Hong Kong Accounting Standards (HKAS)
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As the name suggests, Hong Kong Accounting Standards are a framework of rules governing how financial transactions are handled in the country. The Financial Reporting Standards (FRS) framework is applicable in Hong Kong since January 2005 under the International Accounting Standards Board (IASB). The FRS is based on the International Financial Reporting Standards model.
Hong Kong accounting standards are also known as the Hong Kong Financial Reporting Standards (HKFRS). These standards serve as fundamental principles that define the meaning for the most common accounting terms. HKFRS includes Hong Kong Financial Reporting Standards and Hong Kong Accounting Standards.
The latest version of the HKFRS came into effect in January 2005. The Hong Kong Institute of Certified Public Accountants is responsible for issuing the HKFRS that comprises 41 accounting standards, several interpretations, and 9 financial reporting standards.
It also demands minimum disclosure levels for transactions within the country. The Hong Kong accounting standards provide a fair overview of the financial statements of the company.
Who regulates the accounting industry
The Hong Kong Institute of Certified Public Accountants is the regulating body that oversees the accounting industry within the jurisdiction. A Hong Kong incorporated company must maintain proper accounting books and annually serve satisfactory statutory audit requirements.
A business entity must prepare its financial statements, excluding the cash flow details using the accrual basis of accounting. Transactions are identifiable only during the same financial statement period.
Financial statements are a record of past transactions on the accrual accounting basis. They also give insight into the obligations of cash payment in the future and the resources where cash could accrue.
According to the HKICPA, financial documents include:
In simple words, accounting standards are a set of rules governing the treatment and handling of financial transactions.
Scope of HKFRS
According to the HKICPA, HKFRS is designed for application to general purpose financial statements directed toward the needs of a range of users. HKFRS is not designed for non-profit activities.
Financial statements provide information about the financial performance and position and cash flow of an entity. Typically, a comprehensive set of financial statements includes a statement of:
What do Hong Kong accounting standards consist of
The HKFRS is a combination of 41 distinct accounting standards, 15 financial reporting standards, and different interpretations. As per the revised SME-FRF, any entity incorporated under the new Companies Ordinance is subject to the constitution and requirements imposed by the law of the land, that is, the place of incorporation.
Hong Kong accounting standards for SMEs
Some companies limited by guarantee and private companies may qualify for optional reporting exemption. The new Companies Ordinance came into effect on 3 March 2014. Exemptions are applicable only for companies that meet certain conditions.
A private company does not qualify for the reporting exemption if:
Other exemptions include simplified financial statements to give a fair view of transactions. These statements are exempt that are prepared under the HKICPA SME-FRF and SME-FRS. These statements exclude assets or liabilities at fair value and are prepared on a simplified historical cost basis.
Other Hong Kong incorporated companies must prepare financial statements that give a fair view of their business and comply with HKFRS.
With 22 accounting standards, the SME-FRS are simplified accounting principles that cover certain subjects, such as accounting policies, presentation of financial statements and lease and excludes some topics. These include business review, segment reporting, and interim financial reporting.
Hong Kong accounting standard 2 for inventories
HKAS 2 lays down the accounting standard for inventories. When it comes to accounting for inventories, the cost is recognised as an asset. The amount is carried forward as long as it is easier to recognise the related revenues.
HKAS 2 specifies how the cost is determined and recognised as expenditure.
According to HKAS 2, the cost of inventories includes all costs of purchase, conversion and transportation cost involved in bringing inventories to the current location.
HKAS 18: Revenue
As per the Hong Kong Accounting Standard 18 Revenue, revenue is determined at the value of consideration. The revenue from the sale is recognised when all of the following conditions are met:
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