(A) Introduction Financial Statements of a company is the presentation of Company\'s performance while abiding with the rules and regulations of that country. Even these financial Statements are prepared in the same format as prescribed in the Acts of that country. Like every country, Hongkong goverment has also prescribed certain rules for presentation of Financial statements. Any change in the legal, financial or regulatory policy of a country impacts the business as a whole in the same country which obviously be depicted in the financial statements of that country. Financial reporting framework in Hong Kong \'One Country, Two Systems\' Like other aspects of Hong Kong culture and economics, accounting in the Hong Kong Special Administrative Region (SAR) is a clear example of the \"one country, two systems\" philosophy that sets it apart from Mainland China. Mandatory sources of GAAP There are both mandatory and advisory sources of generally accepted accounting principles (GAAP) in Hong Kong. Mandatory sources are the following: Other sources of GAAP Hong Kong Accounting Standard 8 Accounting Policies, Changes in Accounting Estimates and Errors (HKAS 8, which is identical to IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors) states: 10. In the absence of a Standard or an Interpretation that specifically applies to a transaction, other event or condition, management shall use its judgement in developing and applying an accounting policy that results in information that is: 11. In making the judgement described in paragraph 10, management shall refer to, and consider the applicability of, the following sources in descending order: 12. In making the judgement described in paragraph 10, management may also consider the most recent pronouncements of other standard-setting bodies that use a similar conceptual framework to develop accounting standards, other accounting literature* and accepted industry practices, to the extent that these do not conflict with the sources in paragraph 11. *In the context of Hong Kong, other accounting literature includes Accounting Guidelines and Accounting Bulletins. The Accounting Guidelines and Accounting Bulletins referred to in the footnote to paragraph 12 of HKAS 8 (above) are \'best practice\' guidance documents that have been published by the HKICPA to assist its members in applying HKFRSs. Accounting Guidelines, and Industry Accounting Guidelines, are persuasive in intent and, whilst not mandatory, should normally be followed. Accounting Bulletins are intended to assist members of the HKICPA in dealing with accounting issues and to stimulate debate on subjects of topical interest. TechWatch is a monthly publication prepared by the HKICPA to alert HKICPA members to topics and issues that impact on accountants and their working environment. It is intended for general guidance only. GAAP for Small and Medium-sized Entities The HKICPA released its own Small and Medium-sized Entity Financial R.

1. (A)
Introduction
Financial Statements of a company is the presentation of Company's performance while abiding
with the rules and regulations of that country. Even these financial Statements are prepared in the
same format as prescribed in the Acts of that country.
Like every country, Hongkong goverment has also prescribed certain rules for presentation of
Financial statements.
Any change in the legal, financial or regulatory policy of a country impacts the business as a
whole in the same country which obviously be depicted in the financial statements of that
country.
Financial reporting framework in Hong Kong
'One Country, Two Systems'
Like other aspects of Hong Kong culture and economics, accounting in the Hong Kong Special
Administrative Region (SAR) is a clear example of the "one country, two systems" philosophy
that sets it apart from Mainland China.
Mandatory sources of GAAP
There are both mandatory and advisory sources of generally accepted accounting principles
(GAAP) in Hong Kong. Mandatory sources are the following:
Other sources of GAAP
Hong Kong Accounting Standard 8 Accounting Policies, Changes in Accounting Estimates and
Errors (HKAS 8, which is identical to IAS 8 Accounting Policies, Changes in Accounting
Estimates and Errors) states:
10. In the absence of a Standard or an Interpretation that specifically applies to a transaction,
other event or condition, management shall use its judgement in developing and applying an
accounting policy that results in information that is:
11. In making the judgement described in paragraph 10, management shall refer to, and consider
the applicability of, the following sources in descending order:
12. In making the judgement described in paragraph 10, management may also consider the most
recent pronouncements of other standard-setting bodies that use a similar conceptual framework
to develop accounting standards, other accounting literature* and accepted industry practices, to
the extent that these do not conflict with the sources in paragraph 11.
*In the context of Hong Kong, other accounting literature includes Accounting Guidelines and
Accounting Bulletins.
