Every company incorporated in Hong Kong must prepare financial statements in accordance with Hong Kong accounting standards and have those statements audited by a Hong Kong CPA each year. The standards govern how financial transactions are recorded, presented, and disclosed. Understanding which standards apply to your company and what they require is essential for compliance.
This guide covers the Hong Kong Financial Reporting Standards (HKFRS), the key individual accounting standards (HKAS), the SME-FRS for smaller entities, and how the Hong Kong framework aligns with international reporting. For context on the audit requirement, see our Hong Kong Standards on Auditing guide.
Highlights of this article
- All Hong Kong companies must prepare financial statements and have them audited annually. The HKICPA issues and maintains the applicable standards.
- Hong Kong adopted HKFRS (aligned with IFRS) in 2005. HKFRS and IFRS are substantively the same, making Hong Kong-prepared statements internationally comparable.
- There are 41 HKAS standards and 15 HKFRS standards, each covering specific accounting topics.
- Smaller entities may qualify to report under the SME Financial Reporting Standard (SME-FRS), which simplifies disclosure requirements.
- A company's financial year normally runs for 12 months. Newly incorporated companies may have a first financial year of up to 18 months.
What are Hong Kong's accounting standards?
Hong Kong accounting standards are the rules that govern how businesses record, present, and disclose financial information. They define how transactions are measured, when revenue is recognised, how assets and liabilities are classified, and what must be disclosed in the financial statements.
All companies incorporated in Hong Kong must:
- Maintain proper accounting records
- Prepare annual financial statements
- Have those statements audited by a Hong Kong CPA
- Submit the audited statements with the Profits Tax Return to the IRD
Financial statements include the balance sheet, income statement, statement of changes in equity, cash flow statement, auditor's report, and notes to the accounts.
Who sets Hong Kong's accounting standards?
The Hong Kong Institute of Certified Public Accountants (HKICPA) issues and maintains the Hong Kong Financial Reporting Standards (HKFRS). The HKICPA updated and aligned these standards with IFRS in January 2005.
The HKFRS framework comprises:
- 41 Hong Kong Accounting Standards (HKAS): individual standards covering specific topics
- 15 Hong Kong Financial Reporting Standards (HKFRS): broader standards covering specific reporting areas
- Interpretations issued by the HKICPA
HKFRS and its alignment with IFRS
Hong Kong's reporting standards are substantively identical to the International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB). Companies can choose to prepare statements under HKFRS or adopted IFRS. The differences between the two are minimal.
This alignment means financial statements prepared in Hong Kong are directly comparable to those of companies in other IFRS-adopting jurisdictions. This supports Hong Kong's role as an international financial centre and makes it easier for foreign investors to assess Hong Kong companies.
Key Hong Kong Accounting Standards
HKAS 1: Presentation of financial statements
HKAS 1 sets the requirements for how financial statements must be structured and presented. Key requirements:
- Management must assess the entity's ability to continue as a going concern
- Financial statements (excluding cash flow) must use the accrual basis of accounting
- Statements must be prepared at least once per year
- Comparative information for the prior period must be presented
- Financial statements must present a true and fair view of the company's position
HKAS 2: Inventories
HKAS 2 governs how inventories are measured and carried in the accounts:
- Inventories must be measured at the lower of cost and net realisable value
- Cost includes purchase costs, conversion costs, and other costs incurred to bring the inventory to its present location and condition
- The FIFO (first-in, first-out) or weighted average cost method is permitted; LIFO is not
HKAS 18: Revenue recognition
HKAS 18 sets out when revenue from sales of goods, rendering of services, and interest/royalties/dividends can be recognised. Revenue is recognised when:
- It is probable that future economic benefits will flow to the entity
- Those benefits can be measured reliably
Note: HKAS 18 has been substantially superseded by HKFRS 15 (Revenue from Contracts with Customers) for most companies. HKFRS 15 provides a more detailed 5-step model for revenue recognition.
SME Financial Reporting Framework and Standard (SME-FRS)
The HKICPA introduced a simplified reporting framework specifically for smaller entities: the SME Financial Reporting Framework (SME-FRF) and SME Financial Reporting Standard (SME-FRS). This reduces the disclosure burden for qualifying companies.
Who qualifies?
To use SME-FRS, a private company must meet at least 2 of these 3 criteria:
| Criterion | Small private company | Larger eligible company |
|---|---|---|
| Annual revenue | Below HKD 100 million | Below HKD 200 million |
| Total assets | Below HKD 100 million | Below HKD 200 million |
| Average employees | 100 or fewer | 100 or fewer |
Additionally, at least 75% of shareholders must approve the use of SME-FRS.
Benefits of SME-FRS
| Benefit | Detail |
|---|---|
| Simplified reporting | Fewer disclosure requirements and easier measurement criteria |
| Lower compliance cost | Reduced accounting and auditing time vs full HKFRS |
| Suitable for private entities | Designed for companies without public accountability |
| Internationally recognised | Aligned with international SME reporting practices |
Important: Even under SME-FRS, an audit is still required unless the company is formally registered as dormant.
Financial year and first accounts
A company's financial year normally runs for 12 months. The company chooses its own financial year end date at incorporation: the 1 April to 31 March government fiscal year is not a requirement for companies.
For a newly incorporated company, the first financial year may last up to 18 months. The first Profits Tax Return arrives approximately 18 months after incorporation. Subsequent returns arrive each April.
Accounting records requirement
Under the Companies Ordinance and the Inland Revenue Ordinance, Hong Kong companies must:
- Keep complete and accurate accounting records for all transactions
- Retain records for at least 7 years
- Maintain records in English or Chinese
- Make records available to auditors and the IRD on request
For a practical guide to maintaining those records day to day, see our bookkeeping and accounting guide.
For the full annual compliance calendar, see our annual requirements guide. For the tax filing obligations that flow from the audit, see our Profits Tax Return guide. For the tax filing obligations that flow from your audited accounts, see our Hong Kong corporate tax guide.
Air Corporate provides accounting and audit services for Hong Kong companies from USD 580/year. This includes financial statement preparation under HKFRS, CPA audit, and Profits Tax Return filing. Get started
