TechWatch

THE HONG KONG ACCOUNTANT JULY 200466

TechWatchHEADLINES

HKSA Members’ Handbook

1. Successful Re-launch Of Members’ Handbook On 1 June 2004 AsScheduled

2. Members’ Handbook Updates No. 1 And 2

Technical Update Evening

3. Technical Update Evening (TUE) Programme

Financial Reporting

4. HKSA Issues A New Accounting Standard On Share-Based Payment

5. HKSA Issues New Accounting Standards On Financial Instruments:HKAS 32 & HKAS 39

6. HKSA Invites Comments On The Proposed Implementation Of AFinancial Reporting Framework And Financial Reporting Standard ForSMEs In Hong Kong

7. FASC Invites Comments On IASB Exposure Draft Of A Proposed LimitedAmendment To IFRS 3 Business Combinations – Combinations ByContract Alone Or Involving Mutual Entities

8. FASC Invites Comments On IASB Exposure Draft Of ProposedAmendments To IAS 19 Employee Benefits – Actuarial Gains AndLosses, Group Plans And Disclosures

9. FASC Invites Comments On IFRIC Draft Interpretation D6 Multi-employer Plans

10.FASC Meeting Summary – 22 March 2004

Audit & Assurance

11.HKSA Consults Members And Other Interested Parties On Proposed IPOEngagement Standards

12.Sample Audit Report On LegCo Election Return

13.AASC Meeting Summary – 27 April 2004

TechWatch

This is the 24th Issue of TechWatch,a publication designed to alertmembers to topics and issues thatimpact on accountants and theirworking environment. We welcomeyour comments and feedback.Comments and suggestions onTechWatch should be addressed toStephen Chan, Technical Director(Ethics & Assurance) & Head ofStandards & Technical DepartmentCoordination by email<commentletters@hksa.org.hk>.

TechWatch is available on theHKSA’s website <http://www.hksa.org.hk/professionaltechnical/techwatch/>.

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

67JULY 2004 THE HONG KONG ACCOUNTANT

TechWatchTechWatch

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

○

Ethics

14.HKSA Adopts IFAC Ethics Code On Audit Partner Rotation

Listing & Securities

15.HKSA’s Submissions On Draft Rule Amendments To The Listing RulesRelating To The Regulation Of Sponsors And Independent FinancialAdvisers

16.HKEx Consultation Conclusions On A Proposed Operational Model For AScripless Securities Market

Corporate Governance

17.HKSA Issues A New Comprehensive Guidance On Corporate GovernanceFor Public Sector Bodies

Legislation & Government Initiatives

18.Consultation Paper On Statutory Derivative Action In The Companies(Amendment) Bill 2003

19.CEPA – New Flexible Arrangements For Group Of Companies To ApplyFor Certificate Of Hong Kong Service Supplier

Corporate Restructuring & Insolvency

20.HKSA’s Concerns On The Clearing And Settlement Systems Bill HaveBeen Addressed

Innovation & Technology

21.Is Your E-Business Ready For A Health Check?

Comment Key Dates

Tech

Wat

ch

TechWatch

THE HONG KONG ACCOUNTANT JULY 200468

HKSA Members’ Handbook

1. Successful Re-launch OfMembers’ Handbook On 1 June2004 As ScheduledThe re-launched Members’Handbook <http://www.hksa.org.hk/std/hbk/index.php> aims toprovide members and subscriberswith more options on how to obtain,update and access the Handbook.The previous Members’ Handbooksubscription structure has lapsed andis replaced by a new simplerstructure. Details are set out in theHKSA Circular dated 1 June 2004<http://www.hksa.org.hk/professionaltechnical/handbook/handbook_circular.pdf>.

A CD-ROM of the new Members’Handbook will be issued to allmembers in the week commencing21 June 2004 for their off-line use.This CD-ROM has ‘Smart Update’which means that once it is installedon your computer, with Internetaccess, you can update all the newand revised ProfessionalPronouncements by accessing the‘Smart Update’ function. For furtherinformation, read HKSA Circulardated 16 June 2004 <http://www.hksa.org.hk/professionaltechnical/handbook/celetter_cdrom.pdf>.

For members and registeredstudents who wish to subscribe toboth the hard copy Foundation Setand the hard copy UpdateSubscription, a special concessionprice of HK$1,700 is now offereduntil 31 December 2004. Thesubscription order form <http://www.hksa.org.hk/professionaltechnical/handbook/member_handbook_form.pdf> is available.

2. Members’ Handbook UpdatesNo. 1 And 2Update No. 1<https://www.hksa.org.hk/hksaebk/HKSA_Members_Handbook_Master/updates/update001.pdf> contains arevision to Professional EthicsGuidance 1.308 ‘Independence forassurance engagements’ to adopt theIFAC Code Revision, details are setout in article 14 below under ‘HKSAAdopts IFAC Ethics Code On AuditPartner Rotation’.

