Laws of the People's Republic of China

The Ministry of Finance

Accounting System of the People's Republic of China for Enterprises with Foreign Investment

the Ministry of Finance

June 24,1992

Chapter I General Provisions

Article 1

These System are formulated in accordance with the laws and regulations of the People's Republic of China concerning enterprises with foreign investment with a view to strengthening the accounting functions of enterprises with foreign investment and to protect the legal rights of these enterprises and their investors.

Article 2

These System shall apply to enterprises with foreign investment established in the People's Republic of China which include Chinese-foreign equity joint ventures, Chinese-foreign contractual joint ventures and wholly foreign owned enterprises.

Article 3

The Ministry of Finance shall be responsible for the administration of the accounting affairs relating to enterprises with foreign investment throughout the People's Republic of China.

The finance department and bureau of each province, autonomous regions and municipalities directly under the Central Government and the responsible authorities under the State Council shall administer the accounting affairs relating to enterprises with foreign investment in its own region or under its administration and may, in accordance with the System and the practical circumstances, formulate supplementary provisions, copies of which shall be filed with the Ministry of Finance for reference.

Enterprises with foreign investment shall formulate their own accounting systems, based on the System and related supplementary provisions, to suit their own practical circumstances. The manuals on these accounting systems shall be filed with the responsible finance bureau, local tax authorities and other relevant supervisory authorities.

Chapter II Accounting Practices and Principles

Article 4

Accounting practices of enterprises with foreign investment shall conform with the relevant laws and regulations of the People's Republic of China and with the provisions of the System.

Article 5

Enterprises with foreign investment shall account for their transactions in distinct accounting periods (month, quarter and year).

The accounting year of enterprises with foreign investments shall coincide with the calendar year, i.e. from January 1 to December 31 on the Gregorian calendar.

Article 6

Enterprises with foreign investment shall only account for business transactions which have actually taken place, and shall ensure that the accounting books are accurate, complete, prepared up to date, and shall also ensure that correct methods and appropriate procedures have been applied.

Article 7

Enterprises with foreign investment shall maintain their accounting books using the accrual method. Income earned and expenses incurred during the period shall be accounted for as income and expenses of the period, regardless of whether the amount has been received or paid during the period.

Income and expenses not earned and incurred during the period shall not be accounted for as income and expenses of the period, even if the amount has been received or paid during the period.

Article 8

Enterprises with foreign investment shall match their income with the related expenses. Income earned during an accounting period shall be taken into the accounts of the same accounting period together with the related costs and expenses.

Article 9

Assets of enterprises with foreign investment shall be accounted for at historical cost. Unless otherwise authorized, enterprises may not adjust the carrying value of their assets at their own discretion.

Article 10

Enterprises with foreign investment shall distinguish capital expenditure from revenue expenditure. Expenditure shall be regarded as capital expenditure where the benefits to the enterprise last for more than one (not including one) accounting year and as revenue expenditure where the benefits to the enterprise last for only one accounting year.

Article 11

Accounting methods adopted by enterprises with foreign investment shall be consistent within each accounting period and from one period to the next and shall not be changed at will. Where changes are necessary, such changes shall generally be introduced at the beginning of a new accounting year and shall be disclosed in the notes to the accounts of that accounting year.

Chapter III Book Keeping and Accounting Books

Article 12

Enterprises with foreign investment shall adopt the double entry accounting method.

Article 13

Enterprises with foreign investment may maintain their accounts in Renminbi or a foreign currency (generally, the foreign currency shall be one for which the exchange rate is quoted by the State Administration of Exchange Control. The same definition applies wherever reference is made to foreign currency). This reporting currency shall not be changed at will once it is adopted. Where changes are necessary, approval shall be obtained from the responsible finance bureau or other relevant supervisory authorities under the State Council. Such changes shall be introduced at the beginning of a new accounting year and disclosed in the notes to the accounts of that accounting year.

Enterprises engaged in multi-currency financing or finance leasing may maintain their accounts in Renminbi as well as other related foreign currencies according to their actual requirements.

Article 14

Accounts of enterprises with foreign investment shall be kept in Chinese or in both Chinese and another foreign language.

Article 15

Enterprises with foreign investment shall obtain the original supporting document or prepare a primary voucher whenever there is a business transaction. All original documents and primary vouchers must be true, complete and accurate, and shall be obtained or prepared through proper procedures. The original documents and primary vouchers shall be used as accounting vouchers only after they have been verified as correct.

Article 16

Enterprises with foreign investment shall keep three major accounting books namely the journal ledger, general ledger and sub-ledgers together with all other necessary supporting books.

All accounting books shall be kept based on the primary vouchers, accounting vouchers or voucher summaries which have been verified as correct. All entries to the accounting books must be made on a timely basis, and must be complete, accurate and denoted with clear particulars.

Corrections to any of the accounting books must be made strictly following the working rules for accounting personnel.

Article 17

In the case of Chinese-foreign co-operative joint ventures where parties to the joint ventures pay their taxes separately, combined accounting books shall be kept in accordance with the provisions set out in Article 16 of the System in respect of assets and liabilities and income and expenses commonly shared and borne by the parties. The parties shall also keep relevant books of their own.

Article 18

Where enterprises with foreign investment use computers in maintaining their accounting books, the software used shall conform with the requirements provided in the System and possess functions for ensuring security and confidentiality.

Data stored in magnetic or other media shall be supported by back-up files and hard copies of the data shall be printed on a regular basis.

Chapter IV Current Assets

Article 19

Current assets of enterprises with foreign investment shall include cash on hand, cash in bank, marketable securities, receivables, prepayments and inventory.

Cash on hand, cash in bank and marketable securities shall be accounted for separately; receivables shall be accounted for separately where appropriate as bills receivable, accounts receivable, short term loans receivable and other receivables; prepayments shall be accounted for separately where appropriate as deposits to suppliers (trade deposits), income tax prepaid and expenses prepaid; inventory shall be accounted for separately where appropriate as merchandise, raw materials, work-in-progress, semi-finished goods, finished goods, containers and low-value consumables.

Amounts receivable after one year from the balance sheet date shall be separately disclosed below the long term investment category in the balance sheet.

