Issues in Applying New Co. Ordinance

Microsoft PowerPoint - NCL-20171021-(to-Alumni)-updatedIssues in Applying New Co. Ordinance 21 October 2017
LAM Chi Yuen Nelson CFA® charterholder FCPA(Practising) MBA MSc BBA CPA(US) CTA FCA FCCA FCPA(Aust.) FSCA
www.Facebook.com/NelsonCFA
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Impact on Financial Statements
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© 20132017 Nelson Consulting Limited 5Photo taken by Stephanie and Nelson © 2008Abu Simbel @ Egypt
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Issues in Applying New Co. Ordinance
• Impact on Financial Statements
– Adoption of SMEFRS
– Section 380: General requirements for financial statements
– Section 381: Subsidiary undertakings to be included in annual consolidated financial statements
– Section 383: Disclosure of emoluments and other matters relating to directors
– Schedule 4 and Section 387
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Company Qualifying Conditions
A. A private co. is a “small private co.”, or A private co. is the holding co. of a group of “small private companies”
Size test, meeting any 2 of the following: i. Revenue less than $100M, ii. Assets less than $100M, iii. Employee less than 100
B. An eligible private co., or An eligible private co. is the holding co. of a “group of eligible private companies”
Size test, meeting any 2 of the following: i. Revenue less than $200M, ii. Assets less than $200M, iii. Employee less than 100
75% members’ approval without any member objection
C. A "small guarantee co.“, or A guarantee co. is the holding co. of a "group of small guarantee companies"
Size test, revenue less than $25M
D. Option similar to s. 141D of Cap. 32 S. 359(1)(b)
Adoption of SMEFRS: Criteria
• Shareholder Approval
– The New CO FAQ Q7 of the Companies Registry also clarifies that:
• Sections 360(1) and (2) require a resolution passed by the members holding at least 75% of the voting rights in the company, i.e. 75% of the voting rights of all members of the company.
Source: CR website (Last revision date: 1 June 2016)
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Source: CR website as at 23 October 2015
(Withdrawn by CR from 24 October 2015)
Is it correct? Withdrawn
• The new CO (CAP 622), Section 2: body corporate ()—
(a) includes—
(b) excludes a corporation sole;
company () means—
(a) a company formed and registered under this Ordinance; or
(b) an existing company;
registered under a former Companies Ordinance
Is it correct?
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• Is there any requirement to deliver a copy of the agreement (Section 359(1)(b)(iii)) or the resolution (Sections 360(1) and (2)) to the Registrar of Companies for registration? – The New CO FAQ Q8 of the Companies Registry clarifies that:
• Yes. A company must deliver a copy of
– an agreement made for the purposes of section 359(1)(b)(iii) or
– a resolution passed for the purposes of section 360(1) or (2)
to the Registrar for registration respectively within 15 days after it is made or passed pursuant to sections 622(1)(e) and (f) of the new CO.
Section 379 and Its Implication
• Nopar or no nominal value regime (effective on 3 March 2014)
• Terminology updated to HKFRSs
– Financial statements, consolidated financial statements, statement of comprehensive income, statement of financial position …
• Section 379. Director must prepare financial statements
– Section 379(1): A company’s directors must prepare for each financial year statements that comply with sections 380 and 383.
– Section 379(2): Despite subsection (1), if the company is a holding company at the end of the financial year, the directors must instead prepare for the financial year consolidated statements that comply with sections 380, 381 and 383.
• Exemptions from preparing consolidated financial statements
– Section 379(3)(a): a wholly owned subsidiary of another body corporate
– Section 379(3)(b): if—
• a partially owned subsidiary of another body corporate;
• at least 6 months before year end, notify the members in writing of the intention not to prepare consolidated statements for that year only; and
• 3 months before year end, no member has responded a written request for the preparation of consolidated statements for that year
• Can a parent which is a wholly owned subsidiary of another body corporate prepare consolidated financial statements instead of company level financial statements? – The New CO FAQ Q13 of the Companies Registry clarifies that:
• The law does not require the wholly owned subsidiary to prepare company level financial statements and consolidated financial statements for the same financial year.
