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Chinese Law

Now China is speeding up drafting the Foreign Investment Law of the P. R. China, and adjusting some policies relating to the foreign investment. For a long time, the management function of the Ministry of Foreign Economic and Trade of P. R. China (MOFET, now the name of which has been changed to Ministry of Foreign Trade and Economic Cooperation-MOFTEC) mainly depend on the internal documents, and it is not good for foreign investors to know China’s stipulations on the foreign investment. And now, the central government decided that all the internal documents relating to foreign investment as well as its management should be made public according to law making procedure, otherwise it should be annulled.

Since 1993 China’s Ministry of Finance (MOF) has been working with Deloitte & Touche Tohmatsu to develop a body of Chinese accounting standards that are to be in line with international accounting standards. Despite numerous challenges, tremendous progress has been made in this direction.

The Ministry of Finance has adopted a “need-based” philosophy of standards issuance rather than issuing all the standards at once. Exposure drafts on thirty standards have been published. Sixteen standards have been adopted to date (See Appendix A) and several others are under active development. All the standards that have been adopted are generally consistent with international best practice. Several standards including those on earnings per share, presentation of financial statements, segment reporting, foreign currency translations, impairment, discontinued operations and income taxes among others are to be adopted by 2004.

While the new standards are generally consistent with international standards and practice some differences remain. One of the most obvious differences is that China does not recognize unrealized increases in the fair value of assets, a procedure that is gaining acceptance in IAS . Chinese standards still use historical cost as the basis of measurement. However, the replacement of numerous arcane and often inconsistent Chinese standards by uniform accounting standards has greatly increased the pace of convergence with International Accounting Standards.

Under current international accounting standards historical cost is used for valuation of property, plant and equipment (fixed assets or PP&E) . However, revaluation of long-lived assets is an acceptable alternative if certain conditions are met. There are four main issues concerning the accounting of fixed assets.

First, all costs required to bring an asset into working condition are recorded as part of the cost of the asset. Thus, any reasonable cost such as sales duties, finders’ fees, freight costs and set up costs, which are incurred prior to using the asset in actual production, are not expensed when incurred but capitalized instead. Start up costs cannot be capitalized unless they are absolutely necessary to bring the asset to workable condition. Therefore, there is a great deal of subjective judgment that is exercised in this area regarding the nature of the costs to be capitalized. Further, losses incurred in employing the asset for its intended use may not be capitalized. In addition, if the asset is bought under a deferred payment arrangement, interest costs (explicit or imputed) cannot be capitalized. The same rules apply for self-constructed assets.

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