Appendix IV: PRC Accounting Standards and Financial Regulations vs IAS and US GAAP

SUBJECT	US GAAP	IAS	People s Republic of China Accounting Standards and Accounting Systems for Business Enterprises
Special purpose entities	Consolidate based on risks and rewards. Specific guidance for consolidation of lease arrangements involving SPEs. Specific criteria have to be met for transfers of financial assets.	Consolidate where the substance of the relationship indicates control	Not specified in the regulations.
Foreign currency translation “ individual companies	Translate transactions at rate on date of transaction; monetary assets/liabilities at balance sheet rate; non- monetary items at the historical rate. Difference taken to equity.	Similar to US GAAP.	Translate transactions at rate stipulated by the People s Bank of China (PBOC) rate on date of transaction or 1st day of the month in which the transactions took place. Monetary assets/liabilities denominated in foreign currencies at the balance sheet date are translated into RMB at the exchange rates stipulated by PBOC at the balance sheet date. Translation difference recorded as part of equity.
Foreign entities within consolidated financial statements	Use closing rate for balance sheets,	Similar to US GAAP. average rate for income statements. Take exchange differences to equity Include in gain or loss on disposal of a subsidiary	Use closing rate for balance sheets, average rate for income statements. Take exchange differences to. equity.
Hyperinflation “ foreign entity	Remeasure local currency statements using the reporting currency as the functional currency.	Adjust local statements of foreign entity to current price levels prior to translation.	Not specified in regulations.
Types	All business combinations areacquisitions.	An acquisition is the most common. Uniting of interests/pooling severely restricted.	No effective rules although the Exposure Draft on Business Combination suggests that the purchase method should be used. In practice, most acquisitions are accounted for using the purchase method of accounting.
Purchase method “ fair values on acquisition	Fair value the assets and liabilities of acquired entity but specific rules for acquired in-process research and development ( generally expensed).	Fair value the assets and liabilities of acquired entity.	No effective rules but the Exposure Draft suggests that fair value of assets and liabilities acquired should be used.
	Some plant closure and restructuring liabilities relating solely to the acquired entity may be provided in fair value exercise, if specific criteria about restructuring plans are met	Similar to US GAAP, but more stringent recognition criteria regards timing of implementation of the plan.	Existing regulations do not address this. The Exposure Draft suggests that foreseeable costs of integration, restructuring and redundancy charges should form part of the acquisition costs.
Purchase method “ goodwill	Capitalize but do not amortize. Goodwill should be tested for impairment at least annually at the reporting unit level.	Capitalize and amortize over useful life, normally not longer than 20 years .	If the acquiree retains its status as a legal person, then any excess of the cost of the acquisition over the acquiree s net assets book value (not fair value) would be ˜equity investment difference . This difference should be amortized over the investment period as stipulated in the investment contract or a period not exceeding 10 years. If the acquiree does not continue to be a legal person, then any excess of the cost of the acquisition over the acquiree s net assets fair value would be recognized as ˜goodwill .
Uniting of interests method	Prohibited .	Severely restricted to true mergers of equals . Requirements focus on lack of identification of an acquirer.	Not specified in regulations.
Revenue recognition	Four key criteria have been established. Detailed guidance for specific transactions.	Based on several criteria, In principle similar to US GAAP, which require the recognition of revenue when risks and rewards have been transferred and the revenue can be measured reliably.	Revenue is recognized when risks and rewards have been transferred, ceases ˜control on the goods sold, and the revenue (and associated costs) can be measured reliably.
Construction contracts	Accounted for using the percentage of completion method. Completed contract method permitted.	Accounted for using the percentage of completion method. Completed contract method prohibited.	Accounted for using the percentage of completion method.
Interest income	Accrual basis	Similar to US GAAP	Similar to US GAAP
General	Accrual basis.	Similar to US GAAP	Similar to US GAAP.
Interest expense	Interest expense recognized on an accrual basis. Effective yield (known as interest method) method used to amortize non-cash finance charges.	Interest expense recognized on an accrual basis. Effective yield method used to amortize non-cash finance charges.	Similar to US GAAP.
Inventories “ valuation	Carry at lower of cost or net realizable value (NRV)	Carry at lower of cost and NRV.	Similar to US GAAP.
Inventories “ determining cost	Use FIFO, LIFO, or weighted average method to determine cost. More common use of LIFO.	Use FIFO, LIFO (rarely used), or weighted average method to determine cost.	Use FIFO, LIFO, weighted average, moving average, and specific identification method to determine cost.
Inventories “ provision for obsolescence losses	Recognise based on general rule for making provisions.	Similar to US GAAP.	Similar to US GAAP.
Property, plant and equipment “ revaluation	Revaluations are not permitted.	Use historical cost or revalued amounts. Frequent valuations of entire classes of assets required.	Carried at historical costs. Revaluations are not permitted.
