In Western countries, although amendments and revisions to accounting practices or standards do not have legal binding power, they are formulated according to an existing national legal framework which is provided in most cases by Companies Ordinance or Acts. Companies Ordinance or Acts together with other regulations applicable to individual industries, such as the Banking Ordinance for financial institutions and Listing Rules or Securities Acts for listed or public companies, provide a framework upon which accounting professional bodies formulate accounting and auditing standards. These standards form the basis for establishing accounting principles, and perhaps conventions, that allow enterprises flexibility in formulating their own accounting policies best suited to their individual circumstances. The ultimate objective, in a nutshell, is to produce a set of financial statements that are 'true and fair'.
Until 1994 China lacked a regulatory framework on which accounting and auditing standards could be set since the country's first national Companies Laws were not effective until 1 July 1994. The lack of such a framework also rendered the formulation of other regulations, such as the national Securities Laws and Listing Regulations, more difficult and time consuming.
Nevertheless, having realized the need for establishing acceptable accounting principles to enable PRC enterprises to attract foreign investment or have their stocks listed on overseas markets, the MOF promulgated a separate set of accounting regulations for selected joint stock companies in January 1992.
In addition, MOF made effective on July 1, 1993, the first set of accounting standards - Accounting Standards for Enterprises - applicable to all PRC enterprises. Although it might be confusing at times which accounting regulations or standards would apply, together with the then Accounting Regulations for Foreign Investment Enterprises of the PRC, they have provided relatively uniform accounting practices for enterprises to follow in preparing their financial statements. More importantly because of the lack of a complete regulatory and conceptual framework, these accounting rules or regulations are so comprehensive that they encompass accounting concepts, disclosure requirements, accounting entries, control procedures, record keeping and some aspects of auditing requirements and liquidation.
With the introduction of the Accounting Law in 1999, the Regulations on Financial Reporting of Enterprises in 2000 and the Accounting Systems for Business Enterprises in early 2001, which harmonizes the different accounting standards and regulations applicable to different enterprises, the framework of modern Chinese accounting has finally become clear.
What are the forms and content financial statements in China?
Under the Accounting Laws, the Regulations on Financial Reporting of Enterprises and the ASBE, financial statements or reports should comprise a balance sheet, profit and loss accounts, cash flow statements, notes to the accounts and a profit and loss appropriation account. The regulations also cover classification of assets and liabilities in the balance sheet.
What are the accounting concepts and bases employed in China's accounting regulations?
The general accounting principles or concepts employed in China's accounting regulations include accuracy, completeness, consistency, comparability, timeliness, materiality, accrual basis, matching, prudence, substance over form and going concern. By and large, the principles mirror those of IAS. Other major features of these regulations are as follows:
- The historical cost convention is prescribed. Assets are required to be recorded at purchase cost (less any necessary impairment provision) and revaluations are strictly prohibited except when allowed by other State provisions.
- The concept of fair market value is not commonly used due to the limited existence of open markets.
- These regulations also require companies to use the calendar year, that is January 1 to December 31, as their financial year.
- The double-entry bookkeeping method should be adopted. Records in accounts and books have to be made in renminbi (yuan) (the lawful currency of the PRC). Transactions and balances denominated in foreign currencies have to be converted into renminbi at the official rate, which may differ from the current market rate. All records and balances of transactions made in foreign currencies and the exchange rate used must be maintained for reference.
- A clause in these regulations specifically requires the appropriation of a collective Welfare Fund and a Statutory Reserve Fund from profit after tax.
- Due to the infancy of the new systems, certain footnote disclosures may not be as comprehensive as those acceptable elsewhere in the world. Yet, in certain areas, the Chinese standards are extremely stringent. This includes disclosing the corporate identity of related parties and commenting on the fairness of transactions conducted between related parties, and preparing the cash flow statements using both the direct and indirect methods.
The old standards are neither broad nor flexible enough to allow discussion or manoeuvrability on particular subjects. For the first time, ASBE gives management the authority to exercise professional experience and judgment. While the setting of the ASBE has in theory narrowed the gap between accounting issues in China and those of the Western world, the rigour of applying the ASBE may vary from province to province and from company to company.
What are the auditing requirements in China?
In Western countries limited liability companies are generally subject to an annual audit carried out by independent external auditors whose role is to express an objective opinion on the truthfulness and fairness of the financial statements.
