Key impact of the 2025 revised HKFRS for Private Entities Accounting Standard on local entities

Page 1 of 9Key impact of the 2025 revised HKFRS for Private EntitiesAccounting Standard on local entitiesThis document was developed by the Financial Reporting Standards Committee(FRSC) of the Hong Kong Institute of Certified Public Accountants (HKICPA) and is forgeneral reference only. The HKICPA, FRSC and the HKICPA staff do not accept anyresponsibility or liability, and disclaim all responsibility and liability in respect of thedocument and any consequences that may arise from any person acting or refrainingfrom action as a result of any materials in the document. Members of the HKICPA andother users of this document should also read the full HKFRS for Private EntitiesAccounting Standard, as found in the HKICPA Members’ Handbook for furtherreference, and seek professional advice where necessary when applying thereferences contained in this guidance.The HKICPA’s Standard Setting Department welcomes your comments and feedbackon this document, which should be sent to commentletters@hkicpa.org.hk.In Hong Kong, entities without public accountability1 can choose to adopt the HKFRS forPrivate Entities Accounting Standard (HKFRS for PE), which provides a simplified set ofaccounting standards tailored for eligible private entities. The requirements in the HKFRS forPE are based on those of the full HKFRS Accounting Standards, with simplifications to reflectthe information needs of users of financial statements and the resources available to privateentities.The HKFRS for PE was revised in April 2025 (revised HKFRS for PE) to improve theinformation provided to users of private entities’ financial statements while maintaining thesimplicity of the standard. The revised HKFRS for PE is effective for annual periods beginningon or after 1 January 2027, with early application permitted.The revision in 2025 covered several aspects of the standard. The table on the following pagessummarises the major amendments to the HKFRS for PE and their key impacts on localentities currently applying the extant HKFRS for PE in their financial statements. Thediscussions in the table are not exhaustive. Entities are reminded to read the original text ofthe revised HKFRS for PE to understand how the amendments will affect their financialreporting based on their specific facts and circumstances.1 Refer to paragraphs 1.3 to 1.4 of the HKFRS for PE for the definition of public accountability.Page 2 of 9Major amendments and their key impactsSection inthe revisedHKFRS forPEMajor amendments2Key impacts on local entities3Section 2Concepts andPervasivePrinciples(i) Revised based on the Conceptual Framework forFinancial Reporting issued in 2018. The revised sectionintroduces new concepts related to measurement,presentation and disclosure, and guidance onderecognition. It also clarifies the concepts of prudence,stewardship, measurement uncertainty and substanceover form.(ii) Added an overriding principle that the requirements inother sections of the revised HKFRS for PE takeprecedence over Section 2 in order to resolve anypotential inconsistency between Section 2 and othersections of the revised HKFRS for PE.Entities will need to apply the new concepts in the revised section todevelop accounting policies when other sections of the revisedHKFRS for PE do not specify the accounting requirements. The newconcepts and clarifications will help entities apply judgement indeveloping accounting policies in such circumstances.2 Adapted from the Project Summary issued by the IASB.3 Adapted from the Feedback Statement and Effects Analysis issued by the IASB.Page 3 of 9Section inthe revisedHKFRS forPEMajor amendments2Key impacts on local entities3Section 9Consolidatedand SeparateFinancialStatements(i) Updated the definition of control to align with HKFRS 10Consolidated Financial Statements, which uses thedefinition as the single basis for consolidation (controlmodel).(ii) Introduced requirements for a parent that loses control ofa subsidiary to measure its retained interest in theformer subsidiary at fair value (instead of at carryingamount under the extant HKFRS for PE) on the datecontrol is lost, with any resulting gain or loss recognisedin profit or loss.(i) Entities will have a single basis for assessing control, which theywill use for all investees. Having a single basis removes theuncertainty about which requirements in Section 9 apply to whichentities (including special purpose entities). The rebuttablepresumption that control exists when an investor owns themajority of the voting rights of an investee has been retained,which simplifies the application of the control model. It isexpected that entities with simple group structures will not beaffected by the single model for assessing control. The amendeddefinition may affect entities with complex structures or interestsin special purpose entities.(ii) The amendments align Section 9 with those in Section 19Business Combinations and Goodwill for an acquisition achievedin stages (step acquisitions), facilitating their application byentities. Entities will need to allocate time and incur costs toassess the fair value of the former subsidiary on the date controlis lost for accounting purposes.Page 4 of 9Section inthe revisedHKFRS forPEMajor amendments2Key impacts on local entities3Section 11FinancialInstruments4(i) Added a supplementary principle for classifying financialinstruments based on contractual cash flowcharacteristics.(ii) Added the definition of a financial guarantee contractand amended the requirements for issued intragroupfinancial guarantee contracts. Intragroup financialguarantee contracts issued at nil consideration are in thescope of Section 21 Provisions and Contingencies.Other financial guarantee contracts are within the scopeof Section 11 and will continue to be measured at fairvalue.(iii) Added disclosure requirements for intragroup financialguarantee contracts that are within the scope of Section21 to explain their nature, purpose and possible effectson cash flows.(i) Supplementing the list of examples in Section 11 with a principlefor classifying financial instruments provides a clear rationale forentities to classify and measure financial instruments at eitheramortised cost or fair value. The principle would assist entities inmaking judgement if the financial instrument does not match withthe characteristics in the examples.(ii) The amendments will affect entities issuing intragroup financialguarantee contracts. Including intragroup financial guaranteecontracts in the scope of Section 21 simplifies the requirementsfor entities, removing the complexities of measuring thesecontracts at fair value.(iii) The additional disclosures are not expected to impose asignificant burden on entities issuing intragroup financialguarantee contracts, as they relate to basic information thatshould be readily available before entities consider issuing those4 Section 11 Basic Financial Instruments and Section 12 Other Financial Instrument Issues were combined into a single section, renamed Section 11 FinancialInstruments.Page 5 of 9Section inthe revisedHKFRS forPEMajor amendments2Key impacts on local entities3(iv) Added new disclosure requirements for financial assetsand financial liabilities. These disclosures include: anageing analysis of financial assets and maturity analysisfor financial liabilities.(v) Removed the option to apply the recognition andmeasurement requirements of HKAS 39 FinancialInstruments: Recognition and Measurement.contracts.(iv) It is not expected that these analyses will be costly for privateentities to prepare, as similar analyses are typically generated bymost entities' reporting systems for managing receivables andassessing the liquidity and solvency positions of the entities.(v) The removal of the fallback option to HKAS 39 will only affectentities that are currently adopting such an option. These entitieswill need to apply the transitional requirements in paragraph A11of the revised HKFRS for PE to transition from HKAS 39 toSection 11 of the standard.Page 6 of 9Section inthe revisedHKFRS forPEMajor amendments2Key impacts on local entities3New Section12 Fair ValueMeasurement(i) Combined the fair value measurement requirements inother sections of the HKFRS for PE into this newsection.(ii) Updated the fair value measurement requirements toalign with certain aspects of HKFRS 13 Fair ValueMeasurement, including the definition of fair value, theprinciples of fair value hierarchy, and the disclosurerequirements, for example, a description of the valuationtechniques used for fair value measurementscategorised within Level 2 and Level 3 of the fair valuehierarchy, as well as the inputs used in thesemeasurements.(i) The amendments do not change the requirements for when tomeasure assets and liabilities at fair value. However, moving allthe fair value measurement requirements into a single sectionimproves accessibility of the requirements for entities applyingthe revised HKFRS for PE.(ii) The definition of fair value from HKFRS 13 is clearer and morecomprehensive than the definition in the extant HKFRS for PE.The new definition and guidance will lead to greater clarity andconsistency when entities estimate fair values. However, entitieswill need to invest more time and resources in preparing theadditional disclosures related to the valuation techniques andinputs.Page 7 of 9Section inthe revisedHKFRS forPEMajor amendments2Key impacts on local entities3Section 19BusinessCombinationsand Goodwill(i) Updated the definition of a business to align with thedefinition in HKFRS 3 Business Combinations.(ii) Added accounting requirements for acquisitionsachieved in stages (step acquisitions).(iii) Added new requirements explaining that an entity newlyformed to effect a business combination may not be theacquirer in the combination.(iv) Updated the requirements for the recognition andmeasurement of assets acquired and liabilities assumed,and goodwill. These include:

