Using Non-IFRS Measures in Hong Kong IPO Documents: Guidelines and Pitfalls

The Hong Kong Stock Exchange (HKEX) published its latest “Guidance on the Disclosure of Non-IFRS Measures in Listing Documents” in October 2024, codifying a stricter stance that directly impacts applicants preparing for Main Board or GEM listings in 2025-2026. This guidance, combined with the SFC’s heightened scrutiny under the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (SFC Code, para. 16.3, “Disclosure of Financial Information”), means that any non-IFRS financial measure—such as adjusted EBITDA, non-GAAP net profit, or adjusted revenue—must now satisfy a “relevance and prominence” test that was previously applied more loosely. The practical consequence: a sponsor who presents an adjusted profit figure that exceeds the IFRS-reported net profit by more than 20% without a clear, auditable reconciliation and a stated justification risks a formal SFC inquiry or a material deficiency letter from the HKEX Listing Division. For CFOs and company secretaries, this is not a theoretical compliance exercise—it is a gatekeeping mechanism that can delay the A1 filing by 4-8 weeks or trigger a re-submission of the entire draft prospectus.

The Regulatory Framework: What the HKEX and SFC Now Require

The HKEX’s October 2024 guidance, issued as an update to the “Guide for New Listing Applicants” (HKEX, 2024, Section 3.2), explicitly states that non-IFRS measures must be “clearly identified, reconciled to the most directly comparable IFRS measure, and presented with equal or lesser prominence than the IFRS measure.” This is a direct response to a 2023 review of 40 prospectuses filed between 2021 and 2023, where the Exchange found that 28% of applicants presented non-IFRS adjusted profit as the headline figure in the summary section, effectively misleading investors about the statutory performance. The SFC has parallel authority under the Securities and Futures (Financial Resources) Rules (Cap. 571N) and the SFC Code’s general disclosure obligations, which require that any non-IFRS measure not be “misleading by omission or presentation” (SFC Code, para. 16.1).

The “Relevance and Prominence” Test

The core of the new guidance is the “relevance and prominence” test. A non-IFRS measure is permissible only if it is relevant to the issuer’s business model, industry, or specific transactions, and it must never be given greater visual or textual prominence than the IFRS measure. In practice, this means that the IFRS net profit figure must appear first in any financial highlights table, in a font size no smaller than the adjusted figure, and the reconciliation from IFRS to non-IFRS must be presented immediately adjacent to the adjusted figure—not buried in a footnotes section. The HKEX’s 2024 review found that 32% of prospectuses failed this prominence requirement, with adjusted EBITDA placed in bold or larger type than the IFRS net profit.

Reconciliation Requirements: Auditable and Line-by-Line

Every non-IFRS measure must be reconciled to the most directly comparable IFRS line item, with each adjustment itemised and explained. For example, an adjustment for “share-based compensation expenses” must cite the specific accounting policy (e.g., HKFRS 2, “Share-based Payment”), the amount in HKD, and the reason—such as “non-recurring IPO-related grants.” The reconciliation must be audited by the reporting accountant under HKSA 700 (Revised), “Forming an Opinion and Reporting on Financial Statements,” and the auditor’s report must explicitly confirm that the reconciliation is arithmetically accurate and consistent with the IFRS financial statements. The 2024 guidance adds that any adjustment that is “subjective, recurring, or not clearly identifiable in the IFRS statements” will be rejected—this includes common adjustments like “management’s estimate of normalised tax rate” or “adjusted revenue for one-off customer discounts.”

Common Pitfalls in Non-IFRS Adjustments

The most frequent errors in IPO documents involve adjustments that are either too aggressive, too vague, or too numerous. The HKEX’s 2023 review identified three categories of adjustments that triggered the highest rate of deficiency letters: adjustments for “non-recurring” items that recurred in multiple periods, adjustments that exceeded the IFRS measure by more than 50%, and adjustments that lacked a clear business rationale.

