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Accounting Regulations Of The People's Republic Of China For Enterprises With Foreign Investment(3)
enorth.com.cn   2001-06-01 09:49

 

CHAPTER 10 COST AND EXPENSES Article 50. Material consumption, labour cost and all other expenses incurred during operation shall be accounted for as cost of sales or expenses.

Raw materials consumed by the enterprise during operation shall be accounted for as cost of sales or expenses based on actual quantities consumed and the book unit prices.

Accrued payroll shall be accounted for as cost of sales or expenses based on specific pay scale, ways of remuneration, bonuses and allowances schemes, working hours and production volume. Payments in relation to social welfare insurance, retirement benefits schemes, unemployment insurance schemes, housing allowance and various allowances payable by the State, to employees from the Chinese party shall be accounted for as wages and salaries and be included in cost of sales or expenses.

Other expenses incurred during operations shall be accounted for as cost of sales or expenses at the amount actually incurred. Expenses attributable to the current accounting period but not yet paid shall be accrued for as cost of sales or expense of the period. Expenses paid but attributable to the current and subsequent accounting periods shall be accounted for as deferred charges or deferred expenses and shall be charged by installment to cost of sales or expenses.

Article 51. Enterprises with foreign investment shall accumulate all expenses incurred during operation into the relevant cost items or expense items.

1. The direct cost of production of industrial enterprises include direct materials, direct labour and production overheads. Enterprises may, based on actual requirements, separately account for items such as fuel and power, subcontracting charges, special purposes tools and others.

Direct materials represent raw materials and semi-finished goods which can be directly taken into product cost.

Direct labour represents the wages of those workers who are directly engaged in production.

Production overheads represent expenses incurred by the workshop or the factory management department in organizing and managing production and include wages, depreciation charges, maintenance expenses, materials consumed, amortization of low-value consumables, labou protection expenses, water and electricity charges, office expenses, traveling expenses, transportation charges, insurance expenses, rental expenses, design and drawing expenses, experimental and inspection expenses, environmental protection expenses and inventory losses (less gains).

Expense items of industrial enterprises include selling expenses, general and administrative expenses and financial expenses which shall not be taken into the direct cost of production but accounted for separately as expenses of the cur rent accounting period and separately disclosed in the income statement.

Selling expenses are expenses incurred by the enterprise during the selling activities and include transportation charges, loading and unloading expenses, packaging expenses, insurance expenses, sales commission, handling charges paid to sales agents, advertising expenses, rental expenses and sales services charges. Selling expenses also include operating expenses of the sales department, such as salaries and wages, business trip expenses, depreciation charges, maintenance expenses, office expenses,materials consumed, amortization of low-valued consumables and other expenses.

General and administrative expenses include general office expenses, labour union expenses, expenses incurred by the board of directors, consulting fees, legal fees, entertainment expenses, taxes (including urban real estate tax and license tax for vehicles and vessels), property rental charges, technology transfer fees, amortization of intangible assets, amortization of other assets, bad debts written off, staff training expenses, research and development expenses and other general and administrative expenses. Financial expenses include interest expenses (less interest income), exchange losses (less exchange gains), handling fees charged by financial institutions and other expenses incurred in financial operations.

2. Expenses incurred by commercial enterprises during operation include purchase expenses, selling expenses, general and administrative expenses and financial expenses.

Purchase expenses include transportation charges, loading and unloading expenses, packaging expenses and insurance expenses incurred during the purchasing process, normal losses in transit and sorting and material handling expenses incurred before warehousing.

General and administrative expenses are expenses incurred during storage and expenses incurred by the management department of the enterprise, and include salaries and wages, depreciation charges, maintenance expenses, materials consumed, amortization of low-value consumables, labour protection expenses, water and electricity charges, office expenses, business trip expenses, transportation charges, insurance expenses, rental expenses, inventory losses (less gains), labour union expenses, expenses incurred by the board of directors, consulting fees, legal fees, entertainment expenses, taxes (including urban real estate tax and license tax for vehicles and vessels), property rental charges, amortization of intangible and other assets, bad debts written off, staff training expenses and other general and administrative expenses.

Selling expenses and financial expenses are similar to those of industrial enterprises.

3. Expenses incurred by servicing enterprises during operation include operating expenses, general and administrative expenses and financial expenses.

Operating expenses include expenses incurred during operation and may be categorized into different types in accordance with services provided.

General and administrative expenses include expenses incurred in the management of the enterprise.

