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Please refer to Page iii of the HK SME-FRS, which states that:

Opinion 1: SME-FRF and SME-FRS should be read in the context of the Preface to Hong Kong Financial Reporting Standards. SME-FRS should also be read in the context of the SME-FRF. (Page iii of SME-FRF & SME-FRS (February 2019))

Which on our understanding is that, if any situations not covered by SME-FRS, you can refer to: Hong Kong Financial Reporting Standards.

Some opinion is that when situation not covered by SME-FRS, the CPA in charge should use his Professional skepticism and make professional judgement, which in our understanding, this opinion can also be concluded to refer to HKFRS.

Standard reference:

In the event that the SME-FRS does not cover an event or a transaction undertaken by an entity, management may consider the SME-FRF for guidance on developing an appropriate accounting policy, consistent with the historical cost convention, for that particular event or transaction.

(Paragraph 1.2 of SME-FRS)

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5 Answers

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Opinion 2: if SME-FRS does not cover an event or a transaction undertaken by an entity, management may consider the SME-FRF for guidance to develop an appropriate policy consistent with the historical cost convention. The key is SME standard is based on "historical cost convention" concept which is a concept has some “? conflict / inconsistency ?" with "true and fair view", "fair value accounting" and "net present value by discounting future cash flows".  

In SME standards,  "fair value accounting" and "net present value by discounting future cash flows" only apply for (i) converting foreign currency denominated accounts to reporting currency; (ii) discounting lease payment in advance to present value; and (iii) estimating recoverable amounts [not exhaustive list].

Example of situations not cover by SME-FRS:

Derivatives, forex and swaft, which is not cover by Section 6 Investment of SME-FRS (SME-FRS doesn't have Financial Instrument section), should be accounted using fair value model, by referring to Full GAAP.

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Book-keeping questions:

Question 1: how to account gift income from shareholders?

Question 2: How to handle accounting treatment for court-free amalgamation?

Question 3: When to book a dividend and Conditions to be met when declare dividends

Question 4: Accounting and taxation for crypto-assets

Question 1: how to account gift income from shareholders?

Answer 1: Dr Bank / Cr Other reserve of equity

Reference: Q.16 of HKICPA's CO-rewrite - non transitional Q&A

(Extra only at following)

Question B1 – Capital contributions How should a company account for a shareholder's contribution (e.g. waiver of loan) in equity in its financial statements under the new CO? Should it be credited to share capital or to a reserve?

Where the shareholder's contribution is in the nature of a gift and not a subscription for new shares, a company will credit the amount to an "other reserve" outside of share capital. There is no requirement to notify the Registrar about an alteration of a reserve outside of share capital.

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Question 2: How to handle accounting treatment for court-free amalgamation?

Answer 2: Please HKICPA guidance: [Questions and Answers relating to court-free amalgamation] / [Web based link 2, same content]

HKICPA APlus article: [January 2017 Volume: Court-free amalgamations]

In our point, we think the essential principle is treat the companies merged as single corporate since the companies' incorporation date. In another words, the oldest companies as headquarter and all other later companies as branches.

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Question 3: When to book a dividend and Conditions to be met when declare dividends

Answer 3: Can refer to: [Hong Kong Accounting Standard 10 - Events after the Reporting Period]'s paragraphs 12 and 13.

12. If an entity declares dividends to holders of equity instruments (as defined in HKAS 32 Financial Instruments: Presentation) after the eporting period, the entity shall not recognise those dividends as a liability at the end of the reporting period.

13. If dividends are declared after the reporting period but before the financial statements are authorised for issue, the dividends are not recognised as a liability at the end of the reporting period because no obligation exists at that time. Such dividends are disclosed in the notes in accordance with HKAS 1 Presentation of Financial Statements* .

*: For Hong Kong incorporated companies, please also refer to the legal requirements as set out in the footnotes to paragraphs 95 and 125 of Appendix of HKAS 1 (revised in December 2007) and the example on the disclosure of proposed dividend as attached to HKAS 1.

Conditions to be met when declare dividends:

here are two conditions that need to be meet when declare the dividends.

  • All the directors must agree to declare the dividends and must agree the amount to be declared.

For this all the directors must sign a board resolution and such resolution must contain the amount going to be declared as dividend. And the dividend payment dates.

  • The company must be solvent

That means company must have enough liquid assets (cash and cash equivalent, and etc) and  retained earnings to cover the working Capital requirements after the company pay the dividend.

Companies limited by guarantee normally can not distributed dividends.

