Accounting System of the People’s Republic of China for Enterprises with Foreign Investment
the Ministry of Finance
June 24,1992
Chapter I General Provisions
Article 1
These System are formulated in accordance with the laws and regulations of the People’s Republic of China concerning enterprises with
foreign investment with a view to strengthening the accounting functions of enterprises with foreign investment and to protect the
legal rights of these enterprises and their investors.
Article 2
These System shall apply to enterprises with foreign investment established in the People’s Republic of China which include Chinese-foreign
equity joint ventures, Chinese-foreign contractual joint ventures and wholly foreign owned enterprises.
Article 3
The Ministry of Finance shall be responsible for the administration of the accounting affairs relating to enterprises with foreign
investment throughout the People’s Republic of China.
The finance department and bureau of each province, autonomous regions and municipalities directly under the Central Government and
the responsible authorities under the State Council shall administer the accounting affairs relating to enterprises with foreign
investment in its own region or under its administration and may, in accordance with the System and the practical circumstances,
formulate supplementary provisions, copies of which shall be filed with the Ministry of Finance for reference.
Enterprises with foreign investment shall formulate their own accounting systems, based on the System and related supplementary provisions,
to suit their own practical circumstances. The manuals on these accounting systems shall be filed with the responsible finance bureau,
local tax authorities and other relevant supervisory authorities.
Chapter II Accounting Practices and Principles
Article 4
Accounting practices of enterprises with foreign investment shall conform with the relevant laws and regulations of the People’s Republic
of China and with the provisions of the System.
Article 5
Enterprises with foreign investment shall account for their transactions in distinct accounting periods (month, quarter and year).
The accounting year of enterprises with foreign investments shall coincide with the calendar year, i.e. from January 1 to December
31 on the Gregorian calendar.
Article 6
Enterprises with foreign investment shall only account for business transactions which have actually taken place, and shall ensure
that the accounting books are accurate, complete, prepared up to date, and shall also ensure that correct methods and appropriate
procedures have been applied.
Article 7
Enterprises with foreign investment shall maintain their accounting books using the accrual method. Income earned and expenses incurred
during the period shall be accounted for as income and expenses of the period, regardless of whether the amount has been received
or paid during the period.
Income and expenses not earned and incurred during the period shall not be accounted for as income and expenses of the period, even
if the amount has been received or paid during the period.
Article 8
Enterprises with foreign investment shall match their income with the related expenses. Income earned during an accounting period
shall be taken into the accounts of the same accounting period together with the related costs and expenses.
Article 9
Assets of enterprises with foreign investment shall be accounted for at historical cost. Unless otherwise authorized, enterprises
may not adjust the carrying value of their assets at their own discretion.
Article 10
Enterprises with foreign investment shall distinguish capital expenditure from revenue expenditure. Expenditure shall be regarded
as capital expenditure where the benefits to the enterprise last for more than one (not including one) accounting year and as revenue
expenditure where the benefits to the enterprise last for only one accounting year.
Article 11
Accounting methods adopted by enterprises with foreign investment shall be consistent within each accounting period and from one period
to the next and shall not be changed at will. Where changes are necessary, such changes shall generally be introduced at the beginning
of a new accounting year and shall be disclosed in the notes to the accounts of that accounting year.
Chapter III Book Keeping and Accounting Books
Article 12
Enterprises with foreign investment shall adopt the double entry accounting method.
Article 13
Enterprises with foreign investment may maintain their accounts in Renminbi or a foreign currency (generally, the foreign currency
shall be one for which the exchange rate is quoted by the State Administration of Exchange Control. The same definition applies wherever
reference is made to foreign currency). This reporting currency shall not be changed at will once it is adopted. Where changes are
necessary, approval shall be obtained from the responsible finance bureau or other relevant supervisory authorities under the State
Council. Such changes shall be introduced at the beginning of a new accounting year and disclosed in the notes to the accounts of
that accounting year.
Enterprises engaged in multi-currency financing or finance leasing may maintain their accounts in Renminbi as well as other related
foreign currencies according to their actual requirements.