The “Non-Recurring” Trap

A classic pitfall is classifying a cost as “non-recurring” when it has appeared in two or more consecutive fiscal years. For example, if an issuer has incurred restructuring costs of HKD 8 million in FY2022, HKD 12 million in FY2023, and HKD 15 million in FY2024, the HKEX will treat these as recurring operating expenses, not adjustments. The guidance states that an item is non-recurring only if it is “demonstrably one-off in nature and not expected to recur within the foreseeable future” (HKEX, 2024, Section 3.2.3). Any adjustment for “IPO-related expenses” is acceptable only for the pre-listing period, and must be reversed in post-listing projections. In a 2024 case, a Chinese biotech applicant attempted to adjust out HKD 45 million in R&D expenses as “non-recurring clinical trial delays”; the HKEX rejected the adjustment and required the full IFRS R&D expense to be presented without adjustment.

Over-Adjustment and the “Net Profit Inversion”

Another frequent issue is the “net profit inversion,” where non-IFRS adjusted profit is positive while the IFRS net profit is negative. This is permissible only if the issuer provides a clear, auditable reconciliation and a narrative explanation that the adjustments are “directly related to non-recurring, non-cash, or non-operational items.” However, the HKEX’s 2024 guidance warns that if the adjusted profit exceeds the IFRS net profit by more than 100%, the Exchange will require the sponsor to provide a “sensitivity analysis” showing how the adjusted profit would change if each adjustment were reversed. In practice, this means that for a company with an IFRS net loss of HKD 100 million and an adjusted profit of HKD 50 million (a 150% inversion), the sponsor must present a table showing the impact of removing each adjustment individually, with the final line showing the IFRS loss.

Industry-Specific Adjustments: Biotech, Tech, and Real Estate

Different industries face specific scrutiny. For biotech issuers, adjustments for R&D expenses are generally not permitted unless the R&D is tied to a specific asset that has been written off or impaired. The SFC’s 2023 “Guidance on Disclosure of Financial Information for Biotech Companies” (SFC, 2023, para. 4.2) states that adjusted EBITDA for biotech firms must exclude any capitalised R&D costs that are later expensed. For tech companies with significant share-based compensation, adjustments are allowed only if the compensation is “non-cash and non-recurring,” which excludes annual grants to founders. Real estate developers often attempt to adjust for “fair value gains on investment properties” under HKAS 40; the HKEX’s 2024 guidance clarifies that these gains are operational and cannot be adjusted out unless the property is sold or reclassified within the period.

Disclosure Presentation: Structuring the Prospectus Sections

The placement of non-IFRS measures within the prospectus is as important as their content. The HKEX’s 2024 guidance specifies that non-IFRS measures may appear in three sections only: the “Summary of Financial Information,” the “Management Discussion and Analysis” (MD&A), and a dedicated “Non-IFRS Financial Measures” appendix. They are prohibited from appearing in the “Risk Factors,” “Business Overview,” or “Use of Proceeds” sections unless they are directly cross-referenced to the IFRS measure.

The “Summary” Section: IFRS First, Non-IFRS Second

In the “Summary of Financial Information,” the IFRS net profit for each period must appear as the first row in the table, in a font size no smaller than 10 points. The non-IFRS adjusted profit must appear in a separate row immediately below, with a footnote referencing the reconciliation appendix. The HKEX’s 2024 review found that 22% of applicants placed the adjusted profit in the same row as the IFRS profit, creating confusion. The correct format is a two-row table: Row 1: “Net profit attributable to equity holders (IFRS)” with the amount; Row 2: “Adjusted net profit (non-IFRS)” with the amount and an asterisk linking to the reconciliation.

The MD&A Section: Narrative and Tabular Reconciliation

The MD&A section must include a narrative explanation of why each non-IFRS measure is relevant, followed by a tabular reconciliation. The narrative must state explicitly: “The non-IFRS measure is used by management to assess the company’s underlying operating performance, as it excludes items that are non-recurring, non-cash, or not directly related to the core business.” The tabular reconciliation must show each adjustment line by line, with the IFRS figure as the starting point, each adjustment in HKD, and the non-IFRS figure as the ending point. The total adjustments must not exceed 50% of the IFRS figure in absolute terms unless the sponsor provides a written justification to the HKEX Listing Division.

