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HKEX Publishes Review of the Issuers’ Annual Reports 2024 and Guide on Preparation of Annual Report

Background

In December 2024, The Stock Exchange of Hong Kong Limited (“HKEX“) completed its review of  the issuers’ annual reports for the financial year ended 2023 and published the Review of the Issuers’ Annual Reports 2024 (the “Report“) as well as the Guide on Preparation of Annual Report (the “Guide“) in order to assist issuers in preparing future annual reports. This article summarises the main findings and recommendations in the Report and the Guide.

Review of the Issuers’ Annual Reports 2024

HKEX completed its review of the issuers’ annual reports for 2023 and published the Report which consolidated HKEX’s assessment of issuers’ compliance with specific disclosure requirements under the Listing Rules, adopting a thematic approach and selecting specific areas based on regulatory concerns. The main findings and recommendations are as follows:

(a) Review of Specific Disclosure Requirements

(i) Share schemes: Some issuers only disclosed the number of option shares that could be granted under the remaining scheme limit, but failed to include the option shares that have been granted but not yet exercised.

(ii) Significant investments: Some issuers failed to make the relevant disclosures for significant investments, as significant investments are not confined to securities in the company, but also include funds or wealth management products. If the materiality threshold is exceeded, they must be disclosed.

(iii) Performance guarantees and use of proceeds from fundraisings: Some issuers omitted to disclose the expected timeline for applying unutilised proceeds from fundraisings. Even in the absence of a definitive timetable for the deployment of these funds, issuers should still indicate an approximate timing for fund usage, and update investors through announcements and/or in subsequent financial reports when there is better clarity on the timeline.

(b) Thematic Review

(i) Financial statements with auditors’ modified opinions

  • Common examples are:
    • going concern uncertainty, commonly due to deterioration in economic condition and/or business and/or difficulties in obtaining financing; and
    • valuation of assets and limited access to accounting records, which are often attributable to lack of adequate risk identification policies and mitigating measures.
  • Issuers should:
    • work closely with the auditors, closely monitor the execution and make adjustment as and when necessary; and
    • put in place adequate risk management and internal control systems through:
      • establishing an appropriate policy, to identify risks emerging from material changes in external environment, as well as internal factors (e.g. material mergers and acquisitions and major overhaul of business/operation model);
      • developing risk-mitigating controls and continuous review of their effectiveness;
      • proper documentation of control procedures and activities; and
      • regular reporting to the board for continuous oversight.

(ii) Material lending transactions

  • Certain cases include director misconduct and/or internal control breakdown (e.g. loan impairments, repeated rollovers without commercial rationale, failure to safeguard loan rights).
  • Issuers should ensure their controls over material lending transactions are adequate to safeguard shareholders’ funds.

(iii) Management discussion and analysis (MD&A)

  • There is room for improvement in quality of disclosure, particularly in discussion of year-on-year performance variances; and significant events and risks, their impacts and issuers’ counter measures. Examples include:
    • Failure to identify and discuss specific underlying causes or business factors that drove the results;
    • Highlighting business plans (e.g., requiring substantial investments) without discussing estimated capital expenditure needs or how these needs will be met;
    • Inadequate disclosure of foreign exchange and interest rate risks, and failure to disclose their impacts or mitigation strategies to these risks; and
    • Disclosing a major change in the business model (e.g. shifting from self-operating to a franchise), but failure to provide reasons for such changes or its impact on financial results and the position in the current year and going forward.
  • Newly listed issuers should strive for their MD&A disclosures to align with their listing documents. It is advisable to provide update on significant matters highlighted in the prospectus to enable investors to evaluate whether the post-listing developments are in line with the track record, business plan and prospects outlined in the prospectus.

(iv) Review of Financial Disclosure Under Prevailing Requirements (Including Accounting Standards)

  • There is room for improvement in qualitative disclosure, especially regarding material accounting policy information, key judgements and estimates which should focus on how issuers have applied the accounting requirements according to their own facts and circumstances.
  • Some issuers used non-GAAP measures, and in some cases the non-GAAP measures were not properly labelled; the reconciliation was omitted; and the adjusting items were not clearly explained.

Guide on Preparation of Annual Report

At the time of publishing the Report, HKEX also published this Guide which summarizes relevant key recommendations made by HKEX over the years after reviewing annual reports, as well as all disclosure requirements under the Listing Rules applicable to annual reports to assist issuers in preparing future annual reports.

(a) Mandatory disclosure requirements

(i) According to the Listing Rules (mainly Appendix D2) and guidance materials from HKEX, it is mandatory to disclose the following information in the annual reports:

  • Directors, senior management and shareholders;
  • Financial reporting, accounting and auditing matters;
  • Issue of securities or resale of treasury shares and related matters;
  • Public float;
  • Repurchase of securities and treasury shares;
  • Notifiable transactions;
  • Connected transactions;
  • Share schemes;
  • (if applicable) Newly listed issuers;
  • (if applicable) Issuers listed under special listing regimes or other listing structures; and
  • Corporate governance / environmental, social and governance.

