June 1, 2020

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Chinese Accounting standard: What Foreign Investors Need to Know

When foreigners establish their companies in China, there are a number of things that they will encounter that they are not used to at home. One of these is the China’s system of accounting standards. Indeed, this can be pretty challenging. So, here is a closer look at the Chinese accounting standard and how you can get it right. 

A  Closer Look at the Chinese Accounting Standards 

According to the company law, all foreign-invested businesses must comply with yearly statutory auditing procedures. In China, accounting and bookkeeping are governed by the Chinese Accounting Standards (CAS), commonly known as Chinese General Accepted Accounting Principles. The CAS are based on two standards: 

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

The ASBEs were introduced in 2006 and were later enforced in 2007 and are mainly used for big established businesses.

However, the ASSBEs came later in 2013 for application with small-scale enterprises to help them enhance their internal controls. 

Notably, many multinationals operating in China try reconciling the CAS, the Generally Accepted Accounting Principles, and International Financial Reporting Standards (IFRS), when they are consolidating their statements at the team (group) operation levels.

The Difference between International and Chinese Standards 

While CAS and IFRS have a lot of similarities, they are also different in some aspects. Here are some of these differences: 

  • Valuation methods for fixed assets

If you take a closer look at the IFRS, it provides the choice of selecting the preferred valuation method depending on the fixed assets.

You can value the assets by following the historical-cost method or revaluating the assets. However, CAS, only allows you to value the fixed assets based on the historical cost. 

  • CAS Detailed rules 

For some items, which are common in China, the rules outlined in CAS are more detailed compared to IFRS.

One example of these is the merging of two ventures that are controlled by the one entity and that have similar interests. In such a case, CAS requires that the figures (comparative numbers) are restated. But IFRS does not have a clear rule for this. 

  • IFRS Detailed Rules 

The IFRS states the rule for different situations, such as employee benefits plans, that are not common in China.

But when it comes to CAS, Apart from the employees getting paid using company stocks, it is silent on some employees’ benefits that companies offer.

At this point, difficulties emerge when the parent company tries using benefits packages when rewarding staff in its Chinese subsidiary. In such situations, a company might need to work with the Chinese Ministry of Commerce on how to deal with such entries. 

Navigating Chinese Accounting Standards for your Business  

Notably, the problem with applying Chinese accounting standards has become apparent in most foreign companies.

To navigate through these challenges and avoid hefty fines, it is important to work with a consulting agency that has ample experience in tax matters.

Such an agency will have seen such issues in the past and will, therefore, be able to handle them fast and professionally. 

When it comes to tax matters, the Chinese administration takes it very seriously and you cannot afford to get it wrong. By working with an agency, the experts will help you to do everything right and also train you on how to do it.