Under the Hong Kong Companies Ordinance, all companies must maintain proper accounting records and comply with statutory requirements. But what exactly are Hong Kong Accounting Standards? What should merchants pay attention to? How do financial reporting standards differ for companies of various sizes? This article will break it all down for you.
Hong Kong Accounting Standards, also known as the Hong Kong Financial Reporting Standards (HKFRS), are professional accounting rules established by the Hong Kong Institute of Certified Public Accountants (HKICPA). These standards define accounting terminology, establish basic principles, and set minimum disclosure requirements. They help regulate financial transactions in Hong Kong and serve as essential guidelines for business owners.
For SMEs, the primary reason to understand HKFRS is that annual financial reports submitted to the Inland Revenue Department must comply with these standards. Familiarity with HKFRS ensures that your financial reports are accurate and compliant.
HKFRS comprises 41 accounting standards and 15 financial reporting standards, covering areas such as financial statement presentation, cash flow statements, inventory, and income tax.
HKFRS applies to all profit-oriented entities in Hong Kong, including those engaged in finance, industry, commerce, and similar activities. While largely aligned with International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB), there are some differences between the two.
In 2010, HKICPA introduced HKFRS for Private Entities (HKFRS-PE), a simplified version of HKFRS tailored for private companies without public accountability. It removes topics and disclosure requirements irrelevant to private entities. Additionally, there is the SME-FRF & SME-FRS framework designed for eligible small and medium-sized enterprises.
Key Principle: Accrual Basis
Under HKFRS, companies must use the accrual basis of accounting for all statements except cash flow statements. This means transactions and events that cause significant accounting changes must be recorded as they occur—revenues and expenses are recognized when incurred rather than when cash is received or paid. This method provides a more accurate reflection of a company’s financial position.
Which Accounting Standards Apply in Hong Kong?
⭕️HKAS 1: Presentation of Financial Statements
⭕️HKAS 2: Inventories
⭕️HKAS 7: Cash Flow Statements
⭕️HKAS 12: Income Taxes
⭕️HKAS 18: Revenue
Hong Kong Generally Accepted Accounting Principles (HK GAAP) are a set of accounting principles, standards, and procedures that companies must follow when preparing general-purpose financial statements. Publicly listed companies must also comply with Securities and Futures Commission (SFC) regulations.
The main difference between GAAP and IFRS lies in their approach—GAAP is more rules-based, while IFRS is concept-based. For example, IFRS prohibits the use of LIFO (Last-In-First-Out) inventory valuation methods, whereas GAAP allows it.
Private Companies with Public Accountability
These companies follow HKFRS to ensure detailed and fair representation of their financial status. Reports include extensive disclosures on financial statements, inventory, cash flow statements, income taxes, etc.
Private Companies Without Public Accountability
Private companies can adopt HKFRS-PE. This standard simplifies certain accounting treatments and removes irrelevant topics and disclosure requirements.
Small and Medium-Sized Enterprises (SMEs)
Eligible SMEs can use SME-FRF & SME-FRS—a simplified framework with reduced reporting requirements compared to HKFRS.
Registered companies in Hong Kong can prepare financial statements under the Small and Medium-sized Entity Financial Reporting Standard (SME-FRS) if they meet the following conditions:
| Small Guarantee Company or Group | Small Private Company or Group (must meet at least two criteria) | Larger Eligible Private Company or Group (must meet at least two criteria and obtain approval from at least 75% of shareholders with no objections) |
|---|---|---|---|
Annual Revenue | ≤ HK$25 million | ≤ HK$100 million | ≤ HK$200 million |
Total Assets | No limit | ≤ HK$100 million | ≤ HK$200 million |
Number of Employees | No limit | ≤ 100 | ≤ 100 |
*Larger eligible private companies or groups must obtain approval from at least 75% of shareholders, provided no shareholders object.
The following SMEs cannot qualify for exemptions and must prepare financial statements in accordance with the Hong Kong Financial Reporting Standards (HKFRS):
- Institutions authorized under the Banking Ordinance.
- Entities licensed to conduct regulated activities under Part V of the Securities and Futures Ordinance.
- Businesses engaged in any insurance activities, except as an agent.
- Businesses involving loans repayable with interest or premiums.
| HKFRS (Hong Kong Financial Reporting Standards) | HKFRS-PE (Hong Kong Financial Reporting Standards for Private Entities) | SME-FRF & SME-FRS (Small and Medium-sized Entity Financial Reporting Framework and Standards) | |
|---|---|---|---|
| Applicable Company Types | All profit-oriented entities in Hong Kong | Private enterprises without public accountability | Eligible SMEs |
| Eligibility Criteria | ✅ Private profit-oriented companies with public accountability ✅ SMEs that do not qualify for exemption | ✅ No public accountability ✅ No requirement to issue general-purpose financial statements to third parties | ✅ Companies meeting SME size requirements (see above) ✅ Larger eligible private companies must obtain approval from at least 75% of shareholders with no objections |
| Key Differences in Reporting Requirements | Level of Detail: ⭐️⭐️⭐️⭐️⭐️ ✅ Requires financial statements to fairly and accurately reflect financial status ✅ Most detailed requirements | Level of Detail: ⭐️⭐️⭐️ ✅ Simplified accounting treatments, recognition, and measurement ✅ Excludes topics and disclosures irrelevant to private enterprises | Level of Detail: ⭐️⭐️ ✅ Does not require financial statements to fairly and accurately reflect financial status ✅ Simplified directors’ reports ✅ Can be prepared on a historical cost basis ✅ No fair value or deferred tax valuation for assets or liabilities |
Under the Companies Ordinance, all businesses must maintain proper accounting records. Even if SMEs qualify for simplified reporting exemptions, the lack of professional accounting knowledge can make compliance challenging.
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