China: Modernization of the accounting system for private Non-Profit Organizations

published on 8 October 2024 | reading time approx. 2 Minuten

On 19 August 2024, the Chinese Ministry of Finance released a draft of a new accounting system for private Non-Profit Organizations (NPOs). The current regulations, in effect since 2004, no longer meet today's requirements for transparency and accuracy. We have summarized the key changes and provided an outlook on the future of financial reporting in the non-profit sector.

Background and need for revision »
Key changes in the draft »
Further revisions »
Adjustments to specific accounts »
Summary »

Background and need for revision

The current regulations for private NGOs, such as social organizations and foundations legally registered in China, as well as temples, mosques, and churches, date back to 2004 and were supplemented by an interpretation in 2020. However, a comprehensive and systematic revision of these regulations has not yet occurred.

The new draft has been introduced to align with the evolving laws and regulations concerning NGOs, the regulation of the sector, the business activities of NGOs, and the improvement of the quality of accounting information.

Key changes in the draft

1. Formal Expansion of Scope

The organizations to which the accounting system applies have been expanded and now include, according to the draft:

Representative Offices of foreign NGOs,
International Social Organizations, and
Foreign Chambers of Commerce,

which are registered and established in China in accordance with the law.

2. Recording of Donations in Services and Labor

Donations of services and labor must also be recorded if they meet the definition of an asset, and their cost or value can be reliably measured. If the amount stated on the receipts corresponds to the market value of the donated labor or service, the amount can be accounted for and disclosed in the notes to the annual financial statements.

3. Increased Disclosure Requirements

Disclosure requirements for transactions with related parties, particularly concerning the transfer of resources, the provision of services, and the assumption of obligations, regardless of whether compensation is provided, have been tightened.

In cases of equity investments where control, joint control, or significant influence exists, the degree of influence on the participation and its changes, as well as changes in the ownership interest, must be disclosed.

Further revisions

Treatment of Restricted Assets: A distinction between restricted and unrestricted expenses must be made, and these are to be reported separately.
Elimination of the Equity Method for Valuing Long-Term Investments: The option to use the equity method has been removed, and accounting will now uniformly follow the cost method. Additionally, disclosure requirements for long-term investments have been tightened.
Consolidated Financial Statements: The requirement for consolidated financial statements has been eliminated, with strengthened disclosures in the notes section instead.

Adjustments to specific accounts

Revision of Impairment Accounting: A separate account for impairment expenses has been established to account for the difference between asset impairment losses and administrative expenses.
Introduction of Accounts for Other Long-Term Investments: New accounts have been created for other long-term investments held for more than one year. Previously, only long-term equity investments and investments in long-term debt were recorded.
Expansion of Amortization Accounts: The treatment of long-term amortizations has been adjusted, so that expenses with an amortization period of more than one year are recorded separately.
Various Adjustments to Accounts for Taxes and Net Assets: Several accounts have been added to account for taxes payable and changes in net assets, including corrections from prior years.

Summary

In summary, the draft accounting system for private Non-Profit Organizations aims to implement a timely adjustment that better reflects current regulatory requirements and clarifies the accounting treatment of transactions within Non-Profit Organizations. This will provide stakeholders with clearer guidelines and improve the quality of financial reporting.