In China, auditing is not a legal requirement but is required under the regulations. Prior to the introduction of the ASBE, the primary objective of auditing in China was to carry out inspection on the financial records of a business to ascertain their accuracy and legality (ie. whether the transactions conducted complied with relevant State laws and regulations). Auditors in China are concerned with protecting the legal interests of the company as well as the interests of the State. Only with the implementation of the ASBE were the concepts of true and fair presentation introduced.
Prior to 2000 financial statements of state-owned enterprises were not required to be audited annually by independent auditors, but periodical or social audits conducted for the purpose of ascertaining the enterprise's tax liabilities or other purposes might be conducted by the State Audit Bureau or Tax Bureau. Since 2002, except for a few types of specialized industries that have been explicitly exempted, all other State-owned enterprises must be audited at least annually. In addition, the regulations governing the accounting of joint stock companies and foreign investment enterprises require these companies to be subject to annual audit carried out by registered Chinese certified public accounting firms. When reporting on whether the financial statements of foreign investment enterprises are prepared in accordance with the relevant laws and regulations, auditors may make reference to the following main laws and regulations:
- The PRC Sino-foreign Equity Joint Venture Law (EJV Law) promulgated by the National People Congress (NPC), effective July 8, 1979 and revised March 15, 2001;
- Implementing Regulations of the EJV Law promulgated by the State Council (SC), effective September 20, 1983 and revised July 22, 2001;
- The PRC Sino-foreign Cooperative Joint Venture Law (CJV Law) promulgated by the NPC, effective April 13, 1988 and revised October 31, 2000;
- The PRC Wholly Foreign-Owned Enterprise Law (WFOE Law) promulgated by NPC, effective April 12, 1986 and revised October 31, 2000;
- Implementing Rules of the WFOE Law promulgated by SC, effective December 12, 1990 and revised April 12, 2001;
- The PRC Small and Medium Enterprises Law (SME Law) promulgated by NPC and effective June 29, 2002;
- The PRC Income Tax Law for Foreign Investment Enterprises and Foreign Enterprises (FIEs Income Tax Law) promulgated by NPC and effective July 1, 1991;
- Implementing Regulations of FIEs Income Tax Law promulgated by SC and effective July 1, 1991.
What role does the auditing professionals play in national economic activities?
Only very recently has the impact of accountants or auditors on national economic activities become more apparent. By virtue of the PRC Accounting Law promulgated in January 1985, the function of certified public accountants in carrying out audits was established. This law has now been superseded by the PRC Registered Accountant Law which became effective January 1, 1994. Following the setting up of the Chinese Institute of Certified Public Accountants in 1988, the status of certified public accountants and professional accounting firms in society received a major boost. In China some accounting firms are direct functional units of certain government bureaus. Although other professional accounting firms are not direct functional units of any government departments, many of them are still financially dependent units and require approval from the State to conduct their business as certified public accountants. In 1998 the State Council set forth regulations that require certified public accountants to be independent from any government bureaus. Many professional accounting firms have transformed (or are in the process of transforming) in order to operate the form of sole proprietorship or partnership with unlimited liabilities.
In December 1988 the Ministry of Finance promulgated the Auditing and Certification Regulations (Provisional) which sets out the roles of certified public accountants, audit scope and procedures and the requirements for maintaining audit working papers. From 1995 to 1996 four General Independent Auditing Standards - Basic Standards, Quality Control, Continuing Education and Ethics were issued. New specific auditing standards applicable January 1, 1997 were also promulgated, which complete and clarify the provisional regulations and general standards. So far, twenty-seven specific auditing standards, ten practice bulletins and four practice guidelines have been issued.
What is the format and content of an audit report?
The audit report normally contains a scope paragraph and an opinion paragraph. The scope paragraph sets out the areas covered, the principal audit work and procedures carried out and the results. The opinion paragraph sets out whether the accounts have been prepared in accordance with the relevant laws and regulations. Any reservations in the opinion need to be elaborated on.
In some instances different government bureaus may stipulate their own requirements as to what certified public accountants should opine on. Sometimes these additional requirements have not been agreed by the Ministry of Finance or the CICPA and fall beyond the expertise of what is normally expected of a certified public accountant. In some circumstances these requirements issued by other government bureaus have been retracted.
What is the Accounting Law in China?
