What Business Owners Need to Know About Accounting Standards in Hong Kong

Every commercial company in Hong Kong has to follow these national accounting standards when doing your accounting. It is not just a legal requirement. Following uniform accounting standards helps a company keep its bookkeeping clear, concise, and easy to understand.

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What does Hong Kong Accounting Standards Mean and What is its Importance?

Accounting standards are a set of rules that control how financial transactions are treated. It defines the meanings of terms, and ensures the level of information you disclose in your general financial statements.

The Accounting Standards in Hong Kong are known as Hong Kong Financial Reporting Standards (HKFRS). These standards are issued by the Hong Kong Institute of Certified Public Accountants, also referred to as HKICPA. They establish how companies have to recognize and present contracts, transactions and other financial events in their general purpose financial statements and other financial reporting.

What are the objectives of Hong Kong’s Accounting Standards?

The application of the HKFRS is to ensure that the financial statements of a company are accurately and fairly reported.  

Why do companies need to follow the Hong Kong Accounting Standards?

When financial statements of all companies working in Hong Kong are presented in a standard way, it becomes easy for anyone interested to know about your company, to find financial information they need.

These parties include company shareholders, management, creditors, contracting agents, investors, auditors etc. Following these standards makes it easier for them to make financial and economic decisions such as whether they should work for a company, buy its shares on the stock market or become its contracting agent.

However, in Hong Kong there are over 50 accounting standards, each of them cover different parts of companies’ financial activities.

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.

Which companies need to follow the Hong Kong Accounting Standards?

You’ll need to follow the HKAS if:

1. Your company is incorporated in Hong Kong

2. Your company structure includes Private Limited Companies, Sole Proprietorship, or Partnership.

Hong Kong Accounting Standards for SMEs

If you’re an SME, you generally don’t have to follow HKAS. However, you can follow the  SME Financial Reporting Framework and Standard, or SME-FRF & SME-FRS for short.

A company is considered a small private company or small guarantee company if 2 of the 3 conditions are met regarding its total annual revenue, total asset value and number of employees:

Here’s an example:

What documents do I need to prepare to comply with HKAS?

A company should prepare the financial statements  of your company’s assets, liabilities, equity, income and expenses (including gains and losses), contributions by and distributions to company owners, and cash flows.

The complete set documents you need to file is:

1. A statement of financial position as at the end of the period;
2. A statement of profit or loss and other comprehensive income for the period;
3. A statement of changes in equity for the period;
4. A statement of cash flows for the period;
5. Notes, comprising significant accounting policies and other explanatory information.

To comply with the Company Ordinance and tax rules, these are the things you'll need to do:

1. Your company’s financial statements would need to be audited by a Practicing CPA in Hong Kong every year.
2. For tax filing purposes, information you fill into the Profits Tax Return must be based on audited financial statements.
3. If your company’s gross income exceeds HK$ 2,000,000 (2 million), you’ll need to submit one set of audited financial statements. If your company's gross income is less than HK$2 million, you don't have to submit audited financial statements, but you need to keep it for 7 years for random tax investigation.

2 Examples of Accounting Standards Hong Kong Companies Need to Follow

When Preparing your Financial Statements, Refer to HKAS 1

HKAS 1 has the main requirements on how your company needs to present your financial statements, guidelines on how to structure your statements, and the minimum details and documents you will need to include in your financial statements.

• Financial statements must be a true and fair report of your company’s financial position, financial performance and cash flows of a company;
• A company has to include in its financial reports, details of when there is a change in ownership of equity.
• Use the accrual basis of accounting. This method means that your company’s transactions are recorded as they occur even when you pay or receive the money much later.
• Financial statements need to be presented annually. If you present your statements longer or shorter than one year, you would need to report why you are doing that.

When Accounting for Revenue from Contracts with Customers, refer to HKFRS 15.

HKFRS 15 standardised what is meant by revenue. Companies across all sectors will use the following guidelines:

• A contract with a customer is something that a company should account for;
• Your company should assess the product or services that you have promised your customer at the point of creating the contract
• Transactions are considered as revenue when your company has transferred a good or service you have promised to your customer. The amount of price transacted after doing so is considered the revenue.
• Assets are considered as increasing costs of entering into a contract with a customer if the business expects to recover those costs;

Summary

Hong Kong accounting standards, often referred to as HKAS or HKFRS, are established by the Hong Kong Institute of Certified Public Accountants in accordance with national legislation. They aim to provide a uniform standard of accounting for all entities legally operating in Hong Kong and whose purpose is to gain economic and financial profits.

They only apply to commercial activities, so non-profit activities held in the private, public or government sector do not need to comply with HKFRS.

There are over 50 HKFRS, each applying for different conditions and financial events that have to be included in a company’s general-purpose financial statement. The purpose of HKFRS is to make information on a company’s financial standing and cash flow easy to grasp for third parties such as investors, shareholders, creditors, government etc. If this all gets too confusing for you, remember, you don’t have to do everything yourself when running a company. Ask for help from experienced accountants in Hong Kong. We do affordable online accounting for busy founders.