Chinese Accounting Standards (CAS) vs. IFRS: What are the Main Differences?

Dear Members and Friends,

The China-Italy Chamber of Commerce is glad to share an article published by its Member Hawksford: "Chinese Accounting Standards (CAS) vs. IFRS: What are the Main Differences?".

Chinese Accounting Standards (CAS) vs. IFRS: What are the Main Differences?

Are you planning to open an offshore company in China? The country has undergone significant transformations as the Chinese administration puts every effort into making it a global economic hub.

The increased foreign direct investment (FDI) 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 to develop own accounting rules referred to as Chinese accounting standards (CAS). These Chinese accounting rules differ from the International Financial Reporting Standards (IFRS) that most investors are used to. 

The main goal of developing the Chinese accounting standards (CAS) is to take account of more stakeholders, reduce financial fraud, and optimize the country’s tax strategy. Although efforts have been made to converge CAS with the International Financial Reporting Standards (IFRS), investors with established companies or opening businesses in China should take extra care for compliance. In this article, we take a closer look at these Chinese accounting standards and compare them with International Financial Reporting Standards (IFRS).

A Brief History of the Chinese Account Standards (CAS)

Before we can look at the core differences between the Chinese accounting standards (CAS) with other international systems, let us take a step back to understand where they originated. The Chinese accounting standards can be traced back to the socialist era when the state was the sole industry owner.

The main goal of the accounting standards was assessing the assets owned by the state to ensure they met the production goals. Therefore, the primary objective of the accounting standards of that time was not driven by the need to enhance profitability, but a sort of balance sheet approach with less focus on income & cash-flow statements. Here are the timelines of CAS:

• Towards the close of the 70s, a new law that allowed joint ventures (JV) was passed by the Chinese administration. This law came together with a different accounting regulation that joint ventures had to follow.
• Later in the 90s, the fast-growing economy saw the Chinese accounting standards (CAS) undergo several changes. First, the country adopted the People’s Republic of China (PRC) General Accepted Accounting Standards (PRC GAAS). But these would be adjusted in the coming years.
• In 2001, the People’s Republic of China General Accepted Principles were adjusted further to Accounting Standards for Business Enterprise (ASBE01), which have one main standard and additional 16 specific standards.
• In 2006, ASBE01 was changed further to give the Accounting Standards for Business Enterprises (ASBE06). Notably, ASBE06 is, in many respects, close to International Financial Reporting Standards (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 (ASSBEs), which is a sort of 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 Reporting Standards

While Chinese accounting standards (CAS) and IFRS have demonstrated key similarities, it is prudent that foreign companies take note of the differences because they can easily get them into conflict with the law. So here are the core differences between CAS and IFRS.

The Method of Valuating Fixed Assets

This is one of the most notable differences between CAS and IFRS. Firms that use IFRS have the option of choosing their preferred method of valuation for certain types of fixed assets. You can opt to use the historical – cost valuation method or re-evaluating the asset. But when it comes to CAS, the valuation of fixed assets can only be done using the historical-cost method.

Rules in CAS on Certain Items Common in China are More Detailed

When handling some items that are considered common in China, the Chinese Accounting Standards (CAS) are more detailed than the International Financial Reporting Standards (IFRS). Take the case of merging two companies under the control of one entity and with similar interests. In such a situation, CAS requires you to restate the figures. However, IFRS does not give specific rules on such a situation.

IFRS Rules for Situations Uncommon in China are More Detailed

When dealing with situations that are not common in China, IFRS is more detailed compared to CAS. A good example is the use of employee benefit plans. Except paying staff using a firm’s stock, the Chinese Accounting Standards (CAS) do not address some types of staff benefits that are offered by international firms. On this, it is not uncommon to find multinationals getting into trouble, especially when the mother company back at home tries using benefits packages for its subsidiaries. To address the challenge, it is important to work with the Chinese Ministry of Finance (MOF) to establish how to record such transactions.

New Changes Implementation Delays

When IFRS updates are released, CAS does not implement them immediately. Instead, the Ministry of Finance reviews them to establish if they are okay for application in China and if they will be added into the CAS. This means two things:

The IFRS updates adoption in CAS are delayed. The IFRS updates adoption might 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 on the interpretation of the Chinese accounts. Also, they may find it an uphill task when trying to consolidate their Chinese companies’ accounts with the mother firms back home. So, here are some things that you can do.

