Which accounting standard applies to a Hong Kong SME

What Accounting Standard Applies to a Hong Kong SME

A Hong Kong SME applies the SME Financial Reporting Framework (SME-FRF) and SME Financial Reporting Standard (SME-FRS) only if it is eligible for the reporting exemption under section 359 of the Companies Ordinance (Cap. 622). Qualifying companies use the SME-FRF and SME-FRS. Those that do not qualify must apply either Hong Kong Financial Reporting Standards for Private Entities (HKFRS for Private Entities) or full Hong Kong Financial Reporting Standards (HKFRS).

Hong Kong SME Accounting Framework

Hong Kong’s SME accounting framework has three tiers. Full HKFRS is the first tier, applying to entities with public accountability like listed companies and banks. The second tier is HKFRS for Private Entities, a reduced-disclosure framework for companies without public accountability that do not qualify for the section 359 exemption. The third tier is the SME-FRF and SME-FRS, reserved for companies that meet the section 359 criteria.

The reporting exemption under section 359 is the critical distinction. Qualifying companies may prepare financial statements using the SME-FRF and SME-FRS, which have fewer disclosure requirements than the other frameworks. This exemption does not remove the audit requirement. The financial statements must still be audited by a practising certified public accountant registered with the HKICPA.

HKFRS for Private Entities

The Hong Kong Institute of Certified Public Accountants (HKICPA) adopted HKFRS for Private Entities as the local version of the IFRS for SMEs. It applies to companies without public accountability that are too large for the reporting exemption, or that have elected not to use the SME-FRF.

Using HKFRS for Private Entities ensures compliance with recognised financial reporting standards that demand fewer disclosures than full HKFRS. Financial statements prepared under this framework still require an audit and must meet all statutory filing obligations.

SME-FRS vs HKFRS

The distinction between SME-FRS and HKFRS lies in scope and disclosure. Full HKFRS contains detailed requirements for complex transactions such as financial instruments, business combinations, and deferred tax. The SME-FRS omits many of these requirements because such transactions are less common in smaller entities.

Disclosure requirements under SME-FRS are significantly reduced. The notes to the financial statements are shorter and lack the granular detail demanded by full HKFRS. While preparing financial statements under SME-FRS may be simpler and faster, the framework must be applied in full, not selectively.

Section 359 Reporting Exemption

A company qualifies for the reporting exemption under section 359 by meeting the size criteria in the Companies Ordinance. These criteria are based on turnover, total assets, and number of employees. A private company meeting any two of the three thresholds in a financial year may apply the exemption. The specific thresholds change periodically and should be checked on the Companies Registry website.

Qualifying companies must notify the Registrar in their annual return. The exemption is assessed annually. A company that qualifies one year may not qualify the next if its figures exceed the thresholds.

Audit Requirement

The statutory audit requirement applies regardless of the accounting framework used. Section 405 of the Companies Ordinance mandates an audit for every company. The only exceptions are dormant companies with no significant accounting transactions.

A practising certified public accountant from a registered HKICPA practice unit must conduct the audit. The auditor’s report must state whether the financial statements give a true and fair view of the company’s financial position and were prepared in accordance with the applicable financial reporting framework.

Private Company Considerations

The private company limited by shares is the most common structure for Hong Kong SMEs. These companies have no minimum share capital requirement and can be wholly owned by non-residents. Directors must ensure the correct accounting framework is applied each year, based on the company’s eligibility for the reporting exemption.

When a company grows beyond the size thresholds, it must transition from SME-FRS to HKFRS for Private Entities or full HKFRS. This transition requires careful planning, as opening balances must be restated under the new framework.

Next Steps

Assess your company against the section 359 size thresholds to determine the applicable framework. If it meets the criteria, apply SME-FRF and SME-FRS. If not, use HKFRS for Private Entities or full HKFRS. In all cases, engage a practising certified public accountant registered with the HKICPA to perform the statutory audit.