Article 14
Accounts of enterprises with foreign investment shall be kept in Chinese or in both Chinese and another foreign language.
Article 15
Enterprises with foreign investment shall obtain the original supporting document or prepare a primary voucher whenever there is a
business transaction. All original documents and primary vouchers must be true, complete and accurate, and shall be obtained or prepared
through proper procedures. The original documents and primary vouchers shall be used as accounting vouchers only after they have
been verified as correct.
Article 16
Enterprises with foreign investment shall keep three major accounting books namely the journal ledger, general ledger and sub-ledgers
together with all other necessary supporting books.
All accounting books shall be kept based on the primary vouchers, accounting vouchers or voucher summaries which have been verified
as correct. All entries to the accounting books must be made on a timely basis, and must be complete, accurate and denoted with clear
particulars.
Corrections to any of the accounting books must be made strictly following the working rules for accounting personnel.
Article 17
In the case of Chinese-foreign co-operative joint ventures where parties to the joint ventures pay their taxes separately, combined
accounting books shall be kept in accordance with the provisions set out in Article 16 of the System in respect of assets and liabilities
and income and expenses commonly shared and borne by the parties. The parties shall also keep relevant books of their own.
Article 18
Where enterprises with foreign investment use computers in maintaining their accounting books, the software used shall conform with
the requirements provided in the System and possess functions for ensuring security and confidentiality.
Data stored in magnetic or other media shall be supported by back-up files and hard copies of the data shall be printed on a regular
basis.
Chapter IV Current Assets
Article 19
Current assets of enterprises with foreign investment shall include cash on hand, cash in bank, marketable securities, receivables,
prepayments and inventory.
Cash on hand, cash in bank and marketable securities shall be accounted for separately; receivables shall be accounted for separately
where appropriate as bills receivable, accounts receivable, short term loans receivable and other receivables; prepayments shall
be accounted for separately where appropriate as deposits to suppliers (trade deposits), income tax prepaid and expenses prepaid;
inventory shall be accounted for separately where appropriate as merchandise, raw materials, work-in-progress, semi-finished goods,
finished goods, containers and low-value consumables.
Amounts receivable after one year from the balance sheet date shall be separately disclosed below the long term investment category
in the balance sheet.
Article 20
Enterprises with foreign investment shall keep a journal for cash on hand and cash in bank and shall record each transaction on a
daily basis. Where the accounting books are maintained in multi-currencies (including foreign exchange certificates. The same definition
applies wherever reference is made to multi-currencies), different journals shall be kept for each currency.
Article 21
Marketable securities include inventory and debentures to be realized within one year from the balance sheet date and shall be accounted
for at cost. Where the cost includes an element of dividend declared or interest accrued, that portion relating to the dividend and
interest shall be accounted for as a temporary payment and disclosed under other receivables.
Dividend and interest income received or receivable from marketable securities; and profit or loss arising from disposal or liquidation
of marketable securities shall be accounted for as non-operating income or expenses being profit or loss on investments.
Article 22
Receivables and prepayments shall be separately accounted for in their originating currency.
Enterprises may make a general provision for bad debts at the end of the accounting year. The general provision should not exceed
3 % of the total receivables, such as accounts and bills receivable or loans, outstanding at the end of the accounting year.
Provision for bad debts shall be accounted for separately and stated in the balance sheet as a deduction from receivables or loans.
Where the amount of provision to be provided at the accounting year end exceeds the amount of provision already made in the accounts,
the difference shall be made up by making an additional provision in the accounts; where it is below the amount already provided
for, the balance of the provision should be adjusted downward accordingly.
Enterprises with foreign investment shall charge losses arising from bad debts to general and administrative expenses. For enterprises
which have made a provision for bad debts, any amount of bad debt to be written off shall be charged against the provision for bad
debts. Any subsequent recoveries of bad debts written off shall be credited to the provision for bad debts or general and administrative
expenses.
