28 Sept 2018
Enterprise Financial Systems and Standards
The new Financial Principles for Enterprises which went into force on 1 January 2007 set out clear guidelines covering six major areas of enterprise financial management, namely investment capital, asset management, cost control, revenue allocation, information management and financial supervision. The new Principles also set standards for financial management methods and policies by integrating the different elements of financial management. Moreover, the new Principles have brought innovations to the enterprise financial system by making it more open.
While the section above on the Accounting System for Business Enterprises has covered in detail the recognition and measurement of the assets, liabilities, costs and expenses, and profits of enterprises, the following section will focus on the regulations governing FIEs’ setting up of account books, investment capital, standards and scope of expenses, reorganisation and liquidation, as well as advance recovery of investment by the foreign party.
Prior to 2017, an FIE should apply to the competent financial authority for financial registration within 30 days after submission of application for business registration or change of registration details. According to the Decision of the Ministry of Finance on Repealing Some Rules and Regulatory Documents (Order of the Ministry of Finance No. 77), effective from 16 March 2017, FIEs no longer have to apply for financial registration.
An FIE should submit its financial accounting statements and status report of its financial position to the competent financial or administrative authority and local tax department on a regular basis. The format, content and schedule for submission should follow the relevant stipulations by MOF. Annual financial statements and liquidation reports should be accompanied by an auditor’s report prepared by Chinese certified public accountants (CPAs).
Setting up of Account Books
FIEs must set up account books in China, conduct independent accounting, submit accounting statements as required and accept supervision by financial and tax authorities. An FIE should be manned by qualified financial and accounting personnel responsible for handling financial and accounting matters in accordance with the law (MOF has strict management guidelines regarding the qualifications of financial and accounting personnel.)
To establish an enterprise, a certain amount of registered capital is required and registration at the industry and commerce administration department is also necessary.
(a) Forms of Investment
Investors may make contribution to the registered capital of an enterprise in cash, in kind, by intangible assets, by equity, or by specific claims. Among these, specific claims refer to convertible bonds issued by the enterprise in accordance with the law and claims that can be converted into equity share in accordance with the relevant rules and regulations. Investors making contribution in kind or by intangible assets must provide proof of ownership and right of disposal, or other proof of their validity as required by law. Investors are not allowed to contribute leased assets or collateral assets.
Investors making contribution by non-monetary assets should provide asset appraisal or valuation reports. The Guiding Opinions on Support for Recognising Scientific and Technological Achievements as Capital Investment and Rights to Equity Shares (Zheng Jian Fa No. 87 ) jointly issued by the China Securities Regulatory Commission and the Ministry of Science and Technology in November 2012 encourage the recognition of scientific and technological achievements as capital investment and rights to equity shares. The proportion of intangible assets including scientific and technological achievements can reach 70% of the total registered capital.
If foreign investors are making contribution in cash, it has to be in foreign currencies. However, profits in renminbi made from investment in other FIEs within the Chinese territory may be used as contribution in cash.
When the full amount of the investment capital has been paid up, the FIE should appoint a Chinese CPA to compile a capital verification report.
(b) Rules on Investment Recovery and Share Buyback
In general, during the operation period of the enterprise, investors may not withdraw their share capital by any means except through transfer or reduction of shares according to the law. Enterprises may not buy back the shares issued by themselves except provided for in the Company Law and other laws and regulations. Where an enterprise buys back its own shares, it should comply with the relevant requirements and financial management procedures, and the decision must be made jointly by the investors.
For Sino-foreign contractual joint ventures (JVs) whose contract stipulates that all the fixed assets should be handed over to the Chinese party upon expiry of the JV, provisions can be made in the JV contract that the foreign party may recover its investment during the term of the JV. However, the foreign party should still be jointly responsible for the JV’s liabilities in accordance with the relevant laws and regulations as well as the provisions of the contract. Any pre-tax investment recovery should be reported to the competent financial authority for examination and approval.
