Business Segment Identification and Disclosure for Prospectus Purposes

The Hong Kong Stock Exchange (HKEX) has, since 2023, intensified its scrutiny of business segment disclosures in listing applications, a trend that accelerated into 2025 with the publication of several exchange feedback letters explicitly rejecting vague revenue breakdowns. The Exchange’s Listing Division now demands that applicants demonstrate a clear, internally consistent definition of “operating segments” that aligns with both HKFRS 8 and the narrative in the prospectus’s “Business” section. This is not merely a compliance exercise; a mismatch between the segment information in the financial statements and the business description is a leading cause of comment letters and, in severe cases, return of the application. For a CFO or company secretary preparing a listing application for the Main Board or GEM, the identification and disclosure of business segments is the hinge point upon which the coherence of the entire prospectus rests. A failure to map the company’s internal management structure to its external reporting lines creates a credibility gap that sponsors and the Exchange will exploit.

The Regulatory Foundation: HKFRS 8 and the Listing Rules

The primary regulatory mandate for segment reporting in a Hong Kong IPO prospectus is not found in a single Listing Rule but in the intersection of HKFRS 8 Operating Segments and several specific disclosure requirements under the Main Board Listing Rules and the GEM Listing Rules. The Exchange enforces these standards through its vetting process, and any deviation from the principles of HKFRS 8 must be explicitly justified.

The Core of HKFRS 8: The Management Approach

HKFRS 8 requires an entity to disclose information about its operating segments based on the components of the entity that management uses to make decisions about operating matters. This is the “management approach.” The standard defines an operating segment as a component of an entity that engages in business activities from which it may earn revenues and incur expenses, whose operating results are regularly reviewed by the entity’s chief operating decision maker (CODM), and for which discrete financial information is available. In a Hong Kong IPO context, the CODM is typically the executive directors or the management committee. The Exchange will request a clear identification of the CODM and the internal reports they receive. If a company’s internal reporting to its board is structured by geography, then it is difficult to justify disclosing only product-based segments in the prospectus without a compelling explanation. The 2023 HKEX Guidance Letter GL86-23 (updated periodically) reinforces that the segment information in the accountants’ report must be consistent with the internal reporting used by the CODM.

Listing Rule Requirements for Business Descriptions

Beyond the accounting standard, the Listing Rules impose specific narrative requirements. Main Board Rule 11.07 and GEM Rule 14.04(2) require a listing document to contain “particulars of the business of the applicant and its subsidiaries.” The accompanying Practice Notes, particularly PN21 for Main Board and PN GEM 3 for GEM, elaborate that this must include a description of the principal activities and the relative importance of each segment. The Exchange expects this narrative to be quantified. A statement that the company “operates in the technology sector” is insufficient. The prospectus must state, for example, that “Segment A contributed 62.4% of total revenue for the Track Record Period, while Segment B contributed 31.8%.” The Exchange will compare this narrative breakdown against the segment information in the accountants’ report. Any discrepancy—such as a narrative describing three business lines but the financials showing only two reportable segments—will trigger a comment letter.

The Mechanics of Segment Identification for IPO Applicants

Identifying reportable segments is a forward-looking exercise that must reconcile the company’s current management structure, its historical financial data, and the story it tells investors. The process begins with an internal audit of how the CODM receives information.

Identifying the CODM and Internal Reporting

The first step is to formally document who the CODM is and what reports they review. For a Hong Kong-listed applicant, the CODM is usually the board of directors or an executive committee. The reports they review—typically monthly management accounts—define the segments. If the CODM reviews profit and loss statements for three distinct business units (e.g., manufacturing, trading, and retail), then those three units are the starting point for segment identification. The company must then assess whether these units meet the quantitative thresholds in HKFRS 8: 10% of combined revenue, 10% of combined profit or loss, or 10% of combined assets. A unit that does not meet any threshold can be aggregated with another unit only if they share similar economic characteristics, such as similar long-term gross margins and similar products or services. The Exchange scrutinises aggregation decisions closely. In a 2024 feedback letter concerning a consumer goods applicant, the Exchange rejected the applicant’s aggregation of two retail segments with different gross margins (28% and 45%) into a single “Retail” segment, requiring separate disclosure.

Mapping Internal Segments to External Reporting

Once the internal segments are identified, the applicant must map them to the external reporting segments in the prospectus. This mapping must be consistent across three documents: the Accountants’ Report (under HKFRS 8), the Business Section (under Listing Rules), and the Use of Proceeds section. A common error is to have a “Corporate” or “Other” segment that is too large. The SFC and the Exchange have indicated that an “Other” segment exceeding 10% of total revenue suggests that the primary segments have not been correctly identified. The applicant must also consider the level of disaggregation. If a company has a “Software” segment that internally reports three sub-categories (SaaS, licensing, and maintenance), the prospectus must disclose the revenue breakdown for those sub-categories if they are material to investors. The 2023 HKEX Guidance Letter on “Business Model and Strategy” (GL107-23) explicitly states that the disclosure of key revenue drivers within each segment is expected.

Disclosure in the Prospectus: The Three-Part Alignment

The prospectus must present segment information in a way that allows an investor to understand the company’s business model and its financial performance. This requires a three-part alignment between the narrative, the financial statements, and the use of proceeds.

