Answer
As explained in the answers to questions 1.2 and 1.3 above, section 379 of the CO is explicit on which companies should prepare company level financial statements and which should prepare consolidated financial statements and these requirements take precedence over s380. That is, s379 determines which type of financial statements need to be prepared (company level or consolidated), and s380 then contains the “general requirements for financial statements” being the requirements for the contents of those financial statements (company level or consolidated) as are required to be prepared under s379.
On this basis, the “accounting standards applicable to the financial statements” referred to in s380(4)(b) are those relevant to the type of financial statements (company level or consolidated) required by s379. This is supported by the definition of “accounting standards applicable to the financial statements” set out in s357(4)(a):
“a reference to accounting standards applicable to any financial statements is a reference to accounting standards as are, in accordance with their terms, relevant to the company’s circumstances and to the financial statements”.
This means that the company, as a holding company, shall account for investments in subsidiaries either at cost or in accordance with HKFRS 9 in its company level financial statements if the company does not elect to account for the investments using the equity method as permitted by paragraph 10(c) of HKAS 27 Separate Financial Statements. In addition, as the financial statements are prepared in respect of the holding company only, the disclosures required by HKFRS 12 Disclosures of Interests in Other Entities are not applicable1.
In the case of a holding company preparing company level financial statements to satisfy section 379(1), the statement of compliance included in the financial statements in accordance with section 4 of Schedule 4 to the CO and paragraph 16 of HKAS 1 Presentation of Financial Statements should clearly state that the financial statements comply with the accounting standards applicable to the company level financial statements only. For the avoidance of doubt, it is also advisable for the statement of compliance to explain why the company is not required to prepare consolidated financial statements and the disclosures required by HKFRS 12 are not made1 .
For example, the financial statements could include the following wording as the statement of compliance in the basis of preparation note (e.g. which is typically disclosed as note 1 to the financial statements):
Statement of compliance and basis of preparation
For the purposes of compliance with sections 379 and 380 of the Hong Kong Companies Ordinance (Cap. 622), these financial statements have been prepared to present a true and fair view of the financial position and financial performance of the company only. Consequently, they have been prepared in accordance with all applicable HKFRS Accounting Standards (which term collectively includes Hong Kong Financial Reporting Standards, Hong Kong Accounting Standards (HKASs) and Interpretations) issued by the Hong Kong Institute of Certified Public Accountants, accounting principles generally accepted in Hong Kong and the requirements of the Hong Kong Companies Ordinance (Cap. 622) that are relevant to the preparation of company level financial statements by an intermediate parent company.
[As the company is a holding company that is a wholly owned subsidiary of another body corporate, it satisfies the exemption criteria set out in section 379(3)(a) of the Hong Kong Companies Ordinance (Cap. 622), and is therefore not required to prepare consolidated financial statements.] OR [As the company is a holding company that is a partially owned subsidiary of another body corporate and has satisfied the exemption criteria set out in section 379(3)(b) of the Hong Kong Companies Ordinance (Cap. 622), it is not required to prepare consolidated financial statements].
Given the above, these financial statements are not prepared for the purposes of compliance with HKFRS 10, Consolidated Financial Statements, so far as the preparation of consolidated financial statements is concerned. As a consequence, the financial statements do not give all the information required by HKFRS 10 about the economic activities of the group of which the company is the parent. Furthermore, as these financial statements are prepared in respect of the company only, HKFRS 12, Disclosures of Interests in Other Entities, does not apply to the financial statements1 .
The measurement basis used in the preparation of the financial statements is … [continue with the normal basis of preparation note]
Note that the illustrative wording directly above is only applicable if (a) the company falls within s379(3) of the CO; and (b) the company has complied with those HKFRS Accounting Standards which are applicable to the preparation of company level financial statements. It should be noted that if the company fails to prepare consolidated financial statements when required to do so under s379 and/or the financial statements that it prepares fail to comply with sections 380, 381(if applicable) or 383, then each director may be held to have committed an offence. Specifically;
• s379(4) states that a director has committed an offence and is liable to a fine of $300,000 if the director fails to take all reasonable steps to secure compliance with these sections; and
• s379(5) states a director has committed an offence and is liable to a fine of $300,000 and imprisonment for 12 months if the director wilfully fails to take all reasonable steps to secure compliance with these sections.
