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Questions and Answers relating to consolidated and company level financial statements prepared under Part 9 of the the new Companies Ordinance (Cap. 622)
These Questions and Answers ("Q&As") have been developed by the Institute's Companies Ordinance Application Issues (Financial Reporting) Working Group (Working Group) and are endorsed by the Institute's Financial Reporting Standards Committee (FRSC). These Q&As will be updated from time to time to provide guidance on emerging financial reporting related application issues on the Hong Kong Companies Ordinance (Cap.622).
These Q&As have been developed by the Working Group to cover a range of issues in relation to the preparation of consolidated and company-level financial statements that may arise as companies adopt the requirements of Part 9 for the first time i.e. in financial statements for financial years beginning on or after 3 March 2014 (such as for the year ended 31 December 2015). The intention is to provide certainty on the application of the requirements of the Hong Kong Companies Ordinance and their interaction with certain requirements of HKFRSs.
These Q&As are non-mandatory in nature and intended for general guidance only. Users of these Q&As should consider taking their own legal advice if in doubt as to their obligations under the Hong Kong Companies Ordinance.
The Institute, the FRSC and the Working Group do not accept responsibility or liability, and disclaim all responsibility and liability, in respect of the Q&As and any consequences that may arise from any person acting or refraining from action as a result of any materials in the Q&As.
All references to Parts, Divisions, Sub-divisions, Schedules and sections in the questions and answers are to the new CO, unless otherwise indicated.
Last revision date: 19 June 2015
Q1. | Question 1.1: Whether consolidated financial statements are required when a holding company does not have any material subsidiaries If a reporting entity has subsidiaries but none of its subsidiaries are material is it still necessary to prepare consolidated financial statements? |
Answer
It depends. The Companies Registry’s FAQ confirms that if all of the company’s subsidiaries are collectively immaterial in accordance with section 381(3) then the company is not required to comply with section 379(2) (preparation of consolidated financial statements). In order for this to be the case when the holding company has more than one subsidiary, then the company’s subsidiaries must be immaterial when taken together in accordance with section 381(3)(b). It is not sufficient for each subsidiary to be individually judged to be immaterial.
Q2. | Question 1.2: Application of section 379 to holding companies which are wholly owned subsidiaries of another body corporate If the reporting entity is a wholly owned subsidiary of another body corporate but chooses to prepare consolidated financial statements will this satisfy section 379 of the CO? |
Answer
The requirement to prepare either company-level or consolidated financial statements is set out in section 379 of the CO. The Companies Registry’s FAQ clarifies that the intention of sections 379(2) and 379(3) is as follows:
(a) If a holding company is required to prepare consolidated financial statements then it is not required to prepare company-level financial statements; and
(b) If a holding company is a wholly owned subsidiary of another body corporate (or a partially-owned subsidiary and its shareholders do not object to the preparation of company-level financial statements) then the company is not required to prepare consolidated financial statements.
(c) A wholly owned subsidiary of another body corporate may prepare annual consolidated financial statements so long as the annual consolidated financial statements comply with sections 380 and 383 and in every respect with the requirements applicable to annual consolidated financial statements, in which event no company-level financial statements are required to be prepared by it.
(d) However, if the annual consolidated financial statements do not comply in every respect with the requirements applicable to annual consolidated financial statements, then the wholly owned subsidiary should prepare company-level financial statements for the purposes of compliance with section 379(1) and should regard any additional consolidated financial statements or consolidated financial information which it chooses to prepare in respect of the full financial year as “non statutory accounts” within the meaning of section 436. Further guidance on “non statutory accounts” can be found in Accounting Bulletin 6 issued by the HKICPA.
