The Companies Ordinance clearly states that all Hong Kong companies are expected to keep accurate books of account. They are also expected to satisfy annual statutory audit requirements. The Hong Kong Institute of Certified Public Accountants (HKICPA) determines the standards and regulations foraccounting in Hong Kong. In 2005, this jurisdiction adopted the Financial Reporting Standards (FRS). These standards were modeled from the International Financial Reporting Standards (IFRS). You need a detailed understanding of the Hong Kong financial reporting standards to run a successful business in this state.
We’ll take a closer look at the accounting standards of this jurisdiction. This piece will reveal what your company should do to meet the current standards.
What is the Hong Kong Financial Reporting System?
The Hong Kong financial reporting system refers to the group of standards thatcontrol financial transactions in the region.These standards affect the definition of terms, fundamental principles, and minimum disclosure levels.
This system contains Hong Kong financial reporting standards for different categories of organizations. They determine actions such as transaction requirements, recognition, measurement, presentation, and disclosure.
Hong Kong financial reporting system encompasses financial reporting standards for SMEs, financial reporting standards for private entities, and annual filing requirements.
Each set of laws is designed to suit the peculiarities of the organizations they cover. For instance, Hong Kong financial reporting standards for private entities eliminate disclosure requirements and topics that do not apply to private companies.
Hong Kong Financial Reporting Standards
Simply put, accounting standards determine the treatment and definition of financial transactions. Accounting standards vary according to jurisdiction, and the laws applicable in Hong Kong are called Hong Kong financial reporting standards (HKFRS).
HKFRS determines measurement, recognition, and disclosure requirements for certain transactions and events. These laws ensure uniformity in the general-purpose financial statements of different organizations.
When these standards are applied correctly, they give a true and fair view of what’s happening in the business. Hence, they are treated with all seriousness.
There are sanctions for failure to comply with different aspects of the Hong Kong financial reporting standards. Penalties depend on the extent of the offense.
Scope of Hong Kong Financial Reporting Standards
- Hong Kong financial reporting standards (HKFRS) include all financial reporting standards, Hong Kong Accounting Standards (HKAS), and any Interpretations Issued by the Hong Kong Institute of Certified Public Accountants (HKICPA).
- The HKICPA has declared that HKFRS applies to general-purpose financial documents and financial reporting actions of profit-making entities in that category.
- Profit-making entities are those in financial, industrial, commercial, and other related activities. This classification also includes mutual cooperative entities and mutual insurance companies that offer dividends and other economic benefits to their members or owners.
- Hong Kong financial reporting standards do not apply to non-profit operations in the private and public sectors.
- HKFRS is designed to focus on financial statements that provide the informational needs of several users, such as shareholders, employers, investors, and members of the public.The purpose of these financial statementsis to provide crucial details on the financial performance and cashflows of an organization to aid decision-making.
- General purpose financial statements that are highlighted by the HKFRS include; statement of financial position (also called balance sheet), statement of comprehensive income (income statement), statement of changes in equity, statement of cashflow, and any essential account policies. Note that all financial statements are designed to cover information for an accounting year. Because they cover details only for a specific period, each of them is comparable.
Hong Kong Financial Reporting Standards for SMEs
As mentioned earlier, Hong Kong financial reporting standards are designed for different categories of organizations. There are unique accounting laws for SMEs. They are called the SME Financial Reporting Framework.
These standards simplify theaccounting procedure for SMEs.They’ll produce comprehensive financial statements despite the shortage of their resources. All Hong Kong-incorporated companies qualify for the SME Financial Reporting Framework and Standards.
SMEs are answerable to the financial reporting standards if they fall under the ‘reporting exemption criteria’ in section 359 of the new Companies Ordinance. These exemptions would eliminate certain requirements for directors’ reports and financial statements.
What SMEs Qualify for Reporting Exemptions in Hong Kong?
Only a few companies qualify for reporting exemptions in Hong Kong. The new Companies Ordinance clearly defines these firms.
According to section 359 of the new Companies Ordinance, reporting exemptions only apply to private companies (or groups) or companies (groups of companies) limited by guarantee.
Furthermore, the new Companies Ordinance classifies the following companies as limited by guarantee:
- Companies without a share capital
- Companies whose constitution limits the liabilities of its members only to the amount of money each member has contributed to the company’s assets. These liabilities will be given up if the company liquidates.
From February 1, 2019, the reporting exemption has been extended to now include small private companies and small guarantee companies that may or may not be Hong Kong incorporated.
The new section of the Companies Ordinance redefines the categories of companies eligible for reporting exemptions. The size tests used to definethese exemptions include:
- Small guarantee companies or a group of small guarantee companies:A company can be classified as a small guarantee company if its annual revenue does not exceed HK$25 million or an aggregate of HK$25 million for a group of companies.
- Small private companies or a group of small private companies:A small private company must not generate an annual revenue that exceeds HK$100 million, have total assets of more than HK$100 million, or have more than 100 employees.
