Financial statements are an important accounting requirement and also represents the company’s financial position. We have put together this guide to provide you with a better understanding of companies’ financial statements in Hong Kong.
What is an audited financial statement?
Audited financial statements are accounting documents prepared by a Certified Public Accountant (CPA) on behalf of the company. The audited financial statements provide transparency, financial accountability and accuracy to the company’s stakeholders.
Audited financial statements must be presented to the shareholders within a prescribed time limit.
The audited financial statements will include an opinion related to the financial documents which may be qualified or unqualified.
Qualified and unqualified opinion
An unqualified opinion of the audited financial statements means that the CPA opines that the financial statements give a true and view of the financial position of the company as at the financial year-end and of its financial performance and its cash flow for the year then ended in accordance with Hong Kong Financial Reporting Standard (HKFRS) issued by the Hong Kong Institute of Certified Public Accountants and have been properly prepared in compliance with the Hong Kong Companies Ordinance.
A qualified opinion means that the CPA opines otherwise for a reason stated in the auditor’s report.
Five core elements of the financial statements
Financial statements have five elements, which are:
- Income statement. The income statement shows the company’s revenue and expenses earned over a period of time, which can be during a quarter, half-year or full year.
- Balance sheet. A balance sheet reports the company’s assets, liabilities and shareholders’ equity at a specific point in time.
- Cash flow statement. The cash flow statement summarises changes in cash flow for the company’s operation, investment and financial activities.
- Statement of changes in equity. A statement that explains the changes in the shareholders’ interest and share capital over the reporting time.
- Notes to financial statements. It includes any additional information, such as the company’s information, accounting policies and additional information of the income statement, balance sheet, income statement, cash flow statement and statement of changes in equity.
Benefits of financial statements
Other than the accounting requirement of having financial statements, there are other benefits of maintaining financial statements.
1. Understanding the financial status of your company.
The financial status of your company can be presented through the financial statements. It is important that you know the company’s financial status since it is a major concern to the investors and creditors.
Investors can have a better understanding of the company’s financial position by studying the financial statements.
The different elements of the financial statements represent different financial aspects of the company.
2. Prepare budgets and make decisions
Once you have a better understanding of the company’s financial status, you will be able to make better decisions for the company’s direction.
Preparing budgets also require that you understand the company’s financial position by referring to past financial statements.
3. Identifying trends
Financial statements help identify any past or present trends that could lead to problems or any occurring problems that need to be solved.
The statements could also identify any growth trends that can achieve higher profits.
4. Debt management
The financial statements separate the assets from the liabilities, which can help you manage the company debts and which debts the company should pay off first.
What are consolidated financial statements?
Consolidated financial statements are the financial statements of a company with subsidiaries or multiple branches.
The consolidated financial statements should represent the group’s complete assets, liabilities, income, equity, cash flows and expenses of the parent and subsidiary companies.
The general requirements for consolidated financial statements under section 380(2) of the Companies Ordinance are:
- Give a true and fair view of the financial position of the company, and all the subsidiary undertakings, as a whole at the end of the financial year
- Give a true and fair view of the financial performance of the company, and all the subsidiary undertakings, as a whole for the financial year
According to section 379(3), companies are exempted from preparing consolidated financial statements if they meet one of the following conditions:
- If the company is a wholly-owned subsidiary of another body corporate at the end of the financial year.
- If a company is a partially owned subsidiary of another body corporate at the end of the financial year and directors notify the members in writing about not preparing the consolidated statements at least six months before the end of the financial year and no one objects to the notification within three months before the end of the financial year.
- If the company is a partially owned subsidiary of another body corporate at the end of the financial year and all members agree before the end of the financial year that consolidated statements will not be prepared for the financial year.
It is important that your company has accurate financial statements to represent its financial status and prepare and make financial decisions in the future. To ensure you have a good understanding of companies’ financial statements in Hong Kong, do not hesitate to contact Acclime.
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