Q3. | Question 1.3: Application of section 379 when the holding company was a wholly owned subsidiary of another body corporate for only part of the financial year If a holding company is wholly owned at the end of the year but was not wholly owned throughout the whole of the year is it required to prepare consolidated financial statements under the CO? [UPDATED] |
Answer
The requirement to prepare consolidated financial statements set out in section 379(2) applies to companies which are holding companies as at the end of the year. Section 379(3), as amended by the Companies (Amendment) (No. 2) Ordinance 2018 confirms that the holding company should be a wholly owned subsidiary of another body corporate at the end of the financial year. In practice this means that:
(a) If the company is a wholly owned subsidiary of another body corporate at the end of the financial year then it can prepare company level financial statements to satisfy section 379(1) as per section 379(3)(a);
(b) If the company is not a wholly owned subsidiary of another body corporate at the end of the financial year then it must prepare consolidated financial statements in order to satisfy section 379(2) unless it is a partially owned subsidiary of another body corporate at the year-end date and the requirements of sections 379(3)(b) or 379(3)(c) have been satisfied in respect of notifying the shareholders with none of them objecting or obtaining all members' agreement in writing.
So far as compliance with section 379 is concerned, it is irrelevant whether or not the company was wholly owned or partially owned at any other time in the financial year.
Q4. | Question 1.4: Consequences of the directors of a partially owned subsidiary of another body corporate missing the “six months before the year-end” deadline Section 379(3)(b) requires the directors of a partially owned subsidiary of another body corporate to notify members in writing at least 6 months before the end of the financial year if they do not intend to prepare consolidated financial statements and to allow a period for members to object. What should the directors and members do if the directors miss this deadline but the members still wish to support the directors’ intentions not to prepare consolidated financial statements? [UPDATED] |
Answer
Before 1 February 2019, if the directors miss the “six months before the year-end” deadline, then they must comply with the full requirements for that financial year i.e. they must prepare consolidated financial statements or seek legal advice on the consequences of failing to comply with the relevant statutory requirements. Failure to meet the six months deadline cannot be excused by the members as this is a statutory requirement.
After 1 February 2019, if the directors miss the "six months before the year-end" deadline under section 379(3)(b), the company is still entitled to the exemption if all the members agree in writing before the year-end that the company will not prepare consolidated financial statements (section 379(3)(c)).
Failing to meet this deadline in one financial year does not preclude the directors from taking steps to meet it in good time for the next financial year. However, it should be noted that the notification that is required under section 379(3)(b) and the agreement in writing that is required under section 379(3)(c) in order to claim exemption from the preparation of consolidated financial statements can only apply to one financial year. Therefore, every year either a fresh notification no later than 6 months before the end of the year or an agreement in writing is required if the directors are seeking to take advantage of section 379(3)(b) or section 379(3)(c) respectively.
Q5. | Question 1.5: Identifying the relevant accounting standards when a holding company prepares company level financial statements in accordance with section 379(3) As discussed in questions 1.2 to 1.4, section 379(3) of the CO states that section 379(2) (being the requirement to prepare consolidated financial statements and the exemption from preparing company level financial statements) does not apply to a holding company in the following cases: “(a) if the company is a wholly owned subsidiary of another body corporate at the end of the financial year; or (b) if— (i) the company is a partially owned subsidiary of another body corporate at the end of the financial year; (ii) at least 6 months before the end of the financial year, the directors notify the members in writing of the directors’ intention not to prepare consolidated statements for the financial year, and the notification does not relate to any other financial year; and (iii) as at a date falling 3 months before the end of the financial year, no member has responded to the notification by giving the directors a written request for the preparation of consolidated statements for the financial year; or (c) if— (i) the company is a partially owned subsidiary of another body corporate at the end of the financial year; and (ii) all members agree in writing before the end of the financial year that consolidated statements will not be prepared for the financial year, and the agreement does not relate to any other financial year. Paragraph 4(a) of HKFRS 10 Consolidated Financial Statements also sets out exemption criteria in respect of which entities are exempt from preparing consolidated financial statements. The criteria set out in paragraphs 4(a)(i)-(iii) of HKFRS 10 are typically met by any intermediate holding company which satisfies s379(3) of the CO. However, the criteria set out in paragraph 4(a)(iv) of HKFRS 10, which are that the company’s ultimate or any intermediate parent produces consolidated financial statements that are available for public use and comply with HKFRSs or IFRSs, may, or may not, be met depending on the situation of the company’s parent entity For example, the criteria in HKFRS 10.4(a)(iv) would not be met in the following situations: (a) the company is a wholly owned subsidiary of a private Hong Kong incorporated company which is not required to file its financial statements on public record; or (b) the company 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)? [UPDATED] |
Answer
As explained in the answers to questions 1.2 and 1.3 above, section 379 of the CO is explicit on which companies should prepare company level financial statements and which should prepare consolidated financial statements and these requirements take precedence over s380. That is, 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.
