ii) Post-employment medical benefits The Group operates a number of post-employment medical benefit schemes, the largest being in the United States. The entitlement to these benefits is usually conditional on the employee remaining in service up to retirement age and the completion of a minimum service period. The expected costs of these benefits are accrued over the period of employment using an accounting methodology similar to that for defined benefit pension plans. Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are recognized as other comprehensive income/expense in the period in which they arise. The obligations of these schemes in the United States are valued annually by independent qualified actuaries. (iii) Long-term incentive program The Group operates a long-term incentive program to recognize employees' individual and collective contributions, and includes two types of awards, namely share appreciation rights and restricted share units ("Long-term Incentive Awards"). The Company reserves the right, at its discretion, to pay the award in cash or ordinary shares of the Company. The fair value of the employee services received in exchange for the grant of the Long-term Incentive Awards is recognized as employee benefit expense. The total amount to be expensed over the vesting period is determined by reference to the fair value of the Long-term Incentive Awards granted, including any market performance conditions (for example, an entity's share price); excluding the impact of any service and non-market performance vesting conditions (for example, profitability and sales growth targets); and including the impact of non-vesting conditions. Non-market performance and service conditions are included in assumptions about the number of Long-term Incentive Awards that are expected to become exercisable/ vested. The total expense is recognized over the vesting period, which is the period over which all of the specified vesting conditions