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 (and other qualifying entities), the Hong Kong Institute of Certified Public Accountants (HKICPA) has issued the Small and Medium-sized Entity Financial Reporting Framework and Financial Reporting Standard (SME-FRF & SME-FRS) as a simplified reporting option. In addition, the HKICPA has issued the HKFRS for Private Entities Accounting Standard as another reporting option intended to reduce reporting burden for qualifying private entities, as an alternative to applying full HKFRS Accounting Standards.
Hong Kong Financial Reporting System (HKFRS)
In Hong Kong, the principal accounting standards framework is commonly referred to as HKFRS. These standards set recognition, measurement, presentation and disclosure requirements for transactions and events in general purpose financial statements, and are based on the Conceptual Framework for Financial Reporting.
Hong Kong’s accounting standards are also known as “The Hong Kong Financial Reporting Standards (HKFRS)”.
Hong Kong’s HKFRS have been converged with IFRS Accounting Standards starting with annual reporting periods commencing from 1 January 2005. (In practice, HKFRS are designed to closely align with IFRS, subject to limited local adaptations where applicable.)
HK GAAP Defined
“HK GAAP” is a commonly used term for Hong Kong generally accepted accounting principles, and in practice it generally refers to financial reporting prepared in accordance with HKFRS Accounting Standards (including Hong Kong Financial Reporting Standards, Hong Kong Accounting Standards and related Interpretations issued by the HKICPA), together with applicable requirements under Hong Kong law (e.g., the Companies Ordinance requirements on financial statements and disclosures).
Whenever a business releases its annual accounts to third parties, GAAP adherence should always be pointed out.
If a company’s shares are offered to the public or listed in Hong Kong, it will also need to comply with the relevant listing/offer documentation and disclosure rules (for example, the Stock Exchange of Hong Kong’s Listing Rules and related guidance for listed issuers and applicants), in addition to preparing financial statements under the applicable accounting standards.
When companies present “non-GAAP” or “non-HKFRS” financial measures (for example, adjusted profit or EBITDA), they should ensure these measures are not misleading, are clearly defined, and are reconciled to the most directly comparable HKFRS/IFRS measures in accordance with applicable market guidance (particularly relevant for listed companies and listing applicants).
What distinctions exist between IFRS and GAAP?
The main contrast between US GAAP and IFRS is often described as US GAAP being more rules-based, while IFRS is more principles-based. (Note: this comparison is commonly discussed in the context of US GAAP vs IFRS; “GAAP” can mean different national GAAP frameworks depending on jurisdiction.)
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
- HKFRS Accounting Standards are issued by the Hong Kong Institute of Certified Public Accountants (HKICPA) and are intended to be applied in preparing general purpose financial statements (subject to eligibility for alternative frameworks such as SME-FRF & SME-FRS, or HKFRS for Private Entities, where applicable).
- HKFRS Accounting Standards comprise Hong Kong Financial Reporting Standards, Hong Kong Accounting Standards, and Interpretations issued by the HKICPA.
- HKFRS-based financial statements are designed to meet the information needs of a wide range of users, including shareholders, lenders, employees and other stakeholders.
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 Accounting Standards are a suite of standards and interpretations issued and updated over time. Rather than relying on a fixed count of “how many” standards, businesses should focus on applying the specific standards relevant to their transactions and ensuring appropriate presentation and disclosure across their financial statements.
Below are some instances of Hong Kong accounting standards described in the HKICPAs Handbook:
- Setting out presentation requirements for financial statements (e.g., what statements are presented and what minimum information is disclosed).
- Clarifying how inventories should be measured and recognized.
- Outlining recognition and measurement principles for common transaction areas such as revenue, leases, financial instruments, income taxes, and impairment, as applicable.
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.
In Hong Kong, use of the SME-FRF & SME-FRS is tied to whether a company (or group) qualifies for the “reporting exemption” under the Companies Ordinance.
