Since 1 January 2002, FIEs have implemented the Accounting System for Business Enterprises promulgated by the MOF on 29 December 2000, while the Accounting System for Foreign-invested Enterprises issued by the MOF on 24 June 1992 and its related regulations on account titles and financial statements were nullified. Below are certain issues concerning the implementation of the new accounting system.
(a) If an FIE has to change its accounting estimate as a result of implementing the accounting system, all changes should be made using the prospective application. If an FIE has to change its accounting policies, the following circumstances where it is stipulated that the retrospective adjustment method is to be used:
Provision for short-term investment write-down and provision for impairment of long-term investment, fixed assets, intangible assets, construction in progress and designated loans.
The difference between provision for bad debts on receivables and provision for inventory write-down under the new accounting system and those under the old system.
The changes in depreciation life and residual value for the first time, should be treated as change in accounting policy in the current year and adopt retrospective adjustment method. After that, if FIE adjust on depreciation life and residual value again, it should adopt prospective method.
Investments made before the accounting system was implemented and which continue after the implementation date should be treated according to the stipulations of the Accounting System as from the date of implementation. In other words, investments and investment income confirmed under the old system prior to the implementation of the new accounting system may not be adjusted retrospectively. Any subsequent confirmation of investment income and adjustment of the book value of investments should be treated according to the stipulations of the Accounting System.
In implementing the accounting system, under the new accounting standards that promulgate in 2006, the set-up cost cannot be amortised anymore. Instead, the set-up costs should be entered directly under G&A expenses during the set-up period.
(b) FIEs should abide by the following stipulations in implementing the accounting system:
The balance of “marketable securities” should be entered under “short-term investment”.
The balance of “advance payment for goods” and the balance of “advance receipt of payment for goods” should be entered under “prepayment” and “receipt in advance” respectively.
The balance of “provision for loss in inventory realisation” should be entered under “provision for inventory write-down”.
The creditor’s balance of “exchange loss during set-up period” should be entered into the profit and loss account of the current period.
The balance of other deferred expenses should be treated according to different circumstances: it should be entered under “long-term prepaid expenses” if it can generate benefits in subsequent accounting periods; it should be entered under the profit and loss account of the current period if it cannot generate benefits in subsequent accounting periods.
The balance of “deferred investment loss” should be treated according to different circumstances: it should be entered under “long-term prepaid expenses” if it is a debitor’s balance; it should be entered under “deferred income” if it is a creditor’s balance.
The balance of bonds payable and the premium or discount on bonds payable should be entered under “bonds payable”.
The balance of “wages payable” (or “wages and welfare expenses payable”) should be entered under “payroll payable to the employees (including wages, bonuses and allowances, employee incentive and welfare funds drawn from the enterprise’s after-tax profits); the welfare expenses comes under pension funds, insurance, welfare funds and different kinds of subsidies payable to mainland workers should be entered under profit and loss account of the corresponding period when it actually occurred.
The balance of “reserve fund”, “enterprise development fund” and “profit capitalised on return for investment” should be entered under “surplus reserve”.
A new item, “deferred income”, should be created under “estimated liabilities” on the balance sheet.
A new item, “of which: investment of Chinese party (balance of non-renminbi capital at end of period)” and investment of foreign party (amount of non-renminbi capital at end of period)”, should be created under “paid-in capital” on the balance sheet.
Foreign-invested tourism enterprises, in implementing the Accounting System, should for the time being follow the regulations in the Account Titles and Financial Statements for Foreign-invested Tourism Enterprises in compiling their income statements and supporting reports.
When compiling comparative financial statements using the retrospective adjustment method, if changes in accounting policies occur during the periods covered, adjustments should be made to the net profits and losses and other related items in the periods concerned accordingly. For entries in comparative financial statements subject to cumulative effect due to policy change prior to the periods covered, adjustments should be made to the initial retained income as well as other related items.