Since 1 January 2002, FIEs have implemented the Accounting System for Business Enterprises promulgated by MOF on 29 December 2000, while the Accounting System for Foreign-invested Enterprises issued by MOF on 24 June 1992 and its related regulations on account titles and financial statements were nullified. Given below are certain issues concerning the implementation of the new accounting system.
(a) If an FIE has to change its accounting policies as a result of implementing the Accounting System, all changes should be made using the prospective application except in the following circumstances where it is stipulated that the retrospective adjustment method is to be used:
Provision for short-term investment write-down, and provision for impairment of long-term investment, fixed assets, intangible assets, construction in progress and designated loans.
The difference between provision for bad debts on receivables and provision for inventory write-down under the new Accounting System and those under the old system.
Investments made before the Accounting System was implemented and which continue after the implementation date should be treated according to the stipulations of the Accounting System as from the date of implementation. In other words, investments and investment income confirmed under the old system prior to the implementation of the new Accounting System may not be adjusted retrospectively. Any subsequent confirmation of investment income and adjustment of the book value of investments should be treated according to the stipulations of the Accounting System.
In implementing the Accounting System, if the FIE finds that the start-up cost and exchange loss during the set-up period which are yet to be amortised are relatively large, and that if the balance is entered into the profit and loss account of the current period it would significantly affect its profit, the retrospective adjustment method can be used. If the start-up cost and exchange loss during the set-up period which are yet to be amortised are relatively small, and if the balance is entered into the profit and loss account of the profit, the balance can be entered directly under profit and loss of the period.
(b) FIEs should abide by the following stipulations in implementing the Accounting System:
The balance of "marketable securities" should be entered under "short-term investment".
The balance of "advance payment for goods" and the balance of "advance receipt of payment for goods" should be entered under "prepayment" and "receipt in advance" respectively.
The balance of "provision for loss in inventory realization" should be entered under "provision for inventory write-down".
The creditor's balance of "exchange loss during set-up period" should be treated according to different circumstances: it should be entered under "long-term prepaid expenses" if it is for setting off annual losses incurred in the production and operation of the enterprise; the retrospective adjustment method can be used if the balance is to be written off by equal instalments over five years from the date of commencement of production and operation and if it is entered into the profit and loss account of the current period it would significantly affect the profit of the enterprise;; it can be entered into the profit and loss account of the current period if such entry does not significantly affect the profit of the enterprise.
The balance of other deferred expenses should be treated according to different circumstances: it should be entered under "long-term prepaid expenses" if it can generate benefits in subsequent accounting periods; it should be entered under the profit and loss account of the current period if it cannot generate benefits in subsequent accounting periods.
The balance of "deferred investment loss" should be treated according to different circumstances: it should be entered under "long-term prepaid expenses" if it is debitor's balance; it should be entered under "deferred income" if it is creditor's balance.
The balance of bonds payable and the premium or discount on bonds payable should be entered under "bonds payable".
The balance of "wages payable" (or "wages and welfare expenses payable") should be treated according to different circumstances: it should be entered under "wages payable to the employees (including wages, bonuses and allowances); it should be entered under "welfare expenses payable" if it comes under pension funds, insurance, welfare funds and different kinds of subsidies payable to mainland workers.
Apart from items transferred from "wages payable", "welfare expenses payable" should only include employee incentive and welfare funds drawn from the enterprise's after-tax profits; other current welfare expenses should be entered under the profit and loss account of the corresponding period.
The balance of "reserve fund", "enterprise development fund" and "profit capitalized on return for investment" should be entered under "surplusreserve".
A new item, "deferred income", should be created under "estimated liabilities" on the balance sheet.
A new item, "of which: investment of Chinese party (balance of non-renminbi capital at end of period)" and investment of foreign party (amount of non-renminbi capital at end of period)", should be created under "paid-in capital" on the balance sheet.
Foreign-invested tourism enterprises, in implementing the Accounting System, should for the time being follow the regulations in the Account Titles and Financial Statements for Foreign-invested Tourism Enterprises in compiling their income statements and supporting reports.
When compiling comparative financial statements using the retrospective adjustment method, if changes in accounting policies occur during the periods covered, adjustments should be made to the net profits and losses and o9ther related items in the periods concerned accordingly. For entries in comparative financial statements subject to cumulative effect due to policy change prior to the periods covered, adjustments should be made to the initial retained income as well as other related items.