(c) Sources and Uses of Capital Reserve
The sources of an enterprise’s capital reserve include:
Capital (or share capital) premium – When the amount of capital actually contributed by an investor is higher than the share of paid-in capital it holds in the enterprise, the difference is the capital (or share capital) premium. For a joint stock limited company, when the amount actually received from the shares issued exceeds the total face value of the shares (i.e. share capital), the difference is the capital premium.
Fiscal allocation – In the case of direct investment and capital injection by the state, this refers to the increase in state capital or state-owned capital reserve in accordance with the relevant rules. In the case of investment subsidy, this refers to the increase in capital reserve or paid-in capital.
Other sources – These include non-cash asset reserve in the form of donation, cash donation, equity investment reserve, price difference from related transactions, and price difference from the conversion of foreign currency capital received prior to the implementation of the new Accounting System for Business Enterprises.
Other sources – These include non-cash asset reserve in the form of donation, cash donation, equity investment reserve, price difference from related transactions, and price difference from the conversion of foreign currency capital received prior to the implementation of the new Accounting System for Business Enterprises.
The designated uses of an enterprise’s capital reserve include: in the event of heavy losses where the un-allocated profits of the previous year, the reserve funds and development funds of the enterprise are inadequate to make up for the shortfall, the board of directors may pass a resolution authorising the use of such funds in making up for the losses; upon the board of directors’ decision and completion of the relevant procedures, the funds may be used to increase the capitalisation of the enterprise.
When the statutory reserve is injected into an enterprise to increase its capitalisation, the portion retained by the enterprise should not be less than 25% of the registered capital prior to the injection. When an enterprise increases its paid-in capital or increases its paid-in capital by injecting its capital reserve or surplus reserve, the investors concerned should complete the related financial formalities and business registration alteration procedures after making a financial decision.
Operation of Assets
The recognition and measurement of assets have been detailed in the section on the Accounting System. Summarised below are the administration measures and procedures in relation to the use and safekeeping of assets.
(a) Management of Current Assets
Cash and bank deposits
The cash of an enterprise should be kept by a designated person; bank deposits should be deposited into bank accounts opened in the name of the enterprise.
Prepayments and receivables
Prepayments and receivables should be handled and collected in accordance with stipulations in the contract or agreement.
Foreign currency capital
Receipts, payments and deposits of foreign currency capital should be handled in accordance with the foreign exchange control regulations of the state. Conversion between the foreign currency and the accounting currency should be carried out according to the relevant regulations of MOF.
Inventory must be classified accurately, priced reasonably and kept properly, with a sound collection and return procedure and a regular stock-taking system in place.
In issuing or collecting merchandise, self-produced semi-manufactures, raw materials, finished products, and in collecting low-value consumables and packaging materials, the standard accounting treatment should be adopted in calculating or amortising their actual costs.
For inventory with a face value greatly different to its realisable net value and the face value needs to be adjusted, adjustment can be made by the enterprise upon approval granted by the supervisory finance department or the central government department in charge of the industry.
External investment using tangible or intangible assets
Enterprises using tangible or intangible assets to invest in other enterprises must have the assets re-valued. The difference between the re-valued amount and the face value will be treated as profits or losses for the current period.
(b) Fixed Assets
Fixed assets as investment input
The value of a fixed asset that is used as an investment input should be recognised as that stipulated in the investment contract or agreement, except when the value as stipulated in the contract or agreement is not fair. In case the value stipulated in an investment contract or agreement is not fair, the fair value of that fixed asset will be used as the account value.
Depreciation of fixed assets is calculated using the straight line method, the working capacity (or output) method, the double declining balance method or the sum of years’ digits method by depreciating on a monthly basis starting from the month after the fixed assets were first put into use. For fixed assets which have ceased to be used, depreciation would stop in the month after they have ceased to be used. Once chosen, the depreciation method should not be changed arbitrarily.
Before proceeding with a construction project, an enterprise must prepare its budget, purchase the equipment and materials required, carry out accurate project costing, make efforts in saving project costs, and work out a project completion plan.
