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A Brief Guide To Understanding Hong Kong’s Accounting Standards

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hong kong accounting standards

Hong Kong Accounting Standards are the guidelines that control how financial transactions are handled in the nation.

Accounting standards also refer to a series of guidelines that outline basic underlying concepts, clarify stipulations, and require minimal degrees of visibility to regulate how funds are to be treated.
In essence, accounting standards offer an “accurate and unbiased” summary of a firm’s monetary statements and other financial reporting.

For specific eligible SMEs, the Hong Kong Institute of Certified Public Accountants (HKICPA) has also released a Financial Reporting Standard (SME-FRS). For Hong Kong businesses that are not accountable to the general public, the HKICPA has approved the Hong Kong Financial Reporting Standard for Private Entities (HKFRS for Private Entities) from April 30, 2010.
Read through our brief guide to get a clue about how the Hong Kong accounting system works.

Hong Kong Financial Reporting System (HKFRS)

The Hong Kong Financial Reporting Standards(HKFRS) governs accounts in Hong Kong and also specify investment rules, events recording, and assessment. It displays full transparency in the financial statements.

Hong Kong’s accounting standards are also known as “The Hong Kong Financial Reporting Standards (HKFRS)”.

Hong Kong began adhering to the Financial Reporting Standards (FRS) framework in January 2005. This blueprint is based on the International Financial Reporting Standards (IFRS) framework, a publication of the International Accounting Standards Board (IASB).

HK GAAP Defined 

HK GAAP refers to Hong Kong’s generally accepted accounting principles. While creating its financial reporting records, a corporation must comply with the precepts of accounting rules and practices.

Whenever a business releases its annual accounts to third parties, GAAP adherence should always be pointed out.

The Securities and Futures Commission’s regulations would be followed if such a company’s shares are marketed openly. GAAP regulates the assessment of exquisite shares, asset descriptions, financial statements, and financial reporting.

According to GAAP standards, non-GAAP metrics must be disclosed in accounting records and other shared statements (such as news articles).

What distinctions exist between IFRS and GAAP?

The main contrast between GAAP and IFRS is that GAAP is a theory built on regulations, while IFRS is a framework built on concepts.

This distinction can be seen in the exact description along with the viewpoints. Compared to GAAP, IFRS guidelines offer much less explicit detail.

The two are significantly different in how they handle inventories. While IFRS regulations forbid their usage, GAAP regulations permit Last in, first-out (LIFO) inventories on financial records.

Sections of HKFRS

  • According to the Hong Kong Institute of Certified Public Accountants, the HKFRS is made applicable to all business enterprises’ annual reports and various forms of investment reports.
  • On the contrary, the HKFRS incorporates perspectives made by the HKICPA in addition to the HKAS and their disclosing criteria. Industries involved in commercial enterprise, financial sectors, and other allied professions are examples of lucrative businesses.
  • The private sectors, media houses, and governmental aspects are not meant to be included in the HKFRS’s scope.
  • Most accounting records intended to meet the main info requirements of numerous users, including stockholders, depositors, staff, and the general public alike, are subject to the Hong Kong Financial Reporting Standards (HKFRS).

The underlying concept behind HKFRS 

Now let’s examine accrual-based accounting which is the underlying concept of HKFRS.

Accrual-Based Accounting 

Hong Kong enterprises must utilize the accrual foundation of accounting. It implies that if trades and activities happen, their impacts must be acknowledged. Financial reports created on this premise inform users of both upcoming monetary commitments and future funds. 

Accounting Regulations  Practiced In Hk?

HKFRS has 41 different accounting guidelines, 15 financial reporting standards, and other numerous concepts. They include a variety of subjects, like accounting information, taxation, and profit and loss accounts, among others.

Below are some instances of  Hong Kong accounting standards described in the HKICPAs Handbook:

  • Defining the general specifications necessary for small and medium-sized businesses to submit their financial statements. 
  • Clarifying how commodities should be handled in terms of accounting.
  • Outlining financial statements for income resulting from particular dealings and situational factors.

For further regulations, you can access the HKFRS Handbook from the HKICPA to see the comprehensive guide on the accounting regulations practiced in HK.

HKFRS application to SMEs

An SME-specific reporting structure has also been made available by the HKICPA.

When a hong kong incorporated company complies with the HKFRS application to SMEs standards, it is eligible to make notifications under  standard SME-FRF and SME-FRS:

  • They get a minimum of 75% of shareholders’ consent.
  • They can be divided into different groups based on the required sizes.
Small-scale group or companySmall private businesses or grouplarger private group or company (“eligible”)
Annual income< HKD 25m< HKD 100m< HKD 200m
Overall assetsNo restriction< HKD 100m< HKD 200m
Regular staffsNo restriction< HKD 100m< HKD 100m

Private corporations and Hong Kong companies limited by guarantee might also be eligible for alternative filing options. 

Hong Kong businesses are exempted from the guidelines so that honest and accurate views can be portrayed in their financial dealings. 

While streamlining the accounting documents:

  • Instead of using the HKFRS, a firm could opt to compile its annual accounts within the Hong Kong Framework and Standard.
  • Since neither assets nor liabilities are appraised at actual market worth nor are taxes pushed aside, SMEs’ financial documents are produced using a historical cost method.

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