Your Guide to Hong Kong Accounting Standards

With its strategic location, stable political environment, and strong economy, Hong Kong has most elements conducive to doing business.

However, like most prudent entrepreneurs, you understand that accounting standards are different in Hong Kong. And even a minimal difference can have a substantial impact on your business.

This article will examine the Hong Kong Accounting Standards (HKAS), the Hong Kong Financial Reporting Standards (HKFRS), its scope, and the factors you should consider as you plan to expand your business in HK SAR.

Table of Contents

Hong Kong Accounting Standards and Financial Reporting Explained

Thus, in 1973, the Professional Accountants Ordinance established the Hong Kong Institute of Certified Public Accountants (HKICPA) to regulate the accountancy profession in HK SAR.

The HKICPA issued the Hong Kong Accounting Standards, which serve as a guideline for treating and reporting financial transactions.

What are accounting standards?

Accounting standards refer to standardized policies and principles that regulate the financial accounting practices in a particular jurisdiction. These standards specify how to recognize, measure, present, and disclose business transactions and events.

The Accrual Basis of Accounting

The Hong Kong Accounting Standards follow the accrual basis of accounting. This accounting principle requires entities to record revenues and expenses as they occur, rather than when cash is received or made.

The accrual basis of accounting is crucial as it allows the presentation of information about transactions and events as they occur. By recording transactions through the accrual method, you are in a better position to keep track of business activities and cash flows.

Importance of the Hong Kong Accounting Standards

The Hong Kong Accounting Standards, otherwise known as Hong Kong Financial Reporting Standards (HKFRS), specify the fundamental principles in treating financial transactions. With the application of the HKFRS, a financial statement will have an accurate and fair view that makes them helpful to users.

The benefits of accounting standards include:

Promoting uniformity in accounting. The establishment of accounting standards ensures business transactions’ uniform and standard treatment.

Improves reliability of financial reports and statements. The accounting standards apply to the entire financial aspect and help banks, investors, and regulatory agencies access relevant information for better decision-making.

Prevents fraud. Certified Public Accountants and other preparers of financial reports will have to adhere to specific accounting principles. With the standards, it becomes difficult to manipulate or misrepresent financial information.

Increases comparability. Users of financial statements are in a better position to examine, compare and analyze the financial performance of their business.

While the HKFRS allows varying treatment of business transactions and events, its main objective remains the same. That is, to ensure that transactions and events are accounted for similarly and for unlike transactions to be reported differently.

The key source of Generally Accepted Accounting Principles (GAAP). The Hong Kong Financial Reporting Standards serve as a mandatory source of GAAP.

Serve as an authoritative guidance. The volatile business environment often creates instances of new financial reporting issues not explicitly addressed in the HKFRS arise. Still, the HKFRS serves as a base of interpretation of how these issues should be treated in the financial statements and reports.

As per the Professional Accountants Ordinance, the HKICPA is the only authorized body to issue financial reporting and auditing standards for accounting professionals in Hong Kong.

Scope of the Hong Kong Financial Reporting Standards

According to the HKICPA, the HKFRS applies to general purpose financial statements and other reporting of all types of profit-oriented firms.

These entities include, but are not limited to:

• businesses engage in commercial, industrial, and financial services regardless of their business formation
• mutual insurance companies, and other mutual cooperatives

The HKFRS is designed for profit-oriented entities, but even non-for-profit organizations may find these accounting standards useful and appropriate.

The HKFRS principles apply to general-purpose financial statements. The end goal of financial statements is to provide common but reliable information about the entity’s financial position and performance for all types of users.

Here is a complete set of financial statements:

1. the balance sheet, also referred to as a statement of financial position
2. the income statement, also referred to as a statement of comprehensive income
3. statement of cash flows
4. statement showing the changes in equity other than changes associated with capital transactions and distribution to owners
5. accompanying notes,

The financial statements of entities operating in HK must include an explicit and unreserved statement in the notes to the financial statements that all comply with the HKFRS.

Remember that the Hong Kong Accounting Standards prohibit companies from describing that their financial statements comply with the HKFRS unless they indeed are.

