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HKEX : latest review of issuer financial reports; enforcement action interprets “financial assistance”

 
HKEX published its 2015 financial statements review report, monitoring issuer compliance with disclosure requirements of Listing Rules and accounting standards.

What you should know:

• MD&A should be “balanced” and more “entity-specific”
• Some non-HK incorporated issuers overlooked amended Listing Rules incorporating new “Business Review” requirements
• Directors’ responsibilities and internal controls : should resolve issues identified in modified auditors’ reports as soon as practicable
• “Extended auditor report” for years ending on or after 15 Dec 16: issuers should start preparations
• Findings regarding specific accounting standards (e.g. “impairment”, determination of control)

What you should do/watch out for:

• Audit committee/board/management must start preparing for extended auditor report
• Your future reports: consider identified improvement areas in “Business Review”
• Also consider identified improvement areas in accounting treatment
• Separate proposals on a corporate rescue system being developed
• Click here for our summary; HKEX letter to issuers; press release; full report

HKEX brought action against Rosan Resources Holdings Limited; interpreting “financial assistance” and “aggregation”.

This is NOT a case of direct lending. Issuer used two subsidiaries to enter into acquisition arrangements with the same vendor for the same asset. Following termination of first transaction, vendor was permitted to defer refund of deposit without interest. Deferral constitutes “granting of credit”, hence “financial assistance”.

In the second transaction, another subsidiary made a part payment to the same vendor to acquire the same asset. These two transactions should be “aggregated” for Chapter 14 size tests purposes.

Independent directors (also audit committee members) were also found in breach of directors’ undertaking.

What you should know:

• Deposit deferral (without interest or security) in first transaction amounts to “financial assistance”, as issuer “effectively granted credit” to vendor
• Significant delay: deposit refunded by two tranches, and deferred by 6 to 11 + months
• Significant amount involved (“consideration ratio” : 43.86%); hence also a “major transaction”
• Second acquisition should be further “aggregated”
• Involved the same vendor, assets, proximity in timing

What you should do/watch out for:

• Directors’ duties–expected to “take an active interest” in company’s affairs, including “follow up issues”; consider Listing Rules implications; consult professional advisers
• Directors and management must be sensitive in appreciating what transactions may constitute potential “financial assistance”
• Note under what circumstances transactions may be “aggregated”
• Auditors alerted the board on various occasions

Click to view our summary; Listing Committee decision