The Accounting Guidelines and Accounting Bulletins referred to in the footnote to paragraph 12
of HKAS 8 (above) are 'best practice' guidance documents that have been published by the

2. HKICPA to assist its members in applying HKFRSs. Accounting Guidelines, and Industry
Accounting Guidelines, are persuasive in intent and, whilst not mandatory, should normally be
followed. Accounting Bulletins are intended to assist members of the HKICPA in dealing with
accounting issues and to stimulate debate on subjects of topical interest.
TechWatch is a monthly publication prepared by the HKICPA to alert HKICPA members to
topics and issues that impact on accountants and their working environment. It is intended for
general guidance only.
GAAP for Small and Medium-sized Entities
The HKICPA released its own Small and Medium-sized Entity Financial Reporting Framework
and Financial Reporting Standard (SME-FRF & FRS) in August 2005. The SME-FRF & FRS
became effective for optional use by a qualifying entity's first financial statements that cover a
period beginning on or after 1 January 2005. Entities that qualify include Hong Kong
incorporated companies that meet certain legal requirements and overseas companies that have
no public accountability, meet size requirements and where the owners agree to use the SME-
FRF & FRS.
A revised version of the Small and Medium-sized Entity Financial Reporting Framework and
Financial Reporting Standard (SME-FRF & FRS) was released in March 2014 and is effective
for financial statements that cover a period beginning on or after 3 March 2014 (earlier
application is not permitted). The revised SME-FRF & FRS responds to a new Hong Kong
Companies Ordinance (Cap. 622), which contains an optional reporting exemption for certain
private companies and companies limited by guarantee which satisfy the conditions set out in
section 359 of the new Ordinance.
Companies Ordinance
An amended Companies Ordinance was adopted in July 2003, with most provisions taking effect
in February 2004. You can find this and other Hong Kong ordinances using the Bilingual Laws
Information System on the internet established by the Hong Kong Department of Justice. The
Companies Ordinance is Chapter 32 of the Laws of Ordinances.
The basic requirement to prepare annual accounts is set out in the Companies Ordinance, which
requires that those accounts should give a true and fair view of the company's state of affairs at
the end of its financial year and of its results for the year. Strictly speaking, the Companies
Ordinance only applies to Hong Kong incorporated entities. While many Hong Kong listed
companies are not incorporated in Hong Kong, the Listing Rules and GEM Rules specify that,
with minor exceptions, the Ordinance's disclosure requirements must also be applied.
Sections of the Companies Ordinance deal with the form and content of financial statements
including minimum line items, disclosures in the directors' report, and financial statement
disclosures relating to directors and officers.

3. In July 2005, the Companies Ordinance was amended to enable Hong Kong incorporated
companies to use the definition of 'subsidiary' in IAS 27 Consolidated and Separate Financial
Statements (and the equivalent Hong Kong Standard, HKAS 27) for the purpose of preparing
group accounts. As a result of the amendment, a parent company, including holding companies
incorporated in Hong Kong, must consolidate all entities over which it has control.
In mid-2006 the Financial Services and the Treasury Bureau (FSTB) launched a rewrite of the
Companies Ordinance (CO), in order to provide Hong Kong with a modernised legal
infrastructure and also make the CO more user friendly. The FSTB published the first of a series
of public consultations in March 2007 on the rewrite of the CO to obtain views and comments
from the public on legislative proposals to improve the accounting and auditing provisions in the
CO.
The Companies Ordinance is administered by the Legal Services Division of the Companies
Registry, a government agency. At 31 August 2009, over 740,000 private Hong Kong companies
were registered with the companies Registry, plus 10,000 public companies.
(B)
Requirements for presentation of financial statements
Hong Kong Accounting Standard 1 Presentation of Financial Statements (HKAS 1)
HKAS 1 sets overall requirements for the presentation of financial statements, guidelines for
their structure and minimum requirements for their content.
Main features of HKAS 1
IN5 HKAS 1 affects the presentation of owner changes in equity and of comprehensive income.
It does not change the recognition, measurement or disclosure of specific transactions and other
events required by other HKFRSs.
