Accounts and Audit

Updated: Dec 28, 2020

Reporting Exemption


“Reporting exemption”

"Reporting exemption" means the exemptions available to private or guarantee companies (other than certain companies specifically excluded) that qualify to prepare simplified accounts and directors’ reports. The exemptions are in respect of specific requirements relating to the preparation of financial statements, directors’ and auditor’s reports and they include –


- no requirement to disclose auditor’s remuneration in financial statements;


- no requirement for financial statements to give a "true and fair view";


- subsidiary undertakings may be excluded from consolidated financial statements in accordance with applicable accounting standards;


- no requirement to disclose in the notes to financial statements the material interests of directors in transactions, arrangements or contracts of significance;


- no requirement to disclose or include in the directors’ report-

  • a business review

  • arrangements to enable directors to acquire benefits by the acquisition of shares or debentures

  • donations

  • directors’ reasons for resignation or refusal to stand for re-election

  • material interests of directors in transactions, arrangements or contracts of significance entered into by a specified undertaking of the company;

- no requirement for the auditor to express a "true and fair view" opinion on financial statements; and


- financial statements may be prepared in compliance with the Small and Medium-Sized Entity Financial Reporting Standard and Financial Reporting Framework issued or specified by HKICPA.

Qualifying criteria for “reporting exemption”

The qualifying criteria are as follows-

- a small private company / holding company of a group of small private companies which meets two of the following conditions in a financial year –

  • total revenue / aggregate total revenue not exceeding $100 million

  • total assets / aggregate total assets not exceeding $100 million

  • employees / aggregate number of employees not exceeding 100

  • other private company (not being a member of a corporate group) with unanimous members’ written agreement;


- a small guarantee company / holding company of a group of small guarantee companies with total revenue / aggregate total revenue not exceeding $25 million in a financial year;


- an eligible private company / holding company of a group of eligible private companies which meets higher size criteria (i.e. two of the following conditions in a financial year: total revenue / aggregate total revenue not exceeding $200 million, total assets / aggregate total assets not exceeding HK$200 million, and employees / aggregate number of employees not more than 100) and with 75% approval from members of the holding company and no member votes against the resolution.


- a holding company of a group of companies comprising one or more small private companies / eligible private companies and one or more small guarantee companies (mixed group) provided that the holding company and all of its subsidiaries meet the prescribed size criteria, and (where any member of the group is an eligible private company but not qualified as a small private company) with 75% approval from members of the holding company and no member votes against the resolution.


The group of small private companies / small guarantee companies / eligible private companies or the mixed group as mentioned above may include non-Hong Kong body corporates.


If a company meets the qualifying criteria for the reporting exemption, the exemption will be available to the company in its first financial year and in every subsequent financial year, until the company is disqualified for the exemption.


Reporting exemption for companies which are subsidiaries of a listed company

Unless the subsidiary is a company specified in section 359(4) (which includes, for example, a bank, an insurance company, etc.), it qualifies for reporting exemption if it meets the size criteria or obtains the necessary members’ approval for it to fall within the reporting exemption.


A private company (not being a member of a corporate group) with unanimous members’ agreement may prepare simplified accounts and directors’ reports. The unanimous agreement means the agreement of 100% of ALL members of the company AND not 100% of those members attending at a general meeting to pass a resolution for such purpose

All members of a company are required to agree in writing that the company is to fall within the reporting exemption. It is not a requirement for a resolution to be passed at a meeting by all members of the company or by all members attending the meeting.

An eligible private company / holding company of a group of eligible private companies / holding company of a mixed group may prepare simplified reports if it meets the higher size criteria and has 75% approval from members. The 75% means 75% of the voting rights of ALL members of the company AND not 75% of the voting rights of those members attending a general meeting to pass a resolution for such purpose

A resolution is required to be passed by the members holding at least 75% of the voting rights in the company i.e. 75% of the voting rights of all members of the company.


Companies falling within the reporting exemption required to have their financial statements audited

Audit of financial statements is required for all companies, including companies falling within the reporting exemption, except dormant companies.

Where the company falls within the reporting exemption for the financial year, one or more subsidiary undertakings may be excluded from the annual consolidated financial statements in compliance with the accounting standards applicable to the statements. A company cannot apply the “expense and delay out of proportion to the value to members” exception provided in the Small and Medium-sized Entity – Financial Reporting Standard (“SME-FRS”) to exclude its subsidiaries from the group for the purpose of determining the eligibility for reporting exemption

When determining the eligibility of the holding company of a group of companies for the reporting exemption, the size of the group as a whole is relevant. The relief provided in the SME-FRS is relevant for the purpose of excluding one or more subsidiary undertakings from the annual consolidated financial statements only. In other words, the size of the group must satisfy the size criteria, and the exception in the SME-FRS should not be taken into account in determining eligibility for reporting exemption.