•clarifying that an acquirer cannot recognise acontingent liability that does not meet the definition ofa liability;

•requiring entities to measure contingentconsideration at fair value, if it can be measuredreliably without undue cost or effort; and(i) The new definition of a business is clearer than the existingdefinition and will help entities decide when to apply Section 19.(ii) Entities will benefit from the requirements for step acquisitionsand guidance for a new entity formed in a business combination.The new requirements and guidance will remove the need forentities to apply judgement in setting an accounting policy forthese events and transactions.(iii) Ditto.(iv) The amendments clarify certain aspects of the accounting forbusiness combinations, which would enhance consistentapplication. The clarifications relating to contingent considerationand acquisition-related costs can enhance the informationprovided to users regarding the cost of the businesscombinations.Page 8 of 9Section inthe revisedHKFRS forPEMajor amendments2Key impacts on local entities3•requiring entities to recognise acquisition costs as anexpense in profit or loss at the time of the acquisition.Section 23Revenue fromContracts withCustomers5(i) Introduced a comprehensive framework for recognisingrevenue, based on the five-step model in HKFRS 15 thatrequires an entity to recognise revenue when thecustomer obtains control of goods or services. Therequirements from HKFRS 15 have been simplified tomake the five-step model easier for entities to apply.(ii) Provided transition relief allowing entities to apply theircurrent revenue recognition policy to contracts already inprogress at the date of initial application.Entities should assess when and how much revenue to recognise forgoods and services under the new comprehensive revenuerecognition framework. The revised Section 23 may result inchanges to the accounting for transactions with customers for someentities. Entities should also assess whether systems andoperational changes are necessary to apply the requirements in therevised section.Entities are required to apply the new and amended requirements in the revised HKFRS for PE retrospectively. However, some relief from retrospectiveapplication is available for entities applying certain amendments. Please refer to paragraphs A3 – A49 of the revised HKFRS for PE for details.5 Previously titled Revenue.Page 9 of 9Key areas for which the revised HKFRS for PE were not amendedThe following key areas of the revised HKFRS for PE have either been retained or notamended:

•The concept of ‘undue cost or effort’ in Section 2.•The rebuttable presumption in Section 9 that control exits when an investor owns themajority of the voting rights of an investee.•The incurred loss model for the impairment of financial assets measured at amortisedcost.•The accounting requirements in Section 20 Leases. They were not amended to align withHKFRS 16 Leases.Implementation supportThe IASB has made available the following support materials to assist entities in theimplementation process:

•Project Summary: An overview of the project and a highlight of the major amendments.•Feedback Statement and Effects Analysis: Description of the likely costs and benefits forentities and the users of their financial statements regarding the implementation of thekey amendments to the standard.•Podcasts: Highlight the key updates to the standard, the IASB’s approach to updating it,and the engagement with stakeholders throughout the project.•Webcasts: Provide an overview of the standard and the main changes from the previousedition.The Institute will also offer a series of training programmes to help entities understand andimplement the standard effectively.April 2025