Consolidating China audit figures into group reporting

The Chinese accounting framework is commonly referred to as the Chinese Accounting Standards (CAS) or the Chinese Generally Accepted Accounting Principles (Chinese GAAP).

Although Chinese Accounting Standards maintain a high level of integration with internationally accepted accounting standards such as the International Financial Reporting Standards (IFRS), several core differences exist. Specifically, CAS are characterised by a delayed and not always full implementation of updates to the IFRS. Due to these differences, foreign companies may run into challenges consolidating the audit figures of their Chinese subsidiary into group reporting. 

Introduction to Chinese Accounting Standards (CAS)

The CAS mainly consist of two sets of accounting standards: 1) the Accounting Standards for Business Enterprises (ASBEs); and 2) the Accounting Standards for Small-Sized Business Enterprises (ASSBEs).

The ASBEs provide the Chinese conceptual framework for financial reporting which applies to all enterprises established in Mainland China and can be viewed as the counterpart of the IFRS. Whereas the ASBEs have been commonly adopted by most enterprises in China (either on a compulsory or voluntary basis) since their issuance in 2006, small-scale enterprises may choose to adopt the ASSBEs (the counterpart of IFRS for SMEs) instead.

Key differences between China Accounting Standards and IFRS

1. Fiscal year
   
   According to the CAS, the fiscal year in China must start from 01 January with no exceptions. Consequently, if a firm’s headquarters follow a different fiscal year, adjustments must be made to the financial statements and a special IFRS audit may be required for the Chinese entity.
   
   
2. Assets valuation method
   
   According to the CAS, companies can only use the historical cost method for the valuation of fixed and intangible assets. Contrarily, IFRS allows the use of the historical cost method with the possibility of re-evaluating the asset(s).
   
   
3. Classification of expenses
   
   According to IFRS, expenses shall be classified either by function or by nature. If a company categorises expenses by function, it must provide additional information on the nature of expenses. The CAS require that expenses be classified according to function.
   
   
4. Accounts specific to China
   
   Several accounts required in China do not exist in IFRS. This includes, for example, non-operating income and costs, and surcharges to VAT. When consolidating audit figures, these figures must be transferred to different IFRS accounts.
   
   
5. Lack of detail in financial statements
   
   Financial statements completed according to CAS generally include fewer details than statements prepared according to IFRS. Additional information must be provided by the Chinese entity to facilitate consolidation at the headquarters level. Commonly, the headquarters’ financial department or auditor will provide files to be completed by the Chinese auditor or accountant. 
   
   
6. Difference in detail for situations uncommon or more common in China
   
   Significant differences exist in the level of detail in rules for situations that are uncommon or more common in China. For example, CAS include specific rules on how to deal with accounting figures in the case of a merger between two companies controlled by the same entity, whereas IFRS does not. On the other hand, CAS are more limited in addressing different types of employee benefits offered by international companies compared to IFRS.
   
   

Consolidation of Chinese audit figures

Companies can undertake several steps to ensure accurate consolidation of their Chinese financials into group reporting. This includes adjustments during the annual audit process, or through ongoing reporting during the year.

During the annual audit, it is essential to ensure the audit is delivered in both Chinese and English. Subsequently, the accountant can support the conversion of the Chinese financials according to IFRS or other accounting standards. This could include preparing the reclassification and adjustment entries, or completing documents with additional information based on headquarters requirements.

Alternatively, companies can develop financial statement templates according to the relevant required accounting standards to ensure ongoing reporting for consolidation. This means that the Chinese entity would have two reports, one according to CAS and one according to headquarters’ accounting standards.