Author: Dominik Stuiber
What are the general requirements for financial statements?
For each financial year, the directors of a company must prepare financial statements and the financial statements must be audited. The financial statements must comply with the true and fair view requirements. If the company is a holding company, it must prepare consolidated financial statements and include all subsidiary undertakings, including overseas subsidiaries. The generally applicable financial reporting standards are the HKFRS which are modelled after the IFRS. Private Limited Companies may apply the HKFRS for Private Entities if they do not have any public accountability publish general purpose financial statements for external users.
What Are SME-FRS and what companies are eligible?
In an effort to further ease the burden for SMEs, the Companies Ordinance includes a reporting exemption to qualifying private or guarantee companies. It is to be highlighted here that the reporting exemption does not exempt companies from the preparation of financial statements or the audit requirement altogether, but rather means that certain information otherwise required to be disclosed in the financial statements will not be required in this instance. The reporting exemption extends to:
• Disclosure of auditor’s remuneration;
• True and fair view accounting requirement and the auditor’s requirement to express a true and fair view opinion;
• Certain subsidiary undertakings;
• Material interests of directors in transactions, arrangements, or contracts of significance;
• Business review; and
• Disclosure of arrangements to enable directors to acquire benefits by the acquisition of shares or debentures, directors’ reasons for resignation or refusal to stand for re-election, donations.
SMEs or their holding entities must meet the qualifying criteria of less than HKD100million (aggregate) total revenue and (aggregate) total assets and less than 100 employees. Other private companies may apply the reporting exemption provided that the company is not part of corporate group and all members agree in writing. Qualifying companies may adopt the HK SME-FRS as the standards for the preparation of the financial statements.
Are there any benefits?
The SME-FRS allow for the exclusion of subsidiaries from consolidation on the basis of disproportion of expense and delay to the value to members. This exclusion is in addition to the exclusions mentioned in the Companies Ordinance.
The exemption and SME-FRS allow for the preparation of simplified financial statements, which should be less time and cost consuming.
The relaxation might also result in the expression of an unqualified audit opinion.
Am I better off with SME-FRS?
Whether to adopt SME-FRS or higher standards depends largely on the audience of the financial reports. Companies in a growth phase and looking for new investors and capital should carefully evaluate which standards to adopt and a more detailed and stringent standard could be more advantageous.