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HKEX published its 2017 financial statements review report, monitoring issuer compliance with disclosure requirements of Listing Rules, accounting standards, and Companies Ordinance (“CO”). (Click: full report; press release)

This year’s special review themes are (i) “general accounting” review theme — disclosure of impact of new / amended HKFRS in issue but not yet effective; (ii) “special review” theme — new auditors’ reporting.

For Listing Rule requirements, (as in previous years) HKEX stressed the significance of providing investors with a “meaningful management commentary”.

The report has a useful executive summary. We highlight below “new areas” covered in this report. e.g. specific examples of improvement areas; the above special review themes.

(“Special industry” review theme: industrial engineering companies, and there are additional industry-specific findings).

What you should know:

• (Listing Rules; CO) “Meaningful” management commentary in “MD&A” and “Business Review” to investors (paras 11-21)Improvement areas, as in previous reports: (i) adequate explanation of performance; (ii) commentary on significant balances and transactions; (iii) explanation of principal risks; (iv) use KPIs.Examples of expected elaboration (“principal risks and uncertainties”)

  — Cyber risk and security:  how issuers considered cyber risk; what discussions about cyber risk / security held

  — Data fraud or theft: how internal controls were evaluated to be in place

  — Environmental and social risks: consider carefully whether such risks are relevant and if so, on how such risks affect businesses across different segments and geographical locations

• (Accounting) judgments and estimates (paras 51-57) —  management should have a thorough discussion each year with the audit committee and auditors, whereby management explains the judgments of key assumptions underlying critical accounting estimates

• (Accounting) impairment of tangible and intangible assets (including goodwill) (paras 70-82) — stresses responsibility of directors and management, for proper analysis and judgment to assess the reasonableness of key assumptions applied in impairment testing. Should not rely solely on professional valuers / experts without due diligence

• Accounting for acquisitions (paras 89-102) — consider carefully whether the transaction constitutes a “business combination” or an “asset acquisition” given the very different accounting treatments

• (General accounting review theme; HKAS 8) Impact of applying key HKFRSs in issue but not yet effective (paras 106-118)

  — HKFRS 9 “Financial Instruments” and HKFRS 15 “Revenue from Contracts with Customers” effective from 1 Jan 18. i.e. by the time annual reports for year ended 31 Dec 17 were issued, though not applicable for reporting period— Implementation of new standards not only an accounting issue: possible significant impact, particularly on information systems, internal controls, business contracting processes— HKICPA Alert Issue 24 (Dec 16): estimated impact of new and amended standards should become more accurate closer to the effective date

  — Disclose more entity-specific qualitative / quantitative information (e.g. stage of implementation; accounting policy choices expected to be applied by the management; amount and nature of expected impact for financial statement line items affected

  — Interim report 2018 (for Dec year-end companies): these standards will be applicable; note specific disclosure requirements

  — Annual report 2018 (for Dec year-end companies): should adopt the above approach for disclosure on HKFRS 16 “Leases”, effective 1 Jan 2019 (i.e. by issuance of the report)

• (Special review theme) New auditors’ reporting (paras 155-180)

  — Details on “key audit matters” (“KAMs”): a matter of professional judgment of auditors— KAMs should refer to related disclosure in financial statements— Issuers, in particular audit committees, should have discussions early with auditors regarding KAMs. Directors can then improve relevant disclosures in financial statements

  — Useful observations on 5 common KAMs and suggested additional disclosure (para 166)

What you should do/watch out for:

• Interim report 2018 — significant accounting standards referred to above will be applicable for the reporting period; readiness for implementation and disclosure?

• Annual report 2019 — consider improvement areas like management commentary; follow above approach to disclose new accounting standards in effect (though not yet applicable to reporting period)

• Directors’ responsibilities in various areas (e.g. judgment areas (rigour expected in reviewing assumptions for “impairment”); implementation of new accounting standards and impact on internal controls, company systems/processes)

• Audit committee’s work — particularly regarding early interaction with the auditors on KAMs; special role in reviewing significant financial reporting judgmental areas

Hot Trends

Shareholder activism
– Activist campaign against Nestle

New York hedge fund, Third Point, launched campaign against Swiss-based Nestle (the largest global food and beverage company) …

Activist allegations include:

• Vague strategy

• Sub-optimal portfolio — late to participate in key trends e.g. organic baby foods

• Organization — no external f+b expertise on the board

Nestle responded by outlining a growth plan…

Read + get a feel of a campaign!

— Activist’s website for Nestle campaign

— Letter to Nestle Board

— Presentation on its Nestle plan

— Nestle’s response

Also in this issue

Regulators

This Update in PDF