New Co. Ordinance and Revised SME-FRS 18 June 2014

Transcription

1 New Co. Ordinance and Revised SME-FRS 18 June 2014 LAM Chi Yuen Nelson 林 智 遠 MBA MSc BBA ACA ACS CFA CPA(US) CTA FCCA FCPA FCPA(Aust.) FHKIoD FTIHK MHKSI MSCA 2014 Nelson Consulting Limited 1 Today s Agenda I. Introduction II. Brief Notes on New CO (in particular Part 9) III.Update on SME-FRF & FRS (2014) IV.Major Initiatives of New CO (as Summary) 2014 Nelson Consulting Limited 2 1

2 Today s Agenda I. Introduction 2014 Nelson Consulting Limited 3 Introduction The New Companies Ordinance ("the new CO") consists of Original text: 21 parts, 921 sections, 11 schedules, and totally, 1428 pages Subsidiary legislation: 12 regulations Key changes, brief note, FAQ and other materials can be found in the website of the Companies Registry provides a modernised legal framework for the incorporation and operation of companies in Hong Kong 2014 Nelson Consulting Limited Source: Website of Companies Registry

3 Introduction: 21 Parts Part 1 Preliminary Part 2 Registrar of Companies and Companies Register Part 3 Company Formation and Related Matters, and Re-registration of Company Part 4 Share Capital Part 5 Transactions in relation to Share Capital Part 6 Distribution of Profits and Assets Part 7 Debentures Part 8 Registration of Charges Part 9 Accounts and Audit Part 10 Directors and Company Secretaries Part 11 Fair Dealing by Directors Part 12 Company Administration and Procedure Part 13 Arrangements, Amalgamation, and Compulsory Share Acquisition in Takeover and Share Buy-Back Part 14 Remedies for Protection of Companies or Members Interests Part 15 Dissolution by Striking Off or Deregistration Part 16 Non-Hong Kong Companies Part 17 Companies not Formed, but Registrable, under this Ordinance Part 18 Communications to and by Companies Part 19 Investigations and Enquiries Part 20 Miscellaneous Part 21 Consequential Amendments, and Transitional and Saving Provision 2014 Nelson Consulting Limited 5 Introduction: Key Changes (by CR) 1. Abolition of Par Value of Shares 2. Restricting Corporate Directorship in Private Companies 3. Headcount Test 4. Offences relating to contents of auditor's reports 5. Enhancement of Auditor's rights 6. Restricted Disclosure of Residential Addresses and Identification Numbers 7. Abolition of Memorandum of Association and Matters relating to Company Articles 8. Annual Returns of Local Companies 9. Deregistration and Restoration 10. Types of companies under the new Companies Ordinance and changes affecting companies limited by guarantee 11. Major Changes Affecting Directors 12. Meetings, Resolutions and Company Records 13. Registration of Charges and their Discharge 14. Disclosure of Company Name and Liability Status 15. Major Changes in Filing Requirements under the New Companies Ordinance 16. Non-Hong Kong Companies 17. Accounts and Audit 2014 Nelson Consulting Limited Source: Website of Companies Registry

4 Introduction: Major Initiatives The comprehensive rewrite of the Companies Ordinance (Cap. 32) allows Hong Kong to leverage the developments of company law in other comparable jurisdictions and further enhance its competitiveness and attractiveness as a major international business and financial centre. The new CO aims to achieve 4 main objectives, namely, to 1. Enhance corporate governance, 2. Ensure better regulations, 3. Facilitate business, and 4. Modernise the law Nelson Consulting Limited 7 Introduction: Major Initiatives 1. Enhancing Corporate Governance 2. Ensuring Better Regulation a. Strengthening the accountability of directors b. Enhancing shareholder engagement in the decision-making process c. Improving the disclosure of company information d. Fostering shareholder protection e. Strengthening auditors rights a. Ensuring the accuracy of information on the public register b. Improving the registration of charges c. Refining the scheme for deregistration of companies d. Improving the enforcement regime, incl. The original S Facilitating Business a. Streamlining procedures b. Facilitating simplified reporting c. Facilitating business operations 4. Modernising the Law a. Abolishing par value for shares b. Removing the power to issue share warrants c. Clarifying the rules on indemnification of directors against liabilities to third parties 2014 Nelson Consulting Limited Source: Website of Companies Registry

5 Introduction: Sub. Legislations To facilitate implementation of the new CO, 12 regulations has been made. The plan is to bring the subsidiary legislation into operation together with the new CO in the first quarter of Companies (Accounting Standards (Prescribed Body)) Regulation 2. Companies (Directors' Report) Regulation 3. Companies (Disclosure of Company Name and Liability Status) Regulation 4. Companies (Disclosure of Information about Benefits of Directors) Regulation Companies (Disclosure of Information about Benefits of Directors) (Amendment) Regulation Companies (Fees) Regulation 6. Companies (Model Articles) Notice 7. Companies (Non-Hong Kong Companies) Regulation 8. Companies (Revision of Financial Statements and Reports) Regulation Companies (Revision of Financial Statements and Reports) (Amendment) Regulation Companies (Summary Financial Reports) Regulation 10. Companies (Words and Expressions in Company Names) Order 11. Company Records (Inspection and Provision of Copies) Regulation 12. Companies (Unfair Prejudice Petitions) Proceedings Rules 2014 Nelson Consulting Limited 9 Introduction: Timeline Co. Ord. (Commencement) Notice 2013 was gazetted on 25 Oct appointing 3 Mar as the day on The new which CO the would new commence Companies operation Ordinance after enactment (Cap. of 622) the subsidiary comes into legislation, operation tentatively scheduled in 2014 (to be announced later) The original CO (Cap. 32) would remain in force until the new CO comes into operation When the new CO comes into operation, the original CO (Cap. 32) will be retitled as "Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32)" the core provisions affecting the operation of companies repealed however, those provisions relating to windingup and insolvency of companies and prospectuses remain in force 2014 Nelson Consulting Limited 10 5

6 Today s Agenda II. Brief Notes on New CO (in particular Part 9) 2014 Nelson Consulting Limited 11 Brief Notes on Certain Parts Part 1 Preliminary Part 2 Registrar of Companies and Companies Register Part 3 Company Formation and Related Matters, and Re-registration of Company Part 4 Share Capital Part 5 Transactions in relation to Share Capital Part 6 Distribution of Profits and Assets Part 7 Debentures Part 8 Registration of Charges Part 9 Accounts and Audit Part 10 Directors and Company Secretaries Part 11 Fair Dealing by Directors Part 12 Company Administration and Procedure Part 13 Arrangements, Amalgamation, and Compulsory Share Acquisition in Takeover and Share Buy-Back Part 14 Remedies for Protection of Companies or Members Interests Part 15 Dissolution by Striking Off or Deregistration Part 16 Non-Hong Kong Companies Part 17 Companies not Formed, but Registrable, under this Ordinance Part 18 Communications to and by Companies Part 19 Investigations and Enquiries Part 20 Miscellaneous Part 21 Consequential Amendments, and Transitional and Saving Provision 2014 Nelson Consulting Limited 12 6

7 Brief Notes on Certain Parts Part 1 Part 3 Part 4 Part 5 Part 9 Part 10 Part 11 Part Nelson Consulting Limited 13 Brief Notes on Certain Parts Part 1 Preliminary 2014 Nelson Consulting Limited 14 7

8 Part 1 Preliminary Introduction Part 1 is an introductory part that sets out the title of the new CO, its commencement, the interpretation and definitions of various terms and expressions that are used throughout the new CO, including responsible person, subsidiary, parent undertaking and subsidiary undertaking, and the types of companies that can be formed under the new CO Nelson Consulting Limited 15 Part 1 Preliminary Policy Objectives and Major Changes Part 1 contains initiatives that aim at improving regulation and modernising the law, namely (a) Replacing the formulation of officer who is in default with responsible person to strengthen the enforcement regime; and (b) Streamlining the types of companies that can be formed. Part 1 also provides for the application of the new CO to existing companies and other types of companies. Major Initiative 2d(iv) 2014 Nelson Consulting Limited 16 8

9 Part 1 Preliminary Streamlining the Types of Companies that Can Be Formed (ss 7 12) In the new CO, the types of companies that may be formed are reduced to 5 (from 8) Sections 7 to 12 provide for the definitions whereas section 66 in Part 3 sets out the types of companies that may be formed under the new CO, namely a. private companies limited by shares b. public companies limited by shares c. companies limited by guarantee without a share capital d. private unlimited companies with a share capital e. public unlimited companies with a share capital Named as public co. Combined as limited by guarantee Named as public co Nelson Consulting Limited 17 Part 1 Preliminary Streamlining the Types of Companies that Can Be Formed (ss 7 12) Section 11(1) defines a private company (same as section 29 of Cap. 32) being a company if (a) its articles (i) restrict a member s right to transfer shares; (ii) limit the number of members to 50; and (iii) prohibit any invitation to the public to subscribe for any shares or debentures of the company; and (b) it is not a company limited by guarantee (s. 29). Section 12 defines a public company being a company if (a) it is not a private company; and (b) it is not a company limited by guarantee (s. 12) Nelson Consulting Limited 18 9

10 Brief Notes on Certain Parts Part 3 Company Formation and Related Matters, and Re-registration of Company 2014 Nelson Consulting Limited 19 Part 3 Co. Formation and etc. Introduction Part 3 (Company Formation and Related Matters, and Re-registration of Company) deals with company formation, registration and related matters provides for new requirements for the articles of association of a company following the abolition of the memorandum of association makes the keeping and use of a common seal by a company optional to facilitate business operation 2014 Nelson Consulting Limited 20 10

11 Part 3 Co. Formation and etc. Policy Objectives and Major Changes Part 3 contains initiatives that aim at facilitating business operation and modernising the law, namely (a) Abolishing the Memorandum of Association; (b) Reforming company re-registration provisions; (c) Providing statutory protection for persons dealing with a company; (d) Making the keeping and use of a common seal optional and relaxing the requirements for a company to have an official seal for use abroad; and (e) Widening the scope of documents an attorney can execute on behalf of a company locally or outside Hong Kong Major Initiative 3c(i) 2014 Nelson Consulting Limited 21 Part 3 Co. Formation and etc. Policy Objectives and Major Changes Part 3 also provides for a company to appeal to the Administrative Appeals Board instead of to the court against a direction issued by the Registrar concerning the company s name sets out the types of companies that may be formed incorporates changes introduced through the Companies (Amendment) Ordinance 2010, which provided for an improved company name registration system following the implementation of the new electronic company registration and filing of document services Nelson Consulting Limited 22 11

12 Brief Notes on Certain Parts Part 4 Share Capital 2014 Nelson Consulting Limited 23 Part 4 Share Capital Introduction Part 4 (Share Capital) deals with the core concepts about share capital, its creation, transfer and alteration. In particular, this Part introduces a mandatory no-par regime for all companies with a share capital to modernise the share capital regime Nelson Consulting Limited 24 12

13 Part 4 Share Capital Policy Objectives and Major Changes Part 4 contains initiatives that aim at modernising the law, enhancing corporate governance, ensuring better regulation, and facilitating business operation, namely (a) Adopting a mandatory system of no-par for all companies with a share capital; (b) Removing the power of companies to issue share warrants to bearer; (c) Extending the requirement of shareholders consent for allotments of shares to the grants of rights to subscribe for shares, or to convert securities into shares; (d) Requiring a company to give reasons explaining its refusal to register a transfer of shares upon request; Major Initiative 4a Major Initiative 4b 2014 Nelson Consulting Limited 25 Part 4 Share Capital Policy Objectives and Major Changes Part 4 contains initiatives that aim at modernising the law, enhancing corporate governance, ensuring better regulation, and facilitating business operation, namely (e) Requiring a company to deliver to the Companies Registry ( CR ) a return or notification, including a statement of capital whenever there is a change to its capital structure; (f) Clarifying and simplifying the requirements relating to class rights; and (g) Simplifying the publication procedures for replacement of lost share certificate of a listed company. Major Initiative 2a(iv) 2014 Nelson Consulting Limited 26 13

