China Bookkeeping Essentials: What Foreign-Invested Enterprises Need to Know About CAS and Statutory Reporting

Chinese Accounting Standards vs IFRS: What Foreign Companies Need to Know

China’s Accounting Standards for Business Enterprises (ASBEs), commonly referred to as Chinese Accounting Standards (CAS), are the mandatory financial reporting framework for all enterprises operating in China, including foreign-invested enterprises. While CAS has been substantially converged with International Financial Reporting Standards (IFRS) through a series of reforms since 2006, important differences persist. Foreign companies that assume CAS is identical to IFRS or their home-country GAAP risk producing non-compliant books — and the consequences can include tax authority audits, late-filing penalties, and restatement costs.

Key differences between CAS and IFRS that affect foreign-invested enterprises include:

• Asset impairment: Under IFRS, impairment losses on long-lived assets can be reversed if conditions recover. Under CAS, once an asset impairment loss is recognized for fixed assets, intangible assets, and certain other long-lived assets, reversal is prohibited. This is a permanent difference that affects earnings management.
• Inventory valuation: CAS does not permit the use of the last-in-first-out (LIFO) method for inventory costing. Only first-in-first-out (FIFO) or weighted average cost methods are allowed. Companies accustomed to LIFO under U.S. GAAP must adjust.
• Government grants: CAS has specific rules for the recognition and measurement of government grants that differ from IFRS in certain timing and classification aspects. Given that many foreign-invested enterprises in China may receive local government incentives, this area merits particular attention.
• Related-party disclosure: CAS disclosure requirements for related-party transactions can be more extensive than IFRS in certain respects, particularly regarding transactions with state-owned entities.
• Financial statement presentation: CAS prescribes specific formats for the balance sheet, income statement, and cash flow statement that must be followed exactly. The template approach under CAS differs from the principle-based presentation flexibility available under IFRS.

Statutory Bookkeeping Requirements for Foreign-Invested Enterprises

Under the PRC Accounting Law and the Regulations on Financial Accounting Reports of Enterprises, all enterprises in China — including WFOEs, JVs, and representative offices — must maintain accounting books and records in Chinese, using the Chinese currency (RMB) as the bookkeeping base currency, and in accordance with CAS. This is not optional, and non-compliance carries administrative penalties.

The key statutory obligations include:

• Books must be maintained in China: Accounting records, vouchers, and supporting documentation must be physically kept in China. Maintaining the company’s books offshore — a practice sometimes attempted by foreign parent companies to keep financial control at headquarters — is a violation.
• Chinese language requirement: All accounting books, vouchers, and financial reports must be prepared in Chinese. Foreign companies may keep a parallel set of records in English or another language for internal management purposes, but the Chinese-language set is the legally operative one.
• RMB as functional currency: The books must be maintained in RMB. Transactions denominated in foreign currencies must be translated into RMB at the applicable exchange rate. Enterprises may select a foreign currency as their functional currency only with the approval of the tax authorities, and even then, financial statements submitted to regulatory authorities must be presented in RMB.
• Document retention periods: Accounting vouchers and account books must be retained for 30 years. Financial reports (annual and monthly/quarterly) must be retained for 10 years. Supporting documentation for tax filings must be retained for at least 10 years after the relevant tax year. Destruction of records before the statutory retention period expires is an administrative violation.

Chart of Accounts, Vouchers, and Books: The Building Blocks

Chinese accounting practice is voucher-based. Every transaction must be supported by an original voucher — a contract, invoice, receipt, bank statement, or other documentary evidence of the economic substance of the transaction. The original voucher is used to prepare a bookkeeping voucher (jizhang pingzheng), which is the formal accounting entry recording the transaction in the books. This two-step voucher system serves as the internal control backbone of Chinese accounting.

The standard books required for a foreign-invested enterprise include the general ledger, subsidiary ledgers for accounts receivable and payable, fixed asset register, inventory ledger, cash journal, and bank journal. These must be maintained in bound form — loose-leaf ledgers are permitted during the accounting period, but all pages must be numbered consecutively and bound into permanent volumes at year-end.

The chart of accounts follows an account code structure prescribed by the Ministry of Finance, organized into asset accounts (codes starting with 1), liability accounts (codes starting with 2), equity accounts (codes starting with 3), cost accounts (codes starting with 4), and revenue/profit accounts (codes starting with 5 and 6). While enterprises have some flexibility in adding sub-accounts, the top-level structure is standardized.

The Fapiao System: China’s Unique Invoicing Framework

No discussion of bookkeeping in China is complete without addressing the fapiao (invoice) system. Fapiao are government-controlled tax invoices that serve as both commercial invoices and tax control documents. They are issued through the tax bureau’s electronic system, and every fapiao issued or received is tracked in real time by the tax authorities through the Golden Tax System.