Article 20

Enterprises with foreign investment shall keep a journal for cash on hand and cash in bank and shall record each transaction on a daily basis. Where the accounting books are maintained in multi-currencies (including foreign exchange certificates. The same definition applies wherever reference is made to multi-currencies), different journals shall be kept for each currency.

Article 21

Marketable securities include inventory and debentures to be realized within one year from the balance sheet date and shall be accounted for at cost. Where the cost includes an element of dividend declared or interest accrued, that portion relating to the dividend and interest shall be accounted for as a temporary payment and disclosed under other receivables.

Dividend and interest income received or receivable from marketable securities; and profit or loss arising from disposal or liquidation of marketable securities shall be accounted for as non-operating income or expenses being profit or loss on investments.

Article 22

Receivables and prepayments shall be separately accounted for in their originating currency.

Enterprises may make a general provision for bad debts at the end of the accounting year. The general provision should not exceed 3 % of the total receivables, such as accounts and bills receivable or loans, outstanding at the end of the accounting year.

Provision for bad debts shall be accounted for separately and stated in the balance sheet as a deduction from receivables or loans. Where the amount of provision to be provided at the accounting year end exceeds the amount of provision already made in the accounts, the difference shall be made up by making an additional provision in the accounts; where it is below the amount already provided for, the balance of the provision should be adjusted downward accordingly.

Enterprises with foreign investment shall charge losses arising from bad debts to general and administrative expenses. For enterprises which have made a provision for bad debts, any amount of bad debt to be written off shall be charged against the provision for bad debts. Any subsequent recoveries of bad debts written off shall be credited to the provision for bad debts or general and administrative expenses.

The write-off of bad debts shall be dealt with in accordance with relevant regulations in the People's Republic of China.

Article 23

Inventory shall be accounted for at historical cost.

The historical cost of inventory purchased includes the purchase consideration, transportation, loading and unloading expenses, insurance, reasonable loss incurred in transit, preparatory expenses incurred before warehousing and taxes payable. For trading and service enterprises, the historical cost of commodities purchased includes purchase consideration and taxes payable.

The historical cost of materials manufactured, produced or excavated by the enterprise itself shall be the actual costs incurred in the process of manufacturing, production and excavation of these materials.

The historical cost of inventory processed by third party subcontractors includes costs of raw materials or semi-finished goods actually used together with processing charges, transportation, loading and unloading expenses, insurance and taxes payable. For trading and service enterprises, the historical cost of commodities processed by third parties includes the cost of unprocessed materials, processing charges and taxes payable.

The historical cost of inventory donated to the enterprise includes the price of the inventory determined based on the provisions set out in the second paragraph of Article 49 of the System together with transportation, loading and unloading expenses, insurance and taxes payable borne by the enterprise.

Inventory gains shall be accounted for at original historical cost or at the historical cost or at the historical cost of similar inventory.

Where inventory is accounted for at the planned cost (or standard cost. The same definition applies wherever reference is made to planned cost), any difference between the planned cost and historical cost shall be accounted for separately.

Article 24

Inventory shall be accounted for using the perpetual inventory method.

Merchandise, raw materials, semi-finished goods and finished-products shall be accounted for at historical cost; the historical cost can be determined using the first-in-first-out, weighted average, moving average, last-in-first-out or batch methods. Where the planned cost is used, the difference in cost in each period shall be taken up to adjust the budget cost of inventory acquired or delivered to historical cost.

Low-value consumables and containers for repetitive use may be expended entirely upon incurring or amortized over two years or by installments. Low-value consumable acquired in large quantities on commencement of business may be accounted for as other assets.

Article 25

Inventory counts shall be conducted on a regular basis but not less than once every year. Differences between the results of inventory counts and book records shall be adjusted for as soon as possible after the reasons for such differences are identified. The adjustment shall normally be made before the finalisation of accounts for the accounting year in which the inventory count is conducted.

Gains on inventory shall generally be used to offset relevant expenses. Losses on inventory or damages shall be charged to relevant expenses after taking into account and compensation from person(s) causing such losses or damage or from insurance companies and the scrap value of the inventory. Net losses as a result of extraordinary causes shall be accounted for as non-operating expenses.

At the accounting year end, where defects in or obsolescence of the merchandise, finished goods or semi-finished goods available for sale to third parties have caused the net realizable value of the merchandise and products to be less than their book costs, such loss may be charged to the selling expenses of the accounting year after approval is obtained from the responsible finance bureau or other relevant supervisory authorities under the State Council. Such loss may also be charged to a provision for losses that may arise on sale of the inventory and stated as a deduction from inventory in the balance sheet. On actual sale of inventory for which the provision has been made, any over-provision shall be used to write down the selling expenses. Net realizable value shall be determined based on the expected sales proceeds less any necessary processing or maintenance charges.

Chapter V Long Term Investments

Article 26

Long term investments of enterprises with foreign investment represent capital injected into other enterprises for a period of more than one year and include cash on hand, tangible and intangible assets and shares and debentures not expected to be realized within one year from the balance sheet date. Long term investments shall be accounted for separately and separately disclosed in the balance sheet.

Any portion of long term investments to be realized or recoverable within one year from the balance sheet date shall be separately disclosed under current assets in the balance sheet.

Investments in other enterprises shall be accounted for based on actual payments or based on the cost of materials or intangible assets contributed as agreed in the investment contracts or agreements.

Investments in shares shall be accounted for based on actual payments or based on the cost of materials or intangible assets contributed as agreed in the investment contracts or agreements including expenses related to the transactions. Where the actual payments include dividends declared by the investing company, that portion of the dividend shall be accounted for as a temporary payment and disclosed under other receivables in the books of the investing company.

Investments in debentures shall be accounted for based on actual payments. Where the actual payments include interest accrued, that portion of the interest shall be accounted for as a temporary payment and disclosed under other receivables.

Where debentures are acquired at a premium or discount, the difference between the cost and the face value of the debentures shall be amortized by installments using the straight line method or effective interest rate method over the period to maturity of the debentures in order to adjust the interest income and the book value of the long term investments.

