HGB and China GAAP – what are the differences?

by Richard Hoffmann, ECOVIS Beijing China

Preparing the yearly financial statements is not just a duty in China but also a health check for your company – If several subsidiaries in different countries are involved and different accounting standards come into consideration, then you better choose an auditor who can handle all the necessary types of audits like IFRS, China-GAAP and HGB if needed. This will not only save costs and time but it will also make sure that it’s done at the same standard and quality.

For example, German companies usually have to submit their financial statements according to HGB (Handelsgesetzbuch), which governs all aspects of accounting and bookkeeping in Germany. Their subsidiaries in other countries have to follow the local standards – such as the China GAAP (Generally Accepted Accounting Principles) – while at the same time also preparing a financial statement that suit the requirements of HGB, so that a consolidated statement for the holding company can be produced.

Having to prepare two or more financial statements can add significant costs and are likely to be quite time consuming. We, Ecovis Beijing, as one of the few tax advisors that have the license to prepare statements according to IFRS, HGB and China GAAP in China, can help you with this process. In addition, as we specialize on international companies, we can handle it both better and more cost efficient for you than others.

So what are the main differences between the HGB and China GAAP?

The HGB is built around one central principle – prudence. This means that in case of any doubt the disadvantageous position will be considered. This is complemented by several other principles such as realization (profits must be shown only after they are realized), imparity (possible loses must be shown, even if not yet realized), historical costs (limit of every asset valuation are the historical costs) and lowest value (asset: must show the lowest possible valuation; liability: must show the highest possible valuation). The purpose of a financial statement (HGB) is to deliver reliable informations, guarantee creditor protection and help with tax and payout assessments.

China GAAP on the other hand are very similar to IFRS in many respects: the central building block is the accrual principle – the profit evaluation on an accrued basis. The purpose of a financial statement (China GAAP) is decision usefulness – to deliver information assisting in making decisions. It is more aimed at the investor than at the creditors.

Sales recognition for projects

In China GAAP projects are recognized in the revenue to the percentage of their completeness – something the HGB does not allow. Only when the project is completed, can the revenue be recognized. But it is possible to split a large project into smaller projects, which are independent from each other. In this case, the revenue will be recognized each time a project is recognized. The revenue of the projects should match the cost of the projects!

Exchange gain and loss

When there is a fluctuation or difference in the exchange rate, an exchange gain or loss occurs. An example of such a situation is when the exchange rate concerning a particular invoice changed during the time of it being entered in and the time in which it was paid out.

In China GAAP the balance of all foreign currency accounts should be converted at the year-end into the local currency using the year-end exchange rate. The differences due to the exchange rate should be recognized as exchange Gain/Loss in the profit and loss statement.

In the HGB, the prudence principle forces accountants to make a differentiation between an exchange gain and loss. Under certain circumstance, the unrealized gains can’t be recognized in the profit and loss statement. In the case of a loss, both realized and unrealized losses have to be recognized.

Low value goods

In China GAAP low value goods, which are listed in the inventory balance, become amortized when they are issued for use.

In the HGB low value goods with a value of less than 150€ become direct expenses, while for goods with a value between 150€ and 410€ there is the choice between becoming direct expenses or part of a pool of low value assets and be straight line depreciated over 5 years. Goods with a value of more than 410€ but less than 1000€ become part of this pool and are depreciated as detailed.

Inventory provision / valuation

In China GAAP there is only one method for the inventory provision – the net realized value (NRV), which in general is the expected sales price minus the selling costs.

In the HGB inventory provision is more flexible – there are several methods depending on the type of goods. The inventory provision can be accrued by the proportion of the total inventory, the turnover of the inventory, the NRV method, or a combination of the above.

Fixed assets

In China GAAP for fixed assets there should be set a reasonable residual value, while in the HGB there is no residual value set

If you need help with your financial statements or have questions about the different reporting standards, let us assist you. We are experienced in preparing HGB, China GAAP and IFRS statements!

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