Surrounded by tall skyscrapers, green hills, and a glittering harbor, you may feel as though doing business in Hong Kong is but a dream. But then you realize you’re at a loss when it comes to meeting Hong Kong accounting standards this year.
And your dream suddenly becomes one of your worst nightmares.
The Hong Kong standards for financial reporting come from Hong Kong’s Institute of certified accountants. And they can understandably be overwhelming at first glance.
But no need to fear. We’ve compiled a guide to help you to meet the territory’s financial reporting standards so that you can breathe easy and fully enjoy building your own Ch-Ching Dynasty.
Let’s dig in!
The Hong Kong Accounting Standards
As of 2014, Hong Kong has a total of 28 accounting standards.
These standards touch on your basic principles in accounting. They also cover methods for preparing important financial reports and updating your company’s books.
If you want to do business in Hong Kong, then becoming familiar with these standards is paramount.
So, Why do Business in Hong Kong?
Don’t let the number “28” — as in 28 accounting standards — scare you away from doing business in Hong Kong. This territory remains one of the most in-demand areas for doing business.
And for good reason.
One of the main reasons you’ll find many U.S. business people flocking to Hong Kong is that it’s essentially a gateway to the Chinese. Hong Kong is not only close to China but also has solid banking and financial expertise.
On top of that, a partnership arrangement that took effect in 2004 gives Hong Kong exclusive and extra benefits when it comes to accessing the Chinese mainland market. So, if you’re established in Hong Kong, you can take advantage of this benefit, too.
It’s a win-win-win for you, Hong Kong and China.
Another reason to expand in Hong Kong is the country’s low taxes — in fact, they’re some of the lowest around the globe.
Your profit tax rate in Hong Kong, whether you’re a local or foreign company, is 16.5%.
For the sake of comparison, in the United States, the corporate tax rate can climb as high as 35% right now.
Plus, Hong Kong does not have any sales tax or value-added tax.
So, in Hong Kong, more of the money you make stays right in your coffers – where it belongs. After all, you earned it.
And don’t forget the territory’s world-class infrastructure.
These reasons alone are enough to make learning and applying the 28 Hong Kong accounting standards completely worthwhile.
Why Are Hong Kong Accounting Standards so Critical to my Business?
The Inland Revenue Department accepts only financial statements that you have prepared based on the Hong Kong accounting standards.
This is why it’s so critical that you’re aware of these standards. Knowing them can either make or break your business.
The financial reporting standards cover both medium-sized and small private companies. They do not apply to companies in the public sector or nonprofit organizations.
Hong Kong also follows the international standards for financial reporting. This is paramount, as it means that Hong Kong’s capital markets are aligned with over 100 nations that have likewise adopted the international standards.
When it comes to meeting this territory’s standards for financial reporting, you need several financial statements. These include the following:
- A Profit & Loss Statement
- A statement of cash flow (it is required from big enterprises only)
- A statement about equity-related changes
- Explanatory notes and accounting policies
Your financial accounts need to be maintained at your company’s registered office or a similar location. In addition, your directors need to be able to access them to inspect them.
So, how long do you need to hold onto these records?
Seven is the lucky number here. If you keep your account books for a minimum of seven years, you should be fine.
Cash Flow Statements
This statement is required from big companies only and not applicable to small & medium enterprises (SME).
The statement of cash flow is one of the most important parts of your accounting records in Hong Kong.
This statement essentially reveals how changes in your income and accounts on your balance sheet have affected your cash — along with your cash equivalents.
This statement is invaluable because it breaks your financial analysis down into financing, operating and investing activities. Those who read the statement can quickly learn how much money is flowing into and out of your business.
And they’ll basically be able to answer this question: Is this business able to pay its bills?
Many parties may find your cash flow statement relevant, including the following:
- Accounting personnel, so they know if the business can cover expenses such as payroll
- Possible investors, so they can tell if your company is found financially
- Possible creditors and lenders, so they can know if you can repay a debt
- Possible contractors and employees, so they can know if they would get paid for work done
- Company shareholders
Therefore, having a well-done and thorough statement is critical to your company’s success.
Intangible Assets and Other Details
Another important part of your financial reports is an acknowledgment of your intangible assets.
Sure, your tangible assets — such as your business building, machinery, and cash — are certainly valuable from a financial perspective.
But so are certain items that do not necessarily have physical structures. These include the following:
- Software and other computer-related assets
- Trade names
These are important to highlight because they can be difficult to evaluate. Plus, they are generally susceptible to your typical market failure.
Other necessary parts of your financial records according to the Hong Kong accounting standards include the following:
- Construction contracts
- Income taxes
- Employee benefits
- Impacts of alterations in today’s foreign exchange rates
- Retirement benefit plan reporting and accounting
As long as you include these components in your reporting, you give yourself the room you need to operate freely and even take your business to the next level.
It’s critical that your records provide a fair look at your transactions and accounts.
In other words, don’t be a long-nosed Pinocchio. It’s just not a good look for you — or your business.
Be honest about all of your liabilities and assets, purchases, sales, money used and money received. Down the road, you’ll be glad you did.
How We Can Help
We offer accounting services to companies in Hong Kong who want a guarantee of meeting the Hong Kong accounting standards every time.
Contact us to find out more about how we can help you with the financial reporting side of your business so that you can focus on what’s really important to you: growing your business.