Things You Should Know About Accounting Standards in Hong Kong

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As a Hong Kong business, you should not only keep a proper account of business transactions but also comply with the statutory requirements of Hong Kong Companies Ordinance.

Furthermore, to know that the Hong Kong Institute of Certified Public Accountants (HKICPA) is the body regulating the accounting profession in Hong Kong brings a sense of assurance.

Here we are to have an in-depth analysis of this problem with the aim that you will have a thorough understanding of what Hong Kong accounting standards are and what you need to do to succeed with your own firm.

HKFRS for Private Entities in Hong Kong – Financial Reporting System

The standard of accounting for Hong Kong could be described as the body of rules that controls the financial transactions by defining the terms, determining the fundamentals, and requiring minimum disclosure levels.

Accounting standards, which is also known as Hong Kong Financial Reporting Standards, are descriptions of transaction and event recognition, presentation, measurement, and disclosure as prescribed in the standards.

The HKICPA has also rendered Financial Reporting Standard (SME-FRS) for those SMEs who qualify to certain extent.

In 2010, the Institute of the Accounting Standards Board launched the HKFRS for Private Entities, allowing the reporting for private organizations which are not subject to the public scrutiny.

HKFRS for Private Entities does away with numerous accounting treatments, all of which are allowed in full HKFRSs, reduces the disclosure requirements and topics that are not relevant to the private entities as a whole and makes measurement and recognition requirements simple.

Is HKFRS equal to IFRS?

These two concepts are identical.

Hong Kong adopted financial reporting standards (FRS) that have been modeled on the International Financial Reporting Standards framework (IFRS) issued by the International Accounting Standards Board (IASB).

What is HK GAAP?

Hong Kong Generally Accepted Accounting Principles which can be shorted as HK GAAP is one of them. Those are a bunch of principles, rules, and procedures that a company needs to follow when it begins designing its financial reports with a general purpose.

If a company releases its financial statements outside of the company, then the exact term that must be followed is GAAP. 

When stocks are publicly traded, companies’ financial statements need to be consistent with those of the Securities and Exchange Commission. Revenue recognition, balance sheet classification, item classification, and cash turnover are elaborated under GAAP.

Participants should conduct some investigation if a financial statement is not under the Generally Accepted Accounting Principles. Besides, some companies can still offer both GAAP- and non-GAAP-compliance standards in the financial statement reporting.

So-called non-GAAP measures should be marked with a special indication in the statements, and other public announcements in line with GAAP rules.

How do GAAP and IFRS differ?

The primary difference between GAAP and IFRS lies in their approach: GAAP follows rules because the IFRS is principle based. The same can be said about the details described and their comparisons. To put it in a plain manner, IFRS standards are more commonly general than the specific rules of GAAP.

For this reason, IFRS together with its concepts and guidelines permits a higher level of flexibility during the auditing process that in turn results in more comprehensive disclosure requirements during financial statement audit. Furthermore, the globalization of financial markets is in line with the IFRS principles, which are based on logic, and thus, the transactions between the entities will be more clearly understood from an economic point of view.

One of the benefits the innovators introduce is how they manage inventory. However, the GAAP rules support the implementation of the first-in, first-out (FIFO) method while the IFRS rules prohibit it. On the other hand, both GAAP and IFRS are of the opinion that using the weighted average-cost method in determining the value of inventory is an acceptable technique. The IFRS gives an inventory reversal frame when the circumstances are unchanged, while the GAAP does not have this feature at all.

Scope of HKFRS

The Hong Kong Institute of Certified Public Accountants articulates that the aim of HKFRS is not only to be complied with by profit oriented entities’ financial statements and financial statements, but also any other financial reporting. Such entities include amalgamations and enterprises engaged in financial, industrial, commercial and other activities.

As the HKFRS for private entities umbrella covers all reporting standards, accounting standards (HKAS), and interpretations issued by the HKICPA, we can say that this body is responsible for all the accounting standards in Hong Kong. While HKFRS is not applicable for non-profit organizations, it is necessary to point out that the standard is not designed to be used by these entities regardless if they operate in the public, private, or governmental sectors.

The principles of HKFRS

Let’s examine the primary principle of HKFRS for private entities , known as the accrual accounting basis.

Accrual accounting basis

The unique characteristic of Hong Kong accounting system is the requirement of businesses to adopt the accrual basis, except the Cash flow statement. As a result, major accounting changes are recognized in the financial statements due to the occurrences of the transaction or the event. Financial reports planned under this system do not just present the past cash transactions but also the future cash commitments and incoming assets.