(c) Intangible Assets
In calculating the value of intangible assets, relevant detailed information must be available, which includes copy of ownership certificate, bases and standards for calculation etc. Valuation of proprietary technology, franchise and goodwill must be assessed and recognised by authorised certification bodies or Chinese chartered accountants.
(a) Costs and Expenses
Expenses incurred and associated with the production and operation of an enterprise should be entered as costs and expenses according to stipulations. An enterprise should distinguish production costs and expenses for the period in recognising an expense. Production costs should be included as product costs, and expenses for the period recognised directly in profit or loss of the current period. Period expenses include management fees, marketing fees and finance charges.
Administrative expenses include start-up costs incurred during preparation; expenses incurred by the board of directors and administrative departments in managing the enterprises or the burden of which should be borne by the enterprise such as company funds, trade union funds, the board fee, hire agency fees, consulting fees, litigation expenses, entertainment expenses, technology transfer fees, compensation for mineral resources, research costs and sewage charges; as well as fixed assets repair expenses incurred by production plant and administrative departments.
Selling expenses are a variety of expenses incurred by an enterprise in the sale of goods and materials and rendering of services, including insurance fees, packaging fees, exhibition fees and advertising costs, maintenance costs of goods, expected product quality loss, transport fees, loading and unloading fees an enterprise incurred in the sales process. Financial enterprises should change the title from "selling expenses" to "business and administrative expenses" in accounting the cost incurred in business and management processes.
Financial expenses refer to the expenses incurred in fund raising for the cost of production, which include interest expense, gains and losses in foreign exchange and related charges.
When calculating taxable income, expenses related to receiving income and other reasonable business expenses actually incurred by an enterprise, including costs, expenses, taxes, losses and other expenses, may be deducted in accordance with the actual amount or the required standards.
(b) Wages and Salaries
Reasonable wages and salary expenses incurred by an enterprise are the total remuneration for services in cash or non-cash forms an enterprise pays to its employee or entities having an employment relationship for the year, including salary, bonuses, allowances, subsidies, annual salary increase, overtime pay, as well as other expenses related to the employment. Reasonable wages and salaries are actual wages and salaries paid to employees by an enterprise in accordance with the resolutions of shareholders' meeting, the Board of Directors, the remuneration committee or the salary system provisions promulgated by the relevant management bodies.
(c) Employee Benefits, Trade Union Funds, Employee Education Expenses
Employee benefits, trade union funds, staff education funds incurred by an enterprise are deductible before tax based on the standard. Amounts not exceeding the standard are deductible based on the actual sum. Amounts exceeding the standard deduction can only be deducted based on the standard. The portions of employee benefits expenses incurred by an enterprise not more than 14% of the total wages and salaries are deductible. The portions of trade union funds set aside not more than 2% of total wage and salary cost are deductible. Staff education fees actually paid are deductible up to an amount equivalent to 2.5% of total wages and salaries except to the extent that government authorities of the State Council in charge of finance and taxation stipulate otherwise. The excess can be carried forward for deduction in the following tax years.
(d) Social Security Contributions
Social security contributions (such as old-age insurance, medical insurance, unemployment insurance, work-related injury insurance, maternity insurance and other basic social security and housing fund contributions paid for employees within the scope and standards stipulated) are deductible. Contributions paid to supplemental pension or supplemental medical insurance plans for investors or employees within the scope and standards stipulated are deductible. Property insurance premiums paid by an enterprise in accordance with stipulations are deductible. Commercial insurance premiums for investors and employees are not deductible.
On 19 April 2017, it was decided at a State Council executive meeting that a pilot programme of allowing the pre-individual income tax deduction of commercial health insurance premium payment would be expanded nationwide. Expenses towards buying eligible commercial health insurance are allowed to be deducted pretax up to RMB2,400 per year.