The write-off of bad debts shall be dealt with in accordance with relevant regulations in the People’s Republic of China.
Article 23
Inventory shall be accounted for at historical cost.
The historical cost of inventory purchased includes the purchase consideration, transportation, loading and unloading expenses, insurance,
reasonable loss incurred in transit, preparatory expenses incurred before warehousing and taxes payable. For trading and service
enterprises, the historical cost of commodities purchased includes purchase consideration and taxes payable.
The historical cost of materials manufactured, produced or excavated by the enterprise itself shall be the actual costs incurred in
the process of manufacturing, production and excavation of these materials.
The historical cost of inventory processed by third party subcontractors includes costs of raw materials or semi-finished goods actually
used together with processing charges, transportation, loading and unloading expenses, insurance and taxes payable. For trading and
service enterprises, the historical cost of commodities processed by third parties includes the cost of unprocessed materials, processing
charges and taxes payable.
The historical cost of inventory donated to the enterprise includes the price of the inventory determined based on the provisions
set out in the second paragraph of Article 49 of the System together with transportation, loading and unloading expenses, insurance
and taxes payable borne by the enterprise.
Inventory gains shall be accounted for at original historical cost or at the historical cost or at the historical cost of similar
inventory.
Where inventory is accounted for at the planned cost (or standard cost. The same definition applies wherever reference is made to
planned cost), any difference between the planned cost and historical cost shall be accounted for separately.
Article 24
Inventory shall be accounted for using the perpetual inventory method.
Merchandise, raw materials, semi-finished goods and finished-products shall be accounted for at historical cost; the historical cost
can be determined using the first-in-first-out, weighted average, moving average, last-in-first-out or batch methods. Where the planned
cost is used, the difference in cost in each period shall be taken up to adjust the budget cost of inventory acquired or delivered
to historical cost.
Low-value consumables and containers for repetitive use may be expended entirely upon incurring or amortized over two years or by
installments. Low-value consumable acquired in large quantities on commencement of business may be accounted for as other assets.
Article 25
Inventory counts shall be conducted on a regular basis but not less than once every year. Differences between the results of inventory
counts and book records shall be adjusted for as soon as possible after the reasons for such differences are identified. The adjustment
shall normally be made before the finalisation of accounts for the accounting year in which the inventory count is conducted.
Gains on inventory shall generally be used to offset relevant expenses. Losses on inventory or damages shall be charged to relevant
expenses after taking into account and compensation from person(s) causing such losses or damage or from insurance companies and
the scrap value of the inventory. Net losses as a result of extraordinary causes shall be accounted for as non-operating expenses.
At the accounting year end, where defects in or obsolescence of the merchandise, finished goods or semi-finished goods available for
sale to third parties have caused the net realizable value of the merchandise and products to be less than their book costs, such
loss may be charged to the selling expenses of the accounting year after approval is obtained from the responsible finance bureau
or other relevant supervisory authorities under the State Council. Such loss may also be charged to a provision for losses that may
arise on sale of the inventory and stated as a deduction from inventory in the balance sheet. On actual sale of inventory for which
the provision has been made, any over-provision shall be used to write down the selling expenses. Net realizable value shall be determined
based on the expected sales proceeds less any necessary processing or maintenance charges.
Chapter V Long Term Investments
Article 26
Long term investments of enterprises with foreign investment represent capital injected into other enterprises for a period of more
than one year and include cash on hand, tangible and intangible assets and shares and debentures not expected to be realized within
one year from the balance sheet date. Long term investments shall be accounted for separately and separately disclosed in the balance
sheet.
Any portion of long term investments to be realized or recoverable within one year from the balance sheet date shall be separately
disclosed under current assets in the balance sheet.
Investments in other enterprises shall be accounted for based on actual payments or based on the cost of materials or intangible assets
contributed as agreed in the investment contracts or agreements.
Investments in shares shall be accounted for based on actual payments or based on the cost of materials or intangible assets contributed
as agreed in the investment contracts or agreements including expenses related to the transactions. Where the actual payments include
dividends declared by the investing company, that portion of the dividend shall be accounted for as a temporary payment and disclosed
under other receivables in the books of the investing company.
