NOTES TO THE CONSOLIDATED FINANCIAL  STATEMENTS  (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA)  2.  Basis of preparation and accounting policies (cont’d) 2.3  Summary of significant accounting policies (cont’d) (l)  Financial instruments – initial recognition and subsequent measurement (cont’d) 54 China Yuchai International Limited | Annual Report 2013 Financial guarantee contracts Loans and borrowings Financial liabilities at fair value through profit or loss Financial liabilities (cont’d) Subsequent measurement The measurement of financial liabilities depends on their classification, as described below: Financial liabilities at fair value through profit or loss include financial liabilities held for trading and financial  liabilities designated upon initial recognition as at fair value through profit or loss. Financial liabilities are classified as held for trading if they are incurred for the purpose of repurchasing in  the near term. This category also includes derivative financial instruments entered into by the Group that are  not designated as hedging instruments in hedge relationships as defined by IAS 39. Separated embedded  derivatives are also classified as held for trading unless they are designated as effective hedging instruments. Gains or losses on liabilities held for trading are recognized in the statement of profit or loss. Financial liabilities designated upon initial recognition at fair value through profit and loss are designated at  the initial date of recognition, and only if the criteria of IAS 39 are satisfied. The Group has not designated any  financial liability as at fair value through profit or loss. After initial recognition, interest-bearing loans and borrowings are subsequently measured at amortized cost  using the EIR method. Gains and losses are recognized in profit or loss when the liabilities are derecognized as  well as through the EIR amortization process. Amortized cost is calculated by taking into account any discount or premium on acquisition and fees or costs  that are an integral part of the EIR. The EIR amortization is included in finance costs in the statement of profit or  loss. This category generally applies to interest-bearing loans and borrowings. For more information, please refer to  Note 15. Financial guarantee contracts issued by the Group are those contracts that require a payment to be made  to reimburse the holder for a loss it incurs because the specified debtor fails to make a payment when due  in accordance with the terms of a debt instrument. Financial guarantees are recognized initially as a liability  at fair value, adjusted for transaction costs that are directly attributable to the issuance of the guarantee.  Subsequently, the liability is measured at the higher of the best estimate of the expenditure required to settle  the present obligation at the reporting date and the amount recognized less cumulative amortisation.