Financial Analysis in Hong Kong: Qualitative Examination of Financial Statements (2nd edition) for CEOs and Board Members

Appendix VI. Talking Points for Discussion Questions

Appendix VI Talking Points for Discussion Questions Chapter 1 1.1 Discuss your views about the adequacy of the current regulatory framework of financial reporting in Hong Kong. Explain any particular matters requiring additional regulations and/or de-regulations. Adequacy of current framework in Hong Kong • Current framework in Hong Kong is largely the same as those recognized internationally, i.e. the International Financial Reporting Standards (IFRSs). • Evolving commercial practices and financial innovations may call for new accounting treatments and reporting requirements. • Limited information about corporations’ forecasts or future is reported, but decision-making is generally about the future. Possible areas for additional regulations and/or de-regulations • financial instruments • specialized industries • sustainability reporting, e.g. Global Reporting Initiative (GRI) • integrated reporting (IR) • consultation and setting process of auditing and financial reporting standards 1.2 One of the roles played by the Hong Kong Institute of Certified Public Accountants (HKICPA) is to regulate the accounting profession in Hong Kong. Evaluate the pros and cons of the HKICPA’s role within such regime. Pros • relevant and necessary expertise to regulate its own profession • provide a workable framework for the profession to follow, such as code of ethics relevant to accountants 256 Appendix VI • ensure the profession complying with standard when preparing the financial statement with transparency and accountability Cons • lack of transparency • lack of prosecution power for more severe punishments • perception of lacking fairness Chapter 2 2.1 A new set of Companies Ordinance is expected to be in place during 2014–15. Research on the changes and discuss the pros and cons of three particular changes. Enhancement of auditor’s rights to a wider range of persons for information • pro: empowerment of auditors to obtain information as and when reasonably required • con: possible leakage of sensitive information Offences relating to contents of auditor’s reports • pro: enhancement of the integrity and reliability of auditor’s reports • con: higher risks of making incorrect audit opinions because of new offences Abolition of par value of shares and authorized share capital • pro: more flexibility in structuring the share capital of limited companies • con: without a minimum price on shares, directors must set the price in good faith due to their fiduciary duties 2.2 Review the tripartite relationship of audit and discuss your views if there are any limitations of such relationship in our modern society. • direct contacts between auditor and management, particularly during the audit field work • possible over-reliance of management by directors and/or shareholders • possibly limited understanding and communication between auditor and directors • possibly limited understanding and communication between auditor and shareholders Appendix VI 257 Chapter 3 3.1 While you are doing the financial analysis for corporations, explain which of the five key components of financial statements is most important to you. • statement of comprehensive income • statement of financial position • statement of cash flows • statement of changes in equity • notes to financial statements 3.2 Discuss any new key components or areas that you consider necessary to add to the current requirements of financial statements in the future development of financial reporting. • sales, profits and/or cash flows forecasts • capital investment projections • profiles and/or productivity of employees • records of share prices and price earnings ratios at regular intervals (e.g. month-end) during the year (for listed corporations) • product recall and customers’ satisfaction surveys • work safety reports • research, development and innovation records Chapter 4 4.1 Study and compare the financial statements of a listed corporation for three years. Extract the relevant figures and compute six accounting ratios thereon for each of the three years (18 accounting ratios in total). • profitability, e.g. return on capital employed and profit margin • liquidity, e.g. current ratio and acid-test ratio • profitability or liquidity, e.g. inventory turnover and debtor turnover days • leverage, e.g. debt-to-equity ratio and interest coverage ratio • investment, e.g. price earnings ratio and dividend payout ratio 4.2 Identify any signs, trends or patterns from the 18 accounting ratios as computed above. Discuss your interpretation of those signs, trends and patterns. Examples • current ratio indicating whether the current assets are above the current liabilities, i.e. the ability to meet financial obligations 258 Appendix VI • debtor turnover days indicating the average time taken by customers to pay for the corporation • net profit margin indicating the proportion of sales going into profits • data observation over a period of time for any...