Any difference between the appraised values of tangible or intangible assets contributed and their book values shall be treated as deferred investment profits or losses which shall be accounted for as non-operating income or expenses over the investment period by equal annual installments. The balance of deferred investment profits or losses as at the accounting year end shall be separately disclosed under other assets or other liabilities in the balance sheet.

Article 27

The cost method shall generally be used in accounting for investments in other enterprises and shares. The equity method may also be used where an enterprise's investment exceeds 25% of the total capital or total share capital of the invested enterprise and significance influence can be exercised over its management.

Dividend and interest income received or receivable from long term investments; profit or loss on liquidation or assignment of long term investments and, in the case of enterprises which equity account for long term investments, the changes in book value of long term investments arising from any changes in the interest in the invested enterprise shall be treated as investment gains or losses and accounted for as non-operating income or expenses.

Article 28

Funds to branches which keep their own accounts but do not pay their taxes individually shall be accounted for as funds to branches and separately disclosed under long term investments in the balance sheet.

Funds to branches shall be accounted for at the book value of the cash, tangible or intangible assets actually contributed.

Chapter VI Fixed Assets and Work in Progress

Article 29

Fixed assets of enterprises with foreign investment shall be accounted for separately and separately disclosed in the balance sheet. Assets under finance leases shall be accounted for separately until ownership is transferred. Assets under operating leases shall be recorded in supporting memorandum books and shall be disclosed in the notes to the accounts.

Article 30

Fixed assets shall be accounted for at cost.

The cost of fixed assets contributed by the investors represents the amount stated in contracts, agreements, the enterprise's application document for incorporation or the statement of examination and receipt of fixed assets contributed including transportation, loading and unloading expenses, insurance and taxes payable borne by the enterprise.

The cost of fixed assets purchased represents the purchase consideration including transportation, loading and unloading expenses, insurance and taxes payable.

Cost of fixed assets manufactured and constructed by the enterprise itself represents actual expenses incurred in the manufacturing and construction process.

The cost of fixed assets under finance leases represents the purchase consideration stated in the contracts including transportation, loading and unloading expenses, insurance and taxes payable borne by the enterprise. Where the purchase consideration stated in the contracts includes interest and handling charges, that portion of the interest and handling charges shall be deducted from the cost. Such interest and handling charges need not be accounted for separately if the value of the fixed assets under finance leases is not substantial and the term of the lease is not long.

The cost of fixed assets donated to the enterprise represents the price of the fixed assets determined based on the provisions set out in the second paragraph of Article 49 of the System, including transportation, loading and unloading expenses, insurance and taxes payable borne by the enterprise. For used assets, the rate of depreciation shall be estimated according to the condition of these assets.

Surplus of fixed assets on physical counts shall be determined by the replacement cost of such assets and their rates of depreciation shall be estimated according to the condition of these assets.

Expenses incurred in modifying fixed assets for the purpose of expansion, replacement, renovation or technological improvement may be included under the cost of fixed assets.

Cost shall also include installation costs, if any, of the fixed assets.

Article 31

Fixed assets shall generally be depreciated using the straight line method. The production or service output method may also be used where the straight line method is not appropriate.

Depreciation of fixed assets shall generally be determined based on the cost of fixed assets and the depreciation rate set for each category of fixed assets. Depreciation rates may also be applied on an individual asset basis where the depreciation rate by category is not appropriate. The rates of depreciation of fixed assets shall be determined based on their cost, estimated residual values, which shall generally be not less than 10% of their cost, and their expected useful lives.

Accelerated depreciation shall generally be calculated using only the double reducing balance method or sum-of-digits method.

Fixed assets shall be depreciated on a monthly basis from the month following that in which the assets are used in operation. For fixed assets which are no longer used in operation, provision for depreciation on such assets shall cease to be made from the month following that in which the assets cease to be used. Fixed assets may continue to be used after they have been fully depreciated during which time no further depreciation shall be required. Provision for depreciation shall also cease to be made for fixed assets damaged before the end of their expected useful lives.

Where the cost of fixed assets is adjusted for the purpose of expansion, replacement, renovation or technological improvement, depreciation shall be calculated after taking into account the adjusted cost, accumulated depreciation already provided, estimated residual values and the remaining useful lives. Fixed assets used in construction work during the set-up period of the enterprise may be depreciated in full on completion of work or be equal installments over the period of construction and the depreciation charge shall be included in the cost of construction. In respect of fixed assets used during the set-up period but not directly related to the construction work, the depreciation charge shall be included in pre-operating expenses. Assets under finance and operating leases shall also be depreciated. Fixed assets, other than buildings, idle for a long period shall not be depreciated.

Accumulated depreciation shall be accounted for separately and separately disclosed as a deduction under fixed assets in the balance sheet. Accumulated depreciation for fixed assets under finance leases shall be accounted for separately.

Article 32

A physical count of fixed assets shall be made on a regular basis, at least once every year. Differences between the physical count results and book records shall be adjusted for as soon as possible after the reasons for such differences are identified. The adjustment shall normally be made before the finalisation of accounts for the accounting year in which the physical count of assets is conducted. Any surplus of fixed assets identified on physical counts shall be accounted for as operating income at an amount equal to their cost less accumulated depreciation while losses shall be accounted for as operating expenses at an amount equal to their cost less accumulated depreciation and any compensation from person(s) causing such losses or from insurance companies. Surplus and shortage of fixed assets on physical counts during the construction period shall be included in the related construction cost.

Net profit or losses on disposals of fixed assets arising from sale, obsolescence or damage shall be accounted for as non-operating income or expenses. Net profit or losses on the disposal of fixed assets arising during the period of construction shall be accounted for as part of the construction cost.

During the set-up period of the enterprise, surplus or shortage of fixed assets on physical counts or on disposals not directly related to any construction work, and profits or losses on disposals of fixed assets as a result of extraordinary causes shall be accounted for as pre-operating expenses.

Article 33

Construction in progress of enterprises with foreign investment shall include preparation work before commencement of the construction, work under construction, and construction and installation work completed but not yet used in operation. Construction in progress shall be accounted for separately and separately disclosed in the balance sheet.

