Statutory Financial Reports

Financial Reporting Form 10-K (Annual Report)

and Analysis 10-Q (Quarterly Report)

20-F (Registration Statement/ Annual Report

[Foreign])

8-K (Current Report)

14-A (Proxy Statement/Prospectus)

Other SEC Filings

HKEX 香港交易所
HKEX 香港交易所
Listing
HKEX is a world-leading capital raising venue
for Hong Kong, Mainland Chinese and
international issuers. We also act as the
frontline regulator of companies listed in Hong
Kong.
香港交易所是香港、中國內地和國際發行人的
世界級領先集資市場。我們亦是香港上市公司 連接中國與世界
的前線監管機構。 重塑全球市場格局

https://www.hkexgroup.com/strategic_plan_2019/index_c.htm
三大緃向整合的核心市場 Leader in China Connectivity
Three Vertically Integrated Core Markets
香港聯合交易所 香港期貨交易所 倫敦金屬交易
所

全球首次公開招股市場
年中 年 #1
過去10年中
過去 年中6年

香港交易所的業務
 GAAP Environmental Factors

Types of Accounting rules and guidelines Unions AICPA Lenders

Securities and
Exchange Investors Politicians
o Statements of Financial Accounting Standards Commission
o APB Opinions. Accountants Others
o Accounting Research Bulletins (ARB).
o AICPA pronouncements. The AICPA issues guidelines Provide input to
for certain topics yet to be addressed by the FASB in its
Statements of Position (SOP) or for those involving
Financial Accounting Standards Board
industry-specific matters in its Industry Audit and
Accounting Guidelines.
o EITF Bulletins. EITF Bulletins are issued by the FASB’s Help set
Emerging Issues Task Force.
o Industry practices.
Generally Accepted Accounting Principles

Environmental Factors Environmental Factors

International Financial Reporting Standards
(IFRS)
Securities and Exchange Commission (SEC)
Set by International Accounting
Standards Board

o Independent, quasi-judicial government agency Not currently accepted in U.S.

o Administer securities regulations & disclosures SEC under pressure to

accept IAS
o Can modify & set GAAP, if necessary
o Rarely directly challenges FASB
o Major player in global accounting
 Environmental Factors Environmental Factors
Managers of Companies Auditing
o Primary responsibility for fair & accurate reports o SEC requires Audit Report
o Applies accounting to reflect business activities o Audit opinion can be:
o Managerial discretion is necessary in accounting o clean (fairly presented)
o Major lobbyist on GAAP o qualified (except for)
o disclaimer (no opinion) Auditors
o Check Auditor quality & independence

Environmental Factors
Environmental Factors
Internal Users External Users
Corporate Governance

Board of directors oversight

Audit committee of the board
o oversee accounting process Managers Lenders
o oversee internal control Officers Shareholders
o oversee internal/external audit Internal Auditors Governments

Internal Auditor Sales Managers Labor Unions

Budget Officers External Auditors

Controller Customers
 Alternative information sources Desirable Qualities of
Accounting Information
Economic, Industry & Company News
o Impacts current & future financial condition and performance
Voluntary Disclosure Relevance Faithful representation

Motivation - Legal liability, Expectations Adjustment,

Signaling, Managing expectations
Predictive Confirmator Complete Free from
Value y value Materiality Neutrality
Information Intermediaries -ness error
o Industry devoted to collecting, processing,
interpreting & disseminating company information To be relevant, accounting The numbers and descriptions
o Includes analysts, advisers, debt raters, buy- and information must be capable contained in the financial
sell-side analysts, and forecasters of making a difference in a statements match what really
decision existed or happened.
o Major determinant of GAAP

Primary Characteristic - Relevance Faithfulness representation

1. Completeness: The financial statements include all the
1. Predictive value – Financial information has information that is necessary for faithful representation of
predictive value if it has value as an input to the economic phenomena that it purports to represent.
predictive processes used by investors to form their 2. Neutrality: that a company cannot select information to
own expectations about the future. favor one set of interested parties over another
-Usefulness to decision makers in forecasting events - Information is neutral if it is unbiased, i.e., it is not
more accurately presented in a manner that favors one set of
2. Confirmatory value – Relevant information helps users interested parties over another.
confirm or correct their prior expectations 3. Free from error: An information item that is free from
3. Materiality- Information is material if omitting it or error will be a more accurate (faithful) representation
of a financial item.
misstating it could influence decisions that users
- Does not mean total freedom from error. It means that the
make on the basis of the reported financial information presented is as accurate as possible, given any
information. estimates are based on the best information available at the
time.
 Financial Accounting
Financial Accounting
Important Accounting Principles
Relevance of Accounting Information
o Historical Cost - fair & objective values from arm’s- Relation between Accounting Numbers and Stock Prices
length bargaining
o Accrual Accounting - recognize revenues when
earned, expenses when incurred
o Materiality - threshold when information impacts
decision making
o Conservatism - reporting or disclosing the least
optimistic information about uncertain events and
transactions

