Understanding Hong Kong’s Accounting Standards

10 minute read

 

Hong Kong businesses must keep proper books of accounts and meet all statutory requirements to satisfy the rules of the Hong Kong Companies Ordinance.

Moreover, it’s helpful to know that the Hong Kong Institute of Certified Public Accountants (HKICPA) is in charge of overseeing the accounting profession in the city-state.

Let’s take a more in-depth look at this issue so that you can gain a good understanding of how Hong Kong accounting standards work and what you need to do to meet the grade with your own company.

Overview:

Hong Kong Financial Reporting System (HKFRS)

Hong Kong accounting standards are a number of regulations that oversee financial transactions by defining terms, determining fundamental principles, and requiring minimum disclosure levels.

Accounting standards are also known as Hong Kong Financial Reporting Standards, and they outline the requirements for transaction and event recognition, presentation, measurement, and disclosure.

For certain qualifying SMEs, the HKICPA has also rendered a Financial Reporting Standard (SME-FRS).

In 2010, the Institute introduced the HKFRS for Private Entities for Hong Kong businesses and organizations that are not subject to public scrutiny.

The HKFRS for Private Entities eliminates various accounting treatments allowed by full HKFRSs, eradicates disclosure requirements and topics that aren’t applicable to private entities in general, and simplifies measurement and recognition requirements.

Is HKFRS the same as IFRS?

To be exact, these two are not the same.

Hong Kong has adopted a Financial Reporting Standards framework (FRS) modeled on the International Financial Reporting Standards framework (IFRS) which was released by the International Accounting Standards Board (IASB).

What is HK GAAP?

HK GAAP stands for Hong Kong Generally Accepted Accounting Principles. These are a set of accounting principles, standards, and procedures that a company has to follow when it starts compiling its general purpose financial statements.

GAAP must be followed if a company distributes its financial statements outside of the company.

If a corporation’s stock is publicly traded, financial statements must also follow the Securities and Exchange Commission’s rules. Revenue recognition, balance sheet, item classification, and outstanding share measurements are all covered by GAAP.

Investors should exercise caution if a financial statement is not prepared in accordance with GAAP. In addition, when reporting financial results, some companies may use both GAAP- and non-GAAP-compliant measures.

Non-GAAP measures must be identified in financial statements and other public disclosures (press releases, for instance), according to GAAP regulations.

What is the difference between GAAP and IFRS?

The primary distinction between these two is that GAAP is a rules-based system, whereas IFRS is a principles-based system.

This difference is clear in specific details as well as interpretations. Essentially, IFRS guidelines are much less detailed than GAAP guidelines.

As a result, the IFRS theoretical principles and framework leave more room for interpretation and may frequently necessitate long disclosures on financial statements.

Also, the principles of IFRS are more logical and can better show the economics of a company’s transactions.

The biggest difference between the two deals with their inventory treatment. GAAP rules allow for last-in, first-out inventory accounting methods, while IFRS rules ban their use.

On the other hand, when it comes to the weighted average-cost method, both GAAP and IFRS allow for the first-in, first-out method (FIFO). However, GAAP doesn’t allow for inventory reversals, while FRS allows them in certain situations.

Scope of HKFRS

The Hong Kong Institute of Certified Public Accountants claims that the HKFRS is crafted to be valid for the general financial statements and other financial reporting of all profit-oriented organizations.

However, the HKFRS covers all reporting standards, accounting standards (HKAS), and interpretations issued by HKICPA.

Profitable organizations include those engaged in financial, industrial, commercial, and other similar activities.

HKFRS is not intended to apply to non-profit organizations in the private, public, or government sectors.

The main principle of HKFRS

Let’s take a look at the main principle of the HKFRS, which is called the accrual accounting basis.

Accrual accounting basis

Hong Kong’s accounting system is unique in that Hong Kong businesses need to use the accrual basis of accounting – with the exception of cash flow statements.

This means that the consequences of transactions and events that cause material accounting changes must be recognized as soon as they occur.

Financial reports generated on this basis tell individuals not only about previous transactions involving cash payments and receipts but also about future cash obligations and resources that will be received in the future.

What accounting standards are used in HK?

The HKFRS is made of 41 different accounting standards and 15 financial reporting standards.

