In December 2024, Hong Kong Exchange Board (HKEx) issued “Guide on Preparation of Annual Report”, which covers the following areas:
- Mandatory disclosure requirements under the Listing Rule
- Recommended disclosure in specific areas from thematic review
- Financial disclosures under prevailing requirements
1. Accounting policy information, judgements and estimates
When preparing the financial statements, issuers should put in place a systematic process (Refer to HKFRS Practice Statement 2 – Making Materiality Judgements) in assessing whether the information is material for the purposes of recognition and measurement as well as presentation and disclosure. They should revisit the assessment in each year, by providing additional disclosure, removing immaterial information and reorganising existing disclosure (where appropriate).
Accounting policy information, judgements and estimates should focus on how issuers have applied the accounting requirements according to their own facts and circumstances, which are more useful to investors than the boilerplate description that solely duplicates or summarises the accounting requirements.
2. Revenue
Revenue is a key line item in the financial statements. Issuers should disclose sufficient qualitative and quantitative information to enable investors to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with their customers. Clarity of disclosure can enhance the financial reporting integrity.
3. Business combinations
Issuers should disclose sufficient information to enable investors to evaluate the nature and financial effects of business combinations. When entering into complex transactions, the boards and their management should have more in-depth discussion with their auditors and valuers at an early stage to consider the accounting implications in order to prevent any unintended accounting errors and regulatory consequences.
4. Material intangible assets – impairment testing
The cash-generating unit (CGU) containing goodwill and intangible assets with indefinite useful lives is required to perform an annual impairment test. Issuers should ensure that the valuation techniques, financial budgets and/or key assumptions used in the test are appropriate and reasonable, and not overly optimistic having regard to historical cash flows, available market information and future prospects.
When disclosing the required quantitative inputs (e.g. budget periods, discount rates and terminal growth rates) and qualitative information of the underlying key assumptions, issuers should pay attention to the level of detail of the disclosure. Boilerplate description (e.g. the values of key assumptions are based on “past experience” and “external information sources”) is not enough, issuers should further elaborate on how the projected cash flows link with the
CGU’s latest business development (e.g. the expected new product launch date).
5. Valuation of Level 3 financial assets
Performing Level 3 valuation can be challenging. Directors are reminded of their fiduciary duties and duties of skill, care and diligence under MB Rule 3.08 (GEM Rule 5.01) that they must exercise their own judgement 15 to assess the reasonableness of the valuation techniques and underlying unobservable inputs and should not overly rely on valuers. They should obtain sufficient and timely information from investees (such as latest financial data, updates on operations and business plans, recent share transactions) for measuring fair values and provide robust disclosure on Level 3 measurement.
6. Credit risk disclosure on trade receivables
HKFRS disclosure requirements on the credit risk and expected credit losses (ECL) assessment are more objective-based. Issuers should carefully consider their circumstances and determine: (i) how much detail to disclose; (ii) how much emphasis to place on different aspects of the disclosure requirements; (iii) the appropriate level of aggregation or
disaggregation; and (iv) whether shareholders and investors need additional explanations to evaluate the quantitative information disclosed.
7. Presentation of non-GAAP measures
Issuers should follow our guidance GL103-19 (SFC) when non-GAAP measures are used as a complement to GAAP financial information in the annual report. They should take a holistic approach to ensure non-GAAP measures present a fair and balanced view of the performance, position and cash flow and are not misleading. The audit committees, as gatekeepers, should monitor the integrity of non-GAAP disclosure.
8. Disclosure of possible impact of applying a new or amended standard in issue but not yet effective
Issuers should stay alert to the changes and developments in accounting standards. Implementation of new standards is not just an accounting exercise, but is expected to have a significant impact on some issuers, particularly on their business processes, IT systems and internal controls. Issuers should carefully assess the impact and develop a detailed action plan.
Key Takeaway
- Listed Companies should follow the HKEx Guideline for preparing annual reports in order to avoid further queries from relevant regulatory authorities.
- Most of the topics from the Guide are also applicable to private companies. Finance team should be well-prepared for these topics, as they are potential queries from your auditor.
- Finance team should closely work with management and other business units for obtaining more information on non-quantitative disclosure.
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