As the world becomes more globalized, more people are involved in the business. As a result, it has become widely recognized that there must be widespread agreement on how businesses recognize and present their financial data. Accounting services address this issue by providing a minimum level of transparency and understanding in how businesses recognize and present their financial data. All countries are now expected to maintain accounting standards that provide just that, and Hong Kong is no exception. This article will look at Hong Kong’s financial reporting standards, the extent of their influence, and what SME owners should think about.
The Hong Kong Accounting Standards (“HKAS”) are the rules that govern the treatment of Hong Kong financial transactions. They are also known locally as the Hong Kong Financial Reporting Standards (“HKFRS”). These standards serve as the guiding principles for companies operating in Hong Kong to comply with their local accounting obligations.
The HKAS, which is based on the International Financial Reporting Standards, helps to ensure minimum disclosure levels for financial transactions. They are present to assist in recognizing, measuring, and presenting disclosure requirements for general-purpose financial statements. In conclusion, HKAS provides an overview of what constitutes a “true and fair” financial statement.
The Accounting Standard Requirement in Hong Kong
Accounting standards in Hong Kong are a set of regulations that govern financial transactions by defining terms, establishing fundamental principles, and requiring minimum disclosure levels.
Accounting standards, also known as Hong Kong Financial Reporting Standards (HKFRS), define transaction and event recognition, presentation, measurement, and disclosure procedures.
The HKICPA has also issued a Financial Reporting Standard to certain qualifying SMEs (SME-FRS).
The Institute introduced the HKFRS for Private Entities in 2010 for Hong Kong businesses and organizations that are not subject to public scrutiny.
The HKFRS for Private Entities eliminates various accounting treatments permitted by full HKFRSs, eliminates disclosure requirements and topics that are not generally applicable to private entities, and simplifies measurement and recognition requirements.
What is Gaap in Hong Kong
Hong Kong Generally Accepted Accounting Principles (HK GAAP) is an abbreviation for Hong Kong Generally Accepted Accounting Principles. When preparing general purpose financial statements, a company must adhere to accounting principles, standards, and procedures.
If a company distributes its financial statements outside of the company, GAAP must be followed.
If a company’s stock is publicly traded, its financial statements must also adhere to Securities and Exchange Commission guidelines. GAAP governs revenue recognition, balance sheet, item classification, and outstanding share measurements.
If GAAP does not prepare a financial statement, investors should be cautious. Furthermore, some companies may use GAAP- and non-GAAP-compliant measures when reporting financial results.
According to GAAP regulations, non-GAAP measures must be identified in financial statements and other public disclosures (for example, press releases).
The Scope of Hong Kong Accounting Standard
The Hong Kong Institute of Certified Public Accountants (“HKICPA”) states that the Hong Kong Accounting Standards (“HKAS”) are intended to apply to general purpose financial statements and other financial reporting of all profit-oriented entities.
According to the Hong Kong Institute of Certified Public Accountants, the HKFRS is designed to apply to all profit-oriented organizations’ general financial statements and other financial reporting.
The HKFRS, on the other hand, encompasses all reporting standards, accounting standards (HKAS), and interpretations issued by the HKICPA.
Profitable organizations engage in financial, industrial, commercial, and similar activities.
The HKFRS does not apply to non-profit organizations in the private, public, or government sectors.
The Main Principle of Hong Kong Accounting Standard
Hong Kong’s accounting system is unique in that Hong Kong companies will use the accrual basis of accounting except for cash flow statements. This means that the effects of transactions and events that cause material accounting changes must be recognized as soon as they occur.
Financial statements prepared on this basis inform users of past transactions involving cash payment and receipt and future cash obligations and resources that represent cash to be received in the future.
HKAS 1: Presentations of Financial Statements
HKAS 1 establishes the general rules for financial statements, their structure, and the basic conditions for their content.
HKAS 1 requires management to assess an entity’s ability to continue as a going concern when preparing its financial statements unless the board wishes to liquidate the organization or cease trading.
When an entity fails to collect financial statements on a going concern basis, it must disclose this fact, the concept underpinning the financial papers, and why the entity is not considered a going concern.
HKAS 2: Inventories
The accounting aspect of business for inventories is laid out in HKAS 2.
The main issue is determining how much cost can be viewed as an asset and carried forward until the associated profits are recognized. This HKAS has rules and procedures in place to address this issue.
Stocks must be valued at a lower cost or net value. All expenses for purchase, conversion, and other expenses must be included in inventory. Inventory costs must be allocated using the FIFO or weighted average cost equation.
HKAS 18: Revenue
HKAS 18 establishes and describes the accounting for revenue derived from various events and transactions.
The main issue in revenue accounting is determining when to recognize revenue.
Revenue is calculated based on the fair market value of the consideration received or receivable.
When the following conditions are met, revenue will be recognized as a result of sales:
- The organization transfers the significant risks and rewards of ownership of the goods to the buyer.
- The company retains neither ongoing managerial involvement in the sense of ownership nor effective control over the products sold.
- The total amount of profits can be calculated precisely.
- The entity will most likely benefit economically from the transaction.
- The expenses incurred or about to be incurred in connection with the transaction can be accurately measured.
How Hong Kong Accounting Standard helps SMEs
The HKICPA has also published a reporting framework for SMEs. These are SME-FRF and FRS (SME-FRS). These standards were created to help SMEs with financial reporting.
A Hong Kong-incorporated company can report under SME-FRF and SME-FRS if it meets the following criteria:
- They can be classified by size.
- They get 75% shareholder approval.
Hong Kong limited liability and private companies may be eligible for optional reporting exemptions.
If:
- The company is a licensed bank under the Banking Ordinance.
- It is regulated by Part V of the Securities and Futures Ordinance.
- It works on any insurance firm.
- For its operations, the firm accepts interest-bearing or premium-bearing online loans for bad credit.
- Hong Kong companies are exempt from the Framework and Standard’s requirement to provide a true and fair view of their finances.
When financial papers are simplified:
- Company financial statements may be prepared using the Framework and Standard rather than HKFRS.
- This means that SMEs’ financial reports are based on historical cost, with no fair value assets or liabilities or tax deferrals.
- Aside from that, disclosure notes are less detailed than full financial reports.
Conclusion
The Hong Kong Companies Ordinance is a set of laws that every Hong Kong business must respect and follow. This ordinance addresses the accounting and bookkeeping aspects of business operations. It is your responsibility as the owner to carry out all operations legally.
We understand that accounting can be difficult and that laws can be difficult to follow, but luckily, you can always find a helping hand at Sleek!
Choose a CPA Firm that provides accounting service Hong Kong so you can sleep soundly. Allow the experts to handle this aspect of your business while you concentrate on more important tasks that affect the bottom line.