Where the period of construction exceeds one year, and construction items are numerous and construction cost is substantial, construction items may be accounted for separately. Construction in progress shall be accounted for on the following basis:

materials used in construction -- provisions out in Article 23 of the System;

equipment to be installed -- provisions set out in Article 30 of the System;

payment on account to contractors -- the actual amount paid;

management expenses of the construction work -- the actual management expenses incurred;

construction work undertaken by the enterprise itself -- the direct materials, direct labour, direct mechanical work expenses and attributable management expenses;

construction work undertaken by third party subcontractors -- the amount paid to subcontractors and attributable management expenses;

installation of equipment -- the cost of equipment including installation charges, trial run expenses and attributable management expenses.

Equipment acquired or invested during the set-up period of the enterprise but not yet installed may also be accounted for as construction in progress.

Article 34

Where there is spoilage or damage to the construction in progress, net losses resulting shall generally be accounted for as part of the cost of construction in progress after deduction of the residual value and compensation from person(s) causing such losses or from insurance companies. Net losses arising from spoilage or damage as a result of extraordinary causes shall be accounted for as pre-operating expenses if the construction is undertaken during the set-up period and accounted for as non-operating expenses if the asset has already been used in operation.

Net expenses arising from trial runs before the asset is used in operation shall be accounted for as part of the cost of construction in progress. Where products produced during trial runs can be sold to third parties, the actual or estimated sale proceeds shall be deducted from the cost of construction in progress.

Article 35

When the construction of an asset is completed and it is used in operation but the total cost of the asset is yet to be determined, the asset shall be transferred to fixed assets at the estimated value based on the budgeted price or cost of the work, and shall be depreciated according to the provisions set out in Article 31 of the System. The estimated value of the asset and its accumulated depreciation shall be adjusted for after the actual cost of the asset is ascertained.

Chapter VII Intangible and Other Assets

Article 36

Intangible assets of enterprises with foreign investment include patents, proprietary technology, patents and trademarks, land occupancy rights and other intangible assets, and shall be accounted for separately and separately disclosed in the balance sheet.

Intangible assets contributed by the investors shall be accounted for at the amount specified in the contracts, agreements or the enterprise's application document for incorporation including related expenses borne by the enterprise.

Intangible assets acquired by the enterprises shall be accounted for at cost.

Article 37

Intangible assets shall be amortized by equal installments over the beneficiary period from the time the enterprise starts deriving beneficiary period from the intangible assets or, where there is no specified beneficiary period, over the estimated beneficiary period.

Article 38

Other assets of enterprises with foreign investment include pre-operation expenses, exchange losses during the set-up period, deferred investment losses and other deferred expenses to be amortized by installments, and shall be accounted for separately and separately disclosed in the balance sheet.

Pre-operating expenses shall be accounted for based on cost incurred in relation to business registration fees, wages and salaries, business trip expenses, staff training expenses, expenses incurred by the board of directors (or a joint management committee. The same definition applies wherever reference is made to the board of directors.) and other expenses not included in the purchase or construction of fixed assets or intangible assets.

Exchange losses during the set-up period shall be accounted for based on the amounts realized during the set-up period.

Deferred investment losses shall be accounted for based on the difference between the appraised value and the book value of the investments.

Deferred expenses shall be accounted for based on actual expenses incurred.

Article 39

Other fixed assets shall be amortized on the following basis:

Pre-operating expenses and exchange losses during the set-up period -- by equal installments over a period of not less than 5 years from the date the enterprise commences operation

Deferred investment losses -- by equal installments over the investment period but not less than 10 years

Other deferred expenses -- by equal installments over the estimated beneficiary period but not less than 10 years

Chapter VIII Current Liabilities, Long Term Liabilities and Other Liabilities

Article 40

Current liabilities of enterprises with foreign investment include short term borrowings, payables, deposits from customers (advance deposits) and accrued expenses.

Short term borrowings, deposits from customers (advance deposits) and accrued expenses shall be accounted for separately. Payables shall be accounted for separately where appropriate as bills payable, accounts payable, accrued payroll, tax payable, dividend payable and other payables. Current liabilities denominated in multi-currencies shall be individually accounted for in their originating currencies.

Staff and workers' bonus and welfare fund and other funds, which are liabilities in nature, shall be accounted for as current liabilities.

Amounts payable after one year from the balance sheet date shall be separately disclosed under long term liabilities in the balance sheet.

Article 41

Long term liabilities of enterprises with foreign investment include long term borrowings, redeemable bonds and amounts payable under finance leases, and shall be accounted for separately and separately disclosed in the balance sheet.

Long term liabilities repayable within one year from the balance sheet date shall be separately disclosed under current liabilities in the balance sheet.

Article 42

Redeemable bonds shall be accounted for based on the face value of the bonds issued. The difference between the proceeds of issue and the face value of the bonds shall be accounted for as the premium or discount on issue and shall be accounted for separately and separately disclosed as an addition to or a deduction from the redeemable bonds account in the balance sheet. Accrued interest included in the proceeds of issue shall be accounted for as a temporary receipt and disclosed under other payables.

Premium or discount on the issue of redeemable bonds shall be amortized by installments using the straight line method or effective interest method over the period to maturity of the bonds and shall be charged against the related interest expenses.

Handling charges paid to financial institutions which act as agents to the issue shall be accounted for as finance charges.

Article 43

Other liabilities of enterprises with foreign investment include exchange difference during the set-up period and income derived from deferred investment, and shall be accounted for in the "exchange difference during the set-up period "exchange difference during the set-up period" account and the "deferred investment losses" account respectively.

Article 44

Interest accrued on liabilities shall be accounted for in the appropriate period at the actual interest rate paid.

Interest directly related to fixed assets purchased or constructed shall be included in the purchase or construction cost of the assets before the assets are used in operation or before final accounting has been completed for assets already used in operation. Other interest shall be accounted for as pre-operating expenses during the set-up period and shall be accounted for as expenses of the related accounting period after the enterprise has commenced operation.

Chapter IX Investors' Equity

Article 45

Investors' equity in enterprises with foreign investment include paid-in capital, capital reserve, general reserve, enterprise expansion fund and undistributed profits, and shall be accounted for separately and separately disclosed in the balance sheet.

