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:

• Accounting Standards for Business Enterprises (ASBEs)
• Accounting Standards for Small Business Enterprises (ASSBEs)

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:

• 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.

  Disclaimer:

  

  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 in part by Dezan Shira & Associates a pan-Asia, multi-disciplinary professional services firm, providing legal, tax, and operational advisory to international corporate investors.