Accounting Standards in Hong Kong – The Principles Behind You Must Know
Hong Kong’s Accounting Standards are the rules which govern the handling of financial transactions in the country. As of January 2005, Hong Kong abides by the Financial Reporting Standards (FRS) framework, which follows the International Financial Reporting Standards (IFRS) model. Basically, this framework is under the International Accounting Standards Board (IASB).
The accounting standards in Hong Kong has another name: the Hong Kong Financial Reporting Standards (HKFRS). Further, the introduction of these standards into Hong Kong was to serve as fundamental principles which helped to define meaning for the accounting terms existing. It also demands minimum disclosure levels for the financial transactions which take place in the country. The accounting standards are there to help recognise, measure, present disclosure requirements for important general purpose financial statements. In a nutshell, the accounting standards provide an overview which is “honest and fair” of a company’s financial statements.
Overview of HKICPA
The regulating body responsible for overseeing the accounting industry in Hong Kong is the Hong Kong Institute of Certified Public Accountants (HKICPA). Any company which is incorporated in Hong Kong will be required to maintain proper accounting books. They will also be required to serve satisfactory statutory audit requirements annually, as part of the provisions expected by the Hong Kong Companies Ordinance.
Part of the principles of the accounting standards in Hong Kong is that a business entity is responsible for the preparation of their financial statements. However, this excludes the information of cash flow using the accrual basis of accounting. Under this basis, transactions and other events are only effectively recognizable when they occur within the same financial statement periods.
Any financial statements on the accrual accounting basis provide insight into past transactions, obligations of future cash payment, and the resources which represent where cash may accrue in the future.
Responsibilities of the HKICPA
The scope of responsibilities which fall under the HKICPA jurisdiction include:
- Stipulates that the HKFRS applies to general purpose financial statements and other financial reporting of all profit-oriented entities.
- HKFRS does not apply to non-profit activities in the private sector, public sector or government.
- Stipulates that all general purpose financial statements directed towards the common information needs of a wide range of users. These include shareholders, creditors, employees and the public at large.
- HKFRS includes all Hong Kong Financial Reporting Standards, Hong Kong Accounting Standards (HKAS), and Interpretations delivered by the Hong Kong Institute of Certified Public Accountants (HKICPA).
- Defines profit-oriented entities as those engaged in commercial, industrial, financial and similar activities, which include mutual insurance companies and other mutual cooperative entities which are responsible for providing dividends or other economic benefits directly and proportionately to their owners, members or participants.
According to the HKICPA, this is what a complete pile of financial documents should include:
- A statement of cash flow
- Accounting policies and explanatory notes.
- A statement of financial position (previously known as balance sheet) as at the end of the period.
- 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 comprehensive income (previously known as income statement) for the period
What Do Accounting Standards in Hong Kong Consist of?
The HKFRS has 15 financial reporting standards, 41 distinct accounting standards as well as several other interpretations. Every standard here is related to a specified topic. These topics can range from inventory, financial statements, income taxes, cash flow statements and more.
Some examples of the accounting standards in Hong Kong outlined in the HKICPAs Handbook include the following:
- Specifying the overall requirements needed for a company to present its financial statements. This includes a guideline for what the minimum requirements for submission should include.
- Specifying the treatment of inventories when it comes to accounting.
- Specifying the treatment of accounting involving revenue which arises from certain transactions and events.
For the complete guide to the standards, view the HKICPA’s HKFRS Handbook here.
Accounting Standards in Hong Kong for SMEs
Some private companies and companies limited by guarantee may be eligible for optional reporting exemption. This came into effect when the Hong Kong Companies Ordinance (Cap. 622) came into effect on 3 March 2014. This was also known as the new “CO”. However, exemptions are applicable provided these companies meet certain conditions.
The Small and Medium-sized Entity Financial Reporting Framework (SME-FRF) and Financial Reporting Standard became effective in 2014 for annual periods which began on or after 3 March 2014. These are accounting standards under the HKICPA and in accordance with section 380(4).
As per the new and revised SME-FRF, any business entity which was not a company that was incorporated under the new CO or the CO (Cap.32) was subject to any specific requirements imposed by the law of the entity’s place of incorporation. They would also be subject to its constitution. Additionally, they would qualify for the SME-FRF reporting if they met the same requirements. Such mandates fall under the new CO and section 359.
S141D is under the Company Ordinance as part of the exemption criteria for a company. Simplified reporting also applies to private groups and companies which were subsidiaries of other companies. This includes companies which were limited by guarantee if they fell within the new size tests. For larger private companies, they must have at least 75% shareholder approval with no objections.
Are There Hong Kong Companies Not Permitted for Reporting Exemption?
Yes, the private companies below will not be eligible for reporting exemption in Hong Kong:
- Any business entity which is an institution that carries out banking related business matters by the Banking Ordinance.
- Any business entity which conducts insurance business matters other than a sole agent.
- A business entity which is under Part V of the Securities and Futures Ordinance to carry on a regulated business.
- Any entity which accepts (by way of business or trade) monetary loans at interest or repayable premium. This excludes terms which involve the issue of other securities or debentures.
For a complete and detailed overview of the accounting standards in Hong Kong related to SME-FRS, refer to the HKICPA’s SME-FRS.