Hong Kong has more than 9,000 organisations holding Section 88 tax-exempt status under the Inland Revenue Ordinance, ranging from major institutions to small mutual-aid bodies, school PTAs, religious groups and grassroots charities. They operate with two structural realities that commercial SME accounting software handles badly: donor restrictions on how received funds can be spent, and multiple parallel funding streams (general donations, restricted grants, government subventions, programme-specific corporate sponsorships) that must be reported separately to different audiences.
This guide covers the accounting-software requirements specific to HK Section 88 charities — what fund accounting actually means in practical terms, the restricted vs unrestricted distinction that drives charity bookkeeping, donor acknowledgment and reporting workflows, the valuation of in-kind donations, the IRD Section 88 status maintenance requirements that the auditor will examine, and the project-and-grant tracking that keeps multi-funder organisations from accidentally co-mingling restricted money.
Why NGO accounting needs fund-accounting-aware software
Commercial SME accounting software is built around a single set of books in which every dollar of revenue is fungible — once received, the money can be spent on anything. Charity accounting works on a different premise: some money received can only be spent for the purpose for which it was given. A grant for a youth education programme cannot pay the rent of an admin office. A capital donation for a new wheelchair-accessible facility cannot fund staff salaries during a cash crunch. The accounting system has to enforce — or at least make visible — those restrictions.
This is “fund accounting.” Each fund (restricted or unrestricted) is treated almost as a separate set of books, with its own income, expenditure and remaining balance. The charity’s overall financial position is the consolidation of all funds, but the underlying separation has to remain visible at any reporting moment.
The practical implication for software selection: a charity using a generic SME tool is forced to simulate fund accounting through tracking categories, custom dimensions, or — most often — parallel spreadsheets. This works at low transaction volume but becomes the source of restatement risk at audit time when the funds the auditor expects to see don’t reconcile cleanly to what the software shows.
Restricted vs unrestricted funds — the central distinction
Charity income falls into one of three categories under the standard fund-accounting model used in HK and aligned with international charity accounting practice:
- Unrestricted funds — donations and income with no donor-imposed restrictions. The trustees decide how to spend it. General fundraising appeals, untargeted individual donations, investment income on general reserves all fall here.
- Restricted funds — donations or grants given for a specific purpose stated by the donor. The youth education grant, the building-fund donation, the disaster-relief appeal proceeds. Restricted funds must be spent on the stated purpose; unspent balances carry forward.
- Designated funds — a sub-category of unrestricted funds where the charity’s own trustees have internally allocated money to a specific purpose. Designations can be undone by the trustees; donor restrictions cannot.
The software requirements: every income transaction needs a fund tag at the point of entry; every expenditure transaction needs a fund tag so the system can validate that restricted-fund spending matches the restriction; the trial balance and management reports must show fund-level balances at month-end. Generic SME software with custom-class or department tagging can be made to do this — but the workflow has to be enforced through procedure rather than by the software itself.
The most common SME-charity error: a restricted-fund donation arrives, gets coded to general income, and is unintentionally spent before the project starts. At audit, the auditor reconstructs the restricted-fund balance and finds it negative — meaning the charity has, technically, breached the donor’s restriction. The remedy is reclassification and apology, but it’s a fixable problem only if the underlying records are clean enough to reconstruct.
Donor reporting and acknowledgment receipts
Every Section 88 charity in HK is expected to issue acknowledgment receipts for donations, both because individual donors need them for personal salaries-tax deductions (under Section 26C of the IRO, donations to Section 88 charities are deductible up to 35% of assessable income) and because donor stewardship requires it.
The accounting-software requirements for donor management:
- Donor records separately from accounting transactions. A donor may make multiple donations across multiple years; the records need to consolidate per-donor history for stewardship and reporting.
- Acknowledgment receipts with the charity’s Section 88 number, donor name and address, donation date, amount, and (where applicable) statement of restriction. Many HK charities now generate these from the accounting system at point of recording rather than monthly in batch.
- Annual giving statements for individual donors, summarising the year’s giving in a format usable for the donor’s salaries-tax filing.
- Donor-restricted reporting — for major grant-giving foundations and corporate funders, the charity is typically required to report on how the restricted grant has been spent. Software with project-level tracking generates this report; software without forces it to be reconstructed manually.
