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Frequently Asked Questions - PRC Accounting System

  • 1. What is role of the Accounting Law of the PRC?
  • 2. What are the major differences between PRC accounting system and those in other countries?
  • 3. What is Chinese Accounting Standards ("CAS")?
  • 4. How is the Accounting System for Business Enterprises of PRC prepared?
  • 5. Which system should joint stock limited enterprises follow?
  • 6. Is the Accounting System applicable to FIEs?
  • 7. What is the accounting system for financial institutions?
  • 8. What are the differences between the Accounting System and Accounting Standards?
  • 9. What are the four basic accounting assumptions in China?
  • 10. What are the basic principles of accounting in China?
  • 11. What is Financial Accounting and Reporting Rules for Enterprises ("FARR")?



    1. What is role of the Accounting Law of the PRC?

    The Accounting Law of the PRC (revised on 1 July 2000 ) has highest authority on accounting sector in China. It sets out general accounting principles for all enterprises, including the nature and role of accounting and basic principles. It empowers the Ministry of Finance of PRC to administer accounting affairs and to establish uniform accounting regulations and systems. Such regulations and systems shall be legally binding.


     
    2. What are the major differences between PRC accounting system and those in other countries?

    In establishing your company's accounting structure, one of the first tasks is to identify and to reconcile the differences in accounting practices used by your parent company and the rules in China.


    The PRC does not exactly follow international accounting policies and guidelines, although it is moving on this direction and so far, many of the rules and regulations are the same or similar. Therefore, it will be important for your organization to realize the differences. Reporting for statutory purposes in the PRC and reporting to your home office may vary significantly as a result in differences in different accounting rules.


    Tax deductibility issues, for example, are significantly different between your parent company and your company in China . They are similar to, but may be more complex than, your dealings in most other countries. Capitalization of assets and depreciation can be another area where the PRC accounting rules will likely vary with the rules in your parent company's country.


     
    3. What is Chinese Accounting Standards ("CAS")?

    The Ministry of Finance ("MOF") has been for a long time working to develop a set of Chinese Accounting Standards that are largely in line with International Financial Reporting Standards ("IFRS"). The MOF issued its first Standard in 1997. To date, 16 standards have been adopted and others are still under preparation.


    A complete list of CAS is set out in the table below.


    Accounting Standards


    Effective Date


    Applicable to


    Disclosure of Related Party Relationships and Transactions


    1 Jan. 1997


    Listed enterprises


    Cash Flow Statements (minor revised in 2001)


    1 Jan. 2001


    All enterprises


    Events Occurring After the Balance Sheet Date


    1 Jan. 1998


    Listed enterprises


    Debt Restructuring (revised significantly in 2001)


    1 Jan. 2001


    All enterprises


    Revenue


    1 Jan. 1999


    Listed enterprises


    Investments (minor revised in 2001)


    1 Jan. 2001


    Joint Stock Limited Enterprises (prior to 1 January 2001 it
    applied to listed enterprises only)


    Construction Contracts


    1 Jan. 1999


    Listed enterprises


    Changes in Accounting Policies and Estimates and Corrections of Accounting Errors (minor revised in 2001)


    1 Jan. 2001


    All enterprises (prior to 1 January 2001 it was listed enterprises only)


    Non-monetary Transactions (revised significantly in 2001)/


    1 Jan. 2001


    All enterprises


    Contingencies


    1 July 2000


    All enterprises


    Intangible Assets


    1 Jan. 2001


    Joint Stock Limited Enterprises


    Borrowing Costs


    1 Jan. 2001


    All enterprises


    Leases


    1 Jan. 2001


    All enterprises


    Interim Financial Reporting


    1 Jan. 2002


    Listed enterprises


    Inventories


    1 Jan. 2002


    Joint Stock Limited Enterprises


    Fixed Assets


    1 Jan. 2002


    Joint Stock Limited Enterprises


     
    4. How is the Accounting System for Business Enterprises of PRC prepared?

    In January 2001, the Ministry of Finance ("MOF") adopted a comprehensive Accounting System for Business Enterprises ("the System"). The System is based, partially, on the experience of the MOF in implementing the Accounting System for Joint Stock Limited Enterprises and, partially, on the existing individual Chinese Accounting Standards ("CAS") issued over the past few years.


