- Review concluded that disclosure in issuers’ annual reports was generally satisfactory
- Recommendations were made in respect of the business review in the Management Discussion and Analysis (MD&A) section, financial statements with auditors’ modified opinions, material intangible assets, and material level 3 financial assets
- Artificial intelligence technology now being deployed by the Exchange to enhance issuer annual report review
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 (the Report) on the findings and recommendations from its annual review of issuers’ annual reports1 for the financial year ended between 1 January and 31 December 2019.
This year, the Exchange reviewed 13 specific areas, including three new areas selected as a result of the findings and observations in previous reports and latest market trends.
“We were satisfied with the overall findings of our review, and we were also pleased to see that issuers achieved a very high compliance rate with our Listing Rules in their annual reports,” said Bonnie Y Chan, HKEX’s Head of Listing. “For best practice, we encourage issuers to follow our guidance to further improve their annual report disclosure, to enhance transparency for their shareholders, promoting a fair, orderly and informed market.”
As part of HKEX’s strategic technology-empowered initiatives, the Exchange has recently introduced artificial intelligence, including machine learning, pattern recognition, and natural learning processing, to assist in reviewing issuers’ annual reports and their compliance with the Listing Rules (Rules) governing annual report disclosure vetting.
“The use of artificial intelligence enhanced the breadth and reach of our annual report review, helping us identify whether issuers had adequately disclosed information required under the Rules in their annual reports. We recommend that issuers note our observations when preparing their next annual reports,” said Ms Chan.
As part of its review, the Exchange has made the following recommendations to issuers:
- Disclosure on the impact of the Covid-19 pandemic in issuers’ business review and Management Discussion and Analysis (MD&A) section – Issuers should disclose in their next annual reports (i) the effect of the Covid-19 pandemic on their operations, and the relevant risks or uncertainties that will materially affecting their future performance; (ii) quantitative measures of the financial or operational impact of the Covid-19 pandemic; (iii) assessments of the liquidity positions and working capital sufficiency with reference to their operations and capital commitments; and (iv) measures to manage the impact of the Covid-19 pandemic.
- Financial statements with auditors’ modified opinion – Issuers should continuously review their liquidity positions and funding needs, and formulate and implement action plans to address such needs in a timely manner. Where there are material changes in the reporting items, issuers should develop appropriate and supportable estimates for these items, document key judgments made and consider retaining experts if necessary. They should also engage in early discussions with their auditors and agree in advance the timing, form and approach of the assessment of these estimates as early as practicable.
- Continuing connected transactions – Independent non-executive directors (INEDs) play an important role in providing checks and balances over the issuers’ corporate affairs, business operations and transactions, and in particular, in the monitoring of continuing connected transactions (CCTs). Issuers should have in place appropriate internal controls and mechanisms to monitor, and assist INEDs in overseeing their CCTs, and their INEDs should review the appropriateness of these internal control procedures. Issuers should also make reference to best practices adopted by other issuers set out in our last year’s report.
- Material intangible assets – Issuers should perform proper analysis and carefully consider the impact of the Covid-19 pandemic on impairment tests and update the assumptions used to reflect the latest available information and evidence.
- Material level 3 financial assets – Issuers should develop robust disclosure on level 3 fair value measurements, in particular providing the qualitative and quantitative information to the extent necessary for an understanding of the valuation techniques and the underlying unobservable inputs.
The Report is available under the “Listing Regulations – Listed Issuers – Exchange’s Reports – Review of Issuers’ Annual Report Disclosure” section of the HKEX’s website.
Note:
- Excluding annual reports issued by collective investment schemes listed under Chapter 20 of the Listing Rules for the Main Board.
Ends