Property, plant and equipment “ depreciation	Depreciate over the useful life of the asset, generally by the straight-line method.	Similar to US GAAP.	Depreciate over the estimated useful life of the assets by straight-line method, double-declining method, production method, sum-of-the-years-digits method etc. Useful life and depreciation method is based on management judgement. Assets above RMB2,000 and expected to be used for two or more periods should be capitalized.
Property, plant and equipment “ Asset retirement costs	The present value of future retirement costs should be capitalized as part of the P, P&E.	Asset retirement costs should be accrued for. However, discounting is not required.	Not specified in regulations.
Capitalization of borrowing costs	Compulsory when relates to construction of certain assets.	Permitted for qualifying assets.	Borrowing costs on project-specific borrowings should be capitalized as part of the cost of acquiring or constructing a tangible fixed asset.
Investment property	Treat as for other properties (depreciated cost).	Measure at depreciated cost or fair value and recognize changes in fair value in the income statement.	Not specified in regulations.
Impairment of assets	If impairment indicated, account it as follows : For assets to be held and used, impairment assessed on undiscounted cash flows. If less than carrying amount, measure impairment loss using market value or discounted cash flows. Reversals of losses prohibited. For assets held for disposal, impairment based on lower of carrying amount and fair value.	If impairment indicated, write down assets to higher of net selling price and value in use based on discounted cash flows. If no loss arises, reconsider useful lives of those assets. Reversals of losses permitted in certain circumstances.	Similar to US GAAP but reversals of impairment reserves allowed under certain circumstances.
Acquired intangible assets	Capitalize purchased intangible assets and amortize over useful life, and review for impairment. Intangibles may also be assigned an indefinite useful life, these must not be amortized but reviewed for impairment at least annually. Revaluations are not permitted.	Capitalize if recognition criteria met; intangible assets must be amortized over useful life, normally no longer than 20 years. Revaluations are permitted in rare circumstances.	Capitalize purchased intangible assets and amortize over useful life normally no less than 10 years.
Internally generated intangible assets	Expense both research and development costs as incurred. Some software and website development costs must be capitalized.	Expense research costs as incurred. Capitalize and amortize development costs only if stringent criteria are met.	Expense research and development costs as incurred. Capitalize expenditures such as registration fees and legal fees incurred for legal application of obtaining the asset, and amortize over its estimated useful life.
Leases “ classification	Finance lease if substantially all risks and rewards of ownership transferred. Substance rather than form is important.	Similar to US GAAP. Substance rather than form is more important than that of US GAAP.	Similar to US GAAP.
Leases “ lessor accounting	Record amounts due under finance leases as a receivable. Allocate gross earnings to give constant rate of return based on (pre-tax) net investment method. Specific rules for leveraged leases.	Similar to US GAAP.	Similar to US GAAP.
Leases “ lessee accounting	Record finance leases as asset and obligation for future rentals. Normally depreciate over useful life of asset. Apportion rental payments to give constant interest rate on outstanding obligation. Generally charge operating lease rentals on straight-line basis.	Similar to US GAAP.	Similar to US GAAP except that the aggregate of the future lease payments is presented as a liability undiscounted. The difference between the asset value (calculated as the net present value of future lease payments) and the aggregate of future lease payments is systematically allocated to costs.
Leases “ sale and leaseback transactions	Defer and amortize profits up to certain limits. Immediately recognize losses. estate transaction.	For a finance lease defer and amortize profit arising on sale, if an operating lease Consider specific strict criteria if a real arises then profit recognition depends on sale proceeds compared to fair value of the asset.	For a finance lease, defer and amortize profit arising on sale as an adjustment to depreciation. For an operating lease, defer and amortize profit on sale according to the proportion of the lease payments during the lease.
Financial assets “ security investments	Depends on classification of investment “ if held to maturity or originated by the entity then carry at amortised cost, otherwise at fair value. Unrealised gains/losses on trading securities recognized in the income statement and on availablefor-sale investments recognized in comprehensive income (equity).	Similar to US GAAP, except unrealized gains/ losses on available-for-sale securities recognized in either equity, or the income statement.	Security investments are accounted for as short and long-term investments. Only short-term investments are required to be carried at the lower of cost or market, unless impairment other than temporary exist in long- term investments.
Financial instruments “impairment of securities	When a decline in fair value below the amortized cost basis is other than	Similar to US GAAP, less guidance than US GAAP. temporary, recognition of impairment loss on a security is required.	Similar to US GAAP. Should review fair value of long-term investment securities at least annually.
Financial assets “ loans	Normally capitalised by principal amounts. Write-down of specific account is required when impaired.	Similar to US GAAP.	Similar to US GAAP.
Financial assets - Allowance for	Generally established based on experiences credit losses and/or analysis of recoverability. Commonly general provisions and provisions for specific accounts are made.	Similar to US GAAP.	Similar to US GAAP.
