Exchange Publishes Results of its Latest Review of Disclosure in Issuers’ Annual Reports

25 Jan 2017

The Stock Exchange of Hong Kong Limited (the Exchange), a wholly-owned subsidiary of Hong Kong Exchanges and Clearing Limited (HKEX), today (Wednesday) published a report on the findings and recommendations from its review of issuers’ annual reports1 for the financial year ended between January and December 2015.

As part of its regular regulatory activities, the Exchange reviews issuers’ annual reports to monitor their compliance with its Listing Rules (Rules), corporate conduct and disclosure of material events and developments, and releases its findings and recommendations to improve transparency and promote a fair, orderly and informed market.

“We are pleased to note that issuers have considered and adopted our previous guidance to enhance their disclosures, but there are also areas where issuers can improve their accountability to shareholders,” said David Graham, HKEX’s Chief Regulatory Officer and Head of Listing. “Issuers should consider our findings and recommendations to improve transparency and communication with shareholders.”

The Exchange specifically recommends the following:

(a) Business review in Management Discussion and Analysis (MD&A)2 – issuers should provide sufficient information for shareholders and other investors to make a reasonable assessment of their businesses and financial performance, and are recommended to enhance disclosure as follows:
  • On principal risks and uncertainties: discuss specifically how the major risk areas would affect business operations, their potential financial impact and, where applicable, the measures taken to manage the risks.
  • On environmental policies and compliance with relevant laws and regulations: explain the material impact of the relevant laws and regulations on business operations.
  • On key relationships with employees, customers and suppliers: disclose information about the background of the major customers and length of relationship, credit terms granted, subsequent settlement of trade receivables, risks associated with reliance on major customers and measures to mitigate such risks.
  • On financial key performance indicators: explain the basis for selecting the indicators and how they are effective in measuring business performance.
(b) Significant securities investments in MD&A – issuers should provide sufficient information about investment portfolios and performance during the financial year, and are recommended to disclose a breakdown of major investments held, the fair value of each major investment at the financial year-end date and its size compared to the issuer’s total assets, the performance of each major investment during the year, and a discussion of the strategy for future investments and the prospects of these investments.

(c) Financial statements with auditors’ modified opinions – issuers should provide more detailed and additional information to enable shareholders to better understand the modifications and their actual and potential impact on the financial position. The audit committee should critically review major judgmental areas, and ensure any disagreement with the management is disclosed in the annual reports. Issuers and audit committees should also engage in early discussions with the auditors about the audit plans and how to address the issues that gave rise to the previous year’s modifications in the following financial year.

(d) Continuing connected transactions – issuers should have in place internal control procedures to ensure that continuing connected transactions will be conducted in compliance with the connected transaction rules. They should also ensure that their internal audits would review these transactions and the adequacy and effectiveness of the internal control procedures, and the findings are provided to independent directors to assist them in performing their annual reviews. Independent directors should make appropriate enquiries with the management to ensure that they have sufficient information to review the transactions and the internal control procedures.

In the next review3, the Exchange intends to cover most of the areas reviewed in the report it published today.

Issuers should note the observations and recommendations discussed in the report and follow the relevant guidance. The report is available under the “Rules & Regulations – Rules and Guidance on Listing Matters – Other Guidance Materials for Listed Issuers – Listed issuers’ general disclosure obligation” section of the HKEX’s website.


1. Excluding annual reports issued by collective investment schemes listed under Chapter 20 of the Listing Rules for the Main Board.

2. Following the amendments of the Companies Ordinance that took effect in March 2014, the Rules were amended in 2015 to require a business review section that complies with Schedule 5 of the Companies Ordinance. Certain recommended disclosures in the old Rules have become mandatory disclosure requirements.

3. The next review will cover annual reports for the financial year ended between January and December 2016.


Updated 25 Jan 2017