Chinese Accounting vs. International Financial Reporting Standards: What Are the Main Differences?
08 April 2020 | Guide
Are you planning to open an offshore company in China? The country has undergone a significant transformation as the Chinese administration puts every effort into making it a global economic hub.
The increased foreign direct investment into the country, economic integration of China's Special Administrative Regions, and the desire to become the biggest global economy have made the jurisdiction’s administration develop its own accounting rules referred to as Chinese Accounting Standards (CAS). These Chinese accounting rules differ from the International Financial Reporting Standards (IFRS) that most western investors are used to.
The main goal of developing the CAS has been to take account of more stakeholders, reduce financial fraud, and optimise the country’s tax strategy. Although efforts have been made to converge CAS with the IFRS, investors with established companies or opening businesses in China should take extra care with regard to compliance. This article takes a closer look at the CAS and makes a comparison with IFRS.
A Brief History of the Chinese Account Standards
Before reviewing the core differences between the CAS and the IFRS, it is important to take a step back to understand how they originated. The CAS can be traced back to the socialist era when the state was the sole industry owner.
As such, the main goal of developing accounting standards was to assess the state's assets to ensure they met production goals. The primary objective of the accounting standards of that time was not driven by the need to enhance profitability but to act as a sort of balance sheet approach with less focus on income and cash-flow statements. The following is a CAS timeline:
- Towards the end of the 1970s, a new law that allowed joint ventures (JV) was passed by the Chinese administration. This law came with different accounting regulations that JVs had to follow.
- Later, in the 1990s, the fast-growing economy saw the CAS undergo several changes. First, the country adopted the People’s Republic of China Generally Accepted Accounting Standards (PRC GAAS), but these would be adjusted in the coming years.
- In 2001, the People’s Republic of China Generally Accepted Principles were adjusted further to the Accounting Standards for Business Enterprises (ASBE01), which have one main standard and 16 additional specific standards.
- In 2006, the ASBE01 was changed further to create the Accounting Standards for Business Enterprises (ASBE06). Notably, the ASBE06 are, in many respects, close to the IFRS. Today, all publicly traded enterprises in China are required to use the ASBE06. However, most private firms in the country use ASBE01.
- In 2013, the Chinese government released the Accounting Standards for Small Business Enterprises (ASSBE), which resemble a merger between IFRS and ASBE06. The new standards are structured to make it easy for small enterprises to follow accounting standards and tax rules.
Chinese Accounting Standards vs. International Financial Reporting Standards
While the CAS and IFRS have demonstrated key similarities, it is prudent that foreign companies note the differences to avoid any conflicts with the law. With this in mind, the following explains the core differences between the CAS and IFRS.
The Method of Appraising Fixed Assets
This is one of the most notable differences between the CAS and IFRS. Firms that use the IFRS have the option of choosing their preferred method of valuation for certain types of fixed assets; one can opt to use the historical cost valuation method or choose to re-evaluate an asset. When it comes to the CAS, the valuation of fixed assets can only be done using the historical cost method.
Rules in the Chinese Accounting Standards for Certain Matters Common in China Are More Detailed
When relating to certain matters that are considered common in China, the CAS are more detailed than the IFRS. For example, in the case of merging two companies with similar interests under the control of one entity, the CAS require the figures to be restated. However, the IFRS do not give specific rules on such a situation.
International Financial Reporting Standard Rules for Situations Uncommon in China Are More Detailed
When dealing with situations that are not common in China, IFRS are more detailed compared to CAS. A good example is the use of employee benefit plans. Except for paying staff using a firm’s stock, the CAS do not address certain types of staff benefits that may be offered by international firms. Considering this, it is not uncommon for multinationals to face problems in such matters, especially when the mother company back home tries using benefits packages for its Chinese subsidiaries. To address this challenge, it is important to work with the Chinese Ministry of Finance to establish how to record such transactions.
New Changes Implementation Delays
When IFRS updates are released, CAS do not implement them immediately. Instead, the Ministry of Finance reviews them to establish if they are suitable for application in China and if they will be added into the CAS. This leads to two outcomes:
- The adoption of the IFRS updates in CAS is delayed.
- The adoption of the IFRS updates may not even happen at all.
- Such delays could become a serious challenge, especially for companies that promptly implement IFRS changes in all their subsidiary firms.
What You Should Do when Using Chinese Accounting Standards
When companies move to China, they face major challenges, especially with regard to the interpretation of Chinese accounts. They may also find it an uphill struggle when trying to consolidate their Chinese companies’ accounts with the mother firms back home. Considering this, here are several actions that you can take to help:
- First, you need to adapt to the CAS. This will help you to remain compliant with Chinese laws in relation to accounting and business operations. You should then work out how to reconcile the company books of accounts with those of the parent firm when the need arises.