Every standard is designed for a certain area such as the financial statement presentations, statements of cash flows, inventories, income taxes, and so on.

Let’s go through some examples.

HKAS 1: Presentations of Financial Statements

HKAS 1 lays out the overall rules for financial statements, rules for their structure, and basic conditions for their content.

HKAS 1 stipulates that, when preparing an entity’s financial statements, the management must assess the entity’s power to continue as a going concern, unless the board desires to liquidate the organization or stop trading.

When an entity fails to gather financial statements on a going concern basis, it must reveal this fact, as well as the concept on which the financial papers were generated and the issue of why the entity is not considered a going concern.

HKAS 2: Inventories

HKAS 2 lays out the accounting aspect of business for inventories.

The main problem here is how much cost can be seen as an asset and transferred forward until the related profits are recognized. This HKAS has rules and procedures which deal with this issue.

Inventories must be valued at a lower cost or net value. All expenses of purchase, conversion, and other expenses shall be included in the expenses of inventories. Inventory expenses need to be assigned using the FIFO or weighted average cost equation.

HKAS 18: Revenue

HKAS 18 determines and describes the accounting that is related to revenue coming from various kinds of events and transactions.

The main issue in accounting for revenue is specifying when to recognize revenue.

Revenue is calculated at the fair market value of the consideration receivable or received.

Revenue that comes as a result of sales will be recognized when the following conditions are met:

  1. The organization transfers the considerable risks and rewards of ownership of the goods to the buyer.
  2. The company keeps neither ongoing managerial involvement to the extent typically linked with ownership nor effective control over the products sold.
  3. The total size of profits can be accurately calculated.
  4. It is likely that the economic advantages of the transaction will go to the entity.
  5. The expenses that have already been made or are about to be made in connection with the transaction can be reliably measured.

Other HKAS

For further information and other standards, please consult the HKICPA HKFRS handbook.

 

Small guarantee company/ group

Small private company/ group

Larger (“eligible”) private company/ group

Annual revenue

< HKD 25m

< HKD 100m

< HKD 200m

Total assets

No limit

< HKD 100m

< HKD 200m

Average employees

No limit

< HKD 100

< HKD 100m

Applying HKFRS to SMEs

The HKICPA has also released a reporting framework designed specifically for SMEs. These are the SME Financial Reporting Framework (SME-FRF) and the Financial Reporting Standard (FRS) (SME-FRS). These standards were put in place to make the financial reporting process easier for SMEs.

A company incorporated in Hong Kong is valid for reporting under SME-FRF and SME-FRS if it meets the following requirements:

  1. They can be categorized according to the size requirements.
  2. They obtain at least 75% shareholder approval.

 

 

Small guarantee company/ group

Small private company/ group

Larger (“eligible”) private company/ group

Annual revenue

< HKD 25m

< HKD 100m

< HKD 200m

Total assets

No limit

< HKD 100m

< HKD 200m

Average employees

No limit

< HKD 100

< HKD 100m

 

Optional reporting exemptions may be available to Hong Kong companies restricted by guarantee and private companies.

SMEs can’t qualify if:

  1. The company is an institution authorized under the Banking Ordinance.
  2. It is licensed to perform regulated business under Part V of the Securities and Futures Ordinance.
  3. It operates on any insurance business.
  4. The company accepts loans at interest or repayable at a premium as part of its operations.

Hong Kong companies are excluded from the rule to provide a true and fair view of their financial transactions under Framework and Standard.

When there are simplified financial papers:

  1. A company may prepare its financial statements in accordance with the Framework and Standard rather than HKFRS.
  2. This means that SMEs’ financial papers are generated on a historical cost concept, with no assets or liabilities valued at fair value or put off tax.
  3. In addition, disclosure notes contain fewer details about the reporting entity’s affairs than full financial reports.

How can Sleek help?

The Hong Kong Companies Ordinance is a set of laws that every Hong Kong business needs to respect and follow. This ordinance covers the accounting and bookkeeping side of business operations. As an owner, it is your responsibility to carry out every operation legally.

We know that accounting can seem a bit difficult and the laws difficult to follow, but luckily, you can always find a helping hand at Sleek!

Sleek offers accounting and bookkeeping services so that you can sleep without a single worry on your mind. Let the experts cover this department of your business while you focus on more important tasks that impact the bottom line.

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