Investments in debentures shall be accounted for based on actual payments. Where the actual payments include interest accrued, that
portion of the interest shall be accounted for as a temporary payment and disclosed under other receivables.
Where debentures are acquired at a premium or discount, the difference between the cost and the face value of the debentures shall
be amortized by installments using the straight line method or effective interest rate method over the period to maturity of the
debentures in order to adjust the interest income and the book value of the long term investments.
Any difference between the appraised values of tangible or intangible assets contributed and their book values shall be treated as
deferred investment profits or losses which shall be accounted for as non-operating income or expenses over the investment period
by equal annual installments. The balance of deferred investment profits or losses as at the accounting year end shall be separately
disclosed under other assets or other liabilities in the balance sheet.
Article 27
The cost method shall generally be used in accounting for investments in other enterprises and shares. The equity method may also
be used where an enterprise’s investment exceeds 25% of the total capital or total share capital of the invested enterprise and significance
influence can be exercised over its management.
Dividend and interest income received or receivable from long term investments; profit or loss on liquidation or assignment of long
term investments and, in the case of enterprises which equity account for long term investments, the changes in book value of long
term investments arising from any changes in the interest in the invested enterprise shall be treated as investment gains or losses
and accounted for as non-operating income or expenses.
Article 28
Funds to branches which keep their own accounts but do not pay their taxes individually shall be accounted for as funds to branches
and separately disclosed under long term investments in the balance sheet.
Funds to branches shall be accounted for at the book value of the cash, tangible or intangible assets actually contributed.
Chapter VI Fixed Assets and Work in Progress
Article 29
Fixed assets of enterprises with foreign investment shall be accounted for separately and separately disclosed in the balance sheet.
Assets under finance leases shall be accounted for separately until ownership is transferred. Assets under operating leases shall
be recorded in supporting memorandum books and shall be disclosed in the notes to the accounts.
Article 30
Fixed assets shall be accounted for at cost.
The cost of fixed assets contributed by the investors represents the amount stated in contracts, agreements, the enterprise’s application
document for incorporation or the statement of examination and receipt of fixed assets contributed including transportation, loading
and unloading expenses, insurance and taxes payable borne by the enterprise.
The cost of fixed assets purchased represents the purchase consideration including transportation, loading and unloading expenses,
insurance and taxes payable.
Cost of fixed assets manufactured and constructed by the enterprise itself represents actual expenses incurred in the manufacturing
and construction process.
The cost of fixed assets under finance leases represents the purchase consideration stated in the contracts including transportation,
loading and unloading expenses, insurance and taxes payable borne by the enterprise. Where the purchase consideration stated in the
contracts includes interest and handling charges, that portion of the interest and handling charges shall be deducted from the cost.
Such interest and handling charges need not be accounted for separately if the value of the fixed assets under finance leases is
not substantial and the term of the lease is not long.
The cost of fixed assets donated to the enterprise represents the price of the fixed assets determined based on the provisions set
out in the second paragraph of Article 49 of the System, including transportation, loading and unloading expenses, insurance and
taxes payable borne by the enterprise. For used assets, the rate of depreciation shall be estimated according to the condition of
these assets.
Surplus of fixed assets on physical counts shall be determined by the replacement cost of such assets and their rates of depreciation
shall be estimated according to the condition of these assets.
Expenses incurred in modifying fixed assets for the purpose of expansion, replacement, renovation or technological improvement may
be included under the cost of fixed assets.
Cost shall also include installation costs, if any, of the fixed assets.
Article 31
Fixed assets shall generally be depreciated using the straight line method. The production or service output method may also be used
where the straight line method is not appropriate.
Depreciation of fixed assets shall generally be determined based on the cost of fixed assets and the depreciation rate set for each
category of fixed assets. Depreciation rates may also be applied on an individual asset basis where the depreciation rate by category
is not appropriate. The rates of depreciation of fixed assets shall be determined based on their cost, estimated residual values,
which shall generally be not less than 10% of their cost, and their expected useful lives.
