USASBE 2008 Proceedings - Page 0563
Company US C-S
Company US C-S
C-S = Common-size percentages.
As a result, the PRC company appears to have incurred less warranty costs. This would lead financial statement users to assume that the PRC company is operating more efficiently than the US company. The PRC company cannot escape the eventual actual warranty cost but they are able to defer it to a later period.
A similar difference exists concerning multi-element contracts that specify the delivery of the various elements of a system in stages. US GAAP defers revenue recognition until all elements are delivered unless the separate stages have standalone value that can be determined. An example of a possible multi-element contract would be for a vendor to install computer hardware and software in stages and provide training as needed. China GAAP provides no guidance, which may result in the recognition of the entire contract revenue at the time the contract is signed. Under US GAAP a venture may recognize the revenue pertaining to each element as that element is accepted by the customer or defer recognition of all revenue until the time when the entire contract is satisfied depending on the terms of the contract. If the contract is performed in one accounting period, there would be no difference between the two standards. If performance of the terms of the contract covers more than one period, conversion of Chinese accounting for such a transaction to US GAAP may result in the recognition of less net income by the venture during the period that it takes to satisfy US GAAP rules.
The US GAAP provides for the recognition of agency commission revenue while China GAAP provides for the recognition of the gross revenue and expense elements of the transaction. While the net income from the transaction will be the same under both accounting systems, the gross revenue and expense will be reduced by the same amount if the transaction is converted to US GAAP. The use of gross versus net revenues will change the ratios obtained when using common-sized statements and reduce comparability with the operating results of similar ventures and with industry averages. . For example, Company US uses the net revenue approach and Company PRC uses the gross revenue approach to reporting commissions earned as agents:
Company PRC C-S
Company US C-
C-S = Common-size percentages
If the US entrepreneur is not aware of revenue recognition standards used for PRC GAAP, the assumption might be that the Chinese operation earned 20% on gross revenues when, if it had used US GAAP, it would have reported earnings of 4% of revenue on the same transaction.