(e) Interest Expenses
Interest expenses incurred by an enterprise in manufacturing or business operating activities are allowed to be deducted according to stipulations: Interest expenses incurred by a non-financial enterprise on debts borrowed from financial enterprises, interest expenses incurred by a financial enterprise on savings deposit and inter-bank lending, interest expenses incurred by an enterprise on bonds issued as approved are deductible. Interest expenses incurred by a non-financial enterprise on debts borrowed from non-financial enterprises, if within the amount calculated using the loan interest rate of the same type and period provided by financial enterprises are deductible. The portions exceeding the amount are not deductible. If an enterprise receives debt investment and equity investment from its related parties, the interest expenses so incurred cannot be deducted from taxable income if the proportion of such investments exceeds the prescribed standard.
(f) Entertainment Expenses
Entertainment expenses incurred by an enterprise in relation to the manufacturing or business operations shall be deducted to the extent of 60% of the expenses incurred, but with the total entertainment expenses not exceeding 5% of sales (business) income of the current period. For enterprises engaging in equity investments (including company headquarters and venture capital companies), the share dividends and bonuses received from investees and the gains on transfer of equity shall be considered as business revenue and deductible as entertainment expenses in accordance with the ratio stipulated. Entertainment expenses incurred as start-up cost during the preparation stage of the enterprise shall be considered as business organising fee by the rate of 60% of the actual amount and are deductible before tax in accordance with relevant stipulations.
(g) Borrowing Costs
Reasonable borrowing costs incurred by an enterprise in manufacturing or business operating activities, which are not required to be capitalised, are deductible. For enterprises purchasing and/or constructing fixed assets, intangible assets, or inventories that will not reach estimated saleable condition until after more than 12 months, reasonable borrowing costs incurred during the period of purchasing and/or constructing the relevant assets shall be regarded as capital expenditures and included in the cost of the relevant assets. Reasonable expenses incurred for financing through the issuance of corporate bonds, the obtaining of loans and the obtaining of policyholders deposits, which meet the conditions for capitalisation should be included in the cost of related assets; the expenses which do not meet the capitalisation conditions should be regarded as financial costs and are deductible before calculation of enterprise income tax.
(h) Exchange Losses
Exchange losses incurred in currency transactions, and exchange losses from translations of monetary assets and liabilities in foreign currencies to renminbi amounts at the end of the tax year using the year-end middle spot exchange rate are deductible, except those that have already been recorded into costs of assets or in connection with profit distributions to shareholders.
(i) Advertising Expenses and Marketing Expenses
For advertising expenses and marketing expenses incurred that satisfy relevant requirements, the deductible amount shall not exceed 15% of sales (operating) revenues of the current period except to the extent government authorities of the State Council in charge of finance and taxation stipulate otherwise; while the portion above the ceiling can be carried forward to the following tax years for deduction.
(j) Charitable Donations
Of an enterprise’s charitable donation expenditures, the part which is not more than 12% of its total annual profits are allowed to be deducted in the calculation of taxable income; and the excess over 12% of its total annual profits may be carried forward for three years in the calculation of its taxable income.
The Circular on the Policy Concerning the Deduction of Carried Forward Public Welfare Donations for Enterprise Income Tax promulgated by the MOF and the State Administration of Taxation (Cai Shui No. 15 ) on 11 February 2018 stipulates that, effective 1 January 2017, donations for charitable activities and public welfare undertakings by enterprises through public welfare organisations or county-level or above people's governments, their constituent departments and directly-affiliated institutions can be deducted up to 12% of the total annual profits. The part in excess of 12% of total annual profits can be carried forward to the next three years for deduction.
(k) Fee and Commission Expenses
The portions not exceeding the following limits stipulated are deductible before tax: property and casualty insurance business up to 15% of the total premium income of the year minus surrender value; life insurance business up to 10% of the total premium income of the year minus surrender value; other businesses up to 5% of the income amount recognised by service agreement or contract entered into with service agencies with legitimate business qualification or with qualified individuals.
Revenue Distribution Management
(a) Recognition of Revenue
The revenue of an enterprise refers to the gross inflow of economic benefits arising in the course of the ordinary activities of the enterprise when those inflows result in increases in equity, other than increases relating to contributions from equity participants. Revenue may be generated from the core and non-core businesses of the enterprise.