Article 46

Paid-in capital represents contributions by investors in accordance with the amount specified in the contracts, agreements or the enterprise's application document for incorporation.

Contributions in the form of cash shall be accounted for at the amount actually deposited into the bank account of the enterprise.

Contributions in the form of assets shall be accounted for at the amount specified in the contracts, agreements, the enterprise's application document for incorporation or statement of inspection and receipt of assets contributed.

Contributions in the form of intangible assets shall be accounted for at the amount specified in the contracts, agreements or the enterprise's application document for incorporation.

Where the paid-in capital booked does not agree with the amount stated in the certificate of paid-in capital reported by a certified public accountant in China, proper adjustment shall be made in accordance with the appropriate regulations.

Article 47

Where capital contributed by investors requires translation into the reporting currency, the amount debiting to the corresponding asset account shall be translated in accordance with Article 61 of the System, and the amount crediting to the paid-in capital account shall be translated at the foreign exchange rate specified in the agreement as quoted by the State Administration of Exchange Control (hereinafter this exchange rate is referred to as the "official foreign exchange rate"). Where the exchange rate is not specified in the agreement, translation shall be made at the official foreign exchange rate quoted on the date when the contribution is received.

Where enterprises translate the paid-in capital in foreign currency at the official foreign exchange rate quoted on the date when the contribution is received, and where the currency adopted at the time of registration of incorporation is different from the reporting currency, and where the capital is contributed at different times, the capital shall be translated at the official foreign exchange rate prevailing on the date when the first contribution is received. Where the capital is contributed by installments, each amount received shall be translated at the official foreign exchange rate prevailing on the date of the first receipt.

Exchange differences arising from the adoption of different exchange rates in the corresponding assets account and the paid-in capital account shall be dealt with in the capital reserve account.

Enterprises with foreign investment shall generally translate the paid-in capital account at the official foreign exchange rate quoted on the date when the contribution is received.

Article 48

Capital returned to investors by Chinese-foreign cooperative joint ventures in accordance with relevant laws and regulations during the period of cooperation shall be accounted for separately and separately disclosed as a deduction under the paid-in capital account in the balance sheet.

Article 49

Capital reserve includes donation reserve, exchange differences on the translation of capital and premium on capital.

Donation reserve represents the increase in investors' equity arising from the receipt of a donation in cash or in the form of assets. A donation in cash shall be accounted for at the amount received. A donation in the form of assets shall be accounted for at the amount stated in the invoice or, where there is no invoice, at the fair market price of a similar object available in China or overseas. Where assets donated are used fixed assets, they shall be accounted for at their original cost less estimated accumulated depreciation.

Exchange differences on the translation of capital represent exchange differences arising from the adoption of different exchange rates in the corresponding assets account and the paid-in capital account referred to in Paragraph 4 of Article 47 of the System.

Premium on capital represents the excess amount contributed by investors over the amount of the registered capital.

Chapter X Cost and Expenses

Article 50

Material consumption, labour cost and all other expenses incurred during operation shall be accounted for as cost of sales or expenses.

Raw materials consumed by the enterprise during operation shall be accounted for as cost of sales or expenses based on actual quantities consumed and the book unit prices.

Accrued payroll shall be accounted for as cost of sales or expenses based on specific pay scale, ways of remuneration, bonuses and allowances schemes, working hours and production volume. Payments in relation to social welfare insurance, retirement benefits schemes, unemployment insurance schemes, housing allowance and various allowances payable by the State, to employees from the Chinese party shall be accounted for as wages and salaries and be included in cost of sales or expenses.

Other expenses incurred during operations shall be accounted for as cost of sales or expenses at the amount actually incurred. Expenses attributable to the current accounting period but not yet paid shall be accrued for as cost of sales or expense of the period. Expenses paid but attributable to the current and subsequent accounting periods shall be accounted for as deferred charges or deferred expenses and shall be charged by installment to cost of sales or expenses.

Article 51

Enterprises with foreign investment shall accumulate all expenses incurred during operation into the relevant cost items or expense items.

1.

The direct cost of production of industrial enterprises include direct materials, direct labour and production overheads. Enterprises may, based on actual requirements, separately account for items such as fuel and power, subcontracting charges, special purposes tools and others.

Direct materials represent raw materials and semi-finished goods which can be directly taken into product cost.

Direct labour represents the wages of those workers who are directly engaged in production.

Production overheads represent expenses incurred by the workshop or the factory management department in organizing and managing production and include wages, depreciation charges, maintenance expenses, materials consumed, amortization of low-value consumables, labou protection expenses, water and electricity charges, office expenses, traveling expenses, transportation charges, insurance expenses, rental expenses, design and drawing expenses, experimental and inspection expenses, environmental protection expenses and inventory losses (less gains).

Expense items of industrial enterprises include selling expenses, general and administrative expenses and financial expenses which shall not be taken into the direct cost of production but accounted for separately as expenses of the cur rent accounting period and separately disclosed in the income statement.

Selling expenses are expenses incurred by the enterprise during the selling activities and include transportation charges, loading and unloading expenses, packaging expenses, insurance expenses, sales commission, handling charges paid to sales agents, advertising expenses, rental expenses and sales services charges. Selling expenses also include operating expenses of the sales department, such as salaries and wages, business trip expenses, depreciation charges, maintenance expenses, office expenses,materials consumed, amortization of low-valued consumables and other expenses.

General and administrative expenses include general office expenses, labour union expenses, expenses incurred by the board of directors, consulting fees, legal fees, entertainment expenses, taxes (including urban real estate tax and license tax for vehicles and vessels), property rental charges, technology transfer fees, amortization of intangible assets, amortization of other assets, bad debts written off, staff training expenses, research and development expenses and other general and administrative expenses.

Financial expenses include interest expenses (less interest income), exchange losses (less exchange gains), handling fees charged by financial institutions and other expenses incurred in financial operations.

2.

Expenses incurred by commercial enterprises during operation include purchase expenses, selling expenses, general and administrative expenses and financial expenses.