On this basis, the “accounting standards applicable to the financial statements” referred to in s380(4)(b) are those relevant to the type of financial statements (company level or consolidated) required by s379. This is supported by the definition of “accounting standards applicable to the financial statements” set out in s357(4)(a):
“a reference to accounting standards applicable to any financial statements is a reference to accounting standards as are, in accordance with their terms, relevant to the company’s circumstances and to the financial statements”.
This means that 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 applicable1.
In the case of a holding company preparing company level financial statements to satisfy section 379(1), the statement of compliance included in the financial statements in accordance with section 4 of Schedule 4 to the CO and paragraph 16 of HKAS 1 Presentation of Financial Statements should clearly state that the financial statements comply with the accounting standards applicable to the company level financial statements only. For the avoidance of doubt, it is also advisable for the statement of compliance to explain why the company is not required to prepare consolidated financial statements and the disclosures required by HKFRS 12 are not made1 .
For example, the financial statements could include the following wording as the statement of compliance in the basis of preparation note (e.g. which is typically disclosed as note 1 to the financial statements):
Statement of compliance and basis of preparation
For the purposes of compliance with sections 379 and 380 of the Hong Kong Companies Ordinance (Cap. 622), these financial statements have been prepared to present a true and fair view of the financial position and financial performance of the company only. Consequently, they have been prepared in accordance with all applicable Hong Kong Financial Reporting Standards (HKFRSs, which term collectively includes Hong Kong Accounting Standards (HKASs) and Interpretations) issued by the Hong Kong Institute of Certified Public Accountants, accounting principles generally accepted in Hong Kong and the requirements of the Hong Kong Companies Ordinance (Cap. 622) that are relevant to the preparation of company level financial statements by an intermediate parent company.
[As the company is a holding company that is a wholly owned subsidiary of another body corporate, it satisfies the exemption criteria set out in section 379(3)(a) of the Hong Kong Companies Ordinance (Cap. 622), and is therefore not required to prepare consolidated financial statements.] OR [As the company is a holding company that is a partially owned subsidiary of another body corporate and has satisfied the exemption criteria set out in section 379(3)(b) of the Hong Kong Companies Ordinance (Cap. 622), it is not required to prepare consolidated financial statements].
Given the above, these financial statements are not prepared for the purposes of compliance with HKFRS 10, Consolidated Financial Statements, so far as the preparation of consolidated financial statements is concerned. As a consequence, the financial statements do not give all the information required by HKFRS 10 about the economic activities of the group of which the company is the parent. Furthermore, as these financial statements are prepared in respect of the company only, HKFRS 12, Disclosures of Interests in Other Entities, does not apply to the financial statements1 .
The measurement basis used in the preparation of the financial statements is … [continue with the normal basis of preparation note]
Note that the illustrative wording directly above is only applicable if (a) the company falls within s379(3) of the CO; and (b) the company has complied with those HKFRSs which are applicable to the preparation of company level financial statements. It should be noted that if the company fails to prepare consolidated financial statements when required to do so under s379 and/or the financial statements that it prepares fail to comply with sections 380, 381(if applicable) or 383, then each director may be held to have committed an offence. Specifically;
• s379(4) states that a director has committed an offence and is liable to a fine of $300,000 if the director fails to take all reasonable steps to secure compliance with these sections; and
• s379(5) states a director has committed an offence and is liable to a fine of $300,000 and imprisonment for 12 months if the director wilfully fails to take all reasonable steps to secure compliance with these sections.
It should also be noted that the above approach to the statement of compliance is applicable only in the circumstances when the requirements of section 379 of the CO to prepare company level financial statements take precedence over the requirements of HKFRS 10.4(a). It is not expected that analogies to this guidance may be drawn to justify other departures from the requirements of HKFRS, given the requirements of section 380(4)(b) of the CO and paragraphs 15 to 24 of HKAS 1.