(b) Profit Distribution
Order of priority for profit distribution
Unless otherwise provided for in the law, the net profit of an enterprise should be distributed in the following order of priority:
(i) Making up for previous years’ losses.
(ii) Retaining 10% as statutory reserve. It is only when the cumulative amount of the statutory reserve reaches 50% of the registered capital of the enterprise that retention is no longer required.
(iii) Retaining a certain percentage as arbitrary reserve, with the percentage to be determined by the investors.
(iv) Distributing the profit to investors. Undistributed profits from previous years will be added to the profit of the current year. The profit will be distributed to investors after due consideration is given to the cash flow position.
Unless otherwise provided for in the law, an enterprise must not distribute profit to investors if no profit is left in the current year after making up for previous years’ losses and retaining a certain percentage for surplus reserve.
Principles of profit distribution to investors
Equity JVs should distribute profits according to the actual proportion of capital contribution by the respective investors; cooperative JVs should follow the terms as stated in their contracts; whereas FIEs should do so according to their articles of association.
Investors failing to honour their contractual obligations in terms of capital contribution as stipulated in state regulations or other provisions in the contract will not be eligible for profit distribution.
Before making up for previous year’s losses, an FIE is not allowed to distribute profits. Undistributed profit of previous year may be distributed together with current year’s distributable income.
Conversion of profit in renminbi and profit repatriation
Unless otherwise stated in the contract or articles of association, profit to be distributed in cash is on principle in the currency of the income from the enterprise’s operation. Investors may convert their profit in renminbi into foreign currencies but have to be responsible for the possible profit/loss in currency exchange.
Foreign investors may remit their profit overseas, or they may reinvest it in China.
(c) Reserve Fund, Enterprise Development Fund, Staff Incentive and Welfare Fund
FIEs shall make contribution to reserve fund, staff incentive and welfare fund from after-tax profits in accordance with China’s tax laws and regulations. Reserve fund must account for at least 10% of an enterprise’s after-tax profits. When the reserve fund reaches 50% of the enterprise’s registered capital, further contribution is not required. Contribution ratios for staff incentive and welfare fund are determined by the FIE itself.
Reserve fund is intended primarily to make up for an enterprise’s operating losses. Development fund is usually used for expanding the enterprise’s scale of production or operation; and upon approval by the original approval authority, such fund may also be used to increase investment. Staff incentive and welfare fund is earmarked for ad hoc incentive programmes and collective benefits such as subsidies for the purchase, construction, maintenance and repair of staff housing.
(d) Procedures for Making up Losses
Making up losses by pre-tax profits – the loss incurred by an enterprise in the current year can be made up by the profit before income tax of the following year. After making up the loss, the portion that remains is subject to income tax according to law. If the pre-tax profit of the following year falls short of the amount required to make up for the loss, the process can be carried forward for up to five years consecutively.
Making up losses by after-tax profits – when the loss of the current year cannot be fully made up by the pre-tax profits of the preceding five years, the shortfall can be made up by the after-tax profits of the enterprise from the sixth year onwards.
Making up losses by surplus reserve – when the loss of an enterprise cannot be fully made up according to the process stipulated by the tax law, the board of directors of the enterprise may propose using the surplus reserve to make up for the remaining loss subject to approval by the decision-making body of the enterprise such as the (general) shareholders’ meeting.
Making up losses by capital surplus – by nature, capital surplus does not originate from the profit of an enterprise but falls under the scope of investment capital. There is a fundamental difference between capital surplus and retained earnings. Capital surplus is generally used to increase the capitalisation of an enterprise. However, given the actual conditions in China, the capital surplus of state-owned enterprises can be used to make up for major losses due to policy reasons upon approval by the state.
Reorganisation and Liquidation
Enterprises may undergo reorganisation by means of restructuring, share transfer, merger, split-up and custody. Where equity rights are involved, the investors or authorised agents concerned should conduct feasibility studies, execute internal financial decision-making procedures, and implement the following:
(i) Appraise assets, verify liabilities and appoint an accounting firm to audit the accounts.
