If your company controls one or more entities, you likely need to prepare consolidated financial statements under HKFRS 10 and Section 379 of the Companies Ordinance.
Exemptions exist, but they come with strict rules and conditions.
Consolidation helps eliminate double-counting and shows the group’s true financial position.
Even if exempt, many companies still consolidate for investor confidence, audits, or future transactions.
Special cases like foreign subsidiaries, minority interest, and SME reporting need careful treatment to stay compliant.
If your business owns other companies, you may need to prepare a consolidated financial statement. This report shows the financial position of a parent company and its subsidiaries as one single entity. It’s required under Hong Kong Financial Reporting Standard (HKFRS) 10 when a company controls one or more entities.
Control does not always mean owning more than 50% of shares. It includes having voting rights, power over operations, and exposure to returns. HKFRS 10 replaced older standards (HKAS 27 and HK(SIC)-Int 12) and has been effective since 2013.
In Hong Kong, the Companies Ordinance (CO) governs financial reporting. While HKFRS is aligned with International Financial Reporting Standards (IFRS), the Companies Ordinance prevails if there is a conflict.
Not all companies must file consolidated reports. Section 379 of the CO outlines when consolidation is required. Some private entities and SMEs may use simplified reporting under Section 359, but if your business controls subsidiaries, you likely must consolidate.
Key Components of a Consolidated Financial Statement
Below are components of a consolidated financial statement, as required by HKFRS 10 and aligned with IFRS standards.
| Component / Element | Description | Purpose / What It Shows |
|---|---|---|
| Consolidated Balance Sheet | Combines assets, liabilities, and equity of the parent and subsidiaries. Intercompany balances are eliminated. | Shows the financial position of the entire group at a specific date. |
| Consolidated Income Statement | Also called the consolidated statement of comprehensive income. Includes all revenues, expenses, gains, and losses. | Provides a group-level view of profitability for the reporting period. |
| Consolidated Cash Flow Statement | Summarizes cash inflows/outflows from operating, investing, and financing activities. Intercompany cash flows are removed. | Shows how the group generates and uses cash. Assesses liquidity and cash position. |
| Statement of Changes in Equity | Tracks changes in equity accounts like share capital, retained earnings, and reserves across the group. Includes non-controlling interest (NCI). | Reflects movements in equity and ownership structure over time. |
| Notes to Financial Statements | Includes disclosures on accounting policies, assumptions, and details of group structure and transactions. | Explains financial data. Ensures transparency and clarity for users of the statements. |
Why Consolidated Financial Statements Matter for Hong Kong Companies
- Banks, investors, and regulators expect reliable group-level data. This helps assess the full financial picture.
- Shareholders may request consolidated reports even if not required. It supports transparency, due diligence, and funding.
- Omitting required consolidation may result in a qualified audit opinion, raising concerns with the Inland Revenue Department (IRD).
- Multinational groups often report under various standards (e.g. PRC GAAP, US GAAP). Consolidation under HKFRS ensures consistency.
- Consolidated audits help evaluate performance and structure. Many companies consolidate voluntarily to support long-term goals.
What Is the Purpose of Consolidated Financial Reports?
The goal is to present the financial results of the group as a single economic entity:
- Show total assets, liabilities, income, and cash flow
- Eliminate internal transactions to avoid double counting
- Provide transparency to stakeholders and regulators
- Support accurate tax, audit, and compliance reporting
- Align reporting across multiple jurisdictions and standards
- Meet HKFRS 10 and Companies Ordinance obligations
When Are Consolidated Financial Statements Required in Hong Kong?
Consolidation is typically required if:
- Your company controls one or more subsidiaries
- You do not qualify for exemption under Section 379(3)
You may be exempt if:
- The company is a wholly owned subsidiary of another corporate body
- The company is partially owned, but:
a.) All members are notified in writing, or
b.) No member objects
If you skip consolidation without meeting exemption criteria, your auditor will issue a qualified or disclaimer opinion.
Some companies choose to consolidate voluntarily to build trust or prepare for transactions like a sale or fundraising.
Who Needs to File Them? Does Every Business Have To?
You must prepare a consolidated report if:
- You are a holding company with subsidiaries
- You do not meet simplified reporting criteria under Section 359
To qualify for simplified reporting:
- Your group must meet any two of the following:
- a.) Revenue ≤ HK$100 million
- b.) Total assets ≤ HK$100 million
- c.) Employees ≤ 100
- No member must object, and proper filings must be completed.
How to Prepare Consolidated Financial Statements?
Preparing a consolidated report isn’t just merging numbers—it’s a detailed process that ensures the group’s financial position is accurate, compliant, and clear to stakeholders.
Here’s a basic workflow:
Combine:
- Assets, liabilities, equity
- Revenue and expenses
- Cash flows across the group
Eliminate:
- Intercompany balances
- Transactions between group entities
- Unrealised profits or losses
All statements must comply with HKFRS 10 and be prepared per Sections 380–383 of the Companies Ordinance. Use uniform accounting policies across all entities. Differences must be adjusted before consolidation.
What’s the Difference Between Combined and Consolidated Financial Statements?
These two terms are often confused. Here’s why understanding the difference matters: using the wrong format can mislead investors or trigger compliance issues.
- Consolidated statements: Combine financials of a parent company and its controlled subsidiaries into a single entity view. Intercompany transactions are eliminated.
- Combined statements: Present the financials of entities under common ownership or management, but no legal control. Intercompany transactions are not eliminated.
| Feature | Combined | Consolidated |
|---|---|---|
| Legal control required | No | Yes |
| Intercompany transactions | Not eliminated | Eliminated |
| Use case | Informal reporting, group restructuring | Legal/statutory group reporting |
| Accounting standard | Flexible | HKFRS 10 |
| Required by law | No | Yes (unless exempt) |
Examples:
- A consolidated report is required if Company A owns 100% of Company B and 60% of Company C.
- A combined report may be used if an investor owns 3 independent companies without legal control.
Special Considerations and Exemptions in Hong Kong
Before you prepare or skip a consolidated report, here’s what you need to know about exemptions, audit rules, and common edge cases in Hong Kong.
Audit Exemption
Even if you qualify for reporting exemption under Section 359, you’re not exempt from audits—unless your company is declared dormant (Section 447).
So yes, simplified reporting may apply, but audits are still required in most cases.
Dormant Subsidiaries
Subsidiaries with no accounting activity during the financial year can apply for dormant status.
Dormant companies are exempt from preparing financial statements and audits (Section 447 CO), but one transaction cancels that status.
Multi-Jurisdiction Challenges
If you operate across Hong Kong, China, or the US:
- Convert all financials to one currency
- Standardise reporting format per HKFRS
- Consider mapping your Chart of Accounts (COA) across systems
Companies managing multiple GAAPs (e.g., PRC GAAP, US GAAP) must adjust for differences before consolidating under HKFRS 10.
Handling Minority Interest
If the parent owns less than 100% of a subsidiary:
- The rest is recorded as non-controlling interest (NCI)
- NCI is shown separately in equity and profit/loss reporting
- HKFRS 10 requires presentation of NCI to reflect ownership not held by the parent
Conclusion
Consolidated financial statements are a tool for transparency, compliance, and better business decisions.
Missing a required consolidation can lead to qualified audit opinions, trigger IRD scrutiny, or delay corporate actions like fundraising or restructuring.
Whether you’re unsure about exemptions or need help preparing your consolidated audit, Air Corporate is here to help. Get in touch today and stay audit-ready!
