Exchange Publishes Results of its Latest Review of Listed Issuers' Financial Reports

The Stock Exchange of Hong Kong Limited (the Exchange), a wholly-owned subsidiary of Hong Kong Exchanges and Clearing Limited (HKEX), today (Friday) published a report summarising key findings from its review of 100 periodic financial reports released by listed issuers (issuers) between March 2015 and April 2016*.

"Clear and concise financial reporting is an effective communication tool through which issuers should provide investors with the information they need to make informed investment decisions," said David Graham, HKEX's Chief Regulatory Officer and Head of Listing.

The Exchange's report highlights the following areas where there is room for improvement and special focus is required:

• Enhancements to MD&A – Management Discussion and Analysis (MD&A) should be balanced (with coverage of good news as well as bad news) and sufficiently tailored to the issuer’s specific circumstances;
  
• Disclosures under the Companies Ordinance – a level playing field for all issuers – Issuers should pay attention to the recent Listing Rule amendments with reference to the new Companies Ordinance (Cap 622) applicable to all issuers (whether or not they are incorporated in Hong Kong);
  
• Resolution of issues relating to modified auditors’ reports – Issuers whose financial statements have auditors' reports with modified opinions should take proactive steps to resolve the issues identified with their auditors as soon as practicable;
  
• Extended auditor reporting – Issuers, in particular their audit committee, should note that for audits of financial statements for periods ending on or after 15 December 2016, they should have in-depth conversations with their auditors about key audit matters, going concern issues and other significant events or transactions that occurred during the reporting period;
  
• Key HKFRSs that will soon become effective – Issuers should note that a number of key accounting standards have been issued and will soon become effective, such as Hong Kong Financial Reporting Standard (HKFRS) 9 "Financial Instruments", HKFRS 15 "Revenue from Contracts with Customers", HKFRS 16 "Leases", and should perform a detailed review of these standards as soon as practicable;
  
• Rigorous assessment of impairment of assets – Issuers should aim to improve the quality of their disclosure of how they carried out their work on the impairment of assets, particularly where the recoverable amount was based on value in use, which required management’s estimation of cash flow projections, growth rates and appropriate discount rates;
  
• Non-HKFRS financial information – Issuers that choose to present non-HKFRS financial information to provide additional insight into their performance should ensure that the information is not misleading, would not obscure their financial results and financial position, and would not provide an incomplete description of their financial results based on accounting standards; and
  
• Determination of control over investees – Issuers should ensure that the relevant facts and circumstances are clearly disclosed so that investors and other users of financial statements understand why the issuer has control over an investee, in particular, in cases where the issuer only has de facto control over the investee.

The overarching principle for high quality financial reporting is that the "information provided should be relevant, material and entity-specific". In addition, issuers should avoid making irrelevant and immaterial disclosures.

Issuers should note the key findings and recommendations discussed in the report and follow the relevant guidance. The report is available in the "Rules & Regulations – Rules and Guidance on Listing Matters – Other Guidance Materials for Listed Issuers – Financial reporting matters" section of the HKEX website.

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