The HKFRS Standards

The HKFRS consist of accounting standards, financial reporting standard, and interpretations. Here are examples of these standards:

HKAS 1: Presentation of financial statements

The HKAS 1 describes the general requirements for financial statements, their general content, and structure.

As per the guideline:

• Unless the plan is to liquidate the business, management is required to assess the ability of the entity to continue as a going concern. If the entity cannot be presented as a going concern, the preparer has to indicate such.
• The accrual basis of accounting should be used in preparing financial statements.
• Further, the complete set of financial information should be presented at least once a year.
• Except when the HKFRS so requires or allows, the entity shall not offset accounts. For example, offsetting assets from liabilities are not allowed.

HKFRS 16: Leases

The HKFRS 16 defines the principles associated with recognizing, measuring, presenting, and disclosing leases in financial statements and reports.

The objective of this standard is to ensure that accurate and relevant information is available to substantiate the lease agreements. The information allows the financial statement users to determine the impact of the lease transaction on the entity’s financial position, performance, and cash flow.

HKAS 18: Revenue

The HKAS 18 lays out how to recognize and record revenue arising from transactions and events. The primary concern in accounting for revenue relates to the timing of revenue recognition.

The HKAS 18 sets out that revenue is to be recognized and recorded at the fair value of the consideration received. The scope of HKAS 18 includes the sale of goods, rendering of services, and use by others of assets resulting in interest, royalties, and dividends.

HKAS 2: Inventories

The HKAS 2 describes how inventory accounts should be treated in the financial statements.

One of the primary concerns associated with accounting for inventories is the amount to be recognized and be carried forward to the financial statements.

The HKAS 2 presents that:

• inventories shall be valued and presented at a lower cost and net realizable value;
• investor costs include purchase cost, conversion cost, and other costs incidental to bringing the goods to their current condition,
• either the first-in, first-out or weighted average cost formula shall be used to assign a cost to inventories.

You can refer to the complete set of Hong Kong Financial Reporting Standards in this link.

Financial Reporting Standards for Small and Medium-Sized Entity (SME-FRS)

There are more than 340,000 small and medium enterprises in Hong Kong. According to the Trade and Industry Department, SMEs constitute about 98% of business establishments in HK SAR.

With the large number of SMEs in Hong Kong, it became imperative to create legal and other policies that have a bearing on the growth and development of these businesses. In line with this goal, the HKICPA issued the SME Financial Reporting Framework to simplify the reporting requirements for SMEs.

The SME-FRS is tailored to the HKFRS, except for omitting topics that are generally not applicable to an SME. These topics include interim financial reporting, business review, and segment reporting.

How to Qualify as an SME-FRS?

An entity incorporated by the Hong Kong Companies Ordinance is entitled to apply as an SME-FRS, provided that it meets the criteria for reporting exemption presented in Section 359 of the new Companies Ordinance.

Here are the SMEs that qualify to get an optional reporting exemption in Hong Kong:

However, some companies are not allowed to prepare their financial statements under the SME-FRS guidelines. Some of these entities include:

• the entity operates a banking business and has a valid banking license through the Banking Ordinance
• the entity operates as a corporation and carries a license under Part V of the Securities and Futures Ordinance
• the entity operates an insurance business
• the entity (other than a banking institution) loans money at interest.

FAQs

What are general purpose financial statements?

The financial statements of Hong Kong incorporated companies and other business entities in HK SAR are required to prepare general-purpose financial statements.

These statements are designed to meet the needs of a wide range of users, such as the owners, investors, creditors, and regulatory agencies.

General-purpose financial statements include the profit and loss statement, balance sheet, cash flow, and statement of changes in equity.

What accounting standard is used in Hong Kong?

Hong Kong follows the Financial Reporting Standards framework, tailored to the International Financial Reporting Standards model, a framework under the International Accounting Standards Board.

Wrap Up

Now that you are familiar with the Hong Kong Accounting Standards, you are better prepared to operate and manage the financial aspect of your business in Hong Kong.

Click here if you want to explore ideas about setting up a business in Hong Kong. You can learn about taxes, how to open a Hong Kong corporate bank account and choose a director for your business.