IN6 HKAS 1 requires an entity to present, in a statement of changes in equity, all owner changes
in equity. All non-owner changes in equity (ie comprehensive income) are required to be
presented in one statement of comprehensive income or in two statements (a separate income
statement and a statement of comprehensive income). Components of comprehensive income are
not permitted to be presented in the statement of changes in equity.
IN7 HKAS 1 requires an entity to present a statement of financial position as at the beginning of
the earliest comparative period in a complete set of financial statements when the entity applies
an accounting policy retrospectively or makes a retrospective restatement, as defined in HKAS 8
Accounting Policies, Changes in Accounting Estimates and Errors, or when the entity reclassifies
items in the financial statements.
IN8 HKAS 1 requires an entity to disclose reclassification adjustments and income tax relating to
each component of other comprehensive income. Reclassification adjustments are the amounts
reclassified to profit or loss in the current period that were previously recognised in other

4. comprehensive income.
IN9 HKAS 1 requires the presentation of dividends recognised as distributions to owners and
related amounts per share in the statement of changes in equity or in the notes. Dividends are
distributions to owners in their capacity as owners and the statement of changes in equity
presents all owner changes in equity.
Presentation of items of other comprehensive income
IN17 In July 2011 the HKICPA issued Presentation of Items of Other Comprehensive Income
(Amendments to HKAS 1). The amendments improved the consistency and clarity of the
presentation of items of other comprehensive income (OCI). The amendments also highlighted
the importance on presenting profit or loss and OCI together and with equal prominence. As
explained in paragraph IN13, in 2007 HKAS 1 was amended to require profit or loss and OCI to
be presented together. The amendments issued in July 2011 retained that requirement, but
focused on improving how items of OCI are presented.
IN18 The main change resulting from the amendments was a requirement for entities to group
items presented in OCI on the basis of whether they are potentially reclassifiable to profit or loss
subsequently (reclassification adjustments). The amendments did not address which items are
presented in OCI.
IN19 The amendments did not change the option to present items of OCI either before tax or net
of tax. However, if the items are presented before tax then the tax related to each of the two
groups of OCI items (those that might be reclassified and those that will not be reclassified) must
be shown separately.
The components of other comprehensive income include:
(a) changes in revaluation surplus (see HKAS 16 Property, Plant and Equipment and HKAS 38
Intangible Assets);
(b) actuarial gains and losses onremeasurements of defined benefit plans recognised in
accordance with paragraph 93A of (see HKAS 19 Employee Benefits);
(c) gains and losses arising from translating the financial statements of a foreign operation (see
HKAS 21 The Effects of Changes in Foreign Exchange Rates);
(d) gains and losses on remeasuring available-for-sale financial assets (see HKAS 39 Financial
Instruments: Recognition and Measurement);
(e) the effective portion of gains and losses on hedging instruments in a cash flow hedge (see
HKAS 39).
Owners are holders of instruments classified as equity.
Profit or loss is the total of income less expenses, excluding the components of other
comprehensive income. Reclassification adjustments are amounts reclassified to profit or loss in
the current period that were recognised in other comprehensive income in the current or previous

5. periods.
Total comprehensive income is the change in equity during a period resulting from transactions
and other events, other than those changes resulting from transactions with owners in their
capacity as owners.
Total comprehensive income comprises all components of ‘profit or loss’ and of ‘other
comprehensive income’.
8 Although this Standard uses the terms ‘other comprehensive income’, ‘profit or loss’ and ‘total
comprehensive income’, an entity may use other terms to describe the totals as long as the
meaning is clear. For example, an entity may use the term ‘net income’ to describe profit or loss.
8A The following terms are described in HKAS 32 Financial Instruments: Presentation and are
used in this Standard with the meaning specified in HKAS 32:
(a) puttable financial instrument classified as an equity instrument (described in paragraphs 16A
and 16B of HKAS 32
(b) an instrument that imposes on the entity an obligation to deliver to another party a prorata
share of the net assets of the entity only on liquidation and is classified as an equity instrument
(described in paragraphs 16C and 16D of HKAS 32).