Implications for the auditor’s report
Section 406(1) requires the auditor to state the auditor’s opinion on the following matters:
(a) whether the financial statements have been properly prepared in compliance with the CO; and
(b) in particular, whether the financial statements –
(i) in the case of annual financial statements of a company that does not fall within the reporting exemption for the financial year, give a true and fair view of the financial position and financial performance of the company as required by section 380; or
(ii) in the case of annual consolidated financial statements of a company that does not fall within the reporting exemption for the financial year, give a true and fair view of the financial position and financial performance of the company and all the subsidiary undertakings as required by section 380.
Therefore, although there may appear to be a difference in the criteria between HKFRS 10.4(a) and s379(3) as to which entities should prepare consolidated financial statements, it follows from s406(1) that it is not necessary for the auditor to qualify the auditor’s report on the financial statements of a Hong Kong incorporated company for non compliance with HKFRS 10 in this specific situation if all of the following conditions are met:
(a) the company falls within s379(3) of the CO and is therefore not required by the CO to prepare consolidated financial statements;
(b) the company has followed the requirements of s379(3) and has therefore prepared company level financial statements; and
(c) those company level financial statements comply with those HKFRSs which are applicable to the preparation of company level financial statements, as well as all other requirements of the CO relating to the contents of company level financial statements as set out in sections 380 and 383.
Consistent with this approach, an example unqualified auditor’s report under s405 of the CO would be as follows:
Independent auditor’s report to the members of [name of company]
(incorporated in Hong Kong with limited liability)
We have audited the financial statements of [name of company] (“the company”) set out on pages ........ to ........, which comprise the company’s statement of financial position as at [reporting date], the company’s statement of profit or loss and other comprehensive income, statement of changes in equity and cash flow statement for the year then ended and a summary of significant accounting policies and other explanatory information.
Directors’ responsibility for the financial statements
The directors of the company are responsible for the preparation of financial statements that give a true and fair view in accordance with applicable Hong Kong Financial Reporting Standards issued by the HKICPA that are relevant to these financial statements and the Hong Kong Companies Ordinance and for such internal control as the directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.
Auditor’s responsibility
Our responsibility is to express an opinion on these financial statements based on our audit. This report is made solely to you, as a body, in accordance with section 405 of the Hong Kong Companies Ordinance (Cap. 622), and for no other purpose. We do not assume responsibility towards or accept liability to any other person for the contents of this report.
We conducted our audit in accordance with Hong Kong Standards on Auditing issued by the Hong Kong Institute of Certified Public Accountants. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgement, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation of the financial statements that give a true and fair view in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the financial statements give a true and fair view of the financial position of the company as at [reporting date] and of its financial performance and cash flows for the year then ended in accordance with the applicable Hong Kong Financial Reporting Standards relevant to these financial statements and have been properly prepared in compliance with the Hong Kong Companies Ordinance.
1 According to paragraph 6(b) of HKFRS 12, HKFRS 12 does not apply to an entity’s separate financial statements to which HKAS 27 applies. However, if an entity has interests in unconsolidated structured entities and prepares separate financial statements as its only financial statements, it shall apply the requirements in paragraphs 24–31 of HKFRS 12 when preparing those separate financial statements.
Q6. | Question 1.6: Identifying the relevant accounting standards when a holding company prepares company level financial statements in accordance with section 379(3) and the holding company has investments in joint ventures and/or associates If a holding company as described in question 1.5 has also investments in joint ventures and/or associates, which accounting standards are the “applicable accounting standards” for the purposes of complying with section 380(4)(b) of the CO if the company follows the requirements of section 379(3)? [UPDATED] |
Answer
As discussed in question 1.5, section 379(2) (being the requirement to prepare consolidated financial statements and the exemption from preparing company level financial statements) does not apply to a holding company that satisfies the requirements of section 379(3). For such a holding company that has also investments in joint ventures and/or associates and the criteria set out in paragraph 4(a)(iv) of HKFRS 10 Consolidated Financial Statements (being the exemption from preparing consolidated financial statements) are not met, on the same basis as described in question 1.5, the “accounting standards applicable to the financial statements” referred to in sections 380(4)(b) and 357(4)(a) are those relevant to the company’s circumstances and type of financial statements (company level or consolidated) required by section 379.