Financial Statements and Reports


General requirements for financial statements

The general requirements are –

- a company’s directors must prepare for each financial year financial statements;


- if the company is a holding company at the end of the financial year, consolidated financial statements must be prepared instead unless the company is a partially owned subsidiary where no member requests for the preparation of consolidated financial statements or all members agree in writing that consolidated financial statements will not be prepared;


- if the company is a partially owned subsidiary where no member requests for the preparation of consolidated financial statements or all members agree in writing that consolidated financial statements will not be prepared, company level financial statements must be prepared;


- if the company is a wholly owned subsidiary, either company level financial statements or consolidated financial statements must be prepared;


- subject to permitted exclusions, the consolidated financial statements must include all the subsidiary undertakings of the company;


- unless the company falls within the reporting exemption, the financial statements must give a true and fair view of the financial position and financial performance of the company;


- the financial statements must comply with –

  • the accounting disclosure requirement in Schedule 4;

  • applicable accounting standards issued or specified by the Hong Kong Institute of Certified Public Accountants (“HKICPA”);

- the notes to financial statements must contain the information prescribed by the Companies (Disclosure of Information about Benefits of Directors) Regulation, Cap. 622G; and

  • the financial statements must be audited.

Other requirements are in relation to the laying, sending, publication and voluntary revision of financial statements.


The above requirements do not apply to a company that is dormant.


A holding company which is a wholly owned subsidiary of another body corporate can prepare consolidated financial statements instead of company level financial statements

If the holding company is a wholly owned subsidiary of another body corporate at the end of the financial year, the company has an option to prepare consolidated statements instead of company level financial statements.


In the case of a holding company, if all of the company's subsidiary undertakings are excluded from the annual consolidated financial statements, the holding company is not required to prepare consolidated financial statements


A holding company must prepare consolidated financial statements. If the company falls within the reporting exemption, one or more subsidiary undertakings may be excluded from the annual consolidated financial statements in compliance with the accounting standards applicable to the statements. Accordingly, if all of the subsidiary undertakings are excluded in accordance with the applicable accounting standards, the holding company’s financial statements will be its own company level financial statements.


If the company does not fall within the reporting exemption –


(a) one subsidiary undertaking may be excluded from the annual consolidated financial statements if the inclusion of the subsidiary undertaking is not material for the purpose of giving a true and fair view of the financial position and financial performance; and


(b) more than one subsidiary undertaking may be excluded if the inclusion of those subsidiary undertakings taken together is not material for the purpose of giving a true and fair view of the financial position and financial performance.


Accordingly, if the company has only one subsidiary undertaking and the subsidiary undertaking is excluded, or if all of the company’s subsidiary undertakings, when taken together, are immaterial, then the holding company’s financial statements will be its own company level financial statements.


Financial Year


How the first financial year of a company is determined

A company’s first financial year begins on the first day of its first accounting reference period and ends on the last day of that period, or another date within 7 days before or after the end of that period as specified by the directors. For an existing company, the first accounting reference period begins on the day immediately following its primary accounting reference date and ends on the first anniversary of that date.

Accounting reference period

An accounting reference period is the period by reference to which the company’s annual financial statements are to be prepared. The first and last days of the first accounting reference period determine the company’s first financial year. Every subsequent accounting reference period of a company is a period of 12 months beginning immediately after the end of the previous accounting reference period and ending on its accounting reference date, unless the accounting reference period is shortened or extended by alteration of the accounting reference date.

How the first accounting reference period of a company is determined

The first accounting reference period is determined as follows -

  • For an existing company, it begins on the day immediately following its primary accounting reference date and ends on the first anniversary of that date.

  • it begins on its incorporation date and ends on its primary accounting reference date.

“Primary accounting reference date”

The "primary accounting reference date" is the end date of the accounts or financial statements by reference to which the first accounting reference period, i.e. the first financial year, of a company is determined.


The primary accounting reference date is a date specified by the directors that falls within 18 months after its incorporation date, or if no date is specified by the directors, the last date of the month in which the first anniversary of the company’s incorporation falls.


“Accounting reference date”. It can be altered

The accounting reference date is the anniversary of the company’s primary accounting reference date and is the end date of subsequent accounting reference periods –

- For an existing company, the accounting reference date is the anniversary of the company's primary accounting reference date.


- /it is the anniversary of the company's primary accounting reference date.


- The accounting reference date can be altered by a resolution of directors.


If you would like to know more, please contact Bestar.