• If the holding company is a wholly owned subsidiary of another body corporate at the end of the financial year, the company is not required to prepare consolidated financial statements.
• However, the company may prepare consolidated statements so long as the consolidated statements comply with sections 380 and 383 and in every respect with the accounting requirements applicable to consolidated statements.
• In such event, the company is not required to prepare company level financial statements.
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• Can a parent which is a wholly owned subsidiary of another body corporate prepare consolidated financial statements instead of company level financial statements? – The New CO FAQ Q13 of the Companies Registry clarifies that:
• If the consolidated statements do not comply in every respect with the accounting requirements applicable to consolidated statements, then the company is required to prepare company level financial statements.
• In such event, any additional consolidated statements or consolidated financial information that the company chooses to prepare in respect of the full financial year will be regarded as “non statutory accounts” within the meaning of section 436 and the requirements in the new CO in relation to financial statements, for example, the auditing, laying, sending and filing of financial statements, apply to the company level financial statements and not the consolidated statements.
Accounting Bulletin 6 addresses section 436 (not covered today)
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– Section 379(4): If, as respects any financial statements a copy of which is laid before a company in general meeting under section 429, or sent to a member under section 430 or otherwise circulated, published or issued by the company, a director of the company fails to take all reasonable steps to secure compliance with subsection (1) or (2), the director
• commits an offence and
– Section 379(5): If, as respects any financial statements a copy of which is laid before a company in general meeting under section 429, or sent to a member under section 430 or otherwise circulated, published or issued by the company, a director of the company wilfully fails to take all reasonable steps to secure compliance with subsection (1) or (2), the director
• commits an offence and
– to imprisonment for 12 months.
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© 20132017 Nelson Consulting Limited 19Photo taken by Stephanie and Nelson © 2015Ljubljana @ Slovenia
• Section 380. General requirements for financial statements
– Legal backing to HKFRSs (with pros and cons)
– Lengthy list of disclosure in Tenth Schedule of the old CO (Cap. 32) fully deleted
• Section 380. General requirements for financial statements
– Legal backing to HKFRSs (with pros and cons)
– Lengthy list of disclosure in Tenth Schedule of the old CO (Cap. 32) fully deleted
Section 380. General requirements for financial statements
(4) The financial statements for a financial year must also comply with—
(a) any other requirements of this Ordinance in relation to the financial statements; and
(b) the accounting standards applicable to the financial statements.
Example
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• Q&A relating to consol. and co. level financial statements prepared under Part 9 of the new CO (dated 25.1.16 by HKICPA) – Topic 1 Application of section 379 – Question 1.5: Identifying the relevant
accounting standards when a holding company prepares company level financial statements in accordance with section 379(3)
• The holding company can exempt from preparation of consolidated financial statements under section 379(3), but for example, the criteria in HKFRS 10.4(a)(iv) would not be met in the following situations:
(a) the holding co. is a wholly owned subsidiary of a private HK incorporated co. which is not required to file its financial statements on public record; or
(b) the holding co. is a wholly owned subsidiary of a US parent which issues US GAAP financial statements but does not issue IFRS financial statements.
» In such cases which accounting standards are the “applicable accounting standards” for the purposes of complying with s380(4)(b) of the CO if the company follows the requirements of s379(3)?
Source: HKICPA website as at 12 April 2016
• Summary of answers: – s379 determines which type of financial statements need to be prepared
(company level or consolidated) and
– s380 then contains the “general requirements for financial statements” being the requirements for the contents of those financial statements (company level or consolidated) as are required to be prepared under s379
– (as a result) the company, as a holding company, shall account for investments in subsidiaries either at cost or in accordance with HKFRS 9 in its company level financial statements if the company does not elect to account for the investments using the equity method as permitted by paragraph 10(c) of HKAS 27 Separate Financial statements.
– In addition, as the financial statements are prepared in respect of the holding company only, the disclosures required by HKFRS 12 Disclosures of Interests in Other Entities are not applicable
– For details, please refer to original Q&A in HKICPA’s website
Source: HKICPA website as at 12 April 2016
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• However, please note that
– HKAS 1.16 states: • An entity whose financial statements comply with HKFRSs shall make
an explicit and unreserved statement of such compliance in the notes.
