With regard to the requirements of maintenance of accounting books and records for a Foreign Investment Enterprise (FIE) in China, there are a number of important regulations to observe and make reference to. The following is a summary of the basic requirements.
With regard to the requirements of maintenance of accounting books and records for a Foreign Investment Enterprise (FIE) in China, there are a number of important regulations to observe and make reference to. The following is a summary of the basic requirements.
Accounting Books and Records
Books and records have to be maintained in accordance with the relevant regulations. It is a requirement under the Enterprise Income Tax Law for FIEs to retain their accounting records for at least 15 years.
Reporting Currency
RMB is the base currency for ledgers and financial reports. For enterprises using currencies other than RMB in their business transactions, one of these foreign currencies can be used as the bookkeeping base currency. However, the financial reports are required to be shown in RMB which is translated from such foreign currency.
Language
Accounting records have to be maintained in Chinese. Ethnic minorities may use their dialects whilst FIEs may choose to use Chinese solely or a combination of Chinese and a foreign language.
Accounting Period
The accounting period in China is stipulated from 1 January to 31 December. However, if a Chinese company is a subsidiary of a foreign group of companies whose balance day does not fall on 31 December, the Chinese subsidiary can choose to use another date as its balance day, subject to the approval of the relevant regulatory authorities.
Accounting Offices and Personnel
The PRC Accounting Law incorporates some provisions in relation to the appointment of accounting personnel, their responsibilities and qualifications. Businesses should set up their accounting office and designate an accountant in charge according to the needs of its accounting work. Small sized companies may entrust a qualified agent (for example, a CPA firm) with their accounting work. A cashier shall not be concurrently in charge of auditing, taking custody of accounting records or keeping the revenue, expenses or claims and liability accounts.
Accounting Software
In Hong Kong, a company can choose to use any accounting software with reference to the needs of the company. This, however, is not the case in China where the software has to be an approved one. In the event where a company intends to computerize its accounting system, that is, processing and recording all business transactions and generating financial reports by electronic means, it may purchase an accounting package off the shelf or develop a tailored-made one. In either case, the approval of the finance bureau must be obtained. It is also important to make sure the financial reports generated by the accounting software meet the requirements of the relevant regulatory bodies, such as the tax bureau and the administrative bureau for industry and commerce.
Financial Statements
An FIE should prepare balance sheet, income statement and statement of change in financial position (or statement of cash flows) and submit the same (on a quarterly and annual basis) to the finance and tax bureau.
Statutory Audit
An FIE is required to engage a Chinese CPA firm to undertake an annual statutory audit for its financial statements in accordance with the Chinese auditing standards. The annual income tax return supported by the auditor's report is due for filing with the tax bureau within four months after the year-end.
Representative Office
A representative office is in general not allowed to engage in direct business and receive business income. The accounting records are much simpler, containing cash and bank books, expense and asset accounts. For a representative office taxed on an expense basis, it is nevertheless required to engage a Chinese CPA firm for an expense audit report for tax reporting purpose.
General Requirements and Specific Sector Requirements
In addition to the regulations applicable to all types of businesses, there are specific accounting regulations for entities of different ownership and business activities. Entities categorized by ownership include state-owned enterprises, collective owned enterprises, domestic private enterprises, FIEs and joint stock limited companies. By business activities, companies are categorized as manufacturing enterprises, agriculture enterprises, and transportation (general) Enterprises, transportation (railway) enterprises, transportation (aviation) enterprises, postage and telecommunication enterprises, financial institution enterprises, insurance enterprises, tourism and catering enterprises, foreign economic cooperation enterprises, merchandising enterprises, construction enterprises, real estate development enterprises and group structured companies. Take a manufacturing FIE as an example. It is required to comply with the requirements stipulated in the Companies Law if it is a limited company or a joint stock company in addition to the relevant business, accounting and financial management laws and regulations applicable to FIEs. Meanwhile, it is required to adopt accounting and financial systems and regulations applicable to manufacturing businesses. If the provisions of these regulations are in conflict, in practice, specific accounting and financial laws and regulations will prevail over general accounting and financial laws and regulations. For instance, Article 18 of the PRC Company Law stipulates that the law applies to FIEs with limited liabilities. However, if there are specific laws and regulations applicable to FIEs, these laws and regulations shall prevail.