Update No. 2<https://www.hksa.org.hk/hksaebk/HKSA_Members_Handbook_Master/updates/update002.pdf> containsthe new HKAS 32 ‘FinancialInstruments: Disclosure andPresentation’ and HKAS 39‘Financial Instruments: Recognitionand Measurement’, details are setout in article 5 below.

Technical Update Evening

3. Technical Update Evening (TUE)ProgrammeThe latest TUE Programme <http://www.hksa.org.hk/professionaltechnical/TUE/index.php> includes:• Auditors Beware: New Auditing

Guidance (20 July 2004)• New Hong Kong Accounting

Standards (7 September 2004)• New Audit Risk SASs (27

September 2004)Seats are limited. To secure your

seats, please register early bycompleting the registration form<http://www.hksa.org.hk/professionaltechnical/TUE/TUE_flyer_RegForm.pdf> andreturning it to the HKSA.

Financial Reporting

4. HKSA Issues A New AccountingStandard On Share-BasedPaymentThe HKSA has issued HKFRS 2 Share-based Payment <http://www.hksa.org.hk/professionaltechnical/accounting/standards/> onaccounting for share-based paymenttransactions, including grants ofshare options to employees. HKFRS2 becomes effective for accountingperiods that begin on or after 1January 2005 with earlier applicationencouraged. HKFRS 2 is convergedwith the equivalent standard issuedby the International AccountingStandards Board (IASB), IFRS 2,Share-based Payment.

The objective of HKFRS 2 is tospecify the financial reporting by anentity when it undertakes a share-based payment transaction. Inparticular, the HKFRS requires an

entity to reflect in its profit or lossand financial position the effects ofshare-based payment transactions,including expenses associated withtransactions in which share optionsare granted to employees.

Before the issue of HKFRS 2,there was no existing Standard onthe recognition or measurement ofshare-based payments. Therequirements in HKFRS 2 replacethe disclosure requirements in SSAP34 Employee Benefits that deal withequity compensation benefits.

HKFRS 2, and the accompanyingimplementation guidance and basisfor conclusions, have been publishedin the HKSA Members’ Handbook.

5. HKSA Issues New AccountingStandards On FinancialInstruments: HKAS 32 & HKAS 39The HKSA has issued two Standardsdealing with financial instruments.HKAS 32 Financial Instruments:Disclosure and Presentation <http://www.hksa.org.hk/professionaltechnical/accounting/standards/> deals with the disclosureof financial instruments and theirclassification as debt or equity. HKAS39 Financial Instruments: Recognitionand Measurement <http://www.hksa.org.hk/professionaltechnical/accounting/standards/> deals withrecognition, derecognition,measurement and hedge accounting.These two Standards are based onthe international accountingstandards issued by the IASB. Theyare to be applied prospectively foraccounting periods beginning on orafter 1 January 2005 with earlierapplication prohibited.

These two accounting standardsprovide comprehensive guidance onthe accounting for financialinstruments. The need for suchguidance is crucial. Financialinstruments are a large part of theassets and liabilities of virtually everycompany, in particular financialinstitutions. They also play a centralrole in the efficient operation offinancial markets.

A brief summary of the contentsof HKAS 32 and HKAS 39 is attachedas a note to the press release <http://www.hksa.org.hk/professional

69JULY 2004 THE HONG KONG ACCOUNTANT

TechWatchTechWatch

technical/accounting/pressrelease/>that accompanied publication of thenew Standards.

In April 2004, the IASB haspublished an exposure draft of aproposed limited amendment toIAS 39 (on which HKAS 39 is based)with a comment deadline of 21 July2004. This exposure draft proposesto limit the financial assets andfinancial liabilities to which the fairvalue option may be applied. InHong Kong, an invitation tocomment on this exposure draft wasissued concurrently. The HKSA’sFinancial Accounting StandardsCommittee (FASC) intends torecommend the adoption of asimilar amendment following fromthe IASB’s final approvedamendment. In order to allowentities sufficient time to understandand implement the Standards, theHKSA decided not to delay the issueof these Standards for this onespecific amendment. However, alimited amendment to HKAS 39 willbe made, probably before the end of2004, once the IASB’s proposedamendment to IAS 39 in respect ofthe Fair Value Option is finalised.

6. HKSA Invites Comments On TheProposed Implementation Of AFinancial Reporting FrameworkAnd Financial Reporting StandardFor SMEs In Hong Kong<http://www.hksa.org.hk/professionaltechnical/accounting/exposuredraft/SME-GAAP_CP-IIcl.pdf>

The HKSA has released proposalsfor the introduction of a financialreporting framework for SMEs forcomment by 31 August 2004.

