Hong Kong Financial Reporting Standard (HKFRS) 10/International Financial Reporting Standard (IFRS) 10, entitled "Consolidated Financial Statements", became effective for annual periods commencing on or after 1 January 2013.
HKFRS 10/IFRS 10 establish new guidance on the principle of control (which is the basis for consolidation) for the purpose of determining whether an entity should be consolidated in an issuer's consolidated financial statements. They also explain how the principle of control is applied to identify whether an investor/issuer controls an investee, and therefore whether the investee (which was not previously classified as a subsidiary of the issuer) should be grouped as a subsidiary and be consolidated under the new requirements.
Hong Kong Exchanges and Clearing Limited published a letter entitled "Rule implications arising from the adoption of Hong Kong Financial Reporting Standard 10 / International Financial Reporting Standard 10" on 1 March 2013 to provide guidance to issuers for compliance with the relevant requirements under the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (Listing Rules) in view of the adoption of HKFRS 10/IFRS 10.
Rule 1.01 of the Listing Rules establishes that a subsidiary of an issuer includes any entity which is consolidated into its consolidated financial statements as a subsidiary under the HKFRS or IFRS.
The implementation of HKFRS 10/IFRS 10 may result in various compliance implications:
- Financial statements disclosures.
- Inside information disclosure obligations under Part XIVA of the Securities and Futures Ordinance resulting from the consolidation or deconsolidation of entities.
- Compliance requirements regarding the investee (which belongs to part of the issuer's group under the new requirements) under the Listing Rules.
Financial statements disclosures
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Compliance requirements regarding the investee under the Listing Rules
Issuers should carefully assess whether the transactions conducted by or in relation to the investee will be subject to the relevant Listing Rules compliance requirements such as:
- Inside information disclosure.
- Notifiable transactions and connected transactions. In particular, (a) the group of connected persons may be expanded which may affect matters such as the public float; and (b) associates of an existing connected person may also be expanded which may affect matters such as voting rights and dealing restrictions.
- Spin-off of the investee.
- Share option schemes of subsidiaries.