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SCMP Reporter

MAJOR changes are being proposed to make corporate reporting of profit and loss statements more user-friendly.

  Should these changes find their way into local accounting standards the lives of many professional investors will change dramatically when valuing local company ratings and interpreting their financial statements.

  There are two separate agents of change in Hong Kong's accounting standards.

   The first, which is the subject of this article, is the Hong Kong Society of Accountants, who are at present consulting on changes to the standards governing extraordinary items.

  The second agent of change is a tripartite working group with representatives from the Securities and Futures Commission, the Hong Kong Stock Exchange and the accounting profession. This group is concerned with financial disclosure of listed companies ingeneral.

  Paul Phenix, chairman of the Hong Kong Society of Accountants accounting standards committee said that under the proposed changes profit and loss accounts would only on rare occasions include extraordinary items.

   All other forms of earnings or losses would come into the net profit line of the accounts with large exceptional items being disclosed separately, Mr Phenix said.

   ''The standard of financial reporting has improved tremendously in Hong Kong over the last five or six years. But of course there are times when it is healthy to question some of the figures,'' he said.

   Under the proposed changes, analysts and investors in general are going to be able to see which proportion of a companies accounts is made up of continuous earnings and which part is discontinued earnings.

  They will be able to see the underlying value of a company at a glance and will be equipped to make more informed judgments about the quality of earnings.

  For instance, under the changes investors will be able to see that by far the largest proportion of Hong Kong Telecom's earnings are high quality continuous earnings; as in the long term Hong Kong people and businesses are consistent in their use of the telephone.

  However, the quality of earnings at Hopewell Holdings will look terrible as a significant proportion of the contribution to net profit comes from one off asset disposals.

  These are meant to tide the company over until a recurring earnings flow comes in from the group's power station and road projects.

  Company directors, accountants and other interested parties are being asked to consider the accounting changes in an exposure draft.

  The objective of the exposure draft is to redefine key components of profit and loss account reporting so that in future all companies in Hong Kong using local standards of accounting, report their figures on the same basis.

  The exposure re-defines a number of key terms in accounting:   Extraordinary items are income or expenses that arise from events or transactions that are clearly distinct from ordinary activities of the enterprise and therefore are not expected to recur frequently or regularly.

  The two examples given of organisations reporting extraordinary items would arise from the expropriation of assets or a natural catastrophe.

  Exceptional items are items of income and expense within profit or loss from ordinary activities that are of such size, nature or incidence that their disclosure is relevant to explain the performance of the enterprise for the period.

  Events that might constitute separate disclosure as an exceptional item include write down of stocks and work in progress to items to net realisable value, corporate restructuring, disposals of items of property, plant and equipment, disposal of long term investments, discontinued operations and litigation settlements.

  Ordinary activities are any activities which are undertaken by an enterprise as part of its business and such related activities in which the enterprise engages in furtherance of, incidental to, or arising from these activities.

  Discontinued operations result from the sale or abandonment of an operation that represents a separate major line of business of an enterprise and of which the assets, net profit or loss activities can be distinguished physically, operationally.

    There are only two items that will be allowed to be excluded from the net profit line of a profit and loss account in future:   Fundamental errors which might be discovered in the current period that are of such significance that the financial statements of one or more prior periods can no longer be considered to have been reliable at the date of their issue.

  Prior period adjustments are material adjustments applicable prior to periods arising from changes in accounting policies or from the correction of fundamental error.

  Other items not included in the profit and loss account include revaluation of assets and foreign exchange gains or losses.



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