Management Accounts vs Statutory Accounts: The Difference

At a glance

The preparation, audit and filing requirements for statutory financial statements are as set out in the Companies Ordinance, the Hong Kong Financial Reporting Standards, and as most recently published by the IRD.

They answer different questions

Management accounts answer: which product line made money this month? Which customer has been slowest to pay? Can we carry one more hire? How many months of cash is there for the quiet season?

Statutory accounts answer: as at the year end date, what is this company’s financial position and how did it perform over the year? And has that figure been independently verified?

That is why the formats differ so much. Management accounts can be split by branch, by product, by customer; statutory accounts have to be presented in the categories the standards prescribe.

Why does one business produce two figures?

This is the most common misunderstanding — people see two different numbers and assume one of them is wrong.

There are three reasons:

One: timing differences. Management accounts may record on a cash basis — money in, money out. Statutory accounts use the accruals basis: earned but not yet received still counts as income, incurred but not yet paid still counts as an expense.

Two: year-end adjustments. Depreciation, accruals, prepayment amortisation, bad debt provisions, stock valuation — these are usually all done in one go at the year end. So a gap between the management-account profit and the final statutory profit is entirely normal.

Three: what the standards require. Statutory accounts follow the measurement and disclosure rules in the accounting standards, and for some items the treatment is not yours to choose.

Both figures can be right — they are simply calculated differently. What is worth watching is a gap large enough that nobody can explain it: that means an assumption in the management accounts is wrong, and it is worth digging into.

”I’ve already done the books” — so why prepare statutory accounts?

Because what you have done is, in most cases, management accounts.

What statutory accounts additionally require:

• Preparation under the accounting standards, with prescribed format and disclosures
• Generally, examination by an auditor and an audit report (a statutory audit must be carried out by a Hong Kong practising accountant)
• Approval and signature by the directors
• They form the basis of the profits tax return

So “I did the whole year in a software package” does not mean it can go straight to the IRD. What you have is a good starting point — but it still has to be adjusted, prepared and audited.

So does everything get done twice?

No. In practice it is one underlying set of books, two presentations.

Do the day-to-day bookkeeping once, then:

• Each month or quarter, produce management reports from the angle you want
• At the year end, make the adjustments, prepare the statutory financial statements, and put them through audit

Which is to say management accounts are not a second set of books; they are another view of the same transactions. That is exactly why bookkeeping frequency matters so much — the underlying numbers have to be current before either view is possible.

Conversely, a company that does the books once a year effectively has only statutory accounts and no management accounts. Mid-year, there is nothing to look at.

What should management accounts contain?

There is no standard answer; it depends on the decisions you need to make. But for most small businesses, four things are worth seeing every month:

One: a profit and loss summary — revenue, cost, expenses, profit. Ideally split along the logic of your own business (branch, product line, service type).

Two: cash flow — which is not the same as profit. Plenty of profitable companies run out of working capital.

Three: debtor ageing — who owes how much, and for how long. This is usually the report that shows a problem first.

Four: payables and upcoming commitments — rent, wages, tax, contributions.

Four things, one page. It does not need to be complex, but it does need to arrive every month.

What do you lose by doing only statutory accounts?

You lose timeliness.

By the time the statutory accounts appear, you are looking at things that happened months ago. Useful for filing tax and reporting externally — but not for making decisions, because what has already happened cannot be changed.

And many of the arrangements available have to be decided within the year: the split between salary and dividend, the timing of capital expenditure, an application to hold over provisional tax. Once you only see the numbers after the year end, all of those are closed.

And doing only management accounts?

That is a compliance problem — statutory accounts are not optional.

A company has to keep accounting records, prepare financial statements, have them audited and file its return. On the consequences of not doing so, see what happens when a return is filed late.

So both are needed, but their uses are completely different and neither substitutes for the other.

How to arrange it in practice

If all you have today is one report at the year end, start with the simplest possible step: one page of management reporting each month. Four figures, one page, no need for polish.

Three months in you will start to see trends — the month costs rose, the line that has been losing money all along. That is the whole value of management accounts.

Want someone to connect the day-to-day bookkeeping, the monthly management reporting and the year-end statutory accounts into one thing? Talk to us, or get started.

This is general information and does not constitute accounting or audit advice. The preparation, audit and filing requirements for statutory financial statements are as set out in the Companies Ordinance, the Hong Kong Financial Reporting Standards, and as most recently published by the IRD.