Financial expenses are similar to those of industrial enterprises.

4. Expenses incurred by other enterprises may be dealt with in the similar manner provided above.

Article 52. Sample products and equipment produced in trial runs during product development of an industrial enterprise shall be accounted for as cost of sales and be separately booked if these products and equipment can be sold or, where these products and equipment cannot be sold, the costs for producing such products and equipment shall be included in general and administrative expenses or product cost, on commencement of production, after deduction of the residual value.

CHAPTER 11 INCOME, PROFITS AND PROFIT APPROPRIATION

Article 53. Operating income of enterprises with foreign investment includes income from principal activities and other operating income which shall be accounted for separately. Income from principal activities of enterprises in different industries may be classified into sales income, business income, engineering project income and servicing fee income.

Article 54. Operating income shall generally be recognized on delivery of products or merchandise, hand over of engineering projects, provision of labour or other services, receipt of the sale consideration or having obtained the entitlement to the sale consideration.

The entitlement to the sale consideration means all collection procedures have been cleared by the banks where banks are authorized to collect payments, or consignment sales statements have been received from the sales agent where a sales agent has been appointed. Where in a Chinese foreign co-operative joint venture products are distributed among the investors, operating income shall be recognized when products are distributed to the investors. For enterprises engaged in the hire purchase business, operating income may be recognized according to the payment dates specified in the hire purchase contracts. In the case of long term contracts, operating income may be recognized according to the stage of completion or work completed.

Operating income shall be accounted for to the extent of the amount received and receivable. Sales returns shall be netted off against operating income while sales discounts or sales allowances shall be accounted for separately and separately disclosed as deductions to operating income in the income statement.

Article 55. Total net profit of enterprises with foreign investment includes operating profit and the net non-operating result.

Operating profit represents the gross profit, ie. sales proceeds from principal activities less sales tax and operating costs, less selling expenses, general and administrative expenses and financial expenses (and purchase expenses for commercial enterprises), plus net profit from other business activities, which represents income less expenses from other activities.

The net non-operating result represents the net amount of the total non-operating income and the total non-operating expenses. Non-operating income includes investment income, surplus on revaluation of investments, surplus arising from a physical count of fixed assets, income on disposal of fixed assets, penalty and surcharge levied on customers and prior year income. Non-operating expenses include investment losses, deficit on revaluation of investments, deficit arising from a physical count of fixed assets, loss on disposal of fixed assets, penalty and surcharge levied by suppliers, donation payments, extraordinary losses and prior year losses. Non-operating income and non-operating expenses shall be accounted for separately and separately disclosed in the income statement.

Article 56. Enterprises with foreign investment shall generally prepare financial statements to determine their profit on a monthly basis. Where this is not practicable, financial statements may be prepared on a quarterly or yearly basis after approval is obtained from the responsible finance bureau or the relevant supervisory authorities under the State Council.

Profit shall be determined by the completion of standard financial statements forms during each period in an accounting year and by the proper accounts closing method at the end of the accounting year.

Article 57. Enterprises with foreign investment shall set up a general reserve fund, a staff and workers' bonus and welfare fund and an enterprise expansion fund (wholly foreign owned enterprises may be exempt from the enterprise expansion fund) by way of appropriations from their profit after taxation in accordance with relevant laws and regulations.

The book balances of the general reserve fund and the enterprise expansion fund shall not be reduced except where approval is obtained for the former to be applied in setting off accumulated losses or increasing capital and the latter in increasing capital. The staff and workers' bonus and welfare fund shall be applied in the payment of special bonuses or of collective welfare benefits to staff and workers of the enterprise, and assets acquired through this fund such as buildings and facilities shall not be taken as assets of the enterprise.

Profit after appropriations to the general reserve fund, the staff and workers' bonus and welfare fund and the enterprise expansion fund shall be available for distribution to investors.

Article 58. Adjustments which are identified as being necessary after the accounts of the current year have been finalized shall be made in the relevant accounts of the ensuing year and shall be properly disclosed in the financial statements. Prior year profit or loss items which are identified in the current year shall be adjusted in the non-operating income or expense or in the undistributed profit and tax payable, where appropriate, in the current year's financial statements.

Article 59. Net profit for the year, income tax payable, the general reserve fund, the staff and workers' bonus and welfare fund and the enterprise expansion fund, dividends (including dividends paid from retained income brought forward) paid to investors in the current year, retained income brought forward, adjustments to retained income brought forward and retained income carried forward shall be separately disclosed in the profit appropriation statement.