• First, you need to adapt to the Chinese accounting standards (CAS). This will help you to remain compliant with Chinese laws on accounting and business operations. Then, work out on reconciling the company books of accounts with the parent firm when the need arises.
• Translate the Chinese Subsidiary Accounts. When overseas parent firms ask for detailed financial reports from the Chinese subsidiary, the information should be carefully translated (mapped). This makes them easy to add to the parent's company books.
• Make sure to take note of key differences between CAS and IFRS as early as possible. This will ensure that clarifications are sought as early as possible to avoid delays and possible penalties.
• Working in close collaboration with the Ministry of Finance. This is crucial in helping your company to note Chinese accounting standards (CAS) updates and changes in accounting policies that the ministry might introduce.
• Beware of accounting firms' tricks to take short cuts. For most companies, the first line of action when it comes to financial issues is running to accounting firms. But most of them are known for taking shortcuts to avoid the stringent Chinese accounting standards (CAS), which can result in serious delays and non-compliance.

Agency: The Smart Way to Handle China Accounting Standards

When foreign companies start operations in China, one of the main questions is: “What is the best way to address challenges related to the Chinese Accounting Standards?” The smart answer is selecting an agency, and we are going to tell you why.

• Most agencies have seen the metamorphosis of the Chinese accounting standards (CAS) and clearly understand the best methods for its application. Because they know the standards well, no aspect of its implementation is too complex to them.
• Many are the times that foreign companies in China have found themselves in trouble for handling their financial accounts incorrectly. But these agencies have seen most of these mistakes that companies make and also helped others to address them. Therefore, the agencies are your best bet to avoid such mistakes.
• When you select the best agencies to assist you with accounting, they do more than that. When companies take their operations to China, they have one primary goal: growing into successful multinationals. A good agency will become an important pillar in helping you achieve this goal.
• Your agency can assist you in crafting better strategies for success. For example, the agency can help you with company registration, opening bank accounts, and early establishment. Furthermore, the agency may come in handy to help you to interpret other related laws so that your company can avoid getting into conflict with the law.
• If your offshore Chinese company is new, a good agency can help you to navigate through the turbulent early days of establishment. For example, the agency can help you to interpret marketing data, and craft the best strategies for success.

When you decide to incorporate a company in China, it is important to appreciate that the Chinese administration takes financial and tax-related matters with a lot of strictness. Therefore, you should ensure to understand the Chinese accounting standards (CAS) well and have them implemented correctly. The smart way to do this is working with the best agency because it will not just offer the right accounting solutions, but will also support your enterprise for faster growth and success. With the right agency on your side, you can never go wrong with your business in China.

 FAQ

What are the Chinese Accounting Standards?

The Chinese accounting standards (CAS) are the rules of accounting that are applied in Mainland China. These rules are unique since they started in the Chinese socialist era when the country was the primary owner of all, or say most industries. This implies CAS was originally not meant to act as a tool for profit and loss, but to serve as an inventory of company assets.

To make the Chinese accounting standards (CAS) more effective in propelling the economy to higher levels, they have progressively been reviewed and changed to try and bridge them to the International Financial Reporting Standards (IFRS). Today, CAS rules and IFRS are about 90-95% similar.

What are the main differences between Chinese Accounting Standards and International Financial Reporting Standards (IFRS)?

Although the Chinese Accounting Standards have been changed over time to reconcile them with International Financial Reporting Standards (IFRS), there are still significant gaps that companies moving to China must note. In particular, here are the three main key differences between the two accounting systems.

• The method of valuating fixed assets. IFRS system allows you to choose between the historical-cost valuation method and the re-valuation. But CAS only allows the historical-valuation method.
• The rules used in CAS are more detailed on some items. For some items, such as merging two entities that are controlled by one entity, CAS requires a company to restate the figures. But IFRS does not give any direction on them.
• CAS is slow in implementing updates from IFRS. When IFRS releases updates, the Chinese Ministry of Finance does not implement them on CAS immediately. First, it reviews them to establish whether they are in line with CAS and should be adopted. Indeed, the Ministry of Finance might opt not to implement them at all.

What is the best method for foreign companies to get it right on the Chinese Accounting Standards?

If you plan to open a company in China, the best way to get it right on Chinese accounting standards (CAS) is working with expert firms. These are agencies that have been in the market and understand every aspect of CAS. Instead of using shortcuts when dealing with complex issues that may arise from implementing CAS, they work with your company and the Ministry of Finance to identify the best solutions. Furthermore, the agencies go to great lengths to ensure your company makes the right decisions for success.

In Chinese Accounting Standards (CAS), what is the difference between ASBE06 and ASSBEs?

• ASBE06 (Accounting Standards for Businesses Enterprises) are used for big businesses that are incorporated in China, while ASSBE (Accounting Standards for Small Business Enterprises) are used for small businesses.
• ASBE06 was released in 2007 as an update of ASBE01 of 2001. In 2012, ASBE06 was merged with IFRS to make it more effective. Today, it is the main accounting standard used by the big corporations operating in China.
• ASSB was released in 2013 to give the small enterprises a standardized method of enhancing their accounting. It is also aimed at helping to curb tax and account fraud.

Please find the link to the original article here.

Kind Regards,

CICC Team