14 Part 4 Share Capital No Par Result Adopting a mandatory system of no-par for all companies with a share capital (Section 135 and Division 2 of Part 4 of Schedule 11) The new CO adopts the mandatory system of no-par and abolishes relevant concepts such as nominal value, share premium, and requirement for authorised capital. Deeming provisions are introduced to ensure that contractual rights defined by reference to par value and related concepts will not be affected by the abolition of par. The deeming provisions will save considerable work, expense and time for companies and reduce the possibility of disputes. will not prevent individual companies from reviewing their documents and introducing more specific changes having regard to their own circumstances before the new CO comes into force Nelson Consulting Limited 27 Part 4 Share Capital No Par Result Adopting a mandatory system of no-par for all companies with a share capital (Section 135 and Division 2 of Part 4 of Schedule 11) Section 135 No nominal value states that: (1) Shares in a company have no nominal value (i.e. no par). (2) This section applies to shares issued before the commencement date of this section as well as shares issued on or after that date (s. 135). Note Division 2 of Part 4 of Schedule 11 contains transitional provisions relating to the abolition of nominal value. Section 170 modified from section 53 of Cap. 32, empowers a company to alter its share capital in a number of ways under a no-par environment Nelson Consulting Limited 28 14

15 Part 4 Share Capital Requiring a Company to Give Reasons Explaining its Refusal to Register a Transfer of Shares Upon Request (Section 151(3) and (4)) In Cap. 32 section 69(1) requires a company which refuses to register transfer of shares or debentures to send a notice of such refusal to the transferor and transferee within two months after the transfer was lodged with the company. Currently, there is no requirement for the notice to be accompanied by the reasons for the refusal. In the new CO Section 151(3) and (4) require companies to give reasons explaining their refusal to register a transfer of shares upon request and within 28 days after receiving the request, so as to enhance transparency and to ensure that directors only exercise their powers for proper purposes Nelson Consulting Limited 29 Part 4 Share Capital Requiring a Company to Deliver to the CR a Return or Notification including a Statement of Capital Whenever There is a Change to its Capital Structure (Section 201) In the new CO it requires a company to deliver to the CR such a statement to be contained in a return or notification, whenever there is a change to its capital, e.g. where there is an allotment of shares (section 142) or a permitted alteration of share capital (section 171). a statement of capital will show the company s share capital information as at the time the company has so changed its share capital Nelson Consulting Limited 30 15

16 Part 4 Share Capital Requiring a Company to Deliver to the CR a Return or Notification including a Statement of Capital Whenever There is a Change to its Capital Structure (Section 201) Section 201(2) clarifies that a statement of capital must state (a) the total number of issued shares in the company; (b) the amount paid up or regarded as paid up and the amount (if any) remaining unpaid or regarded as remaining unpaid on the total number of issued shares in the company; (c) the total amount of the company s issued share capital; and (d) for each class of shares (i) the particulars specified in subsection (3); (ii) the total number of issued shares in the class; (iii) the amount paid up or regarded as paid up and the amount (if any) remaining unpaid or regarded as remaining unpaid on the total number of issued shares in the class; and (iv) the total amount of issued share capital of the class (s. 201(2)) Nelson Consulting Limited 31 Part 4 Share Capital Requiring a Company to Deliver to the CR a Return or Notification including a Statement of Capital Whenever There is a Change to its Capital Structure (Section 201) Section 201(3) further clarifies that the particulars in a statement of capital are (a) particulars of any voting rights attached to shares in the class, including rights that arise only in certain circumstances; (b) particulars of any rights attached to shares in the class, as respects dividends, to participate in a distribution; (c) particulars of any rights attached to shares in the class, as respects capital, to participate in a distribution (including on a winding up); and (d) whether or not shares in the class are redeemable shares (s. 201(3)) Nelson Consulting Limited 32 16

17 Brief Notes on Certain Parts Part 5 Transactions in relation to Share Capital 2014 Nelson Consulting Limited 33 Part 5 Transactions re Share Capital Introduction Part 5 (Transactions in relation to Share Capital) contains the provisions concerning capital maintenance (reduction of capital and purchase of a company s own shares) and the giving of financial assistance by a company to another party for the purpose of acquiring shares of that company or its holding company. To facilitate business operation, Part 5 streamlines and rationalises the existing rules by introducing new exceptions based on the solvency test for reduction of capital, buy-backs and financial assistance 2014 Nelson Consulting Limited 34 17

18 Part 5 Transactions re Share Capital Policy Objectives and Major Changes Part 5 contains initiatives that aim at facilitating business operation, namely - (a) Adopting a uniform solvency test based on cash-flow for different types of transactions under this Part; (b) Introducing an alternative court-free procedure for reduction of capital based on a solvency test; (c) Allowing all companies to purchase their own shares out of capital, subject to a solvency test; (d) Allowing all types of companies (listed or unlisted) to provide financial assistance for acquisitions of the companies shares, subject to satisfaction of the solvency test and certain specified procedures; and (e) Relaxing the rules on giving of financial assistance for the purposes of employee share schemes. Major Initiative 3a(ii) Major Initiative 3a(iii) Major Initiative 3a(iv) 2014 Nelson Consulting Limited 35 Part 5 Transactions re Share Capital Adopting a Uniform Solvency Test Based on Cash-flow for Different Types of Transactions under This Part (Sections 204 To 208) In the new CO, There is no requirement for attaching an auditors report to the solvency statement. Auditors would not be in a better position than the directors Directors should be expected to have reasonable grounds in forming their opinion as to the company s solvency and judgment in deciding whether professional assistance is needed. Requiring an auditors report in every case would add expense and cause delay for relatively little gain. Section 204 provides that a uniform solvency test will be applicable to all three categories Reduction of Capital of transactions, namely Buy-Backs Financial Assistance 2014 Nelson Consulting Limited 36 18

19 Brief Notes on Certain Parts Part 9 Accounts and Audit 2014 Nelson Consulting Limited 37 Part 9 Accounts and Audit Introduction Part 9 (Accounts and Audit) contains the accounting and auditing provisions in relation to the keeping of accounting records, the preparation and circulation of annual financial statements, directors reports and auditor s reports and the appointment and rights of auditors. New provisions are introduced to facilitate SMEs to take advantage of simplified accounting and reporting requirements, to require public and large companies to include an analytical business review in directors reports, and to enhance auditors right to information. This Part also introduces new sanctions relating to the contents of auditor s reports (so-called S. 399 but now S. 408) Nelson Consulting Limited 38 19

20 Part 9 Accounts and Audit Policy Objectives and Major Changes Initiatives to enhance corporate governance: (1) Requiring public companies and other companies that do not qualify for simplified reporting to prepare a business review within the directors report, whilst allowing private companies to opt out by special resolution; (2) Empowering auditors to obtain information from a wider range of persons for the performance of their duties; and (3) Improving transparency with regard to circumstances of cessation of office of an auditor. Initiatives to ensure better regulation: (4) Introducing a new offence in relation to inaccurate auditor s reports (so-called S. 399, now S. 408) Major Initiative 1c(i) Major Initiative 1e(i) Major Initiative 2d(v) 2014 Nelson Consulting Limited 39 Part 9 Accounts and Audit Policy Objectives and Major Changes Initiatives that aim at business facilitation: (5) Relaxing the criteria for companies to prepare simplified financial and directors reports i.e. the reporting exemption ; and (6) Making the summary financial report provisions more user-friendly and extending their application to all companies. Initiative to modernise and improve the law: (7) Clarifying the financial year of a company, requiring companies to hold annual general meetings ( AGMs ) and requiring public companies or companies limited by guarantee to file annual returns in respect of every financial year of the company; and (8) Streamlining disclosure requirements that overlap with the accounting standards Major Initiative 3b 2014 Nelson Consulting Limited 40 20

21 Part 9 Accounts and Audit 1. Requiring Certain Companies to Prepare a Business Review within the Directors Report, whilst Allowing Private Companies to Opt Out by Special Resolution (S. 388 and Sch. 5 to the new CO) In Cap. 32 The directors report is basically a report of the company s information that people may wish to know about but is not included in the accounts. Section 129D of Cap. 32 sets out the detailed information required. The report must be approved by the board of directors. A copy of the report must be sent to every member and debenture holder of the company together with a copy of the accounts and auditors report 2014 Nelson Consulting Limited 41 Part 9 Accounts and Audit 1. Requiring Certain Companies to Prepare a Business Review within the Directors Report, whilst Allowing Private Companies to Opt Out by Special Resolution (S. 388 and Sch. 5 to the new CO) In the new CO All companies (except those stated in section 388(3)) are required to prepare, as part of the directors report, a business review which is more analytical and forward-looking than the information required under Cap. 32. The business review will provide additional information for shareholders and help assess how the directors have performed their duties. In particular, the requirement to include information relating to environmental and employee matters that have a significant impact on the company is in line with international trends to promote corporate social responsibility Nelson Consulting Limited 42 21

22 Part 9 Accounts and Audit 1. Requiring Certain Companies to Prepare a Business Review within the Directors Report, whilst Allowing Private Companies to Opt Out by Special Resolution (S. 388 and Sch. 5 to the new CO) Section 388 and Schedule 5 provide for the directors duty to prepare a directors report and the detailed requirements of a business review. The exemptions from preparation of a business review are set out in section 388(3) which include wholly-owned subsidiary companies. The holding company of such companies will prepare the business review unless it is exempted on other grounds Nelson Consulting Limited 43 Part 9 Accounts and Audit 1. Requiring Certain Companies to Prepare a Business Review within the Directors Report, whilst Allowing Private Companies to Opt Out by Special Resolution (S. 388 and Sch. 5 to the new CO) Section 388(3) allows certain companies not prepare business review in the directors report as follows: not require the directors report for a financial year to comply with Schedule 5 (i.e. Contents of Directors Report: Business Review ) if (a) the company falls within the reporting exemption for the financial year; (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 the members to the effect that the company is not to prepare a business review required by that Schedule for the financial year (s. 388(3)) Nelson Consulting Limited 44 22

23 Part 9 Accounts and Audit 1. Requiring Certain Companies to Prepare a Business Review within the Directors Report, whilst Allowing Private Companies to Opt Out by Special Resolution (S. 388 and Sch. 5 to the new CO) 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. 2. To the extent necessary for an understanding of the development, performance or position of the company s business, a business review must include 2014 Nelson Consulting Limited 45 Part 9 Accounts and Audit 1. Requiring Certain Companies to Prepare a Business Review within the Directors Report, whilst Allowing Private Companies to Opt Out by Special Resolution (S. 388 and Sch. 5 to the new CO) Schedule 5 Contents of Directors Report: Business Review : (a) an analysis using financial key performance indicators; (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. 3. This Schedule does not require the disclosure of any information about impending developments or matters in the course of negotiation if the disclosure would, in the directors opinion, be seriously prejudicial to the company s interests Nelson Consulting Limited 46 23

