Financial Statement Preparation

Financial Statement Preparation | Bestar

Hong Kong Financial Statement Preparation

Financial statement preparation in Hong Kong is a crucial annual requirement for almost all companies incorporated there. It's a highly regulated process governed by the Hong Kong Companies Ordinance (CO) and the accounting standards set by the Hong Kong Institute of Certified Public Accountants (HKICPA).

Here's a breakdown of the key aspects:

1. Accounting Standards:

• Hong Kong Financial Reporting Standards (HKFRS): Hong Kong has largely converged its accounting standards with International Financial Reporting Standards (IFRS). This means that HKFRS are designed to be applicable to general-purpose financial statements of all profit-oriented entities.

• SME Financial Reporting Framework and Financial Reporting Standard (SME-FRF & SME-FRS): To ease the burden on smaller businesses, the HKICPA has introduced a simplified reporting framework specifically for Small and Medium-sized Entities (SMEs). This framework streamlines reporting procedures and has fewer disclosure requirements than the full HKFRS.

  • Eligibility for SME-FRF & SME-FRS: Companies can qualify if they meet certain criteria, typically involving thresholds for annual revenue, total assets, and number of employees. For example, a small private company (or group) generally needs to meet at least two of the following: total annual revenue not exceeding HK$100 million, total assets not exceeding HK$100 million, and not exceeding 100 employees. Larger "eligible" private companies also have higher thresholds.

• Accrual Basis of Accounting: Financial statements (excluding cash flow information) must be prepared using the accrual basis of accounting, meaning transactions are recorded when they occur, regardless of when cash is received or paid.

2. Key Financial Statements:

A complete set of financial statements in Hong Kong typically includes:

• Balance Sheet (Statement of Financial Position): Presents the company's assets, liabilities, and equity at a specific point in time.

• Profit and Loss Account (Income Statement/Statement of Comprehensive Income): Shows the company's revenues, expenses, and profits/losses over a period.

• Cash Flow Statement: Details the inflows and outflows of cash from operating, investing, and financing activities.

• Statement of Changes in Equity: Explains the changes in the company's equity over a period.

• Notes to the Accounts: Provide additional explanations and details about the figures presented in the main financial statements, including significant accounting policies.

3. Bookkeeping and Records:

Companies in Hong Kong are required to maintain proper accounting records that are sufficient to show and explain the company's transactions, disclose its financial position and performance with reasonable accuracy, and enable directors to ensure compliance with the Companies Ordinance. These records should include:

• Daily entries of all sums of money received and expended.

• Assets and liabilities of the company.

• Bank statements.

• Sales and purchase invoices.

• Expense receipts.

• Contracts and agreements.

• Petty cash vouchers.

4. Statutory Audit Requirements:

• Mandatory Annual Audit: Almost all companies incorporated in Hong Kong, regardless of their size or whether they conduct operations locally or overseas, are legally required to undergo an annual statutory audit of their financial statements.

• Independent Certified Public Accountant (CPA): The audit must be conducted by an independent Hong Kong Certified Public Accountant (CPA). The auditor cannot be the same person or firm responsible for maintaining the company's financial records to ensure objectivity.

• Purpose of the Audit: The audit provides an independent assessment of the company's financial reports, ensuring they are accurate, comply with HKFRS, and present a true and fair view of the company's financial position. It's also required for filing the Profits Tax Return (PTR) with the Inland Revenue Department (IRD).

• Audit Process: The audit generally involves:

  • Engagement and Planning: Understanding the company's business and risks.

  • Risk Assessment and Internal Controls Evaluation: Identifying areas of potential misstatement and assessing the effectiveness of internal controls.

  • Audit Fieldwork and Evidence Collection: Detailed testing of transactions, balances, and disclosures, examining supporting documents.

  • Audit Documentation and Review: Documenting findings and reviewing the audit work.

  • Audit Reporting: The auditor issues an audit report with an opinion on the financial statements (e.g., unqualified, qualified, adverse, or disclaimer).

• Exemptions:

  • Dormant Companies: Companies with no significant accounting transactions can apply for dormant status and may be exempt from the audit.

  • Reporting Exemptions/Simplified Reporting: While not an audit exemption in itself for most cases, companies qualifying for SME-FRF & SME-FRS may have simplified reporting requirements, which can reduce the complexity of the audit process. However, they generally still require an audit.

5. Filing Deadlines:

• Companies are typically required to hold an Annual General Meeting (AGM) and submit audited financial statements to company members within nine months after the financial year-end.

• Audited financial statements and the auditor's report are also submitted as supplementary material when filing the Profits Tax Return (PTR) with the IRD. The deadline for PTR submission is usually one month from the issue date, with possible extensions.

In summary, preparing financial statements in Hong Kong involves a structured process of maintaining accurate records, adhering to HKFRS (or SME-FRF & SME-FRS for eligible entities), and undergoing a mandatory annual audit by an independent CPA. Given the complexities, many businesses opt to engage professional accounting and audit firms to ensure compliance.

How Bestar can Help

Bestar plays a vital role in helping businesses in Hong Kong navigate the complexities of financial statement preparation and audit compliance. Here's a comprehensive look at how we can assist:

I. Accounting Services (Bookkeeping and Financial Statement Preparation)

• Setting up and Maintaining Accounting Systems:

  
  

  • System Design: Advising on and implementing suitable accounting software (e.g., Xero, QuickBooks) and internal control procedures tailored to the company's size and industry.

