Part D – SME-FRF & SME-FRS

Question D1 – Exemption from giving a true and fair view

If a company is eligible for the reporting exemption but decides not to follow the SME-FRF and SME-FRS (Revised 2014) is it still exempt from preparing financial statements which give a true and fair view?

 

Question D2 – Eligibility: Change in ownership after general meeting

Under section 360, a larger private company not involved in any of the financial services lines of business listed in section 359(4) may use the SME-FRF & SME-FRS (Revised 2014), if at least 75% of all the members pass a resolution at a general meeting that the company is to fall within the reporting exemption for the financial year, with none objecting. The 75% vote is calculated as a percentage of the entire shareholding of a company, not simply as a percentage of the shareholders who attend the general meeting. The resolution is defeated if any member objects either at the meeting or at any time by giving notice in writing to the company. This is provided that the written notice is given at least 6 months before the end of the financial year to which the objection relates.

 

In the case where there is a change in ownership of the company after such resolution was passed at a general meeting, does the new CO or the SME-FRF & SME-FRS (Revised 2014) require that company to pass a new resolution at a general meeting for it to use the SME-FRF & SME-FRS (Revised 2014)?

 
Question D3 – Eligibility: Shareholders' approval in subsequent years

Is it permissible under the new CO for a larger "eligible" company to pass a resolution to adopt the SME-FRF & SME-FRS (Revised 2014) for more than one year?

 

Question D4 – Eligibility: Hong Kong incorporated subsidiary of an overseas incorporated company

Would a Hong Kong incorporated company being a subsidiary of an overseas incorporated company be disqualified from falling within the reporting exemption (thus the use of SME-FRF & SME-FRS (Revised 2014)) under section 359(1)(b)? 

 

Question D5 – Delivery of shareholders' resolution or agreement on reporting exemption to the Companies Registrar

There are certain types of companies that require a shareholders' resolution or agreement for them to fall within reporting exemption for the financial year.


What are the thresholds of the required shareholders' resolution or agreement? Are the companies required to deliver the resolution or agreement to the Companies Registrar for registration?

 

Question D6 – Interaction between the eligibility for the reporting exemption (s.359) and the exemption from preparing consolidated financial statements (s.379(3))

For a holding company, which fulfills the requirement in section 379(3) and is exempted from the new CO's requirement to prepare consolidated financial statements, when assessing its eligibility for the reporting exemption should it be considered on a standalone basis (i.e. at company level) under section 359(1); or does each company in the group (including the holding company), and the group as a whole, need to pass the eligibility tests under s.359(2) before that holding company itself can fall within the reporting exemption?

 

 


 

Question D1 – Exemption from giving a true and fair view

If a company is eligible for the reporting exemption but decides not to follow the SME-FRF and SME-FRS (Revised 2014) is it still exempt from preparing financial statements which give a true and fair view?

 

Answer

No. Every company that is required to prepare financial statements under the new CO is required by section 380(4)(b) to comply with the accounting standards applicable to the financial statements. "Accounting standards" are defined in section 380(8) as being those issued or specified by the HKICPA (as per the Companies (Accounting Standards (Prescribed Body)) Regulation (Cap. 622C) referred to in section 380(8)(a)).

 

Therefore, if an eligible company does not follow the SME-FRF and SME-FRS, then it must prepare financial statements which comply with another body of accounting standards issued or specified by the HKICPA, for example full HKFRSs, which is a body of accounting standards intended to give a true and fair view if properly complied with.

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Question D2 – Eligibility: Change in ownership after general meeting

Under section 360, a larger private company not involved in any of the financial services lines of business listed in section 359(4) may use the SME-FRF & SME-FRS (Revised 2014), if at least 75% of all the members pass a resolution at a general meeting that the company is to fall within the reporting exemption for the financial year, with none objecting. The 75% vote is calculated as a percentage of the entire shareholding of a company, not simply as a percentage of the shareholders who attend the general meeting. The resolution is defeated if any member objects either at the meeting or at any time by giving notice in writing to the company. This is provided that the written notice is given at least 6 months before the end of the financial year to which the objection relates.