The proposals are intended toprovide – for the first time – acomprehensive basis of accountingfor qualifying SMEs: to establishrequirements that are appropriateboth in terms of the compliance costborne by the entities preparingfinancial statements and theusefulness of the financialinformation provided to those often-limited parties who make use of anSME’s annual financial statements.

This consultation follows on fromthe proposed Framework for

Differential Reporting released bythe HKSA for public comment inAugust 2002. The development offinancial reporting requirementsrelevant for SMEs was widelysupported in the first consultation.There were, however, some issuesraised at this time which didnecessitate a review of the proposalsby the HKSA’s GAAP for SmallBusinesses Working Group andwhich we now believe have beenaddressed in this latest consultation.

The following six issues are raisedin the Consultation Paper:• The need for a separate financial

reporting framework forqualifying entities

• The principles underlying SMEfinancial reporting

• Whether SME financialstatements need give a true andfair view

• Which entities should qualify toprepare financial statementsunder the SME financialreporting framework

• Statutory requirements applicableto SME financial reporting

• Applicable financial reportingrequirements, fully containedwithin a separate financialreporting standard

The Consultation Paper isaccompanied by a draft SMEFinancial Reporting Framework andSME Financial Reporting Standard.

Of note, the Consultation Paperproposes that companies currentlyqualifying under section 141D of theCompanies Ordinance would qualifyto apply the Small GAAP Standard.Currently, these companies must beprivate companies, have neither aholding company nor subsidiarycompanies, and all owners mustagree to apply that section.

For non-corporate entities, theConsultation Paper proposes thatentities should qualify on the basis ofsize thresholds set out in the paper.Comments are also invited onwhether the HKSA should lobby fora change in the CompaniesOrdinance to amend section 141D tobecome consistent with the sizerequirements and to permit smallnon-listed groups applying the SMEfinancial reporting standard.

Public comment is invited by 31August 2004 on the issues raised inthe Consultation Paper and on thedraft SME Financial ReportingFramework and Financial ReportingStandard.

7. FASC Invites Comments On IASBExposure Draft Of A ProposedLimited Amendment To IFRS 3Business Combinations –Combinations By Contract AloneOr Involving Mutual Entities<http://www.hksa.org.hk/professionaltechnical/accounting/exposuredraft/BC-i2c.pdf>

The IASB has published forpublic comment proposals for alimited amendment to IFRS 3Business Combinations. The proposalsare set out in the Exposure DraftCombinations by Contract Alone orInvolving Mutual Entities.

The amendments being proposedto IFRS 3 are an interim solution tothe issue of the accounting forcombinations involving mutualentities or combinations in whichseparate entities are broughttogether by contract alone. The IASBidentified the problem whilefinalising IFRS 3 but agreed that itcould not provide an interimsolution without first exposing thatsolution for public comment. Giventhat very few transactions are likelyto be affected by this amendment,the IASB thought it important thatthe March 2004 publication of IFRS3 should not be delayed while itaddresses this issue.

The main features of the IASB’sproposals are:• To remove IFRS 3’s scope

exclusion for combinationsinvolving two or more mutualentities or combinations in whichseparate entities are broughttogether to form a reporting entityby contract alone without theobtaining of an ownership interest.This includes combinations inwhich separate entities arebrought together by contract toform a dual listed corporation.

• That an acquirer should measurethe cost of such a combination as:(a) The net fair value of the

acquiree’s identifiable assets,

TechWatch

THE HONG KONG ACCOUNTANT JULY 200470

liabilities and contingentliabilities when thecombination is one in whichseparate entities or businessesare brought together to form areporting entity by contractalone without the obtaining ofan ownership interest.

(b)The aggregate of thefollowing amounts when thecombination is one in whichthe acquirer and acquiree areboth mutual entities:– the net fair value of the

acquiree’s identifiableassets, liabilities andcontingent liabilities; and

– the fair value, at the dateof exchange, of any assetsgiven, liabilities incurredor assumed, or equityinstruments issued by theacquirer in exchange forcontrol of the acquiree.

Therefore, until guidance onapplying the purchase method tosuch transactions is developed by theIASB as part of a later phase of itsBusiness Combinations project, theacquirer would recognise goodwillequal to the fair value of anyconsideration given by the acquirer inexchange for control of the acquiree.

The IASB’s intention is that theamendments will take effect at thesame time as IFRS 3 (as issued inMarch 2004) is applied.

Under the HKSA’s due processfor setting accounting standards, theHKSA has issued an Invitation toComment on the exposure draft withcomments requested by 16 July 2004.