24 Part 9 Accounts and Audit 1. Requiring Certain Companies to Prepare a Business Review within the Directors Report, whilst Allowing Private Companies to Opt Out by Special Resolution (S. 388 and Sch. 5 to the new CO) Schedule 5 Contents of Directors Report: Business Review : 4. This Schedule has effect in relation to a directors report required to be prepared under section 388(2) as if a reference to the company were a reference to (a) the company; and (b) the subsidiary undertakings included in the annual consolidated financial statements for the financial year. 5. In this Schedule key performance indicators ( 關 鍵 表 現 指 標 ) means factors by reference to which the development, performance or position of the company s business can be measured effectively Nelson Consulting Limited 47 Part 9 Accounts and Audit 1. Requiring Certain Companies to Prepare a Business Review within the Directors Report, whilst Allowing Private Companies to Opt Out by Special Resolution (S. 388 and Sch. 5 to the new CO) To encourage meaningful reporting and to limit directors civil liability for statements or omissions in the directors report, section 448 provides a safe harbour so that directors are liable to the company only in respect of loss suffered by it as a result of any untrue or misleading statements or the omission of anything required to be included The directors are only liable if they knew, or was reckless as to whether, a statement was untrue or misleading, or an omission was dishonest concealment of a material fact Nelson Consulting Limited 48 24

25 Part 9 Accounts and Audit 2. Empowering Auditors to Obtain Information from a Wider Range of Persons for the Performance of their Duties (Section 412) In the new CO The provisions under the new CO empower auditors to require a wider range of persons, including persons holding or accountable for accounting records, to provide them with information and explanation as they reasonably require for the performance of their duties. 3. Improving Transparency with Regard to Circumstances of Cessation of Office of an Auditor (Sections 421 to 427) In the new CO To improve transparency and corporate governance, an outgoing auditors right to make a statement of circumstances is extended to an auditor who has been removed and a retiring auditor who has not been reappointed Nelson Consulting Limited 49 Part 9 Accounts and Audit 4. Introducing a New offence in relation to Inaccurate Auditor s Reports, i.e. 399 Regime (Section 408) In the new CO There is a new offence in section 408 of the new CO relating to omissions in an auditor's report. Section 407 of the new CO provides that if the auditor is of the opinion that the financial statements of a company are not in agreement with its accounting records in any material respect, or the auditor has failed to obtain all the information or explanations that are necessary and material for the purpose of the audit ("the specified statements"),» the auditor must state that fact in the auditor's report. The offence in section 408 will safeguard the reliability and integrity of auditor's reports and enhance enforcement Nelson Consulting Limited 50 25

26 Part 9 Accounts and Audit 5. Relaxing the Criteria for Companies to Prepare Simplified Financial and Directors Reports i.e. the Reporting Exemption (Sections 359 to 366 and Schedule 3 to the new CO) In Cap. 32 Section 141D provides that a private company (other than those specifically excluded) may, with the written agreement of all its shareholders, prepare simplified accounts and simplified directors reports in respect of one financial year at a time. According to the Small and Medium-sized Entity-Financial Reporting Framework ( SME-FRF ) issued by the HKICPA a HK company qualifies for reporting based on the SME-Financial Reporting Standard ( SME-FRS ) if it satisfies the requirement under section 141D The SME-FRF is not applicable to groups of companies or guarantee companies at all under Cap Nelson Consulting Limited 51 Part 9 Accounts and Audit 5. Relaxing the Criteria for Companies to Prepare Simplified Financial and Directors Reports i.e. the Reporting Exemption (Sections 359 to 366 and Schedule 3 to the new CO) In the new CO The criteria for simplified reporting are relaxed by relaxing the criteria for eligibility limits for automatic qualification, introducing a higher size criteria for private companies/groups that opt for simplified reporting, and retaining the exception in section 141D of Cap. 32. A summary of the qualifying conditions for companies to prepare simplified financial and directors report is set out 2014 Nelson Consulting Limited 52 26

27 Part 9 Accounts and Audit 5. Relaxing the Criteria for Companies to Prepare Simplified Financial and Directors Reports i.e. the Reporting Exemption (Sections 359 to 366 and Schedule 3 to the new CO) Company A. a private co. is a small private co., or a private co. is the holding co. of a group of small private companies B. an eligible private co., or an eligible private co. is the holding co. of a group of eligible private companies C. a "small guarantee co., or a guarantee co. is the holding co. of a "group of small guarantee companies" Qualifying Conditions D. option similar to s. 141D of Cap. 32 S. 359(1)(b) Size test, meeting any 2 of the following: (i) < $100M revenue, (ii) < $100M assets, (iii) < 100 employee Size test, meeting any 2 of the following: (i) < $200M revenue, (ii) < $200M assets, (iii) < 100 employee 75% members approval without any member objection Size test, less than $25M revenue 2014 Nelson Consulting Limited 53 Part 9 Accounts and Audit 5. Relaxing the Criteria for Companies to Prepare Simplified Financial and Directors Reports i.e. the Reporting Exemption (Sections 359 to 366 and Schedule 3 to the new CO) A. Small private company (or a group of small private companies) qualified for simplified reporting if it satisfies any 2 of the following conditions: (i) total (or aggregate total) annual revenue of not more than HK$100 million; (ii) total (or aggregate total) assets of not more than HK$100 million; (iii) no more than 100 employees. for small private company : sections 359(1)(a)(i), 361, Schedule 3 section 1(1), (2) for group of small private companies : sections 359(2)(a), (b) and (c)(i), 364, Schedule 3 section 1(7), (8) and (9) 2014 Nelson Consulting Limited 54 27

28 Part 9 Accounts and Audit 5. Relaxing the Criteria for Companies to Prepare Simplified Financial and Directors Reports i.e. the Reporting Exemption (Sections 359 to 366 and Schedule 3 to the new CO) A. Small private company (or a group of small private companies) Section 1 of Schedule 3: The conditions specified for the purposes of s. 361(1), (2) and (3) are (a) that the amount of the company s total revenue for the financial year, as would be reflected in the company s annual financial statements for the financial year if the company were qualified as a small private company for the financial year, does not exceed $100 million; (b) that the amount of the company s total assets at the date of the statement of financial position for the financial year, as would be reflected in the company s annual financial statements for the financial year if the company were qualified as a small private company for the financial year, does not exceed $100 million; and (c) that the average number of the company s employees during the financial year does not exceed Nelson Consulting Limited 55 Part 9 Accounts and Audit 5. Relaxing the Criteria for Companies to Prepare Simplified Financial and Directors Reports i.e. the Reporting Exemption (Sections 359 to 366 and Schedule 3 to the new CO) A. Small private company (or a group of small private companies) Section 2(3) of Schedule 3: For the purposes of section 1(9), 1(12) and (14)(b) of this Schedule, the aggregate amount of the group s total revenue or assets (a) is to be calculated by aggregating the total revenue or assets (as the case may be) of each company in the group, as reflected in the company s annual financial statements or annual consolidated financial statements for the financial year; and (b) is to be calculated on the basis that the set-offs and other adjustments for transactions between companies in the group have been made Nelson Consulting Limited 56 28

29 Part 9 Accounts and Audit 5. Relaxing the Criteria for Companies to Prepare Simplified Financial and Directors Reports i.e. the Reporting Exemption (Sections 359 to 366 and Schedule 3 to the new CO) A. Small private company (or a group of small private companies) Section 2(5) of Schedule 3: For the purposes of subsection (4) and of section 1(1)(c), (2)(c), (3)(c) and (4)(c) of this Schedule, the average number of a company s employees during a financial year is to be calculated by using the following formula M N where M represents the aggregate of the number of the company s employees as at the end of each month during the financial year; N represents the number of months in the financial year Nelson Consulting Limited 57 Part 9 Accounts and Audit 5. Relaxing the Criteria for Companies to Prepare Simplified Financial and Directors Reports i.e. the Reporting Exemption (Sections 359 to 366 and Schedule 3 to the new CO) B. Eligible private company (or a group of eligible private co.) qualified for simplified reporting if it satisfies any 2 of the following conditions: (i) total (or aggregate total) annual revenue of not more than HK$200 million; (ii) total (or aggregate total) assets of not more than HK$200 million; (iii) no more than 100 employees. for eligible private company : sections 359(1)(c), 360(1), 362, Schedule 3 section 1(3) and (4) for group of eligible private companies : sections 359(2)(a),(b) and (c)(ii), 360(2), 365, Schedule 3 section 1(10), (11) and (12) 2014 Nelson Consulting Limited 58 29

30 Part 9 Accounts and Audit 5. Relaxing the Criteria for Companies to Prepare Simplified Financial and Directors Reports i.e. the Reporting Exemption (Sections 359 to 366 and Schedule 3 to the new CO) B. Eligible private company (or a group of eligible private co.) Section 3 of Schedule 3: The conditions specified for the purposes of s. 362(1), (2) and (3) are (a) that the amount of the company s total revenue for the financial year, as would be reflected in the company s annual financial statements for the financial year if the company were qualified as an eligible private company for the financial year, does not exceed $200 million; (b) that the amount of the company s total assets at the date of the statement of financial position for the financial year, as would be reflected in the company s annual financial statements for the financial year if the company were qualified as an eligible private company for the financial year, does not exceed $200 million; and (c) that the average number of the company s employees during the financial year does not exceed Nelson Consulting Limited 59 Part 9 Accounts and Audit 5. Relaxing the Criteria for Companies to Prepare Simplified Financial and Directors Reports i.e. the Reporting Exemption (Sections 359 to 366 and Schedule 3 to the new CO) B. Eligible private company (or a group of eligible private co.) Section 360(1) states: The conditions specified for the purposes of section 359(1)(c)(iii) are (a) subject to subsection (3), a resolution is passed at a general meeting by the members holding at least 75% of the voting rights in the company to the effect that the company is to fall within the reporting exemption for the financial year; and (b) the members holding the remaining voting rights do not vote against the resolution Nelson Consulting Limited 60 30

31 Part 9 Accounts and Audit 5. Relaxing the Criteria for Companies to Prepare Simplified Financial and Directors Reports i.e. the Reporting Exemption (Sections 359 to 366 and Schedule 3 to the new CO) B. Eligible private company (or a group of eligible private co.) Section 360(3) states: If (a) a resolution is passed for the purposes of subsection (1)(a) or (2)(a)(i), (b)(i) or (c)(i) to the effect that a company is to fall within the reporting exemption for a financial year; (b) by notice in writing to the company, a member objects to the company falling within the reporting exemption for the financial year; and (c) the notice is given at least 6 months before the end of the financial year to which the objection relates, the resolution is regarded as not being passed in relation to the financial year to which the objection relates Nelson Consulting Limited 61 Part 9 Accounts and Audit 5. Relaxing the Criteria for Companies to Prepare Simplified Financial and Directors Reports i.e. the Reporting Exemption (Sections 359 to 366 and Schedule 3 to the new CO) B. Eligible private company (or a group of eligible private co.) Section 360(4) states: Within 14 days after receiving a notice under subsection (3)(b), a company must notify its members of the objection. Section 360(5) states: Special notice is required for a resolution mentioned in subsection (1)(a) or (2)(a)(i), (b)(i) or (c)(i) Nelson Consulting Limited 62 31

32 Part 9 Accounts and Audit 5. Relaxing the Criteria for Companies to Prepare Simplified Financial and Directors Reports i.e. the Reporting Exemption (Sections 359 to 366 and Schedule 3 to the new CO) C. Small guarantee company (or a group of small guarantee companies) a company limited by guarantee and qualified for simplified reporting if its total (or aggregate total) annual revenue does not exceed HK$25 million for small guarantee company : sections 359(1)(a)(i), 363, Schedule 3 section 1(5), (6) for group of small guarantee companies : sections 359(3), 366, Schedule 3 section 1(13) and (14) 2014 Nelson Consulting Limited 63 Part 9 Accounts and Audit 5. Relaxing the Criteria for Companies to Prepare Simplified Financial and Directors Reports i.e. the Reporting Exemption (Sections 359 to 366 and Schedule 3 to the new CO) D. Option Similar to Section 141D of Cap. 32 Section 359(1)(b) states that: (1) For the purposes of this Part, a company falls within the reporting exemption for a financial year (b) if (i) it is a private company at all times, and is not a company specified in subsection (4) at any time, during the financial year; (ii) it does not have any subsidiary and is not a subsidiary of another company; and (iii) all members of the company agree in writing that the company is to fall within the reporting exemption for the financial year only (s. 359(1)(b)) 2014 Nelson Consulting Limited 64 32

