- Hong Kong is included in the IFAD GAAP Convergence Studies
- National Professional Organisation Website: Hong Kong Institute of Certified Public Accountants
- Response to IFAC Member Body Survey on Standard Setting and Regulation
- Participant in the Asian-Oceanian Standard-Setters Group (AOSSG)
Financial Reporting Framework in Hong Kong
'One Country, Two Systems'
Like other aspects of Hong Kong culture and economics, accounting in the Hong Kong Special Administrative Region (SAR) is a clear example of the "one country, two systems" philosophy that sets it apart from Mainland China. For information about accounting in China, click here.
Mandatory Sources of GAAP
There are both mandatory and advisory sources of generally accepted accounting principles (GAAP) in Hong Kong. Mandatory sources are the following:
- Companies Ordinance. Legal requirements include maintenance of accounting records, content of financial statements, and audits of companies incorporated in Hong Kong.
- Hong Kong Financial Reporting Standards (HKFRSs). The term HKFRSs includes both Standards (HKFRSs andHKASs) and Interpretations (HK(IFRIC)-Ints, HK(SIC)-Ints, and HK-Ints).
- Standards and Interpretations are developed by the Financial Accounting Standards Committee of the Hong Kong Institute of Certified Public Accountants (HKICPA).
- Standards and Interpretations are virtually identical to their international equivalents (International Financial Reporting Standards) except for three Hong Kong Interpretations (HK-Ints) which have been developed locally by the HKICPA.
- Standards and Interpretations are primarily identical to their international equivalents (International Financial Reporting Standards).
- Listing Rules. The Stock Exchange of Hong Kong Limited (SEHK) has adopted rules governing the listing of securities on its Main Board (the Listing Rules) and on its Growth Enterprise Market (the GEM Rules). These include some accounting and disclosure requirements.
Other Sources of GAAP
Hong Kong Accounting Standard 8 Accounting Policies, Changes in Accounting Estimates and Errors (HKAS 8, which is identical to IAS 8) states:
10. In the absence of a Standard or an Interpretation that specifically applies to a transaction, other event or condition, management shall use its judgement in developing and applying an accounting policy that results in information that is:
11. In making the judgement described in paragraph 10, management shall refer to, and consider the applicability of, the following sources in descending order:
12. In making the judgement described in paragraph 10, management may also consider the most recent pronouncements of other standard-setting bodies that use a similar conceptual framework to develop accounting standards, other accounting literature* and accepted industry practices, to the extent that these do not conflict with the sources in paragraph 11.
*In the context of Hong Kong, other accounting literature includes Accounting Guidelines and Accounting Bulletins.
The Accounting Guidelines and Accounting Bulletins referred to in the footnote to paragraph 12 of HKAS 8 (above) are 'best practice' guidance documents that have been published by the HKICPA to assist its members in applying HKFRSs. Accounting Guidelines, and Industry Accounting Guidelines, are persuasive in intent and, whilst not mandatory, should normally be followed. Accounting Bulletins are intended to assist members of the HKICPA in dealing with accounting issues and to stimulate debate on subjects of topical interest.
TechWatch is a monthly publication prepared by the HKICPA to alert HKICPA members to topics and issues that impact on accountants and their working environment. It is intended for general guidance only.
GAAP for Small and Medium-sized Entities
The HKICPA released its own Small and Medium-sized Entity Financial Reporting Framework and Financial Reporting Standard (SME-FRF & FRS) in August 2005. The SME-FRF & FRS became effective for optional use by a qualifying entity's first financial statements that cover a period beginning on or after 1 January 2005. Entities that qualify include Hong Kong incorporated companies that meet certain legal requirements and overseas companies that have no public accountability, meet size requirements and where the owners agree to use the SME-FRF & FRS.
An amended Companies Ordinance was adopted in July 2003, with most provisions taking effect in February 2004. You can find this and other Hong Kong ordinances using the Bilingual Laws Information System on the internet established by the Hong Kong Department of Justice. The Companies Ordinance is Chapter 32 of the Laws of Ordinances.
The basic requirement to prepare annual accounts is set out in the Companies Ordinance, which requires that those accounts should give a true and fair view of the company's state of affairs at the end of its financial year and of its results for the year. Strictly speaking, the Companies Ordinance only applies to Hong Kong incorporated entities. While many Hong Kong listed companies are not incorporated in Hong Kong, the Listing Rules and GEM Rules specify that, with minor exceptions, the Ordinance's disclosure requirements must also be applied.
