HKEX Review of the Capitalisation of Research and Development Expenditure

The Hong Kong Stock Exchange (HKEX) published a consultation paper in July 2025 proposing a targeted review of Listing Rules concerning the capitalisation of research and development (R&D) expenditure, a move that directly impacts the financial reporting and listing eligibility of technology and biotech applicants. This review, framed as part of the HKEX’s ongoing efforts to enhance the quality and transparency of the Main Board and GEM, comes in response to a sharp increase in R&D-heavy listings since the 2018 reforms. Between 2018 and 2024, companies classified under the HKEX’s new economy sectors—including biotechnology, healthcare, and technology—accounted for over 65% of total IPO proceeds raised on the Main Board, with many capitalising significant portions of their R&D costs under Hong Kong Financial Reporting Standards (HKFRS). The Exchange’s Listing Department has observed that inconsistent capitalisation policies, particularly among pre-revenue biotech issuers, have created discrepancies in reported asset bases and profit forecasts, complicating the assessment of listing suitability under Listing Rules Chapter 8 (for Main Board) and Chapter 18A (for Biotech). The consultation, which closed on 30 September 2025, proposes stricter disclosure requirements and a more prescriptive framework for when R&D costs can be capitalised, directly affecting the financial statements of companies seeking to list via IPO, introduction, or SPAC merger.

The Rationale Behind the HKEX’s Review

The HKEX’s decision to review R&D capitalisation stems from a confluence of market trends and regulatory gaps that have become increasingly apparent since the 2018 listing regime overhaul. The Exchange’s Listing Committee has flagged that the current flexibility under HKFRS—specifically HKAS 38 Intangible Assets—allows issuers to capitalise development costs that meet six criteria, including technical feasibility and intent to complete. However, in practice, pre-revenue biotech and deep-tech companies have often capitalised costs that would be more appropriately expensed, inflating their net asset positions and potentially misleading investors. The HKEX’s 2024 Listing Decision LD117-2024 highlighted a case where a GEM applicant capitalised 78% of its R&D expenditure over three financial years, resulting in intangible assets representing 62% of total assets at the time of its listing application. The Exchange deemed this practice inconsistent with the spirit of Listing Rule 8.05, which requires a minimum profit test for Main Board applicants, as capitalised R&D can be amortised over future periods, smoothing earnings and obscuring underlying cash burn. The review is also driven by the SFC’s 2023 Thematic Review of Financial Reporting by Biotech Listed Companies, which found that 12 of 25 sampled biotech issuers had capitalised R&D at rates exceeding 50% of total R&D spend, with three capitalising over 90%. The SFC’s report recommended that the HKEX provide clearer guidance on the boundary between capitalisation and expensing, particularly for companies with no historical revenue or a single product in development.

Impact on Listing Eligibility and Financial Metrics

The HKEX’s proposed changes would directly affect how listing applicants demonstrate compliance with the financial eligibility tests under Listing Rules Chapter 8. For Main Board applicants relying on the profit test (Rule 8.05(1)), capitalised R&D expenditure is currently treated as an intangible asset, not deducted from profit. If the HKEX mandates that certain R&D costs must be expensed, this could reduce reported profits by millions of HKD for companies with significant development pipelines. For example, a hypothetical biotech applicant with HKD 200 million in R&D spend over three years, capitalising 70% under current practice, would show HKD 140 million in intangible assets and HKD 60 million in expenses. Under a stricter regime requiring 50% expensing, the same company would report HKD 100 million in expenses, reducing its three-year aggregate profit by HKD 40 million—potentially falling short of the HKD 50 million minimum profit requirement for the profit test. This shift would force applicants to either rely on the market capitalisation/revenue test (Rule 8.05(3)) or the revenue/cash flow test (Rule 8.05(2)), both of which have higher thresholds. The HKEX’s consultation paper explicitly notes that it is considering aligning R&D capitalisation rules with the approach taken by the China Securities Regulatory Commission (CSRC) for A-share listings, where development-stage expenditure must be expensed unless the company can demonstrate a high probability of commercial success, a standard that is rarely met by pre-revenue biotech firms.