For bookkeeping purposes, the critical implications are:

• Only fapiao recognized by the tax authorities serve as valid supporting documents for expense deductions and VAT input credit claims. An expense supported by a contract and a bank transfer but lacking a proper fapiao will generally be disallowed as a tax deduction.
• Fapiao management — purchasing fapiao quotas, issuing fapiao to customers, validating and recording fapiao received from suppliers — is an integral part of the bookkeeping function, not a separate administrative task.
• Fapiao must be matched to the underlying transactions and recorded in the month they are issued or received. Mismatches between fapiao dates and accounting period recognition — a common issue when fapiao arrive late — require careful reconciliation in the monthly close process.

Monthly and Quarterly Compliance Filings

Foreign-invested enterprises are subject to a regular cycle of tax and financial filings:

• Monthly: VAT return (typically due by the 15th of the following month), IIT withholding return (by the 15th), and stamp tax declarations. Additional monthly filings may apply depending on the company’s business scope — for example, consumption tax for certain goods, or cultural business development levy for advertising and entertainment businesses.
• Quarterly: Corporate income tax (CIT) prepayment return (due by the 15th following the quarter-end), and in some cases, quarterly financial statements filed with the tax authorities.
• Annual: The annual CIT settlement return (due by May 31 of the following year), annual financial statements filed with the tax and other authorities, annual government filing (nianbao) with the Administration for Market Regulation (due by June 30), and foreign exchange annual report with SAFE.

Accurate and timely bookkeeping is the foundation for all of these filings. Errors in the books flow directly into incorrect tax returns, and correcting them after filing can be a time-consuming and reputation-damaging process.

The Annual Audit and Statutory Reporting Cycle

All foreign-invested enterprises in China are required to undergo an annual statutory audit conducted by a CPA firm registered in China. The audit must be performed in accordance with Chinese Auditing Standards, and the audit opinion is filed with the Administration for Market Regulation as part of the nianbao process. Companies that fail to submit the audited financial statements on time may be placed on the “business anomaly list,” which can restrict business operations and negatively affect credit ratings.

The annual audit cycle typically follows this calendar:

• January–March: Audit fieldwork, including physical inventory observation, confirmation procedures, and testing of transactions and balances.
• April: Draft audit report and management representation letter. Resolution of any audit findings.
• May: Final audit report, CIT annual settlement filing, and non-audit annual submissions (foreign exchange, statistics bureau, finance bureau).
• By June 30: Nianbao filing with the Administration for Market Regulation.

Preparing for the annual audit throughout the year — with clean monthly closes, reconciled intercompany accounts, properly documented related-party transactions, and orderly voucher filing — significantly reduces audit time, cost, and stress. Companies that leave bookkeeping untended until the auditors arrive face expensive catch-up work and a higher risk of audit qualifications.

Common Bookkeeping Mistakes Foreign Companies Make

• Mixing company and personal expenses: Directors and shareholders sometimes treat company bank accounts as an extension of personal funds. Chinese tax authorities scrutinize expense deductibility, and personal expenses charged to the company are disallowed — and may be deemed constructive dividends subject to withholding tax.
• Ignoring fapiao collection for expenses: The company pays a supplier and records the expense based on the contract and bank transfer, but never obtains the fapiao. The expense is disallowed on audit, creating an unexpected CIT liability.
• Using unqualified accounting software: The tax authorities require accounting software that is capable of producing financial statements in the prescribed CAS format and has been reported to the tax bureau. Generic international accounting software not localized for China may not comply.
• Failing to reconcile intercompany accounts: Parent-subsidiary transactions, management fee charges, and cost allocations must be properly documented with written agreements, fapiao where applicable, and arm’s length pricing. Unreconciled or undocumented intercompany balances are a perennial audit issue.
• Not adjusting for foreign exchange differences: Foreign currency balances must be revalued at each balance sheet date, and the resulting exchange differences recognized in profit or loss. Companies that ignore this until year-end delay accurate monthly reporting and obscure the true financial position.

How Dan Young Business Consultancy Can Help

Dan Young Business Consultancy serves over 900 bookkeeping and accounting clients across Guangzhou, Shenzhen, Foshan, Dongguan, and Jiangmen. Our bookkeeping services cover the complete cycle: daily transaction processing and voucher preparation, fapiao management and reconciliation, monthly close and financial statement preparation in strict accordance with CAS, VAT and CIT return preparation and filing, IIT withholding and payroll accounting, annual statutory audit coordination, and nianbao and SAFE annual filing support.

We understand that foreign-invested enterprises often need parallel reporting — CAS-compliant books for Chinese authorities and IFRS or home-country GAAP reports for the parent company. Our team can bridge that gap, maintaining the Chinese statutory books while providing management accounts in the format, language, and currency the parent company requires.

Contact us at [email protected] or call +86 18565453956 to discuss your China bookkeeping requirements.