CHAPTER 12 FOREIGN CURRENCY TRANSACTIONS

Article 60. Foreign currency transactions of enterprises with foreign investment represent transactions denominated in currencies other than the reporting currency. Foreign currency transactions involve the activities of payments and receipts, settlement of current accounts and pricing.

Foreign currency accounts, including cash and bank deposits and debtors (such as accounts receivable and bills receivable) and creditors (such as accounts payable, bills payable, wages payable and dividends payable) denominated in foreign currencies, shall be accounted for separately from similar accounts which are expressed in the reporting currency.

Article 61. When foreign currency transactions take place, the foreign currency amount shall be translated into the reporting currency for recording purpose. Unless otherwise provided, any increase or decrease in the balance of accounts related to foreign currency transactions (including foreign currency accounts and the corresponding non-foreign currency accounts) shall be translated at the official foreign exchange rate (principally the mid-rate. The same definition applies wherever reference is made to the official foreign exchange rate.) quoted on the transaction date or on the first day of the month when the transaction takes place.

Article 62. Balances of foreign currency accounts (not including those foreign currency accounts which are to be translated at rates of foreign exchange quoted by the swap centre and are separately accounted for) at the end of each month shall be translated into the reporting currency at the official foreign exchange rate prevailing at the end of that month. Differences between the amount in reporting currency translated at the official foreign exchange rate prevailing at the end of the month and the amount in the reporting currency stated in the books shall be accounted for as profits or losses for the period under exchange gains or losses.

Foreign exchange differences arising during the set-up period shall be accounted for separately in the "foreign exchange difference during the set-up period" account. Net foreign exchange losses incurred during the set-up period shall be amortized based on the provisions set out in Article 39 of these Regulations and the unamortized value shall be separately disclosed under other assets in the balance sheet. Net foreign exchange gains arising during the set-up period shall be dealt with in one of the following three ways:

1. Written off by equal installments over five years after commencement of operations;

2. Retained for setting off operating losses in future years;

3. Retained until the enterprise is put into liquidation.

The balance of the "foreign exchange gains arising during the set-up period" account shall be separately disclosed under other liabilities in the balance sheet.

Foreign exchange differences directly relating to acquisition or construction of fixed assets before the assets are put into operation, or before the final cost of the asset is determined but the assets are already put into operation, shall be capitalized as part of the purchase cost or construction cost of the assets.

Article 63. Foreign currency purchased or sold through the swap centre shall be accounted for at the actual swap rate. The difference between the value of foreign currency sold translated at the swap rate and the historical reporting currency value of that foreign currency shall also be adjusted at the end of the month based on the provisions set out in the first paragraph of Article 62 of these Regulations.

Foreign currency purchased shall be accounted for separately at the swap rate and this rate shall be used when the foreign currency is utilized. The swap rate may be determined by using the first-in-first-out method, or the weighted average method or the specific item method.

Article 64. Foreign exchange quotas purchased shall be accounted for separately and separately disclosed under current assets in the balance sheet.

Foreign exchange quotas purchased shall be accounted for at cost. Foreign currencies purchased using the foreign exchange quotas and the corresponding Renminbi funds shall be accounted for at the book cost of the foreign exchange quotas purchased and the corresponding Renminbi funds where Renminbi is adopted as the reporting currency, or at the amount of foreign currencies actually received (or the amount of foreign currency actually received in the reporting currency translated at the official foreign exchange rate prevailing on the date of purchase, or on the first day of the month where the currency actually received is different from the reporting currency) where foreign currency is adopted as the reporting currency. Differences between payments received on sale of foreign exchange quotas and their book cost shall be dealt with as foreign exchange gains or losses.

Foreign exchange quotas acquired in sales activities shall be recorded in the supporting memorandum book and disclosed in the notes on the balance sheet. Income received from the sale of such foreign exchange quotas through swap centre shall be dealt with as foreign exchange gains or losses.

CHAPTER 13 LIQUIDATION

Article 65. The liquidation of enterprises with foreign investment includes the dissolution of the enterprise in accordance with the relevant laws and regulations, the valuation and disposal of the assets on completion of the liquidation, the settlement of claims and liabilities, accounting for liquidation expenses and the profit and loss on liquidation, and the distribution of residual assets.

Article 66. The method of valuation of assets for liquidation purposes shall be determined by the liquidation committee in accordance with the relevant laws and regulations.

