Question

Use Excel to create an applicable supporting schedule that provides an example of the adjustments that would need to be made to any China company’s financial statements for it to comply with U.S. GAAP

Answer 1

ADJUSTMENTS TO BE MADE BY CHINESE COMPANY TO COMPLY WITH US GAAP

1. Fixed assets capitalization threshold

In China GAAP, fixed assets related to production and operations of a company with a service life of more than a year are capitalized and other fixed assets having a value of more than 2000 Yuan with an estimated life of more than 2 years should be capitalized.

In US GAAP, companies have the liberty to determine their own materiality threshold above which expenditure is capitalized.

FOR A CHINESE COMPANY TO COMPLY WITH US GAAP IT NEED TO ADOPT ITS OWN MATERIALITY OF CAPITALIZING EXPENDITURE

1. Borrowing Costs

As part of cost of construction of a tangible fixed asset, borrowing costs on project specific borrowings should be capitalized as far as China GAAP is concerned.

In US GAAP, interest expense during construction depending upon the amount of investments in a project gets capitalized irrespective of source of financing but is limited to the amount of interest expenditure incurred.

FOR A CHINESE COMPANY TO COMPLY WITH US GAAP NEED TO CAPITALIZED INTEREST EXPENSE DURING CONSTRUCTION IRRESPECTIVE OF THE SOURCE OF FINANCING BUT LIMITED TO THE AMOUNT OF EXPENDITURE INCURRED.

1. Major Overhauls

In China GAAP, cost of a major overhaul is accrued and is capitalized and expended over the period leading up to the next major overhaul. On the other hand, in US GAAP, it is normally expended as incurred except when the organization has identified as a separate component of the asset.

FOR A CHINESE COMPANY TO COMPLY WITH US GAAP, COST OF A MAJOR OVERHAUL NEED TO BE NORMALLY EXPENDED AS INCURRED.

1. Impairment

In China GAAP, impairment is carried at the lower of net book value and the recoverable amount on a single item basis, the recoverable amount is the higher of net selling price and present value of estimated future cash flows from continuous use and ultimate disposal.

In US GAAP, when conditions indicate possible impairment, it is tested and the test is based upon asset groupings where cash flow can be identified. Impairment gets identified only if undiscounted future cash flows are below book value.

FOR A CHINESE COMPANY TO COMPLY WITH US GAAP, WHEN CONDITIONS INDICATE POSSIBLE IMPAIRMENT IT NEED TO TESTED AND TEST IS BASED UPON ASSETS GROUPING.