Accelerated depreciation shall generally be calculated using only the double reducing balance method or sum-of-digits method.
Fixed assets shall be depreciated on a monthly basis from the month following that in which the assets are used in operation. For
fixed assets which are no longer used in operation, provision for depreciation on such assets shall cease to be made from the month
following that in which the assets cease to be used. Fixed assets may continue to be used after they have been fully depreciated
during which time no further depreciation shall be required. Provision for depreciation shall also cease to be made for fixed assets
damaged before the end of their expected useful lives.
Where the cost of fixed assets is adjusted for the purpose of expansion, replacement, renovation or technological improvement, depreciation
shall be calculated after taking into account the adjusted cost, accumulated depreciation already provided, estimated residual values
and the remaining useful lives. Fixed assets used in construction work during the set-up period of the enterprise may be depreciated
in full on completion of work or be equal installments over the period of construction and the depreciation charge shall be included
in the cost of construction. In respect of fixed assets used during the set-up period but not directly related to the construction
work, the depreciation charge shall be included in pre-operating expenses. Assets under finance and operating leases shall also be
depreciated. Fixed assets, other than buildings, idle for a long period shall not be depreciated.
Accumulated depreciation shall be accounted for separately and separately disclosed as a deduction under fixed assets in the balance
sheet. Accumulated depreciation for fixed assets under finance leases shall be accounted for separately.
Article 32
A physical count of fixed assets shall be made on a regular basis, at least once every year. Differences between the physical count
results and book records shall be adjusted for as soon as possible after the reasons for such differences are identified. The adjustment
shall normally be made before the finalisation of accounts for the accounting year in which the physical count of assets is conducted.
Any surplus of fixed assets identified on physical counts shall be accounted for as operating income at an amount equal to their
cost less accumulated depreciation while losses shall be accounted for as operating expenses at an amount equal to their cost less
accumulated depreciation and any compensation from person(s) causing such losses or from insurance companies. Surplus and shortage
of fixed assets on physical counts during the construction period shall be included in the related construction cost.
Net profit or losses on disposals of fixed assets arising from sale, obsolescence or damage shall be accounted for as non-operating
income or expenses. Net profit or losses on the disposal of fixed assets arising during the period of construction shall be accounted
for as part of the construction cost.
During the set-up period of the enterprise, surplus or shortage of fixed assets on physical counts or on disposals not directly related
to any construction work, and profits or losses on disposals of fixed assets as a result of extraordinary causes shall be accounted
for as pre-operating expenses.
Article 33
Construction in progress of enterprises with foreign investment shall include preparation work before commencement of the construction,
work under construction, and construction and installation work completed but not yet used in operation. Construction in progress
shall be accounted for separately and separately disclosed in the balance sheet.
Where the period of construction exceeds one year, and construction items are numerous and construction cost is substantial, construction
items may be accounted for separately. Construction in progress shall be accounted for on the following basis:
materials used in construction — provisions out in Article 23 of the System;
equipment to be installed — provisions set out in Article 30 of the System;
payment on account to contractors — the actual amount paid;
management expenses of the construction work — the actual management expenses incurred;
construction work undertaken by the enterprise itself — the direct materials, direct labour, direct mechanical work expenses and
attributable management expenses;
construction work undertaken by third party subcontractors — the amount paid to subcontractors and attributable management expenses;
installation of equipment — the cost of equipment including installation charges, trial run expenses and attributable management
expenses.
Equipment acquired or invested during the set-up period of the enterprise but not yet installed may also be accounted for as construction
in progress.
Article 34
Where there is spoilage or damage to the construction in progress, net losses resulting shall generally be accounted for as part of
the cost of construction in progress after deduction of the residual value and compensation from person(s) causing such losses or
from insurance companies. Net losses arising from spoilage or damage as a result of extraordinary causes shall be accounted for as
pre-operating expenses if the construction is undertaken during the set-up period and accounted for as non-operating expenses if
the asset has already been used in operation.
