A Comparison of K GAAP and PRC Accounting Regulations October 2004
Table of Contents
• Foreword • PRC Accounting Regulations and Standards In Effect • Overall Comparison • Comparison of Individual K GAAP and PRC Standards
PRC Accounting Has Progressed A Long Way
Foreword
When the Ministry of Finance issued its first series of accounting standards and regulations in 1992 governing state-owned enterprises, foreign investment enterprises and joint stock limited enterprises, there has been much debate on whether different accounting standards should be applied purely because of their different set-up. The Ministry of Finance has put in tremendous effort in harmonizing these differences in recent years, including the introduction of the Accounting Law, the Accounting Systems for Business Enterprises and specific accounting standards. Although much of the differences have been eliminated, there are still a number of differences between PRC accounting regulations and K GAAP. In the chapters to follow, we will highlight key differences between them. Please note that the following pages may not have addressed all differences between PRC accounting regulations and K GAAP. In the adoption of these accounting standards, the standards should be read in their entirety.
会计法规体系 会计法规体系 PRC Accounting Framework 会计法 Accounting Law
均为财政部制定
企业财务会计报告条例 Regulation on Financial Reporting of Enterprises
企业会计准则 Accounting
会计制度 Accounting System
Standards for Business Enterprises
企业会计制度 Accounting System for Business Enterprises
专业会计核算办法 Accounting
金融企业 会计制度
小企业会计制度
Accounting System for Accounting System Smaller Business, for Financial yet to be issued Institutions
行业会计科目和会计报表等
Treatment for Specific IndustriesAccounts & Financial statements for Specific Industries
专门的补充规定或问题解答 Q&A and other supplementary Regulations
PRC Accounting Regulations and Standards in Effect (1/4) Overall
Effective Date
Accounting Law
1 July 2000
Accounting Standard for Business Enterprises (Basic Standard)
1 July 1993
Accounting Systems for Business Enterprises
1 January 2001
Regulations on Financial Accounting and Reporting 1 January 2001 for Enterprises
PRC Accounting Regulations and Standards in Effect (2/4) Specific Accounting Standards
Effective Date
Disclosure of Related Party Relationships and Transactions
1 January 1997
Events Occurring After the Balance Sheet Date
1 January 1998
(revised in 2003) Cash Flow Statement (revised in 2001)
1 January 1998
Revenue
1 January 1999
Construction Contracts
1 January 1999
Changes to Accounting Policies, Accounting Estimates and Corrections of Accounting Errors (revised in 2001)
1 January 1999
PRC Accounting Regulations and Standards in Effect (3/4) Specific Accounting Standards
Effective Date
Investment (revised in 2001)
1 January 1999
Debt Restructuring (revised in 2001)
1 January 1999
Contingencies
1 January 2000
Non-monetary Transactions (revised in 2001)
1 January 2000
Leases
1 January 2001
Intangible Assets
1 January 2001
Borrowing Costs
1 January 2001
PRC Accounting Regulations and Standards in Effect (4/4) Specific Accounting Standards
Effective Date
Interim Financial Statements
1 January 2001
Fixed Assets
1 January 2002
Inventories
1 January 2002
Accounting Year, Reporting Currency and Language PRC
K GAAP
Accounting Year = Calendar Year
Accounting Year = Determined by Company
Reporting Currency = Rmb or Another Currency + Rmb
Reporting Currency = Korean Won Reporting Language = Korean
Reporting Language = Chinese or Another Language + Chinese
Reporting Time-line
PRC Within 20 days of the subsequent month / quarter, balance sheets and income statements should be submitted to the relevant authorities; Within 4 months of the subsequent year, an audit report together with the annual financial statements should be submitted to the relevant authorities.
K GAAP Stand-alone audit report should be issued to relevant authorities within 2 weeks after annual S/H meeting (Listed company within 1week before S/H meeting). Consolidation audit report should be issued within 4 months from the balance sheet dates. Combined audit report should be issued within 6 months from the balance sheet dates. Within 45 days of the subsequent quarter, a listed company’s review report together with financial statements should be submitted to the relevant authorities;
Current / Non-current Distinction and Presentation PRC
K GAAP
ďƒ˜ Distinguishing current and noncurrent assets and current and noncurrent liability is the only acceptable form of presentation.
ďƒ˜ Enterprise should present assets and liabilities in order of liquidity only when a liquidity presentation provides information that is reliable and is more relevant than a current / non-current presentation.
Contents of financial statements PRC
K GAAP
Balance sheet
Balance sheet
Income statement
Income statement
Profit distribution schedule (supplementary information)
Statement of changes in equity
Cash flow statement Schedule of asset impairment Accounting policies and notes to the financial statements Management’s discussion and analysis can also be presented.
