Accounting Standards in China
Chinese accounting standards
One of the most challenging tasks for foreign investors in China is to fully understand the financial statements prepared for their entities. The Chinese accounting standards (CAS, i.e., the Chinese generally accepted accounting principles) framework is based on two standards:
- Accounting standards for business enterprises (ASBEs); and
- Accounting standards for small business enterprises (ASSBEs).
Multinational corporate groups would normally carry out reconciliations between the CAS and international financial reporting standards (IFRS) or US GAAP for the purpose of consolidation of financial statements on a group level.
The current ASBEs were released in 2006 and came into effect in January 2007. According to the IFRS Foundation, the 2006 ASBEs “substantially converged with IFRS”. By releasing a serial of amendments as of 2012, further convergence between the ASBEs and IFRS has been achieved. The ASSBEs entered into force on January 1, 2013, to provide unified standards for small-scale enterprises and enhance their internal control. The ASSBEs use the ASBEs as a reference but are more similar to tax laws in terms of their tax calculation methods, which significantly simplify the process of making adjustments between accounting standards and tax rules. Small-scale enterprises can choose to adopt either the ASBEs or ASSBEs.
Though the CAS and the IFRS are generally convergent with each other, they are still slightly different in some respects:
- Valuation methods for fixed assets - Under the IFRS, one may choose the valuation method for certain types of fixed assets. The company can value these assets either using the historical cost principle or by applying a revaluation of assets. CAS however only allow fixed assets to be valued according to their historical cost.
- More detailed rules in CAS - For certain items that are common in China, the CAS has more detailed rules than the IFRS. An example would be the merging of two companies controlled by the same entity and having similar interests. CAS requires that the comparative figures be restated, whereas there is no specific rule for this in the IFRS.
- More detailed rules in IFRS - Conversely, the IFRS have rules for situations that are uncommon in China, such as more detailed employee benefit plans. Apart from paying employees with company stock, CAS does not address certain types of employee benefits commonly offered by multinationals. Difficulties can arise when the parent company attempts to translate such a package to its Chinese subsidiary. In this case, the company may need to consult with the MOF as to how these transactions should be recorded.
- Delayed implementation of IFRS - When new updates to the IFRS are released, the MOF first reviews them to determine whether the new rules are appropriate for China and whether it will decide to incorporate them CAS. As a result, the adoption of new IFRS standards is often delayed or does not happen at all. This can lead to further divergence if the countries where other entities of the corporate group are established adopt the new IFRS rules earlier.
Mapping: converting Chinese financial reports
The problem of differing accounting standards is most visible when an overseas parent company requests financial information from its Chinese subsidiary. As the two companies are required by law to follow different standards, the information from the Chinese subsidiary needs to be ‘translated’ to fit into the overseas parent company’s books, in a procedure known as ‘mapping’. Larger multinationals tend to have specialized software for assisting the corporate group with this process, but as this software tends to be very expensive, SMEs often need to do their conversions manually.
There are two major points a company needs to be aware of when ‘mapping’ its books:
- The first is the divergence of accounting rules between Chinese and international accounting standards, as discussed previously. Whether performed in-house or outsourced to a trusted advisor, the company’s accountant needs to take a detailed look at the differences between the CAS and the target accounting system, as well as explore whether any of the firm’s activities are affected, often spending several days in the process. If outsourcing accounting work, it is important to notify your accountant of the need to translate your accounts as soon as possible and ensure that this information is shared throughout the company. If the accountant only learns of this request later, this may significantly delay the process.
- The second is the difference in accounting entry codes. Conversion is a one-time procedure that the outsourced accountant needs to complete when first contracted by a new company. Once the accountant determines which Chinese entry matches which foreign entry, these figures can be automatically converted.
The Canadian Trade Commissioner Service in China recommends that readers seek professional advice regarding their particular circumstances. This publication should not be relied on as a substitute for such professional advice. The Government of Canada does not guarantee the accuracy of any of the information contained on this page. Readers should independently verify the accuracy and reliability of the information.
Content on this page is provided by Dezan Shira & Associates a pan-Asia, multi-disciplinary professional services firm, providing legal, tax, and operational advisory to international corporate investors.
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