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Accounting Standards in China

Chinese accounting standards

Businesses operating in China are required to follow the Chinese Accounting Standards (CAS), also known as the Chinese Generally Accepted Accounting Principles. The CAS framework is based on two standards:

The current ASBEs were released in 2006 and came into force in January 2007. It is widely viewed by the international community that ASBEs are now substantially converged with International Financial Reporting Standards (IFRS), with only some minor discrepancies in wording. Starting January 1, 2021, several new accounting standards started to apply to all entities that have adopted the CAS. The changes will mainly pertain to accounting treatment of revenue and leases.

RMB is the base currency for ledgers and financial reports. Foreign currencies can be used in business transactions and as the bookkeeping base currency; however, financial reports are required to be shown in RMB. Accounting records must be maintained in Chinese. Foreign invested enterprises (FIEs) can choose to use only Chinese or a combination of Chinese and a foreign language. Books and records have to be retained for at least 10 years.

FIEs in China should adopt the accrual basis of accounting in performing recognition, measurement, and reporting. Companies and their legally responsible persons must take full responsibility for the truthfulness, legitimacy, and completeness of financial statements. These statements will be used for computing the companies taxable and distributable profit.

By law, any business transaction carried out in mainland China requires a fapiao. In practice, a significant portion of small to medium-sized companies conduct certain sales under the table out of reluctance to part with their fapiao. This is because for each fapiao issued, tax will be payable on the profit from the transaction. For purchasing goods and services, receiving fapiao from the seller is essential for claiming VAT refunds and lowering one’s tax liability.

Though the CAS and the IFRS are generally convergent with each other, they are still slightly different in some respects:

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:

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