What is a director's report and do I need one in HK

What Is a Director's Report and Do I Need One in Hong Kong?

A directors' report is a statutory narrative that accompanies a Hong Kong company's audited financial statements. For most companies, the answer is yes. It is a required component of the annual financial reporting package under the Companies Ordinance (Cap. 622).

The board prepares this review of the company's business, its performance during the financial year, and its financial position at year end. The board must approve the report before the financial statements are laid before members or sent to them.

Directors Report Requirement Hong Kong

The Companies Ordinance sets out the requirement to prepare a directors' report. Every company must include one with its financial statements for each financial year, unless an exemption applies.

A director or the company secretary must sign the report and state its approval date. It is then delivered to the Companies Registry with the audited financial statements and the auditor's report as part of the annual return filing on Form NAR1.

Hong Kong Financial Statements Directors Report

Three documents form the complete financial reporting package for a Hong Kong company:

The report must include prescribed content. This includes the company's principal activities, a fair review of its business and performance, and particulars of important events affecting the company during the year. It must also state whether the directors consider the company a going concern.

What Is Included in a Directors Report HK

The Companies Ordinance specifies the minimum content of a directors' report. The report must include:

• The company's principal activities and any change during the year
• A fair review of the company's business and its performance
• A description of the principal risks and uncertainties facing the company
• Particulars of any important events affecting the company since the end of the financial year
• An indication of likely future developments in the business
• The amount of any dividend paid or proposed
• The names of the directors who served during the year
• Whether the directors consider the company to be a going concern

Companies qualifying for the reporting exemption under section 359 have reduced disclosure requirements. Those companies apply the SME Financial Reporting Framework and Standard (SME-FRF and SME-FRS) and may prepare a shorter directors' report.

Exemptions and the Reporting Exemption

A company that qualifies for the reporting exemption under section 359 may prepare financial statements with reduced disclosure, but the directors' report requirement generally remains. The exemption reduces the content of the notes to the financial statements, not the directors' report itself.

Only companies that have declared themselves dormant under the Companies Ordinance and have no significant accounting transactions may be fully exempt from preparing a directors' report. A dormant company is also exempt from delivering an annual return on Form NAR1, so the directors' report is not required.

Even companies eligible for the SME-FRS reporting exemption must prepare a directors' report unless they are dormant. The directors' report accompanies the audited financial statements laid before the members, and the audit requirement itself is not removed by the reporting exemption.

Practical Steps

If your company is active and not dormant, you must prepare a directors' report each financial year. The board approves the report, which is then signed and filed with the Companies Registry as part of the annual return. Your auditor will review the directors' report for consistency with the financial statements, and the auditor's report will refer to it.

For companies using the SME-FRF and SME-FRS under the reporting exemption, the directors' report can be shorter but must still cover the prescribed matters. Your accountant or company secretary can prepare the report based on the board's review of the year's activities.