(ii) Formulate settlement plans for workers, collect feedback from workers and the workers’ union or submit the plans to the workers’ union general meeting for examination.
(iii) Negotiate with debtors to formulate debt disposal or debt assumption plans.
(iv) Appoint assessment organisations to carry out asset appraisal. The appraised value will serve as reference in calculating the net asset value or in converting the assets into shares.
(v) Formulate share rights distribution plans and capital restructuring implementation plans, and submit the plans for approval after due examination.
Points to note for different types of reorganisation:
Reorganisation through split-up – The ownership rights of the enterprise to be established should be clearly defined.
Reorganisation through merger – All the assets, liabilities and business activities of the enterprises before the merger will be inherited by the merged enterprise. The ownership rights and equity ratios of all the investors should be clearly stated.
The assets of a merged enterprise are subject to the relevant tax rules and regulations of the state. Where the net asset value exceeds the registered capital of the enterprise after merger, the excess portion should be treated as capital reserve. Where the net asset value falls short of the registered capital, the amount of the registered capital should be altered or the investors should make contribution to make up for the shortfall.
Where an enterprise is formed by the merger of insolvent enterprises through the assumption of debts, the parties concerned should formulate enterprise reorganisation measures and consolidate financial resources and fulfil debt repayment obligations according to the merger plan.
Reorganisation through custody – Investors should decide among themselves and sign a custody agreement clearly stating the assets and liabilities under custody, the objectives of the business under custody, the scope of authority in handling the assets under custody, and revenue allocation method. Financial supervision measures should also be put in place.
The enterprise under custody should formulate relevant plans on the basis of the custody agreement restructuring its assets and liabilities. Without the consent of the investors, the enterprise under custody may not be reorganised, restructured or assigned to other parties, and its assets and business operations may not be transferred to other parties. Also, the enterprise under custody or its assets may not be used as external guarantee.
In the course of enterprise reorganisation, the land which has been allocated by the state and occupied by the enterprise should be reviewed under the relevant rules and regulations, and the relevant procedures should be duly followed. Different actions should be taken according to the different situations as follows:
(i) If the land remains to be held on an allocation basis, it could be excluded from the scope of enterprise asset management but the enterprise should clearly define the land-use rights, use the land in accordance with the stipulated purpose, and duly keep the relevant records, unless otherwise provided for by the state.
(ii) Where the land is used as capital contribution, the land transfer fee payable should be converted into state capital. The resulting state-owned equity should be held by the state capital holding unit prior to the reorganisation or by the unit recognised by the competent finance authority.
(iii) Where the land is to be transferred, the enterprise should purchase the land-use rights and pay the assignment fee.
(iv) Where the land is to be leased to the enterprise for use, the enterprise should pay rent at levels based on the prevailing bank lending rate and should stipulate the details in the leasing agreement.
In the course of enterprise reorganisation, priority should be given to pay off overdue workers’ wages, medical and disability allowances, and ex gratia payments, as well as basic social security premiums and housing fund in arrears, with the existing assets of the enterprise.
Where an enterprise is ordered to close down, declares bankruptcy in accordance with law, terminates its operation upon expiry of the operation period, or dissolves at the joint decision of the investors, it should go through the liquidation process pursuant to the relevant laws and regulations and its articles of association. If the enterprise declares bankruptcy, it should file its case with the people’s court for bankruptcy proceedings.
Liquidation is a legal proceeding for the dissolution of an enterprise. It generally involves the following steps:
Appointment of liquidator – Upon dissolution of an enterprise, a liquidator is appointed in accordance with the relevant laws and regulations and the articles of association of the enterprise. The liquidator will manage the assets of the enterprise according to law.
Announcement of liquidation notice – The liquidator should inform creditors within 10 days after confirmation of the liquidation and should post a public announcement in the mass media including newspapers in accordance with law to call on creditors to declare their claims.
