China_Accounting_Standards_Overview

1、ChinaAccountingStandardsOverview Prepared by KPMG auditing teamI. Introduction Chinas rapid economic growth in the past two decades has amazed the rest of the world. With Chinas accession to the WTO in December 2001, business activities with and within China have been further expanding and Chinas in

2、fluence on the worlds economy continues to increase. China fully understands that a sound financial reporting system plays a key role in the process of economic development. The Chinese Ministry of Finance (MOF), which has the responsibility for regulating accounting matters in China, has set itself

3、 the objectives of fostering investors confidence in financial information, increase transparency of financial reporting, and harmonizing Chinese national accounting standards with International Financial Reporting Standards (IFRSs), so as to reduce the costs of raising capital by enterprises and al

4、leviate the risks of financial crisis.II. History of Development In the process of transforming itself from a centrally planned economy to a market oriented economy, China has long realized the importance of a sound financial infrastructure. The old accounting systems and regulations were designed t

5、o meet the needs of a planned economy, and therefore focused on whether the production goals of state-owned enterprises and their financial and cost plans were being met. Accordingly, the objectives of accounting and performance measurement some twenty years ago were significantly different from the

6、 financial reporting objectives in a modern market riented economy. Since China opened its door to foreign investments in 1979, the rapid growth of its economy, international trade and securities markets has shaped new objectives for financial reporting. State-owned enterprises now look a lot like p

7、rofit-oriented businesses, and managers and other users need reliable and relevant financial information on which to base decisions about the efficient allocation of capital. At the same time, China has reached out to the international community to form joint ventures and gain greater access to the

8、latest technologies and the worlds capital markets. This growing economy increasingly demanded a framework of accounting standards to meet the needs of investors and creditors as well as management and government. As a result, significant accounting reforms were undertaken in the past two decades. A

9、ccounting Law of the Peoples Republic of China There are a number of laws and regulations covering accounting and financial reporting in China. The Accounting Law of the PRC, which was enacted by the National Peoples Congress in 1985 and was last revised as of 1 July 2000, is the highest authority o

10、n accounting in China. It sets out general principles of accounting for all enterprises, including a definition of the nature and role of accounting and basic principles. It empowers the MOF to administer accounting affairs and to establish uniform accounting regulations and systems. Such regulation

11、s and systems have the force of law. Development since the enactment of the Accounting Law have shifted from traditional accounting practice, which, being comparatively more rule-oriented, was concerned with measuring progress by reference to the state plan and with monitoring the legitimacy of the

12、application of state funds. Financial Accounting and Reporting Rules for Enterprises In 2000, the State Council issued Financial Accounting and Reporting Rules for Enterprises. It focuses on such financial accounting and reporting matters as bookkeeping, preparation of financial statements, and repo

13、rting practices. It applies to all enterprises other than very small ones that do not raise funds externally. Promulgation of Accounting Regulations and Standards In the 1980s, the MOF issued the first set of accounting regulation, which was formulated by reference to international accounting practi

14、ce, for joint ventures in China. In 1992, due to the rapid development of the Chinese securities markets, the Accounting System for Experimental Joint Stock Limited Enterprises, which was subsequently replaced by the Accounting System for Joint Stock Limited Enterprises (JSLE), was promulgated by th

15、e MOF in order to standardize accounting practice and disclosures by listed companies. In the same year, the MOF promulgated the Accounting System for Foreign Investment Enterprises and the Chart of Accounts and Accounting Statements for Foreign Investment Industrial Enterprises, which set outs a pr

16、escribed format for the financial statements of enterprises with foreign investment. (Note: These accounting systems were all subsequently replaced by the Accounting System for Business Enterprises as discussed below.) In November 1992, the first accounting standard, the Accounting Standard for Busi

17、ness Enterprises (the Basic Standard), which is regarded as the conceptual framework of Chinas accounting, was promulgated by the MOF and became operative from 1 July 1993. Financial Rules for Business Enterprises (the Basic Financial Rules) which prescribe detail accounting practice were promulgate

18、d in conjunction with the Basic Standard. Both are applicable to all enterprises established within China. In addition to the Basic Standard and the Basic Financial Rules, 13 sets of industry-specific accounting rules (manufacturing, agriculture, transportation (general), transportation (railway), t

19、ransportation (airline), communications, financial institutions, insurance, tourism and catering, foreign economic cooperation, merchandising, construction and real estate development) and 10 sets of industry-specific financial rules were also promulgated by the MOF. (Note: These industry-specific a

20、ccounting rules were subsequently replaced by the industry-specific accounting guidelines gradually as discussed below.) The issuance of these accounting pronouncements represented a milestone for Chinese accounting, because they introduced on a broader scope new accounting concepts and essential el