Purchase expenses include transportation charges, loading and unloading expenses, packaging expenses and insurance expenses incurred during the purchasing process, normal losses in transit and sorting and material handling expenses incurred before warehousing.

General and administrative expenses are expenses incurred during storage and expenses incurred by the management department of the enterprise, and include salaries and wages, depreciation charges, maintenance expenses, materials consumed, amortization of low-value consumables, labour protection expenses, water and electricity charges, office expenses, business trip expenses, transportation charges, insurance expenses, rental expenses, inventory losses (less gains), labour union expenses, expenses incurred by the board of directors, consulting fees, legal fees, entertainment expenses, taxes (including urban real estate tax and license tax for vehicles and vessels), property rental charges, amortization of intangible and other assets, bad debts written off, staff training expenses and other general and administrative expenses.

Selling expenses and financial expenses are similar to those of industrial enterprises.

3.

Expenses incurred by servicing enterprises during operation include operating expenses, general and administrative expenses and financial expenses.

Operating expenses include expenses incurred during operation and may be categorized into different types in accordance with services provided.

General and administrative expenses include expenses incurred in the management of the enterprise.

Financial expenses are similar to those of industrial enterprises.

4.

Expenses incurred by other enterprises may be dealt with in the similar manner provided above.

Article 52

Sample products and equipment produced in trial runs during product development of an industrial enterprise shall be accounted for as cost of sales and be separately booked if these products and equipment can be sold or, where these products and equipment cannot be sold, the costs for producing such products and equipment shall be included in general and administrative expenses or product cost, on commencement of production, after deduction of the residual value.

Chapter XI Income, Profits and Profit Appropriation

Article 53

Operating income of enterprises with foreign investment includes income from principal activities and other operating income which shall be accounted for separately. Income from principal activities of enterprises in different industries may be classified into sales income, business income, engineering project income and servicing fee income.

Article 54

Operating income shall generally be recognized on delivery of products or merchandise, hand over of engineering projects, provision of labour or other services, receipt of the sale consideration or having obtained the entitlement to the sale consideration.

The entitlement to the sale consideration means all collection procedures have been cleared by the banks where banks are authorized to collect payments, or consignment sales statements have been received from the sales agent where a sales agent has been appointed. Where in a Chinese foreign co-operative joint venture products are distributed among the investors, operating income shall be recognized when products are distributed to the investors. For enterprises engaged in the hire purchase business, operating income may be recognized according to the payment dates specified in the hire purchase contracts. In the case of long term contracts, operating income may be recognized according to the stage of completion or work completed.

Operating income shall be accounted for to the extent of the amount received and receivable. Sales returns shall be netted off against operating income while sales discounts or sales allowances shall be accounted for separately and separately disclosed as deductions to operating income in the income statement.

Article 55

Total net profit of enterprises with foreign investment includes operating profit and the net non-operating result.

Operating profit represents the gross profit, ie. sales proceeds from principal activities less sales tax and operating costs, less selling expenses, general and administrative expenses and financial expenses (and purchase expenses for commercial enterprises), plus net profit from other business activities, which represents income less expenses from other activities.

The net non-operating result represents the net amount of the total non-operating income and the total non-operating expenses. Non-operating income includes investment income, surplus on revaluation of investments, surplus arising from a physical count of fixed assets, income on disposal of fixed assets, penalty and surcharge levied on customers and prior year income. Non-operating expenses include investment losses, deficit on revaluation of investments, deficit arising from a physical count of fixed assets, loss on disposal of fixed assets, penalty and surcharge levied by suppliers, donation payments, extraordinary losses and prior year losses. Non-operating income and non-operating expenses shall be accounted for separately and separately disclosed in the income statement.

Article 56

Enterprises with foreign investment shall generally prepare financial statements to determine their profit on a monthly basis. Where this is not practicable, financial statements may be prepared on a quarterly or yearly basis after approval is obtained from the responsible finance bureau or the relevant supervisory authorities under the State Council.

Profit shall be determined by the completion of standard financial statements forms during each period in an accounting year and by the proper accounts closing method at the end of the accounting year.

Article 57

Enterprises with foreign investment shall set up a general reserve fund, a staff and workers' bonus and welfare fund and an enterprise expansion fund (wholly foreign owned enterprises may be exempt from the enterprise expansion fund) by way of appropriations from their profit after taxation in accordance with relevant laws and regulations.

The book balances of the general reserve fund and the enterprise expansion fund shall not be reduced except where approval is obtained for the former to be applied in setting off accumulated losses or increasing capital and the latter in increasing capital. The staff and workers' bonus and welfare fund shall be applied in the payment of special bonuses or of collective welfare benefits to staff and workers of the enterprise, and assets acquired through this fund such as buildings and facilities shall not be taken as assets of the enterprise.

Profit after appropriations to the general reserve fund, the staff and workers' bonus and welfare fund and the enterprise expansion fund shall be available for distribution to investors.

Article 58

Adjustments which are identified as being necessary after the accounts of the current year have been finalized shall be made in the relevant accounts of the ensuing year and shall be properly disclosed in the financial statements. Prior year profit or loss items which are identified in the current year shall be adjusted in the non-operating income or expense or in the undistributed profit and tax payable, where appropriate, in the current year's financial statements.

Article 59

Net profit for the year, income tax payable, the general reserve fund, the staff and workers' bonus and welfare fund and the enterprise expansion fund, dividends (including dividends paid from retained income brought forward) paid to investors in the current year, retained income brought forward, adjustments to retained income brought forward and retained income carried forward shall be separately disclosed in the profit appropriation statement.

Chapter XII Foreign Currency Transactions

Article 60

Foreign currency transactions of enterprises with foreign investment represent transactions denominated in currencies other than the reporting currency. Foreign currency transactions involve the activities of payments and receipts, settlement of current accounts and pricing.

Foreign currency accounts, including cash and bank deposits and debtors (such as accounts receivable and bills receivable) and creditors (such as accounts payable, bills payable, wages payable and dividends payable) denominated in foreign currencies, shall be accounted for separately from similar accounts which are expressed in the reporting currency.

