What You Need to Know about Accounting & Auditing in China - Hot Topics Stephen Austin, CPA, MBA Firm Managing Partner Swenson Advisors, LLP San Diego, California Accounting Day May 12, 2008

A Regional Full Service Accounting Firm with Global Outreach

Overview of Chinese Accounting Standards  Accounting System for Business Enterprises (ASBE)  Chinese Accounting Standards (CAS)  Ministry of Finance (MOF)  Hong Kong  PRC

Accounting Systems for Business Enterprises 13 Chapters  Chapter 1General Provisions  Chapter 2Assets  Chapter 3Liabilities  Chapter 4Owners’ Equity  Chapter 5Revenue  Chapter 6Costs and Expenses  Chapter 7Profit and Profit Distribution  Chapter 8Non-monetary Transactions  Chapter 9Foreign Currency Transactions  Chapter 10Accounting Adjustments  Chapter 11Contingencies  Chapter 12Related Party Relationships and Transactions  Chapter 13Financial Reports

Chinese Accounting Standards Effective July 1, 1993 “BASIC STANDARD” Plus 16 CAS  Disclosures of Related Party Relationships and Transactions  Cash Flow Statements  Events Occurring After the Balance Sheet Date  Debt Restructuring  Revenue  Investments  Construction Contacts  Changes in Accounting Policies and Accounting Estimates and Corrections of Accounting Errors

Chinese Accounting Standards (continued) “BASIC STANDARD” Plus 16 CAS (continued)  Non-monetary Transactions  Contingencies  Intangible Assets  Borrowing Costs  Leases  Interim Financial Reporting  Inventories  Fixed Assets

Future Accounting Standards  Segment Reporting;  Foreign Currency Translations;  Presentation of Financial Statements;  Earnings Per Share;  Accounting for Government Grants;  Discontinuing Operations;  Business Combinations;  Consolidated and Separate Financial Statements;  Impairment of Assets;  Disclosure by Banks and Similar Financial Institutions;  Financial Instruments: Disclosure and Presentation;  Agriculture;  Oil and Gas; Other Extractive Industries (mining, etc).

Key Considerations  Chinese Accounting (traditionally) Designed for State Government Decision Making  National Macro Economic Control  Materially Principles e.g. Related Party Disclosures, Chapter 3  Related Portions Exclude:  Financial Sources  Public Utilities  Government Department and Agencies

Other CAS Observations  Debt Restructuring  Revenue Recognition  Non-Monetary Transactions  Intangible Assets  Inventory

CAS vs IFRS Key Considerations

What are IFRS’s?  A Single Set of Globally-Accepted, High Quality Accounting Standards  Developed by the Internationally Accounting Standards Board (IASB)  Successor of the International Accounting Standards Committee (developed IAS’s)  Used in Approximately 105 Countries and Growing  Standards are Principles Based and Less Extensive  Lack Guidance (including Industry Specific Guidance)  Frequently, the Application of IFRS Requires Judgment)

IASB Structure  A Single Set of Globally-Accepted, High Quality Accounting Standards  Developed by the Internationally Accounting Standards Board (IASB)  Successor of the International Accounting Standards Committee (developed IAS’s)  Used in Approximately 105 Countries and Growing  Standards are Principles Based and Less Extensive  Lack Guidance (including Industry Specific Guidance)  Frequently, the Application of IFRS Requires Judgment)

M&A Environment in China  1.3 Billion People  200,000,000 “Other Citizens”  10%+ Growth Rate  Key Manufacturing Hub of the World  Past 15 Years Largest Recipient of Foreign Private Investors and Development Nations  Foreign Invest Independent Guidance Catalog (10/31/07)

EJV’s and CJV’s

WFOE’s

Chinese State Government Legislation Effecting M&A in China

Ethics and Corruption In Asia Today

“Ethics has Left the Building”

The Lack of Ethical Behavior is Still Rampant

Setting the “Tone at the Top”  Board of Directors  Audit Committee’s  Chief Executive Officer  Senior Management

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SOX (Sin Management) USA - Style

Post Enron Era US Accounting Fraud  577 Separate Cases  693 Fraud Convictions  1,000+ Corporate Executives  1,300 Individuals

China Today  41,000 Executives Prosecuted in 2007  Multiple Sets of Book  FCPA – Still the World Standard  Audit Styles  Other

Setting Up Representative Offices in China (RO’s) 1.Acquire Preliminary Approval as Needed 2.Register with the Administration of Industry an Commerce for Registration Certificate 3.Apply for Carving the Official Chops 4.Apply at the Bureau of Quality and Technology Supervision 5.Apply for Local Tax Registration 6.Apply for State Tax Registration 7.Apply for Approval at People’s Bank of China 8.Open Bank Account 9.Enter into Employment Contracts

Swenson Hong Kong Office Expansion Certificate of Incorporation

Swenson Hong Kong Office Expansion Calvin, Simon and Steve in the reception area of Swenson’s Hong Kong office

Integra International Trade Mission Highlights

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