It’s only natural that China has a host of different considerations that simply do not exist in other nations across the world. So, it?s extremely important that any foreign company trying to establish a presence in mainland China needs to fully understand these differences. Interpreting and understanding accounts systems and standards in China is about as important as it gets for a foreign company trying to make sense of it all. It can be a challenge, but one you need to take seriously.
In the grand scheme of things, China only recently became a viable option for foreign companies and relatively recently embraced a market-driven economy. This has a knock-on effect on Chinese bookkeeping and accounting systems, making them very young and inexperienced when compared to those in established or developed economies. The accounting systems in China are still based on the old social economic principles that governed China for decades.
There is no doubt that China is making up for lost time and progressing in the right direction in terms of converging its accounting standards to reach international standards. But the truth is it’s still very complicated trying to understand the current standards of accounting in China.
Understanding Chinese Accounting Standards & Framework
Company laws in China and other relevant regulatory nuances state that it’s compulsory for any type of Foreign-Invested Enterprises (FIEs) operating in China to adhere to their annual compliance processes and statutory auditing.
Foreign companies have to complete annual statutory audits and adhere to several tax liabilities that are relevant prerequisites for foreign investor enterprises in China so their profits can be properly repatriated and distributed, or even for dividends back in their home nations. If they fail to follow these procedures, it will result in penalties, added expenses, and could even result in having their business licenses revoked.
The Chinese Accounting Standards (CAS) group is the official board that is tasked with governing the accounting and bookkeeping processes in China. These processes are more widely known as the Chinese Generally Accepted Accounting Principles, and in some cases, they can be vague as they sound. Here are the two main standards in the CAS framework:
- Accounting Standards for Business Enterprises (ASBEs).
- Accounting Standards for Small Business Enterprises (ASSBEs).
It’s a normal exercise for multinational corporations to try and combine and reconcile the CAS, the US Generally Accepted Accounting Principles, and the International Financial Reporting Standards (IFRS), when trying to consolidate their own financial statements when dealing at the group level.
The current ASBEs we see today were initially issued in 2006 and came into play in January 2007. Even the IFRS states that the 2006 ASBEs were “substantially converged with the IFRS” and their principles. But only after the amendments in 2012 was the ABSEs and IFRS merge completed and official.
The ASSBEs were officially brought into force back on 1 January 2013, and only then was a unified standard created to enhance the internal controls of small-scale enterprises put in place to prevent accounting fraud and tax fraud. The ASBEs became a point of reference for the ASSBEs in regards to tax laws to simplify the process when adjustments need to be made when following tax rules and accounting standards. It?s possible to adopt either the ASSBEs or the ASBEs if you are a small-scale enterprise.
What are the Differences Between International and Chinese Accounting Standards?
The IFRS and the CAS are very similar to each other, but they also have some slight differences that you need to consider. Here are some of those differences below:
Fixed asset valuation methods
If choosing the IFRS, certain valuation methods are used for fixed assets. These assets can be valued by the company by re-evaluating their assets, or by taking advantage of the historical cost method. If using the CAS, it can only let you use fixed assets in regards to their historical cost.
CAS detailed rules
The CAS rules are more detailed in regards to certain items that are commonly used in China. These rules are much more detailed than those in the IFRS. The perfect example would be when merging two companies that have similar interests but are run by the same entity. In this instance, the CAS would request that where there are no specific IFRS rules in place, the comparative figures should be restated.
IFRS detailed rules
In addition, there are certain situations where IFRS rules are not common in China, which usually pertain to employee benefits. And in this case, aside from being able to pay these benefits in company stock options, the CAS does not address these types of employee benefits that are offered by multinationals. When a parent company tries to apply these same benefit packages to its Chinese subsidiary business, it can cause great confusion and difficulties. If this happens, a consultation with the Ministry of Finance (MOF) and the company on how to record these transactions will take place.
Delayed Initiation of IFRS
It’s the job of the MOF to review all new updates to the IFRS when they are released. This is to decide if they are appropriate for China and if they can be merged into the current CAS rules. In this situation, it is common for the adoption of the new IFRS standards to be delayed, or in some cases, they don?t happen. More complications can arise from this type of scenario, so the corporations and companies might adopt the new IFRS rulings and that causes more confusion.
How to Navigate Current Chinese Accounting Standards
It becomes more apparent regarding the difference in Chinese and international accounting standards in situations where a Chinese subsidiary needs to present financial information requests to an overseas parent business. Only then do we see the issues present themselves. Because companies in China and overseas need to follow their own specific country laws, the difference in standards comes into play. The Chinese subsidiary needs to translate the information into the language for the books of the overseas company, and this is known as “mapping”.
Major multinational companies tend to use specific purpose-made accounting software that helps the group deal with this process. But because this software is so expensive, most small to medium-sized enterprises can’t afford it and so perform their calculations and conversions manually. Mapping the books is a process where both companies need to be on the same proverbial page.
The difference in the international account standards and the Chinese procedures needs to be decided whether you are performing these tasks in-house or outsourcing them to an expert service provider or trusted advisor. Either way, the company accountant will have to look at the difference between a target accounting system or the CAS methods, while also researching if the company’s activities will be affected because it can take several days to analyze the data.
If you do decide to outsource your accounting work, you’ll need to notify the accounts team about any translations needed to the company accounts very quickly. If not, this could have another knock-effect and delay the entire process even longer.
The difference in accounting entry codes is also something you need to carefully check. And the outsourced accounting company you use will need to do a one-time conversion when they are initially contracted by the new company. If this outsourced account then decides that the foreign entry matches the Chinese entry, the figure can be directly converted.
As time moves forward, the CAS is rapidly evolving and its accounting standards are becoming similar to international processes. But this means that foreign investors must still adapt to the evolving environment and keep on top of any updates and changes. These changes in accounting and bookkeeping regulations can create some real challenges in the short term, but over the long term, it’s expected that the CAS will make numerous reforms that will take them even closer to international standards.