diff --git a/packages/flutter/lib/src/rendering/proxy_box.dart b/packages/flutter/lib/src/rendering/proxy_box.dart
index d58b99de28..1037cd4a70 100644
--- a/packages/flutter/lib/src/rendering/proxy_box.dart
+++ b/packages/flutter/lib/src/rendering/proxy_box.dart
@@ -2566,6 +2566,7 @@ class RenderPointerListener extends RenderProxyBoxWithHitTestBehavior {
 
   void _updateAnnotations() {
     bool changed = false;
+    final bool hadHoverAnnotation = _hoverAnnotation != null;
     if (_hoverAnnotation != null && attached) {
       RendererBinding.instance.mouseTracker.detachAnnotation(_hoverAnnotation);
       changed = true;
@@ -2587,6 +2588,10 @@ class RenderPointerListener extends RenderProxyBoxWithHitTestBehavior {
     if (changed) {
       markNeedsPaint();
     }
+    final bool hasHoverAnnotation = _hoverAnnotation != null;
+    if (hadHoverAnnotation != hasHoverAnnotation) {
+      markNeedsCompositingBitsUpdate();
+    }
   }
 
   @override
@@ -2608,6 +2613,9 @@ class RenderPointerListener extends RenderProxyBoxWithHitTestBehavior {
     super.detach();
   }
 
+  @override
+  bool get needsCompositing => _hoverAnnotation != null;
+
   @override
   void paint(PaintingContext context, Offset offset) {
     if (_hoverAnnotation != null) {
diff --git a/packages/flutter/test/widgets/listener_test.dart b/packages/flutter/test/widgets/listener_test.dart
index a4691e3084..b07e49912c 100644
--- a/packages/flutter/test/widgets/listener_test.dart
+++ b/packages/flutter/test/widgets/listener_test.dart
@@ -2,6 +2,7 @@
 // Use of this source code is governed by a BSD-style license that can be
 // found in the LICENSE file.
 
+import 'package:flutter/material.dart';
 import 'package:flutter/rendering.dart';
 import 'package:flutter_test/flutter_test.dart';
 import 'package:flutter/widgets.dart';
@@ -232,5 +233,120 @@ void main() {
       expect(tester.binding.mouseTracker.isAnnotationAttached(renderListener1.hoverAnnotation), isFalse);
       expect(tester.binding.mouseTracker.isAnnotationAttached(renderListener2.hoverAnnotation), isFalse);
     });
+
+    testWidgets('works with transform', (WidgetTester tester) async {
+      // Regression test for https://github.com/flutter/flutter/issues/31986.
+      final Key key = UniqueKey();
+      const double scaleFactor = 2.0;
+      const double localWidth = 150.0;
+      const double localHeight = 100.0;
+      final List<PointerEvent> events = <PointerEvent>[];
+
+      await tester.pumpWidget(
+        MaterialApp(
+          home: Center(
+            child: Transform.scale(
+              scale: scaleFactor,
+              child: Listener(
+                onPointerEnter: (PointerEnterEvent event) {
+                  events.add(event);
+                },
+                onPointerHover: (PointerHoverEvent event) {
+                  events.add(event);
+                },
+                onPointerExit: (PointerExitEvent event) {
+                  events.add(event);
+                },
+                child: Container(
+                  key: key,
+                  color: Colors.blue,
+                  height: localHeight,
+                  width: localWidth,
+                  child: const Text('Hi'),
+                ),
+              ),
+            ),
+          ),
+        ),
+      );
+
+      final Offset topLeft = tester.getTopLeft(find.byKey(key));
+      final Offset topRight = tester.getTopRight(find.byKey(key));
+      final Offset bottomLeft = tester.getBottomLeft(find.byKey(key));
+      expect(topRight.dx - topLeft.dx, scaleFactor * localWidth);
+      expect(bottomLeft.dy - topLeft.dy, scaleFactor * localHeight);
+
+      final TestGesture gesture = await tester.createGesture(kind: PointerDeviceKind.mouse);
+      await gesture.moveTo(topLeft - const Offset(1, 1));
+      await tester.pump();
+      expect(events, isEmpty);
+
+      await gesture.moveTo(topLeft + const Offset(1, 1));
+      await tester.pump();
+      expect(events, hasLength(2));
+      expect(events.first, isA<PointerEnterEvent>());
+      expect(events.last, isA<PointerHoverEvent>());
+      events.clear();
+
+      await gesture.moveTo(bottomLeft + const Offset(1, -1));
+      await tester.pump();
+      expect(events.single, isA<PointerHoverEvent>());
+      expect(events.single.delta, const Offset(0.0, scaleFactor * localHeight - 2));
+      events.clear();
+
+      await gesture.moveTo(bottomLeft + const Offset(1, 1));
+      await tester.pump();
+      expect(events.single, isA<PointerExitEvent>());
+      events.clear();
+    });
+
+    testWidgets('needsCompositing updates correctly and is respected', (WidgetTester tester) async {
+      // Pretend that we have a mouse connected.
+      final TestGesture gesture = await tester.startGesture(Offset.zero, kind: PointerDeviceKind.mouse);
+      await gesture.up();
+
+      await tester.pumpWidget(
+        Transform.scale(
+          scale: 2.0,
+          child: Listener(
+            onPointerDown: (PointerDownEvent _) { },
+          ),
+        ),
+      );
+      final RenderPointerListener listener = tester.renderObject(find.byType(Listener));
+      expect(listener.needsCompositing, isFalse);
+      // No TransformLayer for `Transform.scale` is added because composting is
+      // not required and therefore the transform is executed on the canvas
+      // directly. (One TransformLayer is always present for the root
+      // transform.)
+      expect(tester.layers.whereType<TransformLayer>(), hasLength(1));
+
+      await tester.pumpWidget(
+        Transform.scale(
+          scale: 2.0,
+          child: Listener(
+            onPointerDown: (PointerDownEvent _) { },
+            onPointerHover: (PointerHoverEvent _) { },
+          ),
+        ),
+      );
+      expect(listener.needsCompositing, isTrue);
+      // Composting is required, therefore a dedicated TransformLayer for
+      // `Transform.scale` is added.
+      expect(tester.layers.whereType<TransformLayer>(), hasLength(2));
+
+      await tester.pumpWidget(
+        Transform.scale(
+          scale: 2.0,
+          child: Listener(
+            onPointerDown: (PointerDownEvent _) { },
+          ),
+        ),
+      );
+      expect(listener.needsCompositing, isFalse);
+      // TransformLayer for `Transform.scale` is removed again as transform is
+      // executed directly on the canvas.
+      expect(tester.layers.whereType<TransformLayer>(), hasLength(1));
+    });
   });
 }