Small private companies that use the city's full financial reporting standards, the same set of rules used by publicly-listed companies, are struggling to meet the reporting requirements as standards become more complex.
'For many years, accounting standards were quite simple but, with globalisation, companies' increasing assets and liabilities, and the greater use of exotic transactions, the city's financial reporting standards have grown more complicated over the last decade in order to meet the needs of the public capital markets,' says Paul Pacter, director of Standards for Small and Medium-Sized Entities at the International Accounting Standards Board (IASB) in London, and a director at Deloitte Touche Tohmatsu in Hong Kong. 'That complexity has been pushed down on to small and medium-sized enterprises (SMEs).'
Primarily targeted at the reporting needs of listed companies and financial institutions, the reporting regulations take a long-term view of corporate activities, focusing on future earnings forecasts, long-term cash and debt flow, and company value. Yet these elements are rarely of any relevance to SMEs.
'SMEs say the full accounting standards are a burden, and even more pertinent is that the lenders, customers, venture capitalists and investors, who use their financial statements, cannot make good use of them. The information is not relevant to a SME,' says Pacter, adding that users of SME financial statements are interested in short-term cash flows, liquidity, balance sheet strength, the historical trends of cash flows and interest coverage.
Though there is a set of locally developed accounting standards specifically for SMEs, Ringo Chiu, an audit partner at accounting firm Grant Thornton, says the gamut of technical restrictions severely hinders small companies from using it. 'None of our clients are using these rules because they are just too restrictive,' he says.
Relief is likely to be on its way as the Hong Kong Institute of Certified Public Accountants (HKICPA), the city's only statutory licensing body of certified public accountants, is expected to adopt the IASB standard for SMEs as a financial reporting option by the end of the month.