New Chinese accounting standards for enterprises: Are you ready for the changes?
As the year-end approaches, companies are analyzing their financial performance for 2020 and starting to plan for 2021. A review of the upcoming accounting standard updates is essential to understanding the potential impact on your company.
Starting from Jan. 1, 2021, several new accounting standards are coming into effect under Chinese Accounting Standards for Enterprises (CAS) for private entities. These new accounting standards will not only impact financial reporting of the company but also daily business decisions, internal control, tax planning and so on. In this article, we’ll provide a brief introduction of the new Chinese Accounting Standards for Enterprises No. 14 - Revenue (CAS 14) and new Chinese Accounting Standards for Enterprises No. 21 - Lease (CAS 21).CAS 14 Revenue
The new revenue standard is introducing a five-step revenue recognition method, which is very similar to the method in Accounting Standard Codification (ASC) 606 under U.S. Generally Accepted Accounting Principles (US GAAP). The other key change for the new revenue standard is that the revenue recognition point changes from the point of risk-reward transfer to the point of control-change.
At initial application of the standard, any adjustments as a result of the cumulative effect can be recorded in the opening balance of retained earnings, no retroactive adjustment is required.
To prepare for the new revenue standard, we recommend the companies to take the following, but not limited to, actions:
- Review the existing contracting process as well as the current accounting procedures to ensure that they accommodate the new five-step revenue recognition method.
- Review the tax planning and employee incentive plans to see if any change is required.
- Revisit the financial performance forecasting and indicators and communicate with the relevant stakeholders for potential changes.
CAS 21 Lease
The new CAS 21 is very similar to International Financial Reporting Standards 16.
Under this new standard, there is minimal change on the lessor side. For the lessee, the accounting methods have combined into one method, which is similar to the finance lease under the old CAS 21, and there is no more operating lease. As lessee, unless meeting the exception criteria, right-of-use assets and lease liabilities should be recognized on the balance sheet and interest expense, depreciation expense, and impairment loss (if any) are to be recorded in the income statement, for all leases.
New CAS 21 is notably different from ASC 842 under US GAAP, where ASC 842 differentiates operating leases from finance lease. The companies need to pay special attention when performing a conversion between US GAAP and CAS in 2021.
The new lease standard has a pervasive impact on financial reporting. We recommend the companies to review existing and new leases and consider the relevant impact as early as possible.
If you have any inquiries regarding how these changes impact your China operations, please contact Alex He, Brian Wang, or Vivien Xu from our China office.