It should also be noted that the above approach to the statement of compliance is applicable only in the circumstances when the requirements of section 379 of the CO to prepare company level financial statements take precedence over the requirements of HKFRS 10.4(a). It is not expected that analogies to this guidance may be drawn to justify other departures from the requirements of HKFRS Accounting Standards, given the requirements of section 380(4)(b) of the CO and paragraphs 15 to 24 of HKAS 1.
Implications for the auditor’s report
Section 406(1) requires the auditor to state the auditor’s opinion on the following matters:
(a) whether the financial statements have been properly prepared in compliance with the CO; and
(b) in particular, whether the financial statements –
(i) in the case of annual financial statements of a company that does not fall within the reporting exemption for the financial year, give a true and fair view of the financial position and financial performance of the company as required by section 380; or
(ii) in the case of annual consolidated financial statements of a company that does not fall within the reporting exemption for the financial year, give a true and fair view of the financial position and financial performance of the company and all the subsidiary undertakings as required by section 380.
Therefore, although there may appear to be a difference in the criteria between HKFRS 10.4(a) and s379(3) as to which entities should prepare consolidated financial statements, it follows from s406(1) that it is not necessary for the auditor to qualify the auditor’s report on the financial statements of a Hong Kong incorporated company for non compliance with HKFRS 10 in this specific situation if all of the following conditions are met:
(a) the company falls within s379(3) of the CO and is therefore not required by the CO to prepare consolidated financial statements;
(b) the company has followed the requirements of s379(3) and has therefore prepared company level financial statements; and
(c) those company level financial statements comply with those HKFRS Accounting Standards which are applicable to the preparation of company level financial statements, as well as all other requirements of the CO relating to the contents of company level financial statements as set out in sections 380 and 383.
Consistent with this approach, an example unqualified auditor’s report under s405 of the CO would be as follows:
Independent auditor’s report to the members of [name of company]
(incorporated in Hong Kong with limited liability)
We have audited the financial statements of [name of company] (“the company”) set out on pages ........ to ........, which comprise the company’s statement of financial position as at [reporting date], the company’s statement of profit or loss and other comprehensive income, statement of changes in equity and cash flow statement for the year then ended and a summary of significant accounting policies and other explanatory information.
Directors’ responsibility for the financial statements
The directors of the company are responsible for the preparation of financial statements that give a true and fair view in accordance with applicable Hong Kong Financial Reporting Standards issued by the HKICPA that are relevant to these financial statements and the Hong Kong Companies Ordinance and for such internal control as the directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.
Auditor’s responsibility
Our responsibility is to express an opinion on these financial statements based on our audit. This report is made solely to you, as a body, in accordance with section 405 of the Hong Kong Companies Ordinance (Cap. 622), and for no other purpose. We do not assume responsibility towards or accept liability to any other person for the contents of this report.
We conducted our audit in accordance with Hong Kong Standards on Auditing issued by the Hong Kong Institute of Certified Public Accountants. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgement, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation of the financial statements that give a true and fair view in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the financial statements give a true and fair view of the financial position of the company as at [reporting date] and of its financial performance and cash flows for the year then ended in accordance with the applicable Hong Kong Financial Reporting Standards relevant to these financial statements and have been properly prepared in compliance with the Hong Kong Companies Ordinance.
1 According to paragraph 6(b) of HKFRS 12, HKFRS 12 does not apply to an entity’s separate financial statements to which HKAS 27 applies. However, if an entity has interests in unconsolidated structured entities and prepares separate financial statements as its only financial statements, it shall apply the requirements in paragraphs 24–31 of HKFRS 12 when preparing those separate financial statements.
