A number of omitted disclosures were identified by the review, but in the view of the Exchange, they were not material to the financial statements as a whole and the Exchange obtained confirmation from issuers that the required information would be provided in future financial reports.

The review in the current period included focuses on the following themes:

• goodwill and intangible asset accounting
• telecommunications and internet companies
• non-IFRS/HKAS financial information.

Findings and recommendations from the review include:

• Issuers are generally still not forthcoming in their explanation of significant events and transactions in their annual and interim reports, such as required in interim reports by IAS/HKAS 34 Interim Financial Reporting
• Issuers should familiarise themselves with IFRS 3/HKFRS 3 Business Combinations when carrying out acquisitions of businesses or assets to avoid inappropriate application of the standard
• Issuers should improve and further enhance their disclosures relating to goodwill and intangible assets and management should ensure that the assumptions for growth rates applied in their discounted cash flows when determining the recoverable amount under IAS/HKAS 36 Impairment of Assets are achievable over the period under consideration
• Issuers should follow good practices when providing non-IFRS/HKFRS financial information to ensure that such information is clearly distinguished from the financial information prepared in accordance with accounting standards.

The Exchange did not follow up on these findings but "encourages directors and other persons responsible for financial reporting to take note of the matters discussed in the report, in particular the requirements of the Listing Rules, accounting standards and other regulatory disclosure requirements."

Click for press release (link to HKEx website).

The HKEx listing rules require an applicant for listing on the exchange to have a trading record with certain levels of profitability in the preceding three years.  This trading record is required to exclude any income or loss generated by activities outside the ordinary and usual course of its business.

The guidance letter notes the following concerns of the HKEx:

We consider that the sales of biological assets/ agricultural produce are the principal activities in the ordinary and usual course of business of an applicant which engages in agricultural activities. In addition, biological assets are subject to inherent risks and their valuation is usually subject to higher uncertainty due to complex and not easily verifiable assumptions adopted.

Hong Kong Accounting Standard HKAS 41 Agriculture (equivalent to IAS 41 Agriculture) generally requires a biological asset to be measured at fair value less cost to sell.  For the purposes of seeking a listing, entities will not be able to rely on unrealised agricultural gains recognised in applying HKAS 41 in meeting the trading record requirements.

The measurement of agricultural assets based on their fair values is a controversial topic in Asia, and efforts by various standard setters, such as the Malaysian Accounting Standards Board (MASB), led to the IASB taking on a narrow scope project on the treatment of 'bearer biological assets' such as fruit trees and vineyards under IAS 41.  An exposure draft is expected from the IASB during 2013.

Due to their nature, increases in the fair value of bearer biological assets would only be realised on sale of the operation (as for instance a fruit tree produces fruit each year which can be sold, but any underlying value in the tree itself is unrealised).  Changes in value of the bearer biological assets would be excluded from the trading record test under the HKEx guidance and may be have a large impact on affected entities, particularly if the entity's bearer biological assets are mature and the amount of produce remains relatively constant in both volume and realised price.

Click for access to the HKEx guidance note (link to HKEx website).

Amendments to HKFRS 7 on disclosures about financial instruments

In March 2009, the Hong Kong Institute of Certified Public Accountants (HKICPA) issued amendments to HKFRS 7 Financial Instruments: Disclosures – Improving Disclosures about Financial Instruments. The amendments are identical to the amendments to IFRS 7 Financial Instruments: Disclosures, also issued in March.

The disclosures required by the amendments are classified using a fair value hierarchy that reflects the significance of the inputs used in making the measurements. The following three-level hierarchy is introduced:

• Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities
• Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e., as prices) or indirectly (i.e., derived from prices).
• Level 3: Inputs for the asset or liability that are not based on observable market data (unobservable inputs).

The amendments also require entities to provide additional disclosures about the relative reliability of fair value measurements and additional disclosures are required for fair value measurements in Level 3 of the fair value hierarchy. In addition, the amendments clarify and enhance the existing requirements for the disclosure of liquidity risk.

The amendments to HKFRS 7 apply for annual periods beginning on or after 1 January 2009. However, an entity is not required to provide comparative disclosures in the first year of application. Click here to access Update No. 62 to the Member's Handbook on the HKICPA website which contains the detailed text of the amendment.

Amendments to HKAS 39 and HK(IFRIC)-Int 9 on embedded derivatives

In March 2009, the HKICPA issued amendments to HK(IFRIC)-Int 9 Reassessment of Embedded Derivatives and HKAS 39 Financial Instruments: Recognition and Measurement – Embedded Derivatives. The amendments are identical to the amendments to IAS 39 Financial Instruments: Recognition and Measurement and IFRIC 9 Reassessment of Embedded Derivatives also issued in March 2009.

