bodyType

customContents

entityId

entityUuid

articlePageQuery

filter

article

articleBaseAdvertisingInfoArticle

articleListArticle

articleSeoArticle

helpersCheckIsPostiesArticle

hooksArticleAcknowledgementGateOverlayArticle

hooksTrackPageViewArticle

hooksContentInterestArticle

articleLinkingDataContent

articleSchemaContent

liveArticle

advertZone

sentiment

contentLock

topics

types

sections

moreOnThisArticles

urlAlias

commentCount

sponsorType

authorLocations

authors

paywallTypes

corrections

displaySlideShow

multimediaEmbed

printHeadline

seriesContainer

socialHeadline

headline

flag

firstTopic

glossary

flattenTypeIds

publishedDate

additionalInfoBoxes

images

image

relatedLinks

relatedNewsletters

__typename

createdDate

sponsor

factSheets

series

disableOffPlatformContent

published

updatedDate

summary

subHeadline

body

keywords

copyrighted

customTimezone

liveContents

SCMP Reporter

THE Hong Kong corporate reporting environment is changing, hopefully for the better.

  Only two years ago it seemed corporate engineers could get away with anything, from raping the minorities to butchering the assets of acquired associates, right under the eyes of the regulators.

  Now it seems things are changing so that abuses of reporting and corporate juggling, taken as commonplace in the past, are now no longer acceptable.

  This change has resulted from reforms carried out by local regulators.

   It has also come from overseas with the new awareness that has developed since the mid-1980s in the United States and Britain of what constitutes satisfactory corporate disclosure and ethical behaviour.

  A report issued on Monday by the stock exchange, the Securities and Futures Commission and the local accounting profession, recommending sweeping changes in financial disclosure, comes as a welcome expression of the need to change in Hong Kong.

  Hong Kong is hopefully about to step up a gear or two in the overdue process of overhauling accounting standards in the territory.

  A marketplace might have great regulations, interesting companies, attractive valuations and effective transaction policing. But if it has awful financial disclosure all these positive attributes become worthless.

  Accounting standards are at the heart of financial disclosure and Hong Kong has some way to go before it catches up with the US and UK in standards of disclosure.

  Analysts are some of the most vocal practitioners complaining about accounting abuse or unclear reporting in Hong Kong.

  ''The examples of abuse are so numerous it is almost impossible to get a measure of it,'' said one analyst with a French-owned brokerage.

  ''Abuse comes in with the treatment of associates, taxation provisions, minorities, the taking of exceptionals and extraordinaries; you name it and I bet you I can find a company abusing one standard or another in their accounts,'' he said.

  The report of the working group on financial disclosure is recommending some key changes to local financial reporting standards including the removal of extraordinary items and enhanced disclosure of operating activities.

  A key recommendation is that banks should go to full disclosure of accounts.

   At present, banks in Hong Kong, excluding HSBC Holdings and Hang Seng Bank, hide the true worth of their activities by transferring amounts each year into or from secret reserves.

  Baring Securities head of research Stuart Cook said: ''Hong Kong has one of the worst disclosure records in the region when it comes to banks.''   Many banks are concerned that in periods of earnings downturn, runs on their deposit base might be triggered by worried investors.

   So they hide the true goings-on in their accounts, using hidden reserves to buffer earnings downturns.

  Mr Cook said: ''But we are in a changed environment. Now more and more investors are demanding true earnings statements from analysts instead of those figures stated by the banks.

  ''Banks are deliberately mis-stating their figures and this is misleading the marketplace.

  ''I believe if you are a public company then there should be no veil of secrecy about your numbers. You should show true numbers and be measured on that just like any other company.''   Even with HSBC Holdings, which has achieved some of the best disclosure of any bank listed in Hong Kong or London, one-off provisions and payments make it impossible to work out next year's profit figure.

  For instance, in 1991 the bank showed investment income of $2.1 billion. In 1992 this shot up to $5.5 billion and there was a $3.2 billion amount on the gain made from the sale of its stake in Cathay Pacific.

   But in the $5.5 billion figure there are also a large number of disposals, so why are these not separately noted?   Even when it comes to apparently very predictable companies like utility operations there is room for differences in accounting to make cross-comparisons and valuations distorted.

  As an example, China Light and Power wholly provides for perceived deferred tax liability. Local accounting standards do not demand this unless the expectation is that the capital will not be there in the future to pay the whole amount, which, given the company's cash flow, is not a problem.

  Hong Kong Electric only partial provides deferred tax, in line with local accounting standards.

  This means the net profit at China Light and Power is constantly being under-stated, which is not necessarily a bad thing. But it makes a comparison with Hong Kong Electric difficult without adjustments being made.

  It is not just the treatment of figures that is a problem at reporting time.

  Material changes in financial circumstances need to be reported sooner as well.



Letting in the fresh breeze of disclosure