In the case of such a holding company that has also investments in joint ventures and/or associates and prepares company level financial statements to satisfy section 379(1), the “accounting standards applicable to the financial statements” referred to in sections 380(4)(b) and 357(4)(a) includes paragraph 10 of HKAS 27 Separate Financial Statements. This means that the company, as a holding company, shall account for investments in subsidiaries, joint ventures and/or associates either at cost or in accordance with HKFRS 9 Financial Instruments 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. In such circumstances, HKAS 28 Investments in Associates and Joint Ventures is not a relevant standard for a holding company’s company level financial statements. Furthermore, 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 applicable1. For the avoidance of doubt, in these circumstances, it is advisable for the statement of compliance as illustrated in question 1.5 to expand by explaining why the company is also not required to account for its investments in joint ventures and/or associates using the equity method in the company level financial statements. For the same reason, the statement of compliance may also explain why the disclosures required by HKFRS 12 are not made1 .
For example, the financial statements could include the following illustrative wording as the statement of compliance in the basis of preparation note (e.g. which is typically disclosed as note 1 to the financial statements):
Statement of compliance and basis of preparation
For the purposes of compliance with sections 379 and 380 of the Hong Kong Companies Ordinance (Cap. 622), these financial statements have been prepared to present a true and fair view of the financial position and financial performance of the company only. Consequently, they have been prepared in accordance with all applicable Hong Kong Financial Reporting Standards (HKFRSs, which term collectively includes Hong Kong Accounting Standards (HKASs) and Interpretations) issued by the Hong Kong Institute of Certified Public Accountants, accounting principles generally accepted in Hong Kong and the requirements of the Hong Kong Companies Ordinance (Cap. 622) that are relevant to the preparation of company level financial statements by an intermediate parent company.
[As the company is a holding company that is a wholly owned subsidiary of another body corporate, it satisfies the exemption criteria set out in section 379(3)(a) of the Hong Kong Companies Ordinance (Cap. 622), and is therefore not required to prepare consolidated financial statements.] OR [As the company is a holding company that is a partially owned subsidiary of another body corporate and has satisfied the exemption criteria set out in section 379(3)(b) of the Hong Kong Companies Ordinance (Cap. 622), it is not required to prepare consolidated financial statements].
Given the above, these financial statements are not prepared for the purposes of compliance with HKFRS 10, Consolidated Financial Statements, so far as the preparation of consolidated financial statements is concerned. In addition, for the purposes of preparation of company level financial statements, investments in joint ventures and associates have not been accounted for using the equity method which would otherwise be required by HKAS 28, Investments in Associates and Joint Ventures, in the preparation of consolidated financial statements and company level financial statements of a company that is not a holding company. As a consequence, the financial statements do not give all the information required by HKFRS 10 and HKAS 28 about the economic activities of the group of which the Company is the parent and investor. Furthermore, as these financial statements are prepared in respect of the company only, disclosures required by HKFRS 12, Disclosure of Interests in Other Entities, have not been made1 .
The measurement basis used in the preparation of the financial statements is … [continue with the normal basis of preparation note]
Note that the illustrative wording directly above is only applicable if (a) the company falls within section 379(3) of the CO; and (b) the company has complied with those HKFRSs which are applicable to the preparation of company level financial statements.
It should also be noted that the above approach to the statement of compliance is applicable only in the circumstances when the requirements of section 379 of the CO for a holding company to prepare company level financial statements take precedence over the requirements of HKFRS 10.4(a) and HKAS 28. It is not expected that analogies to this guidance may be drawn to justify other departures from the requirements of HKFRS, given the requirements of section 380(4)(b) of the CO and paragraphs 15 to 24 of HKAS 1.
