A look at the changes coming to the Small and Medium-sized Entity Financial Reporting Framework and Financial Reporting Standard and the reasons behind them
What is the SME standard?
In setting its policy to achieve convergence with International Financial Reporting Standards (IFRSs) in 2001, the Council of the Hong Kong Institute of CPAs acknowledged that Hong Kong Financial Reporting Standards (HKFRSs) that were to be converged with IFRSs would be more exacting than necessary for many smaller companies required to report under the Companies Ordinance (CO). Accordingly, the Council decided that the Institute should develop reporting requirements for small and medium-sized entities (SMEs) that would better meet the needs of users of their financial reports.
Following this, in 2005, the Small and Medium-sized Entity Financial Reporting Framework and Financial Reporting Standard (SME standard) was developed and issued by the Institute after two rounds of public consultations from 2002 to 2004. Based on the feedback received during these consultations, the Financial Reporting Standards Committee (FRSC) of the Institute decided the SME standard should be a predominantly cost-based measurement standard that is straightforward for entities with simple businesses or transactions to apply.
Is the SME standard still fit for purpose?
The SME standard has remained largely unchanged since 2005, except for the addition of sections (e.g. business combinations, consolidated financial statements, investments in associates, investments in joint ventures) to cater for new requirements in the CO enacted in 2012, which enabled the standard to be used to prepare consolidated financial statements, and again in 2015 and 2019 to clarify a few changes to the CO.
In October 2018, the FRSC commenced a post-implementation review (PIR) of the SME standard. The feedback received indicated that the standard appeared to be working as intended and remained suitable for entities with simple businesses or transactions to apply.
As a result, in September 2019 the FRSC issued an exposure draft that proposed only limited amendments to the standard. Stakeholders were generally supportive of these proposals and so, in March 2020, the FRSC issued amendments to the SME standard.
What amendments have been made and why?
The amendments to the SME standard can be found in Appendix 4 of the standard which is available on the Institute’s website, and are summarized in the table below.
When are the amendments effective?
An entity shall apply the amendments retrospectively for annual periods beginning on or after 1 January 2021. Earlier application is permitted.
When will the FRSC perform its next review of the SME standard?
Having considered the feedback obtained in the PIR, the FRSC decided that the next review of the standard should take place in ve years’ time, unless signi cant issues arise earlier. This will provide a stable platform for SMEs, and allow suf cient time and experience for preparers or practitioners to apply the amendments.
Support on the SME standard
Members can nd the latest news and publications related to the SME standard in the SMP and SME Resource Centre of the Institute’s website.
The Institute encourages anyone who would bene t from a refresher on the SME standard and its eligibility requirements to take an e-seminar, entitled “The Small and Medium-sized Entity Financial Framework and Financial Reporting Standard (Audio)” which is recommended for practitioners or preparers who want to understand or know more about the SME standard.
In addition, members can submit their technical enquiries on the SME standard to the Institute’s staff through the technical enquiry form of the Institute’s website.
This article is contributed by the Institute’s Standard Setting Department