Audits in China -How Do They Differ?

Excerpt from Practical China Tax and Finance Strategies
published by WorldTrade Executive

by Tony Upson (Director of Assurance and Advisory at PKF Beijing)


If you are contemplating investing in or trading with a Chinese company or are already doing so, you will want to satisfy yourself about the company’s financial position and results and will no doubt consider the company’s financial statements. Do you know the differences between Chinese audits and financial statements, particularly for private companies, and Western standards?

Here are some items to consider:

Firstly, financial statements for unlisted Chinese companies are not generally on the public record. This is similar to the USA but dissimilar to Europe, where the financial statements of all limited companies are on the public record (in theory, at least). Financial statements of private companies in China have to be prepared for the tax authorities and various other government bodies.

Listed companies have to use modern Chinese accounting standards (Accounting Standards for Business Enterprises or ASBEs), which are similar to International Financial Reporting Standards (IFRS), but private companies often still use the previous system. This form of financial statements is of limited use to a potential investor or other trading partner. Unlike financial statements prepared under IFRS, they are not designed to provide information of use to investors. Areas where differences often exist between financial statements prepared under the old Chinese system and under IFRS include:

• accounting for land use rights as intangible assets rather than operating leases
• doubtful debt provisions based on ageing formulae, rather than realistic appraisal of recoverable amounts
• use of ‘standard’ asset lives and residual values, rather than realistic estimation
• deferral of expenditure such as start-up costs and R & D
• lumping together taxes on income with indirect, sales and other taxes
• deferred tax
• inclusion of the results of subsidiaries in the parent company’s individual accounts

In addition to these differences between the old Chinese rules and IFRS, unaudited financial statements of private companies often do not even comply with the old Chinese rules. Adjustments are only made when financial statements are audited and submitted to the tax bureau. So in Unaudited accounts it is common to find that:

• revenue recognition is on a cash basis rather than an accruals basis
• recognition of costs depends on whether an invoice has been received, not on whether the goods or services have been received.

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