As one of the two SARs of China, Hong Kong enjoys the right to develop its own accounting standards rather than applying the relative standards of mainland China.
The Hong Kong Institute of Certified Public Accountants (HKICPA) is the only organization authorized by law to promulgate financial reporting and auditing standards for professional accountants in Hong Kong.
What is the Hong Kong Financial Reporting Standard?
The accounting standards of Hong Kong are known as the Hong Kong Financial Reporting Standards (HKFRS), which have been fully converged with the International Financial Reporting Standards (IFRS). According to the HKICPA, HKFRS is designed to apply to general-purpose financial statements and other financial reporting of all profit-oriented entities.
The HKICPA issued the Hong Kong Financial Reporting Standard for Private Entities (HKFRS for Private Entities) as a financial reporting option for private entities to relieve the reporting requirements under full HKFRS. Section 1 of HKFRS for Private Entities presents the qualifying criteria for applying this standard.
Entities are not mandated to adopt this standard, even if eligible. This means that such eligible entities can apply for the full HKFRS if they wish.
An additional standard applies to small and medium-sized entities, the Hong Kong Small and Medium-sized Entity Financial Reporting Framework and Financial Reporting Standard (SME-FRF & SME-FRS). This standard is not mandatory. The qualifying criteria are set out in Division 2 of the Hong Kong Companies Ordinance (Cap. 622) and highlighted in Paragraphs 22-43 of this standard.
Scope of HKFRS
According to the Hong Kong Institute of Certified Public Accountants, the HKFRS is designed to be applicable to the overall financial statements and other financial reporting of profit-oriented entities. It encompasses all reporting standards, accounting standards (HKAS), and interpretations issued by the HKICPA.
The scope of HKFRS extends to profit-oriented organizations involved in financial, industrial, commercial, and related activities. It is not intended to be applicable to non-profit organizations operating in the private, public, or government sectors.
Accrual basis of accounting
One of the fundamental principles of accounting standards in Hong Kong is that entities should prepare their financial statements, excluding cash flow information, using the accrual basis of accounting.
According to this basis, the impact of transactions and other events should be recognized when they occur and reported in the financial statements of the relevant periods. Financial statements prepared under the accrual basis of accounting provide users with information about past transactions involving cash inflows and outflows, future cash obligations, and expected cash inflows.
Standards of HKFRS
The HKFRS comprises a set of 41 distinct accounting standards, 15 financial reporting standards, and several interpretations. Each standard addresses a specific topic related to financial statement presentation, inventory accounting, cash flow reporting, income taxes, and more. The HKICPA's HKFRS Handbook includes various standards.
Some standard examples are below:
HKAS 1: Presentation of financial statements
Hong Kong Accounting Standard 1 Presentation of Financial Statements (HKAS 1) outlines the general requirements for financial statement presentation. It provides guidelines for the structure and minimum content of financial statements. Some key points from HKAS 1 include:
- Management of an entity, when preparing financial statements, must assess the entity's ability to continue as a going concern unless liquidation or cessation of trading is intended. If financial statements are not prepared on a going concern basis, the facts must be disclosed along with the basis and reason for not considering the entity a going concern.
- Except for cash flow information, financial statements should be prepared using the accrual basis of accounting.
- Offsetting of assets and liabilities or income and expenses is generally not allowed unless required or permitted by a HKFRS.
- A complete set of financial statements (including comparative information) should be presented at least once a year.
HKAS 2: Inventories
Hong Kong Accounting Standard 2 Inventories (HKAS 2) specifies the accounting treatment for inventories. The standard addresses the determination of cost to be recognized as an asset and carried forward until revenues related to the inventories are recognized. Below are some of the main actions contained in HKAS 2:
- Inventories should be measured at a lower cost and net realizable value.
- The cost of inventories should include all purchase costs, conversion costs, and other costs incurred in bringing the inventories to their present location and condition.
- The cost of inventories can be assigned using the first-in, first-out (FIFO), or weighted average cost formula.
HKAS 18: Revenue
Hong Kong Accounting Standard 18 Revenue (HKAS 18) outlines the accounting treatment for revenue arising from specific transactions and events. The key consideration in revenue recognition is determining the appropriate timing for recognition. Some important points include:
- Revenue should be measured at the fair value of the consideration received or receivable.
- Revenue from the sale of goods can be recognized when certain conditions are met, such as the transfer of significant risks and rewards of ownership to the buyer, absence of continuing managerial involvement or effective control over the goods sold, reliable measurement of revenue and associated costs, and probability of economic benefits flowing to the entity.
Financial Reporting Standards for SMEs (SME-FRS)
The HKICPA has introduced a specialized reporting framework tailored for small and medium-sized enterprises (SMEs). This framework comprises the SME Financial Reporting Framework (SME-FRF) and the Financial Reporting Standard (FRS) (SME-FRS). These standards aim to simplify the financial reporting process for SMEs.
|
|
Small guarantee company/ group |
Small private company/ group |
Larger (“eligible”) private company/ group |
|
Annual revenue |
< HK$25 million (US$3,197) |
< HK$100 million (US$12,788) |
< HK$200 million (US$25,577) |
|
Total assets |
No limit |
< HK$100 million (US$12,788) |
< HK$200 million (US$25,577) |
|
Average employees |
No limit |
< HK$100 million (US$12,788) |
< HK$100 million (US$12,788) |
To be eligible for reporting under SME-FRF and SME-FRS, a company incorporated in Hong Kong must follow the categorization based on size requirements; and obtain a minimum of 75 percent shareholder approval.
However, certain conditions prevent SMEs from qualifying for these exemptions:
- The company is authorized as an institution under the Banking Ordinance.
- It holds a license for regulated business activities under Part V of the Securities and Futures Ordinance.
- The company engages in insurance business operations.
- It accepts interest-bearing loans or loans repayable at a premium as part of its operations.
It should be noted that Hong Kong companies are exempted from the requirement of providing a true and fair view of their financial transactions under the Framework and Standard.
In some cases, there are simplified financial papers:
- A company can prepare its financial statements according to the Framework and Standard instead of using HKFRS.
- This means that SMEs' financial statements are based on the historical cost concept, without valuing assets or liabilities at fair value or deferring taxes.
Furthermore, the disclosure notes in these simplified financial statements provide fewer details about the reporting entity's affairs compared to full financial reports.
