Guide to Accounting and Accounting Standards in Hong Kong

All companies registered in Hong Kong must ensure timely annual filing of statutory returns to the Companies Registrar, as per the provisions of the city’s Companies Ordinance (CO). This is in addition to the company’s profits tax returns which are filed to the Inland Revenue Department of the Government of the Special Administrative Region of Hong Kong. 

These compulsory statutory filings include all company’s annual returns, and changes in the company’s registered office address, and/or particulars of the company directors and the company secretary. 

If the above is not done, it may result in prosecution and fines for any person in a responsible position in the company, including the company directors and the company secretary. Notably, the fines are steep in Hong Kong, with the maximum penalty for every breach being HK$50,000. For continuing offending, a daily default fine of HK$1,000 is imposed. 

What are the Accounting Standards in Hong Kong 

In general, accounting standards in Hong Kong are known as Hong Kong Financial Reporting Standards (HKFRS). These HKFRS as prevalent now were adopted by the city in 2005 and had been modelled on the International Financial Reporting Standards, issued by the International Accounting Standards Board. These standards detail the measurement, presentation, recognition, and disclosure requirements of every transaction and event as it must be mentioned in a general-purpose financial statement of a Hong Kong-incorporated company.  

Scope of Hong Kong Financial Reporting Standards

Notably, in Hong Kong, HKFRS includes not only the Financial Reporting Standards, but also the Hong Kong Accounting Standards (HKAS) and the Interpretations issued by the Hong Kong Institute of Certified Public Accountants (HKICPA). Do note that the HKICPA is the accounting and auditing standard-setter, as well as in-charge of setting the professional ethical standards for accountants in Hong Kong. 

According to HKICPA:

• HKFRS apply to only profit-oriented entities’ general purpose financial statements and other financial reporting needs. As such, these standards doesn’t apply to the public sector or the government, or even to the non-profit activities of the private sector.
• HKFRS is applicable to all general purpose financial statements catering to the wider common information needs of creditors, employees, shareholders, and other interested parties of the public. These general purpose financial statements provide detailed information about the company’s performance, cash flow situation and financial position, which can be used in making economic decisions by the stakeholders. 
• The HKFRS as of now consists of 15 financial reporting standards, 41 accounting standards, and several interpretations. And each of these is related to a specific topic. Some examples include specifying the minimum requirements of a financial statement and how to present it, and in which format; details of inventories; statement of cash flows; corporate tax paid; revenue generated from certain sales or transactions, etc. 
• HKFRS addresses the concepts and framework underlying the information presented in general purpose financial statements of a company, which are aimed at giving a true and fair view of the entity’s financial position at any given time. 
• HKFRS uses the accrual basis of accounting, which means a transaction’s effect is recognised when it occurs and is reported in the financial statement of the period it happens. This is useful as this method informs whomsoever reads the financial statements, of not only the past transactions but also of the future obligations that the company needs to settle. 

Hong Kong Financial Reporting Standards for SMEs

On top of HKFRS, the HKICPA has also issued the SME Financial Reporting Framework (SME-FRF) and Financial Reporting Standard (SME-FRS) – for qualifying SMEs, as the standards of accounting practices. This has been done to simplify the reporting procedure for SMEs, which by definition are always short of resources.  

A company incorporated in Hong Kong qualifies for reporting under the SME-FRF and SME-FRS if it satisfies the ‘reporting exemption criteria’ (detailed below) as per section 359 of the new CO. These exemptions are mainly in the requirements for the contents in financial statements and  the directors’ report, which would normally apply if there isn’t an exemption.

SMEs qualifying for reporting exemptions in Hong Kong

Only certain companies, as detailed below, can qualify for the reporting exemption under the new CO. At a minimum, in accordance with section 359 of the new CO these companies (or groups) must be private companies (or groups) or companies (or a group of companies) limited by guarantee.

According to section 9 of the new CO, a company is limited by guarantee in Hong Kong if: 

• it doesn’t have a share capital; and
• its constitution/articles limit the liability of its members to only the amount each member undertakes to contribute to the assets of the company, if the company wounds up.