10. In the absence of a Standard or an Interpretation that specifically applies to a transaction,
other event or condition, management shall use its judgement in developing and applying an
accounting policy that results in information that is:(a) relevant to the economic decision-making
needs of users; and(b) reliable, in that the financial statements: (i) represent faithfully the
financial position, financial performance and cash flows of the entity;(ii) reflect the economic
substance of transactions, other events and conditions, and not merely the legal form;(iii) are
neutral, i.e. free from bias;(iv) are prudent; and(v) are complete in all material respects.
11. In making the judgement described in paragraph 10, management shall refer to, and consider
the applicability of, the following sources in descending order:(a) the requirements and guidance
in Standards and Interpretations dealing with similar and related issues; and(b) the definitions,
recognition criteria and measurement concepts for assets, liabilities, income and expenses in the
Framework.
12. In making the judgement described in paragraph 10, management may also consider the
most recent pronouncements of other standard-setting bodies that use a similar conceptual
framework to develop accounting standards, other accounting literature* and accepted industry
practices, to the extent that these do not conflict with the sources in paragraph 11.
*In the context of Hong Kong, other accounting literature includes Accounting Guidelines and
Accounting Bulletins.
Solution

6. (A)
Introduction
Financial Statements of a company is the presentation of Company's performance while abiding
with the rules and regulations of that country. Even these financial Statements are prepared in the
same format as prescribed in the Acts of that country.
Like every country, Hongkong goverment has also prescribed certain rules for presentation of
Financial statements.
Any change in the legal, financial or regulatory policy of a country impacts the business as a
whole in the same country which obviously be depicted in the financial statements of that
country.
Financial reporting framework in Hong Kong
'One Country, Two Systems'
Like other aspects of Hong Kong culture and economics, accounting in the Hong Kong Special
Administrative Region (SAR) is a clear example of the "one country, two systems" philosophy
that sets it apart from Mainland China.
Mandatory sources of GAAP
There are both mandatory and advisory sources of generally accepted accounting principles
(GAAP) in Hong Kong. Mandatory sources are the following:
Other sources of GAAP
Hong Kong Accounting Standard 8 Accounting Policies, Changes in Accounting Estimates and
Errors (HKAS 8, which is identical to IAS 8 Accounting Policies, Changes in Accounting
Estimates and Errors) states:
10. In the absence of a Standard or an Interpretation that specifically applies to a transaction,
other event or condition, management shall use its judgement in developing and applying an
accounting policy that results in information that is:
11. In making the judgement described in paragraph 10, management shall refer to, and consider
the applicability of, the following sources in descending order:
12. In making the judgement described in paragraph 10, management may also consider the most
recent pronouncements of other standard-setting bodies that use a similar conceptual framework
to develop accounting standards, other accounting literature* and accepted industry practices, to
the extent that these do not conflict with the sources in paragraph 11.
*In the context of Hong Kong, other accounting literature includes Accounting Guidelines and
Accounting Bulletins.
The Accounting Guidelines and Accounting Bulletins referred to in the footnote to paragraph 12
of HKAS 8 (above) are 'best practice' guidance documents that have been published by the

7. HKICPA to assist its members in applying HKFRSs. Accounting Guidelines, and Industry
Accounting Guidelines, are persuasive in intent and, whilst not mandatory, should normally be
followed. Accounting Bulletins are intended to assist members of the HKICPA in dealing with
accounting issues and to stimulate debate on subjects of topical interest.
TechWatch is a monthly publication prepared by the HKICPA to alert HKICPA members to
topics and issues that impact on accountants and their working environment. It is intended for
general guidance only.
GAAP for Small and Medium-sized Entities
The HKICPA released its own Small and Medium-sized Entity Financial Reporting Framework
and Financial Reporting Standard (SME-FRF & FRS) in August 2005. The SME-FRF & FRS
became effective for optional use by a qualifying entity's first financial statements that cover a
period beginning on or after 1 January 2005. Entities that qualify include Hong Kong
incorporated companies that meet certain legal requirements and overseas companies that have
no public accountability, meet size requirements and where the owners agree to use the SME-
FRF & FRS.