• An entity shall not describe financial statements as complying with HKFRSs unless they comply with all the requirements of HKFRSs.
– HKFRS for PE paragraph 3.3 states • An entity whose financial statements comply with the HKFRS for
Private Entities shall make an explicit and unreserved statement of such compliance in the notes.
• Financial statements shall not be described as complying with the HKFRS for Private Entities unless they comply with all the requirements of this HKFRS.
You make your own decision
• Section 381. Subsidiary undertakings to be included in annual consolidated financial statements – Section 381(1): Subject to subsections (2) and (3), the annual consolidated
financial statements for a financial year must include all the subsidiary undertakings of the company.
– Section 381(2): Where the company falls within the reporting exemption for the financial year, one or more subsidiary undertakings may be excluded from the annual consolidated financial statements in compliance with the accounting standards applicable to the statements.
• Section 381. Subsidiary undertakings to be included in annual consolidated financial statements – Section 381(3): Where the company does not fall within the reporting
exemption for the financial year—
(a) one subsidiary undertaking may be excluded from the annual consolidated financial statements if the inclusion of the subsidiary undertaking is not material for the purpose of giving a true and fair view of the financial position, and of the financial performance, mentioned in section 380(2)(a) and (b); and
(b) more than one subsidiary undertaking may be excluded from the annual consolidated financial statements if the inclusion of those subsidiary undertakings taken together is not material for the purpose of giving a true and fair view of the financial position, and of the financial performance, mentioned in section 380(2)(a) and (b).
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• Disclosure of emoluments and other matters relating to directors – Section 383(1) requires the information prescribed by the relevant
Regulation about the following items to be disclosed in the notes:
a. the directors’ emoluments;
b. the directors’ retirement benefits;
c. payments made or benefit provided in respect of the termination of the service of directors (in the directors or other capacity while directors);
d. loans, quasiloans and other dealings in favour of (i) directors of the company and a holding company of the company; (ii) bodies corporate controlled by such directors; (iii) entities connected with such directors;
e. material interests of directors in transactions, arrangements or contracts entered into by the company or another company in the same group of companies;
f. consideration provided to or receivable by third parties for making available the services of a person as a director or in any other capacity while director.
Section 383 and Its Implication Case
Lenovo Group Limited (incorporated in HK) Note 11a (extract) to Annual Report as at 31 March 2017
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Section 383 and Its Implication Case
China Motor Bus Company, Limited (incorporated in HK) Note 6a (extract) to Annual Report as at 30 June 2017
Schedule 4 and Section 387
• Introduce Schedule 4 to the New CO (Cap. 622)
– Part 1 (for all companies, as also relevant to and discussed in the revised SMEFRS)
– Part 2 (for companies without Reporting Exemptions)
• Schedule 4 “Accounting Disclosures” – Part 1 “Disclosures for Companies whether or not Falling within Reporting Exemption”
1. Aggregate amount of authorized loans
The financial statements for a financial year must contain, under separate headings, the aggregate amount of any outstanding loans made under the authority of sections
• 280 (i.e. exception for employee share schemes, blanket added) and
• 281 (i.e. exception for loans to employees, blanket added)
during the financial year.
2. Statement of financial position to be contained in notes to annual consolidated financial statements
(1) The annual consolidated financial statements for a financial year—
(a) must contain, in the notes to the statements, the holding company’s statement of financial position for the financial year; and
(b) must include a note disclosing the movement in the holding company’s reserves.
(2) Despite section 380(4), the holding company’s statement of financial position to be contained in the notes to the annual consolidated fin. statements for a financial year is not required to contain any notes.
(3) That statement of financial position must be in the format in which that statement would have been prepared if the holding company had not been required to prepare any annual consolidated financial statements for the financial year.
Schedule 4 and Section 387 Case
China Motor Bus Company, Limited (incorporated in HK) Note 23 (extract) to Annual Report as at 30 June 2017
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3. Subsidiary’s financial statements must contain particulars of ultimate parent undertaking
(1)This section applies if, at the end of a financial year, a company is the subsidiary of another undertaking.
