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According to the provisions set out in the Hong Kong Companies Ordinance, companies that are incorporated in Hong Kong must maintain proper books of accounts and must also satisfy statutory audit requirements on an annual basis. The Hong Kong Institute of Certified Public Accountants (HKICPA) is responsible for regulating the accountancy profession in Hong Kong.
Accounting standards are a set of rules that govern the treatment of financial transactions, by specifying certain fundamental principles, defining the meanings of terms and demanding minimum levels of disclosure.
Accounting standards in Hong Kong are known as Hong Kong Financial Reporting Standards (HKFRS) and set out recognition, measurement, presentation and disclosure requirements dealing with transactions and events that are important in general purpose financial statements. It is the application of HKFRS that gives us a “true and fair view” of financial statements.
The HKICPA has also issued a Financial Reporting Standard (SME-FRS) for certain qualifying SMEs. Since 30 April 2010, the Institute issued the Hong Kong Financial Reporting Standard for Private Entities (HKFRS for Private Entities) for Hong Kong companies that do not have public accountability. The HKFRS for Private Entities will eliminate some accounting treatments permitted under full HKFRSs, remove topics and disclosure requirements that are not generally relevant to private entities, and simplify requirements for recognition and measurement.
One of the main principles of Hong Kong accounting standards is that an entity prepares its financial statements, except for cash flow information, using the accrual basis of accounting. Under the accrual basis of accounting, the effects of transactions and other events are recognized when they occur and are reported in financial statements of the periods to which they relate. Financial statements prepared on the accrual basis of accounting inform users not only of past transactions involving the payment and receipt of cash, but also of obligations to pay cash in the future and of resources that represent cash to be received in the future.
The HKFRS consists of 41 distinct accounting standards, 15 financial reporting standards and several interpretations. Each standard relates to a specific topic such as presentation of financial statements, inventories, statement of cash flows, income taxes etc. Some examples of the standards set out in the HKICPA’s HKFRS Handbook include:
HKAS 1: Presentation of financial statements
Hong Kong Accounting Standard 1 Presentation of Financial Statements (HKAS 1) specifies the overall requirements for presentation of financial statements, guidelines for their structure and minimum requirements for their content.
According to HKAS 1:
HKAS 2: Inventories
Hong Kong Accounting Standard 2 Inventories (HKAS 2) specifies the accounting treatment for inventories. One of the main issues in accounting for inventories is the amount of cost to be recognized as an asset and carried forward until the related revenues are recognized. HKAS 2 offers guidance on the determination of cost and its subsequent recognition as an expense, including any write-down to net realizable value. It also provides guidance on the cost formulas that are used to assign costs to inventories.
According to HKAS 2:
HKAS 18: Revenue
Hong Kong Accounting Standard 18 Revenue (HKAS 18) sets out the accounting treatment that is accorded to revenue arising from certain types of transactions and events. The primary issue in accounting for revenue is determining when to recognise revenue.
According to HKAS 18:
For a complete set of HKFRS, please refer to the HKICPA’s HKFRS Handbook.
The new Hong Kong Companies Ordinance (Cap. 622) (“new CO”), which becomes effective on 3 March 2014, contains an optional reporting exemption for certain private companies and companies limited by guarantee which satisfy the conditions set out in section 359 of the new CO. The Small and Medium-sized Entity Financial Reporting Framework and Financial Reporting Standard which are effective for annual periods beginning on or after 3 March 2014 (the “revised SME-FRF and FRS”) are the accounting standards issued by the HKICPA that are to be followed in accordance with section 380(4) by those Hong Kong incorporated companies which are entitled to, and decide to, take advantage of this reporting exemption in the new CO.
In accordance with the revised SME-FRF, an entity which is not a company incorporated under either the new CO or the predecessor CO (Cap. 32), subject to any specific requirements imposed by the law of the entity’s place of incorporation and subject to its constitution, qualifies for reporting under the SME-FRF when the entity meets the same requirements that a Hong Kong incorporated entity is required to meet under section 359 of the new CO.
A company incorporated under the new or predecessor CO qualifies for reporting under the SME-FRF if it satisfies the criteria set out in section 359 of the new CO and the sections and Schedules to which that section refers. Specifically:
(a) Section 359(1)(b) brings forward the qualifying criteria that were previously found in section 141D of the predecessor CO, relating to private companies which do not have subsidiaries and are not a subsidiary of another company. These companies (unless they fall within the types of companies listed in the paragraph below) are eligible for the reporting exemption provided that each year they obtain 100% approval in writing from their shareholders.
(b) The remainder of section 359 introduces 3 additional categories of entities (or groups) that fall within the reporting exemption if they meet certain criteria relating to the type of entity, the size of the entity and in certain cases the need for shareholder approval. Further details on these criteria are set out in the paragraphs below.
The new Company Ordinance carries forward the exemption criteria in s141D as one category of exempt company. In addition, simplified reporting can be adopted by private groups, private companies which are subsidiaries of other companies, and companies/groups limited by guarantee provided that:
The size tests can be summarized as follows:
Small guarantee company/ group1 | Small private company/ group1 | Larger (“eligible”) private company/ group1 | |
---|---|---|---|
Annual revenue | ≤ $25m | ≤ $100m2 | ≤ $200m2 |
Total assets | No limit | ≤ $100m2 | ≤ $200m2 |
Average employees | No limit | ≤ $1002 | ≤ $1002 |
1 In groups, the size tests must be met for each company in the group and for the group as a whole
2 Must meet 2 out of these 3 criteria to qualify as “small” or “eligible”
The following private companies are not permitted to take the reporting exemption:
(a) the entity is an institution authorised under the Banking Ordinance to carry out banking business;
(b) the entity accepts, by way of trade or business (other than banking business) loans of money at interest or repayable at a premium, other than on terms involving the issue of debentures or other securities;
(c) the entity is licensed under Part V of the Securities and Futures Ordinance to carry on a regulated business; or
(d) the entity carries on any insurance business, other than solely as an agent.
Simplified financial statements are exempt from the requirement to give a true and fair view and are prepared under the HKICPA’s Simplified Financial Reporting Framework and Financial Reporting Standard (SME-FRF and SME-FRS), rather than HKFRSs. Typically these financial statements are prepared on a simplified historical cost basis and do not include any assets or liabilities at fair value, or deferred tax. The disclosure notes also contain less information on the reporting entity’s affairs compared to full financial statements.
The remainder of Hong Kong incorporated companies will continue to prepare financial statements which give a true and fair view and comply with HKFRSs.
The SME-FRS are simplified accounting principles based on the HKFRS. Certain topics of the HKFRS have been omitted in the SME-FRS, as they are not relevant to typical SMEs. The SME-FRS consists of 22 accounting standards that cover topics such as presentation of financial statements, accounting policies, leases, etc. Topics such as interim financial reporting, segment reporting, business review, etc. have been omitted in the SME-FRS. For a complete set of SME-FRS, please refer to the HKICPA’s SME-FRS.
Depending on your company’s needs, Hawksford can work with you as your bookkeeper, accountant, controller or a business advisor.
Depending on your company’s needs, Hawksford can work with you as your bookkeeper, accountant, comptroller or a business advisor.
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