PROPOSED IMPLEMENTATION OF
A FINANCIAL REPORTING
FRAMEWORK FOR SMEs
- a second consultation
Simon Riley
Hong Kong Society of Accountants
11 May 2004
1
The First Consultation – Where we left
off last time

General support for a differentiation to
main GAAP for SMEs

Concerns that cost: benefit not
sufficiently redressed

Response: Separate Framework based
primarily on historical cost convention
11 May 2004
HKSA
2
Six Consultation Issues
1. The need for a separate financial
reporting framework for SMEs?
2. Justification / principles for SME
financial reporting framework?
3. True & Fair necessary?
4. Which entities should qualify?
5. How does the Companies Ordinance
requirement fit in?
6. What reporting requirements should
apply?
11 May 2004
HKSA
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Issue 1 – Separate financial reporting
framework for SMEs
 General consensus from first consultation
that a differentiated / separate SME
reporting framework
 Recap on international experience from
first consultation
- SME reporting frameworks in place in UK,
Australia, Canada, NZ
11 May 2004
HKSA
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Issue 1 – Separate financial reporting
framework for SMEs
 Developments at IASB
- Discussion Paper imminent
- Accommodating the IASB’s approach in Hong
Kong
11 May 2004
HKSA
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Issue 2 – Justification / principles
 Cost:benefit
- Limited user group for non-listed SMEs in nonregulated industries
- Financial reporting needs of users
- Resources available to SMEs also limited
 Financial reporting requirements should
always meet the cost:benefit criterion (for
main GAAP & SME GAAP)
11 May 2004
HKSA
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Issue 3 – True & Fair necessary?
 In CP-I, proposition was that “True & Fair”
necessary
- integrated approach
- differential reporting
 Problem:
- disclosure relief not consistent with true & fair
- did not sufficiently redress cost:benefit issue
 Decision to propose SME financial
reporting framework outside True & Fair
11 May 2004
HKSA
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Issue 4 – Which entities qualify?
 No public accountability
- Listed securities
- Banks, insurance companies, dealers,
investment advisers
 Unanimous agreement of owners
 Hong Kong Company – per s.141D,
currently:
- Private company
- No subsidiaries / holding company
11 May 2004
HKSA
8
Issue 4 – Which entities qualify?
 Other entities on the basis of size
- Not to exceed any two of the following:
- Total revenue of HK$50m p.a.
- Total assets of HK$50m
- 50 employees
11 May 2004
HKSA
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Issue 5 – Companies Ordinance
 Current s.141D “True & Correct”
requirement to remain for qualifying
companies
 S.141D companies to prepare financial
statements in accordance with Companies
Ordinance requirements & with relevant
HKSA requirements – (currently PN 600.2
but proposed new SME-Financial
Reporting Standard)
11 May 2004
HKSA
10
Issue 5 – Companies Ordinance
 Proposed retention of s.141D separate
reporting framework but lobby for
changes
- Repeal Eleventh Schedule
- Repeal group company restriction
- Introduce size criteria
11 May 2004
HKSA
11
Issue 6 – Financial Reporting
Framework
 1st consultation: discussion on integrated
v separate framework
 Differential reporting proposal was
integrated operating within true and fair
 Comments received – re-think of approach
 2nd consultation: separate approach
 Financial Reporting Framework (SME-FRF)
& Financial Reporting Standard (SMEFRS)
11 May 2004
HKSA
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Issue 6 – Financial Reporting
Framework
 Cutting ties with “true and fair” (main
GAAP)
 Measurement & Disclosure requirements
greatly simplified – proposed historical
cost basis
 Will not necessarily move in tandem with
main GAAP (contrasts with UK FRSSE
which is linked to ‘true and fair’)
11 May 2004
HKSA
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Issue 6 – Financial Reporting
Framework
 Designed to redress the balance between
cost & benefit
- But a quantification not possible
11 May 2004
HKSA
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Financial Reporting Framework
(SME-FRF)
 Summary of main points
 Different user base for SME financial
statements – absence of investing public
– Accrual accounting still applicable
– substantially same definitions of “asset”, “liability”,
“revenue” & “expense” as per main GAAP
– But historical cost convention considered appropriate
for users’ needs and for cost:benefit in financial
reporting for qualifying entities
– Stewardship rather than business valuation
11 May 2004
HKSA
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Financial Reporting Framework
(SME-FRF)
 For a qualifying entity:
- free choice to apply either SME-FRS or main
GAAP but not a hybrid of the two
- SME-FRS applies only to a single entity’s
financial statements – main GAAP required for
consolidated financial statements
11 May 2004
HKSA
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Financial Reporting Framework
(SME-FRF)
 On first time adoption of the SME-FRS:
- financial statements and comparatives in full
compliance with the SME-FRS
except when impracticable to do so
s.141D exemption on comparatives
- equity reconciliation to that reported under
previous GAAP
11 May 2004
HKSA
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Financial Reporting Standard
(SME-FRS)
 Stand-alone set of financial reporting
requirements
 Applicable only to entity’s separate
financial statements
- Consolidation requires application of full
GAAP
11 May 2004
HKSA
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Financial Reporting Standard
(SME-FRS)
 Significant simplifications to main GAAP
- Asset accounting: Property, Plant & Equipment, Leases,
Investments, Investment Properties, Intangibles: All at
Cost less depreciation / amortisation / impairment (as
applicable)
- Income Taxes: No deferred tax recognition
- Disclosure relief in many cases (e.g. impairment; no
Cash Flow Statement)
 Introduction of Related Party Disclosure
requirements
 Illustrative financial statements
11 May 2004
HKSA
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The Consultation Process
 Consultation documents issued for public
comment
- Comments welcomed by 31 August 2004
- Available on HKSA website
http://www.hksa.org.hk/professionaltechnical/
accounting/exposuredraft/
11 May 2004
HKSA
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The Consultation Process
 We have also specifically written to those
who provided comments on the first
consultation
- First consultation paper & comment letters
posted on the HKSA website
http://www.hksa.org.hk/professionaltechnical/
accounting/rm/consultation_paper.pdf
http://www.hksa.org.hk/professionaltechnical/
accounting/rm/ias_consultation_paper.php
11 May 2004
HKSA
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