Annual financial statement of the company has vital importance in the corporate structure of the company because after the payment of Hong Kong business registration fees this is the document which tells about the economic and financial prospects of the company. Before getting into the introduction of annual financial statement of the company, let’s first get familiarised with the change of terminologies so that readers who were familiar with previous terminologies can get to know about change of terminologies made in Cap. 622. Following are some of important changes of terminologies:

  • The term “accounts” has now been replaced with the term “annual financial statements”.
  • The term “statement of financial position” has now been replaced with the term “balance sheet”.
  • The term “statement of comprehensive income” has now been replaced with the term “profit and loss account”.

Annual Financial Statement as an Obligation

Cap. 622 sets out certain requirements regarding preparation and content of annual financial statement such as:

  • Annual financial statement of the company must be audited.
  • For each company it is compulsory to issue and prepare annual financial statement.
  • Preparation of director’s reports which discuss the state of affairs of the company.
  • The annual financial statement of the company, auditor’s report and director’s report must be presented at the annual general meeting of the company.

Now one may think that what purpose does presentation of annual financial statement serve? So basically, annual financial statement of the company shows that how funds of the company have been utilised and how much profits are derived from utilisation of funds and it is primarily the book of information for the members of the company.

Financial Year in context of Corporate World

Cap. 622 determines the financial year of the company on the basis of corporate provisions of UK. Financial year is different from the nominal year in centurion system and thus for its determination accounting reference period is used. Usually, financial year begins on the first date of company’s accounting reference and ends on the last date of accounting reference. Now, what is basically the accounting reference? Keep reading and find the answer of this question below

Accounting Reference Period

For the companies incorporated after the payment of Hong Kong business registration fees in light of provisions of Cap. 622, accounting reference commence from the day, it was incorporated. In other words, the date company commences it’s corporate business and thus was incorporated, shall mark the beginning of financial year and the day company’s anniversary happens, it shall mark the end of company’s financial year and this date shall be referred as “primary accounting reference date”. If director wants to mark another date as the primary accounting reference date, then directors must specify that date before the end of accounting reference period, provided that date falls within the 18 months’ time period from the date, company was incorporated. For the subsequent years, financial year shall immediately commence on the date, previous financial year was ended and then concludes on the accounting reference date, where the accounting reference date is the anniversary of the previous or subsequent primary accounting reference date. This is also not a sure shot date and the matter is upon the discretion of directors to alter primary accounting reference date. For instance, directors may wish to alter the primary accounting reference date so that financial years of this company and its holdings shall align. The financial period is not restricted to be of 12 months instead it can be shortened or extended but this can not be extended more than 18 months. To avoid any sort of misappropriation, financial year can be changed only once in every five years.

Necessities of the Annual Financial Statement

It is the duty of the executives of the company to present annual financial statement of the company in the annual general meeting of the company no longer than 18 months within company’s incorporation. First of all, company’s profit and loss statement along with balance sheet must be presented to members, after this account statements of the listed companies, subsidiaries and associates of the company, which must not be no older than 6 months (as of date of annual general meeting). After this, account statements of the guarantee companies and the private companies which are the member of same corporate groups must be submitted in the annual general meeting of the company and this account statement must not be older than 9 months since the date of annual general meeting. For the case of listed companies, Exchange Listing Rule 13.46 says that; account statements of the listed companies must be sent to the members of the company and other stakeholders of this listed corporate entity not less than 21 days before the holding of annual general meeting. But, if due to any uncertain circumstances there is some sort of delay then this delay should not prolong more than 4 months after the end of financial year.

Profit/Loss Account and Balance Sheet

As per the statutory requirements, profit/loss account and balance sheet must give the true and fairer picture of the profit made or loss incurred in the respective accounting period and entails the mechanism in which affairs of the state were governed, hence it must comply with the requirements and criteria of the Part 1 of the 10th Schedule. Under the Exchange Listing Rules accounts of the listed companies must comply with the standards of Hong Kong Financial Reporting Standards or with International Financial Reporting Standards. As fashion of subsidiaries companies is prevailing in corporate groups and number of corporate groups are emerging so there is the need to regulate them too. For the companies who are the subsidiaries of the corporate group in Hong Kong, then it is the obligation of the company to prepare its accounts which consolidates with the accounts of its subsidiaries and thus comply with the essence of Part II of 10th Schedule and Subsection 127-129A and in particular, share of the company in profit or loss of the subsidiary must be disclosed reasonably and fairly. If by abiding the rules and regulations, disclosure of subsidiaries and any associates of the company, lengthens the accounts then accounts of the company should mention only details and transactions which principally contributes to the profit or loss of the company. Full details of the subsidiaries and each associate of the company must be filed in accordance with Form AC1 or AC2 and then must be presented within 42 days to the members in annual general meeting.

