USASBE 2008 Proceedings - Page 0560
Issue Intangible Assets
Borrowing Costs- Classification of Costs and Timing of Expenses
Leases-Capitalization, Land Rights
Inventories-Valuation and Effect on Cost of Goods Sold
Explanation PRC GAAP recognizes internally developed Intangible Assets (e.g. brand name) pursuant to their legal recognition. The Intangible Assets are measured at cost, including such items as registration fees and legal fees incurred in the legal application. In contrast, in the US internally developed intangibles have been written off immediately against earnings. PRC GAAP requires the capitalization approach when the capitalization criteria are satisfied. Under IFRS, company has a choice to classify expense as incurred or capitalized provided the capitalization criteria met. Land rights in China have changed and company or individual can effectively possess rights of land permanently. Rights themselves are capitalized, underlying assets (land) remains with PRC. PRC GAAP prohibits the use of LIFO formula to assign the cost of inventories. In addition, PRC GAAP does not have guidance for Inventory Valuation Reserves.
Business Implication Intangible assets and income may be overstated under PRC GAAP.
Capitalization of borrowing cost could affect company’s net assets, income and lead to tax avoidance schemes.
PRC still effectively owns the land itself, so the possibility of the revocation of land rights exists.
The future declines in price of inventory is not recorded and disclosed.