A practical guide to the business review

BETTER BUSINESS REPORTING

A practical

guide to the

business review

May 2015

Contents

 The business review: An evolutionary step towards better business

reporting

 What’s the new legal requirement?

 Preparing a business review: Overall considerations

 Relevance of Accounting Bulletin 5

 AB5’s guiding principles

 Report focus

 Materiality

 Context and linkage

 Planning ahead

 Questions to ask

 The content elements:

 Setting the scene and explaining the year under review

 Bringing the story up to date

 Explaining the likely future development of the business

 Explaining the principal risks and uncertainties

 Overall assessment of the quality of the business review:

Questions for boards to ask themselves

 Further information

 Appendix 1: Extracts from Appendix 16 to the Main Board Listing

Rules

 Appendix 2: Index of KPIs illustrated in the Implementation Guidance

attached to Accounting Bulletin 5

 Appendix 3: A summary of questions to ask

 Appendix 4: Local award winners

A practical guide to the business review

The business review:

An evolutionary step towards

better business reporting

It is widely recognised that narrative reporting has an essential role to play in providing a

broader perspective on business performance alongside the financial statements. The

new requirement to present a business review and the HKICPA’s related guidance are

the latest in a series of regulatory initiatives aimed at improving the relevance of

narrative reports for shareholders and other stakeholders.

In this practical guide to the business review, our aim is to help

in your journey towards better business reporting. We

introduce the new requirements, as well as showing how a

business review can both embrace the HKICPA’s guidance and

meet the Listing Rule requirements and recommendations

relating to the management discussion and analysis (MD&A).

But before we start, it is worth remembering that the new

business review is just one of the initiatives aimed at

improving business reporting by listed companies over the

next few years. The key developments are set out in the

timeline below – each of these can be seen as an evolutionary,

rather than revolutionary, step on the journey towards better

business reporting.

For example, from 2015 the business review is required to

include a description of the principal risks and uncertainties

facing the company or group. This is a step up from the

recommended disclosure item previously found in the Listing

Rules. However, going forward into 2016 we expect even

more robust reporting on this topic in the Corporate

Governance Report, as a result of amendments to the

Corporate Governance Code.

Similarly, the new business review requirements

include a requirement to discuss the entity’s

environmental policies and key relationships that impact

on the company’s or group’s development,

performance and position. This can be seen as

forerunning the Environmental, Social and Governance

(ESG) reporting consultation that is expected to be

issued later in 2015.

Therefore, rather than simply complying with a

disclosure checklist, we would encourage companies to

think more broadly and look ahead. Considering the

business review disclosure in conjunction with the

broader reporting on ESG and risk matters and vice

versa can help ensure that the messages provided to

the market are consistent over time, within one report

and across various reports. Extra benefits can also

come from starting early and focusing your efforts

across the business. This allows time for proper

consideration of shareholder needs and can also be an

efficient way to reduce compliance cost.

A practical guide to the business review

What’s the new legal

requirement?

One of the key changes introduced by the new Hong Kong Companies Ordinance (Cap. 622 or CO)

is to require all Hong Kong incorporated companies to include a “business review” in their directors’

report, unless they are specifically exempt under section 388 of the CO

. This requirement is stated

in section 388 of the CO, while the minimum contents for a business review are set out in Schedule

5 to the CO. The full text of Schedule 5 has been reproduced below for easy reference.

Schedule 5 disclosure requirements for the business review

Sch 5.1

A directors’ report for a financial year must contain a business review that consists of–

a fair review of the company’s business;

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

particulars of important events affecting the company that have occurred since the end of the financial

year; and

an indication of likely future development in the company’s business.

Sch 5.2

To the extent necessary for an understanding of the development, performance or position of the

company’s business, a business review must include–

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.

Sch 5.3

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.

Sch 5.4

This Schedule has effect in relation to a directors' report required to be prepared under section 388(2) [i.e. a

consolidated directors' report] 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.

Sch 5.5

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.

Section 388(3) and (4) of the CO sets out 3 categories of companies which are exempt from preparing a business review. These are

as follows:

1) wholly owned subsidiaries of another body corporate in the financial year as defined in section 357(3);

2) companies which fall under the “reporting exemption” i.e. companies which meet one or more of the size and/or approval

requirements set out in section 359 for private companies and companies limited by guarantee; and

3) private companies whose shareholders have passed a special resolution at least 6 months before the year-end exempting the

company, in accordance with the conditions set out in section 388(3)(c) and (4).

A practical guide to the business review

The business review is part of the directors’

report – boards and audit committees are

responsible for ensuring that the picture of the

business is one they recognize

Other than these brief requirements in Schedule 5, there

is no further indication in the CO as to the expected

contents of the business review.

As a result, the HKICPA, at the invitation of the Companies

Registry, has issued Accounting Bulletin 5 (“AB5”) to

provide further guidance on the preparation and

presentation of the business review, following the

approach taken in the UK to this topic – more on this in the

next section of this guide.

Applicability of Schedule 5 to listed issuers

Paragraph 28 of Appendix 16 to the Main Board Listing

Rules (“App 16.28”), as amended in February 2015

requires all listed issuers, whether or not they are

incorporated in Hong Kong, to comply with Schedule 5,

consistent with the HKEx’s level playing field principle.

The HKEx has set an effective date of years ending 31

December 2015 for these amendments. Before that date,

compliance with Schedule 5 is optional for non Hong Kong

incorporated issuers, creating a short transitional period

when the requirements may differ depending on whether

the issuer is incorporated in Hong Kong or overseas.

In addition, listed issuers and other entities claiming

compliance with the disclosure requirements of the Listing

Rules, still need to ensure that the MD&A information

disclosed in the annual report includes commentary on

each of the matters specifically identified in App 16.32 (or

the equivalent GEM Rule). They may also choose to

comply with App 16.52 (or the equivalent GEM Rule)

which sets out recommended additional disclosure which

issuers are encouraged to disclose in their annual reports.

These specific MD&A items align well with the core

content elements and other matters required by Schedule

5 and therefore we expect that most issuers will include

them within the business review, rather than disclosing

them elsewhere in the annual report. In this guide we

highlight these required and recommended commentary

items in amongst the discussion of the content elements

as applicable. We have also included for easy reference

the full text of these paragraphs in Appendix 1 to this

guide, together with an index of where these items are

discussed in this guide.

Key areas of change that we encourage listed issuers

to focus on:

The impact of Schedule 5 on listed issuers will depend

on the extent to which the issuer went beyond the

minimum requirements in their MD&A’s in prior years.

However, we would encourage all listed issuers to

revisit the content and structure of their reporting to

ensure it continues to align with the information needs

of the shareholders. Areas to focus on would include:

• More rigorous descriptions of business model and

strategy to provide shareholders with an understanding

of the processes, relationships and resources that the

business depends on – and the strategy for developing

and preserving business capability over the longer

term.

• Complementing as well as supplementing the

financial statements by providing additional financial

and non-financial information which may be relevant to

the shareholders’ evaluation of past results and

assessment of future prospects.

• Improved selection and presentation of

performance measures which are relevant to an

understanding of business achievements, prospects

and capabilities.

• Better linkage within the MD&A and between the

MD&A and other elements of the report to promote

understanding and to bring together relevant

information in a cohesive way.

But the most important thing to remember is that each

business review should be unique and authentic –

shareholders will be unimpressed and skeptical at any

signs that the business review is boilerplate or

otherwise lacking in credibility.

Boards and audit committees have a particular role to

play here in ensuring that the picture of the business

presented is one that they recognize. This is

emphasized by the legal requirement that the business

review forms part of the directors’ report, whether

directly or by specific cross-reference to the MD&A

discussion within the annual report.

On 6 February 2015, the HKEx issued its Consultation Conclusions on the Review of Listing Rules on Disclosure of Financial Information with

reference to the New Companies Ordinance and Hong Kong Financial Reporting Standards and Proposed Minor/Housekeeping Rule Amendments

to update the Listing Rules for the new Companies Ordinance disclosure requirements. Amendments to the Listing Rules were included as an

appendix to the Consultation Conclusions. These amendments are mandatory for financial years ending on or after 31 December 2015. This guide is

based on these updated Listing Rules.

A practical guide to the business review

Preparing a business review:

Overall considerations

Given the high level nature of the requirements set out in the legislation, directors are free to decide

on a format and level of information that would make most sense in the company’s circumstances. In

this section of our guide, we consider how the guidance issued by the HKICPA, Accounting Bulletin

5, is relevant to meeting this challenge. We also consider report focus and materiality, the concept of

linkage and the importance of planning ahead, involving the right depth and breadth of experience

and asking the right questions to produce a high quality business review.

Relevance of Accounting Bulletin 5

Accounting Bulletin 5 Guidance for the Preparation and

Presentation of a Business Review under the Hong Kong

Companies Ordinance Cap. 622 (“AB5”) was developed

by the HKICPA at the invitation of the Companies

Registry and was issued in July 2014. It is intended to

assist entities in preparing and presenting a business

review that complies with the requirements of Schedule

5 and that provides useful information for members of

the company.

The guidance, which is not mandatory, was based on

guidance originally developed in the UK, given similarities

in the reporting requirements. The Hong Kong guidance

was written with the requirements of non-public

companies in mind (particularly those companies which

have not previously prepared a business review) but it

also represents minimum best practice for all companies

required to prepare a business review. This guide takes a

similar approach.

AB5 begins by recapping on the obligation under the

Companies Ordinance to prepare a business review. It

then contains the following main sections:

 Guiding principles for the preparation and

presentation of a business review

 Guidance on each of the four content elements

required by Schedule 5

 Implementation guidance which illustrates a range of

financial and non-financial KPIs

It is important to note that the HKICPA’s guidance does not

prescribe a mandatory structure for the report. Instead, it

offers a basis for ensuring that the report provides a holistic

assessment of past performance, the current state of

the business, and its future prospects.

In this section of our guide, we introduce AB5’s

guiding principles. In later sections we look at the

areas of content required by law in the context of the

HKICPA’s guidance and the related requirements of

the Listing Rules, in particular focusing on the role of

KPIs and linkage.

AB5’s guiding principles

AB5 identifies a number of guiding principles to be

considered when preparing and presenting a business

review. These are set out in the box below.

Directors should bear these guiding principles in mind

throughout the planning and drafting of the business

review. It may also be useful to refer to them as the

benchmark for the directors’ assessment of adequacy

of the business review, when the board performs an

overall review prior to approval of the directors’ report.

Guiding principles for the preparation and

presentation of a business review (AB5.15)

1) The review should set out an analysis of the business

through the eyes of the board of directors

2) The scope of the review should be consistent with the

scope of the financial statements

3) The review should complement as well as

supplement the financial statements, in order

to enhance the overall corporate disclosure

4) The review should be understandable

5) The review should be balanced and neutral, dealing

even-handedly with both good and bad aspects

A practical guide to the business review

AB5 sets out principles and guidance

relevant for companies of any size

Principles (1) and (2) are closely related to the legal

requirements: as explained in our section on those

requirements, the business review is part of the directors’

report and therefore it needs to reflect how the directors

see the business. Also, it is a requirement of Schedule 5

that if the business review is attached to consolidated

financial statements, then it should reflect the business of

the group as a whole, i.e. it should be consistent with the

scope of the consolidated financial statements.