A revised version of the Small and Medium-sized Entity Financial Reporting Framework and
Financial Reporting Standard (SME-FRF & FRS) was released in March 2014 and is effective
for financial statements that cover a period beginning on or after 3 March 2014 (earlier
application is not permitted). The revised SME-FRF & FRS responds to a new Hong Kong
Companies Ordinance (Cap. 622), which contains an optional reporting exemption for certain
private companies and companies limited by guarantee which satisfy the conditions set out in
section 359 of the new Ordinance.
Companies Ordinance
An amended Companies Ordinance was adopted in July 2003, with most provisions taking effect
in February 2004. You can find this and other Hong Kong ordinances using the Bilingual Laws
Information System on the internet established by the Hong Kong Department of Justice. The
Companies Ordinance is Chapter 32 of the Laws of Ordinances.
The basic requirement to prepare annual accounts is set out in the Companies Ordinance, which
requires that those accounts should give a true and fair view of the company's state of affairs at
the end of its financial year and of its results for the year. Strictly speaking, the Companies
Ordinance only applies to Hong Kong incorporated entities. While many Hong Kong listed
companies are not incorporated in Hong Kong, the Listing Rules and GEM Rules specify that,
with minor exceptions, the Ordinance's disclosure requirements must also be applied.
Sections of the Companies Ordinance deal with the form and content of financial statements
including minimum line items, disclosures in the directors' report, and financial statement
disclosures relating to directors and officers.

8. In July 2005, the Companies Ordinance was amended to enable Hong Kong incorporated
companies to use the definition of 'subsidiary' in IAS 27 Consolidated and Separate Financial
Statements (and the equivalent Hong Kong Standard, HKAS 27) for the purpose of preparing
group accounts. As a result of the amendment, a parent company, including holding companies
incorporated in Hong Kong, must consolidate all entities over which it has control.
In mid-2006 the Financial Services and the Treasury Bureau (FSTB) launched a rewrite of the
Companies Ordinance (CO), in order to provide Hong Kong with a modernised legal
infrastructure and also make the CO more user friendly. The FSTB published the first of a series
of public consultations in March 2007 on the rewrite of the CO to obtain views and comments
from the public on legislative proposals to improve the accounting and auditing provisions in the
CO.
The Companies Ordinance is administered by the Legal Services Division of the Companies
Registry, a government agency. At 31 August 2009, over 740,000 private Hong Kong companies
were registered with the companies Registry, plus 10,000 public companies.
(B)
Requirements for presentation of financial statements
Hong Kong Accounting Standard 1 Presentation of Financial Statements (HKAS 1)
HKAS 1 sets overall requirements for the presentation of financial statements, guidelines for
their structure and minimum requirements for their content.
Main features of HKAS 1
IN5 HKAS 1 affects the presentation of owner changes in equity and of comprehensive income.
It does not change the recognition, measurement or disclosure of specific transactions and other
events required by other HKFRSs.
IN6 HKAS 1 requires an entity to present, in a statement of changes in equity, all owner changes
in equity. All non-owner changes in equity (ie comprehensive income) are required to be
presented in one statement of comprehensive income or in two statements (a separate income
statement and a statement of comprehensive income). Components of comprehensive income are
not permitted to be presented in the statement of changes in equity.
IN7 HKAS 1 requires an entity to present a statement of financial position as at the beginning of
the earliest comparative period in a complete set of financial statements when the entity applies
an accounting policy retrospectively or makes a retrospective restatement, as defined in HKAS 8
Accounting Policies, Changes in Accounting Estimates and Errors, or when the entity reclassifies
items in the financial statements.
IN8 HKAS 1 requires an entity to disclose reclassification adjustments and income tax relating to
each component of other comprehensive income. Reclassification adjustments are the amounts
reclassified to profit or loss in the current period that were previously recognised in other

9. comprehensive income.
IN9 HKAS 1 requires the presentation of dividends recognised as distributions to owners and
related amounts per share in the statement of changes in equity or in the notes. Dividends are
distributions to owners in their capacity as owners and the statement of changes in equity
presents all owner changes in equity.