Article 67. Liquidation expenses include expenses incurred by the enterprise during the liquidation process. The profit or loss on liquidation includes operating profit or loss arising from the continuation of business after the commencement of liquidation, profit or loss on the disposal of assets and irrecoverable receivables and unpaid liabilities. Net liquidation profit or loss represents the net amount arrived at after offsetting the liquidation loss and the liquidation profit, plus or minus liquidation expenses, and shall be separately disclosed in the balance sheet.

Income tax is payable on net liquidation profit, if any, in accordance with the tax laws.

Article 68. Residual assets shall be distributed in accordance with the relevant regulations.

Article 69. An accounting year shall be deemed to have ended on the date of commencement of liquidation of an enterprise. The enterprise shall prepare and submit to government authorities its accounting report in accordance with Article 71 and Article 72 of these Regulations. Where the liquidation process extends over more than one accounting year, a balance sheet and a profit and loss statement shall be prepared and submitted at the end of each accounting year, and a profit and loss statement for the period from the commencement to the completion of the liquidation process, and an asset distribution statement shall be prepared and submitted on completion of the liquidation.

Accounting statements for completion of the liquidation shall be submitted before the cancellation of the business registration.

CHAPTER 14 CLASSIFICATION OF ACCOUNTS AND ACCOUNTING REPORT

Article 70. Accounts of enterprises with foreign investment shall be classified based on accounting requirements and in conformity with the accounts classifications for different industries drawn up or approved by the Ministry of Finance. Where the classification of accounts is not fixed for a particular industry, reference may be made to the classification of accounts of other industries.

Accounts shall be grouped into four major categories: assets, liabilities, investors' equity and profit and loss. Industrial enterprises may also add in the accounts for costs. Accounts shall be classified and numbered by reference to the accounts classifications set out for specific industries.

Article 71. Accounting reports of enterprises with foreign investment include financial statements and notes on the financial statements.

Financial statements include a balance sheet, an income statement, statement of changes in financial position and a profit appropriation statement. Enterprises which are required to submit a consolidated balance sheet, consolidated income statement and consolidated profit appropriation statement to government authorities shall prepare these financial statements in accordance with the standard accounting forms and specifications for specific industries drawn up or approved by the Ministry of Finance. Other statements may be prepared based on the enterprise's requirements and by reference to the standard accounting forms and specifications for specific industries drawn up or approved by the Ministry of Finance. Where a standard accounting form is not available for a particular industry, reference may be made to the standard accounting forms of other industries.

The main contents of the notes on the financial statements shall be:

1. Total amount of investment, investment composition and stage of investment;

2. Changes in capital structure;

3. Condition of operation;4. Operating results and appropriations of profits;

5. Funds movement and liquidity;

6. Foreign exchange position;7. Principal taxes paid;

8. Gains or losses, spoilage and damage of assets;

9. Changes in accounting policies;10. Other disclosable items and circumstances.

Article 72. Quarterly financial statements and annual financial statements shall be submitted to the responsible finance bureau, local tax authorities, relevant supervisory authorities and the investors. Annual financial statements shall also be submitted to the original authorities which approved the formation of the enterprise.

Quarterly financial statements shall be issued within fifteen days after the end of the quarter whereas annual financial statements shall be issued together with an audit report by a certified public accountant in China within four months after the year end.

Article 73. Where a foreign currency is adopted as the reporting currency, the annual balance sheet, income statement and profit appropriation statement expressed in foreign currency shall be translated into Renminbi.

Balance sheet items shall generally be translated at the official foreign exchange rate prevailing at the year end date. Items which have been translated into foreign currency from Renminbi for bookkeeping purposes shall be re-stated to the original amount in Renminbi. The paid-in capital of those enterprises which used Renminbi as the base currency when applying for incorporation shall be re-stated at the original Renminbi amount if the capital was paid in Renminbi, or if the capital was paid in foreign currency, the amount shall be translated at the official foreign exchange rate prevailing on the date on which the amount was paid. The paid-in capital of those enterprises which used a foreign currency as the base currency when applying for incorporation shall be translated at the official foreign exchange rate prevailing on the year end date.