Principles (3), (4) and (5) deal with qualitative aspects

of the business review. We consider that these

principles are fundamental to all business reviews,

irrespective of the size of the company or group, to

ensure that the business review is a useful addition to

the annual report and presents a fair picture of the

business to the company’s shareholders and other

interested parties. Here are some of the key reasons

why we hold this view:

Complementing and supplementing

If a business review simply summarises or repeats

information which is already found in the financial

statements then it has minimal added value for the

shareholder. For a business review to be useful it

needs instead to complement and supplement the

financial statements. This is explained in AB5 as

follows:

 In complementing the financial statements, the

business review provides useful financial and non-

financial information about the business and its

performance that is not reported in the financial

statements but which, in the directors' judgement,

may be relevant to the members' evaluation of past

results and assessment of future prospects.

 In supplementing the financial statements, the

business review provides additional explanations of

amounts recorded in the financial statements;

and/or explains the conditions and events that

shaped the information contained in the financial

statements. (AB5.18-19)

Understandability

Clearly information cannot be useful if it is not

understandable. In fact, information may even be harmful

if it is easily misunderstood by the reader. AB5 highlights

the following key matters to pay attention to in order to

ensure that the business review is understandable:

 The business review should include only relevant

information on material matters – the inclusion of too

much information may obscure judgments and will

not promote understanding.

 Where additional information is discussed elsewhere

in the annual report, or in other reports, cross-

referencing to those sources will assist the reader.

 Readers should be able to assess the reliability of

information presented – where relevant, directors

should explain the source of the information and the

degree to which it is objectively supportable.

 The writing style should be clear and readily

understandable.

 It should be clear to the reader how any KPIs have

been computed and the source of data used in the

calculation.

Much of this is common sense if the preparer of the

business review keeps in mind the readers’ perspective

and has a genuine wish to share information with them.

But it can nevertheless be a challenge to find the right

balance of compliance and communication when drafting

a business review to be included in a statutory annual

report. Some additional matters to think about in this

regard relating to focus, materiality and linkage are

discussed later on in this section. Also, as part of our

closer look at the content elements, we give examples of

how to present KPIs clearly and how to link information to

increase understandability.

A practical guide to the business review

Biases must be resisted in the business

review – it is part of a statutory

document to be given to shareholders

Balanced and neutral

The principle that the business review should be

“balanced and neutral, dealing even handedly with both

good and bad aspects” is often easier said than done. In

any self-assessment, there is a natural tendency to

emphasize the successes and gloss over the not-so-

flattering aspects of the period or activity under review.

This tendency can also be present in marketing

communications, intended to boost a company’s or

person’s image.

These biases must be resisted in the preparation of the

business review given that this is part of a statutory

document to be presented to shareholders. As AB5

advises, the directors should ensure that members are

not misled as a result of excessive focus on favourable

information or the omission of any significant information

on unfavourable aspects (AB5.25). This will require

companies to be transparent by discussing their

weaknesses and challenges, as well as their successes, to

a consistent level of materiality.

As AB5 points out, one way to fight the biases is to present

KPIs and other information consistently from one year to

the next – this approach works well provided that relevant

and meaningful KPIs have been chosen in the first place.

This is discussed further on pages 14 to 20.

Another way that a company may present a “balanced and

neutral” view of the business is to provide a summary of

the status of key projects/initiatives during the year

compared to strategies or previously discussed plans – this

is illustrated in the following example, as well as in the

examples on pages 9 and 20.

Example of assessing performance against strategy:

Business Strategy

How we did in 2015

Invest in online

growth

Invest in growth from

our online business,

through improving UK

services

Progress: We have added Same-Day, Evening, Sunday and Next-Day to Store delivery services

to UK customers to respond to customer demand for faster and more predictable deliveries. In

the UK market our average sales per active customer

per month increased by 10.3% in the

first 6 months after the launch, with an increase of 12.7% in the frequency of on-line ordering

by these active customers which can be linked to the improved delivery services. These

measures are approximately 10% more than we had expected for this first launch period and

customer feedback has continued to be positive.

People

Improve staff

engagement, to realise

the value to our

business of a

committed workforce

Progress: We measure staff engagement using a range of indicators including staff turnover, sick

days, customer feedback and the use of an independent survey company which benchmarks our

employees’ responses on a 6-monthly survey against a range of other comparable companies.

During 2015 improvements in these measures were noted and fell within the ranges set for this

year in line with our five-year people strategy. In particular, our key indicator of engagement,

being the annualized rate of staff turnover, improved from 18% in 2014 to 15% in 2015 for staff

that had completed at least one year with the group.

Supply chain

management

Control our logistics

from source to store,

allowing us to monitor

our inventory more

efficiently

Progress: The opening of our new European distribution centre has been delayed until Q2 2016,

6 months behind schedule. The centre is a core part of our plan to reshape our warehouse

network and should enable us to reduce overall inventory levels and wastage while maintaining

the same time-interval between order placement and shelf deployment at our stores. However,

completion of the construction has been delayed by the extreme weather conditions experienced

in the early onset of winter in 2015. We estimate that the disruptions to the construction

schedule caused by the weather have increased the overall costs of the construction by 15%. The

structure is now at an advanced stage and we anticipate completion no later than May 2016.

A customer is considered “active” once a 2nd order is placed online within 4 weeks of the 1st order, and is considered “inactive” if the customer has not

placed an order in the last 4 weeks.

Target achieved in 2015 On plan Target missed in 2015

A practical guide to the business review

The significance of information will depend to

large extent on how far it helps shareholders form

their own views of future business prospects

Report focus

The business review forms part of the statutory

reporting by directors to the members of the company.

The members’ needs are therefore paramount when

considering what information should be included in the

business review.

Boards may have a general picture of shareholder

priorities through their ongoing shareholder dialogue.

However, it is important that, when considering what

to include in the business review, they do not merely

respond to past levels of interest. The emphasis of the

guidance in AB5 is on the business telling its story –

directors are responsible for identifying and sharing

information that they consider ought to be relevant to

shareholders’ decisions.

In applying this guidance, the directors will generally

need to consider whether the information in question is

relevant to either:

1) Shareholders’ voting decisions; or

2) Shareholders’ investment decisions (i.e. buy / sell /

hold).

It is also important to recognise that whilst many

financial reporting disclosures are necessarily focused

on historical events, shareholders will generally view

business value from the perspective of its future

earnings prospects. They will need information that can

help them assess this.

That does not mean that directors need to provide

projections. However, the usefulness of information in

the business review will depend to a large extent on

how far it helps shareholders form their own views of

future business prospects.

For example, to assess past success and the potential

earnings impact of a strategy centred on developing a

particular segment of the customer base, shareholders

would need performance information which has a

similar degree of segmentation. If the reported

performance measures are in aggregate, or segmented

in a different way, then the shareholders’ needs are not

being met.

Materiality

The application of materiality is particularly important in a

principles-based framework. The key is to find a balance

between providing enough information for the review to

be useful, but not overwhelming the reader with

excessive detail, which obscures the key messages.

The guidance in AB5 reminds us that when judging

whether information is material, directors should

consider both qualitative and quantitative aspects in the

particular circumstances. Factors to be taken into

account include the legality, sensitivity, normality and

potential consequences of a transaction or event and the

parties involved. For example, the monetary amount at

which an item becomes material may be significantly

lower for fines and penalties, than it would for “business

as usual” items.

In practice, directors of listed companies should be

familiar with making these judgment calls, whether in

respect of announcements of price sensitive information

or more generally in the preparation of annual reports

and other investor communications. Specifically in

respect of the business review, materiality links with the

shareholder focus: the aim is to provide shareholders

with relevant information that is useful for making

resource allocation decisions and assessing the

directors’ stewardship.

When can material information be excluded?

There is no general exemption for information which the

directors may consider to be commercially sensitive.

However, Schedule 5 allows a company not to disclose

any information about “impending developments or

matters in the course of negotiation”, if such disclosure

would, in the directors’ opinion, be “seriously prejudicial”

to the company’s (or group’s) interests.

The safe harbours set out in Section 307D of the

Securities and Futures Ordinance (Cap. 571) which

permit a company to withhold disclosure of inside

information under specified circumstances, have a

similar objective. However, Section 307D sets out more

detailed requirements.

It is not yet clear how these two pieces of legislation will

work together in practice. Therefore we advise directors

to obtain legal advice in this regard.

A practical guide to the business review

Context and linkage

In order for information to be useful it needs to have

context. Consider this simple piece of factual

information: sales grew by 20% in 2014. From this the

shareholder learns nothing they couldn’t already work

out from looking at the income statement and they are

unable to judge whether this is a good or poor

performance from this statistic alone.

The informational value of this statistic is instantly

increased if the reader is given any one or more of the

following pieces of contextual information:

 How much did sales grow in each of the last few

years?

 What was the goal for this year?

 How well did our competitors do?

 Do we expect this trend to continue next year?

Linking information is a key way to provide this context

and provide a more holistic picture, for example:

 Linking information between the content elements

within the business review

 Linking between the business review and other

parts of the annual report

 Linking over time with information contained in

previous business reviews

Linkage between the content elements

As a reminder: Schedule 5 states that a business

review should consist of the following four broad

content elements:

1) Fair review of the business;

2) Subsequent events;

3) Likely future developments; and

4) Principal risks and uncertainties.

If issues raised in relation to one content element are

followed up in the other elements, this can provide

readers with an objective analysis of how the business

is making progress in managing each matter. This may

be particularly relevant for the discussions of risks and

future developments, for example as follows:

Example – linkage of content elements:

Alpha Ltd highlights in its business model description

that 40% of its revenues are currently derived from

maintenance and support provided to its existing user

base. Alpha’s discussion of business trends identifies

that specialist support providers are increasingly

competing for this revenue stream. This discussion

links to Alpha’s strategy which explains that it has

responded by promoting whole-life service contracts.

Although this is currently a small part of overall

revenue, KPIs are provided to show the proportion of

renewals switching to this alternative structure as

useful information when assessing future prospects.

Linking information –

within the business review,

within the annual report

and over time – is a key

way to provide context and

a more holistic picture

A practical guide to the business review

Linkage between the business review and other parts

of the annual report or other reports

To support an annual report that is concise, it is likely

that companies will see a greater need for linking

various reports or aspects within the annual report to

avoid unnecessary repetition.

Better linkage will also drive consistency within the

annual report. In particular, providing reconciliations or

explaining adjustments can help to demonstrate that

any adjusted information in the directors’ report serves

to complement and supplement the financial

statements, rather than being “inconsistent” with

those financial statements.

This distinction is important as the company's auditor

has a new duty under section 406(2) of the Companies

Ordinance to consider whether the information in a

directors' report for a financial year is consistent with

the financial statements for that year. If the auditor

considers that the directors’ report is not consistent,

then the auditor is required to state that opinion in the

auditor's report and may bring that opinion to the

members' attention at a general meeting.

Linkage over time

Providing comparative information is a widely accepted

practice in annual reports. However, this information is only

useful if it enables users to draw meaningful conclusions

about trends. Its ability to do this can be improved by:

 Identifying meaningful data points: for long term,

steady businesses historical information covering 5 or

even 10 years at annual intervals may be useful, but for

fast changing businesses it may be more informative to

show data points every half year, or even more frequently

than that, over the most recent past.

 Complementing the data by explaining the extent to

which it is in fact comparable: if circumstances have

changed over the data period, then users need additional

contextual information to minimize the risk of

misinterpreting the data. For example, it can be useful to

know whether growth in revenue is volume or price

driven, whether organic or from acquisitions, or comes

simply from changes in accounting policies. The focus

should be on providing a mixture of data and balanced and

neutral commentary, rather than simply data in isolation.

