Chinese Accounting vs. International Financial Reporting Standards: What Are the Main Differences?

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.