China Accounting Standards: Overview for Chinese Subsidiaries of Foreign Companies
Foreign companies with operations in China are required to complete several compliance requirements in accordance with Chinese law, including a requirement to maintain proper accounting records and submit them to the Chinese government on a monthly basis. Not only are foreign companies required to perform their accounting in accordance with Chinese regulations, but thorough understanding and proper performance of the accounting of a Chinese subsidiary offers foreign investors more control over their Chinese operations.
In this article we provide an overview of the essential accounting requirements for Chinese subsidiaries and further highlight key differences between Chinese accounting regulations and international accounting standards.
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How Chinese Accounting Standards Work
When preparing the financial reports of a Chinese subsidiary, foreign-invested enterprises are required to follow the Chinese Accounting Standards (CAS), also commonly known as the Chinese Generally Accepted Accounting Principles (or PRC GAAP).
The Chinese Accounting Standards consists of 2 standards:
- The Accounting Standards for Business Enterprises (ASBEs);
- The Accounting Standards for Small Business Enterprises (ASSBEs).
The majority of foreign-invested enterprises will adopt the Accounting Standards for Business Enterprises (ASBEs) as they maintain a high level of integration with international accounting standards such as IFRS and US GAAP.
On the other hand, the Accounting Standards for Small Business Enterprises (ASSBEs) can be adopted by small-scale enterprises instead of the Accounting Standards for Business Enterprises (ASBEs), and therefore fulfill a similar role as compared to the IFRS for SMEs. Whereas the ASBEs forms the basis and foundation for the ASSBEs, the ASSBEs are more in line with Chinese tax law which results in a simplified process for adjustments during the annual CIT filing due to discrepancies between Chinese accounting standards and Chinese tax law.
It should be noted that there are a number of limitations of the Accounting Standards for Small Business Enterprises in China as opposed to the regular accounting standards, namely the ASSBEs do not allow for amortization and do not allow for the depreciation of accounts receivable (AR) and inventory (note that the depreciation of fixed assets remains possible within the framework of the ASSBEs).
Essential Rules Within the Chinese Accounting Standards
The Chinese Accounting Standards stipulate a number of essential rules for the preparation of a company’s financial statements. The purpose of the Chinese Accounting regulations is to ensure the accounting truthfully reflects the financial situation and operating results of an enterprise as the Chinese Accounting Standards are used to determine applicable taxes and distributable profit. For this reason, the Chinese Accounting Standards stipulate that accounting should be done on an accrual basis for enterprises incorporated for the purposes of generating a profit. Cash-based accounting on the other hand is applicable to administrative/public institutions and to Representative Offices (ROs).
The financial statements of a Chinese subsidiary have to be prepared on a monthly basis and must be submitted to the Chinese authorities by the monthly tax filing deadline, which is generally the 15th of the subsequent month. The financial statements which must be prepared include:
- A Balance Sheet;
- The Income Statement;
- Cash Flow Statement.
Although foreign-invested enterprises can use other currencies instead of RMB for business transactions, it is required for the financial reports to be in Chinese and the RMB is the base currency for the ledgers and financial reports. As such, foreign-invested enterprises may choose to apply either Chinese or a combination of Chinese and another foreign language for their accounting records.
In accordance with Chinese law, the fiscal year in China must start on January 1st and end by December 31st, no exceptions are provided. Furthermore, the accounting records and supporting documents of a Chinese company must be retained for a period of 10 years. This also means that companies are required to keep a physical record of supporting documents such as fapiao (official Chinese invoices) for this duration.
Key Differences Between Chinese Accounting Standards and IFRS
Since the main objective of the Chinese authorities to issue the ASBEs and ASSBEs was further convergence with internationally accepted accounting standards, the Chinese Accounting Standards maintain a high level of integration with IFRS. Despite substantial convergence, a number of key differences between Chinese GAAP and IFRS still exist:
- Fixed Asset Valuation Method: According to the Chinese accounting standards companies can only use the historical cost method to valuate fixed- and intangible assets. The historical cost method does not allow for re-evaluation of assets and thus may result in impairment losses of long-term assets.
- Fiscal Year: The Chinese fiscal year always runs from January 1st until December 31st without exceptions. Whereas according to IFRS a company’s fiscal year can start at any point in a year, as long as it consists of a period of 12 months.
- Tax filing: Whereas IFRS may permit returns to be filed on a quarterly or bi-monthly basis, the Chinese Accounting Standards stipulate submission of financial statements on a monthly basis.
- Classification of Expenses: The Chinese Accounting Standards stipulate that expenses are classified according to function, whereas IFRS would classify said expenses by nature.
While there are still differences between the Chinese Accounting Standards and IFRS, the Chinese standards have been transformed over the past few years to be more inline with international standards. For both foreign and local companies operating in China, it is essential that they remain in compliance with the CAS as it is becoming increasingly important.
To discover out more about Chinese Accounting Standards, how they work and how we can support with consolidation, get in touch with us right away.
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