Net expenses arising from trial runs before the asset is used in operation shall be accounted for as part of the cost of construction
in progress. Where products produced during trial runs can be sold to third parties, the actual or estimated sale proceeds shall
be deducted from the cost of construction in progress.
Article 35
When the construction of an asset is completed and it is used in operation but the total cost of the asset is yet to be determined,
the asset shall be transferred to fixed assets at the estimated value based on the budgeted price or cost of the work, and shall
be depreciated according to the provisions set out in Article 31 of the System. The estimated value of the asset and its accumulated
depreciation shall be adjusted for after the actual cost of the asset is ascertained.
Chapter VII Intangible and Other Assets
Article 36
Intangible assets of enterprises with foreign investment include patents, proprietary technology, patents and trademarks, land occupancy
rights and other intangible assets, and shall be accounted for separately and separately disclosed in the balance sheet.
Intangible assets contributed by the investors shall be accounted for at the amount specified in the contracts, agreements or the
enterprise’s application document for incorporation including related expenses borne by the enterprise.
Intangible assets acquired by the enterprises shall be accounted for at cost.
Article 37
Intangible assets shall be amortized by equal installments over the beneficiary period from the time the enterprise starts deriving
beneficiary period from the intangible assets or, where there is no specified beneficiary period, over the estimated beneficiary
period.
Article 38
Other assets of enterprises with foreign investment include pre-operation expenses, exchange losses during the set-up period, deferred
investment losses and other deferred expenses to be amortized by installments, and shall be accounted for separately and separately
disclosed in the balance sheet.
Pre-operating expenses shall be accounted for based on cost incurred in relation to business registration fees, wages and salaries,
business trip expenses, staff training expenses, expenses incurred by the board of directors (or a joint management committee. The
same definition applies wherever reference is made to the board of directors.) and other expenses not included in the purchase or
construction of fixed assets or intangible assets.
Exchange losses during the set-up period shall be accounted for based on the amounts realized during the set-up period.
Deferred investment losses shall be accounted for based on the difference between the appraised value and the book value of the investments.
Deferred expenses shall be accounted for based on actual expenses incurred.
Article 39
Other fixed assets shall be amortized on the following basis:
Pre-operating expenses and exchange losses during the set-up period — by equal installments over a period of not less than 5 years
from the date the enterprise commences operation
Deferred investment losses — by equal installments over the investment period but not less than 10 years
Other deferred expenses — by equal installments over the estimated beneficiary period but not less than 10 years
Chapter VIII Current Liabilities, Long Term Liabilities and Other Liabilities
Article 40
Current liabilities of enterprises with foreign investment include short term borrowings, payables, deposits from customers (advance
deposits) and accrued expenses.
Short term borrowings, deposits from customers (advance deposits) and accrued expenses shall be accounted for separately. Payables
shall be accounted for separately where appropriate as bills payable, accounts payable, accrued payroll, tax payable, dividend payable
and other payables. Current liabilities denominated in multi-currencies shall be individually accounted for in their originating
currencies.
Staff and workers’ bonus and welfare fund and other funds, which are liabilities in nature, shall be accounted for as current liabilities.
Amounts payable after one year from the balance sheet date shall be separately disclosed under long term liabilities in the balance
sheet.
Article 41
Long term liabilities of enterprises with foreign investment include long term borrowings, redeemable bonds and amounts payable under
finance leases, and shall be accounted for separately and separately disclosed in the balance sheet.
Long term liabilities repayable within one year from the balance sheet date shall be separately disclosed under current liabilities
in the balance sheet.
Article 42
Redeemable bonds shall be accounted for based on the face value of the bonds issued. The difference between the proceeds of issue
and the face value of the bonds shall be accounted for as the premium or discount on issue and shall be accounted for separately
and separately disclosed as an addition to or a deduction from the redeemable bonds account in the balance sheet. Accrue