 

In the case where there is a change in ownership of the company after such resolution was passed at a general meeting, does the new CO or the SME-FRF & SME-FRS (Revised 2014) require that company to pass a new resolution at a general meeting for it to use the SME-FRF & SME-FRS (Revised 2014)?

 

Answer

The new CO or SME-FRF & SME-FRS (Revised 2014) contains no specific requirement mandating that a larger "eligible" private company (a company that complies with sections 359(1)(c) and 360(1)) must pass a new resolution at a general meeting to re-confirm its eligibility to use the SME-FRF & SME-FRS (Revised 2014) following a change in ownership. Therefore, if the new shareholders are in agreement with the earlier decision to use the SME-FRF & SME-FRS (Revised 2014), then no further action is required.

 

If the new shareholders disagree with the earlier decision and it is at least 6 months before the end of the financial year, then they may exercise their right to object under section 360(3), causing the company to be ineligible for the reporting exemption. In all other cases of disagreement, the new shareholders may consider seeking legal advice as to their ability to call for another vote and/or their rights (if controlling shareholders) to reverse the earlier decision.

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Question D3 – Eligibility: Shareholders' approval in subsequent years

Is it permissible under the new CO for a larger "eligible" company to pass a resolution to adopt the SME-FRF & SME-FRS (Revised 2014) for more than one year?

 

Answer

The new CO is silent on this matter. It is therefore a legal question as to whether the words of section 360(1) may be interpreted as allowing the company to pass a resolution in respect of more than one financial year.

 

However, as explained in response to Question D2, a larger "eligible" company (or group) will not have certainty about their ability to adopt the SME-FRF & SME-FRS (Revised 2014) until the later of a successful shareholder vote and a date 6 months before the end of the financial year in question. Therefore, even if a larger "eligible" company attempts to pass a resolution to adopt SME-FRF & SME-FRS (Revised 2014) for more than one year, it needs to be aware that the objection period will remain open for future years.

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Question D4 – Eligibility: Hong Kong incorporated subsidiary of an overseas incorporated company

Would a Hong Kong incorporated company being a subsidiary of an overseas incorporated company be disqualified from falling within the reporting exemption (thus the use of SME-FRF & SME-FRS (Revised 2014)) under section 359(1)(b)?

 

Answer

The intention of section 359(1)(b) is to bring forward the qualifying criteria that were previously found in section 141D of the predecessor CO. Under section 359(1)(b) a company falls within the reporting exemption for a financial year if:

(a) it is not:

  1. one that carries on any banking business and holds a valid banking licence granted under the Banking Ordinance (Cap.155); or
  2. one that is a corporation licensed under Part V of the Securities and Futures Ordinance (Cap.571) to carry on a business in any regulated activity within the meaning of that Ordinance; or
  3. one that carries on any insurance business otherwise than solely as an agent; or
  4. accepts, by way of trade or business (other than banking business), loans of money at interest or repayable at a premium, other than on terms involving the issue of debentures or other securities; and

(b) it does not have any subsidiary and is not a subsidiary of another company; and

(c) all members of the company agree in writing that the company is to fall within the reporting exemption for the financial year only.

 

Section 2 defines "company" as (a) a company formed and registered under the new CO or an existing company. "Existing company" is defined as a company formed and registered under a former Companies Ordinance. An overseas incorporated company is therefore not a company defined under the new CO.

 

Based on the above, being a subsidiary of an overseas incorporated company in itself will not disqualify a company incorporated under the Companies Ordinance from falling within reporting exemption under section 359(1)(b).

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Question D5 - Delivery of shareholders' resolution or agreement on reporting exemption to the Companies Registrar

There are certain types of companies that require a shareholders' resolution or agreement for them to fall within reporting exemption for the financial year.

