You start gathering all the supporting documents that have resulted from the transactions and the operations of your business in Hong Kong, but by not being an expert on the topic of how to organize the company records, you decide to seek information and guidance from the expert to assist you in this learning curve.
In this guide, we will go through the basic aspects of the accounting system and the Hong Kong statutory audit requirements so that the daily operations of your Hong Kong-established company are not affected in the long run.
But first, let us go through the accounting standards that are followed in Hong Kong.
Hong Kong Accounting Standards
Mainland China and Hong Kong have different systems related to their taxes, finances, and legal aspects. The system of Hong Kong is more similar to Western standards, which is one of the reasons why it is preferred as a business place in Asia.
According to the Hong Kong Institute of Certified Public Accountants (HKICPA), the International Financial Reporting Standards (IFRS) are being followed. The Financial Reporting Standard (FRS) has been applied to Hong Kong since 2005 and this improvement has boosted the confidence of international authorities and businesses.
Additionally, the law that regulates the behavior of companies established in Hong Kong and their obligations is the Hong Kong Companies Ordinance. For example, it is required that a Certified Public Accountant (CPA) in Hong Kong generates the Audit report from the annual operations of a company.
Moving into the next section of this guide, we will analyze the aspects of Accounting Records.
The transactions that your company generates, from its intended business plan, should be kept and organized. This is what the Accounting Records of your company would be comprised of, which normally include:
- Sales and purchases orders.
- Salaries to employees and directors.
- Business account statements.
The accounting records will evaluate a specific period where the transactions occurred. The period will be defined by the year-end of the company, which consists of 12 months. The year-end is defined in the incorporation documents. For more details, please see our dedicated article about Accounting and Bookkeeping.
Annual Financial Statements
The financial statement is a financial report prepared within a year of operations that portrays elements that can be used to read the standing and the status of a company. It consists of 3 sections:
- Balance sheet: this section shows the elements that the company possesses, such as the assets, capital as well as liabilities.
- Income statement: the next section is composed of the expenses related to the operations, and the profits generated. After the expenses are deducted from the income, the net profit can be calculated within the evaluated period.
- Cash flow Statement: the last section of the report shows the movement of cash and how the company uses it.
Statutory Audit Report
Once the Financial Statement of a company has been prepared in line with the Hong Kong Financial Reporting Standards (FRS), it must be validated through an audit. The auditor’s report will corroborate that the transactions match the supporting documents and that they have been recorded in the correct category.
Furthermore, It is important to mention that not everyone in Hong Kong can perform an audit of a company, it must be done by a Certified Public Accountant (CPA). It is advisable to approach a professional to help guide you during this learning process. You can learn more about the statutory audit report here.
Renewal and submission
Now that we have covered the basic concepts of accounting and audit for companies in Hong Kong, we should discuss the process for submitting these reports, this is what the next section will explore.
Accounting and Audit
Once the Financial Statement has been audited by a Certified Public Accountant in Hong Kong, it needs to be submitted together with the Profit Tax Return to the Inland Revenue Department. It is important to not forget the dates set in the Profit Tax Return for submission to avoid having problems with the tax authority.
As mentioned in the previous paragraph, the Tax Declaration, which is the Profit Tax Return, needs to be submitted with the corresponding supporting documents within the stated period. The period for submitting this form changes according to the year-end of a company, which is the closing period of operations that encompasses 12 months.
It is important to make the distinction that for this example we will refer to the Hong Kong Private Limited Companies since it is one of the most common business entities chosen for business activities. Companies that fail to submit the Profits Tax Return will face consequences, as it is a mandatory requirement for Hong Kong-registered companies to do so. Moreover, legal and monetary fees could be imposed on the company and the owners.
Options for the accounting of your company
To almost finalize this guide, we will discuss some of the most common options available in Hong Kong to help you to cover this important aspect of your company.
- Accounting software: in the last few years, the Hong Kong market for technology solutions in the accounting industry has exploded, even offering cloud base services that will allow people to keep a record of their operations in real-time and almost instantly. The solutions are available for all kinds of budgets and company sizes.
- Bookkeeping and accounting services: if you feel that using an accounting platform is too much for your business operations and would prefer to have a person dedicated to your company, Hong Kong also has a wide variety of accounting firms with years of experience. This could be also useful for you to learn how to keep and record your operations.
As we have seen in this guide, the concept of keeping things in order in your company will benefit you in the long term and will keep your operations healthy and uninterrupted. Although the system in Hong Kong has been simplified to the benefit of the companies and the business environments, the owners of companies should not forget to comply with the regulations and timings mentioned, especially for declaring profits. Seeking the advice of a professional that will help you through the process should not be seen as an expense, but rather an investment to avoid future hassles for your business.
What accounting standards are used in Hong Kong?
Hong Kong Financial Reporting Standards (HKFRSs) is the accounting standards used in Hong Kong. Some of the accounting standards used in Hong Kong are audits of companies, maintenance of financial records, and content of financial statements in Hong Kong.
What is HKAS Hong Kong Accounting Standards?
Who regulates accountants in Hong Kong?