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 aspects:
- 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 have 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 require 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 do 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 this 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.
This article is adapted from “Tax, Accounting and Audit in China 2017.” The guide offers a comprehensive overview of the major taxes that foreign investors are likely to encounter when establishing or operating a business in China, as well as other tax-relevant obligations. This concise, detailed, and pragmatic guide is ideal for business leaders who must navigate the complex tax and accounting landscape in China in order to effectively manage and strategically plan their China operations.
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