33 Part 9 Accounts and Audit 5. Relaxing the Criteria for Companies to Prepare Simplified Financial and Directors Reports i.e. the Reporting Exemption (Sections 359 to 366 and Schedule 3 to the new CO) Companies specified not entitled to reporting exemption Section 359(4)(b) states that: (a) one that carries on any banking business and holds a valid banking licence granted under the Banking (b) one that is a corporation licensed under Part V of the Securities and Futures Ordinance (Cap. 571) to carry on a business in any regulated activity within the meaning of that Ordinance; or (c) one that (i) carries on any insurance business otherwise than solely as an agent; or (ii) accepts, by way of trade or business (other than banking business), loans of money at interest or repayable at a premium, otherwise than on terms involving the issue of debentures or other securities. (s. 359(4)) 2014 Nelson Consulting Limited 65 Part 9 Accounts and Audit EXEMPT 5. Relaxing the Criteria for Companies to Prepare Simplified Financial and Directors Reports i.e. the Reporting Exemption (Sections 359 to 366 and Schedule 3 to the new CO) Companies which are qualified for simplified reporting are referred to in the new CO as companies falling within the reporting exemption. The reporting exemptions are in respect of the specific requirements relating to the preparation of financial statements, and directors reports Nelson Consulting Limited 66 33

34 Part 9 Accounts and Audit EXEMPT 5. Relaxing the Criteria for Companies to Prepare Simplified Financial and Directors Reports i.e. the Reporting Exemption (Sections 359 to 366 and Schedule 3 to the new CO) The exemptions are set out in the following sections Section 380(3) no requirement to disclose auditor s remuneration in financial statements Section 380(7) no requirement for financial statements to give a true and fair view Section 381(2) subsidiary undertakings may be excluded from consolidated financial statements in accordance with applicable accounting standards Section 388(3)(a) no requirement to include business review in directors report Section 406(1)(b) no requirement for auditor to express a true and fair view opinion on the financial statements 2014 Nelson Consulting Limited 67 Part 9 Accounts and Audit EXEMPT 5. Relaxing the Criteria for Companies to Prepare Simplified Financial and Directors Reports i.e. the Reporting Exemption (Sections 359 to 366 and Schedule 3 to the new CO) Under section 380(4)(b), the financial statements of a company must be prepared in compliance with the applicable accounting standards. The intention is that the accounting standards that will be applicable to a company falling within the reporting exemption is the SME-FRS and FRF issued or specified by the HKICPA which is the body prescribed in the Companies (Accounting Standards (Prescribed Body)) Regulation for issuing or specifying the applicable accounting standards under section 380(8)(a). The accounting standards applicable to companies that prepare simplified financial reports are less onerous than the HKFRS applicable to listed, public or other companies not qualified for simplified reporting. Audit of the financial statements is still required for all companies, except dormant companies (section 447), under the new CO Nelson Consulting Limited 68 34

35 Part 9 Accounts and Audit 6. Making the Summary Financial Report Provisions More User- Friendly and Extending Application to all Companies (Ss 437 to 446) In Cap. 32, a listed co. may send a summary financial report in place of the accounts provided that it has obtained the agreement of those persons» Very few listed companies have offered the alternative, partly due to cost considerations and partly due to the complex rules There is also no exemption for listed companies incorporated in Hong Kong not to send out accounts and reports or summary financial reports In the new CO The summary financial report provisions in the new CO are applicable to all companies (other than those qualified for simplified reporting) rather than being only applicable to listed companies as in Cap. 32 Unlike Cap. 32, members consent is not required before a company can send a copy of a summary financial report to its members 2014 Nelson Consulting Limited 69 Part 9 Accounts and Audit 7. Clarifying the Financial Year of a Company, Requiring companies to Hold AGMs and Requiring Companies to File ARs in respect of Every Financial Year (Sections 367 to 371, 610, 662(3), (4)) In Cap. 32, It does not provide for a company s accounting reference period. The financial year is defined in section 2(1) of Cap. 32 as the period in respect of which the accounts so laid are made up. Section 111 of Cap. 32 requires every company to hold an AGM in each year and not more than 15 months is to elapse between the date of one AGM and the next but there are no rules on shorter accounting periods. In addition, there is no provision to regulate the first accounting period, except that the first AGM has to be held within 18 months of incorporation Nelson Consulting Limited 70 35

36 Part 9 Accounts and Audit 7. Clarifying the Financial Year of a Company, Requiring companies to Hold AGMs and Requiring Companies to File ARs in respect of Every Financial Year (Sections 367 to 371, 610, 662(3), (4)) In the new CO It provides for the determination of the financial year of a company which is the same as the accounting reference period. It also provides for alteration of the accounting reference period. Unless exempted under sections 612 or 613, companies are required to hold an AGM within 6 months (for public companies) or 9 months (for private companies or companies limited by guarantee) after the end of the accounting reference period Nelson Consulting Limited 71 Part 9 Accounts and Audit 8. Streamlining Disclosure Requirements that Overlap with the Accounting Standards (Schedule 4 to the new CO) In Cap. 32, There are certain inconsistencies between the accounting requirements under Cap. 32 and the accounting standards, Cap. 32 also provides for certain disclosure requirements as to the contents of the accounts in the Eleventh Schedule (for companies that apply section 141D) and the Tenth Schedule (for other companies) which overlap with the disclosure requirements in the SME-FRS and HKFRS respectively As accounting standards are constantly evolving, it is very difficult to keep the statutory requirements up-to-date This can give rise to potential conflict between the two 2014 Nelson Consulting Limited 72 36

37 Part 9 Accounts and Audit 8. Streamlining Disclosure Requirements that Overlap with the Accounting Standards (Schedule 4 to the new CO) In the new CO To avoid any potential conflict between the Tenth Schedule and HKFRS and between the Eleventh Schedule and SME-FRS, both Schedules are repealed, with only a small number of public interest disclosure requirements not covered by the HKFRS or SME- FRS being retained in Schedule 4 The HKFRS and SME-FRS will be given indirect statutory recognition, as financial statements are required to comply with the applicable accounting standards issued by a body prescribed by the Companies (Accounting Standards (Prescribed Body)) Regulation (section 380(4)(b)) Nelson Consulting Limited 73 Part 9 Accounts and Audit 8. Streamlining Disclosure Requirements that Overlap with the Accounting Standards (Schedule 4 to the new CO) Schedule 4 Accounting Disclosures Part 1 Disclosures for Companies whether or not Falling within Reporting Exemption 1. Aggregate amount of authorized loans 2. Statement of financial position to be contained in notes to annual consolidated financial statements 3. Subsidiary s financial statements must contain particulars of ultimate parent undertaking 4. Compliance with applicable accounting standards Schedule 4 Accounting Disclosures Part 2 Disclosures for Companies not Falling within Reporting Exemption 1. Remuneration of auditor 2014 Nelson Consulting Limited 74 37

38 Part 9 Accounts and Audit 9. Other Amendments in Part 9 In the new CO The exemption to preparation of consolidated financial statements is amended Section 379(1) and (2) Directors must prepare financial statements require that: (1) A company s directors must prepare for each financial year statements that comply with sections 380 and 383. (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. However, section 379(3) exempts the preparation of consolidated financial statements 2014 Nelson Consulting Limited 75 Part 9 Accounts and Audit 9. Other Amendments in Part 9 Section 379(3) exempts the preparation of consolidated financial statements as follows: (3) Subsection (2) does not apply (a) if the company is a wholly owned subsidiary of another body corporate in the financial year; or (b) if (i) the company is a partially owned subsidiary of another body corporate in 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 Nelson Consulting Limited 76 38

39 Schedule 11 Part 9 Transitional and Saving Arrangements for Part 9 Section 77 Financial year and related matters Sections 127 and 141D of, and the Eleventh Schedule to, the predecessor Ordinance, as in force immediately before their repeal, continue to apply in relation to a financial year beginning before the commencement date of Division 3 of Part 9 and ending on or after that commencement date. Section 78 Accounts and directors report: (1) Sections 122, 123, 124, 125, 126, 128, 129, 129A, 129B, 129C, 129D, 129G, 141C, 161, 161A, 161B, 161BA and 161BB of, and the Tenth Schedule to, the predecessor Ordinance, as in force immediately before their repeal, continue to apply in relation to accounts for a financial year beginning before the commencement date of Subdivision 3 of Division 4 of Part 9 and ending on or after that commencement date 2014 Nelson Consulting Limited 77 Brief Notes on Certain Parts Part 10 Directors and Company Secretaries 2014 Nelson Consulting Limited 78 39

40 Part 10 Directors and Co. Secretaries Introduction Part 10 (Directors and Company Secretaries) deals with directors and company secretaries of a company. It mainly reorganises, with some modifications, the existing provisions of the Companies Ordinance (Cap. 32) relating to the appointment, removal and resignation of directors and company secretaries. Part 10 also clarifies the standard of directors duty of care, skill and diligence Nelson Consulting Limited 79 Part 10 Directors and Co. Secretaries Policy Objectives and Major Changes Initiatives to enhance corporate governance: (a) restricting corporate directorship in private companies; (b) clarifying the standard of directors duty of care, skill and diligence; and (c) requiring ratification of conduct of directors by disinterested members approval. Initiatives to improve regulation and modernising the law: (a) enabling the Registrar to give directions to a company relating to the appointment of directors and company secretaries; and (b) clarifying the rules on indemnification of directors against liabilities to third parties. Major Initiative 1a(i) Major Initiative 1a(ii) Major Initiative 1d(iii) Major Initiative 4c(i) 2014 Nelson Consulting Limited 80 40

41 Part 10 Directors and Co. Secretaries Policy Objectives and Major Changes Apart from the above major changes, Part 10 also restates a miscellany of provisions in Cap. 32 concerning directors and company secretaries, including directors vicarious liability for the acts of their alternates (section 478), the avoidance of acts done by a person in a dual capacity as director and company secretary (section 479), prohibition of undischarged bankrupt from acting as director (section 480) and the keeping of minutes of proceedings at directors meetings (sections 481 and 482) Nelson Consulting Limited 81 Brief Notes on Certain Parts Part 11 Fair Dealing by Directors 2014 Nelson Consulting Limited 82 41

42 Part 11 Fair Dealing by Directors Introduction Part 11 (Fair Dealing by Directors) covers fair dealing by directors deals with specified situations in which a director is perceived to have a conflict of interest governs transactions involving directors or their connected entities which require members approval (namely loans and similar transactions, longterm service contracts and payments for loss of office), and covers disclosure by directors of material interests in transactions, arrangements or contracts. introduces new statutory provisions requiring members approval for director s long-term employment by a company requires disinterested members approval in the case of public companies and subsidiaries of public companies Nelson Consulting Limited 83 Part 11 Fair Dealing by Directors Policy Objectives and Major Changes Initiatives to enhance corporate governance include: (a) expanding the prohibitions on loans and similar transactions to cover a wider category of persons connected with a director; (b) requiring disinterested members approval for various prohibited transactions; (c) expanding the prohibitions on payments for loss of office; (d) requiring members approval for directors employment exceeding 3 years; and (e) widening the ambit of disclosure currently required under section 162 of Cap. 32 (i.e. director s interests in contract) Major Initiative 1d(ii) Major Initiative 1d(i) 2014 Nelson Consulting Limited 84 42

