Hong Kong accounting standards and compliance requirements.

Accounting plays a vital role in maintaining the financial health and transparency of businesses in Hong Kong. Foreign founders setting up a company in the city are typically considering more than the reporting standards on paper. They also need to know what records the Inland Revenue Department (IRD) expects them to keep, which accounting method applies and when day to day bookkeeping should be handed to a professional.

This guide covers the accounting principles, requirements and practices that apply to companies in Hong Kong, including what counts as a proper accounting record, how long it needs to be kept and where bookkeeping ends and accounting begins.

Accounting standards in Hong Kong

The accounting standards in Hong Kong are known as the Hong Kong Financial Reporting Standards (HKFRS), which are a set of rules regarding the treatment of financial transactions in Hong Kong. These standards identify the measurement, presentation, recognition and disclosure requirements of transactions and events that are included in a general-purpose financial statement of the company.

Additionally, the Hong Kong Institute of Certified Public Accountants (HKICPA) has developed and issued Financial Reporting Standards specifically for Small and Medium-sized Enterprises (SMEs) Financial Reporting Framework and Financial Reporting Standard, known as SME-FRF & SME-FRS. This framework and the standards streamline reporting procedures, catering to the unique needs of SMEs in Hong Kong.

Moreover, for companies without public accountability, the HKICPA introduced the Hong Kong Financial Reporting Standard for Private Entities (HKFRS for Private Entities). This standard eliminates certain accounting treatments, topics and disclosure requirements that are irrelevant to private entities, ensuring a more tailored and efficient reporting process.

Financial year-end

The fiscal year for a Hong Kong company starts on its date of incorporation and concludes on a date selected by its directors. Ideally, the Board should finalise this before the company’s first anniversary.

In cases where the Board does not decide on a fiscal year-end date, it defaults to the last day of the month of the company’s first anniversary. Many Hong Kong companies opt for either 31 December or 31 March as their fiscal year-end, with the latter aligning with the government’s fiscal year.

Bookkeeping and proper accounting records

All Hong Kong companies need to maintain proper records and accounts on an annual basis, but the detail behind that requirement matters once a company has more than a handful of transactions a month. Bookkeeping, the ongoing recording of transactions, is often managed in-house, while accounting, the preparation of financial statements and tax computations, typically calls for a qualified accountant or CPA firm.

What counts as proper accounting records

Section 373 of the Companies Ordinance requires every Hong Kong company to keep accounting records that explain its transactions, disclose its financial position with accuracy at any time and allow financial statements to be prepared and audited. Section 51C of the Inland Revenue Ordinance sets a parallel requirement, so that assessable profits can be readily ascertained from a company’s records.

Section 373 and Section 51C translate into five practical categories most companies need to keep:

• Bank statements, advice and reconciliations that tie them back to the books
• Sales and purchase invoices, with corresponding delivery documents and contracts
• Receipts for expenditure, together with the signed agreements
• Payroll and Mandatory Provident Fund (MPF) contribution records
• Contracts and agreements with financial terms, such as leases and loan agreements

Gaps in any one category tend to surface at the same point, when an auditor or the IRD asks for supporting evidence behind a figure in the accounts.

Retention period and electronic records

Both the Companies Ordinance and the Inland Revenue Ordinance set a seven-year retention period, though the starting point differs slightly. The Companies Ordinance counts seven years from the end of the financial year the records relate to, while the Inland Revenue Ordinance counts seven years from the completion of the transaction, acts or operations to which they relate. In practice, companies generally plan around the longer of the two.

Electronic copies are accepted under the Electronic Transactions Ordinance (Cap. 553), provided the records remain accessible and legible, and are retained in their original electronic format or a certified equivalent. A director who fails to comply with the IRO’s record-keeping requirement carries a fine of up to HKD 100,000. Penalties under the Companies Ordinance depend on the specific provision breached and should be cited by reference to the relevant section.

Closing a company does not end the obligation on its own terms. Where a company is dissolved, whether by deregistration or winding up, the last director is required to keep its accounting records for at least six years from the date of dissolution, which runs alongside (and can outlast) the seven-year rule that applied while the company was trading.

