Preparation Methods

Title: Preparation Methods for Financial Statements in China: A Regulatory Guide

1. Overview

In China, the preparation of financial statements is a fundamental accounting process mandated by national laws and regulatory frameworks. It involves the systematic collection, classification, summarization, and reporting of an entity's financial transactions and position. Proper preparation methods are critical for ensuring the truthfulness, accuracy, and completeness of financial information. This process serves multiple stakeholders, including investors, creditors, regulatory bodies like the Ministry of Finance (MOF) and the China Securities Regulatory Commission (CSRC), and tax authorities. Adherence to standardized preparation methods, primarily based on the Chinese Accounting Standards (CAS), is essential for corporate governance, capital market integrity, economic decision-making, and national fiscal oversight.

2. Applicable Objects & Scenarios

• Applicable Objects:

  • All enterprises established within China, including state-owned enterprises (SOEs), private companies, and foreign-invested enterprises (FIEs).
  • Publicly listed companies, which have additional disclosure requirements.
  • Non-profit organizations and government agencies, which follow specific budgetary accounting standards.
  • Accounting practitioners and firm auditors responsible for compiling or auditing financial statements.

• Applicable Scenarios:

  • Routine Reporting: Monthly, quarterly, and most critically, annual financial statement preparation.
  • Regulatory Compliance: Submission to the State Administration for Market Regulation (annual report), tax authorities, and industry-specific regulators.
  • Capital Market Activities: During Initial Public Offerings (IPOs), secondary offerings, bond issuances, and ongoing disclosure obligations.
  • Corporate Actions: For mergers and acquisitions, restructuring, or bankruptcy proceedings.
  • Internal Management: For performance evaluation, budgeting, and strategic planning.

3. Core Conclusions

• Mandatory Compliance: Financial statement preparation is not optional; it is a legal requirement under the Accounting Law of the People's Republic of China and related regulations.
• Standardization is Key: Preparation must strictly follow the Chinese Accounting Standards (CAS), which are substantially converged with International Financial Reporting Standards (IFRS). Listed companies must use the CAS for Business Enterprises.
• Truthfulness Principle: The primary objective is to faithfully represent the entity's financial performance, position, and cash flows. Fabrication, falsification, or concealment is illegal.
  • Accrual Basis: Financial statements must be prepared under the accrual basis of accounting, recognizing transactions when they occur, not when cash is paid or received.
  • Going Concern: Statements are prepared under the assumption that the entity will continue its operations in the foreseeable future.
• Component Requirements: A complete set of financial statements includes the Balance Sheet, Income Statement, Cash Flow Statement, Statement of Changes in Owners' Equity, and Notes to the financial statements.

4. Procedures & Steps

Step 1: Preparation

• Closing the Books: Ensure all transactions for the period are recorded in the general ledger. Perform bank reconciliations and confirm account balances.
• Adjusting Entries: Make necessary adjusting entries for accruals, deferrals, depreciation, amortization, and provisions (e.g., for bad debts or asset impairment) in accordance with CAS.
• Trial Balance: Prepare an adjusted trial balance to verify the equality of debits and credits.
• Inventory & Asset Verification: Conduct physical inventory counts and verify the existence and condition of major assets.
• Drafting Statements: Prepare preliminary drafts of all primary statements (Balance Sheet, Income Statement, Cash Flow Statement) and begin drafting the Notes.

Step 2: Application & Submission

• Internal Review & Approval: The draft statements are reviewed by the accounting department head and the company's chief financial officer (CFO).
• Audit (If Required): For companies mandated by law (e.g., listed companies, certain FIEs, large SOEs), financial statements must be audited by a qualified Chinese accounting firm. The auditor issues an audit report.
• Board and Shareholder Approval: The financial statements, along with the auditor's report, are presented to the Board of Directors and, for the annual report, to the shareholders for approval.
• Official Submission: File the approved and (if required) audited financial statements with the relevant authorities:
  • State Administration for Market Regulation (SAMR): Via the National Enterprise Credit Information Publicity System as part of the annual report.
  • Tax Authorities: As part of the Corporate Income Tax reconciliation filing.
  • CSRC and Stock Exchanges: For listed companies, within strict deadlines.
  • Other Industry Regulators: As specified by sector-specific rules.

Step 3: Review & Confirmation

• Regulatory Review: Authorities like SAMR, CSRC, and the State Taxation Administration may review the submitted statements for compliance and accuracy.
• Public Disclosure: Listed companies must publicly disclose their annual reports on designated media and the stock exchange website.
• Archiving: The entity must retain the final version of the financial statements, supporting ledgers, and audit working papers for the legally prescribed period (generally at least 15 years, and permanently for some documents).

5. Frequently Asked Questions (FAQ)

Q1: What is the deadline for preparing and submitting annual financial statements in China? A: The statutory deadline for completing the annual financial statements is March 31st of the following year. The deadline for submitting the annual report to SAMR is June 30th. Listed companies have earlier deadlines set by the CSRC and stock exchanges, typically before April 30th.

Q2: Can we use IFRS directly instead of CAS? A: For most domestic companies in China, the use of CAS is mandatory. Some foreign-invested enterprises' parent companies may prepare consolidated reports using IFRS, but their standalone financial statements in China must comply with CAS. The MOF has substantially converged CAS with IFRS.

Q3: Who is legally responsible for the authenticity of the financial statements? A: The legal representative and the person in charge of the company (e.g., the General Manager), along with the chief financial officer and the person in charge of accounting work, bear legal responsibility. Accountants who prepare false statements may also be held personally liable.

Q4: What are the key differences in preparation for a small-scale taxpayer vs. a general taxpayer? A: While core accounting principles remain the same, the complexity differs. General taxpayers have more complex VAT accounting requirements. However, all enterprises, regardless of taxpayer status, must prepare a full set of financial statements that reflect their true financial position.

Q5: Are electronic invoices mandatory for statement preparation? A: China is actively promoting the use of electronic invoices (including VAT electronic ordinary invoices and special invoices). While not every single transaction must be electronic, the accounting system must be capable of processing and archiving electronic invoices, which are legally equivalent to paper invoices.

Q6: What should be included in the Notes to the financial statements? A: The Notes must provide detailed disclosures on accounting policies, explanations of significant account balances, related party transactions, commitments and contingencies, subsequent events, and any other information necessary for a fair presentation.

7. References & Sources

• Ministry of Finance of the People's Republic of China (MOF): The primary authority for accounting standards.
  • Website: http://www.mof.gov.cn (Check for "Accounting Standards" sections)
• Accounting Law of the People's Republic of China:
  • Available on the National Law Database.
• Chinese Accounting Standards (CAS) for Business Enterprises:
  • Official texts are published and available for purchase/purchase via the MOF and standard publishing houses.
• State Administration for Market Regulation (SAMR): For annual report submission rules.
  • National Enterprise Credit Information Publicity System: http://www.gsxt.gov.cn
• China Securities Regulatory Commission (CSRC): For rules on listed company financial reporting.
  • Website: http://www.csrc.gov.cn
• State Taxation Administration: For tax-related accounting and filing requirements.
  • Website: http://www.chinatax.gov.cn

8. Related Topics

• Chinese Accounting Standards (CAS) - Introduction and Framework
• Annual Report Compliance for Chinese Enterprises
• Corporate Income Tax Calculation and Filing in China
• Audit Requirements for Companies in China
• Internal Control and Risk Management for Financial Reporting