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

Regulatory
01 Jun 2018

  • Exchange publishes its ninth Financial Statements Review Programme Report
  • Report summarises key findings from a review of 100 annual and interim reports
  • Objective is to increase issuers’ awareness of possible pitfalls and improve the quality of their future 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 February 2017 and April 2018 (Note).

“A financial report provides an opportunity for issuers to explain their performance, financial position and future prospects clearly to investors and enhance shareholders’ value,” said David Graham, HKEX’s Chief Regulatory Officer and Head of Listing, “Issuers should take note that financial reports and all other corporate communication should be accurate, complete and not misleading.  The Audit Committee should focus on financial reporting integrity as part of its core oversight responsibilities.”

The report the Exchange published today specifically highlights the importance of the following:

  • Providing investors with a meaningful management commentary – In addition to remaining mindful of what the Exchange’s previous report said about(i) Adequate explanation of performance; (ii) Commentary on significant balances and transactions; (iii) Explanation of principal risks facing the businesses; and (iv) Using key performance indicators, issuers should note the following in today’s report:
     
    • Cyber risk and security: Issuers should elaborate on how they have considered cyber risk and what discussions about cyber risk and security were held;  
       
    • Data fraud or theft: Issuers should elaborate on how they have evaluated the internal controls in place to prevent critical information from being misused through data fraud or theft; and
       
    • Environmental and social risks: Issuers should consider carefully whether such risks are relevant and if they are, elaborate on how such risks affect their businesses across different segments and geographical locations.
       
  • Judgements and estimates – Issuers should ensure that their management has held a thorough discussion each year with the Audit Committee and auditors, whereby the management explains the judgements of key assumptions underlying critical accounting estimates;
     
  • Assessing impairment of tangible and intangible assets (including goodwill) – Directors and management are responsible for performing proper analysis and exercising judgement to assess the reasonableness of key assumptions applied in impairment testing so that assumptions applied (such as growth rates and discount rates) are not overly optimistic.They should not rely solely on professional valuers or other experts without carrying out sufficient due diligence;
     
  • Accounting for acquisitions – Issuers should consider carefully after an acquisition whether the transaction constitutes a business combination or an asset acquisition because the accounting treatments are very different.Moreover, in accounting for a business combination, issuers should properly identify and recognise all identifiable assets so that goodwill or a gain on a bargain purchase is accurately measured;
     
  • Impact of applying key HKFRSs in issue but not yet effective – Hong Kong Financial Reporting Standard (HKFRS) 9 “Financial Instruments” and HKFRS 15 “Revenue from Contracts with Customers” were already effective when issuers issued their annual reports for the year ended 31 December 2017 but did not apply to those reports.Nevertheless, issuers should have disclosed in those reports more entity-specific qualitative and quantitative information, such as the stage of implementation they are at; accounting policy choices expected to be applied by the management; and the amount and nature of expected impacts for financial statement line items affected.  Issuers that have not yet done so should now consult their professional advisers and perform a detailed review of these key HKFRSs as they need to apply these standards in their next interim financial statements; and
     
  • New auditors’ reporting – Issuers should communicate early with their auditors about which documents comprise the annual reports and will be within the scope of “Other information” in Hong Kong Standards on Auditing and ensure that such information is provided to their auditors for consideration, so that the auditors can complete the necessary procedures required prior to the date of the audit report.

The report is available in the “Listing – Rules and Guidance – Other Resources – Listed Issuers – Exchange’s Review of Issuer’s Annual Disclosure – Financial Statements Review” section of the HKEX website.

Note:

As part of its regulatory function, the Exchange operates a Financial Statements Review Programme which reviews, on a risk-based basis, the periodic financial reports published by issuers with a view to encouraging high standards of financial disclosure.  A report of key findings and recommendations is published annually.  The objective is to increase issuers’ awareness of the possible pitfalls in the preparation of periodic financial reports, particularly with respect to compliance with the disclosure requirements of the Listing Rules, accounting standards and relevant disclosure requirements of the Companies Ordinance (Cap 622), so that issuers may learn from the experience of others and improve the quality of their future reports.  The report published today is the Exchange’s ninth report of key findings from its reviews.

 

Ends

Updated 06 May 2020