Exclusive: HKICPA releases comfort letter revisions

Author: | Published: 23 Jun 2011
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Proposed amendments to Hong Kong’s comfort letter have prompted calls for greater global harmonisation of comfort letter standards.

Hong Kong Institute of Certified Public Accountants (HKICPA) this month released for private consultation the latest draft amendment to the city’s standard form of comfort letter (HKSIR 400), together with the big four accounting firms, IFLR can reveal.

If accepted in their present form, the suggested changes will see the HKSIR400 make the long-anticipated move from a non-assurance to an assurance engagement.

But they will also require that the Hong Kong standard be used for both the Hong Kong and Reg S portion of global offering, and broaden the scope of the revised HKSIR 400 standard form comfort letter beyond equity offerings to the debt capital markets (DCM) outside of the US.

Lawyers in Hong Kong have welcomed the move as providing a higher standard of due diligence comfort to banks.

But the provision that a Hong Kong standard should also be followed on the Reg S tranche of Hong Kong transactions may create confusion in an already disharmonised process. And the surprise inclusion of non-US DCM had created problems over market buy-in.

“Bankers will be nervous about what an enforced move away from the US-tracked AU634 lookalike or International Capital Market Association (ICMA) standards, commonly used in Reg S transactions, will involve,” explained one Hong Kong based lawyer.

“The move also raises concerns about increasing differentiation in global accounting practices,” he said.

He believed the establishment of an International Accounting Standards Board (IASB) approved comfort letter standard would be a significant step towards a more unified approach to accounting standards in the offering process.

The development and imposition of local standards could foster confusion. An IASB comfort letter standard would be adopted by jurisdictions following International Financial Reporting Standards (IFRS) and thereby better encourage the establishment of a global standard.

Using a global entity would be a viable alternative to the pushing through of a Hong Kong standard which may or may not be accepted, said another.

It will take time for the international market to become familiar with the new standards, he said.

Further consultation and coordination with the Hong Kong market was also necessary.

“Questions remain as to whether banks will be willing to accept it,” explained a Hong Kong lawyer.

Expanding the scope of the letter to cover DCM has taken DCM bankers by surprise. While they may not end up being adamantly opposed to it, they haven’t had any chance to think about it, which has created concern.

“It was not properly consulted on,” said another.

Asia Securities Industry & Financial Markets Association’s (Asifma) executive director, Will Sage added that it would be necessary to ensure a full and proper consultation process between HKICPA and DCM participants.

“Such consultation is important to ensure that any revised form of HKSIR400 is suitable for and acceptable to debt market participants,” he said. It would also help to define the appropriate scope of application of HKSIR 400 in the debt market context before adoption.

ECM bankers are also not completely behind the move. “I think they would like to preserve the flexibility to use the AU634 lookalike,” explained the lawyer.

But it is likely the final balance of power is with the accounting firms. They are in position to dictate on this, and having unilaterally imposed HKSIR400 in 2004, could feasibly do so again.

“Ultimately if the market goes this way, people will have to get used to it,” the lawyer said.

It is unclear when the proposed changes will come into effect.