The Appendix: Full Audit Trail

The “Non-IFRS Financial Measures” appendix must include a three-year historical reconciliation and a pro forma for the most recent interim period. The reconciliation must be audited by the reporting accountant, with the auditor’s opinion stating that the reconciliation is “free from material misstatement and consistent with the IFRS financial statements.” The appendix must also include a “sensitivity table” showing the impact of each adjustment on the non-IFRS measure, with a range of +/- 10% for each adjustment. This is a new requirement from the 2024 guidance, and it applies to all A1 filings submitted after 1 January 2025.

Cross-Border Considerations: PRC Issuers and VIE Structures

For PRC-based issuers using a Cayman or BVI holding company with a Variable Interest Entity (VIE) structure, non-IFRS measures must address the specific risks of the VIE arrangement. The SFC’s 2023 “Guidance on VIE Structures in Listing Applications” (SFC, 2023, para. 5.1) requires that any non-IFRS measure that consolidates the VIE’s financials must be reconciled to the IFRS measure that reflects the legal entity’s standalone financials. This means that if the non-IFRS adjusted profit includes the VIE’s full contribution, the reconciliation must show the IFRS profit of the Cayman holding company (which may exclude the VIE if it is not consolidated under IFRS 10 due to lack of control), and then add back the VIE’s contribution as a separate adjustment with a note explaining the legal risk.

The “Control” Adjustment

A specific pitfall for VIE issuers is the “control” adjustment. Under IFRS 10, “Consolidated Financial Statements,” a VIE is consolidated only if the parent has power over the VIE, exposure to variable returns, and the ability to use power to affect returns. If the Cayman holding company does not meet all three criteria—common in PRC tech companies where the VIE is controlled by PRC nationals through contractual arrangements—the IFRS statements may not consolidate the VIE at all. In such cases, any non-IFRS measure that consolidates the VIE must be flagged as “non-IFRS and non-statutory,” and the reconciliation must show the IFRS measure as the unconsolidated profit of the Cayman entity. The HKEX’s 2024 guidance specifically warns against presenting a “consolidated non-IFRS profit” that exceeds the IFRS profit by more than 200% without a separate legal opinion on enforceability.

Currency and Exchange Rate Adjustments

For issuers reporting in HKD but with functional currency in RMB, non-IFRS adjustments for foreign exchange gains or losses are permitted only if the exchange rate movement is “demonstrably non-recurring and outside management’s control.” The HKEX’s 2024 guidance cites a 2023 case where a PRC e-commerce issuer adjusted out HKD 280 million in forex losses on USD-denominated convertible notes, arguing they were non-recurring. The HKEX rejected the adjustment because the notes were outstanding for three consecutive years, making the forex losses recurring. The correct approach is to present the forex losses as part of the IFRS net profit and then provide a separate “constant currency” non-IFRS measure that restates the IFRS profit using the average exchange rate for each period, with a full reconciliation.

Actionable Takeaways for 2025-2026 IPO Preparations

1. File the reconciliation appendix with the A1 draft — the HKEX’s 2024 guidance requires the reconciliation to be submitted at the A1 stage, not as a response to comments, and any delay will trigger a formal deficiency letter.

2. Limit adjustments to three categories only — non-recurring items, non-cash items (e.g., share-based compensation, impairment), and non-operational items (e.g., forex gains on financing), each with a clear, auditable justification.

3. Ensure the IFRS net profit appears first in every table — in the summary, MD&A, and financial highlights, the IFRS figure must be in a font size no smaller than the non-IFRS figure, with no bold or colour highlighting on the non-IFRS measure.

4. Obtain a legal opinion on VIE consolidation for any non-IFRS measure that includes the VIE — the SFC’s 2023 VIE guidance requires this opinion to be filed with the A1 submission, and it must state whether the VIE is consolidated under IFRS 10 or not.

5. Prepare a sensitivity analysis for any adjustment exceeding 50% of the IFRS figure — this analysis must show the impact of removing each adjustment individually, with a range of +/- 10%, and it must be included in the non-IFRS measures appendix.