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Are you planning to open an offshore company in China? The country has undergone significant transformations as the Chinese administration puts every effort into making it a global economic hub.
The increased foreign direct investment (FDI) 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 to develop own accounting rules referred to as Chinese accounting standards (CAS). These Chinese accounting rules differ from the International Financial Reporting Standards (IFRS) that most investors are used to.
The main goal of developing the Chinese accounting standards (CAS) is to take account of more stakeholders, reduce financial fraud, and optimize the country’s tax strategy. Although efforts have been made to converge CAS with the International Financial Reporting Standards (IFRS), investors with established companies or opening businesses in China should take extra care for compliance. In this article, we take a closer look at these Chinese accounting standards and compare them with International Financial Reporting Standards (IFRS).
Before we can look at the core differences between the Chinese accounting standards (CAS) with other international systems, let us take a step back to understand where they originated. The Chinese accounting standards can be traced back to the socialist era when the state was the sole industry owner.
The main goal of the accounting standards was assessing the assets owned by the state to ensure they met the production goals. Therefore, the primary objective of the accounting standards of that time was not driven by the need to enhance profitability, but a sort of balance sheet approach with less focus on income & cash-flow statements. Here are the timelines of CAS:
While Chinese accounting standards (CAS) and IFRS have demonstrated key similarities, it is prudent that foreign companies take note of the differences because they can easily get them into conflict with the law. So here are the core differences between CAS and IFRS.
This is one of the most notable differences between CAS and IFRS. Firms that use IFRS have the option of choosing their preferred method of valuation for certain types of fixed assets. You can opt to use the historical – cost valuation method or re-evaluating the asset. But when it comes to CAS, the valuation of fixed assets can only be done using the historical-cost method.
When handling some items that are considered common in China, the Chinese Accounting Standards (CAS) are more detailed than the International Financial Reporting Standards (IFRS). Take the case of merging two companies under the control of one entity and with similar interests. In such a situation, CAS requires you to restate the figures. However, IFRS does not give specific rules on such a situation.
When dealing with situations that are not common in China, IFRS is more detailed compared to CAS. A good example is the use of employee benefit plans. Except paying staff using a firm’s stock, the Chinese Accounting Standards (CAS) do not address some types of staff benefits that are offered by international firms. On this, it is not uncommon to find multinationals getting into trouble, especially when the mother company back at home tries using benefits packages for its subsidiaries. To address the challenge, it is important to work with the Chinese Ministry of Finance (MOF) to establish how to record such transactions.
When IFRS updates are released, CAS does not implement them immediately. Instead, the Ministry of Finance reviews them to establish if they are okay for application in China and if they will be added into the CAS. This means two things:
The IFRS updates adoption in CAS are delayed.
The IFRS updates adoption might 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.
When companies move to China, they face major challenges, especially on the interpretation of the Chinese accounts. Also, they may find it an uphill task when trying to consolidate their Chinese companies’ accounts with the mother firms back home. So, here are some things that you can do.
When foreign companies start operations in China, one of the main questions is: “What is the best way to address challenges related to the Chinese Accounting Standards?” The smart answer is selecting an agency, and we are going to tell you why.
When you decide to incorporate a company in China, it is important to appreciate that the Chinese administration takes financial and tax-related matters with a lot of strictness. Therefore, you should ensure to understand the Chinese accounting standards (CAS) well and have them implemented correctly. The smart way to do this is working with the best agency because it will not just offer the right accounting solutions, but will also support your enterprise for faster growth and success. With the right agency on your side, you can never go wrong with your business in China.
The Chinese accounting standards (CAS) are the rules of accounting that are applied in Mainland China. These rules are unique since they started in the Chinese socialist era when the country was the primary owner of all, or say most industries. This implies CAS was originally not meant to act as a tool for profit and loss, but to serve as an inventory of company assets.
To make the Chinese accounting standards (CAS) more effective in propelling the economy to higher levels, they have progressively been reviewed and changed to try and bridge them to the International Financial Reporting Standards (IFRS). Today, CAS rules and IFRS are about 90-95% similar.
Although the Chinese Accounting Standards have been changed over time to reconcile them with International Financial Reporting Standards (IFRS), there are still significant gaps that companies moving to China must note. In particular, here are the three main key differences between the two accounting systems.
If you plan to open a company in China, the best way to get it right on Chinese accounting standards (CAS) is working with expert firms. These are agencies that have been in the market 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, the agencies go to great lengths to ensure your company makes the right decisions for success.
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