By Zoey Zhang and Jess Feng

Beginning January 1, 2021, a number of new accounting requirements relating to income, leases, and monetary devices, will quickly apply to all entities which have already adopted the Chinese language Accounting Requirements for Enterprise Enterprises (CAS). These new requirements embody:

  • Chinese language Accounting Requirements for Enterprise Enterprises No.14 – Income (2017) (CAS14);
  • Chinese language Accounting Requirements for Enterprise Enterprises No.21 – Leases (2018) (CAS21);
  • Chinese language Accounting Requirements for Enterprise Enterprises No.22 – Recognition and Measurement of Monetary Devices (2017) (CAS22);
  • Chinese language Accounting Requirements for Enterprise Enterprises No.23 – Switch of Monetary Belongings (2017) (CAS23);
  • Chinese language Accounting Requirements for Enterprise Enterprises No.24 – Hedge Accounting (2017) (CAS24); and
  • Chinese language Accounting Requirements for Enterprise Enterprises No.37 – Presentation of Monetary Devices (2017) (CAS37).

The issuance of latest accounting requirements won’t solely convey massive challenges to the accounting work of related enterprises, but additionally make a distinction to their each day enterprise choices, inside management, monetary efficiency, amongst different facets. It’s thus advisable that enterprises make full preparations for the brand new CAS, with a view to meet the expectations of stakeholders and the necessities of regulators.

This text will take you thru the important thing adjustments and contents of the brand new CAS14 relating to income, CAS21 relating to leases, and different Chinese language accounting requirements relating to monetary devices, the impression introduced by these new requirements on companies, and the variations among the many CAS, the Worldwide Monetary Reporting Requirements (IFRS), and the US Usually Accepted Accounting Rules (US GAAP).

New Accounting Requirements for Enterprise Enterprises No.14 – Income

On July 5, 2017, the Ministry of Finance (MOF) released the New Accounting Requirements for Enterprise Enterprises No.14 – Income (CAS14), to convey the brand new CAS14 consistent with the International Financial Reporting Standards No.15 – Income from Contracts with Prospects (IFRS15) printed by the Worldwide Accounting Requirements Board (IASB) on April 28, 2014.

The brand new CAS14 might result in substantial adjustments to income recognition insurance policies of enterprises, equivalent to altering the timing of income recognition and the quantity being acknowledged. Two new steadiness sheet objects – “contract belongings” and “contract liabilities” – might be added into the monetary assertion of enterprises. In addition to, the introduction of the 5-Step Mannequin and extra disclosure necessities might also complicate the accounting work of enterprises and have an effect on the efficiency of their annual monetary statements.

A snapshot of the main adjustments within the new CAS14

The brand new CAS14 applies to the income recognition of most contracts with prospects. Listed below are the main adjustments, which enterprises are beneficial to pay attention to:

  • The brand new CAS14 consolidates the income recognition fashions within the outdated CAS14 and within the CAS15 – Construction Contracts into one unified mannequin. The unified mannequin will now not differentiate varied sorts of transactions, such because the sale of products, rendering of providers, using enterprise belongings by others, and development contracts.
  • The brand new CAS14 emphasizes the switch of management, as an alternative of the switch of serious dangers and rewards, as the important thing criterion to acknowledge contract income. Which means that income needs to be acknowledged solely when the client obtains the management, that’s “dominate using the product and procure nearly all of the financial advantages from it”.
  • The brand new CAS14 introduces the idea of “efficiency obligations”. Enterprises are required to establish separate efficiency obligations in a contract and allocate transaction worth amongst them.
  • The brand new CAS14 gives extra steering on the willpower of transaction worth.
  • The brand new CAS14 supplies extra tips on the accounting therapy of particular transactions.
  • The brand new CAS14 provides new disclosure necessities.

The 5-Step Mannequin framework for income recognition

In July 2018, the MOF issued relevant tips for the CAS14, introducing a 5-Step Mannequin framework to information enterprises to acknowledge income step-by-step. The 5-Step Mannequin displays the core precept of income recognition below the CAS14 – “an entity shall acknowledge income when (or as) it satisfies a efficiency obligation, which is when the client obtains management of the product”. To adjust to the brand new precept, enterprises might want to overview and modify their income recognition course of, which is anticipated to contain extra authorized and danger evaluation work within the accounting course of.

