What are assessable profits? This question hinges on two points: first, there are profits, and second, such profits are assessable.
The Inland Revenue Ordinance does not define “profits”. In fact, there are a number tax cases, particularly in the U.K., on this question. In business practice, profit means the net profit, or the net gain, or the surplus of incomes over expenses. It follows that profits concern determining incomes and expenses.
The second point is: what profits are assessable? As established from tax cases, assessable profits are the accounting profits determined in accordance with generally accepted accounting principles (GAAP) as adjusted to conform with the provisions of Inland Revenue Ordinance.
Then, what are accounting profits or GAAPs? This is a big topic and there are a lot of accounting textbooks on the question. Besides, the Hong Kong Society of Accountancy has from time to time issued Statements of Standard Accounting Practice to standardize the accounting treatments of various topics of importance. Among these principles and practices, the following are of fundamental importance and adopted for tax purpose.
Going concern principle
Accrual or matching principle
Revenue versus capital principle
In a nutshell, where the Inland Revenue Ordinance (IRO) makes a specific provision for a topic, such provision will over-ride the accounting principle or the general commercial practice of that topic.