  • Chart of Accounts: Establishing a comprehensive chart of accounts that accurately reflects the company's financial activities.

    
    

• Day-to-Day Bookkeeping:

  
  

  • Transaction Recording: Accurately recording all financial transactions, including sales, purchases, expenses, and receipts, in accordance with HKFRS or SME-FRF & SME-FRS.

  • Bank Reconciliations: Reconciling bank statements with the company's cash records to ensure accuracy and identify discrepancies.

  • Accounts Payable and Receivable Management: Managing supplier invoices, tracking customer payments, and ensuring timely collections.

  • Payroll Processing: Handling payroll calculations, MPF (Mandatory Provident Fund) contributions, and related tax filings.

    
    

• Preparation of Financial Statements:

  
  

  • Monthly/Quarterly Management Accounts: Providing regular financial reports (e.g., trial balance, income statement, balance sheet, cash flow statement) to give management real-time insights into the company's performance.

  • Annual Statutory Financial Statements: Preparing the full set of annual financial statements required by the Hong Kong Companies Ordinance and HKICPA standards, including the balance sheet, profit and loss account, cash flow statement, statement of changes in equity, and comprehensive notes to the accounts.

  • Compliance with Standards: Ensuring that financial statements strictly adhere to HKFRS or SME-FRF & SME-FRS, which is crucial for a smooth audit.

    
    

• Management Reporting and Advisory:

  
  

  • Financial Analysis: Analyzing financial data to identify trends, profitability drivers, cost inefficiencies, and areas for improvement.

  • Budgeting and Forecasting: Assisting in developing financial budgets and forecasts to support strategic planning and decision-making.

  • Cash Flow Management: Providing insights and strategies for optimizing cash flow, which is critical for business sustainability.

  • Financial Planning: Offering advice on long-term financial planning, investment strategies, and financing options.

II. Audit Services

• Statutory Audit:

  
  

  • Independent Audit Opinion: Conducting the mandatory annual audit of financial statements by our Hong Kong-licensed Certified Public Accountant (CPA) partner to provide an independent opinion on whether the financial statements present a true and fair view and comply with relevant accounting standards.

  • Compliance Assurance: Ensuring that the company meets all statutory audit requirements under the Companies Ordinance and other relevant regulations.

  • Tax Compliance Review: Reviewing the company's tax computations and supporting documents to ensure compliance with Hong Kong tax laws and assist in preparing the Profits Tax Return (PTR).

    
    

• Audit Liaison and Support:

  
  

  • Facilitating the Audit Process: Acting as a point of contact between the company and the external auditors, streamlining the information exchange and addressing auditor queries.

  • Preparing for Audit: Helping the company organize and prepare all necessary financial records and supporting documents for the audit, which can significantly reduce audit time and costs.

  • Resolving Audit Issues: Assisting in resolving any accounting or reporting issues identified during the audit, ensuring a clean audit report.

    
    

• Internal Control Assessment and Improvement:

  
  

  • Evaluating Controls: Assessing the effectiveness of the company's internal control systems to identify weaknesses and risks of fraud or misstatement.

  • Recommendations: Providing recommendations for strengthening internal controls, improving operational efficiency, and mitigating financial risks.

    
    

• Special Purpose Audits:

  
  

  • Due Diligence: Conducting financial due diligence for mergers, acquisitions, or investments.

  • Forensic Audits: Investigating financial irregularities or fraud.

  • Agreed-Upon Procedures: Performing specific procedures on financial information as agreed upon with the client for a particular purpose.

III. Tax Compliance Services

• Profits Tax Return Filing: Preparing and filing the annual Profits Tax Return (PTR) with the Inland Revenue Department (IRD), along with the audited financial statements.

• Tax Advisory: Providing advice on Hong Kong tax laws, optimizing tax efficiency, identifying eligible deductions and allowances, and navigating international tax treaties.

• Responding to IRD Inquiries: Assisting in responding to any queries or investigations from the Inland Revenue Department.

IV. Benefits of Engaging Bestar:

• Compliance Assurance: Ensures strict adherence to Hong Kong's complex accounting standards (HKFRS/SME-FRF & SME-FRS) and regulatory requirements, minimizing the risk of penalties, fines, or legal issues.

• Expertise and Up-to-Date Knowledge: Access to experienced CPAs who are well-versed in the latest accounting standards, tax laws, and industry best practices in Hong Kong.

• Time and Cost Savings: Outsourcing these functions can free up internal resources, allowing businesses to focus on their core operations. It can also be more cost-effective than hiring a full-time in-house accounting team, especially for SMEs.

• Enhanced Financial Credibility: Audited financial statements provide a true and fair view of the company's financial health, which builds trust among investors, lenders, suppliers, and other stakeholders. This is crucial for securing funding or partnerships.

• Improved Decision-Making: Accurate, timely, and well-analyzed financial information enables better strategic planning, resource allocation, and operational decisions.

• Risk Mitigation: Bestar helps identify and mitigate financial risks, including fraud, non-compliance, and operational inefficiencies.

• Scalability and Flexibility: Accounting and audit services can be scaled up or down based on the business's changing needs, accommodating growth or seasonal fluctuations.

• Access to Technology: Bestar utilizes advanced cloud-based accounting software and tools, providing clients with real-time access to financial data and improved efficiency.

By leveraging the expertise of Bestar, businesses in Hong Kong can ensure financial health, maintain compliance, and gain valuable insights to drive their growth and success.

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