43 Part 11 Fair Dealing by Directors Policy Objectives and Major Changes Initiatives to facilitate business and modernising the law include: (a) introducing new exemptions from prohibitions on loans and similar transactions in favour of directors and connected entities; (b) modifying the scope of private companies that are subject to more stringent restrictions similar to a public company; and (c) removing the criminal sanction for breach of the provisions on prohibition of loans and similar transactions in favour of directors and connected entities 2014 Nelson Consulting Limited 85 Brief Notes on Certain Parts Dissolution by Striking Off or Deregistration Part Nelson Consulting Limited 86 43

44 Part 15 Striking Off or Deregistration Introduction Part 15 (Dissolution by Striking Off or Deregistration) sets out the provisions on striking off and deregistration of defunct companies, restoration of companies that have been struck off or deregistered, and related matters (including treatment of properties of dissolved companies) introduces changes which streamline the existing procedures for strikingoff and restoration of companies imposes new requirements to prevent any possible abuse of the deregistration procedure 2014 Nelson Consulting Limited 87 Part 15 Striking Off or Deregistration Policy Objectives and Major Changes Part 15 contains initiatives that aim at facilitating business and improving regulation, namely 1. extending the voluntary deregistration procedure to guarantee companies; 2. imposing additional conditions for deregistration of defunct companies; 3. introducing a new procedure of administrative restoration of a dissolved company by the Registrar; and 4. streamlining the procedures for restoration of dissolved companies by court order. Major Initiative 2c(i) Major Initiative 3a(vi) Major Initiative 3a(vii) 2014 Nelson Consulting Limited 88 44

45 Part 15 Striking Off or Deregistration Extending the Voluntary Deregistration Procedure to Guarantee Companies (Section 750) In the new Co The deregistration procedure is extended to guarantee companies. Public companies and certain categories of businesses (say banks, insurers and etc.) will continue to be excluded (Section 749). The conditions for applying for voluntary deregistration (Section 750(2)), particularly the requirement of agreement by all members would prevent any possible abuse of the procedure Nelson Consulting Limited 89 Part 15 Striking Off or Deregistration Imposing Additional Conditions for Voluntary Deregistration of Defunct Companies (Sections 750 to 751) In the new CO Additional conditions have been imposed on companies applying for deregistration so as to prevent any potential abuse of the deregistration procedure, such as where a company applying for deregistration is a party to legal proceedings or is in possession of immovable property in Hong Kong. Sections 750 to 751 mainly restate the existing deregistration provisions under Cap. 32 with three additional conditions for deregistration Nelson Consulting Limited 90 45

46 Part 15 Striking Off or Deregistration Imposing Additional Conditions for Voluntary Deregistration of Defunct Companies (Sections 750 to 751) Section 750(2) requires a deregistration that: An application must not be made unless, at the time of the application Newly added (a) all the members agree to the deregistration; (b) the company has not commenced operation or business, or has not been in operation or carried on business during the 3 months immediately before the application; (c) the company has no outstanding liabilities; (d) the company is not a party to any legal proceedings; (e) the company s assets do not consist of any immovable property situate in Hong Kong; and (f) if the company is a holding company, none of its subsidiary s assets consist of any immovable property situate in Hong Kong (s. 750(2)) Nelson Consulting Limited 91 Part 15 Striking Off or Deregistration Imposing Additional Conditions for Voluntary Deregistration of Defunct Companies (Sections 750 to 751) Section 750(6) states that: A person who, in connection with an application, knowingly or recklessly gives any information to the Registrar that is false or misleading in a material particular commits an offence and is liable (a) on conviction on indictment to a fine of $300,000 and to imprisonment for 2 years; or (b) on summary conviction to a fine at level 6 and to imprisonment for 6 months (s. 750(6)) Nelson Consulting Limited 92 46

47 Today s Agenda III.Update on SME-FRF & FRS (2014) 2014 Nelson Consulting Limited 93 Scope HK Incorporated Entity The new HK Companies Ordinance (Cap. 622) ( new CO ) becomes effective on 3 March 2014, contains an optional reporting exemption for certain private companies and companies limited by guarantee which satisfy the conditions set out in section 359 of the new CO. The Small and Medium-sized Entity Financial Reporting Framework and Financial Reporting Standard which are effective for annual periods beginning on or after 3 March 2014 (the SME-FRF and FRS (2014) ) are the accounting standards issued by the HKICPA that are to be followed in accordance with section 380(4) by those HK incorporated companies which are entitled to, and decide to, take advantage of this reporting exemption in the new CO (SME-FRF para. 1) 2014 Nelson Consulting Limited 94 47

48 Scope Non-HK Incorporated In accordance with para. 23 of the SME-FRF (2014), an entity which is not a company incorporated under either the new CO or the predecessor CO (Cap. 32), subject to any specific requirements imposed by the law of the entity s place of incorporation and subject to its constitution, qualifies for reporting under the SME-FRF when the entity meets the same requirements that a HK incorporated entity is required to meet under section 359 of the new CO (SME-FRF para. 2) 2014 Nelson Consulting Limited 95 Scope Effective Date Consistent with section 358 of the new CO, this revised SME-FRF becomes effective for a Qualifying Entity s financial statements that cover a period beginning on or after 3 March 2014, the commencement date of the new CO Earlier application of this revised SME-FRF is not permitted (SME-FRF para. 53) 2014 Nelson Consulting Limited 96 48

49 Key Changes from Old SME-FRF and FRS 1. A summary of the criteria for "qualifying entities" with cross-references to the new CO included SME-FRF (2014) Para New specific disclosure requirements to cover the first year that a company transitions from a different GAAP to SME-FRS SME-FRF (2014) Para New guidance on the concept of realized profits and losses SME-FRF (2014) Para New sections to cover business combinations, consolidated financial statements, joint arrangements and associates SME-FRS (2014) Section New guidance on presenting a cash flow statement (optional) SME-FRS (2014) Section Nelson Consulting Limited Adapted from HKICPA s Summary of Main Changes 97 Key Changes from Old SME-FRF and FRS 6. Additional disclosure requirements in the Income Taxes section for disclosure of applicable tax rates and unused tax losses SME-FRS (2014) Section New guidance on determining the "reporting currency (same as functional currency) SME-FRS (2014) Section The definition of "related party" aligned with the definition in full HKFRS SME-FRS (2014) Definitions 9. The definitions of "active market" & "fair value" updated to be consistent with HKFRS 13 SME-FRS (2014) Definitions 10.New guidance on determining whether an entity is acting as an agent or principal SME-FRS (2014) Appendix 1 11.Additional guidance on the non-exempted disclosure requirements in the new CO and certain other provisions SME-FRS (2014) Appendix Nelson Consulting Limited Adapted from HKICPA s Summary of Main Changes 98 49

50 1. Criteria for Qualifying Entities Follows the new CO with some further explanations on Reporting Exemption for easy reference Meeting the size tests in the first year that the new CO applies In accordance with sub-section (2) of each of sections 361 to 366 of the new CO (as applicable), the entity will qualify for the reporting exemption for the first financial year beginning on or after 3 March 2014 if it meets the relevant size tests: (a) in that first financial year; and/or (b) in the immediately preceding financial year. If the entity qualifies in the first financial year in accordance with the above, it will continue to qualify until it is disqualified in accordance with sub-section (4) (as set out in para. 32 of SME-FRS). (SME-FRF para. 30) 2014 Nelson Consulting Limited Criteria for Qualifying Entities Meeting the size tests in all subsequent financial years In accordance with sub-section (3) of each of ss. 361 to 366 of the new CO (as applicable), an entity which was previously disqualified on the grounds of its size will need to meet the size tests for two consecutive reporting periods, before it will qualify for the reporting exemption in the third reporting period, regardless of its size in that period (SME-FRF para. 31) In accordance with sub-section (4) of each of ss. 361 to 363, or sub-section (5) of each of ss. 364 to 366, of the new CO (as applicable), where an entity has previously qualified for the reporting exemption in terms of its size, the entity will continue to qualify for the reporting exemption even when it no longer meets the relevant size tests, unless the entity has failed the size tests for two consecutive reporting periods it will then fail to qualify for the reporting exemption in the third reporting period, regardless of its size in that period. (SME-FRF para. 32) 2014 Nelson Consulting Limited

51 1. Criteria for Qualifying Entities Meeting the size tests in all subsequent financial years In accordance with sub-section (3) of each of ss. 361 to 366 of the new CO (as applicable), an entity which was previously disqualified on the grounds of its size will need to meet the size tests for two consecutive reporting periods, before it will qualify for the reporting exemption in the third reporting period, regardless of its size in that period (SME-FRF para. 31) In accordance with sub-section (4) of each of ss. 361 to 363, or sub-section (5) of each of ss. 364 to 366, of the new CO (as applicable), where an entity has previously qualified for the reporting exemption in terms of its size, the entity will continue to qualify for the reporting exemption even when it no longer meets the relevant size tests, unless the entity has failed the size tests for two consecutive reporting periods it will then fail to qualify for the reporting exemption in the third reporting period, regardless of its size in that period. (SME-FRF para. 32) 2014 Nelson Consulting Limited Criteria for Qualifying Entities An exception to this two year grace period for losing entitlement is where a new company enters the group. In this case, in accordance with sub-section (4) of each of sections 364 to 366 of the new CO (as applicable), the group will no longer be eligible for the reporting exemption in the year in which the new company enters the group, if the new subsidiary is such that the group fails the size tests in that year. (SME-FRF para. 33) Size tests for group of small guarantee companies, small private companies, and eligible private companies each company in the group must meet the size tests; and the aggregate amounts for the group in total must meet the size tests (SME-FRF para. 35, 37 ad 39) 2014 Nelson Consulting Limited

52 1. Criteria for Qualifying Entities Shareholder Approval In accordance with section 360 of the new CO, the shareholder approval requirements for the larger eligible category of private companies or groups are as follows: a) to gain exemption as a larger eligible private company at least 75% of all the members must pass a resolution at a general meeting that the company is to fall within the reporting exemption for the financial year, with none objecting; and b) to gain exemption for a group of larger eligible private companies all the companies in the group individually, as well as the parent of the group, must have obtained the necessary shareholder approval except for those subsidiaries within the group that fall within the small private company category 2014 Nelson Consulting Limited Criteria for Qualifying Entities Shareholder Approval The 75% vote is calculated as a percentage of the entire shareholding of a company, not simply as a percentage of the shareholders who attend the general meeting. The resolution is defeated if any member objects either at the meeting or at any time by giving notice in writing to the company, provided that the written notice is given at least 6 months before the end of the financial year to which the objection relates. (SME-FRF para. 42) For s. 359(1)(b) (i.e. new version of s.141d) exemption, in order to qualify it, The company obtain 100% approval from their shareholders each year This approval must be in writing and can only be given for one year at a time (SME-FRF para. 43) 2014 Nelson Consulting Limited

53 2. Transition from Different GAAP The transition from a different GAAP (for example the transition from HKFRS) to the SME-FRF and SME-FRS is accounted for as follows: a) All items recognised previously under a different GAAP (for example, deferred tax liability) which do not meet the recognition criteria under the SME-FRF and SME-FRS are to be derecognised and dealt with as a change of accounting policy under section 2 of the SME-FRS. b) All items not recognised previously under a different GAAP which meet the recognition criteria under the SME-FRF and SME-FRS3 are to be recognised in accordance with the relevant section of the SME-FRS and dealt with as a change of accounting policy under section 2 of the SME- FRS. c) All items recognised previously under a different GAAP, which meet the recognition criteria under the SME-FRF and SME-FRS, but which were previously measured on a basis inconsistent with the SME-FRF and SME- FRS (for example, unamortised goodwill) are to be re-measured in accordance with the relevant section of the SME-FRS and dealt with as a change of accounting policy under section 2 of the SME-FRS (SME-FRF para. 44) 2014 Nelson Consulting Limited Transition from Different GAAP When an entity transitions from a different GAAP to the SME-FRF and SME-FRS it should disclose the following in the year of transition: a) the fact that this is the first year that the entity has adopted the SME-FRF and SME-FRS; b) the previous accounting framework adopted by the entity in its annual financial statements; c) a reconciliation of net assets as reported in the previous annual financial statements and net assets reported as of the same date under the SME- FRF and SME-FRS, showing separately: i. any items derecognised because they do not meet the recognition criteria under the SME-FRF and SME-FRS; 2014 Nelson Consulting Limited