The amendments clarify the accounting treatment of embedded derivatives for entities that make use of the reclassification amendment issued in October 2008 – which is that on reclassification of a financial asset out of the 'fair value through profit or loss' category all embedded derivatives have to be assessed and, if necessary, separately accounted for.

The amendments set out in Embedded Derivatives apply retrospectively and are required to be applied for annual periods ending on or after 30 June 2009.

Update on convergence of CASs and HKFRSs

In December 2007, the HKICPA signed Joint Declarations with the China Accounting Standards Committee and the Chinese Auditing Standards Board in relation to the financial reporting and auditing standards in Hong Kong and the People's Republic of China. In March 2009, the HKICPA issued an update on the current status of convergence of China Accounting Standards for Business Enterprises (ASBEs, also known as the new Chinese Accounting Standards (CASs)) and Hong Kong Financial Reporting Standards (HKFRSs).

Click here to access the Update Report (Update 1 March 2009) on the current status of convergence as at 31 December 2008 on the HKICPA website. The report is in Chinese. An English translation of the update report will be posted on the Institute's website soon.

Second issue of HKICPA financial reporting and audit alerts

In the February 2009 version of Track Changes, we reported that the Standards and Quality division of the HKICPA will issue a series of alerts for its members highlighting topical financial reporting and auditing issues that should be given particular attention. The first alert was issued last month and dealt with key issues in applying HKFRS 7 Financial Instruments: Disclosures. In March 2009, the HKICPA issued a second alert to remind members who are preparers of financial statements or auditors of financial statements of the importance of carrying out an appropriate assessment of an entity's ability to continue as a going concern.

In the context of the current global financial crisis it is clear that the judgement that management, those charged with governance and auditors must make on whether an entity is a going concern is emerging as a highly sensitive issue. Accordingly, addressing these challenges early in the process of the preparation of annual reports and financial statements and the audit are important to help avoid last minute problems or surprises that may unnecessarily unsettle investors, lenders regulators and analysts. The HKICPA strongly recommends that HKAS 1 (revised) Presentation of Financial Statements and HKSA 570 Going Concern are read carefully.

Click here to access Issue 2, Going concern – Assessing an entity's ability to continue as a going concern on the HKICPA website.

They would not be required to be audited, but would have to include certain key information, including:

• A condensed consolidated income statement, with comparatives;
• A condensed consolidated balance sheet, with comparatives;
• A condensed consolidated cash flow statement, with comparatives;
• A concise and fair business review covering:
  • (i) a review of significant developments of the business of the listed issuer and its subsidiaries during the financial period and of the financial position of the group at the end of the period;
  • (ii) details of important events and transactions affecting the Group which have occurred between the end of the financial period and the date the report is released i.e. details of significant post balance sheet events; and
  • (iii) an indication of future developments in the business of the Group, including prospects for the current financial year.

The paper sets out HKEx's proposals to:

• Shorten the half-year and annual reporting deadlines for Main Board issuers from three months to two months, starting wtih periods ending on or after 30 June 2008 (two years later for small listed companies).
• Introduce mandatory quarterly reporting for Main Board issuers. Quarterly reporting has been a recommended practice since 2005, starting wtih quarterly periods ending on or after 30 September 2008 (two years later for small listed companies). See below for details.
• Align the GEM quarterly reporting requirements with the proposed new Main Board requirements, effective for GEM issuers' three months quarterly accounting periods ending on or after 30 September 2010.

Responses are requested by 5 November 2007 via a Questionnaire (DOC 230k) that accompanies the consultation paper (PDF 248k).

The goal is to achieve convergence "as far as practicable". In recent years most standards are nearly identical, and in most cases compliance with the Hong Kong standard will ensure compliance with the relevant IFRS. Each Hong Kong Statement of Standard Accounting Practice (SSAP) contains a section explaining how it relates to the IFRS dealing with the same topic.

Hong Kong standards will be restructured to coordinate better with IFRSs. SSAPs will be renamed as Hong Kong Accounting Standards (HKASs), and their numbering will be aligned with the IASs. Just as new IASB standards are known as International Financial Reporting Standards, so new HK standards will be known as Hong Kong Financial Reporting Standards (HKFRSs). FASC interpretations will be similarly reorganised to conform to the IASB structure.