Interim reporting has become a critical period for listed issuers and their boards of directors to assess the company’s financial situation and take relevant decisions in the light of COVID-19 pandemic.
The current challenges for listed issuers
Since the outbreak of the COVID-19 pandemic, listed issuers have been facing significant challenges with respect to their financial reporting obligations. The audit process and the release of financial statements as well as the holding of the annual general meeting (“AGM”) have to a certain extent been impacted by the travel restrictions and the government measures to cope with the COVID-19 pandemic, including the prohibition of group gatherings that deter large gatherings.
Additional concerns have also arisen with the announcement from companies like HSBC and Standard Chartered Bank (Hong Kong) Limited on suspension or deferral of their dividend payments as previously declared. This has caused share plunge and demand from retail investors to pay scrip dividend instead of cancelling the cash dividend.
While the listed issuers with financial year ending 31 December have just gone through their difficult time to meet their financial reporting deadlines for their annual reports, the 2020 interim reporting season will be another challenging time for listed issuers amid uncertainties under the COVID-19 pandemic.
Why interim reports are important
To promote transparency and enable investors to make informed investment decisions, listed issuers are required to publish their financial results on a timely basis. Listed issuers whose financial year end is 31 December are obliged to release interim results announcement by 31 August.
Main Board issuers
· Publish annual report not later than 4 months after financial year end
· Publish annual report not later than 3 months after financial year end
· Publish interim report not later than 3 months after interim period end
· Publish half-yearly report not later than 45 days after interim period
· Publish quarterly report not later than 45 days after quarter end
Although the disclosure in the interim report is less extensive than annual report, the board of directors are still obliged to ensure the disclosures provided in the interim financial statements are sufficient for shareholders and investors to understand all significant events and transactions necessary for them to make investment decisions.
Preparation for interim results
The Hong Kong Stock Exchange (“HKEX”) has offered observations and guidance based on the review of recent announcements of business updates of listed issuers through their regulation newsletter in April 2020. Listed issuers are required to provide an update on the actual and potential impact of COVID-19 in their interim reports, taking into consideration the following recommendations:.
- Assess and reflect the impacts of COVID-19 in the interim financial statements.
- Discuss with auditors and audit committee on compliance with the relevant accounting standards, particularly for impairment assessment, fair value measurement and going concern.
- Provide analysis on material impact of COVID-19 on the financial position and performance, quantitative measures of the financial impact, assessments on cost measures and liquidity position.
- Continuously review the current liquidity position and expected financial resources and formulate action plan to address its funding needs.
- Update investors on the impact of COVID-19 pandemic on its business operation and adjustments to future operating plans and provide updates if listed issuer has announced new business initiatives arising from the COVID-19 environment.
- Continuously assess and update investors of material development and new measures in response to the pandemic.
- Disclose principal risks and uncertainties arising from the COVID-19 pandemic and measures to manage the risks.
Listed issuers are encouraged to consult HKEX if they foresee difficulties in meeting the financing reporting deadlines.
Disclosure of specific matters in interim report
Listed issuers are also reminded to pay attention to specific areas of disclosure relevant for their discussion in the management and discussion section or which they are obliged to disclose under the Listing Rules:
- Details of any equity fund raising conducted during the interim period and use of proceeds.
- Any change in use of proceeds of previous equity fund raising in view of changing environment under COVID-19 pandemic.
- Any breach of loan agreement due to default payment as a result of cash flow problem.
- Any breach of any specific performance by controlling shareholder due to pressing financial needs.
Board of Directors are now faced with the difficult decision of determining whether an interim dividend is to be paid out in this reporting season. This will be based on their assessment of the impact of the COVID-19 pandemic on the financial position of the company. They should review the dividend policy of the listed issuer and consider its financial strength, distributable reserve, future cash flow position, impact of COVID-19 on its business operation and the need to preserve extra cash to cope with uncertainties. While the final dividend is normally recommended by the board of directors and subject to shareholders’ approval at the AGM, articles of association of listed issuers generally permit interim dividend to be declared by the board of directors. Offering a scrip dividend alternative may be a solution to enable listed issuers to preserve cash and meet shareholders’ expectation. Directors are reminded to consider pros and cons of various alternatives.
Moving forward in pandemic times
The COVID-19 pandemic is a critical time for most businesses. Decisions made during this time can have long-term impact on the company’s future, and on the immediate pressure to sustain business. Consequently, the interim reporting becomes very critical in 2020 and it is important to ensure that the impact of COVID-19 on the businesses is accurately presented in the financial statements, and that the principal and anticipated risks are outlined clearly. Interim reports must remain the key source of information for material development and determining new measures through the period of the pandemic both for risk management and development. To further empower the board of directors, management on cash flow and proceeds from equity fund raising, monitoring compliance with covenants of existing loan agreements and dividend decision making are also important.
Tricor supports listed issuers in corporate governance matters and compliance with the appropriate local Listing Rules and other relevant legal and regulatory requirements. As the registrar of choice, Tricor can help manage your list of shareholders and take care of the distribution of the interim report. This can be done by either posting the physical report to the shareholders or uploading it online and posting the access information to the shareholders.
 HKEX Listed Issuer Regulation Newsletter, Issue 2, April 2020.