As companies approach their financial year-end, attention typically turns to closing the accounts and preparing for the annual audit. One question needs to be clear from the outset: Which financial reporting framework is the company using?
In Hong Kong, companies may prepare their financial statements under one of three principal frameworks:
- Full HKFRS Accounting Standards;
- HKFRS for Private Entities Accounting Standard (HKFRS for PE); or
- Small and Medium-sized Entity Financial Reporting Framework and Financial Reporting Standard (SME-FRF & SME-FRS).
Each framework has different recognition, measurement, presentation and disclosure requirements, which can affect reported amounts as well as the accounting work required at year-end. This article aims to explain the key features, eligibility requirements and practical differences between the three frameworks, so that companies can better assess which framework applies to them and what its adoption means for their financial reporting.
Full HKFRS
Full HKFRS is the most comprehensive of the three frameworks and is fully converged with IFRS Accounting Standards as from 1.1.2005.
It includes, among other standards:
- HKFRS 9 Financial Instruments;
- HKFRS 15 Revenue from Contracts with Customers;
- HKFRS 16 Leases;
- HKAS 12 Income Taxes;
- HKAS 36 Impairment of Assets; and
- extensive presentation and disclosure requirements.
While any Hong Kong incorporated company may choose to prepare its financial statements under full HKFRS, it is commonly applied by listed companies, larger corporate groups and entities whose parent company or other stakeholders require reporting under full HKFRS or IFRS. Nevertheless, a relatively small company may also adopt full HKFRS where it belongs to an international group requiring group-wide IFRS reporting.
HKFRS for Private Entities — broadly equivalent to IFRS for SMEs
HKFRS for PE is Hong Kong’s version of the IASB’s IFRS for SMEs Accounting Standard. It provides a less complex financial reporting framework than full HKFRS.
The simplifications cover both accounting requirements and disclosures. For example, HKFRS for PE uses an incurred-loss impairment model for financial assets measured at amortised cost rather than the HKFRS 9 expected credit loss model, retains a simpler lease-accounting approach than HKFRS 16, and contains substantially fewer disclosure requirements than full HKFRS. Other areas also contain simplified recognition, measurement or accounting-policy requirements.
Eligibility for HKFRS for PE is based on public accountability, rather than a Hong Kong statutory turnover or asset size test. An entity may use HKFRS for PE regardless of the scale of its operations, provided that it does not have public accountability, prepares general purpose financial statements for external users, and is not subject to other requirements that prescribe a different reporting basis.
Broadly, an entity has public accountability if:
- its debt or equity instruments are publicly traded, or it is in the process of issuing such instruments for public trading; or
- as one of its primary businesses, it holds assets in a fiduciary capacity for a broad group of outsiders, as is typically the case for banks, insurance companies, securities brokers and similar financial institutions.
An entity with public accountability is therefore outside the intended scope of HKFRS for PE.
Revised HKFRS for PE Effective from 2027
HKICPA has issued a revised HKFRS for Private Entities Accounting Standard, effective for annual periods beginning on or after 1 January 2027, with early application permitted.
HKICPA currently describes HKFRS for PE as “equivalent to the IFRS for SMEs Accounting Standard.” For the new version effective from 1 January 2027, HKICPA explicitly says it is “fully converged with the third edition of the IFRS for SMEs Accounting Standard.”
The revised standard is fully converged with the third edition of the IASB’s IFRS for SMEs Accounting Standard. It represents a substantial update, incorporating selected concepts developed under newer full HKFRS Accounting Standards while retaining important simplifications for private entities.
The amendments affect many areas of the standard, with major changes to revenue recognition, consolidation, financial instruments, fair-value measurement, business combinations, and concepts and pervasive principles. The changes may affect accounting policies, recognition and measurement, disclosures and the information required to prepare the financial statements.
Read our article Revised HKFRS for Private Entities: What Changes from 2027?
SME-FRF & SME-FRS — Hong Kong’s Simplified Reporting Framework
SME-FRF & SME-FRS refer to Small and Medium-sized Entity Financial Reporting Framework and Financial Reporting Standard. They provide a Hong Kong-specific simplified reporting framework for eligible companies or groups that qualify for the reporting exemption under section 359 of the Companies Ordinance.