Implications for the auditor’s report
On the same basis as explained in question 1.5, although there may appear to be a difference in the criteria between HKFRS 10.4(a) and section 379(3) as to which entities should prepare consolidated financial statements, it follows from section 406(1) that it is not necessary for the auditor to qualify the auditor’s report on the financial statements of a Hong Kong incorporated company for non compliance with HKFRS 10 in this specific situation if all of the following conditions are met:
(a) the company falls within section 379(3) of the CO and is therefore not required by the CO to prepare consolidated financial statements;
(b) the company has followed the requirements of section 379(3) and has therefore prepared company level financial statements; and
(c) those company level financial statements comply with those HKFRSs which are applicable to the preparation of company level financial statements, as well as all other requirements of the CO relating to the contents of company level financial statements as set out in sections 380 and 383.
Consistent with this approach, an example unqualified auditor’s report under section 405 of the CO would be the one as illustrated in question 1.5.
1 According to paragraph 6(b) of HKFRS 12, HKFRS 12 does not apply to an entity’s separate financial statements to which HKAS 27 applies. However, if an entity has interests in unconsolidated structured entities and prepares separate financial statements as its only financial statements, it shall apply the requirements in paragraphs 24–31 of HKFRS 12 when preparing those separate financial statements.
Q7. | Question 1.7: Identifying the relevant accounting standards when a company that is not a holding company prepares financial statements in accordance with section 379(1) and the company has direct investments in joint ventures and/or associates If a company that has no subsidiary undertakings and is, therefore, not a holding company, which accounting standards are the “applicable accounting standards” for the purposes of complying with section 380(4)(b) of the CO, so far as the accounting for investments in joint ventures and/or associates is concerned? [UPDATED] |
Answer
As the company is not a holding company, it does not fall within the scope of sections 379(2) and (3) of the CO. Instead, the company falls within the scope of section 379(1) and has to prepare company level financial statements. Paragraphs 10(a) and (b) of HKAS 27 Separate Financial Statements (being investments in joint ventures and associates accounted for at cost or in accordance with HKFRS 9 Financial Instruments) are not applicable to the company level financial statements of a company that is not a holding company. Accordingly, the approach to the statement of compliance as discussed in questions 1.5 and 1.6 cannot be applied by analogy. The “accounting standards applicable to the financial statements” referred to in sections 380(4)(b) and 357(4)(a) include HKAS 28 Investments in Associates and Joint Ventures, which requires the company (which is not a holding company) to account for its investments in joint ventures and associates using the equity method, unless the exemption criteria as set out in paragraphs 17 to 19 of HKAS 28 are met.
Q8. | Question 2.1: Signing of company level statement of financial position in consolidated financial statements Does section 387 of the CO (“Statement of financial position to be approved and signed”) apply to company level statement of financial position of the holding company included in the notes to its consolidated financial statements in accordance with Schedule 4 to the CO? |
Answer
The Companies Registry’s FAQ confirms that the answer is yes. Section 387 of the CO states that the directors must sign a statement of financial position that “forms part of any financial statements”. As Schedule 4 to the CO requires the company level statement of financial position of the holding company to be included in the notes to its consolidated financial statements, it follows that this is a statement of financial position that falls under the scope of section 387. It must therefore be approved by the directors and signed on their behalf by 2 directors, or in the case of a company having only one director, by that director, despite the fact that the directors have already approved the entire set of consolidated financial statements (which includes notes to the consolidated financial statements) by signing on the consolidated statement of financial position.
Q9. | Question 2.2: Location of the company level statement of financial position of the holding company in its consolidated financial statements Can the company level statement of financial position of the holding company continue to be shown as a primary statement in its consolidated financial statements? |
Answer
No, Schedule 4 to the CO requires the company level statement of financial position of the holding company to be included in the notes to its consolidated financial statements.
Note: Schedule 4 is not explicit as to where in the notes the company level statement of financial position should be placed. If the directors wish to draw attention to the company level statement of financial position of the holding company and yet comply with a literal interpretation of Schedule 4, they would be advised to include the statement as note 1 or otherwise in a prominent position in the notes to the consolidated financial statements.