The Business Section: Narrative and Quantitative

The “Business” section of the prospectus must provide a narrative that is consistent with the segment information in the financial statements. This section should open with a clear statement of the number of segments and their definitions. For each segment, the text should describe the products or services, the target market, the competitive landscape, and the key operational metrics. Crucially, it must include a table showing the revenue, gross profit, and net profit (or loss) for each segment for each year of the Track Record Period. The numbers in this table must be identical to those in the segment note to the Accountants’ Report. The Exchange will check this arithmetic. A 2025 case involving a biotech applicant on the Main Board saw a one-week delay in the listing timetable because the Business section showed a segment revenue of HKD 45.2 million for FY2024 while the Accountants’ Report showed HKD 45.1 million, a discrepancy the Exchange attributed to a rounding error in the narrative that was not explained.

The Accountants’ Report: Segment Note Requirements

The segment note in the Accountants’ Report must comply fully with HKFRS 8. This includes disclosing the basis of segmentation, the factors used to identify reportable segments, and the types of products and services from which each segment derives its revenue. The note must also disclose the revenue from external customers for each segment, the segment profit or loss, segment assets, and the basis of inter-segment pricing. For a Hong Kong IPO, the segment note is typically one of the most heavily reviewed sections. The reporting accountants must confirm that the segment information is consistent with the internal reporting provided to the CODM. If the company has changed its internal reporting structure during the Track Record Period, the segment information must be restated for all periods presented. A 2024 review by the HKEX’s Listing Committee noted that 18% of rejected applications in the prior year had a material deficiency in the segment note, usually involving inconsistent application of the management approach.

The Use of Proceeds Section: Tying Capital to Segments

The “Use of Proceeds” section must explicitly allocate the net proceeds from the IPO to the identified business segments. This allocation must be logical and consistent with the segment description. If 60% of the proceeds are allocated to “Expansion of the Manufacturing Segment,” then the Business section must have described that segment’s current capacity and the specific expansion plans. The Exchange will query any use of proceeds that is allocated to a segment that is not separately reported. For example, if a company reports only two segments (“Product A” and “Product B”) but allocates 25% of proceeds to “Research and Development,” the Exchange will ask whether R&D is a separate segment or an overhead. The answer must be clear: R&D is either a segment (if the CODM reviews its results) or a corporate expense that is allocated to the existing segments. The 2023 SFC/HKEX Joint Statement on “Use of Proceeds Disclosures” reinforces that vague allocations to “general corporate purposes” are not acceptable for amounts exceeding 5% of the net proceeds.

Practical Pitfalls and Exchange Feedback

The Exchange’s feedback letters provide a rich source of guidance on what constitutes acceptable segment disclosure. The most common pitfalls fall into three categories.

The “Catch-All” Segment Problem

A persistent issue is the use of a “catch-all” or “Other” segment that aggregates several disparate activities. The Exchange’s position, as stated in multiple 2024 comment letters, is that an “Other” segment should not exceed 5% of total revenue. If it does, the applicant must demonstrate that the activities within it are not individually material and cannot be aggregated with any other segment. A 2024 case involved a logistics company that had an “Other” segment comprising 14% of revenue, which included warehousing, freight forwarding, and customs brokerage. The Exchange required the company to disaggregate these into two reportable segments because the gross margins differed by more than 20 percentage points. The company’s application was returned for revision.

Inconsistent Narrative and Financial Data

The Exchange routinely cross-references the narrative in the “Business” section with the segment note in the Accountants’ Report. In a 2025 feedback letter for a retail applicant, the Business section described three “core business lines” (online retail, offline retail, and wholesale), but the Accountants’ Report showed only two reportable segments (retail and wholesale). The Exchange asked the sponsor to explain why the online and offline retail operations were combined, given that the company’s internal reporting showed separate profit and loss statements for each. The sponsor’s response—that the CODM reviewed combined retail results—was accepted only after the company provided board meeting minutes confirming this. The lesson is that the narrative must be a direct reflection of the financial segments, not a marketing description.

Segment Changes During the Track Record Period

If a company changes its internal segment structure during the Track Record Period, HKFRS 8 requires restatement of prior period segment information. This is a common point of confusion. A 2024 application from a manufacturing company that acquired a subsidiary mid-period faced a query because the segment information for the pre-acquisition period did not include the new segment. The Exchange required the company to present the segment information as if the new segment had existed for the entire Track Record Period, using pro forma data. The company’s reporting accountants had to issue a comfort letter confirming the basis of this restatement. The Exchange’s 2023 Guidance Letter on “Pro Forma Financial Information” (GL55-23) provides the framework for such restatements.

Actionable Takeaways

1. Define the CODM and document the internal reports they review before the Track Record Period begins, as the segment structure must be consistent for all three years.
2. Ensure that the revenue and profit figures for each segment in the “Business” section are an exact match to those in the segment note of the Accountants’ Report, with no rounding discrepancies.
3. Keep any “Other” segment below 5% of total revenue; if it exceeds this threshold, expect a detailed query from the Exchange regarding the basis of aggregation.
4. Allocate 100% of the IPO proceeds to the identified reportable segments, with a clear narrative in the “Use of Proceeds” section that references the specific segment definitions.
5. If an acquisition or divestiture occurs during the Track Record Period, prepare pro forma segment information for the entire period to avoid a restatement-related delay.