Example of a transparent way to link achievements during the year to short and longer term strategies:

What we said we would

do in 2015

What we did in 2015

What we plan to do in

2016

Plans beyond 2016

Reduce customer

churn rates by 5%

*Customer churn

rates are measured as

the percentage of

customers who do not

renew their contracts

over the total number

of customers under

that contract type

Our customer churn rates

decreased by 8% during

the year which we believe

is the result of the launch

of our new bundling

packages which provide

consumers with greater

flexibility

We plan to launch new

smart phone plans in

2016. These plans will

offer increased data

allowance and unlimited

voice and SMS across all

Asian markets and some

selected non-Asian

markets

We aim to simplify our pricing

plans, to give clear visibility to

our customers. We also plan to

invest $ 50 million in our

online platform, over the next 5

years, in order to acquire new,

and retain existing, customers

Consolidate our

network engineering

teams across borders

in order to maximise

cost efficiency

We were unable to

complete the

consolidation of our

network engineering

teams on time, as we

have been faced with

some unexpected

regulatory pressures.

We plan to complete the

consolidation of our

network engineering

teams by the 2

quarter

of 2016

Compared to our cost base

in 2015, we aim to reduce

our operating costs by 20%

by 2020 as a result of the

consolidation of our

networking engineering

team, by unifying our IT

management and

simplifying our business

model across markets

A practical guide to the business review

Planning ahead

The traditional approach to annual report preparation

has entailed allocating responsibility for each element

of the report to separate parts of the organisation. It

may be time to rethink this approach. Presenting a

consistent business-wide story will require a more

joined-up approach and advance planning. Approaches

could include one or more of the following actions:

1) Establish a cross-functional team to develop the

report on an integrated basis. Ensure that this team

is chaired by someone who is sufficiently senior to

cut across any existing reporting silos.

2) Develop the “front-end” of the report from the

business model by focusing on a ground-up

assessment of the features that are most

significant to understanding current performance

and assessing future prospects. Ensure that the

reporting team has the right operational and

business strategy representation to do this

effectively.

3) Regularly adapt the content and structure of the

report to reflect evolving business circumstances

and strategies. As well as reporting to

shareholders on how issues identified previously

have developed in the year, continually re-assess

the content to ensure that sufficient prominence is

given to the most important current and emerging

issues.

4) Recognize that it may take time to develop

meaningful shareholder-focused performance

measures. If data for a meaningful measure isn’t

available, put a plan in place to address this for

future periods. For example, this may include

working with industry survey organizations to

obtain benchmarking information, tracking social

media over an extended period to pick up on

trends, or arranging for employee or customer

satisfaction surveys to be conducted at regular

intervals.

All of the above will contribute to a better quality

business review and annual report. But also, perhaps

more significantly, if done well these activities may

also contribute to better quality information and focus

within the organization on setting strategy and

measuring progress against clearly defined goals and

objectives. If the above are not already well

established practices in your organization, now may be

a good time to change.

Questions to ask

As we stressed earlier, each business review should be

unique and authentic – shareholders will be unimpressed

and skeptical at any signs that the business review is

boilerplate or otherwise lacking in credibility.

In order to achieve this quality outcome, those involved

in pulling together the business review need to

challenge themselves continually:

• at the outset, think about what you are aiming to

achieve and plan how you are going to get there;

• during the drafting stage, focus on fact-finding

across the full scope of the topics to be covered

and make sure there is clear understanding of the

matters that need to be discussed; and

• at the final review stage, reflect on how well the

review paints a picture of the business that the

board recognizes, that is useful to shareholders

and fully satisfies the requirements.

To help with meeting these challenges, we have

included throughout the remainder of this guide some

suggested questions to ask – these have been collected

together in Appendix 3 for easy reference. These

questions may be particularly useful to think about

during the drafting and final review stages. To kick off,

here are some questions for the planning stage:

Key questions to ask when planning ahead:

 Have we put together a team with enough insight into

top management’s strategy to ensure the review is

useful and authentic?

 Has the annual report compared well in the past with

information being communicated through other

channels (such as investor presentations) or could it

be improved this year to reduce gaps?

 How well does last year’s MD&A stand up against

AB5’s guiding principles? For example:

 How well did it complement and supplement the

financial statements?

 How far did management go to provide balanced

and neutral information?

 How easy was it to understand?

Could more be done this year on any of these aspects

to improve the usefulness for shareholders?

 What are the new topics that need to be discussed in

this year’s review, compared to last year’s MD&A?

Where is the information for these topics and will we

be able to find comparative information as well?

A practical guide to the business review

The content elements

1. Setting the scene and

explaining the year under review

The requirement to give “a fair review of the business” deals with companies’ (or

groups’) assessments of how they have performed during the year and their financial

position at the end of it. The review should be in the context of the business

objectives, strategies and business model and provide relevant information necessary

for an understanding of the development, performance or position of the business.

In practice we expect this first content element to form

the majority of the business review. AB5.31 identifies

the following 4 topics to be covered in this “fair review

of the business”:

1) A description of the business and the external

environment in which it operates

2) An analysis of the performance of the reporting

entity for the year under review and the financial

position of the reporting entity as at the end of that

period using financial KPIs which complement or

supplement the financial statements

3) A discussion on the reporting entity's

environmental policies and performance and the

reporting entity's compliance with the relevant

laws and regulations that have a significant impact

on the entity

4) An account of the reporting entity's key

relationships with its employees, customers and

suppliers and others that have a significant impact

on the entity and on which the entity's success

depends

The first of these topics sets the scene for the rest of

the business review. Topics 2, 3 and 4 then fill out the

“fair review” of the business with information that

demonstrates compliance with Schedule 5.2’s

requirement to give this information “to the extent

necessary for an understanding of the development,

performance or position of the company’s [or group’s]

business”.

Taken together, these topics overlap with the general

requirement in App 16.32 to include a discussion and

analysis of the group’s performance during the financial

year and the material factors underlying its results and

financial position. There are also specific disclosure items

required or recommended under Appendix 16 which we

would expect to see included in this part of the business

review. These are highlighted in the following discussion

using the abbreviation “App 16”.

The remainder of this section of our guide looks at each of

these 4 topics in turn:

1) Description of the business and the external

environment in which it operates

The business review should provide “a description of the

business and the external environment in which the

reporting entity operates, as context for the directors’

discussion and analysis” (AB5.31(a))

A clear description of the objectives, strategy and

business model can help the review as a whole to stay

focused on the most significant drivers of business value.

It can also provide quantitative and qualitative context to

help shareholders assess the impact of matters on the

business as they arise.

A well written business model description should also give

shareholders greater confidence that the rest of the

review addresses all material aspects of the business.

A practical guide to the business review

Good business model and strategy

descriptions provide the foundation

for a good business review

Basic information: factual description of the business

and its environment

This description provides a foundation for the rest of

the review, so it is important that the picture painted

is one that is recognised by the board, and consistent

with the operational realities of the business.

In a well written business review such a description

would provide an understanding of:

 the industry or industries in which the company or

group operates;

 its main products/services;

 its main categories of customers;

 its main business processes;

 its main distribution methods; and

 the structure of the business and its economic

model, including an overview of the main

operating facilities and their location. (AB5.32).

It would also include a description of the resources

that are significant to the entity’s operations,

consistent with the recommended disclosure

requirement in App 16.52(iii) to disclose the principal

drivers of performance.

Examples of key resources used in the business

could include:

 corporate reputation and brand strength,

 natural resources,

 assembled workforce,

 distribution or supply chain networks,

 research and development projects,

 intellectual capital, licenses, patents, copyrights and

trademarks. (AB5.33).

A transparent business review would also go further and

discuss features of the external environment which are

significant to the business’s success. These could

include the entity’s major markets and competitive

position within those markets, and the significant

features of the legal, regulatory, macro-economic and

social environment that influence the business.

For example, a reporting entity may disclose the fact that

it has significant operations in a certain country currently

experiencing difficult economic or political environment,

or conversely a country experiencing high growth, either

of which circumstances could have a significant impact

on the future development and performance of the

business.

The discussion of the external environment could extend

to the recommended disclosure item set out in App

16.52(iv) relating to trends in the issuer’s industry and

business.

It can be difficult to focus this description at the right level

of detail. Getting the right people involved in the drafting

process can help here. In particular, the involvement of

segment management can help keep the description

grounded in the operational realities of the business.

A practical guide to the business review

Setting out clearly the objectives and strategies of the

business, measuring performance against them and giving

some indication about future plans provides transparency

which investors and analysts would appreciate

Additional information: objectives, strategies and

competitive advantages

In a well written business review, the description of

the business helps shareholders to focus on those

aspects of the company’s (or group’s) business model

that differentiate it from others in the sector.

The difficulty is: where to draw the line between (a)

helping shareholders understand the business and (b)

revealing too much sensitive information which could

erode the entity’s competitive advantage? This is an

important matter for directors to consider and decide

for themselves. Reluctance to reveal too much is

understandable. However, setting out clearly the

objectives and strategies of the business, measuring

performance against them and giving some indication

about future plans may provide transparency which

investors and analysts would appreciate.

In this regard, AB5.34 states that the description of

the business “may” refer to the objectives of the

business to generate or preserve value over the

longer term. These objectives may be defined in

terms of financial or non-financial performance

measures. This guidance is consistent with the

recommended disclosure requirement in App

16.52(iii) to disclose a discussion of the issuer’s

purpose and corporate strategy.

We sometimes see business objectives described in

generic terms – for example ‘to generate shareholder

returns’, or ‘to increase customer satisfaction’.

Descriptions of this nature convey limited information

to shareholders – few businesses would disagree

with these.

A more helpful approach is to describe the board’s

objectives for the business itself – for example, it may

be to become the market leader in a specific

segment, or to establish technological leadership in a

particular sector. Such specific identification of the

board’s objectives can be key to producing a

consistent and focused business review.

Key questions to ask about …

Factual information about the business:

 Does the description of the business align with the

board’s view of the significant business value

drivers?

 Where different segments of the business have

different operating characteristics or performance

drivers, is this clear enough?

 Has sufficient detail been provided about the

business so that shareholders can assess the

potential impact of matters raised elsewhere in the

report?

Any discussion about objectives and strategy:

 Are the stated objectives business-specific? For

example, becoming the market leader in a specific

segment, rather than generic aims such as

maximising shareholder return

 Does the description of the strategy address the

short, medium, and longer term priorities for the

business?

 Is there enough linkage of stated objectives and

strategies to the analysis of performance and other

content elements?

A practical guide to the business review

We would expect this section of the business

review to be a combination of narrative

explanation and a range of well chosen KPIs

2) Analysis of the performance for the year and the

financial position at the end of it using KPIs

The business review should provide “an analysis of the

performance of the reporting entity for the year under

review and the financial position of the reporting entity

as at the end of that period using financial KPIs which

complement or supplement the financial statements”

(AB5.31(b))

The requirement to provide an analysis of how the

business has performed during the year and its

financial position at the end of the year is consistent

with the general requirement in App 16.32 to include a

discussion and analysis of the group’s performance

during the financial year and the material factors

underlying its results and financial position.

In this regard, minimum required disclosure items

under App 16.32 include commentary on the following:

 The capital structure of the group in terms of the

maturity profile of debt and obligation, type of

capital instruments used, currency and interest rate

structure (App 16.32(2))

 Significant investments held and their performance

during the year (App 16.32(4))

 Details of material acquisitions and disposals of

subsidiaries, associates and joint ventures in the

course of the year (App 16.32(5))

 Segment information – this may cover changes in

the industry segment, developments within the

segment and their effect on the results of that

segment. It may also include changes in the market

conditions, new products and services introduced

or announced and their impact on the group’s

performance and changes in revenue and margins

(App 16.32(6)).

