How To Comply With Hong Kong Accounting Standards Efficiently: Guide For SMEs

As a Hong Kong business entity, your company must prepare audited financial statements on an annual basis. Please make sure your financial transactions are handled based on Hong Kong accounting standards. So, what are these standards?

This blog will tell you fundamental facts about Hong Kong accounting rules and how to comply with accounting requirements in Hong Kong!

An overview of Hong Kong accounting rules

Hong Kong accounting standards, or Hong Kong Financial Reporting Standards (HKFRS) refer to a set of accounting rules set out by the Hong Kong Institute of Certified Public Accountants (HKICPA). This framework follows the Financial Reporting Standards (FRS), which have been applied in Hong Kong since January 2005. The FRS model is based on the International Financial Reporting Standards (IFRS) under the International Accounting Standards Board (IASB).

Accounting standards in Hong Kong include 41 accounting standards, some interpretations, and 9 financial reporting standards. Some typical examples of accounting standards include:

• HKAS 1: Presentation of Financial Statements
• HKAS 2: Inventories
• HKAS 7: Cash Flow Statements
• HKAS 12: Income taxes
• HKAS 18: Revenue
• HKAS 19: Employee benefits

Hong Kong accounting standards focus on the company’s financial statements – related accounting terms, accounting principles, disclosure requirements for financial transactions, and a how-to guide to fairness for the company’s financial reports.

Pursuant to the Hong Kong Companies Ordinance, any company incorporated in Hong Kong must comply with the accounting and audit requirements every year. The financial statements must follow the accounting standards in Hong Kong. Also, note that Hong Kong accounting rules stay a strong connection with your chosen financial year end in Hong Kong. Commonly, an accounting report for Hong Kong companies is well attached to the following issues:

• Balance sheet
• Fixed assets of the company like stocks, securities
• Present liabilities on taxation, finance lease obligations, or creditors’ loans
• Shareholders’ retained profits, capital reserves, and other similar equities
• Profit and loss account and summaries of turnovers, profits before tax, tax, dividends, and retained profits of the fiscal year

We will discuss further information on accounting requirements for Hong Kong companies later.

The HKICPA has also introduced The Small and Medium-Sized Entities Financial Reporting Framework and Financial Reporting Standard (SME-FRF & SME-FRS). These standards are made with simplified requirements and removal of irrelevant topics for qualifying Hong Kong SMEs and Private Entities without public accountability, thereby facilitating the preparation of SME financial statements.

The SME-FRF & SME-FRS has been effective since 2014 for financial periods starting on or after 3 March 2014. These accounting standards are managed under the HKICPA and in compliance with the new Companies Ordinance, section 380.

Financial reporting requirements based on Hong Kong accounting standards

Accounting and auditing requirements may vary according to different types of companies in Hong Kong. A general rule applied by the HKICPA is that HKFRS is only applicable to financial statements for general purposes of profit-generated entities.

General requirements for private companies

A private company is considered the most common type of business entity in Hong Kong. As per the country’s laws, private companies must submit their annual financial statements to the Inland Revenue Department as part of the tax filing duty of the company.

These financial statements must be assured to comply with relevant Hong Kong accounting standards for the company – i.e., HKFRS, HKFRS for Private Entities, or the SME-FRF & SME-FRS, depending on each case. Furthermore, some business sectors like banking and insurance businesses may impose different sets of regulations on the filing of financial statements. Each sector can also have its respective regulator to which the company needs to file its financial reports.

Only a private company with qualified dormant status, meaning a company that has no relevant accounting transactions during a financial year, according to the Companies Ordinance would be exempted from filing this annual financial report.

Private companies must keep the books of account at the registered office of the company. Note, however, that such reports would be kept out of view on the public record.

General requirement for listed companies

Public companies and companies limited by guarantee in Hong Kong are both required to prepare financial statements in compliance with Hong Kong accounting standards to the Companies Registrar.

It is worth mentioning that depending on the company’s financial year, there can be different deadlines for the company in filing financial statements with the Companies Registrar. Particularly, you should not miss out on the below important milestones:

If the financial year starts before 3 March 2014, both public companies and companies limited by guarantee must submit the financial reporting within 42 days from the date when the company’s annual general meeting is held.

If the financial year starts on or after 2014, then:

• For public companies: They should submit the financial reporting 42 days after the 6-month span from ending the accounting reference period of that company.
• For a company limited by guarantee: It should file the financial reporting during 42 dates after the 9-month span from the ending of the accounting reference period of that company.

Companies under reporting exemption of Hong Kong accounting standards

As per the new Companies Ordinance of Hong Kong (section 359), there is a reporting exemption for certain Hong Kong companies.