Article 61

When foreign currency transactions take place, the foreign currency amount shall be translated into the reporting currency for recording purpose. Unless otherwise provided, any increase or decrease in the balance of accounts related to foreign currency transactions (including foreign currency accounts and the corresponding non-foreign currency accounts) shall be translated at the official foreign exchange rate (principally the mid-rate. The same definition applies wherever reference is made to the official foreign exchange rate.) quoted on the transaction date or on the first day of the month when the transaction takes place.

Article 62

Balances of foreign currency accounts (not including those foreign currency accounts which are to be translated at rates of foreign exchange quoted by the swap centre and are separately accounted for) at the end of each month shall be translated into the reporting currency at the official foreign exchange rate prevailing at the end of that month. Differences between the amount in reporting currency translated at the official foreign exchange rate prevailing at the end of the month and the amount in the reporting currency stated in the books shall be accounted for as profits or losses for the period under exchange gains or losses.

Foreign exchange differences arising during the set-up period shall be accounted for separately in the "foreign exchange difference during the set-up period" account. Net foreign exchange losses incurred during the set-up period shall be amortized based on the provisions set out in Article 39 of the System and the unamortized value shall be separately disclosed under other assets in the balance sheet. Net foreign exchange gains arising during the set-up period shall be dealt with in one of the following three ways:

1.

Written off by equal installments over five years after commencement of operations;

2.

Retained for setting off operating losses in future years;

3.

Retained until the enterprise is put into liquidation.

The balance of the "foreign exchange gains arising during the set-up period" account shall be separately disclosed under other liabilities in the balance sheet.

Foreign exchange differences directly relating to acquisition or construction of fixed assets before the assets are put into operation, or before the final cost of the asset is determined but the assets are already put into operation, shall be capitalized as part of the purchase cost or construction cost of the assets.

Article 63

Foreign currency purchased or sold through the swap centre shall be accounted for at the actual swap rate.

The difference between the value of foreign currency sold translated at the swap rate and the historical reporting currency value of that foreign currency shall also be adjusted at the end of the month based on the provisions set out in the first paragraph of Article 62 of the System.

Foreign currency purchased shall be accounted for separately at the swap rate and this rate shall be used when the foreign currency is utilized. The swap rate may be determined by using the first-in-first-out method, or the weighted average method or the specific item method.

Article 64

Foreign exchange quotas purchased shall be accounted for separately and separately disclosed under current assets in the balance sheet.

Foreign exchange quotas purchased shall be accounted for at cost. Foreign currencies purchased using the foreign exchange quotas and the corresponding Renminbi funds shall be accounted for at the book cost of the foreign exchange quotas purchased and the corresponding Renminbi funds where Renminbi is adopted as the reporting currency, or at the amount of foreign currencies actually received (or the amount of foreign currency actually received in the reporting currency translated at the official foreign exchange rate prevailing on the date of purchase, or on the first day of the month where the currency actually received is different from the reporting currency) where foreign currency is adopted as the reporting currency. Differences between payments received on sale of foreign exchange quotas and their book cost shall be dealt with as foreign exchange gains or losses.

Foreign exchange quotas acquired in sales activities shall be recorded in the supporting memorandum book and disclosed in the notes on the balance sheet. Income received from the sale of such foreign exchange quotas through swap centre shall be dealt with as foreign exchange gains or losses.

Chapter XIII Liquidation

Article 65

The liquidation of enterprises with foreign investment includes the dissolution of the enterprise in accordance with the relevant laws and regulations, the valuation and disposal of the assets on completion of the liquidation, the settlement of claims and liabilities, accounting for liquidation expenses and the profit and loss on liquidation, and the distribution of residual assets.

Article 66

The method of valuation of assets for liquidation purposes shall be determined by the liquidation committee in accordance with the relevant laws and regulations.

Article 67

Liquidation expenses include expenses incurred by the enterprise during the liquidation process. The profit or loss on liquidation includes operating profit or loss arising from the continuation of business after the commencement of liquidation, profit or loss on the disposal of assets and irrecoverable receivables and unpaid liabilities. Net liquidation profit or loss represents the net amount arrived at after offsetting the liquidation loss and the liquidation profit, plus or minus liquidation expenses, and shall be separately disclosed in the balance sheet.

Income tax is payable on net liquidation profit, if any, in accordance with the tax laws.

Article 68

Residual assets shall be distributed in accordance with the relevant regulations.

Article 69

An accounting year shall be deemed to have ended on the date of commencement of liquidation of an enterprise. The enterprise shall prepare and submit to government authorities its accounting report in accordance with Article 71 and Article 72 of the System. Where the liquidation process extends over more than one accounting year, a balance sheet and a profit and loss statement shall be prepared and submitted at the end of each accounting year, and a profit and loss statement for the period from the commencement to the completion of the liquidation process, and an asset distribution statement shall be prepared and submitted on completion of the liquidation.

Accounting statements for completion of the liquidation shall be submitted before the cancellation of the business registration.

Chapter XIV Classification of Accounts and Accounting Report

Article 70

Accounts of enterprises with foreign investment shall be classified based on accounting requirements and in conformity with the accounts classifications for different industries drawn up or approved by the Ministry of Finance. Where the classification of accounts is not fixed for a particular industry, reference may be made to the classification of accounts of other industries.

Accounts shall be grouped into four major categories: assets, liabilities, investors' equity and profit and loss. Industrial enterprises may also add in the accounts for costs. Accounts shall be classified and numbered by reference to the accounts classifications set out for specific industries.

Article 71

Accounting reports of enterprises with foreign investment include financial statements and notes on the financial statements.

Financial statements include a balance sheet, an income statement, statement of changes in financial position and a profit appropriation statement. Enterprises which are required to submit a consolidated balance sheet, consolidated income statement and consolidated profit appropriation statement to government authorities shall prepare these financial statements in accordance with the standard accounting forms and specifications for specific industries drawn up or approved by the Ministry of Finance. Other statements may be prepared based on the enterprise's requirements and by reference to the standard accounting forms and specifications for specific industries drawn up or approved by the Ministry of Finance. Where a standard accounting form is not available for a particular industry, reference may be made to the standard accounting forms of other industries.