21、ements of financial statements that were in many respects based on international practice. However, these pronouncements were still found to have essential differences with international practice such as the restrictions on making provisions for doubtful debts and obsolete inventories, limited recog

22、nition of impairments of other assets, and, the limited disclosure of financial information for the users to understand the results and financial position of the reporting enterprise. Also, many important issues for which international accounting standards existed simply were not addressed by Chines

23、e standards. Accordingly, the MOF embarked on an even more focus effort for the development of Chinas new accounting requirements. III. The Accounting StandardsIn 1993, with funding from the World Bank, the MOF engaged Deloitte Touche Tohmatsu as consultants to develop a body of Chinese Accounting S

24、tandards (CAS) broadly in line with accounting and financial reporting practice used internationally. Exposure Drafts on about 30 standards have since been published. The original plan of the MOF to make effective the 30 accounting standards around 1997 was abandoned due to the lack of perceived urg

25、ency at that time. The MOF has since adopted a need-based philosophy of standards issuance. In 2000, Deloitte was reappointed as consultants for the second phase of the project. The goal of the second phase of the project is to continue the work of the first phase as well as to develop other industr

26、y-specific standards. Up to 2001, 16 final standards have been issued and became effective (including 14 standards issued under the first phase of the project). Since then, the MOF has not issued any standards. That is partly due to the rapidly changing environment of IFRSs. To cover some urgent or

27、practical issues, the MOF has issued other pronouncements, including guidelines for specific industries and ad hoc pronouncements, known as Caikuai, from time to time. Recently, the MOF has expressed their intention to publish up to 40 accounting standards, which will be highly comparable to the equ

28、ivalent IFRSs, within the coming two years. Although the scope of applicability of each CAS is different, many of the issues addressed in individual CAS are also included in the Accounting System for Business Enterprises (ASBE), which is applicable to Foreign Invested Enterprises (FIEs) and Joint St

29、ock Limited Enterprises (JSLEs). The ASBE is consistent with those standards, though there is generally more detail in the individual standards and supporting guidance than there is in the ASBE. IV. The Accounting System for Business Enterprises Apart from issuing new CASs, the MOF issued in Decembe

30、r 2000 a new comprehensive Accounting System for Business Enterprises (the ASBE). The System is based, in part, on the experience of MOF in implementing the former Accounting System for JSLE and, in part, on the existing individual CAS. The ASBE replaced the Accounting System for JSLE from 1 January

31、 2001 and Accounting Regulations for FIE from 1 January 2002. As of 17 March 2003, the MOF extended the applicability of the ASBE to all enterprises established on or after 1 January 2003 other than small enterprises (defined small enterprises are allowed to adopt the Accounting System for Small Bus

32、iness Enterprises (ASSBE) starting from 1 January 2005) and financial institutions (please see below for the discussion of the separate Accounting System for Financial Institutions). The MOF plans to ultimately require all medium-sized and large enterprises (other than financial enterprises) to adop

33、t the new ASBE, and this plan is now being implementing. When fully implemented, the ASBE will replace the numerous arcane and inconsistent industry accounting regulations that have been promulgated over the years, enabling the financial statements of different types of enterprises to become more co

34、mparable. As well, by introducing a broad asset impairment test and by adopting updated definitions of accounting elements similar to that of IFRSs, the ASBE moves Chinese accounting practice further in the direction of international standards. Although the scope of applicability of individual CASs

35、differ (and only six are applicable to all enterprises), many of the issues addressed in individual CASs are also included in the ASBE, of which the scope of application is wider. The ASBE is consistent with those standards, though there is generally more detail in the individual standards and suppo

36、rting guidance than there is in the ASBE. V. Accounting Guidelines for Specific Industries Up to now, 11 industry-specific accounting guidelines were issued in order to provide more guidance for enterprises that adopt the ASBE. These industry specific accounting guidelines replaced the equivalent ol

37、d industry-specific accounting rules issued in 1993. VI. Other Accounting Pronouncements In addition to the ASBE and the CASs, ad hoc pronouncements (usually titled as Caikuai) issued by the MOF also form an important part of PRC accounting. Questions and Answers From 2002 to 2004, the MOF has issue

38、d four sets of questions and answers relating to the adoption of the System and the CASs. These Q&As clarified the current practice, but also revised a number of current accounting requirements. Other Pronouncements In addition to the Q&As, the following are some other important pronouncements: Caik

39、uai 1995 No. 11, Provisional Regulations on Consolidated Financial Statements, which was issued in 1995, provides guidance on consolidation procedures and on how to determine whether an enterprise should be included in consolidation. Caikuai 2 1996 No. 2, Response to clarify the Scope of Consolidati

40、on states that where a subsidiary with total assets, sales revenue and profits are less than 10% of the corresponding amounts of the group, and subsidiaries operate in special industries (i.e. banking or insurance business) are not required to be consolidated. Caikuaihanzi 1999 No. 10, Response on t

