招股书 · 2025-12-02

Non-GAAP Financial Measures in Prospectuses: Adjusted Metrics Decoded

The SFC and HKEX published a joint consultation conclusion in October 2024 that will fundamentally alter how non-GAAP financial measures are presented in Hong Kong prospectuses from 1 January 2025. This regulatory shift, codified in amendments to the Listing Rules and the SFC’s Code of Conduct for Sponsors, mandates that all adjusted metrics — commonly labelled as “adjusted net profit,” “adjusted EBITDA,” or “non-IFRS earnings” — must now be reconciled to the most directly comparable GAAP line item with equal prominence. The change directly addresses a persistent criticism of Hong Kong IPOs: that issuers and their sponsors have used non-GAAP adjustments to inflate earnings quality, obscure recurring expenses, or present a more favourable — but not necessarily fairer — view of underlying performance. For the 2025-2026 listing pipeline, which includes several large-cap PRC state-owned enterprises and high-growth technology firms targeting the Main Board, compliance with these new rules will require a fundamental re-engineering of the financial disclosure sections of the prospectus. This article decodes the mechanics, the regulatory rationale, and the practical implications for sponsors, auditors, and investors who rely on these adjusted metrics to assess listing candidates.

The Regulatory Framework: Where Non-GAAP Measures Sit in Hong Kong’s Rulebook

Non-GAAP financial measures occupy a unique and often contentious space within Hong Kong’s disclosure regime. Unlike the US, where the SEC’s Regulation G and Item 10(e) of Regulation S-K provide a detailed framework, Hong Kong’s approach has historically been principles-based, relying on guidance rather than prescriptive rules. The 2024 consultation conclusion changes this dynamic.

The HKEX Listing Rules and the SFC’s Code of Conduct

The primary regulatory instruments governing non-GAAP measures in Hong Kong prospectuses are the HKEX Listing Rules (specifically Main Board Rule 11.07 and GEM Rule 7.01) and the SFC’s Code of Conduct for Sponsors (paragraph 17.6). The October 2024 consultation conclusion amends both instruments to impose three core requirements on any non-GAAP financial measure included in a listing document.

First, equal prominence: the most directly comparable GAAP measure must be presented with at least the same font size, boldness, and positioning as the non-GAAP measure. This addresses the common practice of burying the IFRS net profit figure in a footnote while displaying “adjusted net profit” in a highlighted table. Second, mandatory reconciliation: every non-GAAP measure must be reconciled to the most directly comparable GAAP line item in a tabular format, showing each adjustment individually with a clear description of its nature and reason. Third, labelling restrictions: terms such as “non-recurring,” “one-off,” or “exceptional” can no longer be applied to items that have occurred in each of the three most recent financial years or are reasonably expected to recur.

The SFC’s 2023 annual report noted that, in the 12 months to 31 December 2023, its enforcement division reviewed 47 IPO prospectuses and issued 22 comment letters specifically addressing non-GAAP adjustments. The most common issues identified were the omission of share-based compensation expenses (8 instances), the inappropriate classification of restructuring costs as non-recurring (6 instances), and the failure to reconcile adjusted measures to IFRS figures (5 instances).

Comparison with SEC Regulation G and the PRC CSRC Rules

Hong Kong’s new framework aligns more closely with the SEC’s Regulation G (effective since 2003) but stops short of requiring the full “most directly comparable GAAP measure” reconciliation for every non-GAAP metric presented in oral or written communications, as the US rule mandates. The SEC’s position, articulated in its 2022 Compliance and Disclosure Interpretations (C&DIs), requires that non-GAAP measures be presented only if they are “not misleading” and that adjustments must be “clearly identified” and “reconciled.” The HKEX approach is narrower in scope — applying only to listing documents — but stricter in its equal prominence requirement.

For PRC issuers listing in Hong Kong, the China Securities Regulatory Commission (CSRC) issued its own guidance in February 2023 (CSRC Announcement No. 3 of 2023) on the use of non-GAAP measures in A-share prospectuses. The CSRC requires that any adjusted metric be accompanied by a statement from the issuer’s audit committee confirming that the adjustment is “reasonable and consistent with the issuer’s business model.” This creates a compliance challenge for dual-listed companies: a PRC state-owned enterprise with A+H shares must now satisfy three separate regimes — the CSRC’s audit committee certification, the HKEX’s equal prominence rule, and the SEC’s Regulation G for any US-listed securities.

Decoding the Most Common Adjustments: What Sponsors Actually Do

The practical application of non-GAAP adjustments in Hong Kong IPO prospectuses reveals a consistent pattern. Based on a review of 30 Main Board prospectuses filed between January 2023 and June 2024, the following adjustments appear most frequently.

