HKFRS explained: the essential guide for Hong Kong entrepreneurs

Overview of the financial statement

Financial statements are the cornerstone of your company's financial communication, providing a comprehensive picture of its financial health and performance to your stakeholders. These formal records present a structured overview of your business's operations and financial position.

The primary financial statements include:

• The balance sheet, which shows a company's assets, liabilities, and equity at a specific point in time
• The income statement, which reports a company's revenues and expenses over a period
• The cash flow statement, which details the movement of cash and cash equivalents. 

These statements are crucial for stakeholders, including investors and creditors, to assess your company's profitability, liquidity, and solvency. They must be prepared under specific accounting standards, which in Hong Kong are the Hong Kong Financial Reporting Standards (HKFRS). The standards ensure that financial information is presented in a consistent, transparent, and comparable manner, allowing for informed decision-making.

What is HKFRS

HKFRS is a set of accounting standards issued by the Hong Kong Institute of Certified Public Accountants (HKICPA). Its primary purpose is to provide a comprehensive framework for financial reporting within Hong Kong. HKFRS is largely based on the International Financial Reporting Standards (IFRS), which means it aligns closely with globally accepted accounting principles. This alignment is a deliberate effort to enhance the transparency and comparability of financial statements for companies operating in Hong Kong¹. 

The standards cover a wide array of accounting topics, from the recognition of revenue and the valuation of inventory to the treatment of property, plant, and equipment. The goal is to ensure that financial statements are not only accurate but also consistent and understandable to a global audience.

By adhering to HKFRS, companies provide a reliable basis for investors and other stakeholders to evaluate their financial performance and position, thereby fostering confidence in the Hong Kong market. The HKICPA regularly updates HKFRS to reflect changes in the business environment and to maintain convergence with IFRS.

What is the scope of HKFRS?

The scope of HKFRS is extensive, applying to a wide range of entities in Hong Kong.

Generally, all companies incorporated under the Hong Kong Companies Ordinance, whether public or private, that are required to prepare financial statements must follow these standards. HKFRS dictates the principles for recognising, measuring, presenting, and disclosing various financial transactions and events².

The standards are designed to ensure that financial reporting is transparent and provides a true and fair view of a company's financial position. This means that HKFRS goes beyond just the three main financial statements. It also covers the requirements for supplementary information, such as notes to the financial statements and other disclosures, which are essential for a complete understanding of a company's financial health. The application of HKFRS promotes consistency across different companies and industries, making it easier for analysts and investors to compare financial performance.

Understanding the 3 types of HKFRS

The HKFRS framework is not a one-size-fits-all solution; it is tailored to accommodate different types of entities. The HKICPA has developed several versions of the standards to suit the size and nature of businesses in Hong Kong.

HKFRS accounting standards

The full HKFRS Accounting Standards represent the primary set of standards that are mandatory for listed companies and other public interest entities in Hong Kong. This comprehensive framework is fully converged with IFRS, meaning that a company's financial statements prepared under full HKFRS can often be used directly or with minimal adjustments for reporting under IFRS.

These standards are highly detailed and require extensive disclosures, providing a high level of transparency for investors and the public. They cover complex accounting issues and are the foundation for robust financial reporting in Hong Kong's capital markets.

HKFRS for private entities accounting standard

Recognising that the full HKFRS can be overly complex and burdensome for smaller, non-publicly accountable companies, the HKICPA issued the HKFRS for Private Entities Accounting Standard.

This simplified version is based on the IFRS for Small and Medium-sized Enterprises (SMEs). It offers a more streamlined approach to financial reporting by reducing the number of disclosures and simplifying some recognition and measurement principles. This standard is designed to be cost-effective for private companies while still providing a high-quality reporting framework that is understandable to users of their financial statements. It is a practical solution that balances the need for reliable financial information with the resources available to smaller businesses.

SME-FRF & SME-FRS

For even smaller entities, specifically those that are not subject to public accountability and are not considered private entities under the above standard, there is the option to use the Small and Medium-sized Entity Financial Reporting Framework and Financial Reporting Standard (SME-FRF & SME-FRS). This is a significantly simplified framework developed by the HKICPA specifically for companies that meet certain size criteria.