41、he Consolidation Issues of Subsidiaries with Net Liabilities, which was issued in 1999, allows the losses in excess of the equity investments on subsidiaries with net liabilities to be credited to unrecognised investment loss(an item presented below minority interests in the income statement). A new

42、 item unrecognised investment loss representing accumulated losses is added within equity on the balance sheet. Caikuai 2000 No. 19 was issued in 2000 and it provides a series of pronouncements that regulates the accounting treatment in relation to activities involving commodity futures. Caikuai 200

43、1 No. 64, Provisional Regulations on the Accounting Treatments of Sale of Assets and other Transactions between Related Parties, which was issued on 21 December 2001, prescribes any gain arising as a result of a related party transaction that exceeds the gain that would be measured on the basis of t

44、he fair value of the goods or services sold cannot be recognised as income and must be credited directly to equity. This rule applies to listed companies and is effective from its issue date. When there are inconsistencies between the publications, in practice, the most current one takes precedence

45、over previously issued documents unless otherwise specified. VII. Accounting System for Financial Institutions Early in 2002, MOF adopted a new separate Accounting System for Financial Institutions (the ASFI), which was required to be applied, starting 1 January 2002, by all listed banks, insurance

46、companies, brokerages, leasing companies, and finance companies. Starting from 1 January 2004, unlisted brokerages have also been required to adopt the ASFI. Earlier adoption is encouraged. Unlisted financial institutions that are joint stock limited enterprises are also encouraged to follow the ASF

47、I. ASFI is similar to the one for general business enterprises but, in addition, includes principles specific to financial institutions, such as: How to recognise interest income, Repurchase agreements, Securities transactions, Insurance reserves, Accounting by trusts, and Accounting by investment f

48、unds. In addition to the ASFI, the MOF has also issued specific accounting guideline for trust activities which is effective from 1 January 2005 onwards. Accounting Guideline for Trust Activities is applicable to all parties engaged in trust activities (include the trustor, trustee and beneficiary)

49、and the implementation of trust arrangements. It requires separate accounting records to be kept for different trust projects. The recognition and derecognition criteria of trust assets (in the accounting records of the trustor and trustee) depend on whether the risk and rewards of the related asset

50、s are transferred or not. Exposure drafts applicable to financial institutions Furthermore, the MOF issued 2 exposure drafts that are applicable to financial institutions in 2004 which covers the accounting treatment of derivative and hedge accounting, and the accounting treatment for transfer of fi

51、nancial assets. The general principles of the exposure draft on Derivative and Hedge Accounting for Financial Institutions are: Derivative instruments should be measured at fair value (at initial recognition and at the end of each period). Hedges are classified as fair value hedges, cash flow hedges

52、, and hedges of the net investment in a foreign operation, and the accounting is similar to the IAS 39 requirements. Disclosure is required of risk management objectives and policies and, for hedge accounting, the hedging relationship, description of hedging instruments and their fair value, and nat

53、ure of risk mitigated, with further disclosures for cash flow hedges. The exposure draft on Provisional Regulations on Accounting Treatment for Transfer of Financial Assets of Financial Institutions prescribes the accounting treatment for the transfer of financial assets by financial institutions. T

54、he accounting principles followed in the ED are generally consistent with the derecognition provisions of IAS 39, including a continuing involvement approach to derecognition if a financial institution has neither transferred nor retained substantially all the risks and rewards of the ownership of t

55、he financial assets. VIII. Accounting System for Small Business Enterprises This Accounting System was issued in April 2004 and is effective from 1 January 2005 onwards. Qualified small enterprises are allowed to choose to adopt the Accounting System for Small Business Enterprises (ASSBE) or the ASB

56、E . If a parent adopts the ASBE, its subsidiaries must also adopt the ASBE even if they qualify as a small enterprise. If a small enterprise adopts the ASSBE but its size subsequently changes so that it no longer qualifies as a small enterprise for three years that enterprise should change to adopt

57、the ASBE. In October 2004, the MOF issued a pronouncement that provides the transitional arrangements for a small enterprise that chooses to adopt the ASSBE. A small enterprise is one: that does not raise funds from the public (that is, has not issued any shares or debt securities to the public); wh

58、ose operations are relatively small as defined in a document jointly issued by four government bodies covering number of employees, sales volume, and total assets; that is not a sole proprietorship or a partnership; and that is not a financial institution. Following are examples of the size test for

59、 a small enterprise: The ASSBE provides a number of simplifications or exemptions from the requirements of the ASBE. The major differences from the ASBE are: Simplified disclosure requirements. A small enterprise does not need to comply with all the disclosure requirements of the ASBE or other accounting standards. Only an income stateme