China GAAP vs. US GAAP

The difference between China GAAP and US GAAP

There are cultural and regional differences in the way accounting practices are carried out all over the world even though the basic premise remains the same. Over the centuries accountants have had to make minor changes in the way they keep records. The organization called the Financial Reporting Standards (FRS) is trying to come up with Generally Accepted Accounting Principles (GAAP) that will be used in every country so that all have the same reporting practices.

There are differences in the way in which China and the United States handle their financial reporting and these differences have often caused problems. It is impossible to analyze the total difference between China GAAP and the US GAAP in a brief way, but one can look at specific ways in which the two are different.

Threshold of fixed assets capitalization

In the United States, companies decide on their own what the threshold will be for the fixed assets. The expenditure above this benchmark is capitalized.

In China, any fixed assets that are associated with the production and the operation of a company that have been in use for over a year are capitalized. Any other fixed assets that have a service life of two years or more and a value of over 2000 Yuan are also capitalized.

Cost of borrowing

In the US, companies that construct tangible assets can capitalize the interest they pay on the money they borrow for the project. This amount depends on the number of investments that are capitalized in the project. The source of the funding doesn’t matter at all. The capitalization is limited to the interest paid for the cost of borrowing.

In China all borrowing costs should be capitalized.

Major Overhauls

In US GAAP, the cost of carrying out a major overhaul of the company is expended as it is incurred. The only exception is if the company has identified this activity as a separate component of the assets.

In China GAAP, the costs associated with a major overhaul are capitalized. They are expended over the period of time until the next overhaul.

Impairment

In the US, when conditions warrant that an asset is impaired then testing is carried out. The results of the testing are based on groupings that identify cash flow. It is only identified as impairment if the future cash flow is less than the book value of an asset.

In China, the impairment of an asset is calculated according to the lowest book value and the highest amount for which the asset would sell. The recoverable amount would be the difference between the highest selling price and the current estimation of future cash flows from continued use and the ultimate disposal of the asset.