Directors Discretion to Revise the Financial Statements and to formulate their Report after Setting up a Business in HK


Under Section 449 of Cap. 622 if director notices any discrepancy or error in the annual financial statement of the company even if it has been sent to the members of the company then it is directors prerogative to revise the annual financial statement of the company. He or she can seek revision for any modifications, revisions or additions in either directors report or in company’s financial statement. Detailed discussion on revision of financial statements or directors report has been set out in the Cap. 622F which regulates the matters related to Revision of Financial Statements and Reports and is regulated pursuant to the provisions of Section 450 of Cap. 622.

If company has fulfilled its obligation to send the financial statements to the registrar under Section 664 of Cap. 622 and the statement has been despatched to the registrar office, but director notices a discrepancy or error then director on behalf of company or company itself must inform registrar about such notice of director and under the Section 449 (3) of Cap. 622; special warning notice shall be despatched to the registrar office which notifies about director’s decision to revise the financial statement of the company.

Now there is the need to understand that after setting up a business in HK and developing the annual financial report and the directors seeks for revision, then there are two possibilities either this revision is of voluntary nature or director is compelled to revise financial statement of the company. As per the communication of legal commentators, revision of financial statements of the company as per provisions of Section 449 of Cap. 622 is of voluntary nature and so directors are not compelled nor forced to revise the annual financial statements of the company and matter is purely upon the discretion of director. But corporate world is full of rules and regulation and it is quite probable that; Financial Reporting may force directors of the listed companies to exercise their powers pursuant to Section 449 of Cap. 622 to revise the defected accounts and remove the noticed discrepancies. For the situation, where annual financial statement of the company does not comply with provisions of Cap. 622 then this irregularity shall be seen as being offensive under Section 379 of Cap. 622 and if such error-full financial statement is presented in the annual general meeting of the company. If financial statement of the company has been revised in accordance with Section 449 of Cap. 622 then provisions of Cap. 622 shall have effect on this revised financial statement in place of original and un revised financial statement. So in this manner the revised financial statement shall have the standing and legal position as being the annual financial statement of the company (whether it’s online business registration Hong Kong or through agents) not in retrospective sense but purely in prospective sense and thus on account of this; person shall still be held liable for any contravention of companies ordinance that has been done in the previous version of company’s financial statement, prior to the date of revision and shall surely be held liable if contravention in any sense is still visible.

Financial Statements of the Corporate Groups

There is no hinderance nor any doubt on the existence of corporate groups and empire in corporate section hence ascertaining this reality, Section 379 (2) of Cap. 622 emphasis on preparation of consolidated financial statements, by the holding companies after the Hong Kong holding company formation in corporate group. Like other financial statements, these consolidated financial statements are also required to give a true and fairer view of overall financial position of the company, all of its subsidiaries at the end of each financial year. Not only the financial position of the company, instead financial statement should give a true and fair view of financial performance of the company and all of its subsidiaries as a whole, in passed or passing financial year, at the end of each financial year. It must be noted that statement of profit/loss account and the statement of balance sheet shall be made effectively, on the basis of corporate group. One must not think that consolidated financial statements are something extraordinary then conventional financial statement there is not any difference between the financial statement of the company and the consolidated financial statement of corporate group except that consolidated financial statement is made on the basis of corporate group while financial statement of the company is prepared on the basis of individual company. Hence, on account of this, consolidated financial statement must comply with the Schedule 4 and other requirements as communicated by the provisions of Cap. 622 and there is the mandatory requirement of it to be in compliance with the accounting standards.

On the issue of preparation of individual accounts, predecessor companies ordinance requires holding company to prepare individual accounts in Hong Kong holding company formation both for accounts of corporate groups and of itself. However, provisions of Cap. 622 do not require this extra formality except of one formality as per which; individual statement about the financial position of the holding company must be annexed with the consolidated financial statement of the corporate group, as the note.

For the situation where holding company is itself owned subsidiary of another body corporate then there is no compulsion on this holding company to prepare consolidated financial statements of a corporate group. Not only this, but if the holding company is a partially owned subsidiary of some body corporate even then there is no need to prepare consolidated financial statements, provided director(s) of this partially owned subsidiary’s company has notified members of the company of such intention and so members of the company has levied the requirement to prepare consolidated financial statements.

