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Financial Accounting in the PRC

Accounting in the Peoples Republic of China is just like any other country in the world........

There are many, many aspects of accounting in China that are just like other parts of the world. Debits and credits, Profit and Loss statements, Capital Assets, cash flow, ledgers. You will recognize them when you see them, assuming they are in your local language. What can be significantly different are accounting rules and regulations.

We will provide you with information which will help you in your business endeavors, but to provide you with complete and thorough accounting guidance, you will eventually enter the realm of our very first section of China accounting information.........


ACCOUNTING RESOURCES AND THE BIG 6

The Big 6 and other international accounting firms have offices in the PRC. They are staffed by trained professionals both local and foreign nationals. Early contact with one of theses organizations is recommended, especially if you and your financial organization has little experience in China. There are also many local PRC accounting firms . However, you will be best served by an international accounting firm with experience working in the PRC and each of the Big 6 is qualified.


GETTING STARTED

Your company will be well served to engage your main office accounting organization with one of the major international accounting organizations early in your China initiatives. This need not be done prior to business case preparation and approval if your financial organization can collect the necessary business case assumptions (Ie. tax rates, depreciation rules, duties). As you establish your local accounting staff, you should consult with one of the international accounting firms. A second option is to seek consultation with a local accounting firm within the PRC. However, these firms are more limited in experience and may not be as well versed in international issues important to your business.

The best management early on in your business will likely prove to be an EXPAT financial manager coupled with a local accounting manager reporting to the EXPAT. The EXPAT provides your new company with the corporate culture, main office contacts, viewpoints and processes desired by the parent corporation. The local manager provides knowledge and awareness of PRC accounting rules and wealth of local accounting and finance knowledge and insight. With training, including some at your home office, the local manager can be groomed to as the next financial manager, saving the significant cost of an EXPAT a few years in the future.


ACCOUNTING RULES AND REGULATIONS IN THE PRC

The PRC does not follow international accounting policies and guidelines, although it is moving in this direction. Many of the rules and regulations are the same or similar. It will be important for your organization to recognition the differences. Reporting for tax purposes in the PRC and reporting to the home office may vary as a result in differences in these rules.

Tax deductibility issues, for example are significant between the parent corporation, another subsidiary of the parent and your local company. They are similar to, but more complex than your dealings in most other countries. For more information on this issue, see Intercompany Transactions. Capitalization of assets and depreciation is another area where the PRC's accounting rules will likely vary with the parent company's home country rules.

In establishing your company's accounting organization, one of the first tasks is to identify and to reconcile the differences in accounting practices used by the parent corporation and the rules in China.


LOCAL ACCOUNTING HUMAN RESOURCES

In most areas of the PRC, there is shortage of experienced financial personnel who have been trained in western accounting.

The universities in the PRC have only been teaching western accounting for about a dozen years. This means the oldest graduates have up to seven or eight years of accounting experience. With the growth of international investment, the universities output of trained financial and accounting professionals has not caught up with demand. As a result, the experience level of candidates is low. Your choice in hiring professionals may come down to someone with years of PRC accounting experience, or someone trained in western accounting, but with little or no experience.

Along with a limited supply of qualified accountants, obtaining trained financial analysts will prove equally challenging. I have seen many excellent young accountants, but few experienced analysts. The chinese culture does not put a premium on asking the question "why" and challenging information and statements. In addition your new local financial analyst will likely feel uncomfortable in asking questions of and challenging Expat managers. You will need to instill this inquisitive atmosphere for your young financial analysts and teach the new staff the proper analyst responsibilities and expectations..

Where to hire the professionals? The international accounting firms are a natural training ground for the newly graduated, western trained accountant. Being hired by a major international company, who will pay better wages, is a significant draw to the promising young accountant. Other international companies in China is also a source of talent. Consider in the equation that you will not want to initiate a bidding war for the services of these resources or even openly engage in direct solicitation of this population.

Your non-professional staff should not prove as much of a challenge. For basic clerical accounting tasks, you should find more than enough qualified candidates , especially in the major cities. In these areas, you should anticipate hiring individuals out of the high schools with mathematical training and aptitude, and understanding the basics of PC's, including excel spreadsheets. As in any other area of the world, the young recent graduates, are eager to learn.

Your finance and accounting personnel will largely be hired locally. Historically people do not relocate from one city to another. Most people will live their entire lives in the community in which they were born. In addition, if you are looking for professional people to relocate, it will be difficult to entice then to move from the big cities where living standards and conditions are the best, to a less developed location.


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