China New Accounting Standards 2021
Chinese enterprises will be required to adopt several revised accounting standards starting from January 2021. These revised standards concern mainly the recognition of revenue (“new CAS 14”) and the treatment of the financial leases (“new CAS 21”) in the financial statements. Enterprises which are listed in the stock markets and those adopting IFRS have already implemented these standards in the previous years. From January 1st, 2021, these standards will be extended to all the Chinese enterprises adopting the Chinese Accounting Standards for Business Enterprises.
New CAS 14 Revenue
On July 5th, 2017, the Ministry of Finance issued the “Notice on Revising and Issuing the Accounting Standards for Business Enterprises No. 14 Revenue”, to be implemented from January 1st, 2018 by enterprises listed in China and abroad or those adopting the IFRS for their financial statements, from January 1st, 2020 by enterprises listed in China, and from January 1st, 2021 by other companies adopting the Accounting Standards for Business Enterprises.
The New CAS 14 reforms the existing revenue recognition model, highlighting that the main criterion for the revenue recognition shall be the fulfilment of the obligations deriving from a contract and that the revenue shall be recognized when the client obtains control of the relevant goods or service.
The New CAS 14 sets up a five-step method for recognizing and measuring the revenue:
to identify the contract with the client;
to identify the obligations deriving from the contract (for example, the transfer of goods)
to determine the transaction price;
to allocate the transaction price among the obligations; and
to recognize the revenue when each obligation is fulfilled.
New CAS 21 Leases
On December 7th, 2018, the Ministry of Finance issued the “Notice on Revising and Issuing the Accounting Standards for Business Enterprises No. 21 Leases”, with the purpose to align it with the IFRS16. The New CAS21 introduces a revised treatment for financial leases like that applied to operating leases and focuses on the concept of “right to control” of a certain identifiable asset. Under the new CAS 21, the lessee shall recognize the right-of-use asset and the lease liability derived from the lease contract and account for the depreciation, interest expenses, and assets impairment. The new CAS 21 does not apply to short-term leases or low-value asset leases.
Enterprises operating in China, particularly the subsidiaries of foreign investors, shall consider the changes deriving from the introduction of the revised accounting standards and prepare to be in line with the new requirements.