Derecognition of financial assets	Recognize and derecognize assets based on control. Legal isolation of assets even in bankruptcy necessary for derecognition.	Recognize and derecognize assets based on control.	Not specified in regulations.
Provisions “ general	Record provisions relating to present obligations from past events if outflow of resources is probable and can be reliably estimated. Rules for specific situations (employee termination costs, environmental liabilities, loss contingencies).	Record provisions relating to present obligations from past events if outflow of resources is probable and can be reliably estimated.	General concept similar to US GAAP although there are no specific guidance on employee termination and restructuring costs. In practice, best practice would be to have them accrued as the liability arises.
Provision “ compensated absences	Required to recognise the obligation.	Similar to US GAAP.	No rules for compensated absences.
Provisions “ restructuring	Recognise restructuring provisions if management approval and communication for involuntary employee terminations have been made.	Similar to US GAAP, however need detailed formal plan announced or implementation effectively begun.	No specific rules for restructuring.
Employee benefits “ pension costs (defined benefit plans) paid	Must use projected unit credit method to determine benefit obligation.	Similar to US GAAP, although several minor differences.	Not addressed in existing regulations. In practice, employee benefit expenses will only be recognized as
Employee benefits “ other	Account for post-retirement benefits as pensions. More detailed guidance given for termination benefits. Account for termination indemnity plans as pensions.	Similar to US GAAP. Rules also given for termination benefits arising from redundancies and other post-employment and long-term employee benefits. Termination indemnity similar to US GAAP.	No standards for post-retirement benefits.
Contingencies	Disclose unrecognized possible losses and potential gains.	Similar to US GAAP.	Similar to US GAAP.
Deferred income taxes general approach	Use full provision method, (some exceptions) driven by balance sheet temporary differences. Recognize all deferred tax assets and then provide valuation allowance if recovery is less than 50% likely.	Similar to US GAAP. Recognize deferred tax assets if recovery is probable. A number of specific differences in application.	May choose tax payable method or tax effect accounting “ deferral method / liability method. If deferred tax method is used, then application is more similar to IAS.
Deferred income taxes “ main exceptions	The exceptions are treated as permanent	Non-deductible goodwill and temporary differences. differences on initial recognition of assets and liabilities which do not impact accounting or taxable profit.	The exceptions are treated as permanent differences.
Government grants	Recognise as deferred income and amortize. May offset capital grants against asset values.	Similar to US GAAP.	Recognized as income upon receipt.
Financial liabilities “ classification	Generally where an instrument is not a share, classify as liability when obligation to transfer economic benefit exists. Redeemable preference shares normally mezzanine category (between debt and equity).	Classify capital instruments depending on substance of obligations of the issuer. Mandatorily redeemable preference shares are classified as liabilities.	Generally where an instrument is not a share, classify as liability when obligation to transfer economic benefit exists. Financial liabilities exist beyond 1 year is not discounted. Not specified regarding redeemable preference shares in regulations.
Convertible debt	Convertible debt is usually recognized as a liability.	Account for convertible debt on split basis, allocating proceeds between equity and debt	Similar to US GAAP.
Derecognition of financial liabilities	Derecognize liabilities when extinguished. The difference between the carrying amount and the amount paid is recognized in the income statement.	Similar to US GAAP.	Similar to US GAAP.
Derivatives and hedging
Derivatives “ not qualifying as a hedging instruments	Fair value and the change in fair values charged to income.	Similar to US GAAP.	No regulations specified in this area.
Derivatives “ qualifying as a hedging instruments	Recognized at fair value	Similar to US GAAP.	No regulations specified in this area.
Derivatives “ hedging criteria	Numerous requirements including designation, documentation, and periodical testing of effectiveness by each hedging instruments.	Similar to US GAAP.	No regulations specified in this area.
Derivatives and other financial instruments “ measurement of financial instruments and hedging activities	Measure derivatives and hedge instrument at fair value; recognise changes in fair value in income statement except for effective cash flow hedges defer in equity until effect of the underlying transaction is recognized in the income statement.	Similar to US GAAP, except gains/losses on hedge instrument used to hedge forecast transaction, included in cost of asset/liability (basis adjustment).	No regulations specified in this area.
Derivatives and other financial instruments “ measurement of hedges of foreign entity investments	Gains/losses on hedges of foreign entity investments recognised in equity. Gains/losses held in equity must be transferred to the income statement on disposal of investment. All hedge ineffectiveness recognized in the income statement.	Gains/losses on hedges of foreign entity investments recognised in equity, including hedge ineffectiveness on non-derivatives. For derivatives, recognize hedge ineffectiveness in the income statement. Gains/losses held in equity must be transferred to the income statement on disposal of investment.	No regulations specified in this area.