To facilitate business, the new Companies Ordinance (“the new CO”) as amended by the Companies (Amendment) (No. 2) Ordinance 2018 (“the Amendment Ordinance”) relaxes the criteria for companies to prepare simplified financial reports and directors’ reports (i.e. the “reporting exemption”). Private or guarantee companies (other than certain companies specifically excluded) that are qualified for the reporting exemption are exempted from certain specific requirements relating to the preparation of financial statements, directors’ and auditor’s reports. The accounting standards applicable to companies falling within the reporting exemption are less complicated than the standards applicable to listed, public or other companies not qualified for simplified reporting. However, audit of the financial statements is still required for all companies, except dormant companies (section 447), under the new CO.
The size criteria for determining eligibility to prepare simplified reports are –
A small private company (with the exception of a bank/deposit-taking company, an insurance company or a stockbroker) / holding company of a group of small private companies that meets two of the following three conditions in a financial year –
total revenue / aggregate total revenue not exceeding $100 million;
total assets / aggregatetotal assets not exceeding $100 million;
employees / aggregate employees not exceeding 100.
(sections 359(1)(a), 359(2), 361, 364 and Schedule 3 sections 1(1), (7) and (8))
A small guarantee company / holding company of a group of small guarantee companies with total revenue / aggregate total revenue not exceeding $25 million in a financial year.
(sections 359(1)(a), 359(3), 363, 366 and Schedule 3 sections 1(5), (12A) and (13))
A private company or a group of private companies which does / do not satisfy the above size criteria but meets a higher size criteria (eligible private company / group of eligible private companies) and if the members of the holding company holding 75% of the voting rights so resolve and no member objects.
(sections 359(1)(c), 359(2), 360, 362, 365 and Schedule 3 sections 1(3), (10) and (11))
A holding company of a group of companies comprising one or more small private companies / eligible private companies and one or more small guarantee companies (mixed group) provided that the holding company and all of its subsidiaries meet the prescribed size criteria, and (where any member of the group is an eligible private company but not qualified as a small private company) the members of the holding company holding 75% of the voting rights so resolve and no member objects.
(sections 359(3A), 360, 366A and Schedule 3 section 1(8), (11) and (13))
The group of small private companies / small guarantee companies / eligible private companies or the mixed group as mentioned above may include non-Hong Kong body corporates.
For a company formed under the new CO, it falls within the reporting exemption if it meets the size criteria in its first financial year.
For an existing company, it falls within the reporting exemption if it satisfies the size criteria in its first financial year after the commencement of the new CO or in the financial year that immediately precedes that first financial year.
For a mixed group, it falls within the reporting exemption if it satisfies the qualifying criteria in its first financial year after the commencement of the Amendment Ordinance or in the financial year that immediately precedes that first financial year.
For a group of companies comprising non-Hong Kong body corporates or a mixed group, the reporting exemption applies in relation to a financial year beginning on or after the commencement of the Amendment Ordinance and in every subsequent financial year, until it is disqualified for the exemption.
Otherwise the company, whether it is a new company or an existing company, has to meet the size criteria for 2 consecutive financial years in order to qualify for the reporting exemption.
Other private companies (not being a member of a corporate group) may adopt simplified reporting with unanimous members’ written agreement with respect to a financial year (section 359(1)(b)).
A company’s first financial year after the commencement of the new CO begins on the first day of its first accounting reference period and ends on the last day of that period, or another date within 7 days before or after the end of that period as specified by the directors (section 367(1)). An accounting reference period is the period by reference to which the company’s annual financial statements are to be prepared.
Public companies and the larger (i.e., companies that do not qualify for simplified reporting) private companies and guarantee companies are required to prepare a more comprehensive directors’ report which includes an analytical and forward-looking “business review”. The business review will provide useful information such as information relating to the company’s environmental policies and performance and an account of the company’s relationship with its employees that have a significant impact on the company. Private companies are allowed to opt out of the requirement to prepare a business review by passing a special resolution to that effect.
Summary Financial Report
Under the new CO, all companies (other than those qualified for simplified reporting) are given a choice of sending a copy of the summary financial report instead of a copy of the full reporting documents to their members. Members’ consent is not required before a company can send a copy of the summary financial report (section 441). The option of seeking members’ intent on receiving a copy of the summary financial report before sending out copies of the summary financial report or the full reporting documents is also retained (section 442).
Relevant Provisions of the new CO
Provisions on reporting exemption: Sections 359 to 366, Part 9 and Schedule 3
Provisions on financial year: Sections 367 to 371
Provisions on business review: Section 388 and Schedule 5
Provisions on summary financial report: Sections 437 to 446
For a financial year of the company that begins before the commencement of the new CO (i.e. before 3 March 2014) and ends on or after that date, the relevant provisions of the old Companies Ordinance (Cap. 32) in relation to accounts and directors’ report continue to apply in relation to the company for that financial year (Schedule 11 sections 76, 77, 78, 80, 83 and 84).
Frequently Asked Questions
Please also see Highlights on Offences relating to contents of auditor's reports and Enhancement of Auditor's rights.