Accounting in China

The Accounting Law of the PRC sets out the general principles of accounting
for all enterprises and also empowers the Ministry of Finance to administer
accounting affairs and establish uniform accounting regulations and systems.
Under the mandate of the Accounting Law, the Ministry of Finance has issued
various accounting regulations, including accounting standards.

Chinese accounting standards are unique because they originated in a

socialist period in which the state was the sole owner of industry. Therefore
unlike Western accounting standards, they were, initially, less a tool of profit
and loss and more an inventory of assets available to a company. Besides, in
contrast to a Western balance sheet, Chinese accounting standards did not
include an accounting of the debts that a corporation held, thus being less
suitable for management control than for accounting for tax purposes.

Since such a system of accounting is widely considered to be unsuitable for

managing corporations in a market economy, Chinese corporations are
gradually moving toward International Accounting Standards. This has
proven to be a massive undertaking.

A new set of Accounting Standards for Business Enterprises, or ASBE, came

into effect on January 1, 2007. The Ministry of Finance also issued 38 detailed
standards relating to different items based on the new accounting standards.

The overall principles of the process of transformation were to develop

standards that were in line with international best practice, while at the same
time ensuring that the standards were relevant and appropriate to China’s
unique and developing market economy.

At present the ASBEs are only mandatory to listed companies, but non-listed
companies and Foreign Investment Entities (FIE’s), including WFOE’s, are
allowed and encouraged to use the standards, as they are likely to be
mandated to conform to the new standards at a later time.

The ASBEs are substantially in line with IFRSs (International Financial

Reporting Standards), except for certain modifications which reflect China’s
unique circumstances and environment. These include a prohibition of
reversing an asset impairment decision; financial statements incorporating
certain government grants; and related party disclosures between certain
state-owned enterprises.

Other remaining differences with IFRS:

• Certain specific standards allow only a cost model to compute the value
 of fixed and intangible assets with the IFRS allowing a revaluation model.
• IFRS provides an option to class as expenses all borrowing costs while
ASBE maintains, under certain circumstances, that borrowing costs
should be capitalized.
• Biological assets must be measured using a cost model under ASBE,
rather than with a fair value model in the IFRS, unless evidence exists to
warrant the use of fair value.
• The new ASBE prohibits reversing impairment losses but IFRS allows it
under some circumstances, preventing only goodwill impairment.
• When presenting a financial report, ASBE still restricts some aspects of
the statement that would be allowed under IFRS. Expenses, for instance,
are analyzed in different ways depending on the particular aspect of the
statement. They are analyzed by function for income statements, and the
direct method for cash flow statements.

Compulsory accounting requirements

The Accounting Law of the PRC and the ASBE stipulates some requirements
that must be obeyed by Chinese enterprises and FIEs alike.

Most importantly, FIEs shall implement the Accounting System for Business
Enterprises. Furthermore, accounting shall be performed in accordance with
actual economic business conditions, and the company’s legal representative
shall ensure that the financial and accounting reports are accurate and
complete.

The FIE is also required to establish an internal accounting supervision

system, and the law demands that employees that do bookkeeping and
accounting work possess certain qualifications.

Financial and accounting reports

Enterprises established in China shall draw up a yearly financial and

accounting report. Some enterprises may also be required to draw up
half-yearly, quarterly and monthly reports.

According to Chinese law, a financial report is a written document which

shows the financial situation and business results of the enterprise. The yearly
accounting report shall reflect comparative data of at least two years or two
interrelated periods.

Accounting information provided by an enterprise shall reflect all important

transactions or events that relate to its financial position, operating results and
cash flows. Accounting elements include assets, liabilities, owners’ equity,
revenue, expenses and profit.

A financial report includes accounting statements and notes and a descriptive

overview of the financial situation of the enterprise and other information or
data that shall be disclosed in financial reports. The accounting statement
shall at least comprise a balance sheet, an income statement and a cash flow
statement. Small enterprises are not required to include a cash flow statement
when preparing financial statements.

Recognition, measurement and reporting for accounting purposes shall be on

an accrual basis.

A registered accountant or accounting firm shall carry out the auditing of the
financial and accounting reports of an enterprise in accordance with relevant
laws and administrative rules and regulations.

Frequently Asked Questions

1. Are there any requirements as regards the fiscal year in China?

Yes. The fiscal year shall be from January 1 to December 31 under the
Gregorian calendar.

2. Which currency shall be used as base currency?

The Chinese currency, renminbi (RMB) shall be used as bookkeeping base

currency and in financial and accounting reports. Where an enterprise
primarily uses foreign currency in its operations for revenue and
expenditure, a foreign currency may be selected as the bookkeeping base
currency, but the compiled accounting statements shall be shown in RMB
converted from the foreign currency. Where the accounting statements are
compiled and submitted to the relevant domestic authorities by an
overseas enterprise, these shall be shown in RMB converted from the
foreign currency.

3. Which accounting information must be recorded by the FIE?

The following information must be recorded by the FIE:

• receipt and payment of funds and negotiable securities

• receipt and dispatch of, increase or de crease in or use of funds and
property
 • incurring and settlement of claims or debts
• increase or decrease in capital and funds
• calculation of income, payments, expenses and costs
• calculation and handling of financial results
• other matters

4. Can the bookkeeping and financial and accounting reports be made in

English?

Written accounting records, including accounting vouchers, account books

and accounting statements, shall be maintained in Chinese, but they can,
however, simultaneously be made in a foreign language. If they are made
in a foreign language, notes in Chinese are required.

5. Can the accounting books be taken abroad?

No, the accounting books can not be taken abroad.