Presentation of items of other comprehensive income
IN17 In July 2011 the HKICPA issued Presentation of Items of Other Comprehensive Income
(Amendments to HKAS 1). The amendments improved the consistency and clarity of the
presentation of items of other comprehensive income (OCI). The amendments also highlighted
the importance on presenting profit or loss and OCI together and with equal prominence. As
explained in paragraph IN13, in 2007 HKAS 1 was amended to require profit or loss and OCI to
be presented together. The amendments issued in July 2011 retained that requirement, but
focused on improving how items of OCI are presented.
IN18 The main change resulting from the amendments was a requirement for entities to group
items presented in OCI on the basis of whether they are potentially reclassifiable to profit or loss
subsequently (reclassification adjustments). The amendments did not address which items are
presented in OCI.
IN19 The amendments did not change the option to present items of OCI either before tax or net
of tax. However, if the items are presented before tax then the tax related to each of the two
groups of OCI items (those that might be reclassified and those that will not be reclassified) must
be shown separately.
The components of other comprehensive income include:
(a) changes in revaluation surplus (see HKAS 16 Property, Plant and Equipment and HKAS 38
Intangible Assets);
(b) actuarial gains and losses onremeasurements of defined benefit plans recognised in
accordance with paragraph 93A of (see HKAS 19 Employee Benefits);
(c) gains and losses arising from translating the financial statements of a foreign operation (see
HKAS 21 The Effects of Changes in Foreign Exchange Rates);
(d) gains and losses on remeasuring available-for-sale financial assets (see HKAS 39 Financial
Instruments: Recognition and Measurement);
(e) the effective portion of gains and losses on hedging instruments in a cash flow hedge (see
HKAS 39).
Owners are holders of instruments classified as equity.
Profit or loss is the total of income less expenses, excluding the components of other
comprehensive income. Reclassification adjustments are amounts reclassified to profit or loss in
the current period that were recognised in other comprehensive income in the current or previous

10. periods.
Total comprehensive income is the change in equity during a period resulting from transactions
and other events, other than those changes resulting from transactions with owners in their
capacity as owners.
Total comprehensive income comprises all components of ‘profit or loss’ and of ‘other
comprehensive income’.
8 Although this Standard uses the terms ‘other comprehensive income’, ‘profit or loss’ and ‘total
comprehensive income’, an entity may use other terms to describe the totals as long as the
meaning is clear. For example, an entity may use the term ‘net income’ to describe profit or loss.
8A The following terms are described in HKAS 32 Financial Instruments: Presentation and are
used in this Standard with the meaning specified in HKAS 32:
(a) puttable financial instrument classified as an equity instrument (described in paragraphs 16A
and 16B of HKAS 32
(b) an instrument that imposes on the entity an obligation to deliver to another party a prorata
share of the net assets of the entity only on liquidation and is classified as an equity instrument
(described in paragraphs 16C and 16D of HKAS 32).
10. In the absence of a Standard or an Interpretation that specifically applies to a transaction,
other event or condition, management shall use its judgement in developing and applying an
accounting policy that results in information that is:(a) relevant to the economic decision-making
needs of users; and(b) reliable, in that the financial statements: (i) represent faithfully the
financial position, financial performance and cash flows of the entity;(ii) reflect the economic
substance of transactions, other events and conditions, and not merely the legal form;(iii) are
neutral, i.e. free from bias;(iv) are prudent; and(v) are complete in all material respects.
11. In making the judgement described in paragraph 10, management shall refer to, and consider
the applicability of, the following sources in descending order:(a) the requirements and guidance
in Standards and Interpretations dealing with similar and related issues; and(b) the definitions,
recognition criteria and measurement concepts for assets, liabilities, income and expenses in the
Framework.
12. In making the judgement described in paragraph 10, management may also consider the
most recent pronouncements of other standard-setting bodies that use a similar conceptual
framework to develop accounting standards, other accounting literature* and accepted industry
practices, to the extent that these do not conflict with the sources in paragraph 11.
*In the context of Hong Kong, other accounting literature includes Accounting Guidelines and
Accounting Bulletins.