What does the Hong Kong reporting exemption mean

What Is the Reporting Exemption

Section 359 of the Companies Ordinance (Cap. 622) allows a qualifying Hong Kong company to prepare its financial statements using the SME Financial Reporting Framework and Standard (SME-FRF and SME-FRS) instead of full Hong Kong Financial Reporting Standards (HKFRS). This exemption reduces disclosure requirements but does not remove the mandatory audit requirement. Every company must still have its financial statements audited annually by a practising certified public accountant registered with the HKICPA.

Section 359 Hong Kong Companies Ordinance

Section 359 establishes the reporting exemption. A company qualifies if it meets the criteria set out in that section. The directors of a qualifying company may resolve to apply the exemption for a financial year. Once applied, the company prepares its financial statements under the SME-FRF and SME-FRS rather than under full HKFRS or HKFRS for Private Entities. The exemption is a choice, not an automatic entitlement.

SME-FRF and SME-FRS Reporting

The SME Financial Reporting Framework (SME-FRF) and SME Financial Reporting Standard (SME-FRS) are the accounting standards issued by the Hong Kong Institute of Certified Public Accountants (HKICPA) for companies that qualify for the reporting exemption. The SME-FRF sets out the principles for recognising, measuring and presenting transactions, while the SME-FRS specifies the disclosure requirements. Compared to full HKFRS, the SME-FRS requires significantly fewer disclosures, reducing the compliance burden for smaller companies. The SME-FRF and SME-FRS are not the same as HKFRS for Private Entities, which is a separate reduced framework.

Hong Kong Financial Reporting Exemption

The Hong Kong financial reporting exemption is the practical name for the relief under section 359. It applies to private companies that meet the size thresholds or other conditions in the section. A qualifying company may prepare financial statements with reduced disclosures, making the annual reporting process simpler and less costly. The exemption does not affect the company's obligation to maintain proper accounting records, to have those records audited, or to file an annual return with the Companies Registry on Form NAR1.

Conditions for Qualifying

To qualify, a company must be a private company and meet the criteria in section 359. The criteria relate to the company's size, measured by total assets, annual revenue and number of employees. A company that is a member of a group must consider the group's aggregate figures. The directors must assess whether the company qualifies each financial year. If the company ceases to qualify, it must apply full HKFRS or HKFRS for Private Entities from the following financial year.

What the Exemption Does Not Change

The reporting exemption reduces disclosure but does not change the fundamental requirements of the Companies Ordinance. Directors must still prepare financial statements that give a true and fair view of the company's financial position. The audit requirement remains in full force. A practising certified public accountant must audit the financial statements and issue an auditor's report. The company must still keep accounting records for seven years, maintain statutory registers, and file its annual return on time. The exemption is a disclosure relief only, not a compliance holiday.

How to Apply the Exemption

The directors pass a resolution to adopt the SME-FRF and SME-FRS for the financial year. The financial statements are then prepared in accordance with those standards. The auditor's report refers to the SME-FRF and SME-FRS as the applicable financial reporting framework. Document the company's qualification under section 359 and retain the directors' resolution. If the company later grows beyond the qualifying thresholds, it must revert to full HKFRS or HKFRS for Private Entities. The HKICPA publishes guidance on the transition between frameworks.