Also note – as highlighted in paragraphs 22-43 of SME-FRF which was revised in February 2019 –  from financial year beginning on or after February 1, 2019, the reporting exemption has been extended. This now also applies to groups comprising a mix of small private companies, eligible private companies and small guarantee companies, which may or may not be Hong Kong-incorporated. 

So now, there are three sets of size tests, as per the Schedule 3 to the new CO, which are used to define the reporting exemption: 

• For small guarantee companies, or a group of small guarantee companies – a company limited by guarantee qualifies as a small guarantee company if its total annual revenue does not exceed HK$ 25 million; or the aggregate annual revenue of the group must not exceed HK$25 million 
• For small private companies, or a group of small private companies – a private company qualifies as a small private company if does not exceed any two of the following: (a) total revenue of HK$100 million annually (b) by the end of the reporting period, total assets of HK$100 million (c) 100 employees
• For larger “eligible” private companies, or a group of “eligible” companies – a private company qualifies as an “eligible” private company if does not exceed any two of the following: (a) total revenue of HK$200 million annually (b) by the end of the reporting period, total assets of HK$200 million (c) 100 employees (not 200 employees)

Hong Kong Financial Reporting Standards for Private Entities

In 2010, the HKICPA issued the Hong Kong Financial Reporting Standard for Private Entities (HKFRS for Private Entities) as a financial reporting option for private entities in the city. These are much less cumbersome as compared to the HKFRSs, and were introduced to ease the reporting burden of private entities in the city.

A definition of private entities, which can benefit from these standards, is provided in Section 1 of HKFRS for Private Entities. It says private entities are those that:

• do not have public accountability – which means its debt or equity instruments are traded in a public market, and it holds assets in a fiduciary capacity for a broad group of outside stakeholders, an example of which may be banks, insurance companies, mutual funds etc.
• publish general purpose financial statements for users outside the entity such as credit rating agencies, existing and potential creditors etc.

It must be noted that according to HKFRS for Private Entities, a complete set of financial statements of an entity incorporated in Hong Kong shall include all of the following: 

• a statement of the financial position of the company on the reporting date. 
• a statement of comprehensive income and/or income, including all profits and losses incurred during the reporting period. 
• a statement of changes (if any) in company’s equity position during the reporting period.
• a statement of the company’s cash flows during the reporting period.
• company notes, which may include significant accounting policies, and/or other explanatory information.

What are the Annual Filing Requirements in Hong Kong

Related read: Infographic on Annual Filing Requirements and Deadlines for Hong Kong

Now that we know the accounting standards in Hong Kong, the question is what are statutory returns that every Hong Kong-incorporated company must file to the Companies Registry every year. Below are the major ones. 

1. 1.

   Annual Return Form NAR1 is the form to be filled and submitted, as per sections 662 and 664 of the CO, within the time frame as detailed below:

   • For a private company: this must be done within 42 days after the anniversary of the date of incorporation each year.
   • For a company limited by guarantee: this must be done within 42 days after the company’s return date, which is the date nine months after the end of the company’s accounting reference period.
2. 2.

   For change in registered office address, Form NR1 is submitted, as per sections 658 of the CO, within 15 days after the change.

3. 3.

   For change (appointment/cessation) in company secretary and company director(s), Form ND2A is to be submitted, within 15 days after the appointment or cessation as per sections 645 and 652 of the CO.

4. 4.

   For change in particulars of company secretary and company director, submit Form ND2B within 15 days after the change, as per sections 645 and 652 of the CO.

5. 5.

   Additionally, general accounting and bookkeeping compliance requirements in Hong Kong include monthly, quarterly and annual reviews; cash flow and budgeting; maintenance of accounts receivable and ledgers – general, accounts payable, fixed assets; as well as regular management reports and financial analysis.

6. 6.

   Also, as per Chapter 622 of Hong Kong’s Companies Ordinance, all businesses in the city must get their accounts audited by a certified public accountant (CPA) every year, who must be independent. These CPAs must hold a valid practising certificate from the HKICPA.

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