Hong Kong SME Reporting Exemption Procedures
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Hong Kong SME Reporting Exemption Procedures
The Reporting Exemption in Hong Kong allows qualifying small and medium-sized enterprises (SMEs) to prepare simplified financial statements and directors' reports.
It is important to clarify a common misconception: The reporting exemption is not an audit exemption. Under the Hong Kong Companies Ordinance (Cap. 622), almost all companies incorporated in Hong Kong must have their financial statements audited annually by a Hong Kong-registered CPA (Practising). The only general exemption from the audit requirement is for companies that are formally registered as dormant under section 447 of the Companies Ordinance.
What the Reporting Exemption Covers
If a company qualifies for the reporting exemption, it may use the SME Financial Reporting Framework (SME-FRF) and Financial Reporting Standard (SME-FRS). This simplifies reporting by:
Reduced Disclosures: Exempting the company from disclosing certain information in the financial statements and directors' reports (e.g., auditor's remuneration, business review, and specific director-related disclosures).
Consolidation: Providing options to avoid preparing consolidated financial statements under specific conditions (e.g., if all members agree in writing).
Qualification Criteria
To qualify for the reporting exemption, a company must generally be a private company or a company limited by guarantee. Eligibility is determined by meeting size tests, often defined as meeting at least two of three criteria in a financial year.
Company Category | Size Test Criteria (Meet at least 2 of 3) |
Small Private Company | Revenue ≤ HK100M, Assets $\le$ HK100M, Employees ≤ 100 |
Larger "Eligible" Private Company | Revenue ≤ HK200M, Assets $\le$ HK200M, Employees ≤ 100* |
Small Guarantee Company | Revenue ≤ HK$25M |
*Note: Larger eligible private companies also require shareholder approval (at least 75% of voting rights, with no objections) to claim the exemption.
Important Considerations
Exclusions: Companies involved in certain financial services lines of business (specified under section 359(4) of the Companies Ordinance) are ineligible for the reporting exemption, regardless of their size.
Shareholder Approval: While some small companies qualify automatically, larger eligible private companies must obtain explicit shareholder approval. This is often handled via a written resolution or a general meeting.
Consistency: Generally, a company must pass or fail these size tests for two consecutive years to change its eligibility status in the third year.
Audit Obligation: Even when taking advantage of the reporting exemption, you must still appoint an independent, Hong Kong-registered CPA (Practising) to perform a statutory audit and file the audited accounts with your Profits Tax Return to the Inland Revenue Department (IRD).
If you are considering leveraging these exemptions for your operations, it is recommended to have your accounting partner verify your specific eligibility based on your latest group structure and financial figures, as the rules for groups involving both Hong Kong and overseas entities can be complex.
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Hong Kong SME Reporting Exemption Procedures
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