Hong Kong’s financial reporting requirements for private entities are changing. The Hong Kong Institute of Certified Public Accountants (HKICPA) has issued a revised HKFRS for Private Entities Accounting Standard (HKFRS for PE), effective for annual periods beginning on or after 1 January 2027, with early application permitted.
The revised standard is fully converged with the third edition of the IFRS for SMEs Accounting Standard. It represents a substantial update to HKFRS for PE, incorporating selected concepts developed under newer full HKFRS Accounting Standards while retaining important simplifications for private entities.
For entities already reporting under HKFRS for PE, the revision may affect accounting policies, recognition and measurement, disclosures and the information required to prepare the financial statements. The changes are also relevant when considering HKFRS for PE as an alternative to other financial reporting frameworks available in Hong Kong.
Six Areas with Major Changes
Although the revision affects many parts of HKFRS for PE, HKICPA identifies six sections containing major amendments:
Area | Gist of the 2027 revision | Likely practical impact |
Revenue | Revised Section 23 introduces a simplified five-step revenue recognition model based on the principles of HKFRS 15 | Revenue may be recognised differently for more complex customer contracts |
Consolidation | Section 9 introduces an updated control model aligned more closely with HKFRS 10 | The assessment of whether particular entities are consolidated may change |
Financial instruments | Section 11 is substantially revised, including updated classification principles and additional disclosures | Classification and credit and liquidity risk disclosures may require additional analysis |
Fair value | New Section 12 consolidates fair-value requirements and aligns them more closely with HKFRS 13 | A more consistent approach to determining and disclosing fair value |
Business combinations | Section 19 incorporates updated acquisition-accounting principles based on developments in HKFRS 3 | Acquisitions may involve more detailed accounting requirements |
Concepts and pervasive principles | Section 2 is updated based on the 2018 Conceptual Framework for Financial Reporting | An updated basis for accounting-policy judgements where HKFRS for PE does not specifically address a transaction |
A New Approach to Revenue Recognition
The existing HKFRS for PE contains separate principles dealing with sales of goods, services and construction contracts. From 2027, revised Section 23, Revenue from Contracts with Customers, introduces a simplified model based on the principles of HKFRS 15. The model requires an entity to identify the contract and the promises made to the customer, determine and allocate the transaction price, and recognise revenue when or as those promises are satisfied.
For a straightforward sale of goods at a fixed price, the resulting accounting may remain substantially the same. Greater differences may arise where contracts contain multiple components or more complex commercial terms, including:
- bundled products and services;
- equipment sold together with installation or other services;
- rebates, bonuses and other forms of variable consideration;
- customer loyalty arrangements;
- contract modifications;
- deposits and advance payments;
- rights of return;
- principal-versus-agent arrangements; and
- contracts performed over time.
For these arrangements, the revised model may affect the amount or timing of revenue recognition and may require information about contracts to be analysed differently from the existing approach.
An Updated Control Model for Consolidation
Revised Section 9, Consolidated and Separate Financial Statements, updates the definition of control to align more closely with HKFRS 10 and uses the control model as the single basis for determining whether consolidation is required.
The change may be relevant where control is less apparent from the percentage of shares held. For example, an investor holding less than a majority of the voting rights may still control an investee depending on its rights and the relevant facts and circumstances. HKFRS for PE also retains the rebuttable presumption that an investor with a majority of the voting rights controls the investee, preserving a simpler approach for more straightforward ownership structures.
The revised control model may therefore affect consolidation assessments for groups with less straightforward ownership, voting or contractual arrangements.
Financial Instruments: Revised Requirements While Retaining Incurred-Loss Impairment
Section 11, Financial Instruments, is substantially revised. Among other changes, it introduces a supplementary principle based on contractual cash-flow characteristics when determining how certain financial instruments are classified.
The revised section also introduces additional disclosures, including an ageing analysis of financial assets and a maturity analysis of financial liabilities, giving users more information about an entity’s exposure to credit and liquidity risk.
The impairment requirements remain an important point of distinction from full HKFRS. HKFRS for PE continues to apply the incurred-loss model to financial assets measured at amortised cost rather than introducing the HKFRS 9 expected credit loss (ECL) model. This difference can be particularly relevant for entities with substantial trade receivables or other financial assets.
Fair Value Requirements Are Brought Together
A new standalone Section 12, Fair Value Measurement, brings the fair-value measurement requirements together in one section and updates the underlying principles to align more closely with HKFRS 13, including the definition of fair value, fair-value hierarchy principles and related disclosures.
Fair value may arise only occasionally for many private entities. The changes have greater relevance where an entity holds investments or other financial instruments measured at fair value, enters into derivatives, undertakes acquisitions, or has other assets or liabilities requiring fair-value measurement.
Business Combination Accounting Becomes More Sophisticated
Revised Section 19, Business Combinations and Goodwill, incorporates several developments from HKFRS 3. The changes include an updated definition of a business, requirements for acquisitions achieved in stages, additional guidance on identifying the acquirer, revised requirements for contingent consideration and the recognition of acquisition-related costs as expenses rather than as part of the acquisition cost.
The amendments are particularly relevant to private groups that acquire subsidiaries or businesses. HKFRS for PE continues to retain simplifications within its business-combination requirements, and the resulting accounting therefore remains distinct from the full HKFRS 3 model.
The Underlying Accounting Concepts Are Modernised
Section 2, Concepts and Pervasive Principles, has been substantially revised based on the IASB’s 2018 Conceptual Framework for Financial Reporting. Its effects may be less visible in routine accounting than the changes to revenue or financial instruments. The revised concepts become more relevant where judgement is required or an accounting policy has to be developed for a transaction or circumstance that HKFRS for PE does not specifically address.
The revised conceptual foundation provides an updated basis for accounting judgements in areas where the standard does not prescribe a specific accounting treatment.
Important Simplifications That Remain
Despite the extent of the revision, HKFRS for PE remains a simplified reporting framework designed for private entities without public accountability. Several significant differences from full HKFRS continue after 2027:
- Impairment of financial assets: the incurred-loss impairment model remains applicable to financial assets measured at amortised cost, rather than the HKFRS 9 ECL model.
- Lease accounting: Section 20 retains its existing simplified approach and has not been aligned with the HKFRS 16 lessee accounting model.
- Undue cost or effort: this relief continues to be available in areas where HKFRS for PE specifically permits it.
- Control: the rebuttable presumption that an investor controls an investee when it owns a majority of the voting rights remains.
Taken together, the amendments bring HKFRS for PE closer to developments in full HKFRS in selected areas while preserving features intended to keep financial reporting proportionate for private entities.
The revised HKFRS for PE moves closer to full HKFRS in several recognition and measurement areas, so for a straightforward business the difference in routine accounting work may be less significant than before. However, important simplifications remain. In particular, operating leases continue to be accounted for without recognising right-of-use assets and lease liabilities, and the HKFRS 9 expected credit loss model does not apply. Further simplifications also remain in areas such as goodwill, borrowing costs, development costs and disclosure requirements.