(b) Recommended disclosure in specific areas from thematic review

(i) Financial statements with auditors’ modified opinions

  • If an issuer receives a modified audit opinion (covers “qualified opinion”, “adverse opinion” and “disclaimer of opinion”), it should disclose the following in the annual report:
    • Details of modifications and their actual or potential impact on the issuer’s financial position;
    • Management’s position and basis on major judgmental areas, and how the management’s view is different from that of auditors;
    • Audit committee’s view towards the modifications, and whether the audit committee reviewed and agreed with the management’s position concerning major judgmental areas; and
    • Issuer’s proposed plans to address the modifications.
  • Issuers and their audit committees should engage in discussion with the auditors about the proposed action plans to increase the chance of successfully addressing the auditors’ concerns and resolving the audit issues.

(ii) Management discussion and analysis (MD&A)

  • The MD&A provides narrative elaboration of the business trends and year-on-year variances (both positive and negative) of the financial results of an issuer compared to the preceding year, such as to allow investors to understand the key drivers of the issuer’s financial performance, risks and uncertainties of its business and related mitigating measures.
  • For the content that needs to be covered in the MD&A, please refer to the Listing Rules Appendix D2, paragraphs 28(2)(d) and 32.
  • To enhance the quality of disclosure, issuers are recommended to duly consider the following in determining what information to present in their MD&A:
    • Business review (including internal and external factors, using performance/efficiency indicators or industry specific ratios, material line items reported on the financial statements and other expenses)
    • Principal risks and uncertainties (including how it has affected, or is likely to affect their operation, financial position and business plans, and whether they can be mitigated)
    • Liquidity and financial resources (including how it plans to meet the relevant capital expenditure requirements, as well as the requirement to support daily operations and financial commitments (e.g. debt repayment), and whether there are any fundraising plan)
  • Issuers should have due regard to their own circumstances in determining the appropriate information (in terms of type, scope and level of detail) with a view to facilitating investors in appraising the issuers’ past and future performance.
  • In drafting MD&A, directors should also ensure that the presentation is clear, concise, fair, understandable and balanced, such that both good and bad news are presented and reported clearly and evenly, without glossing over or omitting material facts. Directors should endeavour to make the MD&A section informative and avoid using boilerplate statements. They are encouraged to challenge past practices of how key information is structured and conveyed, and make improvements as necessary.
  • Issuers should strive to have their MD&A disclosure on par with the disclosure standard of a listing document.

(iii) Material asset impairments

  • If an issuer reports a material asset impairment in its financial statement, it should discuss the circumstances that led to the impairment as part of its discussion on significant events or transactions during the financial year.
  • Where the impairment is supported by a valuation, issuers should disclose details of such valuation, including:
    • Valuation method and reason for using that method;
    • Details of values of inputs used together with basis and assumptions; and
    • Explanation on any changes in valuation method used or inputs or assumptions.

(iv) Material lending transactions

  • An issuer that engaged in money lending activities outside its ordinary and usual course of businesses (i.e. non-money lenders) should disclose the following:
    • Details of loan receivables (including major terms);
    • Discussion of any material impairments or write-offs of loan receivables and the basis of impairment assessments; and
    • Reasons for granting the loans and how they meet its business strategies.

(v) Performance guarantees

  • Under the Listing Rules, an issuer is required to disclose in the annual report whether the actual performance of the acquired business meets the guarantee. If the guarantee is not met, the issuer is also required to:
    • disclose by announcement the shortfall; whether the vendor has fulfilled its obligation and the directors’ opinion on the fairness of their decision to exercise (or not exercise) the issuer’s rights under the terms of guarantee; and
    • provide appropriate updates in annual reports about the actions the directors have taken so far, and intend to take, and to explain the directors’ actions, in particular whether and how they are fair and reasonable and in the best interests of the shareholders.

(vi) Newly listed issuers

  • The IPO prospectus contains material information on the listing applicant’s business, major shareholders, regulatory/industry environment, principal risks and other matters. After listing, issuers should disclose appropriate information in their annual reports to keep investors updated on the developments of major matters highlighted in the prospectus. For example:
    • Where there are material changes in circumstances as presented in the prospectus (such as material changes in financial performance and position, business environment and risks, business plans and use of IPO proceeds), the issuer should adequately discuss the changes and, if applicable, the directors’ actions to be taken.
    • Where the issuer was given non-competition undertakings by its major shareholders to establish a clear delineation between their businesses, the issuer should disclose whether such shareholders have fulfilled their undertakings
    • In some cases, the issuers might have undertaken (or required by the Listing Committee as a condition to listing) to take certain actions after listing. Such issuers are expected to take appropriate actions to fulfill such undertaking (or condition) and make relevant disclosure in the annual reports.
  • Newly listed issuers should consult their compliance advisers for preparing the annual reports and other compliance matters.

(c) Financial disclosure under prevailing requirements

(i) Issuers should prepare the financial statements with a high standard of financial disclosure and ensure compliance with the applicable accounting standards.

(ii) When preparing financial information in annual reports, the following areas require particular attention: accounting policy information, judgements and estimates; revenue; business combinations; material intangible assets – impairment testing; valuation of Level 3 financial assets; credit risk disclosure on trade receivables; presentation of non-GAAP measures; and disclosure of possible impact of applying a new or amended standard in issue but not yet effective.

HKEX emphasised that other than the disclosure requirements set out in this Guide, issuers must ensure that their annual reports fully comply with all other relevant laws, rules and regulations, and industry standards, as applicable.

In addition, it is recommended that issuers and their audit committees adopt a proactive approach by communicating thoroughly with their auditors regarding audit plans, areas of focus for audits well before the end of that financial year in order to minimise the possibility of last-minute surprises.

Date:
24 January 2025
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