AMGL & Co.
Certified Public Accountants
Companies which meet the criteria set out under section 359 of the new ordinance are eligible to prepare financial statements under the SME-FRF & SME-FRS (Revised) for financial years beginning on or after 3 March 2014 and are qualified to prepare simplified directors’ reports. This simplified reporting regime is referred to as “the reporting exemption” in the ordinance.
The following companies which are not operate in certain types of business as listed in section 359(4) are eligible for this reporting exemption without taking any further action:
The company is a private company which does not have any subsidiaries and is not a subsidiary of another Hong Kong incorporated company and has full shareholder support every financial year (section 359(1)(b));
The company is an eligible private company (or a group of eligible private companies) and gaining sufficient shareholder support (section 359(1)(c) and section 359(2)(c)(ii)).
Types of company are not eligible for the reporting exemption
The following types of company are not eligible for the reporting exemption under the new Companies Ordinance and so are not permitted to prepare their financial statements in accordance with SME-FRF & SME-FRS:
companies that are authorized under the Banking Ordinance to carry out banking business;
companies that accept, by way of trade or business (other than banking business), loans of money at interest or repayable at a premium, other than on terms involving the issue of debentures or other securities;
companies that are licensed under Part V of the Securities and Futures Ordinance to carry on a regulated business; or
companies that carry on any insurance business, other than solely as an agent.
Groups which contain such companies are also not eligible for the reporting exemption and so cannot prepare consolidated financial statements under the SME-FRF and SME-FRS.
In general, a company will have to pass the size tests for two consecutive years in order to become eligible in the 3rd year. Similarly a company would generally have to fail the tests for two consecutive years in order to become ineligible in the 3rd year. However, there are specific transitional rules in this regard which apply in the first year that this part of the new Companies Ordinance comes into operation and also in any year in which a group acquires a new subsidiary.
Qualifying criteria for the companies NOT incorporated under the Hong Kong Companies Ordinance
Subject to any specific requirements imposed by the law of the company's place of incorporation and subject to its constitution, these companies qualify for reporting under the SME-FRF & SME-FRS (Revised) when they meet the same requirements that a Hong Kong incorporated company is required to meet under section 359 of the new Companies Ordinance.
The Companies (Amendment) (No. 2) Ordinance 2018 (2018 Amendment Ordinance) was enacted on 28 November 2018 and commences operation on 1 February 2019. PN 900 is therefore revised to reflect the following key amendments of the 2018 Amendment Ordinance:
Groups which include non-Hong Kong body corporates are eligible for the reporting exemption, and hence the use of Small and Medium-sized Entity Financial Reporting Framework and Financial Reporting Standard for financial reporting if they meet the qualifying criteria for the reporting exemption; and
A partially owned subsidiary of an entity can now be exempted from preparing consolidated financial statements if all members agree in writing before the end of the financial year.
Eligibility: Hong Kong incorporated subsidiary of an overseas incorporated company
Section 2 defines “company” as (a) a company formed and registered under the new CO or (b) an existing company. “Existing company” is defined as a company formed and registered under a former Companies Ordinance. An overseas incorporated company is therefore not a company defined under the new CO.
Based on the above, being a subsidiary of an overseas incorporated company in itself will not disqualify a company incorporated under the Companies Ordinance from falling within reporting exemption under section 359(1)(b).
The exemptions are set out in the following:
no requirement to disclose in the directors’ report the following :
business review (Section 388(3)(a))
directors’ interests in arrangements to enable directors to acquire benefits by the acquisition of shares or debentures (Section 3(3A) of Companies (Directors’ Report) Regulation (Cap. 622D)
donations (Section 4(3) of Companies (Directors’ Report) Regulation (Cap. 622D)
directors’ reasons for resignation or refusal to stand for re-election (Section 8(3) of Companies (Directors’ Report) Regulation (Cap. 622D)
material interests of directors in transactions, arrangements or contracts of significance entered into by a specified undertaking of the company (Section 10(7) of Companies (Directors’ Report) Regulation (Cap. 622D)
no requirement for financial statements to give a “true and fair view” (Section 380(7))
no requirement for auditor to express a “true and fair view” opinion on the financial statements (Section 406(1)(b))
no requirement to disclose auditor’s remuneration in financial statements (Section 380(3) and Schedule 4 Part 2)
subsidiary undertakings may be excluded from consolidated financial statements in accordance with applicable accounting standards (Section 381(2))
no requirement to disclose in the notes to financial statements the material interests of directors in transactions, arrangements or contracts of significance entered into by the company (Section 23 of Companies (Disclosure of Information about Benefits of Directors) Regulation (Cap. 622G))
Exemption from giving a true and fair view
Every company that is required to prepare financial statements under the new CO is required by section 380(4)(b) to comply with the accounting standards applicable to the financial statements.
“Accounting standards” are defined in section 380(8) as being those issued or specified by the HKICPA (as per the Companies (Accounting Standards (Prescribed Body)) Regulation (Cap. 622C) referred to in section 380(8)(a)).
If an eligible company does not follow the SME-FRF and SME-FRS, then it must prepare financial statements which comply with another body of accounting standards issued or specified by the HKICPA, for example full HKFRSs, which is a body of accounting standards intended to give a true and fair view if properly complied with.