HKEX 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), has today (Friday) published a report summarising key findings from its review of 100 periodic financial reports released by listed issuers (issuers) between February 2016 and April 2017.

We encourage issuers to take note of the matters discussed in today’s report,” said David Graham, HKEX’s Chief Regulatory Officer and Head of Listing, “Issuers should ensure that their finance department has the necessary resources and training to perform its role in financial reporting.

The Exchange’s report specifically highlights the following:

Providing management commentary that is useful for investors – Areas for further improvement in the Management Discussion and Analysis (MD&A) and Business Review include:

  • Adequate explanation of performance: Issuers should provide an adequate discussion of performance and properly identify reasons for fluctuation in profit or loss, such as elaborating on the underlying causes instead of only reciting the figures;
  • Significant balances and transactions: Issuers should assess materiality in the context of disclosure and provide commentary on items and transactions reported in the financial statements that are unusual or material because of their nature, size or incidence;
  • Principal risks facing the businesses: Issuers should discuss the operational and financial factors and risks in the environment which are specific to the reporting entity, such as risks of non-compliance with relevant laws and legislations, foreign exchange exposure, concentration of customers and cyber security, and explain how these principal risks are being managed and mitigated; and
  • Using key performance indicators (KPIs): Issuers should ensure that KPIs and non-Hong Kong Financial Reporting Standard financial measures are unbiased, presented with no greater prominence than Hong Kong Financial Reporting Standard (HKFRS) financial information, clearly defined, reconciled to the relevant amounts in the financial statements and presented consistently over time;

Rigorous assessment on impairment of assets – It is the responsibility of directors and senior management to perform proper analysis and exercise judgement to assess the reasonableness of key assumptions applied in impairment testing, and they should not rely solely on professional valuers or other experts;

Disclosure of judgements and assumptions in determining control or significant influence – Issuers should clearly disclose significant judgements and assumptions they have made in determining whether they have control of or significant influence over another entity;

Impact of applying key HKFRSs in issue but not yet effective – Implementation of key HKFRSs (HKFRS 9 “Financial Instruments”, HKFRS 15 “Revenue from Contracts with Customers” and HKFRS 16 “Leases”) is not just an accounting exercise, but is expected to have a significant impact on some issuers, particularly on their information systems, internal controls and business contracting processes. Issuers should early consult their professional advisers and perform a detailed review as soon as practicable. They should progressively provide more entity-specific qualitative and quantitative information in their interim and annual financial statements about the application of these HKFRSs as their effective dates become nearer;

Segment reporting – Issuers should disclose segment information “through the eyes of management” and ensure that the elements presented in the segment information in the financial statements and those included in the MD&A are consistent in terms of segments presented and measures disclosed; and

New auditors’ reporting – Issuers and their audit committee should have in-depth conversations with their auditors regarding key audit matters, going concern issues and other significant events or transactions that occurred during the reporting period. They should also agree with the auditors on a timetable and ensure that the other information included in their annual report is complete and provided to the auditors prior to the date of the audit report.

For a financial report to be an effective communication tool, the information provided should be relevant, material and entity-specific; and issuers should consider removing irrelevant and immaterial disclosures.

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