Jurisdiction - Hong Kong
Hong Kong – What You Need To Know About The New Companies Ordinance: Key Changes Affecting Financial Reporting For Companies.

21 January, 2014


Legal News & Analysis – Asia Pacific – Hong Kong – Regulatory & Compliance


In this bulletin, we focus on the major changes which impact financial reporting by Hong Kong companies. We also highlight some recommended steps for Hong Kong companies to take in preparation for the commencement of the new Ordinance.


Summary Of Key Changes


Simplified Financial And Directors’ Reports Available In Wider Circumstances – the new Companies Ordinance broadens the criteria for companies to qualify for simplified reporting, which are referred to as companies “falling within the reporting exemption”. In summary, the qualifying conditions under the new Companies Ordinance for companies to benefit from the reporting exemption are as follows:


  • a small private company satisfying two of the following: (i) total annual revenue of not more than HKD100m; (ii) total assets of not more than HKD100m; and (iii) not more than 100 employees;
  • a private holding company of a group of small private companies satisfying two of the following: (i) total annual revenue of not more than HKD100m; (ii) total assets of not more than HKD100m; and (iii) no more than 100 employees;
  • a small guarantee company or a guarantee company that is a holding company of a group of small guarantee companies with a total annual revenue of not more than HKD25m;
  • an eligible private company or an eligible private company that is a holding company of a group of eligible private companies that satisfies two of the following: (i) total annual revenue of not more than HKD200m; (ii) total assets of not more than HKD200m; and (iii) not more than 100 employees. In respect of this category, the approval of members holding 75% of the voting rights with no member objecting is also required;
  • a private company (not being part of a group) with the unanimous written consent of its members.


The Reporting Exemption – the reporting exemption relaxes various provisions in the new Companies Ordinance relating to the preparation of a company’s financial statements and directors’ report. In brief, the exemptions are:


  • the financial statement are not required to give a “true and fair view” of the financial position of the company. However, the financial statements must be prepared in compliance with applicable accounting standards prescribed by the Hong Kong Institute of Certified Public Accountants;
  • the auditors are not required to express a “true and fair view” opinion on the financial statements;
  • disclosure of the auditor’s remuneration in the financial statements is not required;
  • subsidiary undertakings may be excluded from the annual consolidated financial statements in accordance with the applicable accounting standards;
  • the business review referred to below need not be included in the directors’ report.


New Business Review Requirement – the new Companies Ordinance introduces a requirement for a business review to be included in the directors’ report for all companies not falling under the reporting exemption. Non-exempt private companies can opt out of the requirement by a special resolution of members. The business review requires more analytical and forward-looking information to be included than under the current Companies Ordinance requirements.


The business review consists of a fair review of the company’s business, a description of the principal risks and uncertainties facing the company, particulars of important events affecting the company since the end of the financial year and an indication of likely future development. No disclosure is required of impending developments or matters in the course of negotiation where the disclosure would, in the opinion of the directors, be seriously prejudicial to the company’s interests.


Where necessary for an understanding of the development, performance or position of the company’s business, the business review must also include:


  • an analysis using financial key performance indicators;
  • a discussion on the company’s environmental policies and performance and its compliance with relevant laws and regulations having a significant impact on the company;
  • an account of the company’s key relationships with its employees, customers and suppliers with a significant impact on the company and on which the company’s success depends.


To protect directors and encourage meaningful reporting, the new Companies Ordinance provides a safe harbour for directors such that they will only be liable to the company for untrue or misleading statements in the directors’ report (or omissions of anything required to be included) if the director knew or was reckless as to whether the statement was untrue, or misleading or knew the omission was a dishonest concealment of a material fact.


Extension Of The Regime For Summary Financial Reports – under the new Companies Ordinance the regime for summary financial reports has been extended to all companies (not just listed companies as currently). The requirement for members’ consent prior to sending summary financial reports has been removed making it easier for companies to take advantage of these provisions. Under the new Ordinance, companies will be able to choose whether to send a copy of the summary financial reports to members in place of the full financial statements, directors’ report and auditors’ report. Members who receive the summary financial reports will have the ability to request a copy of the full financial reporting documents from the company. The new Companies Ordinance also contains provisions to enable a company to seek its members’ prior intentions regarding whether they want to receive summary financial reports.


Financial Year Ends And Introduction Of Accounting Reference Periods – the new Companies Ordinance introduces a concept of accounting reference periods which is the period by which a company’s financial statements are to be prepared.


For companies formed before the commencement of the new Ordinance, the first accounting reference period begins on the date immediately following the date up to which its previous accounts were made (save that there are alternative provisions where there has been default in producing accounts) and ends on the anniversary of that date. For companies formed under the new Companies Ordinance, the accounting reference period will begin on the incorporation date and end on a date specified by the directors or, failing that, the anniversary of the company’s incorporation.


The accounting reference period can be altered by a resolution of the directors. For public companies and companies limited by guarantee, any change in the accounting reference date must be notified to the Companies Registry.


Under the new Companies Ordinance, the time periods for holding AGMs are to be set by reference to the company’s accounting reference date. Private companies and companies limited by guarantee are required to hold their AGMs within nine months of the end of the company’s accounting reference date, and within 6 months for other companies.


Extension Of Auditors’ Powers – the new Companies Ordinance gives auditors powers to require a wider range of persons to provide them with information and explanations reasonably required by them for the performance of their duties. The new regime now extends, in particular, to persons holding or accountable for accounting records.


Auditors’ Statements On Cessation Of Office Extended – the requirement for outgoing auditors to make a statement of the circumstances relating to their cessation of office has been extended to include auditors who have been removed and retiring auditors who have not been reappointed. Under the current Companies Ordinance, the obligation to make a statement is limited an auditor who has resigned.


What Do You Need To Do Now?


We would encourage Hong Kong companies to:


  • discuss the changes to the new Companies Ordinance with your auditors; and


  • assess whether there are any of the new provisions in the new Companies Ordinance that the company can take advantage of, for example, does the company fall in the reporting exemption or wish to prepare summary financial reports.


herbert smith Freehills


For further information, please contact:


Austin Sweeney, Partner, Herbert Smith Freehills

[email protected]


Tommy Tong, Partner, Herbert Smith Freehills

[email protected]


Matt Emsley, Partner, Herbert Smith Freehills

[email protected]


Gary Lock, Partner, Herbert Smith Freehills

[email protected]


Jason Sung, Partner, Herbert Smith Freehills

[email protected]


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