Before moving ahead to the director’s report, let’s throw some light on the information which the financial statement of the company must disclose regarding director(s) of the company. Following are the details which must be disclosed:

  • Under Section 161 disclosure pertaining to emoluments of directors such as salary, fees, bonuses, share options and the housing must be disclosed.
  • Sufficient disclosure about director’s pension, gratuity or any other allowance shall be furnished.
  • If for any case, director losses his or her office, then deemed compensation shall necessary be disclosed.
  • If any loan, guarantees or any security for loans is given to either director or any company controlled by the director or to any associate of the director then under the Section 161B, disclosure must be made.
  • Under Section 162, if director has any material interest in the contracts or agreements company is getting into then this must be disclosed.
  • As per the script of Section 162A; if director has any interest in managerial contracts then this interest must be disclosed properly. Management contracts are those contracts which are other than any contract of service for which any body corporate, firm or any individual, undertake.

What should directors report include?

Companies ordinance says that, directors report must accompany the annual financial statement of the company and it must be signed by the board of directors or by the chairman of meeting in which it is presented or the secretary of the company in company secretarial services Hong Kong, on the behalf of board of directors. director’s report must disclose following information:

  • The main activities of the company and its subsidiaries, throughout the financial year.
  • Complete disclosure of the company’s profit and loss in the financial year and the details on the dividends recommended by the directors of the company, to the members of the company.
  • If director proposed any amount to be transferred to the company’s reserve then sufficient disclosure about this must be made.
  • The total donations made by the company and its subsidiary, which is normally less than HK$ 10,000, during the financial year. If company has no subsidiary then disclosure about donation, irrespective of the amount donated shall be made.
  • If shares or debentures were issued by the company during the financial year then reason of this issuance, class and number of shares issued as well as disclosure about the received considerations shall be made.
  • If any considerable change occurred to the fixed assets of the company and its subsidiaries, then it should be made part of directors report.
  • Name of the serving directors and the directors who retired during subjected financial year, shall be made part of directors report.

One may find plenty of information regarding content of directors report let’s move towards conclusion of our discussion and throw some light on the need and importance of directors report. Section 388 (1) of Cap. 622 says for the preparation of directors report, each financial year. Complete reporting of profit achieved, or loss incurred should be made in directors report. Basically, directors report serves as the supplement to the information given in the financial statement of the company. To know about the exact legality and the content of director’s report, one may refer to the Section 390 and 543 (2), Cap. 622D and the Schedule 5. Cap. 622D deals exclusively with the matters related to the directors report. Above mentioned disclosures are some of important disclosures which must be made in the directors report.

There is another important requirement of the Cap. 622 which says that directors report must contain the business review in which company’s overall present performance is reviewed and this business review should discuss the future developments which must be analytical and forward looking. It must be noted that, it is something which predecessor companies ordinance does not entertain and exclusively is something which Cap. 622 projects. This business review is exempted for the wholly owned subsidiaries, private companies where need of business review can easily be revoked with the help of special resolution, and the companies who adopt simplified reporting method.

As we discussed above that holding companies must prepare consolidated financial statements same goes for the directors report holding companies are required to prepare consolidated directors report which must deals with he corporate matters of the company and all of its subsidiaries. Hence it would not be sufficient nor there is any need to only make holding company subject of directors report.

Regarding the authenticity of directors report, Section 391 of Cap. 622 says it to be signed by the director on behalf of board of directors, provided board of director approved this directors report. Additionally, secretary of the company in company secretarial services Hong Kong is also authorised to sign the directors report on the behalf of the board of directors.

There is the compulsion for the directors report to comply with the Cap. 622, if directors report is found to be contravening the provisions of companies ordinance that is failure to comply with the requirements of Subsection 388 (1) and 388 (2) then this contravention shall amount to offence, under the Section 388 (6) of Cap. 622. Director can defend him or her on the basis of the evidence that he or she had acted reasonably and in the interest of company and that competent person was discharged with the duty under Section 388 (8) of Cap. 622. But if director wilfully fails to take reasonable steps to comply with the requirements of Cap. 622 then as per the Section 388 (7) of Cap. 622 director shall be charged with the maximum available penalty.

If directors report contains any misleading or false statement and from which it is probable that company may or has suffered some loss then director shall be held liable to compensate the loss incurred by the company, provided director must be in knowledge that the statements is untrue and misleading and that ignored this misleading statement recklessly, says the Section 448 (2) of Cap. 622. If some omission exists in the document and director knew of this omission and deliberately didn’t removed it then as per the script of Section 448 (2) and 448 (3) of Cap. 622 director shall be held liable for any loss suffered by the company. It must be noted that liability spans to the compensation to the company and thus director shall not be held liable to compensate any individual or person, even though that person suffered loss on account of defects and irregularities in the directors report, says Section 448 (4) and 448 (5) of Cap. 622.