Preparation of Financial Statements in Hong Kong: What You Need to Know
In accordance with the requirements of the Hong Kong Companies Ordinance, companies incorporated in Hong Kong must prepare and maintain proper accounting records and must satisfy statutory audit requirements on an annual basis.
General requirements include:
• A company’s directors must prepare financial statements for each financial year end according to the provisions of the Hong Kong Companies Ordinance.
• Holding companies are required to prepare consolidated financial statements unless the company is a partially owned subsidiary where no member requests for the preparation of consolidated accounts or all the members agree in writing to not prepare consolidated financial statements. However, the company is still required to prepare company level financial statements. If the company is a wholly owned subsidiary, either company level or consolidated financial statements must be prepared.
• The financial statements must give a true and fair view of the financial position and performance of the company unless the company falls within the reporting exemption.
• The financial statements must comply with the Hong Kong Financial Reporting Standards (HKFRS) issued by the Hong Kong Institute of Certified Public Accountants (HKICPA).
• The financial statements must be audited.
Choosing your Financial year-end date
A company’s first financial year begins on its incorporation date and ends in a date specified by the directors that falls within 18 months after the incorporation date. The following financial years will end on the anniversary of such specified date.
Subsidiaries will generally benefit from having the same financial year-end date of their holding companies. This simplifies the consolidation requirements of the companies and will provide a better representation to the stakeholders, although there is no mandatory requirement in such sense.
Other popular financial year-end dates are 31 December in accordance with the calendar year, 31 March in accordance with the financial year in Hong Kong, or quarterly closing dates such as 30 June and 30 September.
From a tax perspective, companies incorporated in Hong Kong will receive its first profit tax return (PTR) from the Inland Revenue Department 18 months after the date of incorporation. The deadlines for the filing of the annual profit tax return are determined by the company’s year-end date. Companies closing their financial year-end on 31 December are required to submit their profit tax return within mid-August each year, while companies choosing 31 March as their financial year-end date will be required to file their profit tax return within mid-November each year. Deadlines for the filing of the profit tax return is at the end of April each year for other financial year-end dates.
Introduction to the Financial Statements
The General purpose of the financial statements is to provide information about the results of operations, financial position, and cash flows of an organization. This information is important for the management to make decisions regarding the allocation of resources. At a more refined level, there is a different purpose associated with each of the financial statements. A complete set of financial statements include:
• A statement of financial position (previously known as balance sheet) as at the end of the period.
• A statement of comprehensive income (previously known as income statement) for the period.
• A statement showing either all changes in equity or changes in equity other than those arising from capital transactions with owners and distributions to owners.
• A statement of cash flow.
• Accounting policies and explanatory notes.
Shows the assets, liabilities, and equity of the financial reporting date. The purpose of the balance sheet is to provide information to the management about the status of the business as of the date listed on the balance sheet. This information is used to estimate the liquidity, funding, and debt position of an entity, and is the basis for the number of liquidity ratios.
Presents the revenues, expenses, and income incurred during the reporting period. The Income statement informs the management about the ability of a business to generate a profit. In addition, it reveals the volume of sales, and the nature of the various types of expenses, depending upon how expenses information is aggregated. When reviewed over multiple time periods, the income statement can also be used to analyse trends in the results of the company operations.
Statement of retained earnings
Presents changes in equity incurred during the financial reporting period. The report format varies but can include the sale or redeemed stock, dividend payments, and variations caused by reported profits or losses. This financial statement is the least used of the four the financial statements and is usually included in the audited financial statement.
Statement of cash flows
Presents the inflow of cash and outflow of cash which occur during the financial period. The purpose of the Statement of cash flows is to show the nature of cash receipts and cash disbursements, by a variety of categories. This can provide a useful comparison tool to the income statement, especially when the amount of income reported does not match the cash flows experienced by the firm. This statement may be presented when distributing financial statements to outside parties.
Accounting policies and explanatory notes.
The four basic financial statements may be accompanied by detailed disclosures that provide supplementary information about certain topics, as defined by the related accounting framework.
Documents that required for the Preparation of Financial Statement
To prepare the financial statements, companies will have to retain their accounting records including but not limited to:
• Sales: Invoice, Goods return note, Receipt slip, Daily receipt record
• Purchases: Invoice, Petty cash voucher, Payment slip, Check stub, Statement
• General expenses: Invoice, Payment receipt, Check stub, Payroll
• Transaction: Bank statements, Bank paid-in slip, Receipt, Check stub
• Tangible assets: Purchase and sale agreement, Invoice and receipt, Check stub
• Inventory: Purchase and sale agreement, Invoice and receipt, Check stub, Inventory lists