In addition, App 16.52 recommends disclosure of the

following items:

 An overview of trends in the listed issuer’s industry

and business (App 16.52(iv))

 Receipts from and returns to shareholders (App

16.52(vi)).

These requirements are consistent with AB5 which

also adds that when discussing how the business has

performed during the year, the focus should be on

those business segments that are relevant to an

understanding of the development and performance of

the reporting entity as a whole and the ability of the

reporting entity to generate cash to meet known or

probable cash requirements and to fund growth

(AB5.37).

Consistent with the complementing and

supplementing guiding principle, the analysis in the

business review should avoid simply repeating or

summarizing information which can be found in the

financial statements.

Instead, we would expect this section of the business

review to be a combination of narrative explanation of

key features of the performance, financial position and

cash flows in the financial year, together with a range

of well chosen financial and non-financial KPIs which

demonstrate the trends in the performance and key

ratios over a period of time.

For example, this discussion would refer to changes in

market conditions which have had a significant impact

on the development and performance of the reporting

entity during the period, or the introduction of new

products and services which are significant to the

future prospects of the business. In addition, the

business review should draw attention to material

changes in accounting policies which have resulted in

significant changes in the measurement of KPIs during

the financial year under review due to changes in input

data.

When drafting this part of the business review, bear in

mind the overall considerations discussed on pages 4

to 10 of this guide relating to the guiding principles in

AB5, focus, materiality, context and linkage.

These points apply not only to the narrative discussion

in the fair review content element. They also apply

specifically to the KPIs selected and presented as part

of that review – as explained and illustrated in the

following discussion:

A practical guide to the business review

The KPIs disclosed should be those that

are effective in measuring delivery of

strategies and managing the business

Using KPIs to explain performance

Even if this had not been an explicit requirement of

Schedule 5, we would normally expect a company to

include financial, and where appropriate, non-financial

KPIs in its business review in order to provide clear and

useful information to the user. Looking at the drivers of

performance identified in the business model

description that are critical to the future operation of

the business may help to focus the performance

measures on the most relevant matters. Some areas

where KPIs may have a role to play include:

• Assessing progress against the business’s strategy

and objectives

• Measuring the financial performance and position of

the business during the year under review

• Providing objective measures for the discussion on

compliance with environmental policies, laws or

regulations, or relationships with customers,

suppliers, employees or significant others

• Monitoring principal risks and uncertainties and

progress made in managing those risks

• Quantifying trends or factors affecting the future of

the business where practicable.

Specifically, App 16.32(10) requires a listed issuer to

disclose its gearing ratio and App 16.52(i) and (ii)

recommend disclosure of efficiency indicators (e.g.

return on equity, working capital ratios) and industry

specific ratios, if any, for the last five financial years.

In addition to compliance, KPIs can be used to

demonstrate how management is working to develop

and protect shareholder value over an extended period.

Well chosen KPIs may therefore be able to help reduce

the risk of excessive focus by investors and analysts on

short-term earnings measures by giving them more

meaningful measures to think about.

Despite this potential reward, a recent KPMG International

survey highlighted the gap between the key drivers of

business value, and the performance measures being

reported (see table below). The survey also highlighted that

many of the non-financial measures being provided were

derived from existing statutory or other disclosure

requirements instead of being selected for their relevance

to investors.

Companies reporting on key business value drivers

identified as a top

three value

driver

(1)

companies

providing a

related KPI

Operational

66%

21%

Customer

focus

56%

Supply chain

42%

Brand &

reputation

42%

Note: (1) Audit committee members identifying the area as one

of their top three drivers of business value.

Source: The KPMG survey of business reporting: KPMG

International, 2014.

These results indicate that for many companies there is

considerable room for improvement. Now may be a good

time for directors to take a fresh look at the performance

measures currently being reported and to re-evaluate

whether they continue to provide relevant information to

shareholders.

A practical guide to the business review

KPIs selected should be relevant, rather

than focusing only on those that show

the business in a favourable light

Financial vs non-financial KPIs

Schedule 5 specifically refers to an analysis using

“financial” KPIs. These typically use data which can be

found in the financial statements, or can be reconciled

to the financial statements. For example, the gearing

ratio required by App 16.32(10) would generally be

calculated using information from the statement of

financial position.

Financial KPIs can also be derived from a mixture of

both financial and non-financial data – one obvious

example being sales or rental income per square foot.

Other KPIs could be entirely non-financial, such as

carbon dioxide emissions or measures of customer or

employee satisfaction.

Such mixed or non-financial measures complement the

financial statements and, if chosen well, are useful in

communicating information about the performance and

future prospects of the business. For example,

employee turnover, % of qualified staff or spend per

employee on training could be useful measures for

businesses highly dependent on a trained workforce,

and might usefully be disclosed as part of the account

of the group’s key relationships with its employees.

More examples can be found in the implementation

guidance attached to AB5 – for easy reference an index

of these examples is included as Appendix 2 to this

guide.

Selecting balanced and neutral KPIs

Care should be taken to select KPIs which are relevant to

the development, performance or position of the reporting

entity’s business, rather than focusing only on those that

show the business in a favourable light.

As discussed earlier, one way to fight the biases is to

present KPIs and other information consistently from one

year to the next – this approach works well provided that

relevant and meaningful KPIs have been chosen in the

first place.

Another way is to compare KPIs to forward-looking

targets which had been set in previous periods. This

provides useful information provided that appropriate

targets were chosen previously.

Well chosen targets will be those that will be a good

indicator of the success of management’s efforts in

directing the business if met. For example, in a highly

competitive environment where the group is more of a

price-taker, rather than a price-maker, meaningful forward-

looking targets might focus on volume measures (such as

occupancy rates or cubic metres shipped) rather than on

monetary targets, or focus on net margins rather than

gross revenues.

Meaningful targets might also be relative, rather than

absolute, such as maintaining market share or above

average returns compared to industry peers.

In other words, for a target to be meaningful, meeting or

getting close to achieving the target needs to be

something within management’s influence and intention,

at least at the time that the target was set. This helps

shareholders see the business through the eyes of the

directors and provides a strong basis for an assessment of

subsequent performance.

Presenting KPIs in a meaningful way

To maximize the usefulness of KPIs, it is important that

they are presented in a way that is consistent with the

“understandability” and “balanced and neutral” guiding

principles.

These principles are inter-linked: in a well written

business review, KPIs are presented in a way that

enhances their informational value and conveys the key

messages efficiently. Key matters to consider when

judging the quality of the presentation are as follows:

 Will the reader correctly understand how the KPI has

been computed?

 Will the reader correctly understand the relevance of

the KPI to the topic under discussion?

 Is there sufficient contextual information to enable

the reader to interpret the KPI and draw conclusions

from it?

 How straightforward will it be for the reader to reach

these understandings? Could a less diligent reader be

misled by the presentation?

A practical guide to the business review

In a well written business review, KPIs

are presented in a way that enhances

their informational value and conveys

the key messages efficiently

For example, understandability is increased when the

basis of computation and, if relevant, the source of data is

explained or reconciled to the financial statements – for

example, the basis on which the gearing ratio is computed

is a required disclosure under App 16.32(10) and the basis

of computation of efficiency indicators and industry

specific ratios is a recommended item under App 16.52(i)

and (ii).

The informational value is also improved if KPIs are

presented over an extended period of time, particularly if

meaningful data points are chosen and the information is

complemented by narrative explanation. If the method of

calculation has been changed compared to previous

years, this should also be highlighted.

How the KPIs are presented visually is also important.

They can, of course, be presented in a simple narrative

format. However, they can be made far more impactful

using other formats, so long as that format conveys the

information in an unbiased way.

For example, one way to present KPIs may be in a tabular

format. Tabular presentations of performance data can

reduce the risk that key data is ‘lost’ in the narrative

discussion and can include information which explains

why the business is using a particular indicator. This is

shown in the following example of typical revenue KPIs

used in the hotel industry:

Example of KPIs presented in a tabular format:

Occupancy Rates

Average daily rate (ADR)

Revenue per available room

(RevPAR)

Measurement

Total number of rooms sold

divided by Total number of

rooms available

Total room revenue divided by

Total number of rooms sold

Total room revenue divided by

Total number of available rooms

Significance

Occupancy measures the

utilization of our hotels’

capacity. It reflects both supply

and demand and therefore it is

important for us to monitor our

occupancy in order to gain a

sustainable competitive

advantage. Occupancy levels

also help us determine

achievable ADR levels as

demand for hotel rooms

increases or decreases.

ADR measures average room

price attained by a hotel and ADR

trends provide useful information

concerning the pricing

environment and the nature of

the customer base of a hotel or

group of hotels. ADR is a

commonly used performance

measure in the industry, and we

use ADR to assess pricing levels

that we are able to generate by

type of customer, as changes in

rates have a different effect on

overall revenues and incremental

profitability than changes in

occupancy.

This KPI is one of the most

important of all ratios because the

measure incorporates both room

rates and occupancy. It provides a

convenient snapshot of how well

our group is filling its rooms, as

well as how much it is able to

charge.

Occupancy rates (%)

+ 4.78%

2015 : 70.2%

(2014: 67%)

ADR (HK$)

- 10.77%

2015 : 2,501

(2014: 2,803)

RevPAR (HK$)

- 6.50%

2015 : 1,756

(2014: 1,878)

A practical guide to the business review

Another way to present this information may be through

the use of graphs, charts and other data graphics, as

illustrated in the examples below. This approach can be

useful for any measures where the trend in the measure

or the relative position as a proportion of the business or

compared to benchmarks is particularly meaningful and it

can be used instead of, or in addition to, traditional

numerical tables of absolute values.

In each of the examples illustrated below we would

expect the graph or chart to be accompanied by narrative

discussion highlighting the key points shown in the data

and giving additional contextual information which

explains the performance or position shown.

Examples of KPIs presented graphically:

(1) Example of clustered bar chart showing absolute monetary amounts per product category over time, together with

an indication of the trend in the total amount of sales over that period

(2) Example of analyses of employee data as a proportion of total workforce with comparatives and footnote

explaining change in basis of calculation

A practical guide to the business review

(3) Example of line chart using external data and annotated for key events

(4) Examples of bar charts using dual vertical axes to compare and contrast two data sets

(a) Net income and return on equity

(b) Volume sales and market share

(5) Example of graphical reconciliation from prior year operating income to current year absolute amounts

A practical guide to the business review

Linking KPIs with strategies and future targets

Companies may also consider making their

business objectives and strategies measurable by

linking them to relevant KPIs. This can be achieved

either by cross-referencing to another section in the

report where a more detailed analysis of the KPIs

can be found, or by describing the KPIs – and how

they help measure progress against a specific

strategic objective – in the discussion of the

business objectives itself.

To elaborate on this, a company may also refer to

ongoing targets for each KPI in order to

demonstrate how future success will be measured

relative to its current performance. The assessment

of likely future developments is discussed in more

detail in Section 3 of this guide.

An example of how KPIs could be discussed in the

context of strategies and targets is provided below:

Key questions to ask about KPIs:

• Are the KPIs selected for disclosure consistent with

those used by the board to assess the business? For

example, do the measures address progress in

managing the critical resources on which the business

depends?

• Do the measures address the specific part of the

business affected by the issue, rather than being

provided on an aggregate basis for the business as a

whole?

• Are the measures selected and presented in accordance

with the “balanced and neutral” guiding principle? For

example, are they presented consistently over time to

show key trends?

• Are the measures presented in a way which is

understandable? For example, is the basis of

computation and the source of data clear and have they

been given enough context by being linked to other

information, such as strategy and future plans?