Cash flow statement Accounting policies and notes to the financial statements
Accounts Receivable and Bad Debt Provision PRC Carried at original invoiced amount less an estimate made for doubtful receivables. Receivables estimated to be collected beyond one year is not discounted.
K GAAP Similar to PRC accounting regulations. Receivables estimated to be collected beyond one year is discounted.
Inventories
PRC
K GAAP
Carried at lower of cost and net realizable value. Use of FIFO, LIFO, weighted average method, moving weighted average method and specific identification method to determine cost.
Cost formulas to measure inventory is similar to PRC accounting regulations. In addition, the retail method is allowed when retail method provides information that is reliable and is more relevant than other methods
Valuation gain: off-set to management expense.
Valuation gain: not recognize
Investments
PRC
K GAAP
Disclosures of market value only required for listed investments .
Disclosures of fair value of investments are required.
50%:50% joint ventures, they are normally accounted for using the equity method. However, the elimination of inter-company balances is not mentioned.
Investments held over 20% are normally accounted for using the equity method.
Fixed Assets – Capitalization Threshold PRC
According to ASBE (applicable to FIEs effective 1 January 2002) include:
1)
production equipment that have estimated useful lives of more than 1 year should be capitalized.
2)
other non-production equipment with high individual value and with useful lives of more than 2 years can be capitalized.
K GAAP Expenditures for additions, replacements, alterations, and improvements that increase value, prolong life, or make an asset adaptable for a different use are regards as capital expenditure. Fixed assets are those tangible assets that are expected to be used during more than one period.
Fixed Assets – Changes of depreciation method PRC
K GAAP
Changes in the useful life or the depreciation method should be treated as changes of accounting estimate and prospective adjustment is required.
Changes in the depreciation method should be treated as changes of accounting principles and retroactive adjustment is required.
No specific GAAP on the government grant.
Government grant should be deducted from the cost of assets and offset depreciation charges over the useful life of the assets.
Investment Property
PRC Not addressed in existing regulations. Therefore, all fixed assets, regardless of intention, are carried at cost less accumulated depreciation (subject to impairment tests).
K GAAP Investment property includes land, buildings, and other real estate held for investment or nonoperating purposes. Investment properties must be carried at historical cost and impairment test can be applied to.
Borrowing Costs
PRC Borrowing costs on projectspecific borrowings be capitalized as part of the cost of acquiring or constructing a tangible fixed asset.
K GAAP Borrowing costs relating to the acquisition, construction or production of a qualifying asset can be: expensed; or capitalized. The method chosen should be consistently applied though.
Pre-operating costs
PRC All expenditures incurred prior to an enterprise entering commercial production / operation qualify as “pre-operating costs”. Pre-operating costs are capitalized as “long-term deferred assets” and expensed in the month when the enterprise enters commercial production / operation.
K GAAP The definition of start-up costs is different from that used in the PRC. Start-up costs consist of establishment costs such as legal and secretarial costs incurred in establishing a legal entity or expenditures to open a new facility or business; Start-up costs are generally expensed as incurred.
Changes in Accounting Policies, Estimates and Correction of Errors PRC
K GAAP
Change in accounting policies – retroactive / prospective treatment, depending on the specific standard;
Change in accounting policies – retroactive unless the amounts of adjustment resulting from retroactive application of the new accounting policy can be reasonably determined
Change in accounting estimate – prospective treatment; Correction of Errors – retroactive treatment.
Change in accounting estimate – prospective treatment; Correction of Errors – prospective treatment unless the error amount is material.
Business Combination – Goodwill PRC If the acquiree retains its status as a legal
K GAAP
This difference should be amortized over the investment period as stipulated in the investment contract or a period not exceeding 10 years.
Any excess of the cost of the acquisition over the acquirer’s interest in the fair value of the identifiable assets and liabilities as at the date of the exchange transaction should be described as goodwill and recognized as an asset.
If the acquiree does not continue to be a legal person, then any excess of the cost of the acquisition over the acquiree’s net assets fair value would be recognized as “goodwill”.
Goodwill is amortized within 20 years but annual impairment test should be needed.
person, then any excess of the cost of the acquisition over the acquiree’s net assets book value (not fair value) would be “equity investment difference”.
Business Combination – Negative goodwill PRC If the cost of the acquisition is less than the fair value of identifiable assets and liabilities, then the difference is immediately recorded as “capital surplus”.
K GAAP Amount of negative goodwill allocated to depreciable non-monetary assets: Any excess of the acquirer’s interest in the fair value of the identifiable assets and liabilities over cost of the acquisition as at the date of the exchange transaction should be recognized as income immediately. Amount of negative goodwill allocated to non monetary assets is amortized during weighted average useful lives of non-monetary assets
Taxes
PRC
K GAAP
Three methods are allowed in the accounting for income tax:
The liability method (balance sheet approach) should be used to account for income tax.
Tax payable method; Tax effect accounting – deferral method; Tax effect accounting – liability method.