Importance of Hong Kong Company Financial Statements: How to Prepare It Well

What are Hong Kong Company Financial Statements?

Hong Kong company financial statements serve as the report card of your Hong Kong business, showcasing its financial performance and condition. These crucial documents require auditing for credibility with recognized Hong Kong government agencies.

Investors heavily rely on these statements to assess your company’s financial health and potential, making it more attractive for partnerships and investments. Hong Kong company financial statements also provide essential information about operations, financial position, and cash flows, guiding resource allocation decisions.

What is Included in the Hong Kong Company Financial Statements?

Hong Kong company financial statements consist of the following main components:

Balance Sheet

This provides a clear summary of the business’s financial situation as of a specified date. The assets, liabilities, and shareholder equity of the business are shown. Current assets include things like cash and accounts receivable, whereas non-current assets include things like real estate and machinery. Additionally, there are two categories of liabilities: current (such as rent and utilities) and non-current (such as long-term loans). Shareholder equity, on the other hand, represents the remaining interest in assets after deducting liabilities.

Income Statement

The company’s sales, costs, profits, and losses for a particular reporting period are shown on the income statement. It covers non-operating revenues as well as operating revenues from core business operations. Gains represent net income from non-core activities, such as selling assets. Primary expenses are linked to core business operations, while secondary expenses are related to non-core activities. Losses account for losses on asset sales or unusual costs.

Statement of Cash Flows

This displays the cash inflows and outflows during the accounting period. It is divided into cash from operating, investing, and financing activities. Specifically, these are the core business cash flow, investment-related cash flow, and liabilities & equity financing.

Requirements for Hong Kong Company Financial Statements

In Hong Kong, companies must adhere to specific requirements when preparing their financial statements. These requirements are as follows:

• Choosing Financial Year-End – Hong Kong companies need to choose their financial year-end (FYE). The first FYE date should be selected by the Hong Kong company’s directors and fall within 18 months after incorporation. For subsequent years, the FYE will be on the anniversary of the specified date. 
• Preparation According to the Companies Ordinance – Under the provisions of the Companies Ordinance, the responsibility for preparing Hong Kong company financial statements for each financial year end lies with the company’s directors.
• Consolidated Financial Statements (For Holding Companies) – Holding companies must prepare consolidated Hong Kong company financial statements, except in the case of partially owned subsidiaries where no member requests consolidated accounts or all members agree not to prepare them in writing. However, if the Hong Kong company is a wholly-owned subsidiary, it must prepare either company-level or consolidated financial statements.
• Fair and True View of the Company – Unless the company is eligible for a reporting exemption, the Hong Kong company financial statements must give a truthful and fair assessment of the Hong Kong company’s financial situation and performance.
• Audited Financial Statements – The Hong Kong company financial statements must be audited by a licensed auditor who is a Hong Kong Certified Public Accountant (CPA).
• Accounts and Records Keeping – In addition to the specific requirements for Hong Kong company financial statements, companies must maintain accurate records and accounts to comply with Hong Kong regulations annually. These records may encompass bank statements, expenses, and sales receipts, ensuring the precision and up-to-date nature of all financial transactions.

Which Types of Companies are Eligible for Reporting Exemptions?

Under the Companies Ordinance, certain companies can qualify for reporting exemptions for Hong Kong company financial statements. However, a reporting exemption does not mean companies can entirely avoid preparing financial statements. Instead, it simplifies the contents of the statements in several ways:

1. The requirement to provide a true and fair view of the Hong Kong company financial statements is eliminated for companies eligible for reporting exemptions.
2. Companies qualifying for reporting exemptions are not obligated to disclose certain transactions involving directors and the company.
3. The reporting exemption allows companies to adopt the SME-FRF and SME-FRS which involve fewer requirements and disclosures, such as no need for a cash flow statement and no disclosure of financial risk management strategies.