Understanding Hong Kong Accounting Standards

Hong Kong Accounting Standards are a set of rules that regulate all financial transactions in Hong Kong and outline important accounting terms and conditions.

All companies incorporated in Hong Kong are to abide by these provisions and maintain proper accounts and meet statutory audit requirements.

These accounting standards are governed by the Financial Reporting Standards (FRS) which is based on the International Financial Reporting model (IFRS) established by the International Accounting Standards Board (IASB).

These standards were introduced to highlight the fundamental principles that define Hong Kong accounting terms and clarify their scope to ensure fairness and honesty in a company’s financial statements.

What are Hong Kong accounting standards?

There are 41 accounting standards and 15 financial reporting standards set out by the HKFRS along with other statutory interpretations.

Each standard represents a particular topic such as financial statements, cash flow statements, inventory, and taxes, to name a few. 

An overview of three important Hong Kong Accounting Standards (HKAS) is provided below.

How is accountancy regulated in Hong Kong?

The Hong Kong Institute of Certified Public Accountants (HKICPA) is the professional body responsible for regulating accountancy in Hong Kong and issued the updated HKFRS in January 2005.

The HKFRS outlines 41 accounting standards and 15 financial reporting standards that govern the accountancy profession in Hong Kong.

All companies are required to provide financial statements.

A financial statement is a record or a collection of reports that show the financial performance and business activities of a company or business entity.

Financial statements based on accrual accounting summarize all past transactions, and any future cash payment obligations and highlight where cash might accrue in the future.

These statements include the provision of a balance sheet or a statement of financial position, a statement of comprehensive income/a profit and loss account, a statement of change in equity or financial capital, and the auditor’s report along with additional explanatory notes and accounting policies.

Types of  Accounting Standards in Hong Kong

Hong Kong Accounting Standard 1 (HKAS 1) – Presentation of financial statements

HKAS 1 outlines the requirements regarding preparing and presenting financial statements by a business entity in terms of its structure and content.

• The management is required to assess the entity’s ability to continue as a going concern unless they intend to stop trading and liquidate the entity.
• Financial statements excluding cash flow information are required using the accrual basis of accounting.
• Unless permitted by the HKFRS an entity cannot offset its assets and liabilities or income and expenses.
• A complete set of financial statements is required at least once a year.

Hong Kong Accounting Standard 2 (HKAS 2) – Inventories

HKAS 2 outlines the provisions regarding the accounting standards for inventories in terms of the amount of cost that is to be recognized as an asset and how they are to be carried forward.

• Inventories are to be calculated and measured at the lower cost of and net realizable value.
• The cost of inventories must include the cost of purchases, the cost of conversions, and any other costs incurred that contribute to the inventory’s present location and condition

Hong Kong Accounting Standard 18 (HKAS 18) – Revenue

HKAS 18 outlines the accounting standards of revenue earned from particular types of business transactions and requirements regarding when revenue is to be recognized.

• Revenue must be measured at the fair value of the consideration (received or receivable).
• Revenue generated from the sale of goods can only be recognized when the following requirements are met;
• The significant risks and rewards of ownership of goods have been transferred from the entity to the buyer.
• The entity has no continuing managerial involvement in terms of ownership and control over the goods sold.
• The amount of revenue is calculated reliably.

Learn more about HKICPA’s financial reporting standards

What is the scope of the HKFRS?

The HKFRS only applies to the general purpose financial statements and various means of financial reporting of all profit-oriented business entities.

All profit-oriented entities have been defined as those which participate in commercial and financial transactions.

This includes mutual entities such as insurance companies that distribute monetary benefits to their recipients.

Therefore, the HFRS does not apply to any non-profit activities in both the private and public sectors or those carried out by the government.

Lastly, the general purpose financial statements apply to the information of different stakeholders such as creditors, employees, and shareholders as well as the public.

What about SMEs?

In some circumstances, companies limited by guarantee and private companies are eligible for optional reporting exemption under the new Companies Ordinance as of March 2012.

The Small and Medium-sized Entity Financial Reporting Framework (SME-FRF) and the FRS came into effect in 2014.

According to the new SME-FRF, any entity that is not a company incorporated under the new Companies Ordinance as of March 2012 is subject to specific conditions under the jurisdiction of the place of its incorporation.

Companies are also excluded from the reporting exemption if they do not meet certain requirements.

Private companies are not eligible for reporting exemption if:

• The company is authorized by the Banking Ordinance for banking business.
• The company is licensed to perform regulated business activity under the Securities and Future Ordinance Part V
• The company carries out insurance business (excluding business carried out through an agent)
• The company accepts loans at interest or repayable at a premium through the business (excluding terms that involve debentures and securities).

Find out more on the complete guide to accounting standards for SME-FRS in Hong Kong.

Final words

Here is what you should always have in mind:

• Accounting standards are a set of rules that regulate financial transactions and define important accounting terms and conditions.
• The Hong Kong Institute of Certified Public Accountants (HKICPA) is the professional body responsible for regulating accountancy in Hong Kong.
• There are 41 accounting standards and 15 reporting standards that govern accountancy in Hong Kong.
• The HKFRS only applies to general-purpose financial statements and financial reporting of all profit-oriented entities
• Private companies are eligible for optional reporting exemption if they meet certain requirements.

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FAQs

What are Hong Kong accounting standards?

Hong Kong accounting standards are a set of guidelines and regulations that govern how businesses operate in Hong Kong. These standards are designed to ensure that financial information is consistent, accurate, and transparent for individuals including investors, lenders, and regulators.

How do Hong Kong accounting standards differ from international accounting standards?

Hong Kong accounting standards consist of some key differences, such as requiring companies to disclose more information about related party transactions than international standards.

Moreover, Hong Kong accounting standards offer certain areas such as the treatment of research and development costs with more flexibility.

What is the penalty for non-compliance with Hong Kong accounting standards?

Non-compliance with Hong Kong accounting standards can result in penalties such as fines or reputational damage.

In certain cases, this can lead to legal action or criminal charges.