The main contents of the notes on the financial statements shall be:

1.

total amount of investment, investment composition and stage of investment;

2.

changes in capital structure;

3.

condition of operation;

4.

operating results and appropriations of profits;

5.

funds movement and liquidity;

6.

eoreign exchange position;

7.

principal taxes paid;

8.

gains or losses, spoilage and damage of assets;

9.

changes in accounting policies;

10.

other disclosable items and circumstances.

Article 72

Quarterly financial statements and annual financial statements shall be submitted to the responsible finance bureau, local tax authorities, relevant supervisory authorities and the investors. Annual financial statements shall also be submitted to the original authorities which approved the formation of the enterprise.

Quarterly financial statements shall be issued within fifteen days after the end of the quarter whereas annual financial statements shall be issued together with an audit report by a certified public accountant in China within four months after the year end.

Article 73

Where a foreign currency is adopted as the reporting currency, the annual balance sheet, income statement and profit appropriation statement expressed in foreign currency shall be translated into Renminbi.

Balance sheet items shall generally be translated at the official foreign exchange rate prevailing at the year end date. Items which have been translated into foreign currency from Renminbi for bookkeeping purposes shall be re-stated to the original amount in Renminbi. The paid-in capital of those enterprises which used Renminbi as the base currency when applying for incorporation shall be re-stated at the original Renminbi amount if the capital was paid in Renminbi, or if the capital was paid in foreign currency, the amount shall be translated at the official foreign exchange rate prevailing on the date on which the amount was paid. The paid-in capital of those enterprises which used a foreign currency as the base currency when applying for incorporation shall be translated at the official foreign exchange rate prevailing on the year end date.

The portion of operating income in foreign currency included in the income statement shall be translated at the weighted average exchange rate of the year and the resultant amount shall be added to the portion of operating income in Renminbi to arrive at the total operating income in Renminbi. A similar method shall be applied to translate the amount of discounts and allowances in foreign currency into Renminbi. The difference between the total operating income in Renminbi and the amount of discounts and allowances in Renminbi shall be the net operating income in Renminbi. Sales tax shall be stated at the tax amount payable in Renminbi under industrial and commercial consolidated tax. The difference between net operating income in Renminbi and sales tax payable in Renminbi divided by the difference between net operating income in foreign currency and sales tax payable in foreign currency shall be the rate to be applied in translating other items in the income statement.

The total profit appearing in the profit appropriation statement shall be the same amount of the total profit in Renminbi included in the income statement of the same period. Income tax shall be the actual amount of income tax payable in Renminbi during the year. Retained profits brought forward and adjustments to prior year's undistributed profit shall be translated into Renminbi at the official foreign exchange rate prevailing at the end of the previous year. Dividends paid shall be the actual amount paid in Renminbi. Undistributed profits carried forward shall be the amount of undistributed profits in Renminbi included in the balance sheet of the same period. Other items shall be translated at the official foreign exchange rate prevailing at the year end date.

Differences arising from different exchange rates for translating the balance sheet items and the profit appropriation items shall be taken as foreign currency translation differences and separately disclosed in the relevant statements.

Article 74

Where subsidiaries of enterprises with foreign investment in foreign countries or in Hong Kong or Macao adopt the local currency as their reporting currency and use this currency in preparing their financial statements, these financial statements of the subsidiaries shall be translated into Renminbi before they are consolidated into the financial statements of the parent enterprise expressed in Renminbi. Balance sheet items shall be translated on the basis set out in the second paragraph of Article 73 of the System. Profit appropriation items shall be translated on the basis set out in the fourth paragraph of Article 73 of the System. Income statement items shall generally be translated at the weighted average exchange rate of the year.

Article 75

Where an enterprise with foreign investment invests in another enterprise to the extent of more than 50% of the total capital or total share capital of the invested enterprise, the parent enterprise shall prepare consolidated financial statements to consolidate the invested enterprise. Where the invested enterprise and the parent enterprise use different reporting currencies, the financial statements of the invested enterprise shall be translated into the same reporting currency as the parent enterprise before consolidation. Where it is not appropriate to prepare consolidated financial statements due to differences in the nature of the businesses of the invested enterprise and the parent enterprise, approval for exemption from preparing consolidated financial statements shall be obtained from the responsible finance bureau or the relevant supervisory authorities under the State Council. The financial statements of the invested enterprise, whether consolidated financial statements have been prepared or not, shall be submitted to the relevant authorities together with the financial statements of the parent enterprise.

Chapter XV Accounting Records

Article 76

Accounting records of enterprises with foreign investment include accounting vouchers, accounting books, accounting reports, certificates of capital contributed, audit reports, documentation of accounting systems and other important documents related to business management and investors' interests, such as contracts, articles of association, resolutions of the board of directors and long term business contracts.

Article 77

Enterprises with foreign investment shall maintain accounting records and a system for maintaining these records. Accounting records must be properly kept at the place of business of the enterprise in China and protected from loss and damage.

Accounting vouchers, accounting books and monthly and quarterly financial statements shall be kept for at least fifteen years. Annual accounting reports (including accounting statements on liquidation) and other important accounting records must be kept permanently.

Article 78

Accounting records due to be destroyed on expiration of the storage period shall be listed out.

Prior approval for destroying such accounting records shall be obtained from the original responsible authorities.

Article 79

On completion of liquidation, the accounting records of the enterprise shall be transferred to the original responsible authorities for storage. A copy of the list of accounting records transferred shall be submitted to the original responsible finance bureau.

Chapter XVI Supplementary Provisions

Article 80

These System shall be construed and amended by the Ministry of Finance.

Article 81

Where tax adjustments are required in complying the System, adjustments shall be made in accordance with provisions of the tax laws on filing of tax returns.

Article 82

These System shall enter into force on 1 July 1992. The "Accounting System of the People's Republic of China for the Chinese-foreign Equity Joint Ventures" promulgated by the Ministry of Finance on 4 March 1985 shall be nullified on the same date.

Where there are discrepancies between the provisions of special regulations concerning accounting issues of enterprises with foreign investment promulgated prior to the implementation of the System and the provisions of the System, the provisions of the System shall prevail.