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Hong Kong Tax Authority confirms variable consideration is taxable

Executive summary

Hong Kong’s Inland Revenue Department (IRD) has confirmed that variable consideration, recognized as revenue from contracts with customers under the new Hong Kong Financial Reporting Standard (HKFRS) 15, would be taxable, and transitional adjustments to retained earnings are either taxable or deductible in the taxable year when HKFRS 15 is first adopted.

Detailed discussion


Under HKFRS 15 – revenue from contracts with customers, if a contract includes variable consideration, such as price discounts, rebates, incentives and performance bonuses, the entity is required to estimate the amount of variable consideration to which the entity will be entitled.1 HKFRS 15 is effective for annual accounting periods beginning on or after 1 January 2018.

In addition, in the year when HKFRS 15 is first adopted, entities are required to apply HKFRS 15 retroactively, resulting in a cumulative adjustment to the opening balance of retained earnings.

Tax implications of HKFRS 15

Variable consideration is taxable

In its 2018 annual meeting with the Hong Kong Institute of Certified Public Accountants, the IRD indicated that, while an element of estimation is involved when an amount of variable consideration under a customer contract is recognized as revenue under HKFRS 15, the recognized income would generally represent realized income, subject to Hong Kong tax.

Impact of retroactive adjustments to retained earnings

The IRD confirmed that, any transitional adjustments to retained earnings would be either taxable or deductible in the taxable year when HKFRS 15 is first adopted.


1. In contrast, under the previous applicable accounting standards, variable consideration of a contract would not normally be recognized as revenue until the uncertainty associated with the variable consideration was resolved.

EYG no. 012305-18Gbl

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