Historically, the accounting standards in the PRC were characterized by the socialistic idea of state property and basically consisted of reporting of the assets of a company. Requirements for the reporting of liabilities were missing as well as methods to obtain data for calculating the economic success. Such a system might have been sufficient for tax determination. For sustainable business management it was not sufficient. The entry into worldwide trade and capital market, and the opening for international investors made a revision of the regulations necessary to have better understandable and comparable financial statements, which was a not underestimated factor to maintain and increase the competitiveness of Chinese national economy towards international, market-based acting enterprises.
Already in 2006 China released a new accounting law, compiled by the Ministry of Finance in close corporation with prestigious Chinese companies and the International Accounting Standards Board ISAB. International Financial Reporting Standards (IFRS) were introduced into CAS (Chinese Accounting Standards). Today, CAS are closely similar to IFRS. Thereby, from the accounting perspective, for enterprises from abroad the market access to China market is almost unlimited and also vice versa, for Chinese companies into the rest of the world as well as the smooth information exchange due to comparable accounting standards.
Even if CAS are good set of norm, application by local accountants might not always be perfect. In several cases, proper application of CAS are even impaired by requirement of local tax bureau. As a consequence, use of financial statements of Chinese companies, specifically private owned, should be considered with same care and often required proper due diligence. As a result, resentments towards Chinese accounting regulations in itself are unfounded.
However after implementation no significant new standards have been issued; according to Zhang Shaochun, vice minister of Ministry of Finance announced in the beginning of September that consecutive modifications and supplements shall drive the accounting work to a comprehensive transformation and upgrading. The measures decided upon this year focused on more extensive and improved consistency with regulations stipulated in "IFRS 15" version issued in May 2014. Improved definition of survey methods and disclosure requirements should allow financial statements users a better understanding of contract types, the value and the time for the revenue recognition resulting from these contracts – and thereby also the impact on the cash flow.
Due to expert opinion the new supplements will have impact on the perception, how and when a business transaction has to be assessed as realized and it requires that the companies make new assessments of their business processes for each individual contract. Unfortunately, a statement cannot be made if the implementation of the new assessment regulations trends to result in deviate revenue recognition. The core principle of "IFRS 15", which is also realized in CAS, is that a company determines revenues in its financial statements with the volume it expects to get as the consideration for the transfer of goods or the providing of services. The companies are supposed to detect the revenues according to a five-step model as follows:
1. Identifying of the contract/the contracts with a customer.
2. Identification of the several (single) performance obligations
3. Determination of the whole transaction price resulting from this contract
4. Distribution of this transaction price to the separate performance obligations
5. Revenue recognition in case of fulfillment of the performance obligations
If the fulfillment of the performance obligations extends to a time period, the revenue is also realized over a time period. The realization can be determined by the outputs or the inputs of the company, for example by using the data for already transferred units of goods to the customer or already accrued working hours in case of a service obligation on the part of the company. However, if the performance obligations are fulfilled in a point of time, the revenue recognition has also to be determined to this point of time accordingly. In this case according to "IFRS 15" and now also according to CAS, the determination of revenues is effected at this point of time when the customer gets the control over the good or the service. A further challenge for most of the companies will be to guarantee the quality of the required extensive data collection which becomes necessary because of the increased new qualitative and quantitative requirements in "IFRS 15", and as a consequence as well as in CAS concerning the revenue estimation and on the disclosing obligations.
Up-dating IT systems, respecting deadlines
As far as a company has not already implemented its proceedings in compliance with IFRS, an update of its IT systems will be unavoidable. Beside the reconsideration of sales and signing procedures in the course of contract adjustments, there is need to analyze the currently used contractual terms and business practices, for example the selected distribution channels and used sales promotion measures. It is recommended to reconsider if existing plans for employees’ bonuses and incentives are still in alignment with corporate goals.
This new standards are mandatory to be implemented until January 1, 2018 for companies that are stock-listed in China and abroad, as well as the companies, stock-listed overseas and using the IFRS or the accounting standards for Business Enterprises. For companies only stock-listed in China the due date for the implementation of the new accounting standards is January 1, 2020, for all remaining companies it is January 1, 2021.
Despite the extensive conformity with international rules and regulations, the required efforts for realization of the new instructions in China should not be underestimated. It can only be recommended to start a check of conformity with the new standards to fulfill the deadlines as early as possible. Furthermore it is recommended to perform the inspections and the implementation under support of auditors and tax advisors located in China to realize any need of actions due to continuous supplements and amendments to the standards. This need of action is to be identified soon in order to take appropriate measures.
Manager German Desk bei Mazars Consulting (Shanghai) Co. Ltd.