Clearance of assets – Balance sheets and assets lists are to be drawn up. The liquidator will act to recover any outstanding debts of the enterprise. Bad debts which cannot be recovered will be written off. During the liquidation process, if any assets are found to have been mishandled, efforts should be made to recover them in accordance with law. For assets which cannot be paid as compensation to creditors or distributed to investors in kind or in the form of rights, action should be taken to encash such assets.
Handling of ongoing business activities – Business activities which took place prior to the liquidation may continue if the liquidator reckons such activities will not cause any damage to the enterprise if they continue and that they can be completed within the liquidation period. Otherwise, the liquidator may terminate the contract and include the party concerned as one of the creditors of the enterprise.
Payment of overdue taxes – Overdue taxes prior to liquidation and liquidation tax should be paid by the liquidator from the property that remains after paying the liquidation expenses and all the overdue workers’ wages, medical and disability allowances, ex gratia payments, social security premiums, housing funds and economic compensation.
Repayment of debts – After paying the liquidation expenses and all the overdue workers’ wages, medical and disability allowances, ex gratia payments, social security premiums, housing funds, economic compensation and overdue taxes, the liquidation property of the enterprise should be used to repay other debts.
Allocation of residual assets – Upon completion of the liquidation process, the liquidation net income will go to the investors and the residual assets will be allocated to the investors according to their equity ratio or as stipulated in the contract or articles of association of the enterprise. In the case where the subsidiary of a state-owned enterprise undergoes liquidation, after the investment amount contributed by the investors has been deducted from the liquidation net income, the balance will be treated as profit (or loss) on investment and allocated to the investors according to their equity ratio. In the case where the parent company undergoes liquidation, all the liquidation net income will be surrendered to the competent finance authority.
The liquidator will then present a liquidation report accompanied by financial statements containing all the data relating to the liquidation. The enterprise will be deregistered and a public notice on its termination will be served.
(c) Financial Arrangements Relating to the Termination of Labour Relations
In terminating labour relationship with its employees, the enterprise should pay economic compensation and settlement fee to the employees in compliance with the relevant state rules and regulations. Except for expenses that are incurred in the course of normal business operations during the current period, payment should be made as follows:
Labour expenses incurred during reorganisation – To be paid in the following order: undistributed profit, surplus reserve, capital reserve and paid-in capital.
Labour expenses incurred during liquidation – To be paid from the liquidation property after deducting the liquidation expenses.
Regulations Governing FIEs Implementing the Accounting System for Business Enterprises
The Accounting System for Business Enterprises (Cai Hui  No. 25) promulgated by MOF on 29 December 2000 became effective for FIEs starting from 1 January 2002. At the same time, the Accounting System for Foreign Investment Enterprises of the People’s Republic of China (Cai Hui  No. 33) and its related regulations governing account titles and financial statements promulgated by MOF on 24 June 1992 were revoked. The regulations governing the Accounting System for Business Enterprises for FIEs are as follows:
(a) Implementation of the Accounting System for Business Enterprises by FIEs has resulted in changes in their accounting policies adopted. Apart from the following items which adopt the retroactive adjustment method, all other changed items adopt the prospective application method:
Short-term investment impairment reserve, long-term investment, fixed assets, intangible assets, work-in-progress and trust lending impairment reserve under the Accounting System for Business Enterprises.
For the balance between receivables bad debt reserve and inventory impairment reserve under the Accounting System for Business Enterprises and that under the old system, the retroactive adjustment method is adopted.
For investments made before the implementation date of the Accounting System for Business Enterprises which are still valid on the date of implementation, they should be handled according to the regulations of the Accounting System for Business Enterprises starting from the day the system was implemented. In other words, all investments and investment proceeds recognised in accordance with the Accounting System for Foreign Investment Enterprises before the implementation of the Accounting System for Business Enterprises are not subject to retroactive adjustment. However, any subsequent recognition of investment proceeds and adjustment to investment face value should be handled in accordance to the Accounting System for Business Enterprises.
