Summary of Significant Accounting Policies

3 Months Ended

Nov. 30, 2011

Summary of Significant Accounting Policies

Summary of Significant Accounting Policies

NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents.  The Company maintains bank accounts in mainland China and Hong Kong.

(b) Fair Value of Financial Instruments

The Company’s financial instruments primarily consist of cash and cash equivalents, accounts receivable, Other receivables and deposits, tax recoverable, amount due from/(to) related parties, accounts payable, accrued expenses and other payables, and taxes payable.

The estimated fair value amounts have been determined by the Company, using available market information or other appropriate valuation methodologies. However, considerable judgment is required in interpreting market data to develop estimates of fair value. Consequently, the estimates are not necessarily indicative of the amounts that could be realized or would be paid in a current market exchange.

As of the balance sheet dates, the estimated fair values of the financial instruments were not materially different from their carrying values as presented, due to the short maturities of these instruments.

(c) Revenue recognition

The Company has adopted a revenue recognition policy for each type of operation according to ASC 605-45

Revenue represents the invoiced value of services rendered and receivable during the year. Revenue is recognized when all of the following criteria are met:

-       Persuasive evidence of an arrangement exists,

-       Delivery has occurred or services have been rendered,

-       The seller’s price to the buyer is fixed or determinable, and

-       Collectability is reasonably assured

Revenue recognition policy for each of the major products and services:

1.         Discounted call services for consumer (EMS) as follows:

-           Collaboration with China Tie Tong Telecommunications (“CTT”) – Redtone China is appointed as the sole distributor for EMS and will recognize revenue when airtime is utilized by the consumer and revenue is recognized  on a net basis which is computed based on a fixed sharing ratio of the total airtime utilized by consumers after netting the direct traffic termination costs and incidental expenses. Redtone China’s role for Business Collaboration with CTT is as an “Agent” as Redtone China is the sole distributor for the EMS brand owned and controlled by CTT; and

-           Collaboration with other telecommunication providers – Redtone China will act as a discounted consumer call Reseller whereby Redtone China determines the service and package specification and the  pricing policy whereas China Unicom acts as a passive termination partner for call traffic.  Redtone China will pay China Unicom solely based on call traffic termination by China Unicom at a prescribed rate (defined as traffic termination cost on the books of Redtone China).  In this regard, Redtone China will recognize revenue when airtime is utilized by the consumer and the revenue recognized is the gross value of the call charges.    Redtone China’s role for Business Collaboration with China Unicom is that of  “Principal” as China Unicom is playing a passive role as the traffic termination partner while Redtone China is fully responsible for the entire management of the discounted call services

As this is a prepaid product, there is an expiration date for the product sold. If the airtime is not utilized by the expiration date, which is currently one year from the activation date, the product will be deemed to be expired and the revenue recognized at the time is  the remaining gross value of the expired prepaid product.

2.         Discounted call services for corporate consumers is as follows:

-           Collaboration with CTT – the revenue recognized is the commission earned from distributing the discounted call services to corporate customers; and

-           Collaboration with other telecommunication providers –the revenue recognized is the commission earned from distributing the discounted call services to corporate customers.

3.         Reload services for prepaid mobile services – revenue recognized is the commission earned.

4.         Prepaid shopping-card services – revenue recognized is the commission earned.

(d) Earnings per share

Basic earnings per share is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding during the period. Diluted earnings per share is computed similar to basic earnings per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. As of November 30, 2011 and 2010, there were no dilutive securities outstanding.

(e) Foreign currency translation

The accompanying consolidated financial statements are presented in United States dollars (US$). The functional currencies of the Company are the Hong Kong dollar (HK$) and the Renminbi (RMB), respectively. Capital accounts of the financial statements are translated into United States dollars from HK$ or RMB at their historical exchange rates when the capital transactions occurred. Assets and liabilities are translated at the exchange rates as of balance sheet date. Income and expenditures are translated at the average exchange rate of the year. The translation rates are as follows:

	November 30, 2011	May 31, 2011	November 30, 2010
Year end RMB : US$ exchange rate	0.1570	0.1542	0.1508
Average yearly RMB : US$ exchange rate	0.1576	0.1544	0.1505
Year end HK$ : US$ exchange rate	0.1283	0.1285	0.1291
Average yearly HK$ : US$ exchange rate	0.1285	0.1287	0.1289

On July 21, 2005, the PRC changed its foreign currency exchange policy from a fixed RMB/US$ exchange rate into a flexible rate under the control of the PRC’s government.

The RMB is not freely convertible into foreign currency and all foreign exchange transactions must take place through authorized institutions. No representation is made that the RMB amounts could have been, or could be, converted into US$ at the rates used in translation.

(f) Fair Value of Financial Instruments

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. To increase the comparability of fair value measures, the following hierarchy prioritizes the inputs to valuation methodologies used to measure fair value:

Level 1—Valuations based on quoted prices for identical assets and liabilities in active markets.

Level 2—Valuations based on observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.

Level 3—Valuations based on unobservable inputs reflecting our own assumptions, consistent with reasonably available assumptions made by other market participants. These valuations require significant judgment.

We measure the fair value of money market funds and equity securities based on quoted prices in active markets for identical assets or liabilities. All other financial instruments were valued based on quoted market prices of similar instruments and other significant inputs derived from or corroborated by observable market data.

(g) Recent Accounting Pronouncements

New accounting rules and disclosure requirements may significantly impact the financial statements. We believe that there is no new accounting guidance adopted but not yet effective that is relevant to the readers of our financial statements. However, there are numerous new proposals under development which, if and when enacted, may have a significant impact on our financial reporting.