Which Accounting Standards are Employed in Hong Kong?

The HKFRS is a comprehensive guideline, which is organized into 41 applicable accounting standards and 15 comprehensive financial reporting standards.

Each standard deals with a certain aspect such as the preparation of the income statement, cash flow statements, the formula for inventories, income taxes, and other issues.

Here are some examples : 

HKAS 1 Presentations of Financial Statements – HKCIPA 

According to HKAS 1, the fundamental principle this standard reflects is that financial statements are of two types, the structure of these statements, and the basic components of them.

One of the things that HKAS 1 tells management is that when they prepare the financial statement of the entity, they must evaluate the entity’s ability to continue running as a going concern unless the board’s motive is to liquidate the organization or bring an end to trading activities.

The organization should give the reasons why financial papers were not generated according to the going concern principle and indicate what basis of substance they were compiled on if they fail to prepare the financial documents on a going concern principle. 

HKAS 2 Inventories – HKCIPA

In HKAS 2, the accounting principles underlying inventory in the business context are set forth. One of the other issues to be addressed is the question about allocation of costs which can be treated as assets and capitalized and not expensed until the related profits are earned. This standard has the purpose of rules and processes to solve such issue.

Inventories may only be estimated in the lower of cost or net realizable value. Along with purchase, conversion, and all the other costs associated, this concept covers all the expenses incurred. The allocation of the inventory costs is required to be done through either of the methods; the FIFO (First-In, First-Out) or the weighted average cost method.

HKAS 18 Revenue – HKICPA

Revenue recognition is entrenched in HKAS 18 through a system of accounting policies and procedures for diverse events and transactions.

Timing is one of the main issues in accounting economics which relate to when the revenue should be recognized.

The revenue is computed with reference to the fair market valuation of the revenues receivable or received.

Revenue derived from sales is recognized when the following criteria are fulfilled:

  1. It is the organization that makes the customer the new owner of the products in which he/she enjoys the rights and the responsibilities of owning the goods.
  2. The company is only investing capital but has no on-going managerial involvement. Moreover, it exerts no control over the production process, nor does it have any say in the final products sold.
  3. The total amount of profits may now be reported correctly.
  4. It is expected that the entity will be in a position to profit from this particular transaction.
  5. The costs that actually have been made or those that are about to be made in relation to the transaction are relatively precise to measure.

Other HKAS

Other HKAS

Applying HKFRS for Private Entities (SMEs)

The HKICPA has developed market-specific reporting frameworks, namely SME-FRF and SME-FRS, which are the SME Financial Reporting Framework and the Financial Reporting Standard for Small and Medium-sized Entities respectively, to meet the reporting needs of SMEs. By means of these standards, SMEs will be able to simplify the financial reporting process.

A company incorporated in Hong Kong is valid for reporting under SME-FRF and SME-FRS if it meets the following requirements:

  1. Classification can be based on size criteria.
  2. Approval from at least 75% of shareholders is required.
Other HKAS

Hong Kong companies that are restricted by guarantee and private companies may be eligible for optional reporting exemptions.

SMEs can’t qualify if:

  • The company is approved and authorized under the Banking Ordinance.
  • It has been given a license by the authority to carry out regulated businesses under Part V of the Securities and Futures Ordinance.
  • The business is in the insurance business.
  • In addition to this, loans taken at interest or that are repayable at a premium are part and parcel of its activities.

Apart from the Framework and the Standard rule that companies in Hong Kong should have full transparency about their financial operations, businesses from Hong Kong are also exempted.

For simplified financial papers:

  • A company may choose to present its financial statements in compliance with the Framework and Standard whereas they have the alternative to do it under the HKFRS.
  • Following this, SMEs’ financial statements are recorded at historical cost concept, and none of them valued at fair value or deferred tax.
  • In addition, a disclosure note gives fewer specifics about the reporting entity’s activities compared to a full-financial report.

How can FastLane help?

The Hong Kong Companies Ordinance is a legal framework with rules every company operating in Hong Kong is obliged to follow. Through this by-law, the business owner/s will learn the reading and writing of financial statements, balance sheets, and income statements. As a business owner, there is a requirement to operate all completed tasks legally.

We would agree that accounting seems to be a bit hard and it can also be dizzying to follow the laws, however, luckily enough, you can always rely on us and the assistance we can offer you at FastLane!

FastLane is not only a bookkeeper but also has that covers your accounting so worry-free sleep is the thing we are all about. Rely on people with the expertise to take care of this part of your business so you have time for other projects and tasks that will boost your profits.