First promulgated in 1985, the Accounting Law was revised in December 1993 and then in 1999. It represents the highest level of legal norms governing accounting and forms the basis for the formulation of administrative rules and regulations in regard to accounting, as well as provides the highest guiding principles on accounting work. In tandem with this piece of specialized legislation, a number of corresponding laws were passed in the 1990s, including the Certified Public Accountant Law, budget Law and Audit Law followed by related legislation such as Company Law, Law on Negotiable Instruments, Enterprise Bankruptcy Law, Economic Contract Law, and various tax laws. Together they constitute a legal framework of related economic legislation, forming the cornerstone of a legal system governing accounting work.
What are the Accounting Standards in China?
The Accounting Standards for Business Enterprises promulgated by the Ministry of Finance (MOF) on 30 November 1992 went into effect on 1 July 1993. The introduction of the Accounting Standards represents a milestone in the reform of China's accounting system, whereby classification according to ownership, industry and government department is replaced by practices in line with international accounting norms, such as debit-credit bookkeeping, categorization of accounting elements, accounting equation and financial statements. Internationally accepted accounting principles are also adopted, including the principles of prudence, manufacturing cost accounting and capital maintenance. In addition to these basic standards, China promulgated its first set of specific accounting standard in 1997 and MOF has issued 13 more specific accounting standards since.
What is the significance of the Accounting System in China?
On the basis of the accounting standards MOF issued a series of industry-specific accounting systems in 1992 covering industry, commodity distribution, construction, real estate, finance and insurance, transport and communications, foreign economic cooperation, tourism and catering, and agriculture, as well as a separate system for foreign-invested enterprises (FIEs). These unified systems form and integral part of China's legal system governing accounting.
To cope with enterprise reform and comply with WTO requirements, China made a major revamp to its enterprise accounting system in 2000. MOF promulgated the Accounting System for Business Enterprises to be applied to joint stock limited companies starting 1 January 2001 on a temporary basis, while other types of enterprises were also encouraged to follow the new system. Under the Accounting System, a unified system of accounting is established for all types of industry, ownership structure, organization and operation mode, and is applicable to large and medium enterprises except those engaged in finance and insurance. On the basis of the Accounting System, industry-specific accounting measures will be formulated for different industries and enterprises according to their characteristics while a specially designed accounting system will be developed for small enterprises. In addition, financial and insurance enterprises will be subject to a special accounting system for financial and insurance enterprises to accommodate their unique requirements.
The Accounting System for Business Enterprises currently in force is formulated on the basis of the Accounting System for Joint stock Limited Companies and its supplemental provisions and specific accounting standards. It consists of general provisions, account titles and financial statements, as well as examples of key accounting events and selections of major accounting rules. The general provisions list out the broad principles for the recognition, measurement and reporting of accounting elements and key business activities. In the sections on account titles and financial statements, the types of account titles to be adopted for business activities and instructions for use are specified, while samples of financial statements and instructions on their compilation are given. In the appendix, examples of how major accounting events are handled are given.
What is the relationship between the Accounting Standards and the Accounting System?
Both the Accounting system and Accounting standards constitute an integral part of China's unified accounting system. As administrative documents, they set out the rules for accounting such as the recognition, measurement, disclosure and reporting of accounting elements. While both are formulated and promulgated by MOF, certain differences exist between the two.
First, in terms of the scope of application, specific accounting standards are mostly applicable to joint stock limited companies although some of them also apply to other enterprises. As for the Accounting System, apart from joint stock limited companies, other qualified enterprises may also adopt the system but prior approval is required for state-owned enterprises wishing to implement the system.
Second, the Accounting System covers all aspects of an enterprise's transactions and events. In other words, if an enterprise falls within the scope of the Accounting System, the accounting treatment of all its transactions and events must be handled according to the stipulations of the system. As for specific accounting standards, they only govern certain transactions and events or certain accounting aspects of an enterprise. For instance, all the 13 specific accounting standards issued to date merely deal with specific transactions and events of an enterprise.
Third, stipulations concerning the recognition, measurement, disclosure and reporting of accounting elements contained in the specific 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 account titles and instructions for use.
What are the basic assumptions of accounting in China?
(a) Accounting Entity
An accounting entity can be an enterprise, and enterprise group or the accounting department of an enterprise.
