Contents of Annual Financial Statement for a Establish Company in Hong Kong

Transparency and accuracy are the driving forces of corporate world whether to set up a company in Hong Kong online or offline. Annual financial statement is the only document or report upon which company’s prospect, maintaining of trust with the existing shareholder and the performance of the company, depends upon. Not only this, but annual financial statement can attract aspiring investors to invest in any company as this document reports of the profits, gains and overall performance of the company. Hence ascertaining the vitality and importance of this document, there is need to welcome discussion on the proper contents of any annual financial statement so that its accuracy and relevance shall be established.

Section 380 of Cap. 622 sets out the basic contents which any annual financial statement of the company must contain. If we talk about predecessor companies ordinance, it basically does not explain any detail discussion on the contents of financial statement except one requirement which emphasis annual financial statement to give a true and fair view of company’s corporate operations. And if we talk about enforced companies ordinance; it gives more relevance and importance to accounting standards. May be this flexibility is to ensure efficient financial reporting and keeping the legal standards up to date. If we talk in general then certain provisions of predecessor companies ordinance are not welcomed in Cap. 622 and are repealed. As far as provisions of Cap. 622 regarding financial statements are concerned; Cap. 622 introduces an express provision which emphasis on compliance of financial statements with the prevailing and applicable accounting standards. If due to any reason and excuse company’s annual financial statement does not comply with the requirements of Section 380 of Cap. 622 then there is some penalty, about which we shall discuss later in this article. For now, we shall discuss each mandatory content in detail.

Statement of Profit/Loss Account

In simpler terms, it is also known as statement of comprehensive income of the company after set up a company in Hong Kong online or offline. As per the Section 122 (1) of predecessor companies ordinance there was the requirement to prepare profit/loss account, each year but this provision has now been repealed. If we talk about any provision regarding preparation of profit/loss account in Cap. 622 then there is no express provision regarding this matter but as per the general requirement of Section 380 (1) (b) of Cap. 622; company’s financial statement should give a true and fairer view of the financial performance of the company in previous financial year.

Basically, statement of profit/loss account or statement of comprehensive income shows that either company made some monetary profit during previous financial year or incurred some financial loss during previous financial year. The content or major things which contributes in the preparation of statement of profit/loss account includes:

  • Revenue of the company.
  • Expenses of the company.
  • Cash inflows from the trading activities such as sales of products.
  • Company’s operating expenses.
  • Gain made by the company via sale of fixed assets of the company.
  • Finance costs incurred by the company such as interests on loan.
  • Income tax expenses incurred by the company.
  • Depreciation of company’s fixed assets.

The figure quoted at the end of statement comprehensively express the net profit or loss of the company, after all expenses are deducted from all revenue sources. To determine and show whether company made any profit or incurred any loss, difference between the revenue generated by the company in this fiscal period and the expenditures expended by the company in this specific fiscal period is determined and thus on account of this statement of profit/ loss account is generally regarded as historical document of the company as company’s corporate performance is mapped here. The revenue generated by the company and the expenditures incurred by the company are recorded in monetary terms and therefore on account of this, they are called as “historical cost basis”.

Statement of Balance sheet

Section 122 (2) of predecessor companies ordinance requires the companies to prepare balance sheet, each financial year. But, if we take into consideration the provisions of Cap. 622 and more specifically the script of Section 380 (1) (a) then we will come to know that Section 380 (1) (a) does not entail any mandatory requirement instead it emphasis on financial disclosures or  the financial statements of the company to be of true and fair nature and must be prepared at the end of financial year, about the ending financial or ended financial year.

Basically, statement of balance sheet gives the snapshot of company’s overall financial standing because it is prepared keeping in view the ambience of historical record and thus it is not something which may amount to be known as statement of company’s worth. The basic function or feature of this statement is to present the monetary worth of company’s liabilities, reserves and the capital, at the date where statement is prepared and tells about the ways or mechanism through which company’s assets have been distributed among several assets of the company. The format of balance sheet is in tabular form and it entertains the company’s liabilities, shareholder’s capital or equity and assets of the company accompanied with the notes which explains the items mentioned in statement of balance sheet. If we talk about assets then corporate assets can be of two types that is; Current assets and Non-current assets of the company. Those assets which have been expended or converted into cash within 12 months of last financial statement of company such as trading of goods in company’s trade share in the market, are known as current assets of the company. While non-current assets are those which are fixed assets and are utilised to generate income of the company such as any land or property or machinery owned by the company as well as any intangible assets such as goodwill and intellectual property. For a lay man there is the need to define some terminologies. Shareholder’s equity means the capital contributed by the shareholder to the company’s capital and reserves. Liability is the most common term used in corporate business operations and it is basically the amount owed to any other person such as supplier or any loan taken by the company or any debt security issued by the company.

