The updated International Financial Reporting Standard 16 on leases was effective as of 1st January 2019. China also took this update quickly into the Chinese GAAP, because China has been keeping its local GAAP in convergence with the international standards for a better environment facilitating more foreign investments.
The Chinese GAAP is named as the Chinese Accounting Standards (CAS). It is applicable to enterprises for recording and reporting their financial accounts. The CAS is very similar to IFRS. Less use of fair value method in financial reporting is one of the few notable differences that remain. Foreign invested companies or subsidiaries in China need to follow the Chinese GAAP for statutory declarations and inspections in China. Meanwhile, the considerable similarity makes such firms easier to go international with these financial reports.
The new IFRS 16 affects the lessees far more than the lessors. The categorization of financial leases and operational leases was phased out. Since 1st Jan. 2019, the right to use must be recognized in assets and the lease debts in liabilities for every lease. The purpose of such a modification is to improve the visibility of lease commitments and the reflection of economic reality of each company. China actively followed this update in IFRS by incorporating the new method on recognizing leases in the CSA 21, dated back in 2016 when the new IFRS 16 was released. Main contents were kept the same as in IFRS, while additional disclosures on operational leases were added.
Lessees shall disclose the carrying amounts and depreciation charges at the beginning and ending of each period, gain or loss in the current period, total cash flow relating to leases, gain or loss relating to leaseback, information relating to lease liabilities, right to use assets relating to investment on immovable properties, and simplification treatment on any short-term lease or low value assets lease if applicable. Additionally, disclosure shall also be made by lessees on scope or type of lease, potential forthcoming cash outflow, restrictions or commitments derived from lease, information on leaseback and other relevant information.
Lessors shall disclose the income derived from leases and variable lease payment income separately, fixed assets on leases and per self-occupied separately, expected annual lease payments in the forthcoming 5 years from the current year and the net lease payment after 5 years, and, if necessary to report, description of lease activities, reservation for risk management and other relevant information.
Applicability of the new CAS 21 was officially confirmed by the Chinese Ministry of Finance in December 2018. Companies listed in both Chinese and any foreign stock markets will start using this new standard on leases on 1st January 2019 and onwards. Other Chinese companies will start to follow the new CAS 21 as of 1st January 2021. Companies of which mother companies or subsidiaries are listed on any foreign stock markets may adopt CAS 21 in advance but not earlier than adopting CAS 22 and 14.