Sections of the Companies Ordinance deal with the form and content of financial statements including minimum line items, disclosures in the directors' report, and financial statement disclosures relating to directors and officers.
In July 2005, the Companies Ordinance was amended to enable Hong Kong incorporated companies to use the definition of 'subsidiary' in IAS 27 Consolidated and Separate Financial Statements (and the equivalent Hong Kong Standard, HKAS 27) for the purpose of preparing group accounts. As a result of the amendment, a parent company, including holding companies incorporated in Hong Kong, must consolidate all entities over which it has control.
In mid-2006 the Financial Services and the Treasury Bureau (FSTB) launched a rewrite of the Companies Ordinance (CO), in order to provide Hong Kong with a modernised legal infrastructure and also make the CO more user friendly. The FSTB published the first of a series of public consultations in March 2007 on the rewrite of the CO to obtain views and comments from the public on legislative proposals to improve the accounting and auditing provisions in the CO.
The Companies Ordinance is administered by the Legal Services Division of the Companies Registry, a government agency. At 31 August 2009, over 740,000 private Hong Kong companies were registered with the companies Registry, plus 10,000 public companies. Contact details:
Queensway Government Offices
Email: crenq @ cr.gov.hk
Phone: +852 2867 2600
Fax: +852 2596 0585
Securities and Futures Commission
The primary regulatory body for the securities and futures markets is the Hong Kong Securities and Futures Commission (SFC). It was established in 1989 in response to inadequacies exposed by the stock market crash of 1987. The SFC is an independent, non-governmental statutory body, accountable to the Chief Executive of the Hong Kong Special Administrative Region. One of the SFC's objectives is to promote the fairness, efficiency, competitiveness, transparency and orderliness of the securities and futures industry. Through its Corporate Finance Division, the SFC oversees the Stock Exchange and the Futures Exchange and enforces statutory requirements, regulations, and rules of conduct. It does not have authority to establish accounting standards.
The relative roles of the SFC and the Stock Exchange of Hong Kong Limited (SEHK) in relation to the regulation of listed companies are set out in a Memorandum of Understanding Governing Listing Matters signed between the two organisations. SFC has front-line regulatory responsibility for takeovers and merger activity, regulation of offers of investment products, and the enforcement of laws regarding market malpractices. Since March 2000, the SFC has taken over the front-line regulation of all exchange participants (brokers and dealers) from the two exchanges. However, the stock exchange remains the front-line regulator for all companies listed on the Main Board and the Growth Enterprise Market. SFC contact details:
Securities and Futures Commission
8/F, Chater House
8 Connaught Road Central
Email: enquiry @ sfc.hk
Phone: +852 2840 9222
Fax: +852 2521 7836
Stock Exchange Requirements
The Stock Exchange of Hong Kong Limited (SEHK) was opened in 1986 following unification of the four exchanges in existence at that time. The Hong Kong Exchanges and Clearing Limited (HKEx) is the publicly listed holding company of SEHK. SEHK has two separately administered markets, the Main Board and the Growth Enterprise Market (GEM). Conglomerates, finance, and property companies dominate the Main Board. GEM, established in 1999, is geared towards growth companies, particularly those engaged in innovation and technology.
In June 2007, 1,002 companies were listed on the Main Board of the SEHK. Those companies had issued a total of 3,951 securities with a market capitalisation of HK$15,704 billion. The GEM market had 194 listed companies with a market capitalisation of HK$150 billion. The principal stock market index is the Hang Seng Index, a measure of 39 companies representing approximately two-thirds of the SEHK's total market capitalisation.
The Main Board Listing Rules contain a number of financial disclosure requirements. Mostly, they expand on the provisions of the Companies Ordinance, for example in respect of disclosure of directors' emoluments and details of subsidiaries. For Main Board listed companies, the various SEHK accounting requirements have been consolidated in Appendix 16, Disclosure of Financial Information, of the Listing Rules. For listed banks, additional reporting requirements are set out in Appendix 15, Bank Reporting. The requirements establish a minimum level of disclosure with respect to financial and other information in annual reports, interim reports, and public announcements.
