The Stock Exchange published review results of Issuers’ Annual Reports
Introduction
In January 2023, the Stock Exchange of
Hong Kong Limited (the “Stock Exchange”)
published a report (the “Report”) on
the findings and recommendations of its annual review of issuers’ annual
reports for the 2021 financial year end. The Stock Exchange selected a number
of specific areas for review, such as disclosures on financial reporting and
internal controls, material asset valuations and impairments. The review also
assessed issuers’ compliance with annual report disclosure requirements under
the Rules Governing the Listing of Securities on the Stock Exchange (the “Listing Rules”) and specific accounting
standards in financial statements.
Financial
reporting and related controls
Upon review of issuers’ published
unaudited financial results, audited financial statements and announcements,
the Stock Exchange identified the matters below that require issuers’
attention:
1. Material differences
between audited and unaudited financial statements
In 2022, approximately one-fifth (1/5) of
issuers which published unaudited financial statements before the reporting
deadlines subsequently published audited financial statements that reported
material adjustments. As observed by the Stock Exchange, changes to the initial
impairment assessments and valuations of assets are due to (i) failure by
issuers to make impairment assessments on their assets in their unaudited
financial statements, (ii) failure by management to collect or consider
sufficient information to substantiate the assumptions for the preparation of
valuations; and (iii) failure to conduct the valuation processes as the valuers
were unable to perform site visits.
2. Auditors’ modified opinions
The major area of concern raised by
auditors was the fairness of the reported values of issuers’ assets. These
modifications were mainly due to the (i) management’s inability to provide
objective evidence to substantiate the values of acquired assets,
recoverability of loans granted and prepayments made due to insufficient due
diligence or business justifications before relevant transactions were entered
into, (ii) failure by management to maintain proper controls on documentation,
record keeping and segregation of duties and (iii) failure by management to
apply appropriate assumptions in assessing the valuations of assets.
3. Delays in publication of
results
For the 2021 financial year, a small
number of issuers failed to publish their annual results before the 3-month
reporting deadline and consequently, were required to suspend their securities
trading.
In view of the above, the Stock Exchange
suggested, among others, the following room for improvement for directors and
audit committee of issuers:
1.
Directors should ensure the financial
statements are prepared in accordance with relevant accounting standards with
sufficient and objective information being provided;
2.
Directors should deploy adequate resources
to staffing and maintaining appropriate financial reporting system;
3.
To avoid the modified opinions and delays
in publication of financial results, issuers should maintain proper risk
management and internal controls, and to perform proper due diligence at the
time when the issuer initially entered into the arrangements (such as granting
of loans or asset acquisitions); and
4.
The audit committee should ensure
compliance with accounting standards and to review significant financial
reporting judgments, critically assess and challenge the reasonableness of the
assumptions adopted by the management in the valuations of material assets
reported in the issuer’s financial statements, monitor the effectiveness of the
audit process and play an active role in overseeing the issuer’s financial
reporting system, risk management and internal controls.
Material
lending transactions
The Stock Exchange reviewed issuers’
financial statements and management discussion and analysis (“MD&A”) section regarding disclosure
about material asset impairments and have, amongst others, the following
findings:
1. Material asset impairments
(other than loans)
A large majority of the issuers reviewed
have discussed the circumstances that led to the material impairments in the
annual reports, and supported the reported impairment amount by valuations or
other evidence. In a small number of cases, however, the issuers disclosed
generic reasons for the impairments and were required by the Stock Exchange to
make further explanation in supplemental announcements.
The Stock Exchange also reviewed whether
issuers have timely informed the market about material asset impairments by way
of announcements under Rule 13.09 of the Listing Rules (Rule 17.10 of the Rules
Governing the Listing of Securities on the GEM of The Stock Exchange of Hong Kong
Limited (“GEM Listing Rules”)).
Except in two cases, it is observed that issuers generally announced changes to
their financial position arising from asset impairments on a timely basis.
2. Material lending
transactions by money lenders
The Stock Exchange highlighted some common
omissions in disclosure of money lending business in annual reports as follows:
1.
Details of business model and credit
assessment policy – some issuers simply provided a generic description of their
internal control systems without details of the key procedures (e.g. credit
risk assessments, ongoing monitoring of loan recoverability and loan
collection);
2.
Breakdowns of material loan receivables
and major terms of the loans – some issuers disclosed a range of interest rates
for their loan portfolios without further categorisation of the types of loans
and other terms that reflected different credit risks;
3.
Breakdowns of concentration of loans with
major customers (e.g. loans receivables from the top five customers); and
4.
Management discussion on the impairment
assessments of individual loan receivables, and the basis for the general loan
impairment provision.
Thematic
review on newly listed issuers
The Stock Exchange recorded 87
non-compliances with the Listing Rules by newly listed issuers. Non-compliances
with the notifiable or connected transaction Rules included (i) failure to
announce subscriptions of wealth management products issued by banks or
investments in investment funds, which constituted acquisitions under the
relevant Listing Rules on notifiable transactions and (ii) failure to comply
with the relevant Listing Rules on connected transactions when making advances
to connected persons, or (iii) exceeding the agreed annual caps on connected
transactions.
The Stock Exchange reminds newly listed
issuers to consult their compliance advisers on matters required under Chapter
3A of the Listing Rules (Chapter 6A of the GEM Listing Rules). Directors of the
issuers should also ensure that their financial reporting and internal controls
provide adequate safeguards to ensure compliance with the Listing Rules.
Compliance
with annual report disclosure requirements
The Stock Exchange conducted a general
review on issuers’ compliance with specific disclosure under the relevant
Listing Rules requirements and highlighted, among others, the following key
areas at which special attention is needed:
1.
Continuing
connected transactions (“CCT”) – whether the related party transactions
are CCT, terms of the CCT, auditors’ and/or independent non-executive directors’
review findings and whether the amount of CCT exceeded the annual cap;
2.
Share
schemes – the relevant disclosures on share option schemes
required under Rules 17.07, 17.08 and17.09 of the Listing Rules (Rules 23.07,
23.08 and 23.09 of the GEM Listing Rules) and certain recommended disclosures
on share award schemes;
3.
Proceeds
on fundraising – the relevant disclosures under Paragraphs 11(8)
and 11A of Appendix 16 of the Listing Rules (Rules 18.32(8) and 18.32A of the
GEM Listing Rules);
4.
Significant
investment – the relevant disclosures on significant
investment under Paragraph 32(4A) of Appendix 16 of the Listing Rules (Rule
18.41(4A) of the GEM Listing Rules); and
5.
Results
of performance guarantee after acquisition – status
and details of compliance of the performance guarantee under Chapter 14 of the
Listing Rules (Chapter 20 of the GEM Listing Rules.
Conclusion
The Stock Exchange’s annual review serves
the purpose of monitoring the actions taken by the issuers and their directors
to safeguard company’s assets, and whether material information was disclosed
to allow shareholders to properly assess the relevant matters reported on.
Issuers are reminded to consult legal or compliance advisers in order to comply
with the Listing Rules as well as proper accounting standards from time to
time.
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