USASBE 2008 Proceedings - Page 0561
Issue Fixed Assets-Valuation and Expensing
Research & Development Costs
Accounts Receivable (A/R)-Valuation and Timing of Bad Debt Expense
Effects of Currency Conversion Methods on Income
Explanation Fixed Assets are recorded using cost method under PRC GAAP. The depreciation methods are straight-line, Declining- Balance, United-of- Production and Sum-of- Years’-Digits. Generally expensed when incurred, due to uncertainty of actual development. PRC does allow for capitalization and amortization of development costs once project deemed to be viable, based upon meeting specific criteria, but research remains expensed as incurred. With the history of business conducted between traditionally government owned entities, A/R is generally never considered ‘bad.’ A/R typically aged in PRC based upon years rather than 30-day increments. In addition, doubtful accounts are reversed and limited to very low amount (.3% to .5% of receivables). Exchange rate is held artificially constant by PRC government, but forces international participants to anticipate PRC actions, rather than relying on market forces.
Business Implication Fixed Assets are generally accounted for in the same manner as elsewhere in the world. Generally, questions around fixed assets arise concerning existence of the asset.
Typically R&D activities focus on the use of existing technologies and applying to China marketplace. However, the differences in accounting treatment can result in expense reporting that could vary significantly from practices outside PRC.
As companies move towards privatization, A/R becomes more important in terms of valid sales, valid assets and cash flow. Allowance for doubtful accounts under PRC GAAP often do not adequately provide for old receivables. It would affect the valuation of the quality of earnings and working capital.
Unpredictability in revenue and expenses as the exchange rate could be changed at any time by PRC.