- Eligible private companies or groups of eligible private companies:An eligible private company must not have an annual revenue higher than HK$200 million, total assets higher than HK$200 million, or more than 100 employees.
Hong Kong Financial Reporting Standards for Private Entities
In 2010, the Hong Kong Institute of Certified Public Accountants released a set of regulations called HKFRS for Private Entities. This is a unique financial reporting requirement for private entities in the jurisdiction.
These standards were easier to follow than the traditional HKFRSs and allowed private entities toreport their transactions easily.Section 1 of the HKFRS for Private Entities defines private entities in Hong Kong. According to this section, private entities are:
- Companies that are not accountable to the public.
- Companies that publish general-purpose financial statements for external users, including creditors, credit rating agencies, etc.
Hong Kong financial reporting standards for private entities stipulate that any of such entitiesincorporated in Hong Kongshould produce these financial statements:
- Statement of financial position outlining your assets and liabilities for the period
- Statement of comprehensive income, outlining profits and losses during the accounting period
- Statement of changes in equity for the accounting period
- Statement of cashflow for the period
- Company accounting policies and other detailed information
Annual Filing Requirements for Hong Kong Financial Reporting Standards
Now that you’re familiar with theaccounting standardsand the company categories they apply to, it’s time to learn about Hong Kong’s annual filing requirements. Annual filing requirements are the statutory returns that all Hong Kong companies must submit to the Company Registry. These returns must be sent every year.
The annual filing requirements for Hong Kong financial reporting standards include the following:
- Annual Return Form NAR1 (stipulated by sections 662 and 664 of the Companies Ordinance) must be submitted according to the following deadlines:
- For Private Companies: This submission must be made within 42 days of the company’s anniversary date of incorporation.
- For Companies Limited by Guarantee: The submission must be made within 42 days from the company’s return date. The return day is nine months from the end of thecompany’s accounting period.
- Form NR1 (stipulated by section 658 of the Companies Ordinance) for change in registered office address must be submitted within 15 days of the change.
- Form ND2A (stipulated by sections 645 and 652 of the Companies Ordinance) for change in company secretary or director(s) must be submitted within 15 days of the new appointment or cessation.
- Form ND2B (stipulated by sections 645 and 652) for change in details of the company director or secretary must be submitted within 15 days of the change.
- General book compliance and accounting requirements and maintaining records of ledgers.
- Audit report. According to chapter 622 of the Companies Ordinance, every company must audit its accounts through an independent certified public accountant. The public accountant must be certified by the HKICPA.
How Can We Help – Our Accounting Services
This piece has shown the importance ofHong Kong financial reporting standards.Every company has to pay attention to the HKFRS to avoid infringing on compliance requirements. Strict penalties protect these requirements.
For instance, companies that fail to submit their statutory returns as at when due will be prosecuted. Any person in a responsible position for this offense, including company director(s) or secretary, will be prosecuted.
The maximum penalty for this offense is HK$50,000. Each day the offense continues, you’ll pay a daily fine of HK$1,000.
This means you’ll have to pay attention to the financial reporting standards from the company’s establishment. But it’s easier said than done, especially for newcomers in the Hong Kong public and private sectors.
So, how do you focus on running your business while maintaining reporting standards? Hire us to work with you.Premia TNCis a reliable business consultancy firm.Our team of expertswill work with your finance department to stay abreast of all essential reporting standards.
We’ll also ensure you don’t fail to submit any statutory records. We offer flexibleaccounting solutionsthat suit your business’s needs. Our team of experts will lessen your burden. You’ll have less to worry about as you push your firm toward future success.
1. Does Hong Kong Use IFRS or GAAP?
Hong Kong does not rely on International Financial Reporting Standards or Generally Accepted Accounting Principles.
Instead, this jurisdiction has developed its own standards known as Hong Kong financial reporting standards (HKRS). These standards were signed into law on January 1, 2005.
2. What is HKFRS?
Hong Kong Financial Reporting Standards are the accounting standards adopted for the private and public sectors in Hong Kong. They were created from the International Financial Reporting Standards. Private and public companies must comply with these laws or risk penalties.
3. What’s the difference between HKAS and HKFRS?
The Hong Kong accounting standards (HKAS) is not applicable to non-profit activities, whether in the public or private sector.
HKFRS are accounting standards are applied to financial statements that are used by shareholders, creditors, employees, investors, and members of the public.
4. What companies are exempt from the Hong Kong financial report standards?
The new Companies Ordinance stipulates that reporting exemptions apply to private companies or groups of private companies and companies or groups of companies limited by guarantee.
5. What are Companies Limited by Guarantee?
A company or group of companies limited by guarantee are those who do not have a share capital or whose constitution states that the liabilities of members are limited only to the amount that has been contributed to the company’s assets.
These limited liabilities will be given up upon liquidation.
6. How many HKFRS exists?
The Hong Kong financial reporting standards have 41 guidelines, 15 standards, and other accounting concepts. These standards cover several topics, including taxation, accounting details, profit and loss accounts, etc.