Q10. | Question 2.3: Meaning of “company” in the Companies (Disclosure of Information about Benefits of Directors) Regulation (C(DIBD)R or Cap. 622G) When preparing consolidated financial statements, what is the meaning of “the company” in the C(DIBD)R? Is it just the holding company or does it also include the subsidiary undertakings? |
Answer
The reference to “the company” in the C(DIBD)R refers to the company preparing the financial statements. For example, section 15 of the C(DIBD)R refers to financing transactions (i.e. loans, quasi-loans, credit transactions etc) “entered into by a subsidiary undertaking of the company for a person who was at any time during the year a director of the company” (emphasis added). In this requirement, the reference is to transactions benefiting a person who is a director of the company that is preparing the financial statements. It is not referring to directors of that company’s subsidiary undertaking, even if the company is preparing consolidated financial statements. There is therefore no need to extend the requirements in the C(DIBD)R to transactions involving subsidiary undertakings of the company or their directors unless explicitly required to do so by the C(DIBD)R.
Q11. | Question 2.4: Meaning of “director” in the Companies (Disclosure of Information about Benefits of Directors) Regulation (C(DIBD)R or Cap. 622G) When preparing consolidated financial statements, what is the meaning of “director” in the C(DIBD)R? Is it just the directors of the holding company or does it also include the directors of subsidiary undertakings? |
Answer
The C(DIBD)R sets out explicit disclosure requirements relating to directors’ benefits which should be interpreted literally. For example, Part 2 of the C(DIBD)R refers to a person’s services as a director of the company or, while a director of the company, as a director of a subsidiary undertaking. In these requirements the reference to “the company” refers to the company preparing the financial statements and references to “director” should be construed as a references to a director of that company only. There is no requirement to extend these disclosures to directors of subsidiary undertakings of the company unless explicitly required to do so by the C(DIBD)R, even if the company is preparing consolidated financial statements.
Q18. | Question 5.1: Whether to consolidate subsidiary undertakings of an investment entity in order to comply with section 381(1) of the CO Paragraphs 31-32 of HKFRS 10 Consolidated Financial Statements prohibit an investment entity from consolidating its non-service subsidiaries and require instead that these investments are recognised at fair value through profit or loss (FVTPL). Is it acceptable under the CO for the reporting entity to comply with this requirement in HKFRS 10, given that section 381(1) of the CO states that the annual consolidated financial statements must include all subsidiary undertakings of the company (unless immaterial in accordance with section 381(3))? |
Answer
Yes, but it requires invoking the true and fair override in section 380(6) of the CO to override the requirement to comply with section 381(1), as follows:
Section 380(4)(b) of the CO gives statutory backing to HKFRSs by requiring the financial statements to comply with accounting standards issued by the HKICPA. In addition, section 380(6) states that if compliance with s380(4)(a) (i.e. compliance with any other requirements of the CO) would be inconsistent with giving a true and fair view then the financial statements must depart from those requirements to the extent necessary for the financial statements to give a true and fair view.
Given this, it is therefore both acceptable and necessary for an investment entity to exclude its non-service subsidiary undertakings from consolidation when required to do so by HKFRS 10 but in order to do so it is necessary for that entity to override section 381(1) by invoking the true and fair override set out in section 380(6).
When the true and fair override is invoked, section 380(6) requires the financial statements to provide the reasons for, and the particulars and effect of, the departure. For example, in order to satisfy this requirement the consolidated financial statements of an investment entity could include the following disclosure in the statement of compliance note (e.g. which is typically disclosed in note 1 to the financial statements):
Statement of compliance
These annual consolidated financial statements have been prepared in accordance with all applicable Hong Kong Financial Reporting Standards (HKFRSs), which collective term includes all applicable individual Hong Kong Financial Reporting Standards, Hong Kong Accounting Standards (HKASs) and Interpretations issued by the Hong Kong Institute of Certified Public Accountants (HKICPA) and accounting principles generally accepted in Hong Kong.
These financial statements also comply with the applicable requirements of the Hong Kong Companies Ordinance (Cap. 622), with the exception of section 381 which requires a company to include all its subsidiary undertakings (within the meaning of Schedule 1 to Cap. 622) in the company's annual consolidated financial statements. Section 381 is inconsistent with the requirements of HKFRS 10 Consolidated Financial Statements so far as they apply to non-service subsidiaries of an investment entity, which are specifically required to be excluded from the consolidated financial statements and should instead be measured at fair value through profit or loss. For this reason, under the provisions of section 380(6) the company has departed from section 381 and has excluded certain subsidiary undertakings from the consolidated financial statements as disclosed in note yy.*
A summary of the significant accounting policies adopted by the group is set out below.
