Small Company Reporting Exemption: Hong Kong Audit Rules

At a glance

The qualifying conditions, monetary thresholds, resolution requirements and excluded categories are as set out in Part 9 and Schedule 3 of the Companies Ordinance and as most recently published by the Companies Registry.

”Hong Kong companies don’t need an audit” — this is wrong

You see it constantly online, particularly in material about offshore structures.

The fact is that a Hong Kong limited company needs audited financial statements every year, and the audit has to be carried out by a Hong Kong practising accountant.

The misunderstanding usually comes from one of two places:

One: confusion with other jurisdictions. Some jurisdictions genuinely do exempt small companies from audit. Hong Kong does not.

Two: misreading the reporting exemption. People see the word “exemption” and assume the audit is what has been exempted.

Worth adding: a dormant company is a different matter entirely — that is a specific status under the Companies Ordinance with a threshold of no accounting transactions at all during the year, and it has nothing to do with being “small”.

So what does the reporting exemption actually save?

Three things, all of them real:

One: the financial statements can be simpler. Certain disclosures can be omitted, and the statements get shorter.

Two: the SME Financial Reporting Standard can be used. Compared with the full Hong Kong Financial Reporting Standards, its measurement and disclosure requirements are far lighter — fair value measurement and the complex financial instrument disclosures, for instance.

Three: the directors’ report requirements are lighter. Some content can be left out.

The practical effect: preparation takes less time and the audit work is smaller, so the fee is generally lower.

What is saved is not “you don’t have to do it” but “there is less to do”. For most SMEs, that difference is quite real in fee terms.

How do you qualify?

A small private company — any two of these three:

• Total revenue not exceeding HK$100,000,000
• Total assets not exceeding HK$100,000,000
• Not more than 100 employees

Note it is two out of three, not all three. So a company with revenue over a hundred million but only a few dozen staff and modest assets may well still qualify.

In practice the overwhelming majority of Hong Kong SMEs meet this — so it is not an elite threshold, it is the default position for most companies.

Groups — if your company has a holding company or subsidiaries, the test applies to the group as a whole, not to the single company. The structure of a branch versus a subsidiary matters here.

Above the thresholds — there is a further “eligible private company” category with higher thresholds, but it requires a members’ resolution (75% in favour with no member objecting) before the exemption applies. The thresholds are set out in Schedule 3 of the Companies Ordinance.

Not available — listed companies, banks, insurers and other regulated entities, plus the other categories the legislation specifies.

Should you use it?

For most small companies the answer is yes — it saves time and money with no real downside.

But a few situations are worth thinking through:

Planning to raise money or list. Investors and sponsors generally want statements under the full Hong Kong Financial Reporting Standards. Having used the simplified version, you may have to redo earlier years — and redoing costs more than was saved at the time.

Overseas shareholders or a parent company. They may need statements under a particular framework for consolidation.

The bank has specific requirements. Some financing arrangements specify the format of the statements.

Planning to sell. A buyer’s due diligence may want fuller disclosure.

The test is simple: ask yourself whether anyone is likely to ask for a full set of statements in the next two or three years. If not, use the exemption; if so, discuss it first.

How do you obtain it?

A small private company generally qualifies directly, with no special application.

What has to be done in practice:

• Confirm with your auditor whether you qualify and under which category
• Confirm the group position (if there is a holding company or subsidiaries)
• Where the category requires a resolution, follow the procedure properly and keep the resolution on file
• Reconfirm every year — the company grows, hires, acquires something, and the position can change

That last point is the one most often missed: qualifying is not a one-off. Qualifying this year does not mean qualifying next year, particularly for a fast-growing company.

Do not equate this with “saving on the audit fee”

What the reporting exemption saves is disclosure work. What actually drives the audit fee and timetable is still the same thing — how complete the accounts you hand over are.

A company using the reporting exemption but handing over a bag of receipts will still cost more than a company on the full standards with tidy accounts.

There is more on this in the audit process, timetable and cost.

We do bookkeeping and company secretarial work, which includes confirming your qualifying position each year and having the accounts ready. The statutory audit itself is carried out by a licensed accountant.

Want to know whether your company qualifies this year? Talk to us, or get started.

This is general information and does not constitute legal, accounting or audit advice. The qualifying conditions, monetary thresholds, resolution requirements and excluded categories for the reporting exemption are as set out in Part 9 and Schedule 3 of the Companies Ordinance and as most recently published by the Companies Registry; a statutory audit must be carried out by a Hong Kong practising accountant.