2025 Annual Report Audit: Key Focus Areas Under China’s Latest Accounting Standards

1. Long-Term Equity Investments: Switching between the equity method and financial-instrument accounting solely due to changes in board representation is prohibited. “Significant influence” must be assessed comprehensively.
2. Fixed Assets:Assets that are ready for their intended use must be capitalized and depreciated in a timely manner. Depreciation cannot be delayed due to incomplete final settlement.
3. Intangible Assets (R&D): R&D costs may only be capitalized once technical feasibility is genuinely achieved. Administrative staff salaries may not be included in R&D expenditures.
4. Data Resources: Previously expensed data-related costs may not be re-capitalized. Internally generated or purchased data assets must be measured at historical cost, not valuation amounts.
5. Asset Impairment: Idle or suspended assets must undergo impairment assessment. Goodwill impairment testing is mandatory every year, regardless of impairment indicators.
6. Provisions and Contingent Liabilities: If disclosure would cause significant prejudice, details may be omitted; however, the nature of the litigation or arbitration and the reasons for non-disclosure must still be disclosed.
7. Revenue Recognition: Early or delayed revenue recognition is strictly prohibited. Companies may not arbitrarily switch between gross/net or over-time/point-in-time recognition methods.
8. Government Grants: Grants related to ordinary activities must not be recorded as non-operating income. Grants must be disclosed by category: asset-related or income-related.
9. Business Combinations: Contingent consideration must be included in acquisition-date cost at fair value. Adjustments within 12 months affect goodwill; later changes follow their economic substance.
10. Leases: Lease identification must be based on economic substance, not legal form. Lessees must recognize both a right-of-use asset and a lease liability at inception.
11. Financial Instruments: Expected credit losses cannot be understated due to related-party credit assumptions. Derecognition must be assessed holistically based on risk and reward transfer.
12. Standard Warrants: Frequent trading of warrants for profit is treated as financial-instrument activity, not operating revenue. Gains and losses are recorded as investment income.
13. Insurance Contracts: The separation of main and supplementary policies depends on independent pricing, lapse capability, and separately measurable risk.
14. Changes in Accounting Policies or Estimates: If neither the business model nor contract terms change, altering revenue recognition methods is typically classified as prior-period error correction, not a policy change.
15. Scope of Consolidation: The three elements of control must be reassessed continuously. Adjusting consolidation scope solely due to bankruptcy, shutdown, or board changes is prohibited.
16. Related-Party Transactions: All related-party relationships and transactions must be fully and accurately disclosed.
17. Financial Statement Presentation: The unified Ministry of Finance reporting format must be strictly followed. Missing statements or insufficient notes are not permitted.

The quality of the annual financial report directly affects:

• tax settlement and compliance,
• industrial and commercial filings,
• supplementary tax payments or refunds,
• consolidated reporting for multinational groups,
• strategic decision-making at a global level.

ECOVIS recommends that finance teams benchmark the new rules line-by-line, enhance internal controls, and ensure zero deviation in annual-report data.

Engaging a qualified accounting firm for the annual audit not only meets regulatory requirements but also significantly enhances the credibility of financial statements.