Last updated: 15 August 2026 | Related service: Hong Kong bookkeeping service
Every Hong Kong company preparing financial statements must follow an accounting framework. The question SME owners ask most often is: what is the difference between full HKFRS, HKFRS for Private Entities and SME-FRS — and does revenue under HK$100 million automatically mean I can simplify? The answer does not turn on a single number.
The short answer
- Small private company: revenue ≤ HK$100m, assets ≤ HK$100m, employees ≤ 100 — meeting any two normally gives the reporting exemption
- Larger eligible private company: revenue ≤ HK$200m, assets ≤ HK$200m, employees ≤ 200 — meeting any two, plus a resolution passed by at least 75% of voting rights with no member voting against
- A reporting exemption is not an audit exemption: the statements may be simplified, but the statutory audit still applies
- Genuinely no audit: only for an eligible private company formally registered as dormant under section 5
In this article
- What HKFRS is
- The three frameworks
- The reporting exemption
- Small company thresholds
- Larger company thresholds
- Companies that cannot qualify
- The three compared
- What SME-FRS simplifies
- The 2027 update
- How to choose
1. What are Hong Kong accounting standards?
Accounting standards govern how a company recognises revenue, records costs, measures assets and liabilities, and prepares financial statements. A common framework makes statements comparable between companies, and lets banks, investors, the Inland Revenue Department and shareholders rely on them.
| Body | Main function |
|---|---|
| HKICPA | Sets and issues HKFRS, HKSA and other accounting and auditing standards; runs professional qualification, membership registration and continuing education |
| AFRC | Since 1 October 2022, responsible for practising certificates, registration of practice units, inspection, investigation and discipline |
Section 380 of the Companies Ordinance requires financial statements to give a true and fair view of a company's financial position and performance; section 405 requires them to be audited. The framework you choose therefore bears directly on the audit, the tax return and bank financing.
2. The three financial reporting frameworks
| Framework | Generally applies to | Complexity |
|---|---|---|
| Full HKFRS | Listed companies, entities with public accountability, and large or transactionally complex companies | Highest |
| HKFRS for Private Entities | Private entities without public accountability that do not use SME-FRS | Moderate |
| SME-FRF & SME-FRS | Companies qualifying for the reporting exemption under section 359 of the Companies Ordinance | Lowest |
3. The key clarification: a reporting exemption is not an audit exemption
Hong Kong has no audit exemption for small companies. The section 359 "exemption in relation to reporting" only allows a qualifying company to prepare simplified financial and directors' reports with reduced disclosure. The company must still appoint an auditor for every financial year under section 394, and the auditor must still report under section 405.
The only situation in which financial statements and an auditor can genuinely be dispensed with is where an eligible private company passes a special resolution under section 5 and is formally registered as a dormant company. Note that bank interest or monthly account fees usually constitute accounting transactions, which can end the exemption immediately. See company deregistration and dormancy filings.
4. Small private company thresholds: any two
| Test | Small private company threshold |
|---|---|
| Total annual revenue | Not exceeding HK$100,000,000 |
| Total assets at the reporting date | Not exceeding HK$100,000,000 |
| Number of employees | Not exceeding 100 |
Meeting any two of the three, and not being a company excluded by section 359(4), normally brings the reporting exemption automatically. The great majority of Hong Kong SMEs qualify, which is why SME-FRS is so widely used.
5. Larger eligible private companies: higher thresholds plus shareholder approval
| Test | Larger eligible private company threshold |
|---|---|
| Total annual revenue | Not exceeding HK$200,000,000 |
| Total assets at the reporting date | Not exceeding HK$200,000,000 |
| Number of employees | Not exceeding 200 |
Again, any two must be met — but in addition a resolution must be passed at a general meeting by members holding at least 75% of the voting rights, with no other member voting against.
