China’s Accounting Standards: Chinese GAAP vs. US GAAP and IFRS
By Dezan Shira & Associates
Editor: Weining Hu
According to PRC Company Law and other relevant regulations, it is compulsory for all types of Foreign Invested Enterprises (FIEs) in China to comply with statutory annual audit and other compliance processes.
The completion of annual statutory audits and settlement of all relevant tax liabilities are prerequisites for FIEs to distribute and repatriate their profits or dividends back to their home country. Failure to do so may result in extra expenses, penalties, or even revocation of their business license.
When preparing annual financial reports, all FIEs are required to follow the Chinese Generally Accepted Accounting Principles (GAAP), also known as Chinese Accounting Standards (CAS). The CAS framework is based on two standards:
- Accounting Standards for Business Enterprises (ASBEs); and
- Accounting Standards for Small Business Enterprises (ASSBEs).
The Ministry of Finance (MOF) released ASBEs in 2006 and brought them into effect in January 2007. It is widely viewed by the international community that ASBEs are now substantially converged with IFRS, with only some minor discrepancies in wording.
Most FIEs established in China generally adopt ASBEs for their annual financial reports, the structure of which are similar to the Generally Accepted Accounting Principles of the United States (US GAAP) and International Financial Reporting Standards (IFRS).
The ASSBEs are the counterpart of IFRS for SMEs, providing unified standards for small-size enterprises. The ASSBEs use the ASBEs as a reference, but are more similar to tax laws in terms of their tax calculation methods, which 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 is substantially converged with IFRS, there are minor discrepancies between them 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 transaction 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 into the 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.
The problem of different accounting standards is most visible when an overseas parent company requests financial information from its Chinese subsidiary. Converting Chinese financial reports into a target accounting system can be fairly easy for large multinationals, as these companies have sufficient financial support for purchasing specialized software to complete the process.
However, small and medium-sized companies often cannot afford the software needed for such conversions, and instead have to study the divergence of accounting rules and do the conversion manually. As all FIEs are required to prepare financial reports by the end of the fiscal year, it is important for corporate accounting teams to fully understand Chinese accounting practice and ensure correct annual audit processes.
Editor’s note: This article was originally published on April 25, 2013, and has been updated to include the latest regulatory changes.
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