Hong Kong Accounting Requirements Every Director Should Know

Most Hong Kong directors know they need accounts. Considerably fewer know exactly what the law requires.

The Companies Ordinance sets out specific obligations for how accounts have to be prepared, kept and audited. Getting it wrong isn't just an accounting problem. It's a legal one, and it lands on you personally.

Where the obligations come from

Two pieces of legislation, running in parallel.

The Companies Ordinance requires every company to keep proper books of account that give a true and fair view of its financial position. The Inland Revenue Ordinance requires records sufficient for the IRD to verify your profits and losses.

Those are separate obligations, and meeting one doesn't satisfy the other. A company keeping records adequate for tax but not for the Companies Ordinance is still non-compliant. Directors have been prosecuted for failing to keep proper records.

Which standards apply

Financial statements have to be prepared under Hong Kong Financial Reporting Standards, issued by the HKICPA and substantially aligned with IFRS. For most practical purposes the two are equivalent.

Smaller companies may qualify for the SME Financial Reporting Framework, a simplified alternative. Your auditor can tell you whether you meet the size thresholds.

What you can't do is use a different country's standards because it suits your group. A founder once asked whether he could use US GAAP since his parent company did. He couldn't. Hong Kong law requires HKFRS.

The audit

Every Hong Kong company has to have its annual accounts audited by a CPA holding a Hong Kong practising certificate.

It isn't optional, and it has to be finished before your profits tax return goes to the IRD, because the audited accounts are attached to it. The audit requirements guide covers the process and how to keep the cost down.

Companies that assume they're too small to need one are almost always wrong. There's no size exemption here.

What records you have to keep

The requirements are specific:

• Bank statements and reconciliations
• Sales invoices and receipts
• Purchase invoices and expense receipts
• Payroll records and MPF contribution statements
• Contracts and agreements
• Board minutes, resolutions, the share register and statutory records

Everything has to be kept for at least seven years from the end of the accounting period it relates to.

Physical records are fine. Digital records are equally fine, as long as they're complete, accurate and can be produced for inspection.

The annual cycle

Every Hong Kong company has a financial year end, and that date drives everything else. The most common choices are 31 March, 30 June, 30 September and 31 December, but there's no legal requirement to pick any particular one.

After your year end, the cycle runs:

1. Prepare management accounts
2. Complete the audit
3. File the profits tax return with audited accounts attached
4. File the annual return (NAR1) with the Companies Registry by its own separate deadline

The whole thing usually takes three to six months after year end, and how well organised your records are is what decides whether it's three or six.

Where directors are personally on the hook

You're personally responsible for making sure the company meets its accounting obligations. This isn't something you can hand off entirely to an accountant or auditor.

Specifically, you have to make sure proper books are kept, that financial statements are prepared and approved, and that the company doesn't trade while insolvent. You sign the directors' report and approve the accounts before the audit.

Failure to maintain proper accounting records is a criminal offence under the Companies Ordinance. Penalties include fines for the company and personal liability for directors in serious cases. That isn't a theoretical risk.

The failures I see most

Nearly always the same handful of things:

• No proper bookkeeping during the year, so there's a scramble before the audit
• Bank statements missing, or never reconciled
• Expenses claimed with no supporting invoice
• Personal and company finances run through the same account
• Records not kept for the full seven years

A founder came to me with no expense records at all for the year. We went through six months of bank statements categorising every transaction, and his audit cost roughly double what it should have.

None of these are catastrophic if you catch them early. All of them are expensive if you don't.

The short version

Hong Kong's accounting requirements aren't designed to be a burden. A company with clean, current records gets through its audit and tax filing with very little friction.

The directors who struggle are the ones who leave it all to the end. Keeping the books current through the year means your accountant spends less time reconstructing what happened and more time on legitimate tax planning.

Common questions

Do Hong Kong companies have to be audited?

Yes. Almost all companies must have annual accounts audited by a CPA with a Hong Kong practising certificate. There's a limited exemption for formally dormant companies.

What accounting standards apply?

Hong Kong Financial Reporting Standards, issued by the HKICPA. Smaller companies may qualify for the simplified SME Financial Reporting Framework.

How long do I keep records?

At least seven years, under both the Companies Ordinance and the Inland Revenue Ordinance.

What happens if proper records aren't kept?

It's a criminal offence under the Companies Ordinance. Directors can face fines and, in serious cases, personal liability.

Can I keep everything digitally?

Yes, provided the records are complete, accurate and can be produced for inspection when required.

When do accounts need to be ready?

There's no fixed statutory deadline for preparing them, but they have to be done before the audit and before the profits tax return is filed. Most companies finish within three to six months of year end.