Following from the IASB’s finalapproved changes, the FASC intendsto recommend the adoption ofsimilar changes so that the HKFRSsmaintain conformity with the IASB’sStandards. The FASC does notintend to issue a specific Hong Kongexposure draft on the matterscovered in the IASB exposure draft.

8. FASC Invites Comments On IASBExposure Draft Of ProposedAmendments To IAS 19Employee Benefits – ActuarialGains And Losses, Group PlansAnd Disclosures<http://www.hksa.org.hk/

professionaltechnical/accounting/exposuredraft/IAS19-i2c.pdf>

The IASB has published forpublic comment Exposure Draft ofProposed Amendments toInternational Accounting Standard(IAS) 19 Employee Benefits – ActuarialGains And Losses, Group Plans andDisclosures. This exposure draftincludes proposals on aspects ofpension cost accounting, inparticular giving entities an option toshow, in full, pension deficits andavailable surpluses. This proposal issimilar to the requirements of theUK standard, FRS 17 RetirementBenefits. Approval of this proposedoption would enable companies thatalready show the surplus or deficit infull under FRS 17 and are adoptingIFRSs to continue with their presentpolicy.

Entities choosing the proposedoption would recognise in thebalance sheet the surplus or deficitin the plan at the balance sheet dateand would show the best estimate forgains and costs of the plan in theincome statement. The exposuredraft also includes the followingproposals:• To extend the application of

multi-employer plan accountingto entities within a consolidatedgroup that meet specified criteria;and

• For additional disclosures.The IASB is also consideringundertaking a comprehensiveproject on post-employmentbenefits, looking at fundamentalaspects of measurement andrecognition. Until the outcome ofsuch a broader review of theaccounting for post-employmentbenefits, the IASB would continue topermit the option under IAS 19Employee Benefits to recogniseactuarial gains and losses (i.e.unexpected changes in value of theplan) in profit or loss, either in theperiod in which they occur or spreadover the service lives of theemployees. Almost all entitiescurrently using IAS 19 choose tospread actuarial gains and losses.

Under the HKSA’s due processfor setting accounting standards, theHKSA has issued an Invitation to

Comment on the exposure draft withcomments requested by 16 July 2004.

Following from the IASB’s finalapproved changes, the FASCintends to recommend the adoptionof similar changes so that theHKFRSs maintain conformity withthe IASB’s Standards. The FASCdoes not intend to issue a specificHong Kong exposure draft on thematters covered in the IASBexposure draft.

9. FASC Invites Comments On IFRICDraft Interpretation D6Multi-employer Plans<http://www.hksa.org.hk/professionaltechnical/accounting/exposuredraft/D6 I2C.pdf>

The International FinancialReporting InterpretationsCommittee (IFRIC) has released forpublic comment DraftInterpretation, D6 Multi-employerPlans to give guidance on employeebenefit plans that have more thanone participating employer (multi-employer plans).

IAS 19 Employee Benefits allowsparticipants in defined benefitmulti-employer plans to use definedcontribution accounting andprovide additional disclosures if theinformation necessary for definedbenefit accounting is not available.

The draft Interpretationproposes guidance on when a planmeets the definition of a multi-employer plan, how defined benefitaccounting should be applied tosuch plans and, in the light of thatguidance, when the necessaryinformation might not be available.

Under the HKSA’s due processfor setting accounting standards, theHKSA has issued an Invitation toComment on the exposure draft withcomments requested by 25 June2004.

Following from the IASB’s finalapproved Interpretation, the FASCintends to recommend the adoptionof a new Hong Kong Interpretationso that the HKSA interpretationsmaintain conformity with the IASB’sinterpretations. The FASC does notintend to issue a specific Hong Kongexposure draft on the matterscovered in the IFRIC exposure draft.

71JULY 2004 THE HONG KONG ACCOUNTANT

TechWatchTechWatch

10. FASC Meeting Summary – 22March 2004<http://www.hksa.org.hk/professionaltechnical/accounting/fascupdate/index.php>

The FASC met on 22 March 2004and discussed the following items:• Proposed HKFRS 2 Share-based

Payment (converged with IFRS 2)• Financial Instruments – Proposed

HKAS 32 & HKAS 39 based onthe recently revised IAS 32 &IAS 39

• ED/Convergence• Comment letter on the IASCF

Trustees’ Constitution review• Accounting Guideline on Unit

Trusts• Comment letter on IFRIC D3

and D4The FASC meeting summaries areavailable on the HKSA’s website.