54 2. Transition from Different GAAP ii. any items recognised for the first time because they meet the recognition criteria under the SME-FRF and SME-FRS but were not recognised under the previous accounting framework; and iii. the amount by which any items have been re-measured as a result of adopting the measurement requirements of the SME-FRF and SME- FRS. This reconciliation should be presented for the opening balances of the current period and any comparative period presented which have been restated as a result of transitioning to the SME-FRF and SME-FRS; and d) if any opening balances have not been restated because it would require undue cost or effort to do so, this fact. (SME-FRF para. 44) 2014 Nelson Consulting Limited Concept of Realized Profits and Losses New guidance on the concept of realized profits and losses Recognition of an item as income or expense in accordance with the SME- FRS does not necessarily result in that item being realized within the meaning of s. 291 of the new CO. Consequently, a profit which is recognised for accounting purposes under the SME-FRS may not necessarily be capable of distribution to shareholders by way of a dividend. The concept of realized profits and losses and their relationship to profits and losses as recognised under the SME-FRS is dealt with in para. 46 to 52 of the SME-FRF (SME-FRF para.16) 2014 Nelson Consulting Limited

55 3. Concept of Realized Profits and Losses S. 297 of the new CO states that a company may only make a distribution out of profits available for distribution and that, for the purposes of this section, a company s profits available for distribution are its accumulated, realized profits, so far as not previously utilized by distribution or capitalization, less its accumulated, realized losses, so far as not previously written off in a reduction or reorganisation of capital. Such distributable profits are to be computed at the company-level, irrespective of whether the company prepares consolidated financial statements (SME-FRF para.46) 2014 Nelson Consulting Limited Concept of Realized Profits and Losses In accordance with HKICPA s Accounting Bulletin 4 Guidance on the Determination of Realised Profits and Losses in the Context of Distributions under the Hong Kong Companies Ordinance, a profit shall be treated as realised only when realised in the form of: a) cash; or b) other assets, the ultimate cash realisation of which can be assessed with reasonable certainty (SME-FRF para.48) Most transactions recognised under the SME-FRS in company-level financial statements would satisfy this test (SME-FRF para.49) However, if the sale was in exchange for an illiquid asset, such as a property, the profit could not be regarded as realized until the property itself was sold in a cash or near-cash transaction, because the property would not be regarded as readily convertible to cash without a period of marketing (SME-FRF para.50) 2014 Nelson Consulting Limited

56 3. Concept of Realized Profits and Losses With respect to realized losses, in general, where amounts are charged against profit or loss (and hence recorded in co.-level retained earnings), the charge should be regarded as being realized irrespective of whether it arose on re-measurement of the carrying value of an asset or liability, or the charge has crystallised, for example on settlement of a law suit Adjustments should not therefore be made to add back any expenses or other charges when computing profits available for distribution for the purposes of s. 291 of the new CO (SME-FRF para.51) 2014 Nelson Consulting Limited Concept of Realized Profits and Losses Further guidance on the concept of realized profits and realized losses can be found in Accounting Bulletin 4 and etc. However, it should be noted that this guidance is primarily intended to address a wide variety of differences between recognition requirements under full HKFRSs and the concept of realized profits or losses (SME-FRF para.52) Although the same principles for defining realized profits and losses will apply whether a company follows full HKFRSs or SME-FRS in practice as the SME-FRS does not permit upwards revaluation of assets and does not contain specific requirements relating to more complex financial instruments,» many of the differences identified in the Bulletin between recognised profits and losses and realized profits and losses will not be applicable to financial statements prepared in accordance with the SME-FRS (SME-FRF para. 52) 2014 Nelson Consulting Limited

57 4. New Sections New sections to cover business combinations, consolidated financial statements, joint arrangements and associates Section 18 Business Combinations and Goodwill Section 19 Consolidated and Company-level Financial Statements Section 20 Investments in Associates Section 21 Interests in Joint Ventures and Other Forms of Joint Arrangements 2014 Nelson Consulting Limited Section 18 Business Combinations Section 18 is mainly based on HKFRS 3 (2004 version) but simplified and updated with some areas based on HKFRS 3 (2008 version) Apply in accounting for business combinations in a reporting entity s consolidated financial statements (SME-FRS 18.1) Also apply in accounting for the acquisition of an unincorporated business in a reporting entity s company-level financial statements (SME-FRS 18.1) 2014 Nelson Consulting Limited

58 4. Section 18 Business Combinations Section 18 is mainly based on HKFRS 3 (2004 version) but simplified and updated with some areas based on HKFRS 3 (2008 version) Not required to be applied to business combinations involving entities or businesses under common control Common control combinations should be accounted for in accordance with one of the following methods: (a) merger accounting in accordance with Accounting Guideline 5 Merger accounting for common control combinations; or (b) at book values as stated in the financial statements of the acquired entity or in the consolidated financial statements of the previous parent (SME-FRS 18.2) 2014 Nelson Consulting Limited Section 18 Business Combinations All business combinations should be accounted for by applying the purchase method (SME-FRS 18.3) Applying the purchase method involves the following steps: (a) identifying an acquirer; (b) measuring the cost of the business combination; and (c) allocating, at the acquisition date, the cost of the business combination to the assets acquired and liabilities assumed (SME-FRS 18.4) Difference from current HKFRS Nelson Consulting Limited

59 4. Section 18 Business Combinations The acquirer should measure the cost of a business combination as the aggregate of the fair values, at the acquisition date, of assets given, liabilities incurred or assumed, and equity instruments issued by the acquirer, in exchange for control of the acquiree (SME-FRS 18.8) Other costs attributable to effecting the business combination do not form part of the cost of a business combination should instead be recognised as expenses in the income statement in the periods in which the costs are incurred and the services are received (SME-FRS 18.9) Same as current HKFRS Nelson Consulting Limited Section 18 Business Combinations The contingent consideration should include the estimated amount of that adjustment in the cost of the combination at the acquisition date if the adjustment is probable (i.e. more likely than not) and can be measured reliably (SME-FRS 18.10) 2014 Nelson Consulting Limited

60 4. Section 18 Business Combinations The acquirer should recognise separately the acquiree s identifiable assets and, liabilities at the acquisition date only if they satisfy the following criteria at that date: (a) in the case of an asset other than an intangible asset, it is probable that any associated future economic benefits will flow to the acquirer, and its fair value can be measured reliably; (b) in the case of a liability, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and its fair value can be measured reliably; and (c) in the case of an intangible asset, its fair value is readily apparent or otherwise can be measured reliably without undue cost or effort (SME-FRS 18.13) Different from current HKFRS Nelson Consulting Limited Section 18 Business Combinations The acquirer should, at the acquisition date: (a) recognise goodwill acquired in a business combination as an asset; and (b) initially measure that goodwill at its cost, being the excess of the cost of the business combination over the acquirer s interest in the net fair value of the identifiable assets and liabilities recognised in accordance with para (SME-FRS 18.18) After initial recognition, measure goodwill acquired in a business combination at cost less any accumulated amortisation and any accumulated impairment losses (SME-FRS 18.19) A rebuttable presumption that the useful life of goodwill will not exceed 5 years from initial recognition (SME-FRS 18.20) Different from current HKFRS 3 Impairment testing in Section Nelson Consulting Limited

61 4. Section 18 Business Combinations Previous business combination an entity that has not previously issued consolidated financial statements should apply Section either: (a) retrospectively to all past business combinations as a change in accounting policy in accordance with Section 2; or (b) as if all the past business combinations that occurred before the beginning of the comparative period had taken place at the beginning of the comparative period. The difference between the consideration transferred and the carrying amounts of assets and liabilities of the business acquired that meet the recognition criteria under the SME-FRF and SME-FRS at the beginning of the comparative period should be made against the opening balance of retained earnings. Any business combination for which the acquisition date falls between the beginning of the comparative period and the date of the first application of this Section should be accounted for in accordance with this Section. In the case where this option is used, this fact should be disclosed (SME- FRS 18.27) 2014 Nelson Consulting Limited Section 19 Consolidated F.S. Section 19 is mainly based on HKAS 27, not HKFRS 10 A subsidiary is an entity that is controlled by the parent. Control (of an entity) is defined as the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities (SME-FRS 19.4 and Definitions) Control is presumed to exist when the parent owns, directly or indirectly through subsidiaries, more than half of the voting power of an entity that presumption should be overcome if it can be clearly demonstrated that such ownership does not constitute control (SME-FRS 19.5) Different from current HKFRS Nelson Consulting Limited

62 4. Section 19 Consolidated F.S. An entity which is a parent at the end of the financial year is required to present consolidated financial statements in accordance with the SME- FRS except when: Different from current (a) it is a wholly-owned subsidiary of another entity; or HKFRS 10 but same (b) it meets all of the following conditions:- as s. 379(3) i) it is a partially-owned subsidiary of another entity; 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 financial 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 fin. year, no member has responded to the notification by giving the directors a written request for the preparation of consol. fin. statements for the financial year; or (c) all of its subsidiaries qualify for exclusion from consolid. in accordance with paragraph 19.2 (SME-FRS 19.1) 2014 Nelson Consulting Limited Section 19 Consolidated F.S. If a parent is exempt from preparing consolidated financial statements and does not prepare such financial statements, it should prepare company-level financial statements. Company-level financial statements are those in which investments in subsidiaries, associates and joint ventures are accounted for using the cost model set out in Section 6. If consolidated financial statements are presented they should include all subsidiaries of the parent, except that one or more subsidiaries may be excluded from consolidation when: (a) their exclusion measured on an aggregate basis is not material to the group as a whole; or (b) their inclusion would involve expense and delay out of proportion to the value to members of the company (SME-FRS 19.2) 2014 Nelson Consulting Limited

63 4. Section 19 Consolidated F.S. A parent may not exclude a subsidiary from consolidation on the grounds of expense and delay out of proportion to the value to members of the company unless the members of the company have been informed in writing about, and do not object to, this exclusion. In order to satisfy this condition: (a) the notification to the members of the company must: (i) state which financial year that the notification relates to (and the notification must not relate to more than one financial year); (ii) specify the subsidiary or subsidiaries proposed to be excluded; and (iii) state the directors reasons for believing that the inclusion of the subsidiary or subsidiaries in the consolidated financial statements may involve expense and delay out of proportion to the value to the shareholders; 2014 Nelson Consulting Limited Section 19 Consolidated F.S. In order to satisfy this condition: (b) in the case of an entity which needs to obtain shareholder approval in accordance with para. 41 to 43 of SME-FRF in order to qualify for the reporting exemption, the notification to the members of the co. proposing to exclude one or more subsidiaries from consolidation must be included as part of the notice to obtain the necessary shareholder approvals required to qualify for the reporting exemption and must be subject to the same approval and objection processes as apply to that approval; (c) in all other cases the notification must be sent to the members before the date of approval of the financial statements and must allow the members of the co. a period of no less than one month to raise objections, unless all the members of the co. confirm that such a period is not necessary; and (d) within the time frame allowed in accordance with (b) or (c) no member has indicated to the co. that they disagree with the directors assertion that the inclusion of the subsidiary or subsidiaries would involve expense and delay out of proportion to the value to members of the co. (SME-FRS 19.3) 2014 Nelson Consulting Limited

