Chinese Accounting Standards for Business Enterprises (CAS) will undergo several changes starting from January 1st, 2021, which naturally has important implications for enterprises operating under CAS. The changes will mostly affect elements such as revenue, leases, and financial instruments.

Firstly, the innovations of the Chinese Accounting Standard for Business Enterprises No.14 (CAS14) will lead to different revenue recognition policies applied to enterprises. Primarily, the new CAS14 introduces new criterion for revenue recognition, namely the transfer of control, instead of the transfer of significant risks and rewards. Revenue is now recognized using the five-step model framework. Once the customer can use the product and obtain the economic benefits, the revenue can be recognized. Clear guidance on the determination of the transaction price and the performance obligations is also presented in the new CAS14. The major impact of the new CAS14 will be on the timing of revenue recognition and the transaction amount.

Secondly, the new Chinese Accounting Standard for Business Enterprises No.21 (CAS21) will bring about several changes in relation to how leases appear on the financial statements in order to closely align the Standard with the IFRS16. Essentially, the operating leases and financial leases will no longer be differentiated and will be recognized in the balance sheets. Lessees’ balance sheets are expected to see significant increases in both the total assets and total liabilities, thus leading to potentially different negotiation terms for future leases and having an impact on the annual budgets and business operations.

Lastly, new CAS standards in relation to financial instruments now specify categories of financial assets that should be valued using either amortized or fair value methods. Moreover, impairment of financial assets is now assessed based on the expected credit loss, rather than the actual incurred loss.

The new Chinese Accounting Standards are expected to closely align with IFRS and to bring the domestic classifications closer to the global accounting standards. Thus, for companies operating under CAS, preparation and understanding of new standards is of paramount importance. Furthermore, businesses may need to update their accounting systems, internal control processes, and their standards for both internal and consolidated reports.

Our experienced team at PHC Advisory can assist your business in China with full-scale back-office support and corporate advisory service, in full compliance with the CAS. Please, feel free to contact us at info@phcadvisory.com to know more about us and how we can assist you.