Accounting and Auditing in Hong Kong: An Overview
Multinational corporations which are set up in Hong Kong often face unfamiliar rules and regulations, as well as ways of conducting business that may appear unusual compared to similar procedures in their home countries. Business-related rules and regulations in Hong Kong often change rapidly the compliance requirements and make important adjustments to its economy.
An increasing no. of companies in Hong Kong, both private and state-owned, are expanding beyond Hong Kong and aim to become multinational organisations in their own right, with listings on multiple overseas stock exchanges. In both cases, getting the right professional advice and support is crucial to these strategically important expansion plans.
The new Companies Ordinance ("the new CO"), consisting of 921 sections and 11 schedules, deals with a modernised legal framework with regard to the incorporation and operation of Hong Kong companies. It aims towards achieving four main objectives, namely, enhancement of corporate governance, facilitation of better regulation of business and modernisation of the law.
Financial Reporting Requirements in Hong Kong
The financial reporting requirements in Hong Kong are discussed below-
There are certain general reporting requirements, such as
- Preparation of the financial statements by the directors of the company for each financial year (FY) (in case of not falling in the reporting exemptions) reflecting the true and fair picture of the financial position of the company
- Preparation of consolidated financial statements at the end of the FY in case of a holding company unless the company is a partially owned subsidiary where none of the members requests for preparing consolidated financial statements or all members have agreed in writing regarding the non-preparation of the consolidated statements, company level financial statements must be prepared
- If a company is a wholly owned subsidiary, either company-level financial statements or consolidated financial statements must be prepared.
- Depending upon the permitted exclusions, the consolidated financial statements must be including all the subsidiary undertakings of the company)
The financial statements must comply with the following -
The accounting disclosure requirements which are-
- The aggregate amount of any outstanding loans to directors and employees to acquire shares in the company authorized under sections 280 and 281 of the new CO (required under paragraphs 9(1)(c) and 5, respectively of the Tenth and Eleventh Schedules to Cap. 32);
- Information regarding a company’s ultimate parent undertaking (required under section 129A of Cap. 32); and
- auditors’ remuneration (applicable to companies not qualified for simplified reporting, required under paragraph 15 of the Tenth Schedule to Cap. 32
- Section 4 of Part 1 of Schedule 4 further requires a statement to be made in the financial statements as to if they have been prepared as per the applicable accounting standards and to give the particulars of, and the reasons for, any material departure from those standards.
- Applicable accounting standards specified or issued by the Hong Kong Institute of Certified Public Accountants (“HKICPA”)
- The notes of the financial statements should be containing the information prescribed by the Companies.
- Auditing the Financial Statements (section 405).
The above requirements won’t be applicable to a dormant company
Changes as per the New Legislation
The below-mentioned major changes are introduced under the new CO with respect to financial reporting -
- Streamlining disclosure requirements overlapping with the accounting standards
- Relaxation of the criteria for companies for the preparation of simplified financial reports and director’s reports, i.e. the new "reporting exemption."
- Simpler provisions for preparation of the summary financial report and making them more user-friendly as well as extending their application to all companies.
- Requirement of the public companies and other companies not qualifying for simplified reporting to prepare a “business review” in the directors ‘report
- Clarification on the financial year of a company and needing companies for holding annual general meetings, and companies limited by guarantee or public companies or for delivering annual returns, regarding every financial year of the company for registration
- Requirement of a retiring auditor or the one removed for giving a statement of the circumstances connected with the cessation of office
Companies exempted from the reporting requirements are –
- A small guarantee company small private company or ;
- The company being a private company which doesn't have any subsidiaries and isn't a subsidiary of another incorporated company in Hong Kong and has the full support of shareholders every financial year
- The company is considered an eligible private company (or a group of eligible private companies) and the one gaining sufficient shareholder support
Financial Year (FY)
The first financial year of a company commences on the 1st day of its 1st ARP and ends on the last day of such period or after another date within 7 days prior to or after the end of that period as specified by the directors. If there is an existing company, the first accounting reference period commences on the day immediately after its primary accounting reference date and ends on the 1st anniversary of that date.
Accounting Reference Period (ARP)
This is the period by reference to which the company's annual financial statements must be prepared. The first and last days of the 1 accounting reference period ascertain the company’s first financial year under the new CO.
Company’s every subsequent ARP is a period of 12 months starting immediately post the end of the previous accounting reference period and ending on its accounting reference date until and unless the ARP is shortened or extended by alteration of the accounting reference date.
The 1st accounting reference period is determined as follows -
- In the case of an existing company, it starts on the day immediately after its primary accounting reference date and ends on the 1st anniversary of that date
- In the case a company is formed and registered as per the new CO, it begins on its date of incorporation and ends on its primary accounting reference date (section 368(2))
Laying and Publication of Financial Statements
The requirements regarding laying the financial statements are discussed below -
- Directors must lay out financial statements etc., before the company in general meeting.
- The copy of the reporting documents for the financial year must be laid by the company’s director before the company in the annual general meeting, or in any other general meeting directed by the Court, within the specified period.
- This isn’t applicable to a financial year in respect of which an annual general meeting isn’t required to be held.