Disclosure and Audit Implications

The proposed changes also target enhanced disclosure in prospectuses and annual reports, with the HKEX suggesting that issuers must provide a detailed breakdown of R&D capitalisation policies by project, including the stage of development, the criteria met under HKAS 38, and the estimated probability of commercialisation. This would require auditors to issue separate opinions on the appropriateness of capitalisation decisions, a practice already adopted by some Big Four firms for high-risk biotech clients. The HKEX’s Listing Rules currently require that a sponsor’s report (under Rule 11.02) include a statement on the issuer’s compliance with accounting standards, but the proposed changes would mandate a specific section on R&D capitalisation, with the sponsor required to conduct independent verification of the technical feasibility and market viability of each capitalised project. This adds a layer of due diligence that could extend the listing timeline by 4-6 weeks, as sponsors would need to engage external technical experts to validate development milestones—a cost that could range from HKD 500,000 to HKD 2 million per project, based on Mayer Brown’s analysis of comparable engagements in the UK’s AIM market, which adopted similar rules in 2022.

Practical Implications for Listing Applicants

For companies currently preparing for listing, the HKEX’s review creates immediate uncertainty around the treatment of existing capitalised R&D balances. The consultation proposes that any new rules would apply prospectively to listing applications filed after the effective date, but issuers with pending applications may need to restate their financials if the Exchange’s Listing Department deems their current policies non-compliant. This is particularly relevant for SPAC mergers, where the target company’s financial statements are reviewed by the HKEX under Listing Rules Chapter 18B. A SPAC merger announcement typically includes pro forma financial information that assumes the target’s existing accounting policies; if those policies are subsequently disallowed, the merger may be delayed or require renegotiation of terms. The HKEX’s 2024 SPAC Guidance Note GL117-2024 already requires SPAC targets to have a market capitalisation of at least HKD 8 billion at the time of the merger, and any restatement of R&D capitalisation could reduce the asset base, potentially affecting the valuation used for the merger consideration.

Sector-Specific Risks: Biotech and Deep-Tech

Biotech companies listed under Chapter 18A are the most exposed to the proposed changes, as their business models depend on capitalising R&D to demonstrate a positive net asset position. The HKEX’s 2024 Market Statistics show that 47 biotech issuers were listed on the Main Board as of 31 December 2024, with a combined market capitalisation of HKD 1.2 trillion. Of these, 32 had capitalised R&D at rates above 60%, and 18 had intangible assets comprising more than 50% of total assets. If the HKEX mandates that a significant portion of these costs be expensed, several issuers could see their net assets fall below the HKD 100 million minimum required for continued listing under Rule 8.05(3) (market capitalisation test), triggering a review by the Listing Department. Deep-tech companies, including those in artificial intelligence, semiconductors, and advanced manufacturing, face similar risks, as they often capitalise development costs for platforms or prototypes that may take years to generate revenue. The HKEX’s 2023 Listing Decision LD115-2023 rejected a deep-tech applicant that capitalised 85% of its R&D over five years, ruling that the company failed to demonstrate technical feasibility under HKAS 38 because its core technology was still in the prototype stage with no third-party validation. This decision sets a precedent that the Exchange may apply more rigorously under the proposed new rules.

Cross-Border Considerations for PRC Issuers

PRC-based issuers seeking a Hong Kong listing face additional complexity, as the HKEX’s proposed rules may diverge from the CSRC’s treatment of R&D capitalisation under PRC GAAP. Under PRC Accounting Standards for Business Enterprises (ASBE), development-stage expenditure can be capitalised only if the company meets a higher threshold of “probability of economic benefits” compared to HKFRS, and PRC-listed companies typically expense a larger proportion of R&D. The HKEX’s consultation paper notes that it is considering requiring PRC issuers to reconcile their R&D capitalisation policies to HKFRS in their prospectuses, a practice already mandated for A+H dual-listed companies under the CSRC’s 2023 Regulatory Rules for Cross-Border Listings. This reconciliation would need to be audited by both the PRC and Hong Kong auditors, adding to the cost and timeline of the listing process. For issuers using a VIE structure, the HKEX’s proposed changes could also affect the consolidation of R&D expenses from variable interest entities, as the VIE’s financial statements are prepared under PRC GAAP and then adjusted to HKFRS. The HKEX’s 2024 Guidance Note on VIE Structures requires that the VIE’s financials be audited to the same standard as the listed issuer, meaning any divergence in R&D treatment would need to be disclosed and explained.

