Accounting concepts and bases

The general accounting principles or concepts employed in China's accounting regulations include accuracy, completeness, consistency, comparability , timeliness, materiality, accrual basis, matching, prudence, substance over form and going concern. By and large, the principles mirror those of IAS. Other major features of these regulations are as follows :

• The historical cost convention is prescribed. Assets are required to be recorded at purchase cost (less any necessary impairment provision) and revaluations are strictly prohibited except when allowed by other State provisions.

• The concept of fair market value is not commonly used due to the limited existence of open markets.

• These regulations also require companies to use the calendar year, that is 1 January to 31 December, as their financial year.

• The double-entry bookkeeping method should be adopted. Records in accounts and books have to be made in renminbi (yuan) (the lawful currency of the PRC). Transactions and balances denominated in foreign currencies have to be converted into renminbi (yuan) at the official rate, which may differ from the current market rate. All records and balances of transactions made in foreign currencies and the exchange rates used must be maintained for reference.

• A clause in these regulations specifically requires the appropriation of a collective Welfare Fund and a Statutory Reserve Fund from profit after tax.

• Due to the infancy of the new systems, certain footnote disclosures may not be as comprehensive as those acceptable elsewhere in the world. Yet, in certain areas, the Chinese standards are extremely stringent. This includes disclosing the corporate identity of related parties and commenting on the fairness of transactions conducted between related parties, and preparing the cash flow statements using both the direct and indirect methods .

The old standards are neither broad nor flexible enough to allow discussion or manoeuvrability on particular subjects. For the first time, ASBE gives management the authority to exercise professional experience and judgment. While the setting of the ASBE has in theory narrowed the gap between accounting issues in China and those of the Western world, the rigour of applying the ASBE may vary from province to province and from company to company.