Audit & Assurance

11. HKSA Consults Members AndOther Interested Parties OnProposed IPO EngagementStandardsThe HKSA announced at a pressconference on 6 May 2004 therelease of an Exposure Draft (ED) ofProposed Standards and Guidancefor HKSA Members in PerformingListing Engagements <http://www.hksa.org.hk/professionaltechnical/assurance/artf/exposure_draft.pdf>which proposes new requirementson the preparation of accountants’reports on financial information,and also the preparation of financialinformation by listing applicants/listed companies, for inclusion ininvestment circulars. The pressrelease is available in English <http://www.hksa.org.hk/corporate_relations/media/pressrelease/060504e.pdf> andChinese <http://www.hksa.org.hk/corporate_relations/media/pressrelease/060504c.pdf>.Comments <commentletters@hksa.org.hk> on the ED have beenrequested by 14 August 2004.

In addition to consulting theHKSA members, the HKSA alsoinvited comments from theSecurities and Futures Commission,Hong Kong Exchanges and Clearing

Limited, the Companies Registry,over 20 professional and industrybodies, all the companies listed onthe Main Board and GEM, and thesponsors.

12. Sample Audit Report On LegCoElection ReturnAs reported in TechWatch Issue No.20 (January 2004) <http://www.hksa.org.hk/professionaltechnical/techwatch/techwatch20.pdf>, theLegislative Council Ordinance wasamended last year providing for aFinancial Assistance Scheme (the‘Scheme’) for LegCo electioncandidates. The procedures forhandling claims for financialassistance from LegCo electioncandidates are set out in thesubsidiary legislation, ‘The ElectoralAffairs Commission (FinancialAssistance for Legislative CouncilElections)(Application and PaymentProcedure) Regulation’ (the‘Regulation’) <http://www.hksa.org.hk/professionaltechnical/assurance/example_auditors/regulation.pdf>. The Regulationstipulates that a claim for financialassistance from a LegCo electioncandidate must be accompanied byan election return (with the accountsof the declared election expensesand the declared election donations)and an auditor’s report.

The Registration & ElectoralOffice of the Government (REO), inconsultation with the HKSA, hasprepared the REO Notes <http://www.hksa.org.hk/professionaltechnical/assurance/example_auditors/notes_for_candidate.pdf> which willbe distributed to the candidates ofthe forthcoming 2004 LegislativeCouncil Election when thenomination begins on 22 July 2004.

The REO Notes provide guidanceto the candidate and the auditor ofthe candidate of the LegCo electionsseeking financial assistance from theGovernment under the Scheme inorder that:• the candidate will establish

proper internal controls inrelation to the accountingrequirements to ensure that his/her election return (with the

accounts of the declared electionexpenses and the declaredelection donations) complieswith section 37(1) and (2)(b) ofthe Elections (Corrupt and IllegalConduct) Ordinance; and

• the auditor of the candidate willbe able to plan and performappropriate procedures for a highlevel assurance engagement.

A sample auditor’s report is alsoprovided in the REO Notes.

13. AASC Meeting Summary – 27April 2004The Meeting Summary <http://www.hksa.org.hk/professionaltechnical/assurance/aasc/index.php> is available on theHKSA’s website.

Ethics

14. HKSA Adopts IFAC Ethics CodeOn Audit Partner RotationThe HKSA issued Members’Handbook Update No. 1 <https://www.hksa.org.hk/hksaebk/HKSA_Members_Handbook_Master/updates/update001.pdf> to revise itsProfessional Ethics Guidance 1.308‘Independence for assuranceengagements’ <http://www.hksa.org.hk/ebook/HKSA_MembersHandbook Master/volumeI/1_308.pdf> to clarify guidance pertainingto lead engagement partner rotationfor audit clients that are listedentities with immediate effect. Therevision to Guidance 1.308 isrequired as a result of an equivalentrevision to the IFAC Code of Ethics<http://www.ifac.org/News/LastestReleases.tmpl?NID=108630115210957>.

Guidance 1.308, which wasadopted from Section 8 of the IFACCode of Ethics, specifies that thelead engagement partner for a listedaudit client should be rotated after apre-defined period, normally, nomore than seven years, and aftersuch rotation, should not resume therole of the lead engagement partneruntil a further period of time. TheIFAC Ethics Committee recognizesthat this guidance as worded mightimply that the lead engagementpartner would be able to assume the

TechWatch

THE HONG KONG ACCOUNTANT JULY 200472

role of another partner on theengagement.

The IFAC Ethics Committeediscussed the matter at its May 2004meeting <http://www.ifac.org/Ethics/Meeting-Summary.php?MID=0030>, which was attended bythe Chairman of the HKSA EthicsCommittee, Mr. Mark Fong.Following the discussion, the IFACEthics Committee approved in earlyJune 2004 a revision to the IFACCode of Ethics to make it clear thatan individual who has completed apredefined period in the role of thelead engagement partner for anaudit of a listed entity should notparticipate in the audit engagementuntil a further period, normally twoyears, has elapsed.