(b) Continuity Postulate
The Accounting System stipulates the accounting treatment to be adopted by enterprises under normal circumstances based on the continuity postulate. For instance, the historical costing method is used for the assets and liabilities of an enterprise, and the depreciations method on the basis of historical costing is used for fixed assets.
©Accounting Period and Accounting Year
According to the Accounting System, an enterprise should account for its transactions or vents and prepare financial statements in distinct accounting periods. Accounting periods may be a year, half year, q 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 heavily 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 compiled in Chinese. FIEs, foreign enterprises and other foreign organizations in China may use one foreign language concurrently with the Chinese language.
What are the basic principles of accounting in China?
The general principles guiding and evaluating accounting work embrace three sets: general principles for evaluating the quality of accounting information; general principles for recognizing and measuring accounting elements; and general principles for revising the above two sets of principles.
What are the regulations regarding the establishment of a Financial Accounting Department in China?
FIEs should establish a financial accounting department in the place where it is located, to be manned by qualified financial and accounting personnel responsible for handling financial and accounting matters in accordance with the law. (MOF has strict management guidelines regarding the qualifications of financial and accounting personnel.)
What are the issues involved in the implementation of a new accounting system?
Since 1 January 2002, FIEs have implemented the Accounting System for Business Enterprises promulgated by MOF on 29 December 2000, while the Accounting System for Foreign-invested Enterprises issued by MOF on 24 June 1992 and its related regulations on account titles and financial statements were nullified. Given below are certain issues concerning the implementation of the new accounting system.
(a) If an FIE has to change its accounting policies as a result of implementing the Accounting System, all changes should be made using the prospective application except in the following circumstances where it is stipulated that the retrospective adjustment method is to be used:
Provision for short-term investment write-down, and provision for impairment of long-term investment, fixed assets, intangible assets, construction in progress and designated loans.
The difference between provision for bad debts on receivables and provision for inventory write-down under the new Accounting System and those under the old system.
Investments made before the Accounting System was implemented and which continue after the implementation date should be treated according to the stipulations of the Accounting System as from the date of implementation. In other words, investments and investment income confirmed under the old system prior to the implementation of the new Accounting System may not be adjusted retrospectively. Any subsequent confirmation of investment income and adjustment of the book value of investments should be treated according to the stipulations of the Accounting System.
In implementing the Accounting System, if the FIE finds that the start-up cost and exchange loss during the set-up period which are yet to be amortised are relatively large, and that if the balance is entered into the profit and loss account of the current period it would significantly affect its profit, the retrospective adjustment method can be used. If the start-up cost and exchange loss during the set-up period which are yet to be amortised are relatively small, and if the balance is entered into the profit and loss account of the profit, the balance can be entered directly under profit and loss of the period.
(b) FIEs should abide by the following stipulations in implementing the Accounting System:
The balance of "marketable securities" should be entered under "short-term investment".
The balance of "advance payment for goods" and the balance of "advance receipt of payment for goods" should be entered under "prepayment" and "receipt in advance" respectively.
The balance of "provision for loss in inventory realization" should be entered under "provision for inventory write-down".
The creditor's balance of "exchange loss during set-up period" should be treated according to different circumstances: it should be entered under "long-term prepaid expenses" if it is for setting off annual losses incurred in the production and operation of the enterprise; the retrospective adjustment method can be used if the balance is to be written off by equal instalments over five years from the date of commencement of production and operation and if it is entered into the profit and loss account of the current period it would significantly affect the profit of the enterprise;; it can be entered into the profit and loss account of the current period if such entry does not significantly affect the profit of the enterprise.
The balance of other deferred expenses should be treated according to different circumstances: it should be entered under "long-term prepaid expenses" if it can generate benefits in subsequent accounting periods; it should be entered under the profit and loss account of the current period if it cannot generate benefits in subsequent accounting periods.
The balance of "deferred investment loss" should be treated according to different circumstances: it should be entered under "long-term prepaid expenses" if it is debitor's balance; it should be entered under "deferred income" if it is creditor's balance.
The balance of bonds payable and the premium or discount on bonds payable should be entered under "bonds payable".
The balance of "wages payable" (or "wages and welfare expenses payable") should be treated according to different circumstances: it should be entered under "wages payable to the employees (including wages, bonuses and allowances); it should be entered under "welfare expenses payable" if it comes under pension funds, insurance, welfare funds and different kinds of subsidies payable to mainland workers.