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:
Private company with no subsidiaries (and not a subsidiary of another company): may qualify for reporting exemption subject to meeting the statutory conditions; where required, 100% written approval from shareholders is needed for each year.
- Small private company: must not exceed any two of the following:
- Total annual revenue of HK$100 million
- Total assets of HK$100 million at the end of the reporting period
- 100 employees
(Shareholder approval is generally not required for this category under the Companies Ordinance reporting exemption framework.)
- Larger “eligible” private company: must not exceed any two of the following:
- Total annual revenue of HK$200 million
- Total assets of HK$200 million at the end of the reporting period
- 100 employees
AND it generally requires at least 75% member approval by resolution (with additional statutory conditions on objections).
Private companies and companies limited by guarantee may have different eligibility pathways under the reporting exemption framework, including specific tests for small guarantee companies (commonly linked to an annual revenue threshold) and rules for groups.
Hong Kong businesses are exempted from the guidelines so that honest and accurate views can be portrayed in their financial dealings.
Even where a company qualifies for the reporting exemption and uses SME-FRF & SME-FRS (or prepares simplified financial statements/directors’ reports as permitted), the company remains responsible for maintaining proper accounting records and preparing compliant financial statements under applicable law.
While streamlining the accounting documents:
- Instead of using full HKFRS Accounting Standards, an eligible company may apply SME-FRF & SME-FRS (where it qualifies for reporting exemption) or consider HKFRS for Private Entities (where applicable) as an alternative reporting option to reduce complexity compared with full HKFRS.
- SMEs’ financial documents are often prepared using a cost-based approach in many areas under simplified frameworks, but the specific measurement bases depend on the chosen framework and the applicable sections/standards.
Who sets Hong Kong’s accounting standards and what the law requires
In Hong Kong, the accounting standards referred to in company law are those issued by a prescribed body. Under the Companies Ordinance framework, the HKICPA is prescribed for the purposes of the definition of “accounting standards”, giving statutory recognition to HKICPA-issued standards as the relevant accounting standards for compliance.
Companies also have legal obligations beyond “using a standard,” including:
- Keeping accounting records: Companies must keep accounting records that are sufficient to show and explain the company’s transactions and to disclose, with reasonable accuracy, the company’s financial position and financial performance.
- Preparation of financial statements: Financial statements must be prepared in accordance with the Companies Ordinance requirements and applicable accounting standards, subject to the overarching requirement that they give a true and fair view (with limited exceptions for companies that qualify for simplified reporting under the statutory framework).
- Record retention: For tax purposes, the Inland Revenue Ordinance requires persons carrying on a trade, profession or business in Hong Kong to keep sufficient records (in English or Chinese) to enable assessable profits to be readily ascertained, and to retain those records for not less than 7 years.
These legal requirements are often relevant in practice when businesses are setting up their finance processes, preparing for audit, responding to tax queries, or due diligence for investment and banking purposes.
Reporting exemption is not “no compliance” (common pitfalls for SMEs)
A common misconception is that “SME reporting exemption” means a company can ignore proper bookkeeping or skip annual compliance. In practice:
- The reporting exemption focuses on allowing simplified financial statements and/or directors’ reports for qualifying companies and groups. Eligibility is rule-based (including size tests, group rules, and, for some categories, shareholder/member approval thresholds).
- Companies should carefully confirm whether they qualify as a small private company, eligible private company, or other qualifying category under the Companies Ordinance framework (and whether any ineligible activities apply, such as certain regulated financial activities).
- Even when using simplified frameworks like SME-FRF & SME-FRS, companies should still implement a consistent year-end close process (bank reconciliations, AR/AP aging, fixed asset register, inventory support, related party tracking), because tax authorities, auditors, and counterparties typically require documentary support.
Practical tip: If your business is near the size thresholds, monitor the tests over time—eligibility can change based on multi-year rules and group composition changes.
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