For an eligible company with relatively straightforward operations, SME-FRF & SME-FRS can significantly simplify the financial reporting process. The framework is primarily based on historical cost, contains simpler recognition and measurement requirements in a number of areas, and requires substantially fewer disclosures than full HKFRS.
It can therefore be particularly suitable for private companies whose financial statements are prepared mainly to satisfy statutory reporting requirements and the information needs of shareholders, rather than the broader reporting requirements associated with listed companies, international groups or capital markets.
There is also an important distinction in the reporting objective. Financial statements prepared under full HKFRS or HKFRS for PE are intended to give a true and fair view. SME-FRF & SME-FRS instead provides a simplified reporting framework for companies that qualify for the reporting exemption under the Companies Ordinance, with the appropriate application of SME-FRS resulting in a proper presentation appropriate for SMEs.
Unlike HKFRS for PE, eligibility is closely connected to the statutory reporting exemption. For private companies, the Companies Ordinance provides several qualification routes based on company or group size, together with a separate route based on unanimous member agreement.
Route 1a — Small Private Company
A private company may qualify as a small private company if it does not exceed any two of the following three thresholds:
Criterion | Threshold |
Annual revenue | HK$100 million |
Total assets | HK$100 million |
Employees | 100 |
If the company satisfies this small-company test, shareholder approval is not required merely in order to obtain the reporting exemption.
Route 1b — Small Company Limited by Guarantee
A company limited by guarantee may qualify for the reporting exemption if its total annual revenue does not exceed HK$25 million. Unlike the tests for private companies, there are no separate asset or employee thresholds. A group of small companies limited by guarantee may also qualify where each entity meets the applicable requirements and the group’s aggregate annual revenue does not exceed HK$25 million. Member approval is not required merely to obtain the reporting exemption.
Route 2 — Small Private Group
A holding company can also qualify for simplified reporting where the group as a whole satisfies the small-group requirements.
Broadly:
- the constituent companies must satisfy the relevant small-company eligibility requirements; and
- the aggregate group amounts must not exceed any two of the small-company thresholds.
For a qualifying small private group, shareholder approval is generally not required.
Route 3 — Larger Eligible Private Company
A private company that exceeds the small-company thresholds may still qualify as a larger eligible private company if it does not exceed any two of:
Criterion | Threshold |
Annual revenue | HK$200 million |
Total assets | HK$200 million |
Employees | 100 |
Unlike a small private company, this route generally requires shareholder approval.
At least 75% of all members must approve the company falling within the reporting exemption, and none of the remaining members may vote against the resolution, subject to the detailed requirements of the Companies Ordinance.
Route 4 — Larger Eligible Group
A holding company may qualify where the group satisfies the larger eligible-group requirements. Each Hong Kong incorporated company in the group must meet either the small private company or larger eligible private company criteria. The group may also include overseas incorporated entities, which are assessed against the same relevant criteria.
Broadly, the aggregate amounts for the group must not exceed any two of the following thresholds:
- HK$200 million annual revenue;
- HK$200 million total assets; and
- 100 employees.
The applicable shareholder approval requirements must also be satisfied.
Route 5 — Special Unanimous-Consent Route
The Companies Ordinance also provides a separate route under which a private company may qualify for the reporting exemption without satisfying a size test.
Under this route, the company must:
- have no subsidiary;
- not be a subsidiary of another Hong Kong incorporated company; and
- obtain written agreement from all members that it should fall within the reporting exemption for that financial year.
When Do the Size Tests Take Effect?
Meeting or exceeding a size threshold in a single financial year does not necessarily change a company’s eligibility immediately. The Companies Ordinance contains rules governing the financial years that are relevant when determining whether a company or group qualifies for, or ceases to qualify for, the reporting exemption.
In general, a company must satisfy the relevant size tests for two consecutive financial years before qualifying in the following year. Similarly, a company that has already qualified will generally continue to qualify until it has failed the relevant size tests for two consecutive financial years. Specific rules also apply in certain circumstances, including where a group acquires a new subsidiary.
Groups and Holding Companies
As Routes 2 and 4 illustrate, the reporting exemption can also apply in a group context. Depending on the circumstances, the relevant group provisions may extend to:
- groups of small private companies;
- groups of larger eligible private companies;
- groups containing qualifying non-Hong Kong body corporates; and
- certain mixed groups containing private companies and companies limited by guarantee.