(2)The company’s financial statements for the financial year must contain, in the notes to the statements—
(a) the name of the undertaking regarded by the directors as being the company’s ultimate parent undertaking; and
(b) the following information relating to that undertaking as known to the directors—
(i) if that undertaking is a body corporate, the country in which it is incorporated;
(ii) if that undertaking is not a body corporate, the address of its principal place of business.
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4. Compliance with applicable accounting standards
The financial statements for a financial year must state—
(a) whether they have been prepared in accordance with the applicable accounting standards within the meaning of section 380; and
(b) if they have not been so prepared, the particulars of, and the reasons for, any material departure from those standards.
• Schedule 4 “Accounting Disclosures” – Part 2 “Disclosures for Companies not Falling within Reporting Exemption”
1. Remuneration of auditor
(1) A company’s financial statements for a financial year must state, under a separate heading, the amount of the remuneration of the auditor.
(2) In this section—
remuneration (), in relation to an auditor of a company, includes any sum paid by the company in respect of the auditor’s expenses.
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Schedule 4 and Section 387 Case
China Motor Bus Company, Limited (incorporated in HK) Note 5b (extract) to Annual Report as at 30 June 2017
OPERATING PROFIT Operating profit is arrived at
2017 2016 $000’s $000’s
after charging:
(b) Other items: Auditor’s remuneration – audit services 3,896 3,793 – tax services 304 294 – other auditrelated services 555 1,125
Schedule 4 and Section 387 Example
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• Section 387. Statement of financial position to be approved and signed (1) A statement of financial position that forms part of any financial
statements—
(b) must be signed—
(i) by 2 directors on the directors’ behalf; or
(ii) in the case of a company having only one director, by the director.
(2) Every copy of a statement of financial position that forms part of any financial statements laid before a company in general meeting under section 429, or sent to a member under section 430 or otherwise circulated, published or issued by the company, must state the name of the person who signed the statement on the directors’ behalf.
• Section 387. Statement of financial position to be approved and signed (3) If, as respects any financial statements a copy of which is circulated,
published or issued by the company, subsection (1) is contravened,
• the company, and every responsible person of the company, commit an offence, and
• each is liable to a fine at level 4 (i.e. HK$25,000, blanket added).
(4) If subsection (2) is contravened,
Today’s Agenda
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© 20132017 Nelson Consulting Limited 47Photo taken by Stephanie and Nelson © 2016Strokkur of Golden Circle @ Iceland
• Section 391. Directors’ report to be approved and signed (1) A directors’ report—
(a) must be approved by the directors; and
(b) must be signed on the directors’ behalf by a director or by the company secretary.
(2) Every copy of a directors’ report laid before a company in general meeting under section 429, or sent to a member under section 430 or otherwise circulated, published or issued by the company, must state the name of the person who signed the report on the directors’ behalf.
Impact on Directors’ Report
• Section 391. Directors’ report to be approved and signed (3) If, as respects any directors’ report a copy of which is circulated, published
or issued by the company, subsection (1) is contravened,
(4) If subsection (2) is contravened,
• In addition to section 391, which sets out the requirements relating to the approval and signature of the directors’ report, the disclosure requirements for the directors’ report under the new CO (Cap. 622) are contained in the following locations:
a. Sections 388 to 391 and 543(2)
b. Schedule 5 “Contents of Directors' Report: Business Review” (unless exempt under section 388(3)); and
c. Companies (Directors’ Report) Regulation (Cap. 622D)
• Changes in the directors’ report summarised as follows:
– There are new provisions requiring the directors’ report to contain the following information –
• a business review (discussed later);
• equitylinked agreements entered into by the company (section 6 of Cap. 622D), if any;
• a summary of the reasons relating to the affairs of the company given by a director who has resigned or refused to stand for reelection (section 8 of Cap. 622D) (except for companies falling within the reporting exemption), if any; and
• permitted indemnity provision for the benefit of directors (section 470 and section 9 of Cap. 622D), if any.