Listing & Securities

15. HKSA’s Submissions On DraftRule Amendments To The ListingRules Relating To The RegulationOf Sponsors And IndependentFinancial AdvisersThe HKSA made a submission<http://www.hksa.org.hk/professionaltechnical/listing/080604.pdf> on 8 June 2004 on theDraft Amendments to the ListingRules <http://www.hkex.com.hk/consul/paper/Amendment_May_04.pdf> issued by the Stock Exchange(the ‘Exchange’).

The Draft Amendments to theListing Rules reflect the results ofextensive public consultationconducted by the Exchange and theSecurities and Futures Commission(SFC) in May 2003 under their jointConsultation Paper on theRegulation of Sponsors andIndependent Financial Advisers.The HKSA’s submission dated 29August 2003 <http://www.hksa.org.hk/professionaltechnical/listing/290803.pdf> on the May 2003Consultation Paper is available.

In the HKSA’s submission dated8 June 2004, we indicated that weare fully supportive of any plans bythe Exchange and the SFC to raisestandards in the market. However,there are certain proposedrequirements in the Draft ProposedAmendments on independence and

due diligence which are of concernto market practitioners. In view ofthe market practitioners’ concerns,we request the Exchange to consultwidely with the market practitionersand benchmark the proposalsagainst the requirements in majoroverseas jurisdictions. We alsocommented on the proposedstructure of the draft ExchangePractice Note and set out certainpreliminary thoughts for theExchange’s consideration.

16. HKEx Consultation ConclusionsOn A Proposed Operational ModelFor A Scripless Securities MarketHKEx published the ConsultationConclusions on a ProposedOperational Model for a ScriplessSecurities Market <http://www.hkex.com.hk/consul/conclusion/HKEx-Con(E).pdf> which propose a wayforward for the scripless initiative inHong Kong in the light of marketcomments. The HKSA’s submission<http://www.hksa.org.hk/professionaltechnical/listing/151203.pdf> on the Consultation Papersupported the HKEx’s initiative.

In summary, the ConsultationConclusions propose:• keeping a single register of

members (ROM) for each listedcompany as at present in order toavoid fragmentation of the ROM.The ROM will continue to bemaintained by share registrars asit is currently;

• a progressive approach onimplementation to minimize theup-front impact on the marketand allow time for marketintermediaries and investors togain familiarity with the scriplessenvironment; and

• to make the shareholdinginformation of HKSCCParticipants (excluding InvestorParticipants) available to thepublic.

Corporate Governance

17. HKSA Issues A NewComprehensive Guidance OnCorporate Governance ForPublic Sector BodiesThe HKSA launched its latest

bilingual guide, entitled ‘CorporateGovernance for Public Bodies – A BasicFramework’ <http://www.hksa.org.hk/publications/corporategovernanceguides/index.php>, at a press conference held on2 June 2004. The release of theguide, which is probably the firstcomprehensive corporategovernance guide for the publicsector in Hong Kong, confirms theHKSA’s continuing commitment toimproving standards of corporategovernance in Hong Kong.

Given the lack of benchmarks,common standards or generalguidance in respect of public sectorcorporate governance, this newguide responds to the increasingexpectations and demands forgreater accountability, transparencyand openness in this sector byproviding a basic framework ofcorporate governance principles andrecommended best practices forpublic sector entities.

The HKSA guide is directed atgoverning boards of public sectorbodies and at assisting governingboards to understand fully their roleand responsibilities and to dischargetheir responsibilities efficiently andeffectively. It identifies certainfundamental principles required ofan organisation (Openness, Integrityand Accountability) and keypersonal qualities required ofgoverning board members(Selflessness, Integrity, Objectivity,Accountability, Openness, Honestyand Leadership), and applies theseprinciples and qualities to four keyaspects or dimensions of thegovernance of public sectororganisations, namely,(i) Standards of Behaviour(ii)Organisational Structures and

Processes(iii)Risk Management and Control(iv)Accountability, Reporting and

DisclosureThe HKSA guide utilises conceptsderived from some significantoverseas studies and adapts these tosuit the local environment andconditions. It is applicable to mosttypes of organisations in the publicsector and, to some extent, can betailored to the situations of

73JULY 2004 THE HONG KONG ACCOUNTANT

TechWatchTechWatch

individual organisations, dependingon their size, complexity andresources.

The HKSA guide can bedownloaded from the HKSA’swebsite. Members may obtain oneprinted copy of the guide bycompleting and sending the RequestForm <http://www.hksa.org.hk/publications/corporategovernanceguides/index.php> tothe Operation and FinanceDepartment of the HKSA. Additionalprinted copies can be purchased atthe HKSA’s counter at HK$60 each.