Apart from items transferred from "wages payable", "welfare expenses payable" should only include employee incentive and welfare funds drawn from the enterprise's after-tax profits; other current welfare expenses should be entered under the profit and loss account of the corresponding period.
The balance of "reserve fund", "enterprise development fund" and "profit capitalized on return for investment" should be entered under "surplusreserve".
A new item, "deferred income", should be created under "estimated liabilities" on the balance sheet.
A new item, "of which: investment of Chinese party (balance of non-renminbi capital at end of period)" and investment of foreign party (amount of non-renminbi capital at end of period)", should be created under "paid-in capital" on the balance sheet.
Foreign-invested tourism enterprises, in implementing the Accounting System, should for the time being follow the regulations in the Account Titles and Financial Statements for Foreign-invested Tourism Enterprises in compiling their income statements and supporting reports.
When compiling comparative financial statements using the retrospective adjustment method, if changes in accounting policies occur during the periods covered, adjustments should be made to the net profits and losses and o9ther related items in the periods concerned accordingly. For entries in comparative financial statements subject to cumulative effect due to policy change prior to the periods covered, adjustments should be made to the initial retained income as well as other related items.
What is the definition of an invoice?
Invoice is the proof of payment in a transaction involving the sale of goods, provision of labour service, or other business activities. It is also a document supporting that a payment and receipt has taken place, an official document for financial management and accounting, and an important tool in auditing for taxation purpose.
Invoices are generally in triplicate copies, namely the stub, invoice copy and accounts copy. Value-added tax (VAT) invoices have one more copy, which is the deduction copy.
What is the procedure for the purchase and collection of an invoice?
(a) Purchase and collection procedure
An individual or enterprise that has completed tax registration as required by law will be issued a tax registration certificate, after which he or it can apply to the competent tax office for the purchase of invoice by submitting the following: identification document of the applicant, tax registration certificate or other proofs, official seal or special seal for invoices. Upon examination and approval by the tax office, an invoice collection book specifying the type and quantity of invoices to be purchased as well as the method of purchase will be issued. The applicant can then purchase the invoices from the competent tax office.
(b) Temporary purchase of invoice in other localities
An individual or enterprise in need of invoices on a temporary basis can apply directly to the local tax office. When an individual or enterprise conducts business activities in places other than the place of original tax office and needs invoices, an application can be made to the local tax office by submitting proofs from the original tax office. A guarantor is required in this case or a deposit of no more than Rmb10,000 is payable depending on the face value and quantity of invoices specified in the invoice collection book. This kind of invoices issued by the tax office where the business activities take place have to be used and cancelled within a specified period.
What are the stages in the issuance of an invoice?
(a) An individual or enterprise that receives payment for the sale of goods, provision of service or other business activities should issue invoices to the payer. Under special circumstances, the payer will issue invoices to the payee.
(b) When enterprises and individuals engaged in production or other business operations purchase a good, receive a service or conduct a business activity, they should ask the payee for an invoice and must not change the description or amount shown on the invoice.
(c) Invoices should be issued in serial order within a specified period of time. Invoices in multiple copies should be issued at one time to accurately record the details of a transaction and stamped with the issuer's official seal or special invoice seal.
(d) No individual or enterprise should borrow, transfer or issue invoices on others' behalf. Unless approval is granted by the tax authority, the invoice books should not be detached for use. The scope of use for special invoices should not be extended randomly.
(e) Invoices which fail to meet the relevant requirements cannot be used as financial proof. Enterprises and individuals may refuse to accept such invoices.
What is the procedure concerning the storage of invoices?
(a) An enterprise or individual that issues invoices should set up an invoice register recording the usage of invoices and report to the competent tax office on such usage on a regular basis.
(b) When an enterprise or individual applies for changes or cancellation 9f tax registration, the invoices and invoice books should also be changed or cancelled at the same time.
(c) An enterprise or individual should take good care of the invoices and keep them in good condition pursuant to the rules of the tax office.
Invoice stubs and invoice registers should be retained for five years after which time they should be destroyed upon checking by the tax office.
Are invoices subject to inspection by the tax authorities?
Enterprises and individuals involved in printing and using invoices are subject to inspection by the tax authorities. They must fully cooperate with inspectors from the tax departments by providing true and accurate information.