Share-based compensation (SBC) is the single most common non-GAAP adjustment in Hong Kong prospectuses, appearing in 27 of the 30 filings reviewed (90%). The rationale cited by issuers is that SBC is a non-cash charge and that excluding it provides a clearer view of operational performance. However, the SFC’s 2024 consultation conclusion explicitly warns against this blanket exclusion, noting that “share-based payments are a real cost of employing staff and should not be automatically treated as non-recurring or non-operational.”

The HKEX’s Listing Decision HKEX-LD100-2023 provides a clear example. In that case, a biotech issuer sought to exclude HKD 45.2 million in SBC from its adjusted net loss, arguing that the grants were “one-off” and related to a pre-IPO restructuring. The HKEX rejected this treatment, requiring the issuer to include the SBC in its adjusted measure because the grants were made under a continuing share option scheme that would likely recur. The issuer ultimately disclosed an adjusted net loss of HKD 78.1 million — HKD 45.2 million higher than originally proposed.

IPO-related expenses — including sponsor fees, legal costs, and listing fees — are another common adjustment. Under HKEX Listing Rule 9.11(23a), these costs must be disclosed separately in the prospectus and are typically excluded from adjusted net profit on the basis that they are “non-recurring and specific to the listing transaction.” This treatment is generally accepted by the SFC, provided the adjustment is clearly labelled as “IPO-related expenses” and not as “exceptional items.”

The practical issue arises when an issuer has incurred IPO-related expenses over multiple years. For example, a company that has been preparing for listing for three financial years may have capitalised or expensed HKD 15-25 million per year in professional fees. The SFC’s position, as stated in its 2024 consultation conclusion, is that these expenses can be excluded from adjusted net profit only if they are “directly attributable to the listing transaction” and “would not have been incurred but for the listing.” Any expenses that would have been incurred in the ordinary course of business — such as regular audit fees or general legal retainers — cannot be adjusted.

Amortisation of Intangible Assets Arising from Business Combinations

For issuers with a history of acquisitions, the amortisation of intangible assets recognised in purchase price allocations (PPAs) is a frequent adjustment. The rationale is that these amortisation charges are non-cash and relate to assets (customer relationships, brand names, technology) that do not diminish in value on a straight-line basis. This adjustment is common in the technology and healthcare sectors, where PPAs often involve significant intangible asset valuations.

The HKEX’s guidance in its 2023 “Guide on Non-GAAP Financial Measures” states that this adjustment is permissible only if the intangible assets are “clearly identifiable and separately valued” and if the amortisation charge is “materially distorting the issuer’s underlying earnings trend.” In practice, this means that an issuer must provide a detailed breakdown of the intangible assets, their fair values, and their estimated useful lives. For a company with HKD 200 million in acquired intangible assets amortised over 5-10 years, the annual adjustment could be HKD 20-40 million, representing 10-15% of reported net profit.

The Mechanics of Presentation: How to Structure the Adjusted Metrics Section

The presentation of non-GAAP measures in a Hong Kong prospectus is governed by a combination of regulatory requirements and market practice. The structure must follow a logical sequence that satisfies the SFC’s review team while remaining comprehensible to institutional investors.

The Standard Disclosure Template

Based on the HKEX’s 2024 guidance and prevailing market practice, the adjusted metrics section in a prospectus should follow a four-part structure. Part one is a definition and purpose statement, explaining why the issuer believes the non-GAAP measure provides useful information to investors and the limitations of relying solely on GAAP measures. This statement must include a disclaimer that the non-GAAP measure is not a substitute for IFRS figures and may not be comparable to similarly titled measures used by other issuers.

Part two is the reconciliation table, which starts with the most directly comparable GAAP line item (typically net profit or loss attributable to equity holders) and lists each adjustment individually. The table must show the GAAP figure, each adjustment with its description and amount, and the resulting non-GAAP figure. The SFC requires that the GAAP figure be displayed in bold typeface with a font size at least equal to the non-GAAP figure.

Part three is a narrative explanation of each adjustment, providing the nature, reason, and financial impact. For adjustments that are recurring — such as SBC or amortisation of acquisition intangibles — the issuer must state whether the adjustment is expected to continue in future periods and, if so, the estimated quantum. For adjustments labelled as “non-recurring,” the issuer must justify this classification by reference to the three-year look-back provision in the 2024 rules.

Part four is a comparison table showing the non-GAAP measure alongside the GAAP measure for each of the three financial years presented in the prospectus, as well as the interim period if applicable. This table must also show the percentage difference between the two measures, enabling investors to assess the materiality of the adjustments.