CAP 622D Co. (Directors’ Report) Reg.
• CAP 622D Companies (Directors’ Report) Regulation contains – Section 1 Commencement
– Section 2 Interpretation
– Section 7 Recommended dividend
– Section 9 Permitted indemnity provision
– Section 10 Material interests in transaction, arrangement or contract
CAP 622D Co. (Directors’ Report) Reg. Case
Lenovo Group Limited (incorporated in HK) Directors’ Report as at 31 March 2017
– EQUITYLINKED AGREEMENTS
• No equitylinked agreements were entered by the Company during the year or subsisted at the end of the year save for the “LongTerm Incentive Program” and the “Employee Share Purchase Plan” as disclosed in the Compensation Committee Report and note 29 to the financial statements.
CAP 622D Co. (Directors’ Report) Reg. Case
Lenovo Group Limited (incorporated in HK) Directors’ Report as at 31 March 2017
– DIRECTORS’ INDEMNITIES AND INSURANCE
• As permitted by the articles of association of the Company, a director or a former director of the Company may be indemnified out of the Company’s assets against any liability incurred by the director to a person other than the Company or an associated company of the Company that attaches to such director in his or her capacity as a director of the Company, to the extent permitted by law.
• Such permitted indemnity provision is in force throughout the year and up to the date of this report.
• The Company has also taken out and maintained directors’ and officers’ liability insurance throughout the year, which provides appropriate cover for certain legal actions brought against its directors and officers.
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• Indemnity of directors – A permitted indemnity provision (as defined in section 469 of the HK
Companies Ordinance) for the benefit of the directors of the company is currently in force and was in force throughout the year. [KPMG (2015)]
Example
– The amount of donations made by the company and its subsidiary undertakings which are exempted from disclosure is raised to $10,000 from $1,000 in section 129D(3)(e) of the old Companies Ordinance (Cap. 32) (“the old Ordinance”) (section 4 of Cap. 622D); and
– The requirement under section 129D(3)(j) of the old Ordinance is modified, (refer to the following slides).
– The disclosure of information on material interests of directors in contracts of significance entered into by a company or a specified undertaking of the company is expanded to cover
• transactions and arrangements in addition to contracts and,
• where the company is a public company, material interests of a connected entity of a director of the company.
– “Specified undertaking” means
» a parent company or subsidiary undertaking of the company, or
» a subsidiary undertaking of the company’s parent company.
– For material interests of directors in transactions, arrangements and contracts entered into by a specified undertaking of a company,
• the information must be contained in the directors’ report of the company.
– For transactions, arrangements and contracts entered into by the company,
• disclosure of the information is required to be made in the notes to financial statements instead (section 383 and section 22 of Cap. 622G).
– Disclosure of significant transactions, arrangements or contracts entered into by the company, where a director has a material interest, has been moved to the financial statements and will therefore be subject to audit
– The names of all the directors in the group must be disclosed in a consolidated directors’ report, and the disclosure should extend to the date of approving the directors’ report
– For a company which is a holding company and an annual consolidated financial statements and a consolidated directors’ report are prepared under section 388(2), the consolidated directors’ report must contain the name of every person who was a director
• of the company or
(i) during the financial year; or
(ii) during the period beginning with the end of the financial year and ending on the date of the report.
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– Certain disclosure requirements have been dropped from the directors’ report (as moved to notes to financial statements)
– Unless the company is exempt, a new “business review” section must be included in the directors’ report
Today’s Agenda
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Business Review – Exemption
• Section 388(3) sets out 3 situations under which a company is exempt from including a business review in the directors' report in compliance with Schedule 5. These are: a. the company falls within the reporting exemption;
b. the company is a wholly owned subsidiary of another body corporate in the financial year; or
c. the company is a private company that does not fall within the reporting exemption for the financial year, and a special resolution is passed by members to the effect that the company is not to prepare a business review required by that Schedule for the financial year.
