Hong Kong Financial Reporting Standards for Private Entities
This Questions and Answers (Q&As) below have been developed by the Financial Reporting Standards Committee ("FRSC") of the Hong Kong Institute of Certified Public Accountants (the Institute) and is for general guidance only. The HKICPA, FRSC and their staffs do not accept any responsibility or liability in respect of the Q&As and any consequences that may arise from any person acting or refraining from action as a result of any materials in the Q&As. Members of the HKICPA and other users of this Q&As should also read the original text of HKFRS for Private Entities, as found in the HKICPA Members’ Handbook for further reference and seek legal advice where necessary when applying the guidance within this Q&As.
The Institute's Standard Setting Department welcomes your comments and feedback on this paper, which should be sent to commentletters@hkicpa.org.hk .
Last revision date: April 2010
Q1. Is HKFRS for Private Entities applicable to financial institutions?
Answer
As stated in paragraph BC59 of the Basis for Conclusions, the primary business of banks, insurance companies, securities brokers/dealers, pension funds, mutual funds and investment banks is to hold and manage financial resources entrusted to them by a broad group of clients, customers or members who are not involved in the management of the entities. This means that such an entity acts in a public fiduciary capacity, and therefore it is publicly accountable. Hence, it is the view of the FRSC that HKFRS for Private Entities is not applicable to financial institutions and entities mentioned above.
Q2. Is HKFRS for Private Entities applicable to companies limited by guarantee or unlimited companies?
Answer
A company limited by guarantee refers to a company whose members' liability is limited to such an amount as they have undertaken to contribute to the assets of the company in the event of winding up and an unlimited company refers to a company whose members' liabilities are not limited.
It is the view of the FRSC that being a company limited by guarantee or an unlimited company in itself would not expressly make that company a Private Entity. The entity would also need to consider other facts and circumstances specific to the entity for determination of the applicability of HKFRS for Private Entities.
Q3. Is HKFRS for Private Entities applicable to an entity which is a subsidiary whose parent uses full HKFRS or IFRS?
Answer
As stated in paragraph 1.6 of HKFRS for Private Entities, a subsidiary whose parent uses full HKFRSs or IFRSs, or a subsidiary which is part of a consolidated group that uses full HKFRSs or IFRSs, is not prohibited from using HKFRS for Private Entities in its own financial statements if that subsidiary itself does not have public accountability.
Q4. Under the Hong Kong Companies Ordinance, limited companies may be classified as private or public companies. Does this classification of limited companies affect the applicability of HKFRS for Private Entities?
Answer
Private companies under Section 29 of the Companies Ordinance are companies which by their articles:
restrict the right to transfer their shares;
limit their members to 50; and
prohibit any invitation to the public to subscribe for their shares or debentures.
All other limited companies are classified as public companies.
It is the view of the FRSC that the classification of limited companies (i.e. as a private company or a public company) should not be the sole factor the entity considers when determining whether it has public accountability. For example: even though a private company is prohibited from inviting the public to subscribe for its shares or debentures, it may still have public accountability by holding assets in a fiduciary capacity for a broad group of outsiders as one of its primary businesses. On the other hand, even though a public company is permitted to invite the public to subscribe for its shares or debentures, it may not necessarily do so and hence a public company may not have public accountability solely by being classified as public.
An entity should also consider the entity-specific facts and circumstances for determination of the applicability of HKFRS for Private Entities.
Q5. Is HKFRS for Private Entities applicable to small publicly traded entities?
Answer
FRSC is of the view that HKFRS for Private Entities cannot be used by publicly traded entities whether the entity is big or small, for financial reporting. The fact that the entity is publicly traded places the entity outside the scope of HKFRS for Private Entities.
As stated in paragraph BC76 of the Basis for Conclusions, entities, large or small, whose debt or equity instruments are traded in public capital markets have chosen to seek capital from outside investors who are not involved in managing the business and who do not have the power to demand information that they might find useful. Full HKFRSs have been designed to serve public capital markets by providing financial information especially intended for investors and creditors in such markets.
Q6. Is HKFRS for Private Entities applicable to not-for-profit organisations?
Answer
As explained in paragraph 1.4 of HKFRS for Private Entities and in paragraph 6 above, entities (including charitable organisations) may not necessarily be publicly accountable even if they hold assets in a fiduciary capacity for a broad group of outsiders provided they do so for reasons incidental to a primary business (i.e. conducting charitable programmes and activities).
The FRSC is of the view that not-for-profit organisations (including charitable organisations) solely by their nature are not prohibited to use HKFRS for Private Entities for preparing their general purpose financial statements.
However, as explained in paragraphs 8-13, entities would also need to consider if there are any statutory requirements in place or other entity-specific facts and circumstances requiring entities to prepare their accounts in accordance with specific accounting requirements for statutory or other purposes.
Q7. Is HKFRS for Private Entities applicable to the preparation of financial statements of Owners' Corporations of Buildings?
Answer
Under the Building Management Ordinance ("BMO"), a professional property manager employed by the Owners' Corporation ("OC") or its Management Committee ("MC"), is required to prepare annual financial statements which give a true and fair view of the financial transactions and financial position of the OC.
The OC may hold and manage resources entrusted to it by property owners who may not be actively involved in the management of the building (for example: building management and maintenance fund, etc.). The FRSC is of the view that the above situation does not necessarily make the OC publicly accountable and an OC, in general, is a Private Entity by its nature provided there are no other specific facts and circumstances that make the OC publicly accountable.
Q8. Is HKFRS for Private Entities applicable to the preparation of financial statements of schools (including both Incorporated Management Committee ("IMC") schools and non-IMC schools)?
Answer
As stated in paragraph 9, the Education Bureau ("EB") requires schools (including both IMC and non-IMC schools) to prepare their financial statements in accordance with the Code of Aid and other related accounting instructions. Those schools should adhere to the relevant requirements of EB, and not just HKFRS for Private Entities, to prepare financial statements for that purpose.
Schools may hold and manage resources entrusted to them by other parties who may not be actively involved in the management of the school (for example: school maintenance funds, school development funds, issuance of debentures which are not publicly traded, etc.). The FRSC is of the view that the above situation does not in itself make a school publicly accountable and schools, in general, are Private Entities by nature, provided there are no other specific facts and circumstances which make the school publicly accountable. Accordingly, the FRSC is of the view that a school, on the basis of its nature, can use HKFRS for Private Entities to prepare general purpose financial statements, in addition to the accounts prepared solely for statutory purposes.
Q9. Is HKFRS for Private Entities applicable to the preparation of financial statements of solicitor firms?
Answer
Despite that solicitors hold client monies, this is incidental to the primary business (i.e. provision of legal services). FRSC is of the view that that a solicitor firm is a Private Entity by its nature provided there are no other specific facts and circumstances that would make the solicitor firm publicly accountable under the definition of HKFRS for Private Entities.
Q10. Is HKFRS for Private Entities applicable to the preparation of financial statements of securities brokers?
Answer
The FRSC is of the view that the primary business of securities brokers is to hold and manage financial resources entrusted to them by a broad group of clients, customers or members who are not involved in the management of the entities. Securities brokers are hence publicly accountable as they act in a public fiduciary capacity and therefore they would not fall within the scope of HKFRS for Private Entities.
Q11. Is shareholders' approval required for an entity to adopt HKFRS for Private Entities?
Answer
HKFRS for Private Entities does not contain the requirement for an entity to obtain shareholders' approval for adoption of the standard.