Listed below are the important thing contents of the 5-Step Mannequin framework:

  1. Establish the contract(s): It supplies key standards for figuring out a contract, which might require entities to guage phrases of their contracts in particulars and develop credit score danger evaluation insurance policies to make sure that the contracts meet the brand new commonplace.
  2. Establish efficiency obligation(s): It asks entities to establish a number of separate efficiency obligations in a single contract, which might require entities to establish their guarantees to switch distinct merchandise to the client and assess the interrelation between the guarantees below the brand new commonplace. This step might be difficult because it requires entities’ accounting judgement.
  3. Decide the transaction worth: It supplies tips for entities to find out the transaction worth, which is the consideration (fee for a services or products) an entity expects to be entitled to obtain. It additionally clarifies accounting therapies with particular association relating to variable consideration, important financing element within the contract, non-cash consideration, and consideration payable to a buyer.
  4. Allocate the transaction worth: It supplies clear provisions that when a contract accommodates two or extra efficiency obligations, on the inception of the contract, the entity ought to decide the “standalone promoting worth” of the distinct product underlying every efficiency obligation and allocate the transaction worth in proportion to the standalone promoting worth. This step would require accounting estimate notably when the standalone worth shouldn’t be available.
  5. Acknowledge income: It wants entities to find out whether or not a efficiency obligation is glad over time or at some extent of time. For a efficiency obligation glad over time, the entity ought to acknowledge income primarily based on efficiency progress over time. This step may fully change the timing of income recognition.

Transitional accounting therapy

An entity that first applies these requirements shall, primarily based on the cumulative effect of initially making use of these requirements, alter the opening steadiness of retained earnings and the quantity of different related objects in monetary statements of the annual reporting interval, and shall not alter the knowledge of the comparative interval.

Affect of the brand new CAS14

Total, the brand new CAS14 will probably have an effect on the timing of income recognition and the transaction quantity being acknowledged in numerous enterprise contracts in addition to pose challenges to entities’ accounting practices. Right here, we summarize a few of the main challenges and impression:

  • Figuring out separate efficiency obligations would require a excessive diploma of judgement by way of product integration, product modification and customization, and interrelationship amongst merchandise, to find out which guarantees are individually identifiable and which aren’t. Incorrect classification may have an effect on the timing and accuracy of income recognition.
  • Beneath the outdated accounting commonplace, income will be acknowledged solely when the quantity of income will be measured reliably. With the brand new accounting commonplace changing into efficient, income from contracts with variable consideration will be acknowledged primarily based on the anticipated quantity or the most probably quantity with sure constraints. This transformation may probably convey the timing of income recognition sooner than it was.
  • For development contracts lasting for a couple of 12 months, entities want to think about whether or not there’s any important financing element in receipt upfront from buyer and retention payable. It includes accounting judgements as as to if such preparations are of financing in nature.
  • The change in income recognition coverage might have an effect on your financial institution covenants, compensation, and bonus plan, and the power to pay dividends.
  • The brand new CAS14 will in all probability have a major impression on the next particular sorts of transactions from each accounting and tax views:
    i) Gross sales contract with a proper of return;
    ii) Gross sales contract with warranties;
    iii) Distinguishing between the principal and the agent;
    iv) Gross sales contract with buyer’s extra buy choices;
    v) Licenses of mental property;
    vi) Buyback;
    vii) Superior funds;
    viii) Non-refundable preliminary funds;
    ix) Copyright distribution; and
    x) Promoting manufacturing and launch through on-line and new media.

New Accounting Requirements for Enterprise Enterprises No.21 – Leases

On December 7, 2018, the MOF released the New Accounting Requirements for Enterprise Enterprises No.21– Leases (CAS21), to convey the brand new CAS21 consistent with the IFRS16 printed by the IASB on January 13, 2016.

The brand new CAS21 would convey important adjustments to monetary statements, particularly for lessees with substantial working leases.

Because the working leases and finance leases will now not be differentiated – each might be acknowledged within the steadiness sheets, related lessees may even see notable will increase in whole belongings and whole liabilities of their steadiness sheet. These adjustments might have an effect on the lease negotiation, due to this fact additionally influencing the lessor’s operation.

A snapshot of the main adjustments within the new CAS21

  • The brand new CAS21 optimized the ideas to differentiate leases from providers. It introduces the ideas of the “recognized belongings” and the “proper to regulate”, and makes use of the “proper to regulate” to find out the scope of software of lease accounting.
  • Beneath the brand new CAS21, the lessee is now not required to distinguish working lease and finance lease. The lessee ought to acknowledge right-of-use belongings and lease liabilities on all leases (aside from short-term leases and low-value asset leases which might be topic to simplified accounting therapy) within the steadiness sheet in addition to curiosity expense, accrued depreciation and any impairment loss within the earnings assertion.
  • The brand new CAS21 supplies extra steering on lessor accounting. It emphasizes on the substance of the transaction apart from the type of contract, provides extra indicative indicators for a lease to be categorized as a finance lease, gives extra steering on the accounting therapy for a finance lease with the producer or supplier because the lessor, and provides extra disclosure necessities for lessors.
  • The brand new CAS21 supplies extra steering on preparations equivalent to gross sales and leaseback, sub-lease, lease adjustments, and many others.

