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With the opening of the Chinese economy to foreign investments in the past 40 years, China is transforming into a global economic hub. However, with the standardisation of business administration with the International Financial Reporting Standards (IFRS), foreign investors need to be cautious of the differences between the global IFRS and the local Chinese GAAP. In this article, these inconsistencies between IFRS and Chinese GAAP are getting analysed, as well as looking into the optimal preparation for this challenge.

To increase the foreign direct investment (FDI) into the Chinese economy, the Public Republic of China (PRC) implemented special economic zones (SEZs) to further develop towards the biggest global economy. Hence, on the business administration level, this inquires for own accounting rules referred to as the Chinese Accounting Standards (CAS) or the Chinese General Accepted Accounting Principles (Chinese GAAP). While the CAS is implemented to reduce financial fraud or to optimize China’s tax strategy, in an international context the function of IFRS is to streamline international accounting regulations and transparency. Meaning, that the IFRS should be applied on top of the CAS so that the company can both adhere to the international and the local rules. Nowadays, while China starts to converge more with the IFRS principles, the Chinese GAAP still differs from the well-known and familiarized IFRS trademarked by foreign investors.

Background

The organ of the Accounting Regulatory Department of the Ministry of Finance (MoF) is responsible for setting the accounting standards in China. As the previous regulations of the CAS were mainly concerned with sorting a balance sheet of the state-owned industry in the socialist era, the regulations in current years are aimed to reflect the financial status, analyse the operating results, and maintain transparency (for the state). The Chinese GAAP has two subordinate accounting policies:

In 2001, the GAAP initialy included the Accounting Standards for Business enterprises (ASBE01), however, the ASBE01 was in 2006 further transformed into the ASBE06. The ASBE06, which currently is still required for all publicly traded enterprises in China, is the main set of accounting measurements. Luckily, the Chinese GAAP (ASBE06), has key similarities with IFRS. For small-sized business cooperations, there is a special set of accounting measurements called the Accounting Standards for Small-Sized Business Enterprises (ASSBE). This standard can be seen as a merger between IFRS and ASBE06 and has the goal to make it easier for small enterprises to follow the tax regulations and accounting standards.

Differences Chinese Generally Accepted Accounting Principles (Chinese GAAP or CAS) and International Financial Reporting Standards (IFRS)

Knowing that the CAS and IFRS have similarities, it is evident that the foreign investor should be aware of the regulations that differ within these sets of accounting rules. Hereby the differences between the CAS (GAAP) and IFRS:

Valuating Fixed Assets

Whereas the IFRS has the choice to utilize the preferred method of valuating fixed assets, the CAS does not endorse this flexibility. In IFRS, one can opt for re-evaluating the assets or use the historical-cost valuation method. In CAS, only the latter is agreed upon to be used when valuating fixed assets.

Implementation Delays

Whenever IFRS updates/changes are released, these new IFRS rules are not immediately, and in some cases never, adopted in the CAS. In short, the Ministry of Finance (MoF) will review the latest release of the IFRS and see if it can be adopted into the China business framework. For foreign investors, this means that 1) the IFRS updates are delayed, 2) the IFRS might never be applied and thus results in 3) the IFRS regulations can be different than in other countries. This can lead to serious problems in companies with an overarching implementation of IFRS changes (e.g. software) in all of the subsidiary ventures.

Common Services in China

When handling cases of common service in China, the CAS has a more detailed description of the situation. For example, In the case of merging two companies with similar interests and under the control of one entity. The CAS requires a restatement of the figure while IFRS has no specific rules for this situation.

Uncommon Services in China

Opposite to the previous point, uncommon situations in China are less detailed than the IFRS counterpart. The Italian-Chinese Chamber of Commerce exemplifies this difference by looking at employee benefit plans. The CAS has no specific rules for staff benefits offered by international firms besides payments in the firm’s stock. In the case of using benefits packages for its subsidiaries, the mother company can get into serious problems and should always have contact with the MoF to address and record such transactions accurately.

Fiscal Year

The fiscal year of the CAS starts from January 1^st, while the start of the fiscal year can be decided by the company when applying IFRS. Regarding IFRS, the year must be 12 consecutive years.

How to successfully do business in China regarding the Chinese Accounting Standards?

To minimalize the potential risk of conflicts with the law, it is recommended for foreign investors to notice the differences between CAS and IFRS and apply both of the accounting standards in the right way. In this process of familiarizing with CAS, the differences should be known, and the contact between the firm and the Ministry of Finance should be optimal to resolve challenges and uncertainties. Moreover, be aware that the CAS can only be filed in the China language, and that short-cuts in the Chinese accounting world often result in serious delays and non-compliance: further complicating the international business. Thus, in the case of maintaining an overview of both CAS and IFRS, even while it is about 90-95% similar, it is recommended to have (specialized) agencies on your side. With experts on the topic, it is evident that the venture is assisted by experience. This way, the short straw will not be drawn when dealing in an unknown and new business environment.

