With the launching of the new and revised Hong Kong Financial Reporting Standards ("HKFRSs" and Hong Kong Accounting Standards "HKASs" in the coming year (effective for accounting periods beginning on or after January 1, 2005), the rules for accountants to follow in preparing the financial statements will become more and more complicated. The more sophisticated accounting standards are perceived to increase the reporting burden of smaller enterprises and the lengthy and complex disclosure is considered to be inappropriate for the needs of the users of the financial statements of these small enterprises. With a view to balance their interest and cost, the Hong Kong Institute of Certified Public Accountants ("HKICPA" had proposed a new reporting framework and standard on Small and Medium-sized Enterprises ("SMEs), known as Differential Reporting".

What are the major differences?
1) Mainly measured in historical cost, e.g. fixed assets, investment in securities, etc.,
2) No cash flow statement required;
3) No deferred tax assets or liabilities should be recognized.

Who will be eligible?
1) Company incorporated under the Hong Kong Companies Ordinance satisfying the criteria set out in S.141D of that Ordinance.

2) Overseas Companies which satisfy all of the following requirements:
- does not have public accountability, e.g. not an issuer of securities; its equity or debt securities are not publicly traded; not an institution authorized under the Banking Ordinance; not an insurer authorized under the Insurance Companies Ordinance; not a licenced corporation under the Securities and Futures Ordinance.
- all of its owners agree to prepare the financial statements under the SME financial report standards, and
- considered to be an SME in terms of its size, i.e. to fulfill any two of the following criteria :
i) total revenue not exceeding HK$50 million;
ii) total assets not exceeding HK$50 million;
iii) less than 50 employees.

The consultation has been due for comments by April 30, 2005. It is expected that the inconsistent treatment for Hong Kong companies (no size test) and overseas companies would be dealt with thereafter. At the first sight, it appears that the proposed standard would release the "overload" reporting burden of SMEs. SMEs should however be aware of the fact that much reconciliation work would be required from one year to another when they are not eligible to use Differential Reporting in a particular year. Also, since the Differential Reporting is for SMEs in Hong Kong only, it cannot be referred to as in compliance with HKFRS or HKAS.

Contact Point : Ms. Silvia LUK
(852) 21578357
luk.silvia@cwcccpa.com