Regulators at the Institute’s latest Annual Corporate and Regulatory Update seminar reaffirmed the key importance that they attach to companies’ disclosure standards.

Hong Kong operates a disclosure based regulatory regime. Under this model, the regulatory framework seeks to ensure that companies make full disclosure of their affairs so that investors can make informed investment decisions. This article addresses some of the key disclosure challenges highlighted by the Institute’s latest Annual Corporate and Regulatory Update (ACRU) seminar.

The business review disclosure requirements

Probably the biggest disclosure challenge facing listed issuers in Hong Kong at the moment is compliance with the business review requirement of the new Companies Ordinance. ‘The key requirement is for the business review and I would like to emphasise that this is the major change,’ said Steve Ong, Senior Vice-President, Head of Accounting Affairs, Listing Department, Hong Kong Exchanges and Clearing Ltd (HKEx), in his Session 1 presentation.

Under Section 388 of the new Companies Ordinance, companies, unless exempted, need to include a business review in the directors’ report section of their corporate reports. The requisite contents of the business review are set out in Schedule 5 of the law, and must include a number of environmental, social and governance areas, such as the company’s environmental policies and performance, and the company’s key relationships with its employees, customers and suppliers and others that have a significant impact on the company.

Depending on their year-end, Hong Kong-incorporated companies that do not fall within the reporting exemption will have to produce their first business review before the end of this year.

Perhaps not surprisingly therefore, this issue received a lot of attention at this year’s ACRU seminar.

Creating a level playing field

Since the Companies Ordinance only applies to Hong Kong-incorporated issuers, there was a danger that Hong Kong-domiciled companies would be subject to tougher disclosure requirements than those incorporated in other jurisdictions. To avoid this disparity, HKEx has proposed broadly similar disclosure requirements in Appendix 16 of the Listing Rules to bring them in line with the new Companies Ordinance and Hong Kong Financial Reporting Standards.

Mr Ong said that the goal of this exercise was ‘to ensure a level playing field’. Updating the Listing Rules to mandate the same level of disclosure seeks to ensure that all listed companies in Hong Kong, irrespective of their domicile, are subject to the same disclosure rules.

He acknowledged that some aspects of the new disclosure requirements – in particular the requirement for companies to give an indication of likely future developments in its business – may be a challenge for some companies, but referred participants to the guidance issued by the Hong Kong Institute of Certified Public Accountants (HKICPA) in this area. The HKICPA has issued its Accounting Bulletin 5: Guidance for the Preparation and Presentation of a Business Review under the Hong Kong Companies Ordinance Cap 622, which gives guiding principles for the preparation and presentation of the business review.

He also made the point that many companies are already disclosing the information included in the business review requirement. ‘Many top-tier companies in Hong Kong already do this well. I am involved with a number of disclosure awards in Hong Kong and, through the years, I have read increasingly excellent annual reports by listed companies. We don’t expect everything to be perfect in December 2015. Corporate reporting is an evolution, if you are improving year by year that is key,’ Mr Ong said.

He also urged companies not to think of the business review requirement as a compliance burden, but to bear in mind the benefits of the exercise. ‘Compliance with these new disclosure requirements should not be a tick-box exercise, the requirements are an opportunity for companies to improve their corporate governance,’ he said.

He pointed out that company secretaries will have a key role to play in ensuring compliance with the new disclosure requirements – in particular ensuring that this issue gets the attention it needs from the finance team and the board. ‘I have always been of the opinion that company secretaries have an important role to play – you are the guardian of the board of directors and a lot of CFOs don’t sit on the board,’ he said.

The danger of duplication

One concern of the market regarding the new business review requirement and the matching requirements in the Listing Rules, is the danger that companies will have to duplicate information in different parts of their annual reports. Questions raised at the ACRU seminar indicate that there is a degree of confusion in the market as to which section of the annual report should include the mandated disclosures. Many of these disclosures are typically included in the management discussion and analysis (MD&A), or the chairman’s statement sections of listed issuers’ reports. These include:

• particulars of any important events affecting the issuer which have occurred since the end of the financial year

• a description of the issuers’ principal risks and uncertainties, and

• an indication of likely future developments in its business.

Mr Ong acknowledged that ‘a lot of you are already doing this very well in your MD&A sections, and so will already be in compliance with the new rules’. He added that HKEx is flexible on this issue. ‘As long as the information is in there, we are fine. We will not dictate to the market the way to present information required under Appendix 16. The intention of the amendment to Appendix 16 is to allow flexibility for issuers such that they are allowed to have any method of presentation that is suitable to their individual needs,’ he said.

In her Session 3 presentation, Karen Ho, Deputy Principal Solicitor, Companies Registry, made it clear that the new Companies Ordinance requires Hong Kong-incorporated issuers to include the business review in the directors’ report section of their annual reports. Mr Ong confirmed that, if the information required in Appendix 16.32 and recommended in Appendix 16.52 has been disclosed in a business review in the directors’ report, no additional disclosure is required.

