Every company in Hong Kong, regardless of its nature, is required to maintain and audit its annual financial and accounting records, according to the Companies Ordinance. The sole purpose of maintaining these business financials in Hong Kong is to give the company clarity on the year's revenue and expenses. They can either be paper-based or computer-based, depending on the nature of the company. The analysis of the profits and transactions helps the company understand its financial position and exude credibility to the public. Failing to record and maintain the concerned documents will be considered an offense and may lead to legal complications.
If you are running a business and are wondering what the business financial requirements in Hong Kong are or what to record in business financials, this article will surely help you.
What is business financial in Hong Kong?
Business financials in Hong Kong is nothing but promptly reported and maintained records of income, expenses and transactions that happen annually in a company. Every company is expected to present a statutory report comprising all the year's financial statements to the Inland Revenue Department (IRD). These reports will be considered valid only if they are signed by a Certified Public Accountant (CPA).
Purpose of business financial
You need a business financial in Hong Kong to analyze how your company has performed over the year. An understanding of the financial position of your company will help you assess the resources, income streams, and net revenue. You can outline the priorities for your company in the following years using the trends and perspectives you gain from the analysis. The financial accounts, income statements and accounting policies must be presented annually to the board of directors and authorities.
What to record in business financials in Hong Kong?
Now that you have a better understanding of financial accounting, you may wonder what to record in business financials because there is too much data around your company finances and it may get overwhelming to maintain. The main components of business finances in Hong Kong are the income statement, balance sheet, and cash flow statement. Read on to know more about each in detail.
The Income statement
It is using the income statement that you analyze the capacity of a company in generating profits in the business year. It comprises information regarding the revenue, income, expense, and loss to demonstrate the trends in the company's operation.
The Revenue can be operating (by selling the products or services as listed in the main activities of your business) or non-operating (gained through other passive sources). This should be recorded and submitted in a stipulated time frame.
The Income usually referred to as gains, is the amount you receive through any activity, regardless of being core or non-core. The consolidated income gained during a particular reporting period is noted and filed.
The Expense can be either primary – done through operating activities like paying wages, sales of a company product and bills or secondary – an outcome of money spent for non-operating activities such as debts and loans.
The loss is determined by analyzing the money spent on selling an asset of the company property.
The Balance sheet
The Balance sheet includes all the assets, liabilities and equity a company is accountable for in a given period. It is a reflection of the financial status of your business. You can use this to determine how much is left in the funding, what investments have been made over the year, and the liquidity of cash.
Assets can be current (all the benefits like cash, income, securities and any receivables) or non-current (the company's properties).
Liabilities can also be current like rent, bills, and payroll responsibilities, and non-current debts, taxes and interests that a company is responsible for.
Shareholder equity can be determined by assessing the total assets and liabilities. The difference between the two should be positive and only then you can pay returns to your shareholders.
A balance of all these components, such as assets, liabilities, and equity, must be achieved to maintain your records accurately. An imbalance is usually an indication of errors.
The Cash flow statement (CFS)
A Cash Flow statement demonstrates how the cash flows in and gets distributed in the company. This analysis should match that of the income statement to maintain accuracy. The cash flow can be analyzed from three types of activities done in an organization.
Through operating activities like selling products or services as a part of the main business operation.
Through investing activities like the purchase or sale of either properties or land.
Through financial activities repaying liabilities, loans, or returning to shareholders.
Requirements of business financials in Hong Kong
The basic requirements of business financials in Hong Kong are accounting and record keeping, fulfilling the general requirements, and choosing the right financial year-end.
The Hong Kong Institute of Certified Public Accountants (HKICPA) issues provisions for Hong Kong Financial Reporting Standards (HKFRS) for all companies for conformance. Your annual financial statements must reflect your business's financial performance and position, complying with the standards. If you are a partially owned subsidiary and all the members of your company file against the requirements in writing, you may stop maintaining company-level statements. But every company must conduct annual audits by a Certified Public Accountant (CPA) to be legally compliant with the standards of business financials in Hong Kong.
Accounting and record keeping
The purpose of maintaining the financial statements is to ensure accurate documentation of records and transactions. You must have a list of invoices, receipts, daily records, vouchers, and pay slips concerning Sales, expenses and purchases, respectively. Along with these, the sale and purchase agreement of your assets, inventory and shares need to be filed promptly. These documents will help you prepare a consolidated financial statement which should be submitted to the Inland Revenue Department (IRD).
Choosing a financial year-end
Any business must file its Profit Tax Return within the first 18 months of the company incorporation. After this, the time frame shrinks to 15 months from the incorporation anniversary. So, to make sure your statements and annual filings are audited and filed promptly you need a financial year-end. Every company has the liberty to choose its own FYE but the most common dates are the 31st of December, 31 March, 30 June, and 30 September. If your company is a subsidiary of a parent company abroad, it is advisable to set the same financial year end as your main company to file your business financials in Hong Kong. This way, you can cut down expenses on double auditing and repeated filings of statements. There are also options to change your fiscal year-end date if you can produce authentic reasons and approval from all the board members.
Eligibility criteria for reporting exemption in Hong Kong
If you want to be exempted from filing your financial statements for a year, you can choose not to only if you are considered eligible. Firstly, your company must be either private or limited by guarantee. In the former case, your annual revenue must not exceed HKD 100 million, assets must not exceed the HKD 100 million limit and the count of employees should not exceed 100. If your company is limited by guarantee, your annual revenue must not exceed HKD 25 million. Remember, you must prepare and maintain records even if you claim a reporting exemption. You can only choose not to be transparent about your data regarding the board members and refrain from revealing certain transactions and giving exact values. However, this is an optional advantage and you are expected to have a clear idea backed by research if you need to be exempted.
It is crucial to maintain accurate records of your business finances in Hong Kong. Failing to prepare a consolidated statement annually can lead you to pay a penalty of up to HKD 100,000. You can follow a routine of updating and maintaining these files from the early days of incorporation to avoid errors. If this sounds overwhelming to you, get in touch with a professional service provider to make your journey an easy ride.