The portion of operating income in foreign currency included in the income statement shall be translated at the weighted average exchange rate of the year and the resultant amount shall be added to the portion of operating income in Renminbi to arrive at the total operating income in Renminbi. A similar method shall be applied to translate the amount of discounts and allowances in foreign currency into Renminbi. The difference between the total operating income in Renminbi and the amount of discounts and allowances in Renminbi shall be the net operating income in Renminbi. Sales tax shall be stated at the tax amount payable in Renminbi under industrial and commercial consolidated tax. The difference between net operating income in Renminbi and sales tax payable in Renminbi divided by the difference between net operating income in foreign currency and sales tax payable in foreign currency shall be the rate to be applied in translating other items in the income statement.

The total profit appearing in the profit appropriation statement shall be the same amount of the total profit in Renminbi included in the income statement of the same period. Income tax shall be the actual amount of income tax payable in Renminbi during the year. Retained profits brought forward and adjustments to prior year's undistributed profit shall be translated into Renminbi at the official foreign exchange rate prevailing at the end of the previous year. Dividends paid shall be the actual amount paid in Renminbi. Undistributed profits carried forward shall be the amount of undistributed profits in Renminbi included in the balance sheet of the same period. Other items shall be translated at the official foreign exchange rate prevailing at the year end date.

Differences arising from different exchange rates for translating the balance sheet items and the profit appropriation items shall be taken as foreign currency translation differences and separately disclosed in the relevant statements.

Article 74. Where subsidiaries of enterprises with foreign investment in foreign countries or in Hong Kong or Macao adopt the local currency as their reporting currency and use this currency in preparing their financial statements, these financial statements of the subsidiaries shall be translated into Renminbi before they are consolidated into the financial statements of the parent enterprise expressed in Renminbi. Balance sheet items shall be translated on the basis set out in the second paragraph of Article 73 of these Regulations. Profit appropriation items shall be translated on the basis set out in the fourth paragraph of Article 73 of these Regulations. Income statement items shall generally be translated at the weighted average exchange rate of the year.

Article 75. Where an enterprise with foreign investment invests in another enterprise to the extent of more than 50% of the total capital or total share capital of the invested enterprise, the parent enterprise shall prepare consolidated financial statements to consolidate the invested enterprise. Where the invested enterprise and the parent enterprise use different reporting currencies, the financial statements of the invested enterprise shall be translated into the same reporting currency as the parent enterprise before consolidation. Where it is not appropriate to prepare consolidated financial statements due to differences in the nature of the businesses of the invested enterprise and the parent enterprise, approval for exemption from preparing consolidated financial statements shall be obtained from the responsible finance bureau or the relevant supervisory authorities under the State Council. The financial statements of the invested enterprise, whether consolidated financial statements have been prepared or not, shall be submitted to the relevant authorities together with the financial statements of the parent enterprise.

CHAPTER 15 ACCOUNTING RECORDS

Article 76. Accounting records of enterprises with foreign investment include accounting vouchers, accounting books, accounting reports, certificates of capital contributed, audit reports, documentation of accounting systems and other important documents related to business management and investors' interests, such as contracts, articles of association, resolutions of the board of directors and long term business contracts.

Article 77. Enterprises with foreign investment shall maintain accounting records and a system for maintaining these records. Accounting records must be properly kept at the place of business of the enterprise in China and protected from loss and damage. Accounting vouchers, accounting books and monthly and quarterly financial statements shall be kept for at least fifteen years. Annual accounting reports (including accounting statements on liquidation) and other important accounting records must be kept permanently.

Article 78. Accounting records due to be destroyed on expiration of the storage period shall be listed out. Prior approval for destroying such accounting records shall be obtained from the original responsible authorities.

Article 79. On completion of liquidation, the accounting records of the enterprise shall be transferred to the original responsible authorities for storage. A copy of the list of accounting records transferred shall be submitted to the original responsible finance bureau.

CHAPTER 16 SUPPLEMENTARY PROVISIONS

Article 80. These Regulations shall be construed and amended by the Ministry of Finance.

Article 81. Where tax adjustments are required in complying these Regulations, adjustments shall be made in accordance with provisions of the tax laws on filing of tax returns.

Article 82. These Regulations shall become effective on 1 July 1992. The "Accounting Regulations of the People's Republic of China for the Joint Ventures Using Chinese and Foreign Investment" promulgated by the Ministry of Finance on 4 March 1985 shall be annulled on the same date. Where there are discrepancies between the provisions of special regulations concerning accounting issues of enterprises with foreign investment promulgated prior to the implementation of these Regulations and the provisions of these Regulations, the provisions of these Regulations shall prevail.

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