64 4. Section 19 Consolidated F.S. Consolidation procedures follows HKAS 27, except that On disposal of subsidiary the gain or loss, includes the cumulative amount of any exchange differences that relate to the subsidiary recognised in equity in accordance with Section 15, except when undue cost or effort is needed to arrive at such cumulative amount of exchange difference and disclosure is made in the financial statements for such exclusion on a transaction by transaction basis (SME-FRS 19.11) If an entity ceases to be a subsidiary but the investor (former parent) continues to hold some equity shares, the carrying amount of any investment retained in the former subsidiary at the date that the entity ceases to be a subsidiary should be regarded as the cost on initial measurement of an investment (SME-FRS 19.12) 2014 Nelson Consulting Limited Section 20 Associates Section 20 specifies: A reporting entity should make an accounting policy choice between the benchmark treatment and the allowed alternative treatment and apply the policy consistently in accordance with para (SME-FRS 20.3) Benchmark Allowed Alternative Cost model, irrespective of company-level or consolidated financial statements Equity method for consolidated financial statements; and Cost model for all other cases 2014 Nelson Consulting Limited

65 4. Section 21 Joint Ventures & Other JA Section 21 states A joint venture Joint Venture is a contractual arrangement whereby two or more parties undertake an economic activity through an entity that is separate from the parties and subject to joint control (SME-FRS 21.2) does not include other forms Other Joint of joint arrangements, Arrangements such as an arrangement to use the assets and other resources of the venturers or the joint ownership by the venturers of one or more assets contributed to, or acquired for the purpose of, the joint arrangement, as these do not involve the establishment of an entity that is separate from the venturers themselves (SME-FRS 21.3) 2014 Nelson Consulting Limited Section 21 Joint Ventures & Other JA A reporting entity should make an accounting policy choice between the benchmark treatment and the allowed alternative treatment and Joint Venture apply the policy consistently in accordance with paragraphs (SME-FRS 21.4) Benchmark Allowed Alternative Cost model, irrespective of company-level or consolidated financial statements Equity method for consolidated financial statements; and Cost model for all other cases 2014 Nelson Consulting Limited

66 4. Section 21 Joint Ventures & Other JA In respect of its interests in these other forms of joint arrangements, a venturer should recognise in its financial statements: (a) its assets and its share of any jointly controlled assets, classified according to the nature of the assets; (b) any liabilities that it has incurred and its share of any liabilities incurred jointly with the other venturers in relation to the joint arrangement; Other Joint Arrangements (c) any income from the sale or use of its share of the output of the joint arrangement, together with its share of any expenses incurred by the joint arrangement; and (d) any expenses that it has incurred in respect of its interest in the joint arrangement (SME-FRS 21.3) 2014 Nelson Consulting Limited Cash Flow Statement New guidance on presenting a cash flow statement (optional) In accordance with section 1.1 of the SME-FRS, an entity which prepares and presents its financial statements in accordance with the SME-FRS is not required to include a cash flow statement in those financial statements However, if an entity voluntarily includes a cash flow statement in those financial statements, then this cash flow statement should be prepared in accordance with the requirements of section 22 of the SME-FRS (SME-FRS 22.1) 2014 Nelson Consulting Limited

67 6. Additional Disclosure for Income Taxes Additional disclosure requirements in the Income Taxes Section An entity should disclose: a) the accounting policy adopted for income taxes; and b) major components of tax expense (income); c) the applicable tax rates and jurisdictions in which the tax expense arose; and d) the amount of unused tax losses available to be carried forward against future taxable profits and the expiry dates of those losses (SME-FRS 14.9) New New 2014 Nelson Consulting Limited Determining Reporting Currency New guidance on determining the reporting currency Consistent with the definition and guidance in HKAS 21, SME-FRS defines: An entity s reporting currency is the currency of the primary economic environment in which the entity operates. SME-FRS 15.1 requires: Each entity should identify its reporting currency. SME-FRS Section 15 provides other guidance similar to HKAS Nelson Consulting Limited

68 8. Definition of Related Party Definition of related party aligned with that of full HKFRS A related party is a person or entity that is related to the entity that is preparing its financial statements (the reporting entity ). a) A person or a close member of that person s family is related to a reporting entity if that person: i. has control or joint control over the reporting entity; ii. has significant influence over the reporting entity; or iii. is a member of the key management personnel of the reporting entity or of a parent of the reporting entity. b) An entity is related to a reporting entity if any of the following conditions applies: i. The entity and the reporting entity are members of the same group (which means that each parent, subsidiary and fellow subsidiary is related to the others). ii. One entity is an associate or joint venture of the other entity (or an associate or joint venture of a member of a group of which the other entity is a member) Nelson Consulting Limited Definition of Related Party Definition of related party aligned with that of full HKFRS A related party is a person or entity that is related to the entity that is preparing its financial statements (the reporting entity ). b) An entity is related to a reporting entity if any of the following conditions applies: iii. Both entities are joint ventures of the same third party. iv. One entity is a joint venture of a third entity and the other entity is an associate of the third entity. v. The entity is a post-employment benefit plan for the benefit of employees of either the reporting entity or an entity related to the reporting entity. If the reporting entity is itself such a plan, the sponsoring employers are also related to the reporting entity. vi. The entity is controlled or jointly controlled by a person identified in (a). vii. A person identified in (a)(i) has significant influence over the entity or is a member of the key management personnel of the entity (or of a parent of the entity) Nelson Consulting Limited

69 9. Active Market and Fair Value Definitions of active market and fair value updated to similar to HKFRS 13 An active market is a market in which transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between a knowledgeable, willing buyer and a knowledgeable, willing seller in an arm s length transaction Nelson Consulting Limited New Guidance on Revenue Appendix 1 B20 Determining whether an entity is acting as a principal or as an agent SME-FRS Para states that: In an agency relationship, the gross inflows of economic benefits include amounts collected on behalf of the principal and which do not result in increases in equity for the entity. The amounts collected on behalf of the principal are not revenue. Instead, revenue is the amount of commission. Determining whether an entity is acting as a principal or as an agent requires judgement and consideration of all relevant facts and circumstances. An entity is acting as a principal when it has exposure to the significant risks and rewards associated with the sale of goods or the rendering of services Nelson Consulting Limited

70 10. New Guidance on Revenue Appendix 1 B20 Determining whether an entity is acting as a principal or as an agent Features that indicate that an entity is acting as a principal include: a) the entity has the primary responsibility for providing the goods or services to the customer or for fulfilling the order, for example by being responsible for the acceptability of the products or services ordered or purchased by the customer; b) the entity has inventory risk before or after the customer order, during shipping or on return; c) the entity has latitude in establishing prices, either directly or indirectly, for example by providing additional goods or services; and d) the entity bears the customer s credit risk for the amount receivable from the customer Nelson Consulting Limited New Guidance on Revenue Appendix 1 B20 Determining whether an entity is acting as a principal or as an agent An entity is acting as an agent when it does not have exposure to the significant risks and rewards associated with the sale of goods or the rendering of services. One feature indicating that an entity is acting as an agent is that the amount the entity earns is predetermined, being either a fixed fee per transaction or a stated percentage of the amount billed to the customer Nelson Consulting Limited

71 11. Guidance on Non-Exempted Disclosure Appendix 1 Section D As explained in para. 21 of the SME-FRF, unless specifically exempt from a particular requirement, the financial statements and directors report prepared by a qualifying entity are required to follow the same requirements in the new CO as apply to full financial statements and directors reports. These non-exempt disclosure requirements which apply under the new CO are set out below: S. 383: Sch. 4 Part 1.1 Sch. 4 Part 1.2 Sch. 4 Part 1.3 Sch. 4 Part 1.4 S Nelson Consulting Limited Guidance on Non-Exempted Disclosure S. 383 The financial statements must contain the information prescribed by the Regulation about the following matters: (a) directors emoluments (b) directors retirement benefits (c) termination benefits paid to directors (d) loans, quasi-loans and other dealings in favour of directors of the company or its holding company (e) material interests of directors in transactions, arrangements or contracts entered into by the company or another company in the same group (f) consideration provided to or receivable by a third party for making available the services of a director In this regard, reference should be made to the Companies (Disclosure of Information about Benefits of Directors) Regulation made under s. 451 & 452(2) for the purposes of s Nelson Consulting Limited

72 11. Guidance on Non-Exempted Disclosure Sch 4 Part 1.1 The financial statements must disclose the aggregate amount of outstanding loans made under the authority of sections 280 and 281. Sch 4 Part 1.2 If a company presents consolidated financial statements it must also include in the notes to the consolidated financial statements: a) a note which contains the parent company s company-level statement of financial position in the format in which that statement would have been prepared if the parent company had not been required to prepare consolidated financial statements; and b) a note which discloses the movement in the parent company s reserves. Further notes to the parent company s company-level statement of financial position are not required Nelson Consulting Limited Guidance on Non-Exempted Disclosure Sch 4 Part 1.3 If at the end of the year the company is a subsidiary of another undertaking, it must disclosure particulars relating to that parent undertaking as set out in Sch. 4. Sch 4 Part 1.4 The financial statements must state whether they have been prepared in accordance with the applicable accounting standards within the meaning of section 380 of the new CO and, if they have not been so prepared, must state the particulars of, and the reasons for, any material departure from those standards. (NB As stated in paragraph 20 of the SME-FRF, the SME-FRF and FRS are the applicable accounting standards for the purposes of section 380 for those companies which are entitled to and do take advantage of the reporting exemption) 2014 Nelson Consulting Limited

73 11. Guidance on Non-Exempted Disclosure S. 387 The statement of financial position must be approved by the directors and must be signed by 2 directors on the directors behalf (unless the company only has one director, in which case the sole director must sign the statement of financial position). The names of the director(s) who signed the statement of financial position must be stated on any statement of financial position laid before the company in general meeting, sent to a member under section 430 or otherwise, circulated, published or issued by the company Nelson Consulting Limited 145 Today s Agenda IV.Major Initiatives of New CO (as Summary) 2014 Nelson Consulting Limited

74 Major Initiatives (Measures for 4 Main Objectives) 1. Enhancing Corporate Governance 2. Ensuring Better Regulation a. Strengthening the accountability of directors b. Enhancing shareholder engagement in the decision-making process c. Improving the disclosure of company information d. Fostering shareholder protection e. Strengthening auditors rights a. Ensuring the accuracy of information on the public register b. Improving the registration of charges c. Refining the scheme for deregistration of companies d. Improving the enforcement regime, incl. The original S Facilitating Business a. Streamlining procedures b. Facilitating simplified reporting c. Facilitating business operations 4. Modernising the Law a. Abolishing par value for shares b. Removing the power to issue share warrants c. Clarifying the rules on indemnification of directors against liabilities to third parties 2014 Nelson Consulting Limited 147 Major Initiatives (Measures for 4 Main Objectives) 1. Enhancing Corporate Governance a. Strengthening the Accountability of Directors i. Restricting the appointment of corporate directors by requiring every private company to have at least one natural person to act as director, to enhance transparency and New CO Part 10 S. 457 accountability. ii. Clarifying in the statute the directors duty of care, skill and diligence with a view to providing clear guidance to directors. New CO Part 10 S. 465 & Nelson Consulting Limited

75 Major Initiatives (Measures for 4 Main Objectives) 1. Enhancing Corporate Governance b. Enhancing Shareholder Engagement in the Decision-Making Process i. Introducing a comprehensive set of rules for proposing and passing a written resolution. ii. Requiring a company to bear the expenses of circulating members statements relating to the business of, and proposed resolutions for, Annual General Meetings, if they are received in time to be New CO Part 12 S. 548 to 561 sent with the notice of the meeting. iii. Reducing the threshold requirement for members to demand a poll from 10% to 5% of the total voting rights. New CO Part 12 S. 580 & etc. New CO Part 12 S Nelson Consulting Limited 149 Major Initiatives (Measures for 4 Main Objectives) 1. Enhancing Corporate Governance c. Improving the Disclosure of Company Information i. Requiring public companies and the larger (i.e., companies that do not qualify for simplified reporting) private companies and guarantee companies to prepare a more comprehensive directors report which includes an analytical and forward-looking business review, whilst allowing private companies to opt out by special resolution. The business review will provide useful information for shareholders. In particular, the requirement to include information relating to environmental and employee matters that have a significant effect on the company is in line with international trends to promote corporate social responsibility. New CO Part 9 S.388 & Sch Nelson Consulting Limited