- In the event of failure by the director in taking all reasonable steps for securing compliance, the director is considered to be committing an offence making him liable to a fine of $300,000.
- Upon the wilful failure of the director in taking all reasonable steps for securing compliancewith the same, he is considered to have committed an offence and is liable to a fine of $300,000 and to imprisonment for 12 months.
- If there is a requirement by the company for holding an annual general meeting in respect of a financial year, the company should be sending a copy of the reporting documents for the FY to every member at least 21 days before the date of the meeting wherein the copy is required to be laid.
Requirement in connection with the Publication of Financial statements
The publication requirements become applicable if there has been
- A circulation, publication or issuance of any specified financial statements or any non-statutory accounts regarding the company
- If the company otherwise makes such financial statements or accounts available for public inspection in a manner calculated for the invitation of members of the public generally, or any class of them, to read the financial statements or accounts.
- The specified financial statements must be accompanied by the auditor’s report on those statements.
The non-statutory accounts must be accompanied by a statement which must indicate
- That those accounts aren’t specified financial statements of the company
- Whether there has been the delivery of the specified financial statements for the financial year with which those accounts purport to deal to the Registrar
- Whether there has been the preparation of the auditor’s report on the specified financial statements for the financial year; and
- Whether the auditor’s report— (i) was qualified or otherwise modified, referred to any matter to which the auditor drew attention through emphasis without qualifying the report, orcontained a statement under section 406(2) or 407(2) or (3).
- The non-statutory accounts shouldn't be accompanied by any auditor's report on the specified financial statements.
If there is any contravention of the above-mentioned provisions by the company, every responsible person of the company would be deemed to have committed an offence, and each is liable for a fine of $150,000
Auditing Requirements in Hong Kong
As per the prevelant law in the country and Hong Kong Companies Ordinance, all companies which are registered in Hong Kong must have their annual financial statements audited by a practising Hong Kong Certified Public Accountant (CPA)every year.
The purpose of Statutory audit reports is the examination of a company's financial reports, which is conducted by an independent party for adherence to the requirements of the disclosure as per the prevailing law of Hong Kong Companies Ordinance and tax obligations of the Inland Revenue Ordinance.
Financial reports include the balance sheet, income statement, cash flow statement and statement of changes in equity.
Auditing in Hong Kong has to be conducted by a prfessionally qualified Hong Kong Certified Public Accountant (CPA). The CPA will audit the financial records, followed by the submission of the same to the Inland Revenue Department (IRD). The primary responsibilities include the registration of accountants, issuance of practising certificates and regulation of members' professional standards and conduct.
Hong Kong Standards on Auditing
The Hong Kong Standards for Quality Control, Auditing, Assurance, and Associated Services provides the objectives and due process of the Institute Council, the Hong Kong Standards for Quality Control, Auditing, Assurance, and Associated Services.
The Auditing and Tax Filing Process
The preparation and performance of an audit isn’t easy. It's a time-consuming process for both the business and the external auditor. A brief overview of the audit process in Hong Kong is discussed below.
- Preparation of the financial statements and supporting documents (e.g. sales and purchase invoices, contracts, bank statements, expenditure receipts, etc.) by the company for handling to the CPA’s
- Analysis of the company's activities and identification of the potential effects of the audit on the company by the CPA
- Examination by the CPA with regards to the financial statements and supporting documents for accuracy and along with identification and evaluation of any errors that could materially affect the financial statements.
- Issuance of an auditor’s report and audit opinion by the auditor for reflecting the accuracy and appropriate presentation of the company’s annual financial statements.
- The signing of the auditor's report and the supporting documents by the company's directors
- Receipt of the signed audit report by the auditor, creation of the tax calculation form, and sending all required documents to the IRD.
Services Provided by Enterslice
Many companies seeking a foothold in Hong Kong start with a small management team responsible for administering the entire operation, from overseeing production, generating new sales and monitoring internal controls, to meeting the requirements of local regulators. Our team offers a comprehensive suite of services as well as practical advice and solutions to support the clients from the initial planning stage to the complete setup of legal entities. Once the legal entities of our clients are set up, we can manage the essential administrative and back-office tasks, such as accounting and a range of other activities, so that our clients can focus on developing and growing your business. Our services include
Our bookkeeping services include maintenance of accounting records, including cash books, general ledgers, fixed asset registers, accounts receivable and payables sub-ledgers
We can assist in the preparation of periodic management accounts, cash flow statements, budgets and forecasts for management purposes.
Statutory Financial Reports
Our team can provide assistance in the preparation of annual statutory financial statements and compliance filing
We can liaise withthe auditors of the company during audits of the company’s financial records
We can provide guidance in treasury and payment processing to ensure that the same is done easily.
Our controlling services include reviewing expense claims and payment applications from the holistic view of accounting, tax and control requirements
- Assistance in the implementation of an accounting system, including setting up a chart of accounts, master data, and tailored reports appropriate for the reporting requirements
- Drafting accounting policies and control procedures for the client’s own accounting department
- Seconding qualified professional accountants and managers to their company on a temporary or part-time basis
- Reviewing accounts to ensure appropriateness and providing assistance to make improvement
- Providing training for in-house accountants