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Review of Disclosure in Issuers' Annual Reports

Written by: Mr. Stanley Chan - Senior Risk Consultant

In January 2017, the Stock Exchange of Hong Kong Limited (“the Exchange”) published a report on the findings and recommendations  in relation to the review of issuers’ annual reports for the financial year ended between January and December 2015. The Exchange performed such review with a focus on the issuers’ compliance with the listing rules, corporate conduct and disclosure of material events and developments. The Exchange aims to improve transparency and promote a fair, orderly and informed market through the release of its findings and recommendations. Some of the major issues are highlighted as follows:

Business review in management discussion and analysis section
The Exchange assessed whether the issuers’ business review sections complied with the listing rules and provided sufficient information for investors to make a reasonable assessment of their businesses and financial performance. However, the Exchange found that in many cases the disclosures concerning the following issues were too generic, as explained below:

(a) On principal risks and uncertainties:
Risk exposures to areas such as exchange rate fluctuations, industry competition, changes in the government policies, and reliance on major customers or suppliers, were generally discussed by issuers in their annual reports. However, most of them did not elaborate on how these risks were related to (or would affect) their business operations and the potential impact. They also failed to provide meaningful information about their risk management policies.

It is recommended that information regarding how the major risk areas would affect business operations, their potential financial impact and, the measures taken to manage the risks should be disclosed.

(b) On environmental policies and compliance with relevant laws and regulations:
A vast majority of issuers confirmed that they had complied with the relevant laws and regulations, but failed to explain whether and how the laws and regulations would have a material implication or impact on their business operations.

The Exchange suggests that the issuers should include more detailed disclosures, including whether and how the laws and regulations in question would have a material implication or impact on their operations and, the historical compliance record and details of the non-compliance.


Continuing connected transactions
According to the listing rules, an issuer must report its continuing connected transactions in the annual report. It must also confirm whether its related party transactions as disclosed in the financial statements were connected transactions and whether these transactions complied with the connected transaction requirements. Besides, independent directors must also confirm whether such transactions were made (i) on fair and reasonable terms and in the interests of the issuers’ shareholders as a whole; (ii) on normal or better commercial terms; and (iii) in the issuer’s ordinary and usual course of business. The Exchange found that the disclosure in this aspect is better than the others and a vast majority of issuers have complied with the above disclosure requirements.

The Exchange reminds the issuers that they should provide material and relevant information about their financial results and position on the annual report, and assist investors to assess their past performance and future prospects. Thus, the disclosure in annual reports should be clear, straightforward, providing a qualitative analysis that complements and explains quantitative information in the related financial statements. They should strike a balance on the discussion of all major aspects of the issuers’ businesses, including both positive and negative circumstances.

Review of Disclosure in Issuers' Annual Reports to Monitor Rule Compliance Report 2016, The Stock Exchange of Hong Kong Limited, January 2017.


If there are any aspects which we may assist, please do not hesitate to contact:

Managing Partner - Mr. Roy Lo
roy.lo@shinewing.hk (Tel. 3583 8048) or

Senior Risk Manager - Ms. Gloria So
gloria.so@shinewing.hk (Tel. 3583 8517)


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