Hong Kong Financial Reporting Standards (HKFRS): A Comprehensive Guide for Businesses

Accounting standards are a set of rules that guide how to record, measure, present and disclose financial information, ensuring true and fair view of financial statements.

In Hong Kong, the Hong Kong Financial Reporting Standards (HKFRS) system was established to prescribe how to handle significant financial transactions.

The Hong Kong Institute of Chartered Certified Accountants (HKICPA) has issued:

• Financial Reporting Standards SME-FRS dedicated to small and medium businesses.
• HKFRS for Private Entities (effective from 30/04/2010) for private companies without public accountability.

Compared with the full HKFRS, the HKFRS for Private Entities has:

• Eliminate some complex accounting methods.
• Reduce unnecessary disclosure requirements.
• Simplify regulations on recording and measurement, making it easier for private enterprises to apply.

Thanks to this system of standards, companies in Hong Kong can comply with accounting regulations appropriate to their size and operating model.

Hong Kong Accounting Standard 1: Presentation of Financial Statements (HKAS 1) sets out the overall requirements and rules for the presentation of financial statements, guidance on structure and minimum requirements for content.

According to HKAS 1:

• When preparing financial statements for an entity, management must make an assessment of the entity's ability to continue as a going concern unless management intends to liquidate or liquidate the entity. When an entity does not prepare financial statements on a going concern basis, it must disclose this fact, along with the reasons why the entity is not considered to be a going concern.
• An entity is responsible for preparing financial statements, except for information on the statement of cash flows, and must apply the accrual basis of accounting.
• An entity does not offset assets and liabilities or income and expenses, except as required or permitted by HKFRS.
• An entity shall present a complete set of financial statements (including comparative information) at least once a year.

Inventories (HKAS 2) specifies the accounting treatment for inventories. One of the key issues raised in accounting for inventories is the amount of cost to be recognised as an asset until the related revenues are recognised. HKAS 2 provides guidance on the determination of costs, including any write-down to net realizable value. It also provides guidance on the cost accounting methods used to assign inventory costs.

According to HKAS 2:

• Inventories are measured at the lower of cost and net realizable value.
• The cost of inventories includes purchase costs, conversion costs and other costs incurred in bringing the inventories to their present location and condition.
• The cost of inventory is calculated using the First in first out (FIFO) or weighted average method.

Hong Kong Accounting Standard 18 Revenue (HKAS 18) sets out the accounting rules for revenue arising from certain types of transactions and economic activities. The main issue raised in HKAS 18 is how to determine when to recognise revenue.

According to HKAS 18:

• Revenue is measured at the fair value of the consideration received or receivable.
• Revenue from sales is recognized when all of the following conditions are satisfied:
• Entities transfer to the buyer the risks and rewards of ownership of the goods;
• Entities that no longer hold management rights related to the ownership of goods or associated with ownership or control of goods sold;
• Revenue can be measured reliably
• It is probable that the economic benefits from the transaction will flow to the entity; and
• The costs incurred or to be incurred in respect of a transaction can be measured reliably.

In addition to the new CO, Hong Kong also adopted the Small and Medium-Sized Entities Financial Reporting Framework (SME-FRF) and the Financial Reporting Standard (FRS). These standards apply to accounting periods beginning on or after 03 March 3. The SME-FRF and FRS are issued by the Hong Kong Institute of Certified Public Accountants (HKICPA) and are consistent with section 2014(380) of the new CO. Companies that qualify for exemption from reporting under the new CO may apply this set of accounting standards.

Under the SME-FRF, an enterprise can apply the SME financial reporting framework if it satisfies the same requirements as Hong Kong companies under the new section 359 CO. Specifically:

• If a company is incorporated under a new CO or a predecessor CO (Cap. 32), it must satisfy the criteria specified in section 359 to be exempted from reporting.
• If the company is not established under the above two ordinances, it must comply with the laws and constitution of the country where the enterprise is established.

A company established under a new CO or a predecessor CO may be exempt from financial reporting if it meets one of the following conditions:

1. A private company that has no subsidiaries and is not a subsidiary of another company:

• Satisfy the conditions specified in section 359(1)(b) of the new CO (formerly section 141D of the predecessor CO).
• Not included in the list of companies excluded from reporting exemption.
• 100% written consent of shareholders each year.

2. Three other groups of businesses may be exempted from reporting if they meet specific conditions:

• Private companies belong to a private group.
• Private companies are subsidiaries of another company.
• Companies/groups limited by guarantee.

In some cases, to be eligible for reporting exemption, a company must meet size requirements and obtain at least 75% shareholder approval, with no shareholder objections.

Comparison table of business classification criteria:

The SME-FRS is a simplified version of the Hong Kong Financial Reporting Standards (HKFRS), designed to be suitable for small and medium-sized enterprises. Some complex topics in the HKFRS have been removed because they are not relevant to the operations of SMEs.

SME-FRS includes 22 accounting standards, focusing on important contents such as:

• Presentation of Financial Statements.
• Accounting Policies.
• Leases.

Some topics such as interim financial reporting, segment reporting, business reviews are not covered in SME-FRS to simplify financial reporting for SMEs.

Hong Kong adopts Hong Kong Financial Reporting Standards (HKFRS), which are consistent with International Financial Reporting Standards (IFRS).

All companies registered in Hong Kong, including small and medium enterprises (SMEs), unless exempted.

Yes. All limited liability companies must have their financial statements audited by a licensed auditor.

Financial statements must include a Balance Sheet, Income Statement, Cash Flow Statement, and Notes to the Financial Statements.