Example of how to link KPIs to future priorities of the business:

Strategic

priority

Key performance

indicator

Target

for 2015

Actual performance

Performance for 2015

Target

for

2016

2015

2014

2013

Loyal and

satisfied

customers

To increase

customer

satisfaction and

build long-

lasting

relationships.

Customer satisfaction

survey

“Overall satisfaction” score

(being the proportion of

extremely satisfied

customers across current

account and savings) from

an annual independent

survey of approximately

5,000 customers.

58%

Target

exceeded

60%

55%

48%

Since the roll out of a new

customer-service based

training programme in 2013

we have seen a significant

improvement in our

customer satisfaction score,

reducing the gap between us

and the top 3 peers.

To be

one of

the top

3 in

peer

group

(Average of top 3

peers)

(62%)

(60%)

Consistent

profitability

and a strong

balance sheet

To focus on cost

discipline and

achieve

operating

efficiencies in

order to

maintain the

capacity to

invest in the

future.

Loan loss rate

Defined as total annualized

loan impairment divided by

gross loans and advances to

customers and banks held at

amortised cost at the

balance sheet date

65 bps

Target

missed

bps

We saw higher levels of

write-offs in the home loans

recovery book and the

impact of one large name in

the commercial property

portfolio. Further discussion

of the performance of our

loan portfolio can be found

on pages [•] to [•].

68 bps

Cost-to-income ratio

Defined as total operating

expenses, excluding

provisions and charges,

divided by total operating

income.

50%

Target

met

50%

51%

54%

We remained focused on cost

discipline as we managed

higher operational and

regulatory costs while

continuing to invest

significantly in the business.

Cost increases were offset by

a continued improvement in

net interest income.

48%

A practical guide to the business review

Take care to focus on these matters in

the business review only to the extent

that is relevant and material to the

shareholders’ assessment of the business

The Environmental, Social and Governance Reporting Guide was issued by the HKEx as an Appendix to the Main Board Listing Rules

(Appendix 27). According to App 16.53, issuers are encouraged to include the information set out in Appendix 27 in the annual report

regarding the same period covered in the annual report or as a separate report. The Note to this paragraph states that where the

information is included in a separate report, an issuer is free to report on any period but should consistently report on the same period

so that the information can be comparable. However, the Exchange encourages an issuer to report regarding the same period as in the

annual report.

These recommended specific items were deleted from App 16.52 in the February 2015 amendments to the Listing Rules to avoid

duplication with the requirements of Schedule 5.

3) Discussion on environmental policies, compliance

with laws and regulations and 4) An account of key

relationships

To the extent necessary for an understanding of the

development, performance or position of the reporting

entity's business, the business review should include:

 a discussion on the company’s (or group’s)

environmental policies and performance and

compliance with the relevant laws and regulations

that have a significant impact on the company (or

group) (Sch 5.2(b)); and

 an account of key relationships with employees,

customers and suppliers and others that have a

significant impact on the company (or group) and on

which its success depends (Sch 5.2(c)).

which the company’s [or group’s] success depends”.

Care should therefore be taken to focus on these matters

in the business review only to the extent that is relevant

and material to the shareholders’ assessment of the

business’s performance and future prospects. If the

directors wish to include more detail on these matters,

e.g. in accordance with The Environmental, Social and

Governance Reporting Guide (Appendix 27 to the

MBLR)

, then it is advisable to consider developing

separate reports to which the business review can cross-

refer.

Set out below are some examples of topics that may be

covered in the business review to satisfy Schedule 5’s

requirements. To ensure that the business review

remains concise, this analysis can be enhanced by the

inclusion of some relevant KPIs as illustrated on the

previous pages of this guide and in the discussion below.

Discussion on environmental policies and compliance

with relevant laws and regulations

It is important to note that the scope of this disclosure

requirement is not just limited to typical “green” issues.

In addition to a discussion on policies and performance

on environmental issues, Schedule 5 requires that

directors identify those laws and regulations that “have a

significant impact on the company” (or group). Examples

of topics to be covered in this discussion could include:

 environmental issues such as greenhouse gas

emissions, management of hazardous wastes and

efficient use of scarce resources;

 relevant laws and regulations on providing a safe

working environment;

 relevant standards, laws and regulations on health

and safety of products and services provided to

customers, compensation for defective

products/services and/or data privacy; and

Previously

App 16.52 included the following

recommended commentary items:

 “a discussion on the listed issuer’s environmental

policies and performance, including compliance with

relevant laws and regulations”; and

 “an account of the listed issuer’s key relationships

with employees, customers, suppliers and others,

on which its success depends”.

Therefore, for some listed issuers, these requirements in

Schedule 5 will not be new. However, we would

encourage all listed issuers to revisit the content and

structure of their reporting to ensure it is sufficient for

the purposes of Schedule 5.

Schedule 5 requires a discussion of these matters “to

the extent necessary for an understanding of the

development, performance or position of the company’s

[or group’s] business”. It also specifically requires that

directors identify those laws and regulations and key

relationships that “have a significant impact on the

company” (or group) and, in the case of relationships, “on

A practical guide to the business review

 other legislation, such as the US’s Foreign Account

Tax Compliance Act, anti-money laundering legislation

or sanctions against certain regimes, all of which

impose obligations on the company to ensure that it

(or its group) refrains from acting in a manner contrary

to public policy.

For example, one company said the following in their

annual report about the passenger rights legislation

facing the airline industry:

“… European airlines, including our own, have also

become subject to air passenger rights legislation

whereby airlines may be required to pay compensation

to passengers whose flights are delayed more than

three hours. Since its introduction, this legislation has

cost the Group £19 million in compensation payments.

We are actively engaged in lobbying governments in the

interests both of our industry and our customers, and

reminding them of the importance of travel and tourism

as a source of employment and driver of growth.”

In order to comply with the specific disclosure requirement

in Schedule 5, it is not enough simply to state that the

group is subject to these laws and regulations – the review

needs to go further by discussing the group’s compliance

with those laws and regulations to the extent necessary for

an understanding of the development, performance or

position of the business. For example, this might involve:

 discussing the measures and controls put in place to

ensure compliance with the relevant laws and

regulations;

 discussing the extent to which complying with the

relevant laws/regulations has had financial or other

consequences for the business (such as increased

operating costs from carrying out “know your

customer” anti-money laundering checks, or reduced

passenger demand, when passengers are subject to

additional levies on airline tickets); and

 disclosing if the business has been subject to any

significant regulatory action such as fines or other

penalties imposed for non-compliance, suspension or

closure of any activities or refusal of permission.

Key Relationships

Schedule 5 requires companies to give an account of key

relationships with their employees, customers, suppliers

and others that have a significant impact on the

company/group and on which the company’s/group’s

success depends. To comply with this requirement it is

necessary to take a broad view in considering the extent

to which the actions of stakeholders other than

shareholders can affect the company's or group’s

performance and thus its value.

For example, relationships with customers, suppliers,

distributors, employees, contractors, lenders, creditors

and/or regulators could be important to the business’s

success, as could the company's/group’s broader impact

on society and the communities affected by its activities.

Strategic alliances with other companies can also affect

the performance of the company and its value.

AB5.48 gives the following examples of matters that may

be included in the business review in this regard:

 policies on employees’ compensation, recruitment,

training and development;

 policies on managing environmental and social risks

of distribution and supply chain networks; and

 community involvement and contribution in relation to

education, environmental concerns, culture, sport and

social responsibilities.

KPIs and other data can be used effectively to anchor an

account of a relationship objectively. For example, a

retailer disclosed the following as one of its 5 customer-

focused strategic KPIs in a recent annual report:

2. New customers choose us

29.1% of new loyal customers

Definition: New loyal customers

as a percentage of last year’s loyal

customer base

Commentary: We want to build our loyal customer base so in addition to

retaining our existing loyal customers, we want to attract new ones. Our

investments in the customer offer are designed to create long-term value

for new customers too.

Loyal customers are defined based on their frequency of spend and average

weekly spend.

The relevant KPIs will vary depending on the nature of

the relationship. For example, if giving an account of the

relationship with employees, relevant KPIs could include

staff turnover, % of staff with more than 5 years’

service, lost work day frequency rate etc.

A practical guide to the business review

KPIs can be used effectively to anchor an

account of a relationship in facts and

provide at-a-glance information

KPIs can also be combined with other measures to

provide at-a-glance information which gives insight into

the state of a relationship. Examples of charts and graphs

with multiple data sets were given earlier in this section

and can be used for this purpose. Set out below is a

further example from the British Broadcasting

Corporation’s (BBC’s) annual report, which demonstrates

how a KPI (in their case the answer to the survey

question

on whether the BBC had lots of fresh and new ideas)

can be compared to information on how important this

issue is to their customers in order to assess their own

performance. Similar approaches could be used for many

other data pairings to complement any narrative account

of the state of a relationship. Care, however, needs to be

taken to ensure that the pairing is meaningful and that

appropriate conclusions are drawn from the data shown,

to minimise the risk that the reader is misled.

Extract from the “Understanding audiences” section of the BBC’s 2013/14 annual report:

In addition:

 App 16.32(7) requires details of the number and

remuneration of employees, remuneration policies,

bonus and share option schemes and training schemes

to be disclosed and commented on; and

 App 16.52(v) recommends disclosure of a discussion

on the listed issuer’s policies and performance on

community, social, ethical and reputational issues.

This information could be given in this discussion or more

generally in the description of the business.

Key questions to ask about the discussion on

environmental policies, laws and regulations and

key relationships:

• Does the discussion identify those environmental

policies, laws and regulations which have a

significant impact on the business and does it

include a discussion of the extent of compliance?

• Does the discussion identify and give an account of

those relationships on which the

company’s/group’s success depends?

• If KPIs have been included in the discussion, are

they balanced and neutral and presented in an

understandable way?

• Have cross references been included to where

further information can be found, where relevant?

A practical guide to the business review

The content elements

2. Bringing the story up to date

Schedule 5 requires the business review to provide “particulars of important events that have

occurred since the end of the financial year”. This will bring the story up to date and can provide a

bridge between the discussion of the year’s performance and position and where the business is

heading.

Schedule 5 requires companies to disclose the

particulars of important events affecting the reporting

entity that occurred after the financial year end and up

to the date of the report.

The law is not definitive on how the review should be

structured, but in our view it would be logical for this

discussion to follow the review of the financial year, as

this discussion will update the story of the business to

the date of approval of the report.

The review’s discussion should not be limited to

financial events – some discussion may be needed on

non-financial events if the company considers them to

be important to the business.

However, as discussed on page 7 of this guide,

Schedule 5 allows a company not to disclose any

information about “impending developments or

matters in the course of negotiation”, if such

disclosure would, in the directors’ opinion, be

“seriously prejudicial” to the company’s (or group’s)

interests.

The safe harbours set out in Section 307D of the

Securities and Futures Ordinance (Cap. 571) which

permit a company to withhold disclosure of inside

information under specified circumstances, have a

similar objective. However, Section 307D sets out

more detailed requirements.

It is not yet clear how these two pieces of legislation

will work together in practice. Therefore we advise

directors to obtain legal advice in this regard.

Complementing and supplementing the financial

statements

Although the business review may make reference to

where information on post year-end events may be

found elsewhere in the annual report, companies

should generally be looking to go beyond the

disclosures made in their financial statements.

For example, the business review could discuss how

the events impact on the performance measures

disclosed in respect of the year under review and

companies could quantify this impact by updating the

affected KPIs. The review may also discuss:

 the likely impact of these important events on the

future plans of the business; and

 whether these events have caused management

to re-assess the principal risks and uncertainties

facing the business going forward.

