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Understanding Chinese Accounting Standards (CAS) for Foreign Companies

Foreign companies establishing a presence in China face unique considerations, particularly with the interpretation and understanding of China’s accounting standards. This guide provides an overview of the accounting standards adopted in China and highlights the differences between Chinese Accounting Standards (CAS) and International Financial Reporting Standards (IFRS).

What Accounting Standards are Adopted in China?

China employs its own accounting rules known as the Chinese Accounting Standards (CAS). While CAS and IFRS have significantly converged, notable differences in practical implementation and interpretation remain. CAS consists of two primary standards:

  1. Accounting Standards for Business Enterprises (ASBEs)

  2. Accounting Standards for Small Business Enterprises (ASSBEs)

ASBEs, which are highly aligned with IFRS, must be followed by all listed companies in China for their financial statements. Most foreign-invested entities (FIEs) also adhere to ASBEs. ASSBEs, on the other hand, provide simplified standards for small enterprises, similar to tax laws, allowing easier adjustment between accounting standards and tax rules.

Additional Accounting Frameworks

In addition to CAS, some enterprises use the Accounting System for Business Enterprises, comprising 14 chapters that outline accounting principles and rules. This system is less common now, as many companies have shifted to CAS.

Recent Updates to CAS

Starting January 1, 2021, several updated standards apply to entities using CAS:

  • CAS14 – Revenue (2017)

  • CAS21 – Leases (2018)

  • CAS22 – Recognition and Measurement of Financial Instruments (2017)

  • CAS23 – Transfer of Financial Assets (2017)

  • CAS24 – Hedge Accounting (2017)

  • CAS37 – Presentation of Financial Instruments (2017)

From January 1, 2022, new interpretations and standards include:

  • Interpretation No.15 (2021)

  • Interpretation No.16 (2022)

  • CAS25 – Insurance Contract (2020) (effective from January 1, 2023)

Reporting Language and Currency

RMB is the base currency for ledgers and financial reports in China. Enterprises may use foreign currencies for transactions but must present financial reports in RMB. Accounting records must be maintained in Chinese, though FIEs can use a combination of Chinese and another language.

Discrepancies Between CAS and Tax Laws

Discrepancies between CAS and tax laws, known as book-tax differences, arise from their different objectives. Accounting standards aim to accurately reflect an enterprise’s financial situation, while tax laws focus on ensuring tax revenue. These differences can be categorized into temporary and permanent differences.

Common Book-Tax Differences

Assets

CAS

Tax Laws

Fixed assets can be recognized even without qualified invoices.

Asset not recognized, resulting in a permanent difference.

Depreciation

CAS

Tax Laws

Both straight-line and accelerated methods acceptable.

Straight-line preferred; accelerated only under specific conditions.

Liabilities

Tax laws do not provide direct deductions for liabilities, but related costs and expenses can be deductible with proper documentation.

Income

CAS

Tax Laws

Revenue from sales to shareholders or creditors is not regarded as income.

Such revenue is regarded as income.

Treasury bond interest is income.

Exempt from taxable income.

Costs and Expenses

CAS allows recognition of expenses likely to decrease assets or increase liabilities. Tax laws impose several requirements for pre-tax deductible expenses.

CAS vs. IFRS: Key Differences

Presentation of Financial Statements

  • Accounting Year: CAS mandates a January 1 to December 31 year. IFRS allows flexibility.

  • Presentation Currency: CAS requires RMB. IFRS has no specific requirement.

  • Titles of Financial Statements: CAS uses different titles (e.g., "balance sheet" vs. "statement of financial position").

  • Income Statement Classification: CAS requires classification by function. IFRS allows classification by function or nature.

Accounting Treatment

For certain items like land and related party identification, CAS may impose different treatments compared to IFRS.

Bookkeeping Practices

CAS bookkeeping can be more complex, especially for VAT-related accounts and lease liabilities, which require specific sub-account names.

Bridging CAS and IFRS

Converting CAS to IFRS involves analyzing and mapping differences, which can be done in two phases:

Phase One

  1. Identify differences in accounting treatment.

  2. Confirm accounting policies.

  3. Analyze report formats and disclosure requirements.

  4. List differences and prepare adjustment entries.

Phase Two

  1. Match sub-ledger accounts under CAS with those under IFRS.

  2. Set up formula links between accounts.

  3. Post adjusting entries.

  4. Generate IFRS financial statements.

This structured approach ensures accurate translation of financial information from Chinese subsidiaries into the parent company’s accounting system.

Conclusion

Understanding and navigating CAS is crucial for foreign companies operating in China. By acknowledging the differences and implementing structured conversion processes, companies can ensure compliance and accurate financial reporting.

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