Small enterprises, large multinational firms, joint ventures, branches, subsidiaries and etc. cannot escape one of the most important aspects of business operation- accounting. As an FIE, it is even more crucial to understand the Chinese accounting standards (currently known Chinese Accounting Standards or CAS) in order to comply with auditing requirements and make it possible for tax benefits.
How did this all come about anyway? Once upon a time, China actually used Soviet-style fund accounting based on a planned economy. Since the economic reforms in 1979, CAS has evolved with the shift to a market based economy, the increase of foreign direct investment, growing development of securities markets and international mergers and acquisitions. Therefore, it is no surprise that CAS was created based on IFRS to create a more modern, internationally applicable system which takes more stakeholders into consideration.
FIEs usually use both the CAS and the international accounting standards GAAP or IFRS so that both China and the FIEs’ foreign counterparts are covered. If your company is already using IFRS, it will give you an advantage in CAS reporting however IFRS and CAS are not equivalent. Here are the principle differences all FIEs should take into account:
a. CAS has fewer options for accounting policies compared to that of IFRS in order to make financial statements more comparable. In a way, CAS rules are more rigid and inflexible. For example, items of property, plant & equipment – own use:
IFRS: Cost model or revaluation model
CAS: Cost model ONLY
b. CAS addresses specific requirements that cater towards the Chinese business environment which is not emphasized in IFRS. For example, business combination – common control business:
IFRS: Carry over method or acquisition method
CAS: Interest pooling method
c. As a counterpart of part b., specific requirements in IFRS for certain items that are not fully developed in the Chinese business environment, are only mentioned in the general guidelines in the CAS. Some examples are: retirement funds, share-based payment plans and etc. So when FIEs convert from IFRS to CAS, it is particularly important to follow CAS rules and even consult the Ministry of Finance if necessary to determine which items can be included
d. There is a delay between the time IFRS issues amendments or standards and when they come into effect in CAS. This is because the Ministry of Finance will consider these items under the Chinese economy and obtain feedback from stakeholders before implementing these new IFRS standards or amendments in CAS.
Be aware this is only a general description of the differences between CAS and IFRS. Always seek for proper advice for your own specific business situation. Contact the Maxxelli Consulting team for more information.
