SME-FRF and SME-FRS Eligibility for Hong Kong Small Companies

SME-FRF and SME-FRS Eligibility Hong Kong Small Companies

Section 359 of the Companies Ordinance (Cap. 622) answers the question of sme-frf and sme-frs eligibility hong kong small companies with a three-part size test. A company qualifies as small if it meets any two of the three criteria, total revenue, total assets and number of employees, for two consecutive financial years. Qualifying companies may prepare financial statements under the SME-FRF (Small and Medium-sized Entity Financial Reporting Framework) and SME-FRS (Small and Medium-sized Entity Financial Reporting Standard) rather than full Hong Kong Financial Reporting Standards (HKFRS).

Hong Kong SME Financial Reporting Framework

The Hong Kong SME financial reporting framework consists of the SME-FRF and the SME-FRS, both issued by the Hong Kong Institute of Certified Public Accountants (HKICPA). It is designed for small private companies that meet the section 359 threshold. Companies that qualify may prepare financial statements that are simpler and less detailed than those required under full HKFRS.

The SME-FRF sets out the conceptual basis for financial reporting by small entities. The SME-FRS contains the specific recognition, measurement, presentation and disclosure requirements. Together, they provide a streamlined alternative to the more complex HKFRS for private entities. A company that elects to use the SME-FRF and SME-FRS must apply them consistently. Switching between frameworks from one year to the next requires a valid reason.

Hong Kong Small Company Reporting Exemption

The Hong Kong small company reporting exemption under section 359 is not automatic. A company must satisfy the size test and must not be a public interest entity or any other type of company that the legislation excludes.

The exemption applies to financial statements prepared for a financial year. If a company meets the qualifying conditions for two consecutive years, it may prepare its financial statements under the SME-FRF and SME-FRS for the subsequent year. If a company ceases to meet the conditions for two consecutive years, it must revert to full HKFRS. The exemption does not remove the requirement for an audit. Qualifying small companies may still need audited financial statements if their articles of association or other legislation require it.

Hong Kong SME-FRS Eligibility Criteria

The Hong Kong SME-FRS eligibility criteria are set out in section 359 of the Companies Ordinance (Cap. 622). A company is a small private company if it satisfies any two of the following conditions in both of the two preceding consecutive financial years:

The group threshold applies when a company is a parent company. The test is then applied on a consolidated basis: total revenue and total assets of the group must each be not more than HK$100 million, and the number of employees of the group must be not more than 100. A company that is a member of a group must also ensure that no company in the group is a public interest entity.

If a company does not have a full two-year history at the time of its first financial year, the test is applied to that single year. For subsequent years, the two-year history requirement applies.

Hong Kong Section 359 Small Company

Section 359 of the Companies Ordinance (Cap. 622) defines a small private company for the purpose of the reporting exemption. The term "small private company" in section 359 refers to a private company that is not a public company, not a company limited by guarantee, and not a company that is part of a group containing a public interest entity.

The following types of company are expressly excluded from the exemption, even if they meet the size test: - Listed companies and their subsidiaries - Companies that are public interest entities (for example, banks, insurers, securities firms and other financial institutions regulated under Hong Kong law) - Companies that are parent companies of a group that includes a public interest entity

A small private company that qualifies under section 359 may prepare its financial statements under the SME-FRF and SME-FRS. The financial statements must still be audited by a practising certified public accountant registered with the HKICPA, unless another exemption applies. The audit may be performed under the simplified reporting requirements of the SME-FRF and SME-FRS, which reduces the auditor's workload and the associated cost.

Contrast with Full HKFRS

Full HKFRS requires extensive disclosures, detailed recognition criteria and complex measurement rules. The SME-FRF and SME-FRS reduce the disclosure burden significantly. Full HKFRS requires detailed segment reporting, earnings per share calculations, and extensive notes on financial instruments. The SME-FRS omits these requirements entirely.

The table below summarises the key differences:

A company that qualifies for the reporting exemption must still prepare financial statements that give a true and fair view. The SME-FRS achieves this with fewer pages and fewer notes. Directors of a small private company should consider whether the exemption reduces cost and administrative burden without compromising the needs of the company's members and creditors.

Practical Steps for Qualifying Companies

A company that believes it qualifies as a small private company under section 359 should take the following steps:

1. Calculate the thresholds - Compare total revenue, total assets and number of employees against the HK$100 million limits for two consecutive years.
2. Check the group threshold - If the company is part of a group, apply the test on a consolidated basis and confirm no group member is a public interest entity.
3. Confirm the company type - Ensure the company is a private company limited by shares and is not a public interest entity.
4. Document the decision - The directors should record the basis on which the company qualifies, particularly if the company is close to the threshold.
5. Prepare financial statements - Use the SME-FRF and SME-FRS templates available from the HKICPA.
6. Engage a practising certified public accountant - An audit is still required. The accountant must hold a practising certificate from the HKICPA.

File the financial statements prepared under the SME-FRF and SME-FRS with the Companies Registry together with the annual return (Form NAR1) within 42 days after the return date. The registration fee for a private company is HK$105 if filed on time.

Important Exclusions and Limitations

The reporting exemption under section 359 does not apply to every small company. Note the following:

• Public interest entities are excluded. This category includes companies regulated by the Hong Kong Monetary Authority, the Securities and Futures Commission, the Insurance Authority, and the Mandatory Provident Fund Schemes Authority.
• Group companies - If any company within the group is a public interest entity, all companies in that group are excluded from the exemption, even if they individually meet the size test.
• Companies limited by guarantee are not eligible, regardless of size.
• Unlimited companies with a share capital may qualify if they are private and meet the size test, but the exemption is less common for unlimited companies.
• Overseas companies re-domiciled into Hong Kong under the new regime (effective 23 May 2025) may qualify if they meet the size test and are private companies limited by shares.

The reporting exemption is optional. A company that qualifies may choose to continue using full HKFRS. Once a company elects to use the SME-FRF and SME-FRS, it must apply that framework consistently unless a change is justified by a change in circumstances.

Summary of the Section 359 Test

The size test under section 359 is applied as follows:

• Two out of three criteria must be met for two consecutive years.
• Total revenue and total assets are each capped at HK$100 million.
• Number of employees is capped at 100.
• Group test - For a parent company, the same thresholds apply to the consolidated figures.
• First year - If the company has only one year of history, the test is applied to that year alone.
• No public interest entity - The company must not be, and must not have a group member that is, a public interest entity.

A company that satisfies these conditions may prepare its financial statements under the SME-FRF and SME-FRS. The exemption does not alter the requirement to file an annual return or to have audited financial statements. It does reduce the cost and complexity of both the preparation and the audit.