Hong Kong Accounting Standards: The Four Things an SME Actually Needs to Know

At a glance

The scope, conditions and detailed requirements of the standards are as published by the HKICPA and under the Companies Ordinance.

SMEs can use the simplified framework

The HKICPA maintains the SME Financial Reporting Framework and Standard (SME-FRF & SME-FRS), which substantially simplifies both measurement and disclosure compared with full HKFRS — no complex fair value measurement or financial instrument disclosures, for instance.

Eligibility is tied to the reporting exemption in s.359 of the Companies Ordinance. The thresholds (two out of three: total revenue, total assets, number of employees) and what you actually save are in can a small company skip the audit.

One reminder: using the simplified framework does not mean skipping the audit. Every Hong Kong limited company is audited; what is simplified is the format of the statements and the disclosures.

1. When is revenue recognised?

Not when the money arrives, and not when the invoice is issued, but when the risks and rewards transfer.

• Goods → generally on delivery
• Services → generally on completion (long-term contracts may recognise by stage of completion)

The practical effect: goods delivered before the year end but not yet paid for are this year’s revenue; a deposit received for goods not yet delivered is a liability, not revenue.

This matters especially to a trading company — who owns goods in transit turns on the contract terms, and it changes this year’s profit directly.

2. How are fixed assets depreciated?

A piece of equipment cannot be expensed all at once; it is spread over its expected useful life.

But note that accounting depreciation and tax depreciation are two different things:

• For accounts — over the useful life you estimate (straight line over five years, for example)
• For tax — under the depreciation allowance regime in the Inland Revenue Ordinance, at rates fixed by the legislation

Because they differ, the tax computation adds back the accounting depreciation and deducts the tax depreciation allowances instead. That is exactly why a tax computation exists.

Worth noting that some items are written off 100% immediately (computer hardware and software, environmental protection facilities) — see what expenses are deductible.

3. How is inventory valued?

At the lower of cost and net realisable value.

Which means: if the goods are not selling and the market price has fallen, they are carried at the lower net realisable value and the difference is recognised as a loss.

In practice the biggest problem is not the valuation method — it is that no stock count was done. Without a count on the year-end date, quantities can only be inferred from the ledger, the auditor cannot verify them, and a qualified opinion follows.

This one cannot be fixed afterwards. If you hold inventory, count it on the year-end date and record item, quantity and cost.

4. How are receivables provided for?

Where a customer’s debt may not be recovered, it has to be assessed and an impairment provision made.

But there is a clear line on the tax side: a general provision is not deductible; only a specific bad debt that has been identified is.

So the provision in your accounts is not necessarily deductible for tax. To deduct it, you need a reason why that particular debt will not be recovered — the customer has ceased trading, collection has failed, reasonable steps have been taken. On keeping those records, see chasing a customer who will not pay.

What happens if you do not follow the standards?

1. A problem in the audit report. Where the treatment departs visibly from the standards, the auditor will ask for an adjustment; if it cannot be adjusted, the opinion is affected.

2. IRD attention. The financial statements are the basis of the return, so a treatment that does not hold up attracts an enquiry.

3. They are unusable externally. Bank lending, investors and a buyer’s due diligence all start with the statements.

What does an SME actually have to do?

Frankly: you do not need to memorise the standards. That is the accountant’s and the auditor’s job.

Three things are yours:

1. Keep complete supporting documents. Every transaction backed by an original document, retained for seven years.

2. Count the inventory at the year-end date. Compulsory if you hold stock, and impossible to recreate later.

3. Review with your accountant regularly. Do not wait until the year end to find out the treatment has to change throughout. Quarterly is enough — which is the value of keeping the books monthly or quarterly.

Do those three and the standards themselves can be left to the professionals.

We handle bookkeeping and company secretary work, and set your bookkeeping up to meet the standards; the statutory audit is performed by a practising CPA.

Get started, or talk to us first.

This article is general information and does not constitute accounting or audit advice. The scope, conditions and detailed requirements of the standards are as published by the HKICPA and under the Companies Ordinance and the Inland Revenue Ordinance.