     
    5. Which system should joint stock limited enterprises follow?

    Starting 1 January 2001, all joint stock limited enterprises ("JSLEs") were required to follow the System íV except enterprises in banking, insurance, and other specialised financial industries.


    When the System became effective on 1 January 2001, the old Accounting System for JSLEs was abolished. Starting from 2001, enterprises besides JSLEs have been encouraged to follow the System as well, with a proviso that State-owned enterprises should get approval in advance from relevant government authorities. In addition, if a parent company adopts the System, the parent should require all its subsidiaries to adopt the System as well.


     
    6. Is the Accounting System applicable to FIEs?

    As of 1 January 2002 , the MOF extended the applicable scope of the System to all foreign invested enterprises excluding those in banking, insurance, and other financial service industry.


     
    7. What is the accounting system for financial institutions?

    Early in 2002, the MOF issued a new separate íV though similar íV accounting system for Financial Institutions. It must be adopted, starting 1 January 2002 , by all listed and foreign invested banks, insurance companies, brokerages, leasing companies, and finance companies.


    Unlisted financial institutions that are joint stock limited enterprises are encouraged to follow the new system. Other unlisted financial institutions should continue to use the old Accounting Systems for Financial Institutions.


    The Accounting System for Financial Institutions is similar to the accounting system for general business enterprises. But it comprises principles specific to financial institutions, such as how to recognise interest, repurchase agreements, securities transactions, insurance reserves, accounting by trusts, and accounting by investment funds.


     
    8. What are the differences between the Accounting System and Accounting Standards?

    While both are formulated and promulgated by MOF, there exist certain differences them.


    First, the application scope is different. Specific accounting standards are mostly applicable to joint stock limited companies, although sometimes the standards apply to other enterprises too. The Accounting System applies not only joint stock limited companies, but also other qualified enterprises.


    Second, specific accounting standards only govern certain transactions and events or certain accounting aspects of an enterprise, while the Accounting System covers all aspects of an enterprise's transactions and events.


    Third, the accounting standards are more general, with no stipulations on how accounting records should be made. By comparison, stipulations in the Accounting System are more specific, giving detailed rules on the accounts and instructions for use.


     
    9. What are the four basic accounting assumptions in China?

    (a) Accounting Entity
    An accounting entity can be an enterprise, an enterprise group or the accounting department of an enterprise.

    (b) Continuity Postulate
    The Accounting System stipulates that, under normal circumstances, the accounting treatment to be adopted by enterprises should be based on continuity postulate. For instance, the historical costing method is used for the assets and liabilities of an enterprise, and historical cost is used for the depreciation method of fixed assets.

    (c) Accounting Period and Accounting Year
    An enterprise should account for its transactions or events and prepare financial statements in distinct accounting periods. Accounting periods may be a year, half year, a quarter or a month, commencing on the first day thereof according to the calendar year.

    (d) Measurement Currency and Reporting Currency
    Renminbi is the reporting currency of enterprises. While a certain foreign currency may be used as the reporting currency for enterprises which frequently engaged in foreign currency transactions, all foreign currency transactions should be converted into Reminbi when financial statements are prepared and submitted.


    Accounting records and financial reports should be maintained in Chinese. FIEs, foreign enterprises and other foreign organizations in China may at the same time use one foreign language together with Chinese.


     
    10. What are the basic principles of accounting in China?

    The general principles guiding and evaluating accounting work comprise three categories.

    (1) general principles for evaluating the quality of accounting information;

    (2) general principles for recognizing and measuring accounting elements; and

    (3) general principles for revising the above two sets of principles.


     
    11. What is Financial Accounting and Reporting Rules for Enterprises ("FARR")?

    In 2000, the State Council of the PRC issued Financial Accounting and Reporting Rules for Enterprises ("FARR"). It focuses on financial accounting and reporting matters such as bookkeeping, preparation of financial statements, and reporting practices. It applies to all enterprises other than very small ones that do not raise funds externally.



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