Accrual versus cash basis accounting

Hong Kong’s annual financial statements and audit are prepared on an accrual basis, which recognises income and expenses when they are earned or incurred rather than when cash changes hands. Many smaller companies keep their day to day records on a simpler cash basis, particularly in the early stages.

The practical consequence surfaces at year end. Where a company has been recording transactions on a cash basis, the accountant typically needs to restate the accounts to bring accruals, prepayments and payables in line with the correct period before the audit can proceed. This restatement takes longer and costs more the further the underlying records are from accrual principles, which is one reason companies tend to move to accrual-based bookkeeping earlier as transaction volume grows.

The practical question for a growing company is usually not whether to use a professional at all, since the annual audit already requires one, but when to extend that support to the bookkeeping itself. Companies with rising transaction volume or more complex contracts tend to hand this over around the same point the accrual restatement above starts becoming time-consuming.

Annual financial statements

All companies in Hong Kong prepare annual financial statements, including a profit and loss statement, balance sheet, cash flow statement and statement of changes in equity. Private companies are not required to file annual financial statements with the Companies Registry, but proper accounts should be kept at the company’s office. Public companies file their annual statements with the Companies Registry.

Audit

Financial statements, profits and taxes owed to the government undergo verification and auditing by a third party to ensure compliance with Hong Kong laws. As per the Companies Ordinance, all Hong Kong-incorporated companies undergo an annual financial audit conducted by a licensed auditor, known as a Hong Kong Certified Public Accountant (CPA).

Financial statements that need to be presented to the auditor include:

• All bank statements
• All contracts
• All expenditure receipts
• All financial statements
• All management accounts
• All relevant accounting documents
• All sales and purchase invoices
• Balance sheet
• Detailed general ledger for business transactions
• Income statement

Once the auditor reviews the statements and documents, they provide their opinion on any material deviations from the Hong Kong Financial Reporting Standards and Auditing Standards. This opinion, documented in the audit report, assesses whether the company’s financial reports have a true and fair view of its financial status.

Small and medium-sized companies will be eligible for reporting exemption (the accounts must be audited but do not need to be lodged with the Companies Registry) if the company is private, has no subsidiary and is not itself a subsidiary of another company, and meets two of the three thresholds for its category:

An eligible private company also needs approval from shareholders holding at least 75% of the voting rights, with no shareholder objecting, in addition to meeting the size thresholds above.

For a group of companies, which may include non-Hong Kong body corporates that would have qualified under the relevant category had they been incorporated under the Companies Ordinance, the following aggregation rules apply:

• A group of small private companies does not exceed two out of the three thresholds set for a small private company.
• A group of eligible companies (small private or larger eligible) does not exceed two out of the three thresholds set for a larger eligible private company.
• A group of small guarantee companies does not exceed a combined annual revenue of HKD 25,000,000.
• For a mixed group, the applicable threshold depends on the holding company: the small private company aggregation applies if the holding company is a small private company, the eligible aggregation applies if it is an eligible private company and the HKD 25,000,000 combined revenue threshold applies if it is a small guarantee company.

Conclusion

Understanding accounting in Hong Kong is crucial for companies registered in the region. Adhering to the Hong Kong Financial Reporting Standards (HKFRS), maintaining accurate financial records, preparing annual financial statements and undergoing audits are fundamental aspects that ensure compliance with regulatory requirements and transparency in financial reporting.

The practical work sits in keeping the right records for seven years, moving to accrual-based bookkeeping before it becomes a year-end scramble and knowing when ongoing bookkeeping needs a professional rather than an in-house spreadsheet. Where the rules feel unclear or a company has outgrown its current setup, the right support can help apply them to the business and build a workable reporting approach.

How Acclime can help with accounting compliance in Hong Kong

Acclime Hong Kong offers complete support for accounting services and audit compliance. From bookkeeping and financial statement preparation to statutory audit coordination, our team of experts can assist with everything from maintaining proper books of account to ensuring full compliance with Hong Kong Financial Reporting Standards (HKFRS).

By partnering with us, businesses in Hong Kong can confidently manage their accounting obligations while maintaining accurate financial records and regulatory compliance. Contact us to learn more about how we can support your accounting requirements and annual audit needs.