On 20 January 2023, the Stock Exchange of Hong Kong Limited (the “Exchange“) published a report on its annual review of issuers’ annual reports for the 2021 financial year. The Exchange adopted a thematic approach and identified specific areas of review. Whilst noting that issuers continued to achieve a high rate of compliance with annual report disclosure requirements under the Listing Rules, the Exchange identified several areas of improvements and made recommendations to issuers.

Financial reporting and related controls

• Asset valuation remained a major issue in financial reporting. Some issuers were overly optimistic and failed to apply proper assumptions in valuing their assets. Directors are recommended to critically assess management’s accounting estimates and challenge the reasonableness of the assumptions adopted by the management.
• Some issuers failed to maintain proper controls on documentation and record keeping and were unable to provide objective evidence to substantiate the reported values of their assets. Directors are recommended to establish and maintain proper risk management and internal controls, and deploy adequate resources to maintain them.

Material lending transactions

• Having reviewed material lending transactions and related disclosure last year and identified breaches and deficiencies, the Exchange conducted a further review this year. Cases of material impairments on loan receivables that raised concerns about potential breaches of directors’ duties were identified. These cases suggested weaknesses in internal controls, and for issuers that operate money lending businesses, a lack of proper credit risk assessments and inadequate due diligence.
• Directors are recommended to critically assess the commercial rationale for making the loans, whether the loan terms are fair and reasonable, and whether the use of funds is in the interests of the issuer and its shareholders. For issuers that operate money lending businesses, directors should also maintain effective risk management and internal control systems to assess and manage credit risk exposure and to monitor the recoverability of loans and adequacy of the collaterals.
• A number of issuers did not fully follow last year’s recommendations on disclosure of material lending transactions. Issuers should disclose details of material loan receivables and for money lenders, their business models, credit assessments and approval policies, and details of their loan portfolios and loan impairment assessments.

Financial statement disclosure under accounting standards

• Several key areas for further improvement were highlighted, including judgments and estimates, material intangible assets and fair value measurements.
• In view of economic uncertainty and market volatility, issuers and their audit committees are recommended to maintain a close dialogue with auditors on the audit focus areas and other emerging issues identified during the audit, and take prompt actions to address auditors’ concerns.

Issuers should take note of the observations and recommendation contained in the report in order to improve transpiration and accountability to investors in its future annual reports.  For further information, please visit this link.