The integration that matters most in practice is between the accounting system and the donor-management / fundraising system. At smaller scale these may be one tool; at larger scale they are typically separate systems with a clean interface between them.
In-kind donations valuation
HK charities frequently receive donations of goods rather than cash — corporate gifts of equipment, food donations to hot-meal programmes, in-kind professional services from sponsoring firms, donated property. These have to be recognised in the accounts at fair value at the date of donation, even though no cash changed hands.
The accounting workflow for in-kind donations:
- Identify and document the donation — what was given, by whom, when, in what condition.
- Determine fair value — typically the price the charity would have paid to acquire equivalent goods or services. For goods with a clear market, this is straightforward; for professional services donated by partner firms, the donating firm’s standard rate (less normal discounting) is the typical baseline.
- Record both income and expenditure simultaneously — an in-kind donation is income (recorded as donations received in kind) and immediately expenditure (the goods consumed or the services received). The net effect on cash is zero but the net effect on the P&L is to gross up both sides.
- For donated assets (a vehicle, a building improvement) — capitalise at fair value, depreciate per the charity’s policy.
The software requirement is the ability to record in-kind transactions without forcing them through a cash account. Some charity-specific tools handle this natively; generic SME tools require a workaround using a clearing account.
IRD Section 88 status maintenance and audit expectations
Section 88 status is granted by IRD and reviewed periodically. Maintaining the status requires:
- Annual audited financial statements, prepared in accordance with applicable accounting standards (HKFRS or HKFRS-PE for smaller charities), submitted to IRD on request.
- An annual return / activity report describing the charity’s activities for the year — how funds were spent, how this furthered the charitable purposes.
- Demonstrating that activities remain within the charitable purposes stated in the charity’s constitution and approved by IRD when status was granted.
- Public benefit demonstration — that the charity’s activities benefit the public or a sufficient section of the public, not a private group.
The auditor’s role in a Section 88 charity engagement extends beyond the standard financial-statement audit. Auditors typically examine: that restricted funds have been spent only for their restricted purposes; that related-party transactions (with trustees, with donor-connected companies) have been properly disclosed; that fundraising costs are reasonable as a proportion of funds raised; and that the charity’s activities remain consistent with its stated purposes.
For HK charities approaching their first audit, see our first-time audit guide for the audit-readiness picture — most of the principles apply, with the additional charity-specific requirements layered on top.
Project budgeting and grant tracking
A mid-sized HK charity typically runs 4–10 distinct programmes / projects simultaneously, each with its own budget, funding mix and timeline. The accounting system has to support project-level reporting where:
- Each project has an approved annual budget broken down by category (staff, programme costs, overhead allocation).
- Income to the project (restricted grants, earmarked donations, allocated unrestricted funds) is tracked at project level.
- Expenditure is captured against the project, with reasonable overhead-allocation methodology for the shared admin and fundraising costs.
- Period-end reporting shows budget vs actual at project level, with variance commentary.
- Multi-year grants are tracked across periods, with deferred-income recognition for grants that span fiscal years.
This is the report a programme manager needs to know whether to slow down spending, a CEO needs to know whether to launch a new fundraising appeal, and a major funder expects to receive at year-end. Generic SME software can be configured to produce something close, but the configuration cost is real and the upkeep depends on consistent coding discipline at point of entry.
How Giga Accounting by 凌峰會計 can help
Giga Accounting by 凌峰會計 supports fund and project tracking through the same dimensional-coding framework that handles multi-company and multi-currency for our commercial clients — which means a charity gets fund accounting, project budgeting and grant tracking without paying for a charity-only specialty tool. The 10GB-per-company storage allowance accommodates the higher document volume that charity work generates (donor records, grant agreements, programme reports) without forcing periodic purge.
Get in touch for a 30-minute scoping call against your charity’s specific funding mix, or see our flat per-company pricing. For HK charities receiving international funding in foreign currency, the multi-currency mechanics are covered in our multi-currency accounting software guide; for the company-secretarial side that maintains the charity’s constitution and trustee filings, see our company secretary services in HK; and for guidance on choosing an accounting firm experienced with charity audits, see how to choose an accounting firm in HK.