In addition to this discussion of specific important

events, directors may also consider whether it would be

useful to provide more general commentary on the

direction of the business since year end. This can bridge

the gap between the discussion of what happened

during the financial year under review and the discussion

of the likely future developments of the business.

Key questions to ask when bringing the story

up to date:

• Has the company disclosed both financial and non-

financial events that are important to the business?

• If not, has legal advice been obtained on whether it

is acceptable to withhold this information from the

public?

• Has sufficient information about the event been

given in the business review, including updating the

KPIs where applicable and discussing the impact of

the event on the future business?

• Would it be useful to provide more general

commentary on the direction of the business since

year end and where it is heading?

A practical guide to the business review

The content elements

3. Explaining the likely future

development of the business

Schedule 5 requires the business review to contain an indication of the likely future development in the

company’s (group’s) business. In a well written business review, this discussion would address the

main trends and factors likely to affect the future development, performance, or position of the

business.

Companies may already be discussing the main business

trends in their annual reports as this is a recommended

disclosure item under App 16.52(iv). However, even those

companies complying with this recommended practice

item may not be providing sufficient explanations to help

readers assess the potential impact of these trends on the

business.

Trends and likely future developments can arise from both

internal factors (such as the development of new product

segments) and external factors (such as changing

customer needs and preferences, and emerging threats

and opportunities).

In a well written business review, the discussion should

go beyond providing high level assessments that might

apply to any business in the sector. Instead, companies

may consider discussing:

 the likely impact of each trend or factor on their

future business and to what extent this depends on

factors within or outside their control or influence;

 whether they feel that the identified trend or factor

presents new opportunities or threats to the

business; and

 how the company is managing any risk exposure

relating to each trend or factor identified.

In this regard, App 16.32 requires the following to be

disclosed:

 the state of the group’s order book (where applicable)

and prospects for new business including new

products and services introduced or announced (App

16.32(3));

 future prospects of significant investments held (App

16.32(4)); and

 details of future plans for material investments or

capital assets (App 16.32(9)).

In addition, AB5.56 states that the discussion should

include comments on short and longer-term funding plans

to support the directors' strategies to achieve the

reporting entity’s objectives. The discussion should

supplement the information provided in the financial

statements by, for example, commenting on any special

factors that may have a significant effect on future cash

flows.

This could include, for example, the existence and timing

of commitments for capital expenditures and other known

or probable cash requirements. The discussion on funding

should also include details of expected sources of funding

in the coming year for the planned material investments or

capital assets as required by App 16.32(9). Conversely,

where the reporting entity has cash that is surplus to

future operating requirements and current levels of

distribution, the discussion should include future plans for

making use of the excess.

A practical guide to the business review

Holding back “seriously prejudicial” information

As discussed in the previous section of this guide,

Schedule 5 allows the directors not to disclose any

information about “impending developments or matters in

the course of negotiation”, if such disclosure would, in the

directors’ opinion, be “seriously prejudicial” to the

company’s (or group’s) interests.

This exemption may also be relevant in some specific

situations to the discussion of the likely future

development of the business. However, care should be

taken not to misuse this exemption, by taking it too

broadly. For example, even where there is a business

acquisition in the course of negotiation, shareholder needs

may be able to be met by disclosing information about the

group’s plans for future expansion or diversification of

which this acquisition is a part, without disclosing

information which is “seriously prejudicial” to the

negotiations.

If the board is considering making use of this exemption,

we recommend that you obtain legal advice in this regard.

Linkage

As discussed earlier, companies should also think about

linking their future development discussions to their

strategies and performance measures where appropriate.

There is no prescribed structure for doing this, so

companies will need to consider how best to tell the story

of how business value is expected to be generated and

preserved. Tables, such as those illustrated on pages 9 and

20, might be a useful presentation technique to assist with

this.

Companies can also help shareholders assess the impact of

the trends and factors identified by providing contextual

information. For example, if a trend has been identified

affecting a specific customer segment, shareholders will

need to understand the size of that segment if they are to

model its impact. Ideally this information should already be

available from the description of the business model.

There is also a clear commonality between the discussion

of further prospects and the principal risks and

uncertainties facing the business. Care should be taken to

ensure that the discussion of future prospects takes those

identified principal risks and uncertainties into account, to

present a balanced and neutral discussion of how the

directors view the future. This could include their plans to

mitigate any negative impacts or take advantage of any

opportunities that may arise as the future unfolds. What-if

analyses which flex KPIs for a range of possible future

outcomes can also provide useful information in this

regard.

Including a health warning

AB5.57 advises that given the nature of some forward-

looking information, in particular statements that cannot

be objectively verified but have been made in good faith,

directors may want to include a warning in the review to

treat such statements with caution, explaining the

uncertainties underpinning such information.

Typically such warnings will be drafted with the assistance

of the company’s legal advisers and vary from a

boilerplate style of general health warning, to more

specific wording which draws attention to the specific

risks and uncertainties facing the group. However, these

statements all share the same basic intent of conveying

the following 3 key messages:

 the discussion and analysis includes forward-looking

statements;

 these forward-looking statements reflect current

assumptions about future developments based on the

directors’ current views; however

 actual outcomes and developments may be different

due to risks and uncertainties outside of the directors’

control.

Some companies include a comprehensive health warning

statement in a prominent position at the start of their

annual report. In such cases it may still be advisable to

integrate the above key messages into the discussions of

future prospects in the business review, and/or to take

particular care to ensure the discussion is understandable

in its own right. This is in order to minimise the risk that

the reader misinterprets the discussions as reflecting

greater confidence in the directors’ ability to predict or

control the future than the directors feel themselves.

Key questions to ask about the indication of

the likely future developments:

• Does the discussion address the material

anticipated changes across the business model,

covering changes arising from both management

initiatives, and external factors?

• Do identified trends look beyond those already

apparent in the financial statements?

• Is sufficient detail provided for shareholders to form

their own views on the implications of each trend or

factor?

• Does the review contain sufficient warning about

the uncertainty of any forward-looking information?

A practical guide to the business review

The content elements

4. Explaining the principal risks

and uncertainties

Schedule 5 requires the business review to include a description of the principal risks and

uncertainties facing the company (or group). In a well written business review the description of the

principal risks and uncertainties should cover the exposure to negative consequences, as well the

directors’ policy for managing principal risks and potential opportunities.

Previously App 16.52(v) included the following

recommended commentary item: “a discussion on

business risks (including known events, uncertainties and

other factors which may substantially affect future

performance) and risks management policy”

. In addition,

App 16.32 continues to require commentary on the

following matters that are relevant to the discussion of risk

and uncertainties:

 the group’s liquidity and financial resources. This may

include comments on the level of borrowings at the

end of the period under review, the seasonality of

borrowing requirements, and the maturity profile of

borrowings and committed borrowing facilities.

Reference may also be made to the funding

requirements for capital expenditure commitments and

authorisations (App 16.32(1));

 details of charges on group assets (App 16.32(8));

 exposure to fluctuations in exchange rates and any

related hedges (App 16.32(11)); and

 details of contingent liabilities, if any (App 16.32(12)).

Some form of risk discussions, especially relating to

liquidity risk, may therefore already be an established part

of many listed companies’ annual reports. But these

discussions may well not go far enough, or have the right

balance, compared to the new requirement in Schedule 5

to discuss the principal risks and uncertainties facing the

business. A closer look at the guidance in AB5 may drive

further improvement in disclosures in this area:

Guidance in AB5 on identifying risks to disclose

There is an emphasis in AB5 on addressing the full range

of business risks irrespective of whether they are financial

or non-financial in nature – specifically, AB5.50 mentions

reputational, strategic, commercial, operational and

financial risks as the types of risk that the business may

face.

AB5.50 also lists the following common examples of risks:

(a) risk of loss of income, for example arising from

increased competition affecting market share and/or

pricing of products and services, or changes in the

market itself;

(b) risk of increased costs, for example arising from

impact of inflation or scarce supply on costs of key

resources such as premises, skilled workforce, raw

materials;

reporting entity's exposure to price changes in the

value of property or commodities held, or exposure to

customers' credit risk or exposure to the risk that

inventories may become obsolete due to changes in

technology or fashion;

(d) liquidity risk, for example slowing down in the timing

of cash receipts may put pressure on the reporting

entity's ability to meet loan repayment schedules or

otherwise increase borrowing costs; and

(e) risks arising from the reporting entity's reliance on

availability of skilled workforce, key suppliers or

providers of finance (such as continuing banking

facilities).

This recommended specific item was deleted from App 16.52 in the February 2015 amendments to the Listing Rules to avoid duplication

with the requirements of Schedule 5.

A practical guide to the business review

Consistent with App 16.32(1), AB5 also specifically

highlights the ability of the reporting entity to fund its

current and future operations and stated strategies as an

area for discussion of risk. The guidance is consistent with

the items listed in App 16.32(1) in this regard, but goes

further by flagging covenants with lenders as an extra area

where principal risks could lie (AB5.51-52).

This guidance in AB5 is aimed at those companies

preparing business reviews for the first time. Listed issuers

would be well advised to consider whether their current

risk disclosures match up to this guidance, as well as

considering whether the guidance goes far enough given

the facts and circumstances of the issuer’s business and

its environment.

Reviewing the information planned to be disclosed in

respect of the fair review of the business (i.e. the first

content element discussed earlier on in this guide),

including the discussions of compliance with laws and

regulations and key relationships, may identify further

matters which are a source of risk for the issuer. Some

risks may also link to governance disclosures to explain

how the board is monitoring and setting risk appetite and

policy.

On the other hand, it is important to ensure that the

discussion in the business review is limited to the

“principal” risks and uncertainties facing the company or

group. Consistent with the principle of materiality, this

discussion should focus on those risks which are most

relevant to the shareholders’ decisions, and these risks

should not be obscured by excessive discussion of other

risks that are unlikely to crystallize or, if they did

crystallize, would not have a material impact.

One way of demonstrating that you have identified the

principal risks facing the group is to use a “heat map”. For

example, a South African based gold mining company

included the heat map reproduced below in a recent annual

report to present its top 10 risks in terms of the likelihood

of occurrence and the severity of impact. Although all of

these risks appear in the top right hand quadrant of

greatest heat, the relative positioning of these 10 risks each

to the other on the two axes of probability and severity

helps the shareholder distinguish between them. The heat

map also helps the shareholder understand that there may

be other risks with potential high impact which the

company has not disclosed as the directors consider them

less likely – this could help the shareholders ask for further

information about any potential worst case scenarios if they

consider it useful to know.

Example of a heat map which plots risks against severity and probability axes:

A practical guide to the business review

Company-specific descriptions, supported by

quantitative disclosures, can help shareholders

form a view of the potential earnings implications

Presenting risk information in the business review

AB5.49 states that the description of the principal risks and

uncertainties should cover the exposure to negative

consequences, as well the directors' policy for managing

principal risks and any potential opportunities.

Broad descriptions of generic or industry level risks and

mitigating actions are unlikely to provide this. Instead,

company-specific descriptions, supported by quantitative

disclosures can help shareholders form a view of the

potential earnings implications. For example, one company

said the following in a recent discussion on risk factors:

“We review the oil and gas price assumptions we use to

evaluate project decisions and commercial opportunities on a

periodic basis. We generally test projects and other

opportunities against a long-term price range of $70-110 per

barrel for Brent crude oil … While we believe our current long-

term price assumptions are prudent, if such assumptions

proved to be incorrect it could have a material adverse effect

on us. For near-term planning purposes, we stress test the

financial framework against a wider range of prices.”