Clarification of the important thing contents in CAS21

Listed below are the important thing contents of CAS21 entities ought to take note of:

  • Definition of leases: The brand new CAS21 supplies clear provisions to differentiate the “leases” from “providers”, the place it emphasised two ideas – “recognized belongings” and the “proper to regulate using the recognized belongings”. They’re the 2 key factors when assessing whether or not the contract is a lease or features a lease.
  • Splitting of leases: The brand new CAS21 regulates that the place a contract concurrently accommodates a number of separate leases, the lessee and lessor shall break up the contract and conduct accounting therapy respectively for every separate lease. The place a contract concurrently accommodates leased and non-leased components, the lessee and lessor shall break up the leased and non-leased components, except the simplified therapy has been adopted.
  • Lease time period: The lease time period must embody the interval lined by the lessee’s choice to renew leases, and exclude the interval lined by the lessee’s choice to terminate leases, when the lessee has fairly decided that the choices might be exercised.
  • Accounting therapy for lessees: On the lease inception date, the lessee will begin recognizing the right-of-use belongings in addition to the lease liabilities for all leases (anticipate for short-term leases and low-value asset leases which might be topic to simplified therapy) – on their steadiness sheets. The brand new commonplace additionally explains methods to measure “right-of-use belongings” and “lease liabilities” utilizing the suitable low cost fee.
  • Simplified accounting therapy: Simplified accounting therapy is relevant to short-term lease (a lease with a lease time period of no more than 12 months on the lease inception date) and low-value asset lease (a lease of a single new leased asset with comparatively low worth when the one leased asset is a brand new asset).

Transitional accounting therapy

Because the potential impact of the brand new lease commonplace is critical and pervasive, the usual supplies a lessee with a number of decisions for transitional accounting therapy.

On the primary day of implementation (that’s, January 1, 2020), an organization might choose to not re-assess whether or not a contract that already exists is a lease or features a lease. Nevertheless, contracts commencing on or after the primary day of implementation have to use the brand new commonplace.

If an entity decides to re-assess current leases, it might select to regulate the retained earnings in the beginning of the 12 months when implementing the brand new commonplace for the primary time however shall not alter data within the comparative interval. For entities adopting this methodology, any lease that might be accomplished inside 12 months after the primary day of implementation (that’s, January 1, 2020) could also be handled as a short-term lease, thereby topic to simplified therapy.

Alternatively, an entity might select to undertake the retrospective adjustment methodology in accordance with CAS28 – Modifications in Accounting Insurance policies and Estimates and Correction of Errors.

Affect of the brand new CAS21

For a lessee below working lease, each whole belongings and whole liabilities will improve as a result of right-of-use belongings and lease liabilities acknowledged within the steadiness sheet. This can have a major impression on varied monetary indicators (that’s, return on belongings, gearing ratio). The impression might be notably important for industries that closely undertake the present working lease mannequin, equivalent to manufacturing, transportation, airways, and many others.

In addition to, for lessees, the brand new commonplace will have an effect on the earnings assertion by recognizing curiosity expense within the finance expense class, thereby influencing Earnings Earlier than Curiosity and Taxes (EBIT) and Earnings Earlier than Curiosity Taxes and Amortization (EBITA).

Additionally, whole expense acknowledged within the earnings assertion might be front-loaded, that means that the overall expense for the primary few intervals after the inception of the lease might be bigger than the quantity that might have been reported below the outdated commonplace. As well as, the distinction between lease expense and lease fee will give rise to deferred taxation.

For lessees, not all the lease fee might be introduced below money outflows from working actions. As an alternative, compensation of the principal and curiosity of lease legal responsibility might be included in money outflows from financing actions.

For each lessees and lessors, when assessing the lease time period, important judgement is concerned in figuring out whether or not the choice to resume or terminate lease might be exercised.

New Accounting Requirements for Enterprise Enterprises No.22 – Recognition and Measurement of Monetary Devices

On March 31, 2017, the MOF released the brand new CAS22 – Recognition and Measurement of Monetary Devices, CAS23 – Switch of Monetary Belongings, and CAS24 – Hedge Accounting. These new CAS relating to monetary devices are in line with the IFRS9 printed by the IASB on July 24, 2014 in materials facets.

The key adjustments in these accounting requirements relating to monetary devices embody:

  • The classification of monetary belongings is modified from the present 4 classes to 3 classes. Monetary belongings at the moment are categorized based on the enterprise mannequin of the administration of monetary belongings and the traits of the contractual money flows, quite than the definitions offered within the outdated commonplace.
  • Impairment of monetary belongings is assessed primarily based on the anticipated credit score loss, as an alternative of the truly occurred loss.
  • Guidelines on hedge accounting are amended to raised mirror the chance administration actions of an entity. The edge and complexity of entities making use of hedge accounting have been lowered.