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Source:

China-Italy Chamber of Commerce

The four sets of accounting standards in Japan are the International Financial Reporting Standards (IFRS), Japanese Generally Accepted Accounting Principles (J-GAAP), Japan’s Modified International Standards (JMIS) and the United States Generally Accepted Accounting Principles (US GAAP). In this article, we explain why IFRS and J-GAAP are the most prominent accounting standards in Japan. Whereas J-GAAP is mostly used for Japanese small-medium enterprises (SMEs), more and more Japanese companies apply to IFRS every year. As a Japanese company, with or without (foreign) subsidiaries, what should you keep in mind when applying these standards? Is it more convenient to use J-GAAP since it is well implemented? Or is it perhaps more desirable to choose IFRS since this method makes comparing per country more convenient?

IFRS in Japan

IFRS is principle-based, emphasizes balance sheets, and has global standards, with a flexible implementation convenient to use and easy to understand. Both Japan and the US implement GAAP but have adopted IFRS as a bylaw principle. This is a set of detailed rules regarding accounting standards, interpretation guidelines, practical guidelines and more. However, the rules are roughly sketched compared to J-GAAP. Many notes need to be taken with efficient substantiation for a sufficient interpretation of details per company and country. Unlike J-GAAP, IFRS includes non-operating income as ‘other operating income’ and ‘other operating expenses.’

J-GAAP

In Japan, the income statement is emphasized as information for evaluating the asset value required for investors and creditors and the profit and loss statement for a certain period. Japanese accounting standards implement ‘ordinary’ and ‘extraordinary’ profit and loss. Non-operating income – such as dividends and stock interests, deposits and savings – and operating income – such as main business profit – are included. After deducting non-operating expenses (e.g., loss on sales of interest payments and loans), ordinary income is an essential indicator of corporate profitability under the Japanese accounting standards.

IFRS versus J-GAAP

For companies with a subsidiary or subsidiaries overseas, the implementation of IFRS can unify the accounting indicators: Accounting management becomes convenient by comparing everyone’s performance efficiently. Japanese companies without subsidiaries can apply to IFRS as well if they have a capital of 2 billion yen or more, or are newly registered to the stock market. The application is voluntary, as a de facto national policy. At this moment (March 2021), no conclusion has been reached by the Japanese government regarding compulsory applications.

As stated by the Companies Act, disclosure under J-GAAP is still required, so companies have to prepare multiple reports for both IFRS and the Japanese accounting standards. As IFRS is based on principles, a significant amount of information is necessary, which increases the amount of clerical work involved and the burden on the person in charge.

‘Goodwill’ is the difference between a company’s acquisition price and its book value. Under J-GAAP, a fixed amount is amortized and expensed every year, so profits in the account settlements will inevitably decrease. Goodwill must be amortized within every 20 year acquisition period, but in IFRS, this is not the case. In the IFRS case, goodwill is amortized unless the corporate value drops significantly, resulting in not being recorded as an expense. The value decreases after each period, registered as an impairment loss without amortization.

It will cost a certain amount of money to switch from J-GAAP to IFRS. Changing standards, systems, and audits costs time and money, making companies think twice before switching systems, especially if they choose to do business in Japan only.

Companies that are active in mergers and acquisitions (M&A) can profit in their financial results with IFRS. Since IFRS is a globally used method, many foreign investors understand IFRS better than J-GAAP. Examples of companies applying IFRS that are active in M&A are Rakuten and Softbank.

In December 2018, Japan erased the variances between IFRS and J-GAAP, by bridging the gaps. However, IFRS is different from Japanese conventional accounting standards, which can make application challenging. IFRS is frequently revised, so companies have to consider this as well. As mentioned before, Japanese companies adopting IFRS are increasing but compared to the world, the number of applications is still small, making referred information scarce.

In Japan, J-GAAP still mostly applied standard; however, with global IFRS support and more Japanese companies applying this standard, IFRS is most likely the accounting future for Japan. IFRS is frequently revised and has different rules than J-GAAP, so you need to keep up to-to-date with the latest information and knowledge, which is both rewarding yet time and cost-consuming. This track of data can be quite challenging, so many companies leave this part to an expert. If you are looking for an expert to help you with this, feel free to contact us. Global Connect Admin (GCA) already helps multinationals with subsidiaries with IFRS standards, accounting and financial management, and fiscal reports. While they focus on their core business, we assist them with their financial business. Feel free to ask us questions or read other GCA articles.

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Sources

Digima – KPMG Japan