The implications do not stop here and there is the compulsion that, profit/loss accounts and balance sheets of the company must be accompanied with the director’s report. Content of director’s report should extensively discuss following:

  • Explanation and reporting of company’s profits and loss in this financial year.
  • Reporting of the mechanism in which affairs of the company were run.
  • Reporting of the auditor’s view that whether the presented accounts gives true and fairer view or not.

In practical scenarios, auditors do not sign his/her opinion until and unless, company’s accounts are verified and signed by the company’s directors either in any board meeting or via written resolution and even if balance sheets are not signed and certified by at least two directors or sole directors in the capacity of sole proprietorship HK. Do not get reckoned on the concept of sole director because possibility exist that company may have one controller or in simple words only one director in the company with sole proprietorship HK. While talking about the listed companies then annual reports of the listed companies must comply with the provisions of Appendix 16 of Exchange Listing Rules and must properly and extensively discuss and discloses the much more and extended data as compared to the expected disclosures from the annual reports of the private companies. Amendments in the legislation has somehow eased the corporate business proceedings and one example of this is the Subsection 141CA - 141CH which says that; if any member requests for the financial report or annual financial statement of the company then instead of sending full length financial report, sending the Summary Financial Report shall be suffice and would satisfy the legal obligations, if any.

As director’s report is also needed along with other financial reports so let’s get introduced to the director’s report and rest of details shall be discussed in the latter articles.

Director’s Report

The director’s report must be submitted along with annual financial statement of the company because it would be a sort of executive summary. The director’s report must be signed and approved by the director, if due to any reason director is not reachable then any appointee of him or her or the company secretary Hong Kong or the chairman of the meeting in which it is being presented, shall sign the report. If director’s report is approved through the written resolution then either company secretary Hong Kong or any authorised director who is entitled to act on behalf of the secretary of the company can sign this report on behalf of the members of the board of the directors. Director’s report should contain following details among other affairs of the company but following details are mandatory to be inculcated in the director’s report:

  • Director’s report must discuss the main activities of the company during concerned financial year.
  • Director’s report should tell about the amount which has been recommended as the dividend.
  • If there is any significant change in the assets of the company, then director’s report should discuss it also.
  • Director’s report should entertain the details regarding total or any shares issued in the concerned financial year.
  • Matters related to directors of the company, their performance or any relevant detail should be made part of the director’s report.
  • Director’s report should specifically discuss the contracts or agreements, transacted between the company and the director.

Once all the reports, account statements are compiled, verified and signed, then they should be presented to the members of the company in annual general meeting of the company and must be despatched at the postal address of the members before 21 days of holding of annual general meeting. Shorter delivery period is permissible if all member agrees to attend and vote at the annual general meeting of the company. However, these copies should be sent to each and every member of the company even if entitlements and rights of share of respective members does not entitle them to receive notice of the annual general meeting of the company.

For the companies which are registered as the dormant companies, such companies are although requires to maintain and keep accounting records but as long as they retain the status of the dormant company they are exempted from the legal obligations such as to prepare accounts and annual financial statements of the company and the appointment of auditors.

This was generally the case of every company but as non-private or public companies always has some different obligations because they have stakes of general public associated with them hence specifically for the public companies, they are required to annex annual financial reports of the company along with director’s report with the annual year return for the concerned year and requires to file the same with the registrar of companies within 42 days of annual general meeting holding. Private companies are however exempted from filing annual financial statements with the registrar of the company but if they do need to submit it to registrar then they are required to submit the profit tax returns to the office of Inland Revenue. It must be noted that it is not the requirement which companies ordinance lays down. Instead it is the requirement of the Subsection 85 and 51 of Inland Revenue Ordinance under which board of Inland Revenue is authorised and empowered to specify tax filing forms.