Hong Kong's Reporting Exemption for Private Companies
Hong Kong aims to simplify the Financial Reporting Standards (FRS) by offering a “reporting exemption” for small-to-medium-sized enterprises (SMEs) that meet specific criteria. This can speed up the reporting process and reduce the administrative burden on smaller companies.
If your company qualifies for a reporting exemption, you may prepare simplified accounts and director's reports. In this article, we’ll look at which private companies qualify for the “reporting exemption” and some differences between FRS and SME FRS.
Major Differences Between SME FRS and Full FRS
1. Consolidated Financial Statements:
Under SME FRS, companies can be exempted from preparing consolidated financial statements if they meet certain conditions, such as being a wholly-owned subsidiary or having all shareholders agree not to consolidate. This can save businesses significant time and money.
2. Investments in Subsidiaries, Joint Ventures, and Associates:
In the separate financial statements of a company, investments in subsidiaries, joint ventures, and associates are recorded at cost rather than at fair value.
It’s important to note that an audit of the financial statements is still required for all companies except dormant companies. – New Companies Ordinance, Part 9
Ask us for further information on how to prepare financial statements and related directors' reports under the reporting exemption.
Qualification Requirements for Reporting Exemption
To qualify for the reporting exemption, private companies must meet the/one of the following criteria:
Automatic Qualification
Private companies without subsidiaries and not being a subsidiary of another company qualify automatically if all shareholders agree.
Size Test
Subsidiaries of listed companies can prepare SME-FRS as long as they meet one of the above criteria.
Small Guarantee Companies (or a group of small guarantee companies):
Often used by charities, these companies must have annual revenues not exceeding HK$25 million.
Small Private Companies (or a group of small private companies):
Must meet at least 2 out of 3 criteria:
Total annual revenues not exceeding HK$100 million
Total assets not exceeding HK$100 million at the end of the period
Not exceeding 100 employees
Larger Eligible Private Companies (or group of eligible companies):
Must have shareholder approval of at least 75% of the shareholders and must meet at least 2 out of 3 criteria:
Total annual revenue not exceeding HK$200 million
Total assets not exceeding HK$200 million at the end of the reporting period
Not exceeding 100 employees
There are no reporting exemptions where the company is licensed under the Securities and Futures Ordinance (SFO).
Obtain Shareholder Approval When Establishing The Entity
Shareholder approval is often required, and it usually has to be given before the year-end, so explore SME FRS when establishing the entity, not after the first financial year-end.
Financial Statement Adjustments for Consolidation
When preparing consolidated financial statements for a parent entity using SME FRS, certain adjustments must be made to account for the differences between SME FRS and Full FRS. Ask us [contact page] for details on these adjustments.
Always Maintain Records and Evaluate Financial Statements
Even if your company is exempt from reporting, you are required to evaluate financial statements with the Companies Registry and maintain records of financial transactions.
Ask a Trusted Partner
Shepherd Asia's comprehensive knowledge of Hong Kong's financial system positions us as a trusted partner for clients in various industries. Our expertise in understanding and navigating reporting exemptions for private companies ensures that our clients can make informed decisions and operate effectively within Hong Kong's complex regulatory environment. Contact us for more information.
