An Overview of Financial Statements in Hong Kong

Financial statements are essential for understanding a company’s performance and financial health. They provide insight into what a business owns and owes, how it earns and spends, and how equity changes over time. A complete set includes:

• Balance sheet (statement of financial position)
• Income statement (profit or loss)
• Cash flow statement
• Statement of changes in equity
• Notes to the financial statements

Together, these documents form a full picture of a company’s financial condition.

Hong Kong Basics: HKFRS vs SME-FRS

In Hong Kong, companies must prepare financial statements under the Hong Kong Financial Reporting Standards (HKFRS), which are fully aligned with the International Financial Reporting Standards (IFRS).

SME-FRS Option

Certain private companies may adopt the Small and Medium-Sized Entity Financial Reporting Framework/Standard (SME-FRF/SME-FRS) if they qualify for a reporting exemption under the Companies Ordinance. Under SME-FRS, a cash flow statement is not mandatory unless voluntarily provided.

Audit Requirement

Most companies must still undergo a statutory audit in Hong Kong, even if reporting under SME-FRS. The only exception is for dormant companies, which are exempt.

Upcoming Changes

For financial periods beginning on or after 1 August 2025, Hong Kong will implement HKFRS S1 and S2 sustainability disclosure standards, aligning with IFRS sustainability reporting.

Why Are Financial Statements Important?

Financial statements help business owners, lenders, and investors assess liquidity, profitability, leverage, and trends. Consistent reporting under HKFRS or SME-FRS makes it easier to compare results across years and industries.

In Hong Kong, annual audited financial statements are crucial not only for year-over-year performance tracking but also for tax filing and regulatory compliance.

What Does a Balance Sheet Show?

In Hong Kong, companies prepare financial statements under HKFRS or SME-FRS to meet compliance requirements and provide stakeholders with reliable insights into performance and financial health. These reports are the foundation for audits, tax filings, and investor decisions. The four core statements are:

Balance Sheet (Statement of Financial Position)

The balance sheet shows a company’s financial position at a specific date. Under HKFRS or SME-FRS, items are classified as current (expected to be realized or settled within 12 months) or non-current.

Assets

• Cash and cash equivalents
• Accounts receivable
• Inventory and prepaid expenses
• Property, plant, and equipment (PPE)
• Investments (current or non-current)
• Intangible assets (patents, goodwill)

Liabilities

• Accounts payable
• Accrued expenses (e.g., wages payable)
• Notes/loans payable
• Dividends payable (if declared)
• Long-term debt

Equity

• Share capital
• Retained earnings
• Other reserves

Income Statement (Profit or Loss)

The income statement covers a period and reports revenue, expenses, and profit or loss. Companies may present:

• A single statement that includes Other Comprehensive Income (OCI)
• Two separate statements (profit or loss, and OCI)

OCI captures items like foreign currency translation differences or certain investment revaluations.

Key Ratios

• ROE = Profit ÷ Average Equity
• ROA = Profit ÷ Average Assets
• Current ratio = Current assets ÷ Current liabilities
• Quick ratio = (Cash + near-cash) ÷ Current liabilities
• Debt-to-equity = Total debt ÷ Equity

Cash Flow Statement

The cash flow statement shows how money flows through:

• Operating activities – cash from core business operations
• Investing activities – cash used for or from long-term assets
• Financing activities – cash from loans, share issues, or dividends

Statement of Changes in Equity and Notes

The statement of changes in equity explains movements in share capital, retained earnings, and reserves during the year.

The notes provide policies, accounting judgments, and breakdowns of major line items. They are essential to interpret the numbers correctly.

How to Read Financial Statements (Step by Step)

1. Check the framework: HKFRS or SME-FRS? Reporting exemption?
2. Confirm audit status: Most companies require an audit unless dormant.
3. Read the auditor’s opinion: Look for qualifications or emphasis.
4. Review notes and judgments: Accounting policies may affect interpretation.
5. Compare across periods: At least three years for meaningful trends.
6. Run ratios: Liquidity, leverage, and profitability indicators.
7. Check cash flow: Healthy companies generate operating cash, not just profit.

Limitations to Keep in Mind

• Use of estimates and accounting policies may affect accuracy.
• Intangibles like brand value or goodwill may not be fully reflected.
• Ratios must be compared with industry benchmarks.
• Always read the notes and auditor’s report for context.

Tools for Financial Analysis

• Excel, Power BI, Tableau – for ratio analysis and dashboards.
• Xero, QuickBooks Online – for Hong Kong SMEs, with built-in reporting and bank feeds.

Case Example: Turning Analysis into Action

A Hong Kong distributor has stable revenue but declining margins. Review shows:

• Shrinking net margin
• Slow receivables turnover
• High inventory tying up cash

Management shortens payment terms, revises pricing, and optimizes stock. Within three months, working capital and margins improve. This shows how analysis translates into practical business decisions.

2025 Update: Sustainability Disclosures

From 1 August 2025, Hong Kong will adopt HKFRS S1/S2. Companies will need to disclose climate and sustainability risks in line with IFRS Sustainability Standards. Businesses should start preparing now.

Conclusion

Understanding financial statements is key to running a successful business in Hong Kong. Always check whether your company reports under HKFRS or SME-FRS, confirm audit requirements, and keep an eye on the 2025 sustainability rules.

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