Extract of SME-FRS: Paragraphs 46-52:

Realized profits and Realized Losses

46. Consistent with section 79A of the predecessor CO (Cap. 32), section 297 of the new CO states that a company may only make a distribution out of profits available for distribution and that, for the purposes of this section, a company’s profits available for distribution are its accumulated, realized profits, so far as not previously utilized by distribution or capitalization, less its accumulated, realized losses, so far as not previously written off in a reduction or reorganisation of capital. Such distributable profits are to be computed at the company-level, irrespective of whether the company prepares consolidated financial statements.

47. Also consistent with section 79A of the predecessor CO, section 291 of the new CO states that a reference to realized profits or losses of a company is a reference to those profits or losses of the company that are regarded as realized for the purposes of any financial statements prepared by the directors in accordance with principles generally accepted, at the time when the financial statements were prepared, with respect to the determination for accounting purposes of realized profits or realized losses.

48. In accordance with Accounting Bulletin 4 “Guidance on the Determination of Realised Profits and Losses in the Context of Distributions under the Hong Kong Companies Ordinance” issued by the HKICPA, a profit shall be treated as realised only when realised in the form of:

(a) cash; or

(b) other assets, the ultimate cash realisation of which can be assessed with reasonable certainty.

49. Most transactions recognised under the SME-FRS in company-level financial statements would satisfy this test. For example, a sale of inventory on normal credit terms will still give rise to a realized profit at the point of sale if the debtor is capable of settling the receivable within a reasonable period of time and there is a reasonable certainty that the debtor will be capable of settling when called upon to do so.

50. However, if the sale was in exchange for an illiquid asset, such as a property, the profit could not be regarded as realized until the property itself was sold in a cash or near-cash transaction, because the property would not be regarded as readily convertible to cash without a period of marketing. Similarly, unrealized profits might also arise if the sale was to, for example, a subsidiary, and the subsidiary had no independent means of settling the inter-company payable without assistance from the parent. As a result, care should be taken when computing profits available for distribution for the purposes of section 291 of the new CO, to exclude from the company-level retained earnings any amounts relating to profits which are still unrealized.

51. With respect to realized losses, in general, where amounts are charged against profit or loss (and hence recorded in company-level retained earnings), the charge should be regarded as being “realized” irrespective of whether it arose on re-measurement of the carrying value of an asset or liability, or the charge has crystallised, for example on settlement of a law suit. Adjustments should not therefore be made to add back any expenses or other charges when computing profits available for distribution for the purposes of section 291 of the new CO.

52. Further guidance on the concept of realized profits and realized losses can be found in Accounting Bulletin 4 and the accompanying Staff Summary issued by the HKICPA. However, it should be noted that this guidance is primarily intended to address a wide variety of differences between recognition requirements under full HKFRSs and the concept of realized profits or losses. Although the same principles for defining realized profits and losses will apply whether a company follows full HKFRSs or SME-FRS, in practice as the SME-FRS does not permit upwards revaluation of assets and does not contain specific requirements relating to more complex financial instruments, many of the differences identified in the Bulletin between recognised profits and losses and realized profits and losses will not be applicable to financial statements prepared in accordance with the SME-FRS. This guidance will therefore only be of relevance when the nature of consideration received in a transaction recognised under the SME-FRS gives rise to a potentially unrealised profit. For example, the guidance in section 9 on intra group transactions and in section 10 on asset swaps may be relevant in such situations.

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Question 4: Accounting and taxation for crypto-assets



HKICPA provide a guidance website: https://www.hkicpa.org.hk/en/Standards-and-regulation/Standards/Major-projects/Crypto---Assets

Extracted from [the IFRS Interpretations Committee published an agenda decision] https://cdn.ifrs.org/-/media/feature/supporting-implementation/agenda-decisions/holdings-of-cryptocurrencies-june-2019.pdf:

  • The Committee observed that a holding of cryptocurrency meets the definition of an intangible asset in IAS 38 on the grounds that (a) it is capable of being separated from the holder and sold or transferred individually; and (b) it does not give the holder a right to receive a fixed or determinable number of units of currency.
  • The Committee concluded that a holding of cryptocurrency is not a financial asset. This is because a cryptocurrency is not cash
  • The Committee observed that an entity may hold cryptocurrencies for sale in the ordinary course of business. In that circumstance, a holding of cryptocurrency is inventory for the entity and, accordingly, IAS 2 applies to that holding.



HKICPA APlus article - [IRD issues guidance on cryptocurrency taxation]

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