Legislation & GovernmentInitiatives

18. Consultation Paper On StatutoryDerivative Action In TheCompanies (Amendment) Bill2003Amongst the provisions onshareholder remedies introduced inthe Companies (Amendment) Bill

2003 are provisions relating to astatutory derivative action (SDA), toenable a shareholder of a companyto commence an action on behalf ofthe company in respect of a wrongdone to the company. The SDAprocedure addresses variouspractical obstacles associated withthe common law derivative action(CDA), which have resulted in fewCDAs being initiated in Hong Kong.As reported in TechWatch Issue No.23 <http://www.hksa.org.hk/professionaltechnical/techwatch/index.php>, the Administrationproposed a number of CommitteeStage Amendments (CSAs) to theBill to address the comments madeby the Bills Committee anddeputations.

The HKSA made a submission<http://www.hksa.org.hk/professionaltechnical/whatsnew/docs/statutory_derivative.pdf> onthe CSAs and other related issues asdetailed in the Consultation Paper on

Statutory Derivative Action in theCompanies (Amendment) Bill 2003(‘the Consultation Paper’). Themain points of the submission wereas follows:• The HKSA supported the

proposed introduction of a leaverequirement and did not object tothe inclusion of the additionalconditions for the granting ofleave referred to in paragraph 6(b) of the Consultation Paper.

• On balance, the HKSAconsidered it desirable to providefor the co-existence of the SDAand the CDA in the Bill. However,it was also pointed out that theproposals put forward by theGovernment in paragraph 12 ofthe Consultation Paper, whichaimed to address the situation inwhich the same shareholdercommenced both an SDA and aCDA on the same subject matter,could easily be circumvented byhaving two or more shareholders

TechWatch

THE HONG KONG ACCOUNTANT JULY 200474

agreeing to initiate the actionsseparately. For this reason, theHKSA suggested two possiblealternative approaches, asexplained in the submission.

Taking into account the views ofvarious organisations, theGovernment has proposed furtheramendments to the CSAs, whichinclude:• restricting the scope of the SDAs

to proceedings in respect offraud, negligence, default incompliance with any law or rule,or breach of duty against thespecified corporation (section168BAA); and

• lowering the threshold forgranting leave by, for example,replacing the ‘best interests’condition (i.e. that it is in the bestinterests of the company that leavebe granted) with a condition thatit is ‘prima facie in the interests ofthe specified corporation’ (section168BB(3)(a)).

As regards the co-existence of actionin SDA and CDA, the Administrationtakes the view that, in practice, amember would be unlikely to takederivative actions at the same timeunder common law and statute.Under the circumstances, theAdministration proposes to deal withthis eventuality by giving the courtthe discretion to:• dismiss an application for leave to

commence an SDA if a CDA hasbeen commenced by the samemember in respect of the samesubject matter (section 168BCA);and

• prevent a member fromcommencing a CDA if leave hasbeen granted to the samemember to commence an SDA inrespect of the same subject matter(section 168BCB).

A new section 168BCC has also beenproposed to empower the court tomake any order and give anydirection it considers appropriate inrelation to sections 168BCA and168BCB.

The HKSA’s Expert Panel onLegal Matters has considered thechanges proposed by the

Administration and is of the viewthat they are generally acceptable.

19. CEPA - New FlexibleArrangements For Group OfCompanies To Apply ForCertificate Of Hong Kong ServiceSupplierIn accordance with the Mainlandand Hong Kong Closer EconomicPartnership Arrangement (CEPA),Hong Kong service suppliers canobtain certain preferential treatmentprovided they fulfil the definition of‘Hong Kong Service Supplier’(HKSS) and related requirementsstipulated in the CEPA. Detailsrelating to the application of HKSSCertificates are set out in the Tradeand Industry Department (TID)’sNotice to Service Suppliers No. 2/2003 <http://www.tid.gov.hk/english/aboutus/tradecircular/ntss/2003/ntss022003_index.html> issuedon 14 November 2003.

Further to the above Notice, theTID issued on 20 May 2004 Notice toService Suppliers No. 3/2004<http://www.tid.gov.hk/english/aboutus/tradecircular/ntss/2004/ntss032004_index.html> setting outthe new flexible arrangements forgroup of companies to apply for theHKSS Certificates under CEPA. TheTID also took the opportunity tostreamline the documentationrequirements for the application ofHKSS Certificates.