The Regulatory Landscape and Future Outlook

The HKEX’s review of R&D capitalisation is part of a broader global trend toward stricter accounting treatment of intangible assets, driven by investor concerns about the quality of reported earnings. The International Accounting Standards Board (IASB) published a discussion paper in 2024 on the recognition of internally generated intangible assets, proposing a more restrictive approach that would require companies to expense all development costs unless they can demonstrate a direct link to a specific, commercially viable product. The HKEX’s consultation aligns with this direction, and the Exchange has indicated that it may adopt IASB’s final guidance once it is issued, expected in 2026. In the meantime, the HKEX is also consulting on related changes to Listing Rules Chapter 19 (for overseas issuers) and Chapter 20 (for PRC issuers), to ensure consistency across all listing regimes. The SFC has publicly supported the review, with its CEO stating in a 2025 speech that “capitalisation of R&D must not become a tool for earnings management, particularly in sectors where commercialisation is uncertain.”

Comparison with Other Markets

Hong Kong is not alone in tightening R&D capitalisation rules. The UK’s Financial Conduct Authority (FCA) introduced similar requirements for AIM-listed companies in 2022, mandating that development costs be expensed unless the company has received regulatory approval for its product or has a signed commercial contract. The US Securities and Exchange Commission (SEC) has not issued specific guidance, but US GAAP under ASC 730 requires all R&D costs to be expensed, with limited exceptions for software development. The HKEX’s approach is more balanced, allowing capitalisation under strict conditions, but the proposed changes would bring Hong Kong closer to the UK’s model. For issuers considering a dual listing, the divergence between HKFRS and US GAAP could create accounting mismatches, requiring additional reconciliation in the prospectus. Mayer Brown’s 2025 Cross-Border Listing Guide notes that companies listing in both Hong Kong and the US typically adopt HKFRS for their Hong Kong filings and provide a reconciliation to US GAAP, which can increase audit costs by 15-20%.

Timeline and Next Steps

The HKEX’s consultation closed on 30 September 2025, and the Exchange is expected to publish its conclusions and final rule amendments by Q1 2026, with an effective date of 1 July 2026. Companies planning to file listing applications after that date should begin reviewing their R&D capitalisation policies now, engaging auditors and sponsors to assess the impact of the proposed changes. The HKEX has indicated that it will provide a transitional period of 6-12 months for existing listed companies to adjust their accounting policies, but new applicants will be subject to the new rules immediately upon effectiveness. The Listing Committee has also signalled that it may issue additional guidance on the application of the new rules to specific sectors, such as biotechnology, healthcare, and technology, through updated listing decisions and FAQs.

Actionable Takeaways for Listing Applicants

• Review existing R&D capitalisation policies against the proposed HKEX criteria, focusing on technical feasibility and commercial viability, and engage auditors to assess the impact on net assets and profit tests under Listing Rules Chapter 8.
• Prepare a detailed project-by-project breakdown of capitalised R&D, including development stage, criteria met under HKAS 38, and estimated probability of commercialisation, to be included in the prospectus as recommended by the HKEX’s consultation.
• For SPAC targets, model the effect of expensing a higher proportion of R&D on the pro forma financial statements used in the merger announcement, and discuss potential adjustments with the SPAC sponsor before the business combination agreement is signed.
• PRC issuers should reconcile R&D capitalisation policies between PRC GAAP and HKFRS, and prepare audited reconciliation statements as required by the CSRC’s 2023 cross-border listing rules, to avoid delays in the listing process.
• Monitor the HKEX’s publication of final rule amendments and any sector-specific guidance, and adjust listing timelines accordingly, allowing for an additional 4-6 weeks of due diligence and audit work if the new rules are adopted.