Financial Accounting
Accruals-The Cornerstone
Limitations of Accounting Information
Illustration - Case Facts
o Timeliness - periodic disclosure, not real-time
o Establish company and invest $700 equity
basis
o Purchase plain T-shirts for $5 each

o Fixed screen cost of $100

o Frequency - quarterly and annually
o Variable print cost of $0.75 per T-shirt

o Forward Looking - limited prospective o Sold 25 T-shirts at $10 each for cash

information o Sold 25 T-shirts at $10 each on credit

 Accruals- The Cornerstone Accruals-The Cornerstone
Case Illustration – Cash Accounting Case Illustration – Accrual Accounting

Statement of Cash Flows Balance Sheet (Cash basis) Income Statement Balance Sheet (Accrual basis)
Revenues Assets
Receipts Assets T-Shirt sales $500.00 Cash $275.00
T-Shirt sales $250 Cash $275 T-Shirt inventory 337.50
Expenses Receivables 250.00
Payments T-Shirts costs $250.00 Total assets $862.50
T-Shirt purchases $500 Equity Screen depreciation 50.00
Printing charges 37.50 Equity
Screen purchase 100 Beginning Equity $700
Total expenses (337.50) Beginning equity $700.00
Printing charges 75 Less net cash outflow (425)
Add net income 162.50
Total payments $(675) Total equity $275 Net income $162.50 Total equity $862.50
Net cash outflow $(425)

Accruals -The Cornerstone Accruals-The Cornerstone

Net Operating
= + Accruals Foundations of Accrual Accounting
Income Cash Flow
Revenue Recognition
– recognize revenues when the performance
+ obligation is satisfied
=
Expense Matching
– match with corresponding revenues
- Product costs

- Period costs
 Accruals-The Cornerstone Accruals-The Cornerstone

Short-Term and Long-Term Accruals

Relation between Cash Flows and Accruals
Short-Term Accruals:
Operating cash flow (OCF) Yield current assets and current liabilities (also called
-/+ Cash investment & divestment in operating assets working capital accruals)
= Free cash flow (FCF) Long-Term Accruals: Yield non-current assets and non-
+/- Financing cash flows (including investment & current liabilities (arise mainly from
divestment in financing assets) capitalization)
= Net cash flow (NCF) Note: Analysis research suggests short-term
accruals are more useful in company valuation

Accruals-The Cornerstone Economic concepts of income

Accruals and Cash Flows - Myths
Economic income
o Myth: Since company value depends on future cash
flows, only current cash flows are relevant for Permanent income
valuation.
Operating income
o Myth: All cash flows are value relevant.
o Myth: All accrual accounting adjustments are value
irrelevant. Economic income
o Myth: Cash flows cannot be manipulated. o Measures changes in Shareholders wealth.
o Myth: All income is manipulated. o Cash flows + Present value of expected future cash flows.
o Myth: It is impossible to consistently manage income o Useful when the objective of analysis is determining the
upward in the long run. exact return to the shareholder for the period.
o Less useful for forecasting future earnings potential.
 Accounting concept of income Accounting Vs Economic income

o Based on the concept of accrual accounting Reasons for difference

o Main purpose is income measurement o Alternative income concepts
o Two main processes – o Historical cost
o Revenue recognition o Transaction basis
o Expense matching o Conservatism
o Earnings management

Fair value accounting Historical cost Vs Fair value

Asset and liability values are determined on the

basis of their fair values (typically market prices)
on the measurement date (i.e., approximately
the date of the financial statements).

Discuss: Advantages and disadvantages of Fair Value

 Accounting Analysis
Implications for Analysis
Sources of Accounting Distortions
Accounting Standards – attributed to
Focus on the balance sheet.
o
o
1) political process of standard-setting,
o Restating income.
2) accounting principles and assumptions, and
o Analyzing use of inputs. 3) conservatism
o Analyzing financial liabilities. o Estimation Errors – attributed to estimation errors
inherent in accrual accounting
o Reliability vs Relevance – attributed to over-emphasis on
reliability at the loss of relevance
o Earnings Management – attributed to window-dressing of
financial statements by managers to achieve personal
benefits

39
The Expectations Gap
Financial Reporting Challenges
What the public thinks accountants should do vs.
IFRS in a Political Environment what accountants think they can do.

Significant Financial Reporting Issues

Financial reports fail to provide:

Non-financial measurements: customer satisfaction,
defective rate…

Forward-looking information needed by present and
potential investors and creditors

Much information about sort assets: intangibles

Timeliness: little to no real-time F/S information was
available
 Accounting Analysis Auditing and Financial
Analysis Objectives Statement Analysis
o Comparatives Analysis – demand for financial comparisons
across companies and/or across
time
o Income Measurement - demand for (1) equity wealth
changes and (2) measure of
earning power. These correspond
to two alternative income concepts
(1) Economic Income (or
empirically, economic profit)
(2) Permanent Income (or
empirically, sustainable profit)