The existence of subsidiaries therefore does not, by itself, mean that a holding company is ineligible to apply SME-FRF & SME-FRS. Where relevant, the applicable qualification requirements must be considered at group level.
Similarly, a company is not automatically excluded from SME-FRF & SME-FRS merely because it is a subsidiary. Its eligibility should be assessed against the applicable requirements of the Companies Ordinance and SME-FRF.
Can a Company Change Its Financial Reporting Framework?
A company can change its financial reporting framework, provided that it is eligible to use the new framework and complies with the applicable transitional requirements. All Hong Kong incorporated companies may adopt full HKFRS, whereas HKFRS for PE and SME-FRF & SME-FRS are available only to entities meeting their respective eligibility requirements. Accordingly, a company that has grown beyond the reporting-exemption criteria may have to move away from SME-FRF & SME-FRS, while an eligible private company may choose to move from full HKFRS to HKFRS for PE or, if it qualifies for the reporting exemption, to SME-FRF & SME-FRS. HKICPA notes that each framework contains specific requirements for first-time adoption and that moving between frameworks is therefore not expected to be common.
A change of framework is more than a change in the format of the financial statements. The company must assess how recognition and measurement differences affect its opening balances, comparative information, accounting policies and disclosures. On first adopting full HKFRS, HKFRS 1 generally requires the preparation of an opening HKFRS statement of financial position and retrospective application of HKFRS, subject to specified exceptions and exemptions. A first-time adopter of HKFRS for PE applies the transition provisions in Section 35, which likewise contain retrospective requirements together with specified reliefs. Where an entity moves to SME-FRF & SME-FRS, items that no longer meet the recognition criteria are derecognised, newly qualifying items are recognised and relevant balances are remeasured; the first-year financial statements must also disclose the previous framework and reconcile the previously reported net assets to those under SME-FRF & SME-FRS.
Before changing framework, management should therefore consider not only eligibility, but also the effect on reported profits, assets and liabilities, comparative figures, tax-related balances, group reporting requirements, banking covenants and other stakeholder requirements. The accounting team and auditor should ideally consider the transition before year-end so that the necessary opening-balance information, reconciliations and supporting records are available.
Drivers of changes of financial reporting framework
In practice, changes of financial reporting framework are usually driven by one of three factors: eligibility, stakeholder requirements or cost-benefit considerations. A company may be required to move to a more comprehensive framework because it has grown, developed public accountability or become subject to group or financing requirements. Conversely, an eligible private company may voluntarily move to a simpler framework where the information needs of shareholders and other users no longer justify the cost and complexity of full HKFRS. One nuance worth adding is that growth alone does not necessarily force a company from HKFRS for PE to full HKFRS, because HKFRS for PE eligibility is based principally on public accountability, not a turnover or asset-size test. By contrast, size and statutory reporting-exemption criteria are central to eligibility for SME-FRF & SME-FRS.
Comparing the Three Financial Reporting Frameworks
Feature | Full HKFRS | HKFRS for PE | SME-FRF & SME-FRS |
Basis | Substantially converged with IFRS Accounting Standards | Based on the IFRS for SMEs Accounting Standard | Hong Kong-specific simplified reporting framework |
Target Audience / Eligibility | Mandatory for public accountability; optional for any private entity. | Entities without public accountability that choose a broader international standard than SME-FRS. | Private companies qualifying for reporting exemption under section 359 of the Hong Kong Companies Ordinance. |
Required Statements | Comprehensive set: Statement of Financial Position, P&L, Statement of Changes in Equity, Cash Flow Statement, and Notes. | Full set of financial statements including a Cash Flow Statement. | Basic set: Balance Sheet, Income Statement, and Notes (Cash Flow Statement not required). |
Can a holding company qualify? | Yes | Potentially | Yes, subject to group eligibility tests |
Can an entity with a holding company qualify? | Yes | Potentially | Potentially — being a subsidiary is not a blanket prohibition |
Shareholder approval | Not generally relevant to framework eligibility | Not generally required by the standard itself | Depends on qualifying category |
HKFRS 9 Expected Credit Loss | Yes | No | No |
Complexity | Highest | Intermediate | Lowest |