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HKEX review: annual reports disclosure

HKEX published a report on its review of issuers’ annual reports for financial year ended between Jan to Dec 2019.  (Press release; full report)

This covers: (i) rule compliance, corporate conduct, and disclosure of material developments; (ii) financial statements review. 13 areas were covered (full list: P.4 of report). HKEX used artificial intelligence in this review.

A key area is the disclosure of Covid-19 impact, in “business review and MD&A”. 

HKEX acknowledges that Covid was only at an incipient stage when issuers prepared 2019 annual reports. For the next report, it recommends appropriate disclosure on Covid’s impact  on operations, financial performance and financial position, and assess the risks/ impact on future performance. Issuers should continuously evaluate the situation and (as appropriate) announce material business developments. Useful examples are given.

(These are in line with HKEX’s previous Listed Issuer Regulation Newsletter; read our April 20 legal update).

As regards “annual review of continuing connected transactions” by independent directors (“INEDs”), HKEX stresses the important role of INEDs.  Issuers should have appropriate internal controls to monitor, and assist INEDs in their roles. INEDs should review the appropriateness of these internal control procedures. It also refers to examples of good practices in last year’s report. (Read our Jan 20 legal update)

Other notable compliance-related themes are summarised below. Accounting-related themes include financial statements with modified auditor opinion, material intangible assets, etc.

What you should know:

Disclosure of Covid in “Business review”/ MD&A (para 10, P.6)

• Impact on operations; risks/uncertainties that materially affect future performance
  — E.g. suspension of operations, disruption to supply chains/distribution channels, change in customers’ demands, etc.

• Quantitative measures of the financial or operational impact
  — E.g. % of revenue or profit, operating capacity, impairments to assets, loans and receivables
  — Disclosure example (para 14, P.8)
  

• Assessments of liquidity positions and working capital sufficiency
  — With reference to operations and capital commitments
  — Assessments of the ability to fulfill financial obligations or meet debt covenants
  — Disclosure example (para 15, P.8)

• Measures taken/ to be taken to manage the impact
  — E.g. cost control, funding and adjustment to business plans
  — Disclosure examples (para 16, P.8)

Other notable themes

• Updates on material asset impairments and performance guarantees after acquisitions  (para 40, P.15)

• Disclosure on share option and award schemes (para 64. P.21)
  — Currently, rules (Chapter 17) only covers share options
  — Recommend issuers with share award schemes to follow above disclosure requirements in future annual reports
  

What you should do:

• Your forthcoming annual results announcement/annual reports — note expectations on Covid-19 disclosure in particular

• Your forthcoming annual INED review of CCTs — consider the referenced best practices in monitoring

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This Update in PDF