• Section 388(4) requires that the resolution must be passed at least 6 months before the year end
• Section 622(2) requires the delivery of a copy of the resolution to the Companies Registrar for registration within 15 days after it is made or passed
Business Review
Business Review – Contents
• Schedule 5 “Contents of Directors’ Report: Business Review”: 1. A directors’ report for a financial year must contain a business review that
consists of—
a. a fair review of the company’s business;
b. a description of the principal risks and uncertainties facing the company;
c. particulars of important events affecting the company that have occurred since the end of the financial year; and
d. an indication of likely future development in the company’s business.
Business Review
Business Review – Contents
• Schedule 5 “Contents of Directors’ Report: Business Review”: 2. To the extent necessary for an understanding of the development,
performance or position of the company’s business, a business review must include
a. an analysis using financial key performance indicators;
– key performance indicators (, KPIs) means factors by reference to which the development, performance or position of the company’s business can be measured effectively.
b. a discussion on—
i. the company’s environmental policies and performance; and
ii. the company’s compliance with the relevant laws and regulations that have a significant impact on the company; and
c. an account of the company’s key relationships with its employees, customers and suppliers and others that have a significant impact on the company and on which the company’s success depends.
Business Review
Business Review and AG 5
• AG 5.15 Guiding Principles:
– Business reviews prepared and presented for the purposes of compliance with Schedule 5 should be consistent with the following guiding principles:
(a) The review should set out an analysis of the business through the eyes of the board of directors
(b) The scope of the review should be consistent with the scope of the financial statements
(c) The review should complement as well as supplement the financial statements, in order to enhance the overall corporate disclosure
(d) The review should be understandable
(e) The review should be balanced and neutral, dealing evenhandedly with both good and bad aspects
Business Review
• AG 5.31 A fair review of the reporting entity’s business:
– In order to satisfy the minimum requirements for a fair review of the reporting entity’s business, the review should include as a minimum:
(a) a description of the business and the external environment in which the reporting entity operates, as context for the directors’ discussion and analysis;
(b) an analysis of the performance of the reporting entity for the year under review and the financial position of the reporting entity as at the end of that period using financial KPIs which complement or supplement the financial statements;
(c) a discussion of the reporting entity’s environmental policies and performance and the reporting entity’s compliance with the relevant laws and regulations that have a significant impact on the entity; and
(d) an account of the reporting entity’s key relationships with its employees, customers and suppliers and others that have a significant impact on the entity and on which the entity’s success depends.
Business Review
• AG 5.41 KPIs (Key Performance Indicators):
– The KPIs disclosed should be those that the directors judge are effective in measuring the delivery of their strategies and managing their business.
– Regular measurement using KPIs enables a reporting entity to set and communicate its performance targets and to measure whether it is achieving them.
Business Review
• AG 5.42 KPIs (Key Performance Indicators): – KPIs should be presented in a way which is understandable to the user.
– To achieve this objective it may be necessary for the business review to include information which: • explains the calculation methods; • discloses the source of underlying data and, where relevant, explains the
assumptions;
• highlights where information from the financial statements has been adjusted for the purposes of computing a KPI, and provides a reconciliation;
• discloses corresponding amounts for the financial year immediately preceding the current year where available; and/or
• identifies and explains any significant changes to the calculation method used to compute the KPIs compared to previous financial years, including significant changes in the underlying accounting policies adopted in the financial statements.
Business Review
• AG 6.IG7: A number of economic measures exist that are commonly used by companies in order to assess a company’s ability to create value over time, and which are likely to be considered a KPI. These include the following example:
– IG Example 1: Return on capital employed (ROCE)
• AG 6.IG8: In addition, directors often supplement these with other measures common to their industry to monitor their long term objectives around market positioning and progress towards stated objectives. The following examples are illustrated in this Implementation Guidance:
– IG Example 2: Market share
– IG Example 3: Average revenue per user (customer)
– IG Example 4: Sales per square foot
– IG Example 5: Percentage of revenue from new products
– IG Example 6: Cost per unit sold
– IG Example 7: Economic capital
– IG Example 8: Cash conversion rate
Example
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Issues in Applying New CO (Cap. 622) 21 October 2017
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Issues in Applying New Co. Ordinance

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