- You should translate the Chinese subsidiary accounts. When overseas parent firms ask for detailed financial reports from a Chinese subsidiary, the information should be carefully translated and mapped, which makes it easy to add to the parent company’s books.
- You should be sure to take note of key differences between CAS and IFRS as early as possible. This will ensure that clarifications are sought early on to avoid delays and possible penalties.
- It is important to work in collaboration with the Ministry of Finance. This is crucial in helping your company to take note of any CAS updates and changes in accounting policies that the ministry might introduce.
- Beware of accounting firms' tricks and love of short cuts. For many companies, the first line of action when it comes to any financial issues is running to accounting firms. However, most of these are known for taking shortcuts to avoid the stringent CAS, which can result in serious delays and non-compliance.
Agencies: The Smart Way to Handle China Accounting Standards
When foreign companies start operations in China, one of their main questions is: ‘What is the best way to address the challenges related to the CAS?’ The smart answer is selecting an agency and we are going to tell you why.
- Most agencies have seen the metamorphosis of the CAS and clearly understand the best methods for applying them effectively. As they know the standards well, no aspect of its implementation is too complex for them.
- Many times, foreign companies in China have found themselves in trouble for incorrectly managing their financial accounts. However, agencies have seen most of these mistakes that companies make and have also helped others to address them. As a result, they are your best bet to avoid such mistakes.
- When you select the best agencies to assist you with accounting, they do more than just that. When investors incorporate their companies in China, their primary goal is growing into successful multinationals and good agencies can help them achieve this goal.
- A good agency can assist you in crafting better strategies for success. For example, agencies can help you with company registration, opening bank accounts and early establishment. Furthermore, agencies can also help you to interpret other related laws so that your company can avoid any trouble with the law.
- If your Chinese offshore company is new, a good agency can help you to navigate through the turbulent early days of establishment. For example, an agency can assist you in interpreting marketing data and crafting the best strategies for success.
When you decide to incorporate a company in China, it is important to appreciate that the Chinese administration approaches financial and tax-related matters with a very serious attitude. Therefore, you should understand the CAS well and implement them correctly.
The smart way to do this is to work with the best agency because it will offer the right accounting solutions and support your enterprise for faster growth and success. With the right agency by your side, you can never go wrong with your business in China.
Q. What are the Chinese Accounting Standards?
The CAS are the rules of accounting that are applied in mainland China. These rules are unique because they started in the Chinese socialist era when the country was the primary owner of most if not all industries. This implies that CAS were originally not meant to act as a tool for profit and loss calculation but to serve as an inventory of company assets.
To make the CAS more effective in propelling the economy to higher levels, they have progressively been reviewed and changed to try and bridge them with the IFRS. Today, CAS rules and IFRS rules are about 90-95% similar.
Q. What are the main differences between Chinese Accounting Standards and International Financial Reporting Standards?
Although the CAS have been changed over time to reconcile them with the IFRS, there are still significant gaps that companies moving to China must note. In particular, there are three main differences between the two accounting systems:
- The method for appraising fixed assets. The IFRS system allows you to choose between the historical cost valuation method and the re-valuation model. However, the CAS only allow the historical cost valuation method when appraising fixed assets.
- The rules used in the CAS are more detailed for certain situations. For some matters, such as merging two entities that are controlled by one company, the CAS require the figures to be restated. However, the IFRS do not provide any guidance on this.
- The CAS are slow in implementing updates from the IFRS. When the IFRS release updates, the Chinese Ministry of Finance does not immediately implement them for the CAS. First, it reviews them to establish whether they are in line with the CAS and should be adopted. Indeed, the Ministry of Finance might opt not to implement them at all.
Q. What is the best method for foreign companies to get it right with regard to Chinese Accounting Standards?
If you plan to open a company in China, the best way to get it right with regard to CAS is working with expert firms. These are agencies that have been in the market for some time and understand every aspect of CAS. Instead of using shortcuts when dealing with complex issues that may arise from implementing CAS, they work with your company and the Ministry of Finance to identify the best solutions. Furthermore, such agencies go to great lengths to ensure your company makes the right decisions for success.
Q. In the Chinese Accounting Standards, what is the difference between ASBE06 and ASSBE?
ASBE06, or Accounting Standards for Business Enterprises, are used for big businesses that are incorporated in China, while ASSBE, or Accounting Standards for Small Business Enterprises, are used for small businesses.
- ASBE06 were released in 2007 as an update to ASBE01 from 2001. In 2012, ASBE06 were merged with IFRS to make them more effective. Today, they are the main accounting standards used by the big corporations operating in China.
- ASSBE were released in 2013 to give small enterprises a standardised method of enhancing their accounting. They are also aimed at helping to curb tax and accounting fraud.
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