The SME-FRF & SME-FRS focuses on providing a basic, yet reliable, set of financial statements. It is intended to be a practical and straightforward option for micro and small businesses, reducing the complexity of financial reporting and the associated compliance costs. The goal is to ensure that even the smallest companies can prepare financial statements that are useful and compliant with a recognised standard³.

Comparison between HKFRS and IFRS

The core principle of HKFRS is its alignment with IFRS, making Hong Kong a jurisdiction with a high degree of international accounting compatibility. However, despite this high convergence, you also need to understand the subtle differences and the relationship between them so that you can apply the correct standards when preparing and presenting financial statements in Hong Kong.

The IFRS are a single set of high-quality, global accounting standards developed by the IFRS Foundation, which are used in over 140 jurisdictions worldwide. Meanwhile, the HKFRS are the local standards issued by the HKICPA.

The HKICPA's policy is to converge HKFRS with IFRS as much as possible. This means that for the most part, a company applying full HKFRS is applying IFRS with only a few, very minor, modifications or additional requirements specific to Hong Kong's legal and regulatory environment⁴ ⁵.

The key differences often relate to transitional provisions, effective dates of new standards, or specific legal requirements in Hong Kong's Companies Ordinance. For example, the effective date of a new IFRS standard might be adopted a little later in HKFRS to allow companies more time to implement the changes. However, these differences are generally considered minor and don't undermine the overall consistency between the two sets of standards.

From our own experience working with businesses that operate across borders, we’ve seen how the convergence between HKFRS and IFRS reduces complexity and builds investor confidence. Companies preparing financial statements under HKFRS often find that their reports are readily accepted and understood in other IFRS jurisdictions, which streamlines audits, cross-border reporting, and even fundraising. This practical alignment is one of the reasons Hong Kong continues to thrive as a global financial hub.

Annual filing requirements

In Hong Kong, all companies incorporated under the Companies Ordinance are required to prepare and file financial statements annually. This is a fundamental regulatory requirement that ensures transparency and accountability.

The specific requirements for annual filing depend on the size and type of the company. For all companies, the process involves preparing an annual report that includes the financial statements, a directors' report, and an auditor's report. The financial statements must be prepared in accordance with the applicable accounting standard, which is typically HKFRS or one of its simplified versions (HKFRS for Private Entities or SME-FRF & SME-FRS).

Private companies that qualify as a "small private company" or "private company with simplified reporting" may be eligible for simplified reporting requirements, which include exemptions from certain disclosures and a simpler audit process. These exemptions are designed to reduce the compliance burden on small businesses.

Public companies and other public interest entities, on the other hand, have more stringent requirements. Their financial statements must be prepared in full compliance with HKFRS, and they are subject to a mandatory audit by a qualified professional. The audited financial statements, along with other documents, must be filed with the Companies Registry and, for listed companies, also with the Stock Exchange of Hong Kong.

The annual filing process is a critical part of corporate governance in Hong Kong. It ensures that companies are held accountable for their financial performance and that stakeholders have access to reliable and consistent financial information. Failure to comply with these requirements can lead to penalties and legal consequences.

Simplify your financial reporting with Aspire's all-in-one solution

From our experience, we’ve learned that businesses often struggle to maintain meticulous records and apply accounting policies consistently when preparing financial statements. We later found that these issues usually stem from manual recording practices, which create room for human error and inaccuracy—ultimately undermining reporting compliance.

These pain points led us to introduce Aspire’s Business Account, where Hong Kong entrepreneurs—including you—can gain full visibility over their finances and prepare more accurate financial reports.

Here’s how our Business Account can help you:

• Get a complete view of your cash inflows and outflows, including the status of accounts payable, receivable, and recurring payments, in real time. This makes it easier to create and categorise cash flows for your cash flow statements.
• Gain real-time visibility into business expenses and invoice statuses.
• Simplify cross-border payments and international transactions with detailed, upfront invoice documentation.
• Save up to 50% of time spent on manual accounting tasks with smart automation.
• Eliminate manual data entry entirely through real-time syncing with Xero and QuickBooks.

With Aspire, you can spend less time on administrative tasks and more time growing your business.