Let’s recall our mathematical fantasy world and understand and corelate the assets, liabilities and shareholder’s equity in one equation as:

Assets of the company= Shareholder’s equity + Liabilities of the company

There is sort of technicality involved in this equation as per which shareholder’s equity is basically the funds owed to the shareholder by the company and this is the reason that it is written at the right-hand side of equation, with the liabilities of the company. Legal commentators communicated that, it is necessary that shareholder’s equity and the liabilities of the company must be balanced with the assets of the company because the funds coming from the right-hand side of equation is in the form of left-hand side of the company, in simpler terms in the form of assets of the company.

Corporate culture gives very importance to authenticity and trustworthiness and thus to negate any irregularity and probability of misappropriations there is the requirement to get statement of balance sheet approved and counter signed by the board of directors of the company or any two directors of the company can sign it on behalf of whole of board of directors. For the case of setting up sole proprietorship in Hong Kong where there is only one director who controls the affairs of the company related to corporate business and the matters related to setting up sole proprietorship in Hong Kong, then that sole director is supposed to authorise and sign the statement of company’s balance sheet.

Definition of True and Fair View

We have been reading a lot that financial statement should reflect the true and fair perspective of company’s financial standing, let’s see what the term “true and fairer view implies”. The requirement of Section 380 (1) of Cap. 622 is basically an overriding requirement and to give true and fairer view, financial statement should have certain information entailed in Schedule 4 of Cap. 622 along with compliance with the accounting standards, as communicated by the Section 380 (3) and 380 (4) of Cap.622. But if due to any reason compliance with the Section 380 (3) and 380 (4) of Cap.622 could not be furnished then additional required information must be given in the annual financial statement of the company to give true and fairer view.

There is a little confusion among corporate aspirants that what difference does “true and fairer view” shares with the term “true and correct view”. This question is of vital need as corporate world demands perfection and trueness in corporate affairs. To understand this distinction, we shall have to recall from past excerpts where the earlier regulations in United Kingdom emphasised on the financial statements to give true and correct view and this provision was later on amended followed by the Companies Act 1948 and emphasised on financial statements of the company to give true and fairer view. This provision was amended, and distinction was drawn on the basis of one basic difference that; the word “correct” implies strictness and allows the adoption of only that way which is correct and does not shows any flexibility because what is correct, is correct and everything other than this is wrong. This was quite unacceptable especially in the situation where there was no any absolute accounting standards. Thus, to provide flexibility and to compensate the non-existence of any accounting standards this provision was amended as to give the “true and fairer view”. In the legislation, what the auditor considers “fair” is termed as fairer. If we talk about Hong Kong, these provisions were introduced in Hong Kong in 1974, as the result of wider accounting reforms followed by the United Kingdom’s amendments in Companies Act of 1948 and 1967.

Standards of Financial Reporting and Accounting

For the accounting records there is the need to comply with accounting standards as specified by the Hong Kong Institute of Certified Public Accountants (HKICPA) and for the financial reporting to comply with standards, then as given in HKICPA, there is the need to comply with Hong Kong Financial Reporting Standards (HKFRS). HKICPA was established to regulate the profession of accountancy through the Professional Accountants Ordinance named as Cap. 50. Now we shall discuss these standards in detail so that compliance would be easy to comprehend and no ambiguity in this regard shall be left.

Hong Kong Financial Reporting Standards (HKFRS)

HKFRS serves as the standard to ensure that financial statements of the company give true and fairer view as per the requirements and needs of Cap. 622. Schedule 10 of predecessor companies ordinance although entailed reporting standards but they seem to be obsolete as they were enacted when there were no enforced accounting standards thus after the introduction of accounting standards by the HKICPA, amended was much needed and Section 380 (5) of Cap. 622 entertained much needed regulations and introduced the ways and manner, by adoption of which company’s financial statements can give true and fair view and Section 380 (4) (b) of Cap. 622 emphasis on the compliance of accounting standards while reporting the financial statement of the company.

International Financial Reporting Standards (IFRS)

Apart from HKICPA and HKFRS there are some financial reporting standards specified by the International Financial Reporting Standards (IFRS) and are issued by the international Accounting Standards Board, which sets the standards. It is an internationally acclaimed regulatory body and many countries including Hong Kong recognised this standard setting body or entity. All those companies which deems to be listed in Hong Kong, USA or any European countries as an offshore company incorporation, needs to comply with the standards of both IFRS and HKICPA to address the eligibility criteria for offshore company incorporation. On account of commencement of convergence programme by the HKICPA, any company which comply with HKFRS, means that it complies with the standards of IFRS also.