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Directors’ report

 

The disclosure requirements for the directors' report under the new CO are contained in the following locations:

 

  • Sections 388, 390 and 543(2)

  • Schedule 5 "Contents of Directors' Report: Business Review" (unless exempt under section 388(3)); and

  • Companies (Directors' Report) Regulation (Cap. 622D)

 

In addition, section 391 sets out the requirements relating to the approval and signature of the directors' report.

 

Contents of directors’ report: general (section 390)

 

  • Name of directors during the financial year or up to date of the report

  • Principal activities of the company in the course of the financial year

  • Particulars of other matter material for members’ appreciation of state of affairs (in the directors’ opinion, not harmful to business)

 

Disclosure of directors' names

 

Section 390(1)(a) states that the directors' report must contain the name of every person who was a director of the company either during the financial year or during the period beginning with the end of the financial year and ending on the date of the directors' report.

 

However, if the company is required to prepare a consolidated directors' report (as per section 388(2)), then section 390(3) states that section 390 has effect as if a reference to "the company" in section 390(1) or (2) were a reference to "the company and the subsidiary undertakings" included in the annual consolidated financial statements for the financial year. This means that the names of any persons who were or are directors of any company in the group included in the consolidated financial statements need to be disclosed in the holding company's consolidated directors' report in such cases.

 

The names of directors of all subsidiary undertakings included in the annual consolidated financial statements may be disclosed on a consolidated basis, without further setting out specifically the directorship of each individual subsidiary undertaking. Therefore, if a person is a director of more than one company in the group his or her name may be disclosed once in the list of names. 

 

If, in the opinion of the directors of the holding company, the number of names of directors of all subsidiary undertakings is of excessive length, disclosure of the names of such directors may be made by way of inclusion by reference, provided that the information on the relevant directors' names is clearly contained in the holding company’s Directors' Report by making the list of such names readily available to the reader. This may include, for example, by providing a link to the holding company’s website that contains a full list of the names.

 

Holding companies will still need to collect and collate the information for all subsidiary undertakings included in the consolidated financial statements to compile the list of names and to ensure that they have appropriate mechanisms in place to update the list for appointments, resignations and removals of directors.

 

Disclosure of principal activities

 

Section 390(1)(b) states that the directors' report must contain the principal activities of the company in the course of the financial year.

 

Section 390 is applicable to all companies required to prepare a directors' report i.e. there is no exemption from its requirements. Therefore, a statement of principal activities is required to be made by all companies as a minimum. Those companies that are also required to prepare a business review under section 388, will then provide further discussion and analysis in their directors' reports relating to those principal activities in accordance with Schedule 5.

 

For groups, the statement of principal activities will be prepared on a consolidated basis and any required business review will provide further discussion and analysis in the consolidated directors' report relating to the consolidated principal activities in accordance with Schedule 5. This is because section 390(3) states that section 390 has effect as if a reference to "the company" in subsection (1) or (2) were a reference to "the company and the subsidiary undertakings" included in the annual consolidated financial statements for the financial year.

 

Directors’ report to be approved and signed (section 391)

 

  • Approved by directors

  • Signed on the directors’ behalf by a director or by the company secretary

  • State the name of the person who signed the report on the directors’ behalf

 

Disclosure of management contract (section 543)

 

If (a) a company enters into a contract by which a person undertakes the management and administration of the whole or any substantial part of any business of the company; and (b) the contract is not a contract of service with any director of the company or any person engaged in the full-time employment of the company.

 

The directors’ report for any year in which the contract is in force must include—

  • a statement of the existence and duration of the contract; and

  • the name of every director and shadow director interested in the contract, and the nature and extent of the interest

 

Business Review (schedule 5)

 

A business review is required to be contained in a directors’ report (section 388). It should include the following information of a company –

 

  • a fair review of its business;

  • a description of the principal risks and uncertainties facing the company;

  • particulars of important events affecting it that have occurred since the end of the financial year;

  • an indication of likely future development in its business;

  • an analysis using financial key performance indicators;

  • a discussion of its environmental policies and performance, and its compliance with relevant laws and regulations that have a significant impact on the company; and

  • an account of its key relationships with employees, customers, suppliers and others that have a significant impact on the company and on which its success depends.

 

Disclosure of any information about impending developments or matters in the course of negotiation is not require if the disclosure would, in the directors’ opinion, be seriously prejudicial to the company’s interests.

 

Information required extends to any subsidiary if consolidated directors' report.

 

Not all companies are required to prepare a business review.

 

 

Information required by Companies (Directors’ Report) Regulation (Cap. 622D)

 

  • Particulars of shares issued (section 5)

  • Particulars of debentures issued (section 5A)

  • Particulars of equity-linked agreement (section 6)

  • Dividend recommended (section 7)

  • Permitted indemnity provision in force (section 9)

 

No requirement to disclose in the directors’ report if a company that falls within the reporting exemption for the financial year:

  • Directors’ interests in arrangements to enable directors to acquire benefits by the acquisition of shares or debentures (section 3

  • Donations of HK$10,000 or above (not apply if wholly-owned subsidiary of another Hong Kong company) (section 4)

  • Reasons of director resigned or refused to stand for reelection relating to affairs of company (section 8)

  • Material interests of directors in transactions, arrangements or contracts of significance entered into by a specified undertaking of the company (section 10)

 

Note: The reference to consolidated directors' report in section 388(2) does not automatically cause the reporting items in the C(DR)R to be reported on a consolidated basis. For example, the requirement in section 8 of the Regulation which requires the reasons for a director’s resignation to be disclosed only applies if a director of the company has resigned. Even if the directors’ report is a consolidated report being prepared under section 388(2), there is no need to disclose information in relation to the resignation of a director of any of the company’s subsidiary undertakings in that report. Instead, that information will be disclosed in the directors’ report of the relevant subsidiary undertaking, if it is incorporated in Hong Kong.

 

 

 

Source: http://www.zhtraining.com/pdf/SCAA_0115.pdf

             http://www.hkicpa.org.hk/en/standards-and-regulations/standards/new-co/qa-index/pa-director-report/

             http://www.cr.gov.hk/en/companies_ordinance/faq_account-audit.htm#16