 

What are the thresholds of the required shareholders' resolution or agreement? Are the companies required to deliver the resolution or agreement to the Companies Registrar for registration?

 

Answer

The following types of companies can be eligible for the reporting exemption if they fall into one of the following two categories:

 

  1. the company is an "eligible" private company (or a group of eligible private companies) by virtue of falling within the larger size tests of HK$200 million total annual revenue, HK$200 million total assets and 100 employees and gaining sufficient shareholder support (section 359(1)(c) and section 359(2)(c)(ii)); or
  2. the company is a private company which does not have any subsidiaries and is not a subsidiary of another Hong Kong incorporated company and has unanimous shareholder support (section 359(1)(b)).

 

Specifically, the extent of shareholder support required for the above is as follows:

 

Category 1

 

A resolution has to be passed by at least 75% of all shareholders (i.e. not merely 75% of the shareholders attending the meeting). The resolution will fail if any shareholder votes against the resolution at a general meeting or if any shareholder objects in writing and gives notice of objection to the company at least six months before the end of the financial year to which the objection relates (section 360(1), section 360(2)(a), (b), (c) and section 360(3)).

 

Alternatively, the company may pass a written resolution under section 548(1), which can be passed without a meeting and without any previous notice being required, for falling within the reporting exemption. A written resolution is passed when all eligible members have signified their agreement to it.

 

However, for passing a written resolution the company needs to follow other procedures in subdivision 2 of division 1 in Part 12 of the new CO, which include notifying its auditor of the proposed resolution under section 555.

 

Please refer to subdivision 2 of division 1 in Part 12 of the new CO about written resolution.

 

Category 2

 

All the members of the company have to agree in writing that the company is to fall within the reporting exemption for the financial year (section 359(1)(b)(iii)).

 

Delivery of resolution or agreement to the Companies Registrar

 

Section 622 on registration of and requirements relating to certain resolutions applies to the resolution (whether special or written) for category 1 (under section 622(1)(f)) and the agreement for category 2 (under section 622(1)(e)).

 

Section 622(2) requires the company to deliver a copy of the special or written resolution or agreement to the Registrar for registration within 15 days after it is made or passed. If the resolution is not in writing, a reference to a copy of the resolution is to be construed as a written memorandum setting out the terms of the resolution. A company is required to keep records comprising copies of resolutions and minutes of general meetings in the manner prescribed in section 618.

 

In case a company contravenes Section 622(2), the company and every responsible person of the company commit an offence, and each is liable to a fine at level 3 and, in the case of a continuing offence, to a further fine of HK$300 for each day during which the offence continues.

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Question D6 – Interaction between the eligibility for the reporting exemption (s.359) and the exemption from preparing consolidated financial statements (s.379(3))

For a holding company, which fulfills the requirement in section 379(3) and is exempted from the new CO's requirement to prepare consolidated financial statements, when assessing its eligibility for the reporting exemption should it be considered on a standalone basis (i.e. at company level) under section 359(1); or does each company in the group (including the holding company), and the group as a whole, need to pass the eligibility tests under s.359(2) before that holding company itself can fall within the reporting exemption?

 

Answer

There is no clear link stated in the new CO between the requirements in section 379(3) (on the eligibility for not preparing consolidated financial statements) and section 359 (on the eligibility for the reporting exemption). However it would seem reasonable to assume that a correlation is intended.

 

Based on such assumption, if a holding company is required to prepare consolidated financial statements, then the group needs to qualify for the reporting exemption under section 359(2) before it is qualified for simplified reporting (i.e. qualified for preparing consolidated financial statements under the SME-FRF & SME-FRS (Revised 2014)); whereas if the holding company does not need to prepare consolidated financial statements, then it may qualify for simplified reporting as a stand-alone company under section 359(1) and thus, qualify for preparing company-level financial statements only under the SME-FRF & SME-FRS (Revised 2014).

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Last revision date: 19 March 2015
Please refer to our cover page for background information on the Q&As