76 Major Initiatives (Measures for 4 Main Objectives) 1. Enhancing Corporate Governance d. Fostering Shareholder Protection i. Introducing more effective rules to deal with directors conflicts of interests, including expanding the requirement for seeking shareholders approval to cover directors employment contracts which exceed three years. ii. Requiring disinterested shareholders approval in cases where shareholders approval is required for transactions of public companies and their subsidiaries. iii. Requiring the conduct of directors to be ratified by disinterested shareholders approval to prevent conflicts of interest and possible abuse of power by interested majority shareholders in ratifying the unauthorised conduct of directors. New CO Part 11 S. 530 to 535 New CO Part 11 S. 496 & etc. New CO Part 10 S Nelson Consulting Limited 151 Major Initiatives (Measures for 4 Main Objectives) 1. Enhancing Corporate Governance d. Fostering Shareholder Protection iv.replacing the headcount test with a not more than 10% disinterested voting requirement for privatisations and specified schemes of arrangement, while giving the court a new discretion to dispense with the test (in cases where it is retained) for members schemes. v. Extending the scope of the unfair prejudice remedy to cover proposed acts and omissions, so that a member may bring an action for unfair prejudice even if the act or omission that would be prejudicial to the interests of members is not yet effected. New CO Part 13 S.673 & etc. New CO Part 14 S Nelson Consulting Limited

77 Major Initiatives (Measures for 4 Main Objectives) 1. Enhancing Corporate Governance e. Strengthening Auditors Rights i. Empowering an auditor to require a wider range of persons, including the officers of a company s Hong Kong subsidiary undertakings and any person holding or accountable for the company or its subsidiary undertakings accounting records, to provide information or explanation reasonably required for the performance of the auditor s duties. The offence for failure to provide the information or explanation is extended to cover officers of the company and the wider range of persons. New CO Part 9 S Nelson Consulting Limited 153 Major Initiatives (Measures for 4 Main Objectives) 2. Ensuring Better Regulation a. Ensuring the Accuracy of Information on the Public Register i. Clarifying the Registrar s powers in relation to the registration of documents, such as specifying the requirements for the authentication of documents to be delivered to the Companies Registry and the manner of delivery, and withholding the registration of unsatisfactory documents pending further particulars. ii. Clarifying the Registrar s powers in relation to the keeping of the register, such as rectifying typographical or clerical errors, making annotations and requiring a company to resolve any inconsistency or provide updated information. New CO Part 2 S. 31, 35 to 38 New CO Part 2 S. 39 to Nelson Consulting Limited

78 Major Initiatives (Measures for 4 Main Objectives) 2. Ensuring Better Regulation a. Ensuring the Accuracy of Information on the Public Register iii. Providing a statutory basis for applications to court for removing information from the register that is inaccurate, forged or derived from anything invalid, ineffective or done without the authority of the company. New CO Part 2 S. 42 iv.requiring a company to deliver to the Registry a return, including a statement of capital, whenever there is a change to its capital structure, to ensure that the public register contains up-to-date information on a company s share capital structure. New CO Part 4 S Nelson Consulting Limited 155 Major Initiatives (Measures for 4 Main Objectives) 2. Ensuring Better Regulation b. Improving the Registration of Charges i. Revising the list of registrable charges, such as expressly providing that a charge on an aircraft or any share in an aircraft is registrable, and removing the requirement to register a charge for the purpose of securing an New CO Part 8 S. 334 issue of debentures. ii. Replacing the automatic acceleration of the repayment obligation with a choice given to the lender as to whether the secured amount is to become immediately payable when a charge is void due to non-compliance with the registration requirements. New CO Part 8 S. 337(6) 2014 Nelson Consulting Limited

79 Major Initiatives (Measures for 4 Main Objectives) 2. Ensuring Better Regulation b. Improving the Registration of Charges iii. Requiring a certified copy of the charge instrument (in addition to the prescribed particulars of the charge) to be registered and available for public inspection, to provide more detailed info. to those searching the register. New CO Part 8 S. 335, & etc. iv.shortening the period for delivery to the Registrar of the charge instrument and the prescribed particulars from five weeks to one month, to reduce the period during which the charge is not visible on the register. New CO Part 8 S. 335 & etc. v. Requiring written evidence of satisfaction/release of a charge to accompany a notification to the Registrar for registration of the satisfaction/release, thus making such documents available for public inspection. New CO Part 8 S Nelson Consulting Limited 157 Major Initiatives (Measures for 4 Main Objectives) 2. Ensuring Better Regulation c. Refining the Scheme for Deregistration of Companies i. Imposing three additional conditions for the deregistration of defunct companies, namely that the applicant must confirm that that the company is not a party to any legal proceedings and that neither the company nor its subsidiary has any immovable property in Hong Kong, to minimise any potential abuse of the deregistration procedure. New CO Part 15 S. 750 to Nelson Consulting Limited

80 Major Initiatives (Measures for 4 Main Objectives) 2. Ensuring Better Regulation d. Improving the Enforcement Regime i. Enhancing the investigatory powers of an inspector, for example, by requiring a person under investigation to preserve records or documents and to verify statements made by statutory declaration. ii. Providing better safeguards to ensure the confidentiality of information obtained in investigations and enquiries and for the better protection of informers. iii. Providing new powers for the Registrar to obtain documents or information to ascertain whether any conduct that would constitute an offence in relation to the provision of false or misleading statement to the Registrar has taken place. New CO Part 19 S. 846 to 850 New CO Part 19 S. 880 to 885 New CO Part 19 S. 873 to Nelson Consulting Limited 159 Major Initiatives (Measures for 4 Main Objectives) 2. Ensuring Better Regulation d. Improving the Enforcement Regime iv.strengthening the enforcement regime in relation to the liabilities of officers of companies for the companies contravention of provisions in the new Ordinance, including New CO Part 1 S. 3 lowering the threshold for prosecuting a breach or contravention and extending it to cover reckless acts through a new definition of responsible person. v. Introducing a new offence in relation to inaccurate auditor's reports New CO Part 9 S. 408 so-called 399 regime, now S. 408 the offence would be committed if the auditors in question knowingly or recklessly caused two important statements to be omitted from the auditor s report Nelson Consulting Limited

81 Major Initiatives (Measures for 4 Main Objectives) 2. Ensuring Better Regulation d. Improving the Enforcement Regime vi.empowering the Registrar to compound specified offences to optimise the use of judicial resources. Compoundable offences are generally confined to straightforward, minor regulatory offences committed by companies that are punishable by a fine. New CO Part 20 S Nelson Consulting Limited 161 Major Initiatives (Measures for 4 Main Objectives) 3. Facilitating Business a. Streamlining Procedures i. Allowing companies to dispense with Annual General Meetings by unanimous shareholders consent. ii. Introducing an alternative court-free procedure for New CO Part 12 S. 612 to 614 reducing capital based on a solvency test. iii. Allowing all types of companies (rather than just private companies, as in the current Companies Ordinance (Cap.32)) to purchase their own shares out of capital, subject to a solvency test. New CO Part 5 S. 215 to 225 New CO Part 5 S. 257 to Nelson Consulting Limited

82 Major Initiatives (Measures for 4 Main Objectives) 3. Facilitating Business a. Streamlining Procedures iv.allowing all types of companies (whether listed or unlisted) to provide financial assistance to another party for the purpose of acquiring the company s own shares or the shares of its holding company, subject to a solvency test. Under the current CO, subject to certain specified exceptions, there is a broad prohibition on the giving of financial assistance to purchase the company s own shares. New CO Part 5 S. 283 to 289 v. Introducing a new court-free statutory amalgamation procedure for wholly owned intragroup companies. New CO Part 13 S. 678 to Nelson Consulting Limited 163 Major Initiatives (Measures for 4 Main Objectives) 3. Facilitating Business a. Streamlining Procedures vi. Streamlining the procedures for the restoration of dissolved companies New CO Part 15 S. 765 to 767 by court order. vii. Introducing a new administrative restoration procedure for a company dissolved by the Registrar in straightforward cases, without the need for recourse to the court. New CO Part 15 S. 760 to Nelson Consulting Limited

83 Major Initiatives (Measures for 4 Main Objectives) 3. Facilitating Business b. Facilitating Simplified Reporting i. Facilitating SMEs to prepare simplified financial and directors reports along the following lines: a private company (with the exception of a bank/deposit-taking company, an insurance company or a stockbroker) will automatically qualify for simplified reporting if it qualifies as a small private company. the holding company of a group of companies that qualifies as a group of small private companies will also qualify for simplified reporting. a private company that is not a member of a corporate group may adopt simplified reporting with the agreement of all the members. New CO Part 9 S , S Nelson Consulting Limited 165 Major Initiatives (Measures for 4 Main Objectives) 3. Facilitating Business b. Facilitating Simplified Reporting ii. Allowing small guarantee co. and groups of small guarantee co., which have a total annual revenue of not more than $25 million, to qualify for simplified reporting. New CO Part 9 S , S.3 iii. A private co. or a group of private co. which is not qualified as a small private co. or a group of small private co. respectively may prepare simplified reports New CO Part 9 S , S.3 if it meets a higher size criteria and if the members holding 75% of the voting rights so resolve and no member objects. iv.making the summary financial reporting provisions more user-friendly and extending their application to companies in general (rather than confining them to listed companies) New CO Part 9 S. 437 to Nelson Consulting Limited

84 Major Initiatives (Measures for 4 Main Objectives) 3. Facilitating Business c. Facilitating Business Operations i. Making the use of a common seal optional and relaxing the requirements for a company to have an official seal for use abroad. ii. Permitting a general meeting to be held at more than one location using electronic technology. New CO Part 3 S. 124 & etc. New CO Part 12 S. 584 iii. Setting out the rules governing communications to and by companies in electronic form. New CO Part 18 S. 831 to Nelson Consulting Limited 167 Major Initiatives (Measures for 4 Main Objectives) a. Abolishing Par Value for Shares i. Adopting a mandatory system of no-par for all companies with a share capital as par value is an antiquated concept that may give rise to practical problems, such as inhibiting the raising of new capital and unnecessarily complicating the accounting regime New CO Part 4 S Modernising the Law NO PAR 2014 Nelson Consulting Limited

85 Major Initiatives (Measures for 4 Main Objectives) b. Removing the Power to Issue Share Warrants i. Removing the power of companies to issue share warrants to bearers. Share warrants are rarely issued by companies nowadays and are undesirable from the perspective of anti-money laundering because of the lack of transparency in the recording of their ownership and the manner by which they are transferred. New CO Part 4 S Modernising the Law 2014 Nelson Consulting Limited 169 Major Initiatives (Measures for 4 Main Objectives) c. Clarifying the Rules on Indemnification of Directors against Liabilities to Third Parties i. Clarifying the rules on the indemnification of directors against liabilities to third parties in order to remove the uncertainties at common law. New CO Part 10 S. 467 & etc. 4. Modernising the Law 2014 Nelson Consulting Limited

86 New Co. Ordinance and Revised SME-FRS 18 June 2014 LAM Chi Yuen Nelson 林 智 遠 Nelson Consulting Limited 171 New Co. Ordinance and Revised SME-FRS 18 June 2014 Q&A Session LAM Chi Yuen Nelson 林 智 遠 Nelson Consulting Limited