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Hong Kong Accounting Standards (HKAS)

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As the name suggests, Hong Kong Accounting Standards are a framework of rules governing how financial transactions are handled in the country. The Financial Reporting Standards (FRS) framework is applicable in Hong Kong since January 2005 under the International Accounting Standards Board (IASB). The FRS is based on the International Financial Reporting Standards model.

Hong Kong accounting standards are also known as the Hong Kong Financial Reporting Standards (HKFRS). These standards serve as fundamental principles that define the meaning for the most common accounting terms. HKFRS includes Hong Kong Financial Reporting Standards and Hong Kong Accounting Standards.

 

The latest version of the HKFRS came into effect in January 2005. The Hong Kong Institute of Certified Public Accountants is responsible for issuing the HKFRS that comprises 41 accounting standards, several interpretations, and 9 financial reporting standards.

 

It also demands minimum disclosure levels for transactions within the country. The Hong Kong accounting standards provide a fair overview of the financial statements of the company.

Who regulates the accounting industry

The Hong Kong Institute of Certified Public Accountants is the regulating body that oversees the accounting industry within the jurisdiction. A Hong Kong incorporated company must maintain proper accounting books and annually serve satisfactory statutory audit requirements.

 

A business entity must prepare its financial statements, excluding the cash flow details using the accrual basis of accounting. Transactions are identifiable only during the same financial statement period.

 

Financial statements are a record of past transactions on the accrual accounting basis. They also give insight into the obligations of cash payment in the future and the resources where cash could accrue.

  • HKFRS applies only to general purpose financial statements. This also applies to the financial reporting of profit-oriented entities.
  • Hong Kong accounting standards are not applicable to non-profit activities, irrespective of the public or private sector or government.
  • HKFRS applies to financial statements that details the needs of shareholders, employees, creditors, and the public.

According to the HKICPA, financial documents include:

  • Statement of cash flow
  • Accounting policies
  • The balance sheet at the end of the period
  • Explanatory notes
  • Statement of comprehensive income
  • Statement showing changes in equity or changes arising from capital transactions

In simple words, accounting standards are a set of rules governing the treatment and handling of financial transactions. 

Scope of HKFRS

According to the HKICPA, HKFRS is designed for application to general purpose financial statements directed toward the needs of a range of users. HKFRS is not designed for non-profit activities.

 

Financial statements provide information about the financial performance and position and cash flow of an entity. Typically, a comprehensive set of financial statements includes a statement of:

  • Cash flow
  • Financial position
  • Comprehensive income for the financial period
  • All equity changes

What do Hong Kong accounting standards consist of

The HKFRS is a combination of 41 distinct accounting standards, 15 financial reporting standards, and different interpretations. As per the revised SME-FRF, any entity incorporated under the new Companies Ordinance is subject to the constitution and requirements imposed by the law of the land, that is, the place of incorporation.

Hong Kong accounting standards for SMEs

Some companies limited by guarantee and private companies may qualify for optional reporting exemption. The new Companies Ordinance came into effect on 3 March 2014. Exemptions are applicable only for companies that meet certain conditions.

A private company does not qualify for the reporting exemption if:

  • The institution is authorised under the Banking Ordinance for banking business.
  • The entity is licensed to perform regulated business activities under Part V of the Securities and Futures Ordinance.
  • The company carries on any insurance business. This excludes a business carried out by an agent.
  • The company accepts loans at interest or repayable at a premium as part of business or trade. This excludes terms involving debentures and securities.

Other exemptions include simplified financial statements to give a fair view of transactions. These statements are exempt that are prepared under the HKICPA SME-FRF and SME-FRS. These statements exclude assets or liabilities at fair value and are prepared on a simplified historical cost basis.

 

Other Hong Kong incorporated companies must prepare financial statements that give a fair view of their business and comply with HKFRS.

 

With 22 accounting standards, the SME-FRS are simplified accounting principles that cover certain subjects, such as accounting policies, presentation of financial statements and lease and excludes some topics. These include business review, segment reporting, and interim financial reporting.

Hong Kong accounting standard 2 for inventories

HKAS 2 lays down the accounting standard for inventories. When it comes to accounting for inventories, the cost is recognised as an asset. The amount is carried forward as long as it is easier to recognise the related revenues.

 

HKAS 2 specifies how the cost is determined and recognised as expenditure.

 

According to HKAS 2, the cost of inventories includes all costs of purchase, conversion and transportation cost involved in bringing inventories to the current location.

HKAS 18: Revenue

As per the Hong Kong Accounting Standard 18 Revenue, revenue is determined at the value of consideration. The revenue from the sale is recognised when all of the following conditions are met:

  • The business transfers risks and rewards of ownership to the buyer.
  • The amount of revenue is determined reliably.
  • The costs incurred with respect to the transaction can be reliably measured.
  • The entity does not retain effective control over the sale. There is no continuing managerial involvement associated with ownership.
  • The entity benefits from the economic benefits accruing from the transaction.

Next steps

We offer no-nonsense accounting for companies looking to set themselves up in Hong Kong. Get in touch with us to begin. 

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