Corporate Restructuring &Insolvency

20. HKSA’s Concerns On TheClearing And SettlementSystems Bill Have BeenAddressedSince the HKSA first made asubmission <http://www.hksa.org.hk/professionaltechnical/whatsnew/docs/clearing_settlement_bill.pdf> on 6February 2004 on the Clearing andSettlement Systems Bill, which is atechnical piece of legislationintroducing a legal framework forsupervisory oversight of clearing andsettlement systems in Hong Kong (as

reported in TechWatch Issue No. 21<http://www.hksa.org.hk/professionaltechnical/techwatch/index.php>), a series of exchangeshave taken place between the HKSAand the Administration to addressthe HKSA’s concerns on the Bill.The main concerns in respect of theBill have been expressed by theHKSA’s Insolvency PractitionersCommittee. One of the principalissues has been to clarify anyambiguity in the Bill that in the eventof the insolvency of a participant in aclearing system, the finality oftransfers through the system, whichthe Bill understandably seeks toprotect, does not prevent aninsolvency office-holder fromchallenging an underlyingtransaction where, for example,there has been a preference ortransaction at an undervalue.

In the course of thecorrespondence <http://www.hksa.org.hk/professionaltechnical/insolvency/index.php> (see itemsdated 1 April, 20 May and 28 May2004), the Administration hasproposed revisions which the IPCfinds acceptable.

A revised marked-up version ofthe Bill may be accessed at theLegislative Council website <http://www.legco.gov.hk/english/index.htm> .

Innovation & Technology

21. Is Your E-Business Ready For AHealth Check?Sharpen your skills to master the newwave of E-business expansion. Tune upyour operations system by benchmarking itwith the E-Commerce best practicestandards – The New Trust ServicesFramework.

HKSA is offering the New TrustServices Training Workshop toupdate members with the lateststandards in E-Commerce bestpractice. Click here <http://www.hksa.org.hk/professionaltechnical/webtrust/tstraining15062004.pdf>for detail.

75JULY 2004 THE HONG KONG ACCOUNTANT

TechWatchTechWatch

Comment Key DatesDate Subject

25 June 2004 Hong Kong Invitation to Comment <http://www.hksa.org.hk/professionaltechnical/accounting/exposuredraft/> onIFRIC Draft Interpretation D6, Multi-employer Plans, which has been posted on the IASB’s website <http://www.iasb.org.uk/>[IASB deadline: 9 July 2004]

7 July 2004 Hong Kong Invitation to Comment <http://www.hksa.org.hk/professionaltechnical/accounting/exposuredraft/> onIASB exposure draft of proposed limited amendments to IAS 39 Financial Instruments: Recognition andMeasurement on the Fair Value Option, which has been posted on the IASB’s website <http://www.iasb.org.uk/>[IASB deadline: 21 July 2004]

16 July 2004 Hong Kong Invitation to Comment <http://www.hksa.org.hk/professionaltechnical/accounting/exposuredraft/> onIASB exposure draft of a proposed limited amendment to IFRS 3 Business Combinations – Combinations ByContract Alone Or Involving Mutual Entities, which has been posted on the IASB’s website<http://www.iasb.org.uk/>[IASB deadline: 31 July 2004]

16 July 2004 Hong Kong Invitation to Comment <http://www.hksa.org.hk/professionaltechnical/accounting/exposuredraft/> onIASB exposure draft of proposed amendments to IAS 19 Employee Benefits – Actuarial Gains And Losses, GroupPlans and Disclosures, which has been posted on the IASB’s website <http://www.iasb.org.uk/>[IASB deadline: 31 July 2004]

14 August 2004 HKSA Exposure Draft of Proposed Standards and Guidance for HKSA Members in Performing Listing Engagements<http://www.hksa.org.hk/professionaltechnical/assurance/artf/index.php>

31 August 2004 Consultation Paper on a Proposed Introduction of a Financial Reporting Framework and Financial Reporting Standardfor Small and Medium-sized Entities in Hong Kong <http://www.hksa.org.hk/professionaltechnical/accounting/exposuredraft/>

Please send comments to commentletters@hksa.org.hk

TechWatch is prepared by the HKSA Standards & Technical Department and intended for general guidance only. Professional advice shouldbe taken before applying the content of this publication to your particular circumstances. While the HKSA endeavours to ensure that theinformation in this publication is correct, no responsibility for loss to any person acting or refraining from action as a result of using anysuch information can be accepted by the HKSA.

The Technical Directors of the HKSA Standards & Technical Department are:

Stephen Chan, Technical Director (Ethics & Assurance) & Head of Department CoordinationSimon Riley, Technical Director (Financial Reporting)Peter Tisman, Technical Director (Business Members & Specialist Practices)Gary Wong, Project Director (Innovation & Technology)

Further information on the HKSA Standards & Technical Department <http://www.hksa.org.hk/professionaltechnical/> is available at theHKSA’s website.

Hong Kong Society of Accountants4th Floor, Tower Two, Lippo Centre, 89 Queensway, Hong KongTel: (852)2287 7228 Fax: (852)2865 6776E-mail: hksa@hksa.org.hkWebsite: http://www.hksa.org.hk