In implementing the Accounting System for Business Enterprises, if the unamortised establishment expenses and the construction period exchange loss balance of the FIE are substantial and the direct transfer of which to the income statement of the current period creates a great impact on the profit/loss of the enterprise, they can be handled using the retroactive adjustment method. But if such amounts are relatively small and the direct transfer of which to the income statement of the current period does not create a great impact on the profit/loss of the enterprise, such balances can be transferred to the income statement of the current period directly.
(b) Any other issues arising from the implementation of the Accounting System for Business Enterprises by FIEs can be handled as follows:
Balance under “Securities” is transferred to “Short-term Investment”.
Balance under “Prepayment” and balance under “Advance Collection” are transferred to “Accounts Prepaid” and “Advance Receipt” respectively.
- Balance under “Inventory Realisation Loss Reserve” is transferred to “Inventory Impairment Reserve”.
Credit balance under “Construction Period Exchange Loss” should be treated on a case-by-case basis: for balance to be settled at the time of liquidation, it should be transferred to “Long-term Prepaid Expenses”; for balance to be used to offset the losses incurred during the current financial year in the production and operation of the enterprise, it should be transferred to “Long-term Prepaid Expenses”; for balance to be amortised equally in the five years starting from the year the enterprise commenced production and operation, if its direct transfer to the income statement of the current period creates a great impact on the profit/loss of the enterprise, it can be handled using the retroactive adjustment method; but if such direct transfer does not create a great impact on the profit/loss of the enterprise, the balance can be transferred to the income statement of the current period directly.
Other deferred expenses balances should be treated according to different circumstances: for items that can benefit the subsequent accounting period, they should be transferred to “Long-term Prepaid Expenses”; for those that cannot benefit the subsequent accounting period, they should be transferred to the income statement of the current period directly.
Balance under “Deferred Investment Loss” should be treated according to different circumstances: credit balance should be transferred to “Long-term Prepaid Expenses”; debit balance should be transferred to “Deferred Income”.
Payable company debt, payable company debt premium and impairment balance should be transferred to “Payable Bonds”.
“Payable Wages” and “Payable Wages and Welfare” are combined under “Payable Remuneration”. According to the scope and standards prescribed by relevant competent authorities under the State Council and by provincial people’s government, the scope and limits of reasonable expenditures on wages and salaries incurred by enterprises that are deductible cover the “five insurance and one fund” (basic social insurance premiums including old-age insurance premium, basic medical insurance premium, unemployment insurance premium, work-related injury insurance premium and maternity insurance premium and housing fund) contributed on behalf of employees. Staff welfare fund, trade union fee and staff education expenses are deductible according to prescribed limits, if the limits are not exceeded, the actual expenditure is deducted; if the limits are exceeded, deductions are allowed only up to the limits. When an enterprise distributes non-monetary items to its employees as welfare, such as products produced by the enterprise itself or products purchased from external parties, the fair value of the products concerned should be recorded as asset cost or expenses of the current period based on the recipients.
Balances under “Reserve Fund”, “Enterprise Development Fund” and “Profit Capitalised on Return for Investment” are transferred to “Surplus Reserve”.
The item “Deferred Income” is added under “Projected Liabilities” in the balance sheet.
Under “Paid-in Capital” in the balance sheet, the item “Of which: investment by the Chinese party (closing balance of non-renminbi capital) and investment by the foreign party (retained non-renminbi capital)” is added.
For foreign-invested tourism enterprises, on the basis of the Accounting System for Business Enterprises, their income statement and supporting statements should be prepared in accordance with the formats stipulated in the Account Titles and Financial Statements of Foreign Investment Tourist Enterprises.
(c) In preparing comparative financial statements adopting the retroactive adjustment method, if any accounting policy change occurs during the period the comparative financial statements are prepared, the net profit/loss and other relevant items should be adjusted accordingly. For any cumulative effect arising from policy change in the previous comparable periods, adjustment should be made to the retained income brought forward in the comparative financial statements. The amount of other relevant items in the financial statements should also be adjusted at the same time.