GEM Rules are generally, though not entirely, consistent with the requirements of the Listing Rules. SEHK routinely reviews the interim and annual reports and accounts of listed companies and makes enquiries about any apparent breach of the disclosure requirements or failures to observe HKICPA Accounting Standards and Guidelines or to disclose material departures. Offending companies that cannot satisfactorily resolve the queries will be in breach of the Exchange's rules.
Companies whose primary listing is on the SEHK main board are permitted to adopt IFRSs instead of Hong Kong Financial Reporting Standards (HKFRSs). While SEHK rules require that they explain any significant differences with HKFRSs, including a reconciliation of the financial effect on net profit or loss, there are essentially no such differences because HKFRSs are virtually identical to IFRSs. Overseas-incorporated issuers and applicants that have or will have a secondary listing on the SEHK are permitted to follow US GAAP.
The HKEx's website, www.hkex.com.hk, has hyperlinks to the websites of all listed companies. GEM listed companies are required to publish their annual and interim financial reports on the GEM's own website, www.hkgem.com. The listing requirements are administered by:
Listing, Regulation and Risk Management Division
Hong Kong Exchanges and Clearing Ltd.
12/F, One International Finance Centre
1 Harbour View Street Central
Website – HKEX: www.hkex.com.hk
Website – GEM: www.hkgem.com
Email: info @ hkex.com.hk
Phone: +852 2522 1122
Fax: +852 2295 3106
Banks and Insurance Companies
Hong Kong (population approximately 7 million) has one of the highest concentrations of banking institutions in the world. 69 of the world's 100 largest banks have an operation in Hong Kong. At the end of December 2006, there were 138 licensed banks, 31 restricted licence banks, and 33 deposit-taking companies in business. These 202 authorized institutions operate a comprehensive network of 1,313 local branches. Of these 202 authorized institutions, 181 are beneficially owned by interests from 30 countries. In addition, there are 84 local representative offices of overseas banks in Hong Kong.
The Hong Kong Monetary Authority is the bank regulator. HKMA prescribes certain financial information to be reported periodically to HKMA as well as certain accounting and reporting requirements for the general-purpose financial statements of banks. As noted earlier, Appendix 15 of the SEHK Listing Rules also sets out bank reporting requirements. HKMA contact details:
Hong Kong Monetary Authority
Two International Finance Centre
8 Finance Street
Email: hkma @ hkma.gov.hk
Phone: +852 2878 8196
Fax: +852 2878 8197
As at 28 February 2007, there were 183 authorized insurers in Hong Kong, of which 118 were pure general insurers, 47 were pure long-term insurers and the remaining 18 were composite insurers.
According to the statistics as at 28 February 2007 provided by the Insurance Agents Registration Board ('IARB'), there were 1,853 insurance agencies, 27,540 individual agents and 23,079 responsible officers/technical representatives registered with the IARB.
The Authority has established certain accounting and reporting requirements for the general-purpose financial statements of insurance companies. Contact details:
Office of the Commissioner of Insurance
21/F Queensway Government Offices
Email: iamail @ oci.gov.hk
Phone: +852 2867 2565
Fax: +852 2869 0252
Measurement of Taxable Income
Measurement of taxable income is governed by the Inland Revenue Ordinance and related regulations, which are separate from laws and regulations for measuring income in general purpose financial statements.
Hong Kong Institute of Certified Public Accountants (HKICPA)
The HKICPA (until 2004 known as the Hong Kong Society of Accountants) is a professional organisation with 26,402 members (June 2007). Its Financial Reporting Standards Committee is responsible for establishing financial reporting standards in Hong Kong. Hong Kong Financial Reporting Standards (including Interpretations) were converged with International Financial Reporting Standards (IFRSs) with effect from 1 January 2005, except for some minor differences. With full convergence achieved, the roles of the Council are now to maintain this convergence, support the implementation of the converged standards and also facilitate communication between the Hong Kong reporting community and the IASB The HKICPA has also developed three of its own Interpretations in areas of particular importance in Hong Kong, where there are no corresponding international interpretations. English is the official language of Hong Kong financial reporting standards. HKICPA standards are available for purchase in printed form. Electronic versions are currently available without charge at www.hkicpa.org.hk. HKICPA contact details:
Hong Kong Institute of Certified Public Accountants
37/F., Wu Chung House
213 Queen's Road East
Wanchai, Hong Kong
Email: hkicpa @ hkicpa.org.hk
Phone: +852 2287 7228
Fax: +852 2865 6603 or 2865 6776