* The additional note disclosure would need to satisfy the requirement in section 380(6) to give particulars and the effect of the departure from section 381(1) – in this regard, the disclosure of the fair value of the investee(s) and the amounts recognized in the statement of comprehensive income for the year for the investee(s), in addition to the disclosures which have been made which satisfy paragraphs 9A and 19A to 19G of HKFRS 12 Disclosure of Interests in Other Entities and paragraphs 91 to 99 of HKFRS 13 Fair Value Measurement should generally be sufficient.
Note: there is no need for the auditor to refer to a true and fair override under section 380(6) in the auditor’s report, unless the auditor disagrees with the basis of the override or considers that the disclosures are deficient compared to the requirements of section 380(6). Provided that the auditor is satisfied in respect of these matters, then the override will have no impact on the auditor’s ability to provide an unqualified opinion on compliance with the Companies Ordinance.
Q19. | Question 5.2: True and fair override disclosures to be made by an investment entity with no service subsidiaries The answer to question 5.1 refers to over-riding section 381 by excluding one or more subsidiaries from the consolidated financial statements. But what if an investment entity with material subsidiaries carried at FVTPL does not have any subsidiaries which provide services that fall under paragraph 32 of HKFRS 10 and therefore does not prepare consolidated financial statements? What disclosures should be made in this case under section 380(6) in respect of invoking the true and fair override of the CO? |
Answer
In this case, the true and fair override is an override of section 379(2) (preparation of consolidated financial statements) of the CO, rather than section 381(1) (subsidiary undertakings included in annual consolidated financial statements), and the disclosures to satisfy section 380(6) will need to reflect this circumstance. For example, in order to satisfy this requirement the company-level financial statements of an investment entity could include the following disclosure in the statement of compliance note (e.g. which is typically disclosed in note 1 to the financial statements):
Statement of compliance
These annual financial statements have been prepared in accordance with all applicable Hong Kong Financial Reporting Standards (HKFRSs), which collective term includes all applicable individual Hong Kong Financial Reporting Standards, Hong Kong Accounting Standards (HKASs) and Interpretations issued by the Hong Kong Institute of Certified Public Accountants (HKICPA) and accounting principles generally accepted in Hong Kong.
These financial statements also comply with the applicable requirements of the Hong Kong Companies Ordinance (Cap. 622), with the exception of section 379(2) which requires a company that is a holding company to prepare consolidated financial statements. Section 379(2) is inconsistent with the requirements of HKFRS 10 Consolidated Financial Statements so far as they apply to non-service subsidiaries of an investment entity, which are specifically required to be excluded from the consolidated financial statements and should instead be measured at fair value through profit or loss. For this reason, under the provisions of section 380(6) the company has departed from section 379(2) and has not prepared consolidated financial statements because all of its subsidiaries are excluded. The investments in all of its subsidiaries are measured at fair value through profit or loss, as disclosed in note yy.*
A summary of the significant accounting policies adopted by the company is set out below.
* The additional note disclosure would need to satisfy the requirement in section 380(6) to give particulars and the effect of the departure from section 379(2). In this regard, the disclosure of the fair value of the investee(s) and the amounts recognized in the statement of comprehensive income for the year for the investee(s), in addition to the disclosures which have been made which satisfy paragraphs 9A and 19A to 19G of HKFRS 12 Disclosure of Interests in Other Entities and paragraphs 91 to 99 of HKFRS 13 Fair Value Measurement should generally be sufficient.
Note: there is no need for the auditor to refer to a true and fair override under section 380(6) in the auditor’s report, unless the auditor disagrees with the basis of the override or considers that the disclosures are deficient compared to the requirements of section 380(6). Provided that the auditor is satisfied in respect of these matters, then the override will have no impact on the auditor’s ability to provide an unqualified opinion on compliance with the Companies Ordinance.