In May 2000, the Stock Exchange of Hong Kong announced amendments to the Listing Rules for the Main Board with regard to financial disclosure provisions. These amendments will create a significant impact for all listed companies, many of whom may not be fully aware of the implication of the amendments and many of whom are also likely to struggle in complying with the new financial disclosures provisions.
The principal amendments introduced by the Stock Exchange of Hong Kong Limited include:
Interim results
+ Revised minimum disclosures in the interim announcements
The challenge that many listed companies face is whether the information required for disclosure is readily available from their current accounting and reporting system. Potentially, new reporting tools and programs may be required in order to enable the necessary information to be readily extractable. Additional programming requirements cost money and time.
+ Requirement for compliance with the relevant accounting standard on interim financial reporting
Under the new requirements, interim reports are required to be prepared in accordance with the relevant applicable accounting standard on interim financial reporting (i.e. either Statement of Standard Accounting Practice No.25 or International Accounting Standard No. 34). Listed companies are therefore strongly advised to familiarize themselves with the requirements of these standards ahead of the reporting deadline in order to ensure that the information required under these standards can be readily available when necessary.
+ The requirement for the review of interim reports by audit committees, and if a listed issuer has not established an audit committee, the auditors are required to review the interim report
The amendments not only focus on improved disclosures, but also on improved corporate governance, specifying the requirement for the interim financial reports to be reviewed by an audit committee.
In most instances, entities that are listed on the Stock Exchange of Hong Kong Limited would already have an established audit committee, as recommended under the Code of Best Practice issued by the Stock Exchange of Hong Kong Limited. However, these entities would still need to consider whether reviews of interim reports are within the existing mandate of the audit committee and whether the committee members are suitably qualified and trained to review financial statements.
For companies that do not currently have an established audit committee, the implication are even greater. Matters that the companies would need to consider are:
- Should the company consider establishing an audit committee?
- If so, how should the company go about establishing an audit committee?
- Who should be the appointed members on the audit committee?
- What qualification should the appointed members have?
- What training should the members receive to enable them to take up the role?
- What should the mandate of the committee be?
- What would be the costs of establishing such a committee?
If a company does not currently have an audit committee and does not wish to establish an audit committee, the listing rules requires the auditors to review the interim report, in which case advance arrangement and discussion with the auditors would be strongly recommended.
+ Deadline for the interim reports to be distributed to shareholders
Interim reports are required to be distributed to shareholders within three months of the period end. Prior to the amendments, the listing rules only stated that interim reports are required to be issued as soon as possible after the announcement.
After allowing time for the review of the interim report by either the audit committee or the auditors and printing time, companies face an even tighter deadline for finalizing and preparing the interim reports. Listed issuers would therefore face a major challenge to meet the reporting deadline.
Annual results
+ Revised minimum disclosures in the preliminary announcement
Under the amendments, a full set of audited financial statements is required to be included as part of the preliminary announcements which effectively signifies that the financial statements would need to be finalized by the time the preliminary announcement is released. Typically in the past, the full set of audited financial statements were far from ready at the time when listed companies released their announcement. Typically full audited financial statements are only finalized after the announcement date which could take up to two months in some cases. This new requirement would therefore bring significant strain on listed companies as they would now be working towards an even tighter deadline.
+ Revised deadline for the distribution of the annual reports to shareholders
Under the amendments, the deadline for the annual reports to be distributed to shareholders have been brought forward from five months to four months. The acceleration in the annual reporting will be yet another challenge for listed companies. Have all companies considered the impact of the acceleration in reporting deadline? Will all of us be all to meet these deadlines?
Accountants’ Reports
The new Main Board Appendix 16 also introduces new disclosure requirements for accountants reports. It requires the following components in respect of at least three financial years to be included in an accountants' report:
- balance sheet
- income statement
- cash flow statement
- statement of movements in equity other than those arising from capital transactions with shareholders and distributions to shareholders
- accounting policies and explanatory notes
The above represents a significant change from the previous requirements where only
information relating to the results for at least three financial years, and assets and liabilities as at the date to which the latest audited accounts of the potential listing applicant have been
made up, was required to be disclosed.
The requirements for the inclusion of the assets and liabilities for three years would require significant additional work, especially if adjustments to prior years’ assets and liabilities are necessary.
The new financial disclosure provisions are effective for accounting periods ending on or after 1 July 2000. The implications of the new Main Board Appendix 16 may not have been fully digested yet by many of the listed entities. Listed issuers face significant challenge in meeting these requirements. Have you considered the following:
+ Does your financial reporting system enable you to obtain all the information that is required under the amendments (including comparatives)?
+ Does your company have an established audit committee?
+ If yes, is the review of the interim financial reports within their mandate?
+ If not, is there any need for your company to establish an audit committee?
+ Also, if not, have you contacted your auditors and agree on the terms on which a review of the interim financial statements will be carried out by the auditors?
+ Have you considered the full impact of the acceleration in reporting deadline?
+ Have you considered the impact of the requirements for three balance sheets to be included in the accountants reports?
Marie-Anne Kong, Senior manager, Audit and Business Advisory Services, Financial Services Division, PricewaterhouseCoopers