6. Which companies cannot use the reporting exemption?
- Banks and deposit-taking companies
- Insurance companies
- Securities brokers
- Other regulated entities specified in section 359(4)
Listed companies and entities with public accountability are generally not suited to SME-FRS either. Final eligibility should be confirmed by your auditor against the company's structure, the nature of its business and the legislation.
7. The three frameworks compared
| Item | Full HKFRS | HKFRS for PE | SME-FRS |
|---|---|---|---|
| Applies to | Listed, large and publicly accountable entities | Private entities without public accountability | Companies qualifying under section 359 |
| Fair value | More extensive requirements | Partly simplified | Mainly historical cost |
| Deferred tax | Generally required | Requirements apply | Usually not required |
| Disclosure | Most detailed | Moderate | Most concise |
| Cost to prepare | Highest | Moderate | Usually lowest |
8. What does SME-FRS actually simplify?
- Mainly historical cost: little complex fair value measurement or valuation modelling
- Simplified deferred tax: generally no complex deferred tax computations
- Fewer disclosures: notes to the financial statements are more concise than under full HKFRS
- Easier to apply: suited to private companies with simple transactions and limited resources
Simplified does not mean casual. The company must still keep business records, prepare financial statements, arrange the statutory audit and file its tax return. See our bookkeeping service.
9. HKFRS for Private Entities: the 2027 update
HKFRS for Private Entities is designed for private entities without public accountability. The revised standard takes effect for accounting periods beginning on or after 1 January 2027, with early adoption permitted.
If your company uses or plans to use this framework, discuss the transition with your auditor before the next financial year begins — comparative figures and accounting policy disclosures included — rather than making changes close to the year end.
10. How to choose the right framework
- Establish the nature of the company: is it listed, a bank, an insurer, a securities broker or another regulated entity?
- Apply the size tests: do revenue, assets and employee numbers meet the section 359 thresholds?
- Confirm shareholder approval: for a larger eligible company, is there 75% approval with no member against?
- Consider commercial needs: do bank financing, investors, an overseas parent or a future listing call for the fuller framework?
- Have your auditor confirm it: settle the framework before preparing, so the audit does not require it to be redone.
A practical note: do not choose SME-FRS simply because it is cheaper. If the company has an overseas parent, plans to raise finance, faces investor requirements or holds complex financial instruments, a fuller framework can reduce the cost of switching later. Choose the framework alongside your plans for the next two to three years.
FAQ
Can a Hong Kong SME use SME-FRS automatically?
Not necessarily. SME-FRS applies to companies qualifying for the reporting exemption under section 359. A small private company meeting any two of revenue not exceeding HK$100m, assets not exceeding HK$100m and no more than 100 employees, and not excluded, normally qualifies.
Is a reporting exemption the same as an audit exemption?
No. The section 359 reporting exemption only allows a qualifying company to prepare simplified financial and directors' reports. The financial statements must still be audited. Hong Kong has no audit exemption for small companies.
How do the small and larger eligible company thresholds differ?
Small private company: revenue ≤ HK$100m, assets ≤ HK$100m, employees ≤ 100, meeting any two. Larger eligible private company: revenue ≤ HK$200m, assets ≤ HK$200m, employees ≤ 200, meeting any two, plus a resolution passed by members holding at least 75% of the voting rights with no other member voting against.
When does the new HKFRS for Private Entities take effect?
The revised standard applies to annual accounting periods beginning on or after 1 January 2027, with early adoption permitted.
How do I decide which framework my company should use?
First establish whether the company is excluded by section 359(4), whether it qualifies for the reporting exemption, and whether bank financing, investors or an overseas parent's consolidation create additional requirements. Then have an auditor holding a practising certificate confirm whether to adopt full HKFRS, HKFRS for Private Entities or SME-FRS.
This article is general information and does not constitute accounting, audit or legal advice. Eligibility for the reporting exemption and for a particular framework depends on the individual company, its group structure, shareholder resolutions and the financial year's figures. See our terms of use.
