Accounting Standards in Hong Kong: Comprehensive Guide for 2023
In this article, we'll walk you through the fundamentals of Hong Kong Financial Reporting Standards (HKFRS), compliance requirements, and key considerations that can impact your business's financial health.
In Hong Kong, accounting standards play a crucial role when running a business. Let’s begin with a few key questions.
Who needs to prepare accounts in Hong Kong?
Anyone engaged in a trade, profession, or business, whether it's a sole proprietorship, partnership, or a limited company, must prepare accounts according to Hong Kong accounting standards.
Can the accounts be prepared by my company accountant?
Yes the accounts can be prepared internally, however, limited companies must have their accounts audited by a Certified Public Accountant (CPA) to ensure compliance with HKFRS (Hong Kong Financial Reporting Standards). More on these standards below.
How often should accounts be prepared?
In Hong Kong, financial statements should be prepared at least once a year to meet tax compliance requirements. However, for a more comprehensive understanding of financial health, it is advisable to update your financial records at least once per month. As your business scales, consider hiring a part-time bookkeeper to maintain real-time financial information.
Why is accounting necessary in Hong Kong?
Accounting is essential for practical reasons. It aids in decision-making processes, such as determining the profitability of various product lines and pinpointing areas where they may be incurring losses.
From a legal perspective, maintaining proper books of accounts is a requirement stipulated in the Hong Kong Companies Ordinance. These financial records serve as the foundation for the annual statutory audit and are vital for the tax return filing process.
Legal Requirements for Accounting in Hong Kong
In addition to the requirements outlined above, there are regulations that ensure transparency, consistency, and comparability in financial reporting practices.
Accounting Standards in Hong Kong
Accounting standards in Hong Kong are known as Hong Kong Financial Reporting Standards (HKFRS), which are modelled after International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB). These standards set the rules for the treatment of financial transactions in reporting across international markets.
Common Audit Pitfalls in Hong Kong
For limited companies subject to audit, several areas can pose challenges:
Inventory: Auditors are required to physically observe the inventory count at the balance sheet date, as mandated by HKFRS, to ensure accuracy. Failure to do so can result in a "qualified" audit report, which may raise concerns among investors and stakeholders.
Net Asset Liability Position: Many businesses, particularly those in research-intensive fields like medical technology, may experience initial years of losses, which can lead to a "net liability position" where liabilities exceed assets at the balance sheet date. Auditors must add a "going concern remark" in such cases, which could affect investor confidence.
Record Keeping and Compliance in Hong Kong
Even after the audit and tax filing are complete, the company must retain financial records and source documents for a minimum of seven years. This practice aligns with Hong Kong regulatory requirements and ensures you are prepared for potential inquiries or audits.
In summary, accounting in Hong Kong is a legal obligation, which requires CPA involvement for audit. It's also a powerful tool for informed decision-making.
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