Companies with listing plans in Hong Kong are being urged to be well prepared for the potentially significant impact of the changes in international and Hong Kong accounting standards on initial public offerings (IPOs) in the special administrative region.
Experts predict that listing in Hong Kong will become a more complex process as a result of the changes, made to improve the quality and consistency of standards and to achieve further global convergence.
"Mainland companies hoping for a Hong Kong listing are facing great complexity. They need to prepare now," said Conway Lee, a partner with Ernst & Young in Beijing.
To meet the demand on the increased use of International Financial Reporting Standards (IFRSs) around the world, the International Accounting Standards Board (IASB) issued several new IFRSs and revised several existing international accounting standards in late 2003 and last year.
The Hong Kong Institute of Certified Public Accountants (HKICPA) announced that Hong Kong standards (HKFRS) would fully converge with IFRS effective for financial reporting periods beginning on or after January 1, 2005. Accordingly, new standards have been issued by the Hong Kong CPA institute, and the existing standards have been realigned with IFRS.
Referring to the new and revised international and Hong Kong accounting standards, Lee said: "Companies which have Hong Kong IPO plans face an imminent task to understand the changes in international and Hong Kong accounting standards, and assess the impact on Hong Kong IPOs."
Some of the new and revised international and Hong Kong accounting standards deal with financial reporting issues which were previously unaddressed, such as share-based payments.
According to the new standards, all share-based payment transactions should be recognized in the financial statements, using a fair value measurement basis.
In particular, shares or share options granted to employees as remuneration should be recognized as an expense and included in the operating results. Therefore, there will be a potential impact on management plans for employee share options schemes.
Consistent accounting standards and policies should be applied for the preparation of financial information throughout the track record period.
If any financial year or stub period within the track record period is a period beginning on or after January 1, 2005, financial information for that period in 2005 will need to be prepared under the new standards, and the new standards should also be applied to the previous three years.
But the old standards may still be applied when companies experience difficulties in dealing with the inconsistency between the track record results and the profit forecast for 2005, which should be based on the new standards.
Also, if there is a delay in the IPO timeframe, and the stub period financial information in 2005, companies will also feel it hard to present their accounting reports.
"The changes in accounting standards may have a significant impact on the IPO companies' financial information," said Lee, adding: "Early consultation with the professionals and seeking their assistance is of paramount importance."
January 1, 2005 is the beginning of a new era for financial reporting under IFRS and HKFRS, pointed out Ernst and Young.
According to Lee, companies planning a Hong Kong listing after the second half of this year will have to start preparing now for the new standards.
China Securities Regulatory Commission Chief Accountant Zhang Weiguo said the mainland's exchanges are also taking steps to follow the new international standards.
As China is gradually integrated into the global economy, the nation's bourses need to improve their accounting and auditing capabilities to bring them up to the international standards, said Zhang.
As international standards are revised based on years of experiences in developed economies, it would be cost-effective to follow international standards, he said.
Experts believe training local professionals is critical now that it is vital to keep up with the new standards. What's more, recent corporate failures have also highlighted the need for enhanced training and development programmes for accountants and finance professionals.
But training professional accountants is not enough in order to ensure the proper execution of improved standards, said Zhang. Corporate management also needs to improve its knowledge of the equity markets.
But he added that the Chinese mainlands's exchanges will still maintain some rules reflecting the special economic characteristics of the nation.
"China is so unique with a huge market, full of diversity. We cannot change everything overnight, and specific rules are required to reflect the local situation."
(China Daily April 4, 2005)