One way to disclose the principal risks concisely may be to

present the information in a table, describing the risks

themselves and how they are being managed. It may also

be useful to link risk descriptions to other parts of the report

which set out the strategy and/or provide indicators of

progress in managing the risk. This is illustrated in the

example below, which describes a principal risk that might

be identified by a mining company, and how it links to other

components of that company’s business review:

Example of how to link the principal risks of the business to other components of the business review:

Risk

Description

Link to Strategy

Risk Mitigation

Risk indicators

monitored

Impact on future business if

mitigation is unsuccessful

Failure to

obtain access

to a sufficient

number of new

sites for

exploration

and

commercially

viable

extraction

purposes

Obtaining access to

new sites for

exploration purposes

and identifying new

opportunities for

commercially viable

extraction are key to

our strategy to

maintain sustainable

earnings over the

long term.

In each of our major

locations we have put in

place a team of experienced

negotiators to maximize our

chances of obtaining access

to land on commercially

viable terms. These

negotiators seek sustained

cooperation with local

governments and the wider

community in order to

reduce risks of refusal or

protracted legal disputes.

We receive monthly

progress reports on

status of new

opportunities for

extraction. We also

monitor a range of

quantitative measures

which indicate significant

delays or failure to

access land for

exploration projects, in

order that appropriate

action can be authorised.

Failure to obtain access to land

for exploration purposes and/or

failure to identify new

commercially viable extraction

opportunities will prevent us

from maintaining earnings as our

existing projects approach the

end of their productive lives.

Further details of the proved and

undeveloped reserves of our

existing projects can be found in

our discussion of our business

and its future.

As mentioned at the start of this guide, the business review

is just the beginning of a series of regulatory initiatives

aimed at improving the relevance of narrative reports for

shareholders.

One of these initiatives

aims to improve transparency of

companies’ risk management and internal controls, including

an annual review of effectiveness. Given the progressive

nature of disclosures around risks, we suggest that

companies take this opportunity to revisit their risk

management disclosures to ensure cohesive descriptions in

the business review and corporate governance reports.

Key questions to ask about the discussion of

principal risks and uncertainties:

• Are the risks highlighted the most relevant to an

understanding of business prospects – including

those relating to success in implementing

business strategies?

• Does the report address significant risks arising

from both the internal and external environment?

• Do the disclosures link to KPIs and governance

explanations that address progress in managing

the risk?

On 19 December 2014, the HKEx issued its new requirements in the Consultation Conclusions on Risk Management and Internal Control: Review of the

Corporate Governance Code and Corporate Governance Report. The new requirements will apply to accounting periods beginning on or after 1 January 2016 (as

illustrated in the timeline on page 1 of this guide).

A practical guide to the business review

Overall assessment of the quality

of the business review:

Questions for boards to ask

themselves

As part of the board’s overall assessment before approval, we expect that the directors will be

familiar with the proposed contents of the business review and will have raised concerns if anything

appeared untoward.

However, as the board is ultimately responsible for the contents of the annual report, we would

recommend that the directors also ask themselves the following questions:

 Are we confident that the process for drafting the review was robust

enough to ensure that the review is factually accurate?

 Are we satisfied that the content of the review is comprehensive

enough to meet the statutory requirements and, where applicable, the

requirements of the Listing Rules?

 Do we consider that the review stands up well against the guiding

principles set out in AB5 and in particular is it a fair and balanced

discussion of our business and its future prospects?

 Do we believe that the review will make a positive contribution to

shareholders’ overall understanding of who we are, what we do and

why we are worth investing in?

These questions address fundamental assertions which should underpin the approval of any

directors’ report which contains a business review. So if the board cannot answer “yes” to each of

these questions, then clearly there is work still to be done for this year’s report!

But even if confident enough to approve this year’s report, we would encourage all companies, even

the best, to challenge themselves continuously to find new and improved ways to communicate key

messages effectively and efficiently to those who need to know. With the benefit of hindsight and

feedback, we therefore recommend that each year you ask yourselves one more question:

What can we do better next time?

”

‘‘

A practical guide to the business review

Further information

For easy reference, this guide includes the following appendices which may assist in drafting or improving a

business review:

 Appendix 1: Extracts from Appendix 16 to the Main Board Listing Rules (with equivalent paragraph

references to the GEM Listing Rules) with an index of where these requirements are discussed in this guide

 Appendix 2: Index of KPIs illustrated in the Implementation Guidance attached to Accounting Bulletin 5

 Appendix 3: A summary of all the questions mentioned in this guide that you may find useful to ask

 Appendix 4: Names and website addresses of the distinguished companies who have received recognition in

the recent HKICPA and Hong Kong Management Association report competitions.

In addition, your usual KPMG contact can provide you with copies of the following KPMG publications:

 HK Companies Ordinance Checklist on the Business Review for Listed Companies – to help

companies ensure that the minimum requirements of Schedule 5 and the Listing Rules are met, and to

help when assessing the extent to which the business review has taken the guidance in AB5 into

account

 HK Companies Ordinance Checklist on the Business Review for Non-listed Companies – to help

companies ensure that the minimum requirements of Schedule 5 are met, and to help when assessing

the extent to which the business review has taken the guidance in AB5 into account

 The KPMG survey of business reporting – to provide an overview of current reporting practice

globally and highlight areas where this could be developed to provide shareholders with a better

understanding of business performance. This publication is also available from our external website

at: www.kpmg.com/betterbusinessreporting

 KPMG’s Briefing Note 2 “What’s new for directors’ reports?” – to highlight the areas of change and

key requirements relating to the directors’ report under the new HK Companies Ordinance. This

Briefing Note, along with other Briefing Notes in the series, is also available from our external website

at: www.kpmg.com/cn/hk-companies-ordinance

The HKICPA’s Accounting Bulletin 5 Guidance for the Preparation and Presentation of a Business

Review under the Hong Kong Companies Ordinance Cap.622 (“AB5”) can be found on the Institute’s

website at http://www.hkicpa.org.hk/en/standards-and-regulations/standards/financial-reporting/circular/.

The above is just a selection of the sources of information available. Please contact your usual KPMG contact

if you feel we can help in any way with improving your business reporting.

Appendix 1:

Extracts from Appendix 16 to the Main

Board Listing Rules

Paragraph 28 (equivalent to Rule 18.07A of the GEM Listing Rules) [emphasis added]:

Discussed

in this

guide on

page …

A listed issuer (whether or not it is incorporated in Hong Kong) shall include

disclosures required under the following provisions of the Companies Ordinance and

subsidiary legislation:–

App 16.28 (1)

in financial statements

a) Section 383 – Notes to financial statements to contain information on directors’

emoluments etc.;

b) Schedule 4 – Accounting Disclosures relating to:

(i) Part 1(1) Aggregate amount of authorized loans;

(ii) Part 1(2) Statement of financial position to be contained in notes to annual

consolidated financial statements;

(iii) Part 1(3) Subsidiary’s financial statements must contain particulars of

ultimate parent undertaking;

(iv) Part 2(1) Remuneration of auditor; and

c) Companies (Disclosure of Information about Benefits of Directors) Regulation; and

App 16.28 (2)

in directors’ report

a) Section 390 – Contents of directors’ report: general;

b) Section 470 – Permitted indemnity provision to be disclosed in directors’ report;

c) Section 543 – Disclosure of management contract;

d) Schedule 5 – Content of Directors’ Report: Business Review; and

e) Companies (Directors’ Report) Regulation.

28.1 Directors must prepare the directors’ report which complies with section 388 of the

Companies Ordinance and the directors’ report must be approved and signed,

which complies with section 391 of the Companies Ordinance.

28.2 Section 390(3)(b) of the Companies Ordinance requires a company to disclose the

name(s) of the director(s) of its subsidiaries. Notwithstanding the disclosure

provisions in the sub-paragraph 2(a) above, a listed issuer not incorporated in Hong

Kong is not required to disclose the name(s) of its subsidiaries’ director(s).

On 6 February 2015, the HKEx issued its Consultation Conclusions on the Review of Listing Rules on Disclosure of Financial Information with

reference to the New Companies Ordinance and Hong Kong Financial Reporting Standards and Proposed Minor/Housekeeping Rule

Amendments to update the Listing Rules for the new Companies Ordinance disclosure requirements. Amendments to the Listing Rules were

included as an appendix to the Consultation Conclusions. These amendments are mandatory for financial years ending on or after 31 December

2015. This guide is based on these updated Listing Rules.

Paragraph 32 (equivalent to Rule 18.41 of the GEM Listing Rules):

A listed issuer shall include in its annual report a discussion and analysis of the group’s

performance during the financial year and the material factors underlying its results and

financial position. It should emphasize trends and identify significant events or transactions

during the financial year under review. As a minimum the directors of the listed issuer should

comment on the following:–

3, 11, 14

App 16.32 (1)

the group’s liquidity and financial resources. This may include comments on the level of

borrowings at the end of the period under review, the seasonality of borrowing requirements,

and the maturity profile of borrowings and committed borrowing facilities. Reference may also

be made to the funding requirements for capital expenditure commitments and

authorisations;

27, 28

App 16.32 (2)

the capital structure of the group in terms of maturity profile of debt and obligation, type of

capital instruments used, currency and interest rate structure. The discussion may cover:

a) funding and treasury policies and objectives in terms of the manner in which treasury

activities are controlled;

b) the currencies in which borrowings are made and in which cash and cash equivalents

are held;

c) the extent to which borrowings are at fixed interest rates;

d) the use of financial instruments for hedging purposes; and

e) the extent to which foreign currency net investments are hedged by currency

borrowings and other hedging instruments;

App 16.32 (3)

the state of the group’s order book (where applicable) and prospects for new business

including new products and services introduced or announced;

App 16.32 (4)

significant investments held, their performance during the financial year and their future

prospects;

14, 25

App 16.32 (5)

details of material acquisitions and disposals of subsidiaries, associates and joint ventures in

the course of the financial year;

App 16.32 (6)

comments on segmental information. This may cover changes in the industry segment,

developments within the segment and their effect on the results of that segment. It may also

include changes in the market conditions, new products and services introduced or

announced and their impact on the group’s performance and changes in revenue and margins;

App 16.32 (7)

where applicable, details of the number and remuneration of employees, remuneration

policies, bonus and share option schemes and training schemes;

App 16.32 (8)

details of charges on group assets;

App 16.32 (9)

details of future plans for material investments or capital assets and their expected sources of

funding in the coming year;

32.1 It is the responsibility of the directors of the listed issuer to determine what

investment or capital asset is material in the context of the listed issuer’s business,

operations and financial performance. The materiality of investment or capital asset

varies from one listed issuer to another according to its financial performance, assets

and capitalisation, the nature of its operations and other factors. An event that is

“material” in the context of a smaller listed issuer’s business and affairs is often not

material to a large listed issuer. The directors of the listed issuer are in the best

position to determine materiality. The Exchange recognises that decisions on

disclosure require careful subjective judgements, and encourages listed issuers to

consult the Exchange when in doubt as to whether disclosure should be made.

App 16.32 (10)

gearing ratio;

32.2 The basis on which the gearing ratio is computed should be disclosed.

15, 16

App 16.32 (11)

exposure to fluctuations in exchange rates and any related hedges; and

App 16.32 (12)

details of contingent liabilities, if any.

32.3 If the above information required in this paragraph has been disclosed in a

business review in the directors’ report as set out in paragraph 28, no additional

disclosure is required.

