An Overview of Accounting and Auditing in China
In China, all companies must prepare annual financial statements, and they must also be audited. The Certified Public Accountants Law of China of 2014 and The Accounting Law of China of 2017 regulate Accounting in China. Every Chinese company must comply with the Chinese Accounting Standards (CAS), also referred to as the Generally Accepted Accounting Principles of China.
Chinese Accounting Standards (CAS)
The structure of CAS or the GAAP of China is based on the following standards:
- Accounting Standards for Business Enterprises (ASBE);
- Accounting Standards for Small Business Enterprises (ASSBE).
ASBE is similar to International Financial Reporting Standards (IFRS). Only a few insignificant discrepancies are there. The companies' accounting records are to be kept in China, and a local script can be used concurrently for autonomous national regions. Enterprises with foreign companies, foreign investments, and other overseas entities within the People’s Republic of China (PRC) can concurrently use any foreign language. The accounts of the companies must be signed by an authorized person, such as the manager or the accountant and sealed. Accounting books and records must be stored for at least ten years. Companies incorporated in mainland China must file their annual financial statements with the Ministry of Finance and the Administration for Industry and Commerce (AIC). An annual tax return must be filed with the State Administration of Taxation (SAT).
Corporate Tax must be calculated per the tax legislation and not accounting standards due to the discrepancies between accounting standards and tax legislation. Annual instructions are issued by the local tax authority for collating accounting and tax standards every year. Thus, the annual report must contain collation and correction sheets to eliminate discrepancies between tax legislation and accounting standards. Any Transactions with affiliated persons must also be enclosed with the annual report and collation of a related party transaction report.
What does a standard annual report comprise?
The annual report comprises the following:
- Balance Sheet
- Profit and Loss Statement
- Cash Flow Statement
- Statement of changes in equity
- Notes to financial statements
- Collation of taxable profit
Audit of Accounts
The audit of accounts of Chinese companies is done as per the Audit Law 1994. Chinese companies have to audit their accounts compulsorily. The compulsory audit ensures that the companies comply with the Chinese financial and accounting standards, i.e., ASBE and ASSBE. The audit must be done by the end of May every year. Companies with foreign capital distribute their profit or dividends back to their country only after the end of the annual audit and after fulfilling all relevant tax obligations. For companies with foreign investments in China, an annual check is mandatory, which is to be carried out by the government department of the State Council. Requirements of an auditor’s report depend upon the region, as some regions require a separate auditor’s report on corporate tax. In Beijing, a separate auditor’s report on corporate tax is required if the following conditions are met:
- Annual sales income exceeds 30,000,000 CNY;
- Last year’s losses are carried over to be deducted from this year’s income; or
- Annual losses exceeding 100,000 CNY.
In Shanghai, a separate auditor’s report is required if the following conditions are met:
- The current year’s loss exceeds 5,000,000 CNY
- Losses carried over from previous years
The time for preparation and submission of financial statements
The tax return and financial statements of a company must be filed for a reporting quarter within 15 days from the end of the quarter. Further, the annual report and corporate tax return must be filed by companies within five months from the end of the financial year. In case of delay in the payment of profit tax, a late payment fee of 0.05% of the amount of unpaid tax will be charged daily. Additionally, the fee for late payment of company profit tax, penalties can also be imposed.
Consolidated Financial Statements
No companyin China is required to file a consolidated report. Each enterprise files its separate accounts.