The CAS relating to monetary devices requires monetary belongings to be measured at amortized value or honest worth. Relying on the enterprise mannequin of an entity’s administration of monetary belongings, accounts receivable and payments receivable could be reclassified as monetary belongings at honest worth by means of different complete earnings or honest worth by means of revenue and loss. Financial institution’s structured deposits, wealth funding merchandise, or different monetary devices that don’t fulfill the take a look at of “solely funds of principal and curiosity on the principal quantity excellent” could be reclassified as monetary belongings at honest worth by means of revenue and loss. Additionally, below the brand new commonplace, all of the non-trading fairness devices shall be measured at honest worth.

As well as, shifting to an anticipated credit score loss mannequin is usually a main problem, notably for banks and different lenders. Since affordable and well-grounded forward-looking data must be obtained when evaluating impairment, extra accounting judgement might be concerned in assessing the credit score dangers of the monetary devices, probably leading to fluctuated provision acknowledged in earnings assertion. The anticipated credit score loss methodology in impairment evaluation of monetary devices might lead to extra impairment being acknowledged earlier in earnings statements than it was. In addition to, the anticipated credit score loss mannequin can also be relevant to lease receivables and contract belongings.

CAS vs. IFRS vs. US GAAP

Income – CAS14 vs. IFRS15 vs. ASC606

There isn’t any materials distinction between the CAS14, IFRS15, and ASC606 (Accounting Commonplace Committee 606 – Income from Contracts with Prospects).

Nevertheless, entities ought to pay attention to the refined variations when making ready for GAAP changes. For instance, each CAS14 and ASC606 particularly state that delivery and dealing with actions earlier than the client obtains management of the product are fulfilment actions, which shouldn’t be recognized as separate efficiency obligations. Nevertheless, no comparable requirement is famous below IFRS15.

Leases – CAS21 vs. IFRS16 vs. ASC842

There are a number of notable variations to bear in mind when making ready for GAAP changes.

As a result of particular circumstances of Mainland China, the land use rights are categorized as intangible belongings, thus not topic to CAS21. Beneath IFRS, nonetheless, the land use rights are thought to be property, plant, and gear and are topic to IFRS16.

One of many notable variations between CAS21 and ASC842 is that for lessee accounting, US GAAP differentiates working lease from finance lease. For working lease, the lessee acknowledges right-of-use belongings and lease liabilities within the steadiness sheet. Nevertheless, below ASC842, the general impression on earnings assertion stay fixed for every interval. Quite the opposite, the impression of CAS21 on the earnings assertion is frontloaded.

Monetary devices – CAS22 vs. IFRS9

There isn’t any materials distinction between CAS22 and IFRS9, however solely refined variations. For instance, whereas CAS22 specifies the therapy relating to the change in principal throughout the existence of the monetary belongings, IFRS 9 makes use of the time period the anticipated lifetime of the monetary devices.

The way to put together for the brand new Chinese language accounting requirements?

All enterprises are required to undertake the brand new accounting requirements beginning January 1, 2021. Thus, related enterprises are beneficial to:

  • Absolutely perceive the adjustments specified within the new accounting requirements.
  • Conduct a complete overview and evaluation on the impression of the brand new accounting requirements on company monetary statements, key monetary efficiency indicators, and capital regulation and talk with shareholders, banks, and authority-in-charge for potential affect.
  • Be taught from the apply and expertise of those that already carried out the brand new requirements.
  • Put together for the transitional accounting therapies and arrange a timeframe for the adoption of the brand new requirements in addition to a plan to maneuver ahead on particular tasks.
  • Establish the gaps between the present apply and the implementation below the brand new requirements, and replace the accounting system, data system, inside management course of, and accounting insurance policies.
  • Overseas-invested enterprises ought to talk with the headquarters in a well timed method, examine whether or not there are any variations between CAS and the accounting requirements adopted by the company group, alter the each day administration studies and consolidated studies, and assess whether or not it’s essential to replace the mapping with group administration accounts.

Dezan Shira & Associates (DSA) has a robust China presence and gives deep, blended service experience in accounting, tax, and know-how answer providers. For extra data, you’re welcome to contact us at accounting@dezshira.com.


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China Briefing is written and produced by Dezan Shira & Associates. The apply assists overseas traders into China and has carried out so since 1992 by means of workplaces in Beijing, Tianjin, Dalian, Qingdao, Shanghai, Hangzhou, Ningbo, Suzhou, Guangzhou, Dongguan, Zhongshan, Shenzhen, and Hong Kong. Please contact the agency for help in China at china@dezshira.com

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