Paragraph 52 (equivalent to Rule 18.83 of the GEM Listing Rules):

App 16.52

Issuers are encouraged to disclose the following additional commentary on discussion and

analysis in their interim and annual reports:

(i) efficiency indicators (e.g. return on equity, working capital ratios) for the last five

financial years indicating the bases of computation;

(ii) industry specific ratios, if any, for the last five financial years indicating the bases

of computation;

(iii) a discussion of the listed issuer’s purpose, corporate strategy and principal

drivers of performance;

(iv) an overview of trends in the listed issuer’s industry and business;

(v) a discussion on the listed issuer’s policies and performance on community,

social, ethical and reputational issues; and

(vi) receipts from, and returns to, shareholders.

52.1 Issuers should also note the recommended disclosures set out in paragraphs Q to T

of Appendix 14

15, 17

12, 13

12, 14, 25

23, 27

Paragraph 53 (equivalent to Rule 18.84 of the GEM Listing Rules):

App 16.53

Issuers are encouraged to include information set out in Appendix 27

in the annual report

regarding the same period covered in the annual report, or as a separate report.

53.1 Where the information is included in a separate report, an issuer is free to report on

any period but should consistently report on the same period so that the information

can be comparable. However, the Exchange encourages an issuer to report regarding

the same period as in the annual report.

Paragraphs Q to T of Appendix 14 of the Main Board Listing Rules set out a number of recommended disclosures on corporate

governance matters. The areas covered by these paragraphs are:

 Share interests of senior management;

 Investor relations, including details of shareholders and the last shareholders’ meeting;

 Internal controls; and

 Management functions, including the division of responsibility between the board and management.

Appendix 27 contains the “Environmental, Social and Governance Reporting Guide”.

Appendix 2:

Index of KPIs illustrated in the

Implementation Guidance attached to

Accounting Bulletin 5

Financial KPIs

 IG Example 1: Return on capital employed (ROCE)

 IG Example 2: Market share

 IG Example 3: Average revenue per user (customer)

 IG Example 4: Sales per square foot

 IG Example 5: Percentage of revenue from new products

 IG Example 6: Cost per unit sold

 IG Example 7: Economic capital

 IG Example 8: Cash conversion rate

Non-financial KPIs

 Measures relating to the reporting entity's environmental policies and performance and

compliance with laws and regulations (paragraphs 44-45):

 IG Example 9: Environmental spillage

 IG Example 10: CO2 emissions

 IG Example 11: Waste

 IG Example 12: Employee health and safety

 Measures relating to the reporting entity's key relationships (paragraphs 46-48):

 IG Example 13: Number of subscribers

 IG Example 14: Number of products sold per customer

 IG Example 15: Customer churn

 IG Example 16: Employee morale

 Other measures that may reflect on the current or future development in the business or

the principal risks and uncertainties facing the reporting entity:

 IG Example 17: Products in the development pipeline

 IG Example 18: Reserves

 IG Example 19: Market risk

 IG Example 20: Monitoring of social risks in the supply chain

 IG Example 21: Business continuity management

Appendix 3:

A summary of questions to ask

The following brings together all the questions we suggest in this guide that you

may find useful to ask. This is not intended to be an exhaustive list of things to think

about, but may provide some useful prompts either at the planning stage or when

reviewing the draft

Discussed

in this

guide on

page …

Overall

considerations

Key questions to ask when planning ahead:

 Have we put together a team with enough insight into top management’s

strategy to ensure the review is useful and authentic?

 Has the annual report compared well in the past with information being

communicated through other channels (such as investor presentations) or

could it be improved this year to reduce gaps?

 How well does last year’s MD&A stand up against AB5’s guiding principles?

For example:

 How well did it complement and supplement the financial statements?

 How far did management go to provide balanced and neutral information?

 How easy was it to understand?

Could more be done this year on any of these aspects to improve the

usefulness for shareholders?

 What are the new topics that need to be discussed in this year’s review,

compared to last year’s MD&A? Where is the information for these topics and

will we be able to find comparative information as well?

Setting the

scene

Key questions to ask about …

Factual information about the business:

 Does the description of the business align with the board’s view of the

significant business value drivers?

 Where different segments of the business have different operating

characteristics or performance drivers, is this clear enough?

 Has sufficient detail been provided about the business so that shareholders

can assess the potential impact of matters raised elsewhere in the report?

Any discussion about objectives and strategy:

 Are the stated objectives business-specific? For example, becoming the

market leader in a specific segment, rather than generic aims such as

maximising shareholder return

 Does the description of the strategy address the short, medium, and longer

term priorities for the business?

 Is there enough linkage of stated objectives and strategies to the analysis of

performance and other content elements?

Explaining

the year

under review

Key questions to ask about KPIs:

• Are the KPIs selected for disclosure consistent with those used by the board

to assess the business? For example, do the measures address progress in

managing the critical resources on which the business depends?

• Do the measures address the specific part of the business affected by the

issue, rather than being provided on an aggregate basis for the business as a

whole?

• Are the measures selected and presented in accordance with the “balanced

and neutral” guiding principle? For example, are they presented consistently

over time to show key trends?

• Are the measures presented in a way which is understandable? For example,

is the basis of computation and the source of data clear and have they been

given enough context by being linked to other information, such as strategy

and future plans?

Explaining

the year

under review

Key questions to ask about the discussion on environmental policies,

laws and regulations and key relationships:

• Does the discussion identify those environmental policies, laws and

regulations which have a significant impact on the business and does it

include a discussion of the extent of compliance?

• Does the discussion identify and give an account of those relationships on

which the company’s/group’s success depends?

• If KPIs have been included in the discussion, are they balanced and neutral

and presented in an understandable way?

• Have cross references been included to where further information can be

found, where relevant?

Bringing the

story up to

date

Key questions to ask when bringing the story up to date:

• Has the company disclosed both financial and non-financial events that are

important to the business?

• If not, has legal advice been obtained on whether it is acceptable to withhold

this information from the public?

• Has sufficient information about the event been given in the business review,

including updating the KPIs where applicable and discussing the impact of the

event on the future business?

• Would it be useful to provide more general commentary on the direction of

the business since year end and where it is heading?

Explaining

the likely

future

development

of the

business

Key questions to ask about the indication of the likely future

developments:

• Does the discussion address the material anticipated changes across the

business model, covering changes arising from both management initiatives,

and external factors?

• Do identified trends look beyond those already apparent in the financial

statements?

• Is sufficient detail provided for shareholders to form their own views on the

implications of each trend or factor?

• Does the review contain sufficient warning about the uncertainty of any

forward-looking information?

Explaining

the principal

risks and

uncertainties

Key questions to ask about the discussion of principal risks and

uncertainties:

• Are the risks highlighted the most relevant to an understanding of business

prospects – including those relating to success in implementing business

strategies?

• Does the report address significant risks arising from both the internal and

external environment?

• Do the disclosures link to KPIs and governance explanations that address

progress in managing the risk?

Overall

assessment

of the quality

of the

business

review

Questions for boards to ask themselves

 Are we confident that the process for drafting the review was robust enough to

ensure that the review is factually accurate?

 Are we satisfied that the content of the review is comprehensive enough to

meet the statutory requirements and, where applicable, the requirements of the

Listing Rules?

 Do we consider that the review stands up well against the guiding principles set

out in AB5 and in particular is it a fair and balanced discussion of our business and

its future prospects?

 Do we believe that the review will make a positive contribution to shareholders’

overall understanding of who we are, what we do and why we are worth

investing in?

 What can we do better next time?

Appendix 4: Local award winners

Each year, the following annual report competitions take place in Hong Kong:

 The HKICPA’s Best Corporate Governance Disclosure Awards, which acknowledges listed companies and public

sector/not-for-profit organisations that exemplify the best corporate governance standards in Hong Kong, as reflected

in their annual reports; and

 The Hong Kong Management Association’s (HKMA) Best Annual Reports Awards, which recognises companies

for their exemplary achievement in producing timely, accurate, informative and well-presented annual reports.

For your reference, we have provided a list of those companies – along with a link to their websites – who were commended by

the HKICPA and/or the HKMA in their 2014 awards for their well presented corporate governance disclosures and annual

reports. Searching out high quality annual reports of companies in comparable businesses or environments, whether listed in

Hong Kong or in overseas markets with similar reporting regimes, can be a good source of inspiration for ways to improve your

own business reporting.

The full judges’ reports can be found on the HKICPA’s and HKMA’s websites at: http://www.hkicpa.org.hk/en/about-us/best-

corporate-governance-disclosure-awards/ and http://www.hkma.org.hk/bara-award/introduction.html respectively.

The HKICPA’s Best Corporate Governance

Disclosure Awards – Award winners

The HKMA Best Annual Reports Awards – Award winners

 Airport Authority Hong Kong

www.hongkongairport.com

 China Merchants Bank Co., Ltd

www.cmbchina.com

 China Minsheng Banking Corp., Ltd

www.cmbc.com.cn

 China Shenhua Energy Company Limited

www.csec.com

 CLP Holdings Limited www.clpgroup.com

 COSCO International Holdings Limited

www.coscointl.com

 COSCO Pacific Limited www.coscopac.com.hk

 Hang Seng Bank Limited www.hangseng.com

 Hong Kong Exchanges and Clearing Limited

www.hkex.com.hk

 Hong Kong Productivity Council www.hkpc.org

 HSBC Holdings plc www.hsbc.com

 Hysan Development Company Limited

www.hysan.com.hk

 Lenovo Group Limited www.lenovo.com

 Prudential plc www.prudential.co.uk

 Securities and Futures Commission www.sfc.hk

 SOCAM Development Limited www.socam.com

 The Hongkong and Shanghai Hotels, Limited

www.hshgroup.com

 The Link Real Estate Investment Trust

www.thelinkreit.com

 Transport International Holdings Limited

www.tih.hk

 VTech Holdings Limited www.vtech.com

 Airport Authority Hong Kong www.hongkongairport.com

 ANTA Sports Products Limited www.anta.com.hk

 CITIC Limited www.citic.com

 CLP Holdings Limited www.clpgroup.com

 Guodian Technology & Environment Group Corporation Limited

www.khjt.com.cn

 Hang Seng Bank Limited www.hangseng.com

 Hong Kong Exchanges and Clearing Limited www.hkex.com.hk

 Hong Kong Housing Society www.hkhs.com

 Hong Kong Monetary Authority www.hkma.gov.hk

 Hong Kong Productivity Council www.hkpc.org

 HSBC Holdings plc www.hsbc.com

 Hysan Development Company Limited www.hysan.com.hk

 Industrial and Commercial Bank of China Limited www.icbc-

ltd.com

 Jiangsu Expressway Company Limited www.jsexpressway.com

 Mandatory Provident Fund Schemes Authority

www.mpfa.org.hk

 MTR Corporation Limited www.mtr.com.hk

 New World Department Store China Limited www.nwds.com.hk

 Next Media Limited www.nextmedia.com/investor

 Sa Sa International Holdings Limited corp.sasa.com

 Securities and Futures Commission www.sfc.hk

 Swire Pacific Limited www.swirepacific.com

 The Hongkong and Shanghai Hotels, Limited

www.hshgroup.com

 The Hong Kong Jockey Club www.hkjc.com

 The Hong Kong Polytechnic University www.polyu.edu.hk

 The Land Registry www.landreg.gov.hk

 The Link Real Estate Investment Trust www.thelinkreit.com

 Transport International Holdings Limited www.tih.hk

 Tung Wah Group of Hospitals www.tungwah.org.hk

 Urban Renewal Authority www.ura.org.hk

This publication was produced by KPMG China’s Department of Professional Practice. The information contained herein is of a general nature and is not intended to address

the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information

is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice

after a thorough examination of the particular situation.

KPMG International.

kpmg.com/cn

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Shenyang

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Nanjing

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Tel : +86 (25) 8691 2888

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Qingdao

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Xiamen

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Tianjin

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