Disclosure scorecard

Speakers from HKEx and the Securities and Futures Commission (SFC) attending this year’s ACRU seminar highlighted both disclosure success stories and areas for improvement that have come to their attention.

In her Session 1 presentation, Dion Wong, Senior Vice-President, Compliance and Monitoring, Listing Department, HKEx, highlighted the findings of the latest HKEx review of listed companies’ annual reports – the HKEx Annual Report Review Programme 2014. She noted that the latest review saw an overall improvement in the disclosure standards of listed issuers and a reduction in cases involving possible material breaches of the Listing Rules. Moreover, she said there was evidence that issuers have considered guidance provided by HKEx via its annual reports reviews and follow-up process. However, she also highlighted areas where corporate disclosures could be improved.

Intended use of equity fundraising proceeds

Ms Wong emphasised that issuers engaged in equity fundraising need to clearly disclose their intended use of the proceeds at the time of the fundraising and report back to shareholders on how these proceeds were actually used in their annual reports.

The 2014 annual report review found that 40% of issuers provided specific details about their proposed use of the proceeds in corporate announcements, and 59% of issuers provided updates on the application of funds raised in their annual reports. While these figures were an improvement on the figures for 2013 – about 20% of issuers disclosed this information in 2013 – Ms Wong said that this is still an area requiring improvement. She urged listed issuers to:

• clearly disclose the reasons for the fundraising and the intended use of proceeds at time of fundraising, and

• provide meaningful updates in annual reports on the actual use of proceeds, including details of the application and a breakdown of how the funds were allocated among different uses.

Reliance on key customers

Another area of weakness in listed issuers’ disclosures highlighted by both HKEx and the SFC was the level of disclosure relating to key customers and their relationship with the issuer. In Session 2 of the seminar, Michael Duignan, Senior Director, Corporate Finance Division, SFC, acknowledged that in some cases customers may not wish to be identified by name in listed issuers’ reports, but companies that withhold this information from the public domain cannot then make allusions to those ‘undisclosed’ customers in investor briefings. ‘If a customer says it doesn’t want to be named, fair enough, but your chairman cannot then tell investors at a briefing about a big customer that can’t be named but whose logo is an apple with a bite out of it,’ he said.

Repeat disclosures

Both HKEx and the SFC also highlighted the dangers of making repeat disclosures. In particular, there is a danger of misleading the market where issuers make a restatement in a corporate announcement of information already available in the prospectus. Mr Duignan recommended issuers read the advice given on this issue in the latest edition of the SFC’s Corporate Regulation Newsletter. The newsletter advises companies who feel that they need to make an announcement about matters previously disclosed to clarify the extent to which the information in the announcement differs from previously disclosed information.

Quality disclosure

One issue which the SFC has been promoting for some time is the need for companies to provide figures in their profit alerts and warnings. Last year, the SFC issued guidance warning against the use of vague terms to describe changes in projected profit, such as ‘a significant increase’, ‘a material increase’, ‘an increase’, ‘a certain increase’, or ‘record a profit as compared to a loss’.

In his ACRU presentation, Mr Duignan said that there is evidence that more companies are providing more quantitative data in their profit alerts. Figure 1 shows that the number of ‘quantitative’ corporate announcements being made in Hong Kong has increased when compared with the figures for last year.

Mr Duignan emphasised that the purpose of Hong Kong’s disclosure requirements is not just to generate more disclosure, but to ensure better quality disclosure.

‘Our emphasis is on disclosure, but it goes beyond that – the objective is to have more meaningful disclosure,’ he said.


The Institute’s 16th Annual Corporate and Regulatory Update seminar took place on 3 June 2015. More photos of the event are available on the HKICS website: The second cover story this month covers other major compliance issues covered by this year’s ACRU.

The HKEx ‘Annual Report Review Programme 2014’, together with previous review reports, is available on the HKEx website: The SFC ‘Corporate Regulation Newsletter’ is available on the SFC website:


SIDEBAR: Electronic filing

Over the last decade, the Companies Registry has been transitioning from paper-based services to electronic services. A milestone was reached in March this year when it launched its full-scale electronic filing service. Wendy Ma, Deputy Registry Manager, Companies Registry, gave ACRU participants an update on what this means for Registry users.

In brief, Registry users may now submit all forms specified under the new Companies Ordinance (Cap 622) and the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap 32) and related documents to the Registrar of Companies for registration through the e-Registry, round the clock. One question in the Q&A session concluding Session 3 of the ACRU seminar, was whether the Companies Registry would adopt mandatory e-filing in the future. Ms Ma said that the Registry has no plans to make e-filing mandatory.

The new frontier in this gradual widening of the Registry’s electronic services is to make these services available via mobile devices. Ms Ma explained that company searches are already possible via a mobile device. The Company Search Mobile Service (CSMS) was released in June 2012 for searches on Company Name, Document Index and Company Particulars. The service was enhanced in December 2014 to include searches on Directors Index and Disqualification Orders Index. Further enhancements for providing all other services under the Cyber Search Centre (except screen prints and online tutorials) is under way, and aims to be ready in early 2016.