HONGKONG ACCOUNTING FOR GLOBAL COMPARABILITY, CONSISTENCY AND ACCEPTANCE
As many businesses continuously expand, a need for financial representation of their operation increases. As defined by the Accounting Standards Council (ASC), accounting is an economic activity. Its function is to provide quantitative information, primarily financial in nature, about economic entities, that is intended to be useful in making economic decision.
Business establishments and companies must prepare book of accounts, comply with the statutory requirements and issue a financial report on an annual basis. This would be utilized by the stakeholders for better decision and sound judgment about their interest on a particular company. In Hong Kong accounting, a financial statement to be issued must be composed of:
· Balance Sheet
· Income Statement
· Statement representing (1) all changes in equity or (2) changes in equity not arising from capital transactions with the owners and capital distribution.
· Cash Flow Statement
· Explanatory Notes and Accounting Policy
These five financial statements cover different areas. Issuance of a complete set could help the user in evaluating the effects of a single transaction on the entire financial status of the company. Explanatory notes and accounting policy should also be disclosed so that the user will be guided and will not be misled with the information provided. Through financial statements, the choices and decisions made by the stakeholder would sound more reasonable and fact-based. Example:
· Decision whether to buy, hold or sell an equity investment.
· Assessment of the company’s liquidity or ability to pay currently maturing debts.
· Assessment of the company’s solvency or the ability to meet long term obligations.
· Decision whether to invest an amount of money in purchasing new machineries or to invest an amount of money for repairing old equipments. (and many others)
Long years ago, different countries follow different accounting standards – the criteria for representation, recognition and adjustment of accounts vary. It was in year 2005 when Hong Kong Accounting adapted the International Accounting Standards (IAS). The very purpose of adapting the International Accounting Standards issued by the International Accounting Standards Board (IASB) are (1) to promote the financial statements’ worldwide acceptance and observance and (2) to work generally for the improvement and harmonization of regulations, accounting standards and procedures relating to the presentation of financial statements. In other words, global comparability, consistency and acceptance are the primary purposes of the International Accounting Standards.
Paradoxically, every country is governed by different laws and regulation. This imposes a limitation towards the complete adaption of the International Accounting Standards. This is the reason why the International Accounting Standard 32 and International Accounting Standard 39.