Meaning of “reporting exemption”

If your Hong Kong company falls under this reporting exemption, your company would be entitled to submit “simplified” financial statements and auditor’s reports. Examples of requirements that can be removed are as the followings:

• No need to declare the remuneration for the auditor or the material interest of directors in relevant contracts in the financial statements.
• No need to present a “true and fair view” to the financial statements. Also, there is no need for auditors to declare a “true and fair view” on financial statements.
• Lack of information on the business review, donations, explanations of directors’ resignations, and agreements on directors’ benefits in respect of the acquisition of the shares is still acceptable.
• Subsidiary undertakings may not be included in consolidated financial statements

A key to mention is that this reporting exemption would be optional for eligible entities.

Eligibility under the reporting exemption

Eligible conditions under Hong Kong Companies Ordinance apply to a private company and a company limited by guarantee. To qualify for the granted exemption, below are taken-in-account criteria:

It is a small private company/ holding company of a group of small private companies for the reporting year, and it is NOT a company falling into any of the following activities at any time within the reporting year:

• Carrying on banking business and obtaining a banking license under the Banking Ordinance (Cap. 155)
• Carrying on a business licensed under Part V of the Securities and Futures Ordinance (Cap. 571)
• Carrying on insurance business (except in the case of sole agent for this activity)
• Accepting loans of money at interest or repayable at a premium

It is a private company, which is:

• Not a holding company of any subsidiary
• Not the subsidiary of any other company
• NOT a company falling into any of the activities mentioned above
• It has passed the approval of all members in writing that the company would fall within the reporting exemption for the reporting year only

It is a small company limited by the guarantee/ holding company of a group of small company limited by guarantee for the reporting year. And it is NOT a company falling into the activities mentioned above.

It is an eligible private company/ holding company of a group of eligible private companies for the reporting year, which is:

• NOT a company falling into any of the activities mentioned above
• It has passed a resolution at the company’s general meeting by members with at least 75% of the voting rights in the company, without any objections from other members having the remaining voting rights.

It is a holding company of a group of companies, which is:

• none of its members is falling into any of the activities mentioned above or includes a non-Hong Kong body corporate
• Its members must include at least one small private company/eligible private company, and at least one small guarantee company 
• It has passed a resolution at the company’s general meeting by members with at least 75% of the voting rights in the company, without any objections from other members having the remaining voting rights.

Other companies are eligible to come under-reporting exemption, as prescribed in section 359.

Determination of a small private company/ company limited by guarantee

The question arising for new players can be: Whether my company is a small private company?

Hong Kong law prescribes 3 criteria to identify different types of entities in Hong Kong. Accordingly, if your company adopts 2 out of 3 conditions in terms of the company’s size test (total revenue, asset value, and employee numbers), then it is a small private company.

Below are criteria concerning size tests to define the entity types that need to follow Hong Kong accounting standards:

As a small private company:

• a max of 100 million HKD in total annual revenue,
• a max of 100 million HKD in total asset value at the end of the reporting period, plus
• the number of employees not exceeding 100.

As a small company limited by guarantee: a max of 25 million HKD in total annual revenue.

As a larger eligible private company:

• a max of 200 million HKD in total annual revenue,
• a max of 200 million HKD in total asset value at the end of the reporting period, plus
• the number of employees not exceeding 100.

Michael owns a private company incorporated in Hong Kong, and its main activity is e-commerce. For some initial years, it is a small private company. The company has:

• Employees: 30
• Total yearly revenue: 15 million HKD
• Total asset value: 5 million HKD

Following the SME-FRF & SME-FRS, Michael’s company satisfied the requirements of a small private company in Hong Kong, resulting in its eligibility for reporting exemption.

The case is in the 4^th year. His company decided to expand its business scale to a broader network of clients. In the said time point, the private company increased to 150 employees. The company’s earnings were around 180 million HKD a year. Accompanying its fast growth, the total asset of the company reached 35 million HKD in value.

From the perspective of Hong Kong accounting rules, Michael’s company met 2 out 3 criteria to enjoy the financial reporting exemption. So in this 4^th year, the company has the duty of complying with the filing requirements of financial statements to ensure its respective accounting standards in Hong Kong.

Required documents for financial reporting of Hong Kong companies

Section 380 (4) of the Companies Ordinance stipulates that accounting standards shall be applicable to any financial statements of a Hong Kong company. Accordingly, HKICPA requires a set of financial documents in case an eligible company needs to prepare financial statements in compliance with Hong Kong accounting standards. The needed information includes:

• A statement of financial position/Balance sheet at the end of the period
• Statement of comprehensive income
• Statement of cash flow
• Accounting policies
• Explanatory notes
• Equity or capital transactions changes

As a really important compliance requirement for any company incorporated in Hong Kong, financial reporting and accounting-related duties are worth considering. Seeking a reliable partner to conduct an annual audit and offer seamless accounting services in Hong Kong for your company will be a wise choice.

Need more advice on accounting and auditing matters for your Hong Kong companies? Feel free to contact our local accountants or leave us a message at service@bbcincorp.com.

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