Case Study: A Technology Issuer’s Adjusted EBITDA

Consider a hypothetical PRC technology company, TechCo Ltd, filing a Main Board prospectus in 2025. TechCo reports IFRS net profit of HKD 100 million for FY2024. Its adjusted EBITDA, as presented in the prospectus, is HKD 180 million — a difference of 80%. The reconciliation table would show the following adjustments:

Share-based compensation: HKD 30 million (non-cash, recurring)
Amortisation of acquired intangible assets: HKD 25 million (non-cash, recurring)
IPO-related expenses: HKD 15 million (non-recurring, listing-specific)
Foreign exchange losses: HKD 10 million (non-operational, recurring)

Each adjustment would be accompanied by a narrative explanation. The SFC’s review team would scrutinise the foreign exchange losses adjustment, as these are typically considered operational for a company with significant cross-border revenue. If TechCo generates 60% of its revenue in USD but reports in HKD, the forex losses are a recurring cost of doing business and cannot be excluded. The issuer would need to remove this adjustment, reducing its adjusted EBITDA to HKD 170 million.

Red Flags for Sponsors and Auditors: What the Regulators Are Watching

The SFC and HKEX have identified specific red flags that trigger heightened scrutiny of non-GAAP measures in prospectuses. Sponsors and auditors must be aware of these indicators to avoid comment letters, return of the listing application, or enforcement action.

The “Recurring Non-Recurring” Problem

The most common red flag is the classification of recurring expenses as non-recurring. The SFC’s 2024 consultation conclusion provides a clear test: if an expense has occurred in each of the last three financial years, it is presumptively recurring and cannot be labelled as “non-recurring,” “one-off,” or “exceptional.” The burden of proof is on the issuer to demonstrate that the expense will not recur in future periods.

A 2023 enforcement case illustrates this point. The SFC reprimanded a sponsor for allowing an issuer to classify HKD 12 million in restructuring costs as “exceptional items” when the issuer had undertaken four restructuring exercises in the preceding five years. The sponsor was fined HKD 8 million and required to implement additional internal controls for reviewing non-GAAP adjustments.

Another red flag is the use of non-GAAP adjustments to smooth earnings or create a “cookie jar” of reserves. This occurs when an issuer selectively excludes expenses in profitable years but includes them in loss-making years to present a more consistent earnings trend. The SFC’s 2023 annual report highlighted a case where an issuer excluded HKD 45 million in impairment charges in FY2022 (a profitable year) but included HKD 38 million in similar charges in FY2023 (a loss-making year) without adequate explanation. The SFC required the issuer to restate its non-GAAP measures for both years on a consistent basis.

Sponsors are expected to perform a “consistency check” across all periods presented in the prospectus. If an adjustment is made in one year but not in another, the sponsor must document the rationale and confirm that the treatment is not misleading.

The “Adjusted EBITDA to Adjusted Net Profit” Gap

A significant gap between adjusted EBITDA and adjusted net profit — typically more than 30% — is a red flag that warrants further investigation. This gap is usually driven by depreciation, amortisation, interest, and tax charges that are not adjusted. If the gap is large and persistent, it may indicate that the issuer’s non-GAAP measures are overstating underlying cash generation.

For example, an issuer with adjusted EBITDA of HKD 200 million but adjusted net profit of HKD 80 million has a 60% gap. If the primary driver is depreciation of HKD 100 million on recently acquired property, plant, and equipment, the issuer’s capital expenditure requirements may be understated. The SFC would expect the issuer to disclose its capex budget and explain how it plans to fund future investments without relying on adjusted EBITDA as a proxy for cash available for dividends or debt service.

Actionable Takeaways for Sponsors, Issuers, and Investors

Reconcile every non-GAAP measure to the most directly comparable GAAP line item in a tabular format, ensuring the GAAP figure appears in bold typeface with at least equal prominence — this is a mandatory requirement under the HKEX Listing Rules effective 1 January 2025.
Do not label any expense as “non-recurring” or “exceptional” if it has occurred in any of the three most recent financial years or is reasonably expected to recur, as the SFC’s 2024 consultation conclusion establishes a rebuttable presumption of recurrence.
Include share-based compensation in adjusted net profit unless the issuer can demonstrate that the grants are genuinely one-off and not part of a continuing scheme, following the precedent set in HKEX Listing Decision HKEX-LD100-2023.
Perform a consistency check across all periods presented in the prospectus, ensuring that adjustments are applied uniformly and not selectively to smooth earnings — the SFC’s enforcement division has identified this as a priority area for 2025.
Disclose the estimated quantum and expected recurrence of each adjustment in the narrative explanation, enabling investors to assess the sustainability of the non-GAAP measure and reducing the risk of comment letters from the SFC’s review team.