Want to Change Your Hong Kong Company's Functional Currency? Know the Process Key Points Easily!

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In the context of an increasingly complex international trading environment, more and more Hong Kong-based companies are re-evaluating their financial structures and accounting policies. Among these, the choice and potential change of functional currency have become key concerns for many businesses. For companies that have long used the U.S. dollar as their primary settlement currency but are registered in Hong Kong, the question of whether to switch from Hong Kong dollars HKD to the U.S. dollar USD or another foreign currency as the functional currency has become a matter requiring careful consideration.

1. What is Functional Currency and Why Change It?

According to the Hong Kong Financial Reporting Standards HKFRS, a company’s functional currency refers to the currency of the primary economic environment in which it operates. Typically, a company determines its functional currency at incorporation based on the main currency used in its business operations. For example, a company incorporated in Hong Kong but whose majority of customers and suppliers are located in the United States may choose USD as its functional currency. Conversely, a locally-focused company would likely use HKD.

However, with changing market conditions, enterprises may be influenced by factors such as exchange rate volatility, cross-border settlement efficiency, and tax planning considerations, prompting them to consider adjusting their functional currency.

Recent media reports indicate that some export-oriented Hong Kong companies began initiating the process of changing their functional currency in the fourth quarter of 2025. The main reasons include

Exchange Rate Risk Control While the HKD is pegged to the USD and thus relatively stable, amid heightened global economic uncertainty, companies aim to reduce the impact of exchange gains and losses on profit statements by aligning their functional currency with their operational currency.

Simplified Financial Accounting If a company’s revenues and expenses are primarily denominated in USD, but its functional currency is HKD, each financial reporting cycle requires extensive foreign exchange conversion, increasing both workload and the risk of errors.

Easier Consolidation for Group Reporting For subsidiaries within multinational groups, aligning functional currencies facilitates more efficient internal consolidation of financial statements.

2. Legal Basis and Procedures for Changing Functional Currency

Under the Hong Kong Companies Ordinance and relevant accounting standards, changing the functional currency is classified as a change in accounting policy and must follow the following basic procedures

1. Assess the Necessity of the Change A company should first conduct a comprehensive analysis of its core operations, sources of cash flow, and debt structure to confirm that the change will provide a more accurate reflection of its financial position and performance.

2. Board Resolution As a significant accounting policy change, altering the functional currency must be formally approved by the board of directors and documented in meeting minutes.

3. Implement the Change and Apply Retrospective Adjustment According to HKFRS, upon changing the functional currency, all prior period financial statements must be retrospectively adjusted to maintain consistency and comparability of financial data.

4. Disclosure of the Change In the annual financial report, the company must clearly explain the reasons for the change, the implementation date, and the impact on both current and prior period financial statements.

5. Update Tax Filings Although changing the functional currency does not affect tax liability calculations, the company must notify the Inland Revenue Department of the change and ensure that the currency used in tax filings aligns with that used in financial reporting.

3. Common Issues and Key Considerations During Implementation

Although technically straightforward, the process of changing the functional currency involves several important details

Handling Historical Data Prior historical financial statements need to be restated in the new functional currency, which may involve extensive retrieval of historical exchange rates and conversion calculations. It is advisable to use professional accounting software or consult with an accounting firm to assist with this task.

Contract and Invoice Management If the company has existing contracts or invoices denominated in the previous functional currency, it must carefully manage ongoing settlements to avoid ambiguity or disputes.

Bank Accounts and Payment Arrangements If existing bank accounts only support HKD transactions, the company may need to open new foreign currency accounts to align with the new functional currency. Additionally, payment and receipt arrangements should be coordinated to ensure currency consistency.

Communication with Staff and Clients Changes in functional currency may affect financial statement formats and invoice templates. Companies should promptly inform employees, clients, and partners to ensure transparency and smooth transition.

Ongoing Monitoring and Evaluation After the change, the company should periodically assess whether the new functional currency remains appropriate, avoiding future financial disruptions caused by market shifts.

4. Conclusion

As globalization deepens, the challenges faced by enterprises in financial management are becoming increasingly complex. Timely adjustment of the functional currency is one of the important strategies to optimize financial structure and enhance operational efficiency. For Hong Kong companies considering such a change, understanding the applicable regulations, following compliance procedures, and maintaining effective internal communication are critical to ensuring a successful transition. Only through a comprehensive evaluation of pros and cons can companies truly align their financial strategy with business development goals.