As per Hong Kong company’s ordinance subdivision 3 section 379 subsection 1, a Company Director will have to prepare year-end financial accounts that comply with sections 380 and 383.
Subsection 2 states that if a company is a holding company at the end of the accounting period, the Director has to prepare a consolidated account for the financial year that complies with sections 380, 381 and 383.
Subsection 2 of section 379 will not apply when:
(a) A company is a wholly owned subsidiary of another body corporate in the financial year; or
(b) When a company is a partially owned subsidiary of another body corporate in the financial year.
(ii) At least 6 months before the end of the accounting period, the directors notify members in writing of the directors’ intention not to prepare consolidated statements, and the notification does not relate to any other accounting period; and
(iii) As at a date falling 3 months before the end of the accounting period, no member has responded to the notification by giving the Directors a written request for the preparation of consolidated statements for the financial year.
(1) The annual financial statements for an accounting period:
(2) The annual consolidated financial statements for an accounting period:
(3) The financial statements for an accounting period must comply with:
(4) The financial statements for an accounting period must also comply with:
(5) If, in relation to any financial statements, compliance with subsections (3) and (4) would be insufficient to give a true and fair view under subsection (1) or (2), the financial statements must contain all additional information necessary for that purpose.
(6) If, in relation to any financial statements, compliance with subsection (3) or (4) would be inconsistent with a requirement to give a true and fair view under subsection (1) or (2), the financial statements:
(7) Subsections (1), (2), (5) and (6) do not apply if the company falls within the reporting exemption for the financial year.
(8) In this section:
A subsidiary is a company that is controlled by a parent while a special purpose entity (SPE) is a company established to achieve a narrow and well-defined objective. An SPE may be in a form of a corporation, trust, partnership, or unincorporated entity. Often SPEs are established with legal arrangements that impose strict requirements over the operation of the SPE. A company shall consolidate the accounts of the SPE when the substance of the relationship indicates that the SPE is controlled by that company.
(1) Subject to subsections (2) and (3), the annual consolidated financial statements for an accounting period must include all the subsidiary undertakings of the company.
(2) Where the company falls within the reporting exemption for the accounting period, one or more subsidiary undertakings may be excluded from the annual consolidated financial statements in compliance with the accounting standards applicable to the statements.
(3) Where the company does not fall within the reporting exemption for the accounting period:
Control is assumed to exist when the parent company owns, directly or indirectly through subsidiaries more than half of the voting power of a company. This assumption can be overcome in certain circumstances if it can be proved that the ownership of the parent company does not constitute control.
Control can also be said to exist when a parent company owns half or less of the voting power but it needs to satisfy the following conditions:
(a) Power over more than half of the voting rights by virtue of an agreement with other investors.
(b) Power to govern the financial and operating policies of the entity under a statute or an agreement.
(c) Power to appoint or remove majority of members of the board of directors or equivalent governing body and control of the entity is by that board or body or;
(d) Power to cast the majority of votes at meetings of the Board of Directors or equivalent governing body and control of the entity is by that board or body.
The following circumstances indicate that a company controls a SPE:
(a) Activities of the SPE are being conducted on behalf of the parent company according to its specific business needs.
(b) The parent company has the final decision-making powers over the activities of the SPE even though its daily decisions have been delegated.
(c) The parent company has rights to obtain the benefits and bear the risks associated to the activities of the SPE.
(d) The parent company retains its majority of the residual or ownership risks related to the SPE or its assets.
Consolidated accounts present accounts of the group as a single economic entity.
When preparing consolidated financial statements, the parent company has to:
(a) Combine the accounts of the parent and its subsidiaries line by line by adding together like items of assets, liabilities, equity, income and expenses.
(b) Eliminate the carrying amount of the parent’s investment in each subsidiary and the parent’s portion of equity of each subsidiary.
(c) Measure and present non-controlling interest in the profit or loss of consolidated subsidiaries for the reporting period separately from the interest of the owners of the parent; and
(d) Measure and present non-controlling interest in the net assets of consolidated subsidiaries separately from the parent shareholders’ equity in them. Non-controlling interest in the net assets consists of:
(i) The amount of the non-controlling interest at the date of the original combination calculated in accordance with Section 19 Business Combinations and Goodwill, and
(ii) the non-controlling interest’s share of changes in equity since the date of the combination.
The proportion of profit or loss and changes in equity are allocated to the owners of the parent company and to the non-controlling interest based on the existing ownership interests and do not reflect the possible exercise or conversion of options or convertible instruments.
Intercompany balances and transactions, including income, expenses and dividends, are eliminated in full. Profits and losses resulting from Intercompany transactions recognised in assets, such as inventory and property, plant and equipment, are eliminated in full. Intercompany losses may indicate an impairment that requires recognition in the consolidated financial statements.
Financial statements of the parent company and its subsidiaries used in the consolidated accounts have to be prepared with the same reporting date and accounting policies for similar transactions, other events, and conditions in similar conditions. If a subsidiary company in the group uses a different accounting policy, adjustments have to be made to that subsidiary’s financial statements when preparing the consolidated financial statements.
The income and expenses of a subsidiary are included in the consolidated financial statements from the acquisition date until the day the parent company does not have control over the subsidiary. The difference between the proceeds from the disposal of the subsidiary and it’s carrying amount as of the date of disposal, excluding the cumulative amount of any exchange differences that relate to a foreign subsidiary is recognised in the consolidated statement of comprehensive income (or the income statement, if presented) as the gain or loss on the disposal of the subsidiary.
If a company ceases to be a subsidiary but the investor (former parent) continues to hold an investment in the former subsidiary, that investment shall be accounted for as a financial asset in accordance with Section 11 Basic Financial Instruments (HKFRS for private entities) or Section 12 Other Financial Instruments Issues (HKFRS for private entities) from the date the company ceases to be a subsidiary, provided that it does not become an associate (in which case Section 14 Investments in Associates in HKFRS for private entities applies) or a jointly controlled company (in which case Section 15 Investments in Joint Ventures in HKFRS for private entities applies). The carrying amount of the investment at the date that the company ceases to be a subsidiary shall be regarded as the cost on initial measurement of the financial asset.
A company shall either report non-controlling interest:
(i) In the statement of financial position of the consolidated accounts as an item of equity separately from the owners’ equity amount or;
(ii) In the consolidated profit and loss amount at the statement of comprehensive income
Profit or loss and each item at the statement of other comprehensive income shall be attributed to the owners of the parent company and to the non-controlling interest. Total comprehensive income shall be attributed to the owners of the parent company and to the non-controlling interest even if this results in the non-controlling interest having a deficit balance.
(1) This section applies if at any time during a financial year of a private company:
(2) The financial statements of the company for the financial year must comply with sections 380 and 381 as if the company were a public company.
(3) The Court may, on the application of the company or a person interested in the matter, order that subsections (1) and (2) do not apply.
(4) The Court may make the order on any terms and conditions that the Court thinks just and expedient.
(5) The Court must not make the order unless the Court is satisfied that:
The following disclosures are to be made at the consolidated accounts:
(a) Disclose that the financial statements are consolidated.
(b) The basis for concluding that controls exist if the parent does not own directly or indirectly through subsidiaries more than half of the voting power.
(c) If the subsidiaries used in the preparation of the consolidated accounts have a different accounting period than the parent company.
(d) The nature and extent of any significant restrictions (eg. resulting from borrowing arrangements or regulatory requirements) on the ability of subsidiaries to transfer funds to the parent company in the form of cash dividends or repayment of loans.