Laws of the People's Republic of China

Ministry of Finance

Circular of the Ministry of Finance on the Relevant Issues concerning Enterprise Accounting Treatments after the effect of the Company Law

No. 67 [2006] of the Ministry of Finance

March 15, 2006

To the departments (bureaus) of finance of all provinces, autonomous regions, municipalities directly under the Central Government and cities under separate state planning, and the bureau of finance of Xinjiang Production and Construction Corp., all the relevant ministries and commissions of and the relevant institutions directly under the State Council, and all the enterprises directly under the Central Government,

The Company Law of our country amended and adopted for the third time has come into force as of January 1, 2006, and we hereby circulate a notice on the enterprise accounting treatments as follows:

I.

On the Appraisal of Capital Contributions in the form of In-kind Capital

According to Article 27 of the Company Law, where an enterprise establishes a company by the capital contributions of substance, intellectual property right, land use right or other non monetary assets, the aforesaid capital contributions shall be subject to appraisal and pricing to verify the assets. Where a state-owned or state holding enterprise makes capital contributions in non monetary assets or accepts the capital contributions in non monetary assets from other enterprises, it shall entrust a qualified asset appraisal institution for asset appraisal in accordance with the relevant state provisions on asset appraisal; and the appraisal of capital contributions in other non monetary assets shall be conducted by referring to the aforesaid provisions.

II.

On the Disposal of the Balance of Public Welfare Funds

An enterprise established according to the Company Law shall not draw public welfare funds when it distributes profits according to Article 167 of the Company Law after January 1, 2006. At the same time, the State-owned enterprises and other enterprises shall abolish the system of public welfare funds simultaneously in order to keep the coherence between the accounting policies of the enterprises. With respect to the balance of public welfare funds before December 31, 2005, the enterprise shall put it under the management and use of the surplus reserves; the deficit of public welfare funds shall be made up by the surplus reserves, capital reserves and the undistributed profits of the previous year in sequence, and it shall be carried forward to the account of undistributed profits and be made up by the after-tax profits realized in the later years where there still remains deficits.

Where an enterprise carries out the reform of housing system upon approval, it shall abide by the Notice on the Relevant Accounting Treatments in the Reform of Enterprise Housing System (Cai Qi [2000] No.295) and the Supplementary Notice on the Relevant Accounting Treatments in the Reform of Enterprise Housing System (Cai Qi [2000] No. 878) in the process of implementation. An enterprise shall not purchase or build houses for its employees any more and shall not arrange the relevant expenses in surplus reserves after carrying out the housing monetization reform according to the uniform State provisions.

With respect to the expenses for purchasing fixed assets necessary for the staff canteen, infirmary, nursery and other welfare institutions originally operated by the public welfare funds, an enterprise that has not peeled the social functions from itself or has not implemented the segmentation between main and supplementary businesses and restructuring of the latter shall be subject to examination and approval in strict accordance with the procedures and privilege prescribed in the internal accounting system of the enterprise, and shall implement the relevant management system regarding the production and operational assets of the enterprise.

After an enterprise abolishes the system of public welfare funds, if the board of directors of a foreign-funded enterprise decides to continuously draw the staff bonus and welfare fund, it shall be subject to the liability management, with the purposes, conditions and procedures for the use thereof being specified.

III.

On the Issue of Accounting Treatments After a Joint-stock Limited Company Purchase its Own Stocks

Where a joint-stock limited company repurchases its own stocks in light of Article 143 of the Company Law, it shall carry out the accounting treatments according to the following requirements:

i.

The stocks repurchased by a company shall be subject to the management of treasury stocks before cancellation or transfer, and all the expenses in the stock repurchase shall be transferred into the cost of treasury stocks. However, in case of the stock repurchase resulted from the merger with any other company that holds its stocks, the cost of treasury bonds shall be determined on the basis of the book value of the relevant investments of its stocks held by the other company provided that both participants of the merger are ultimately controlled by a same shareholder both before and after the merger; and if they are not ultimately controlled by a same shareholder, the cost of treasury stocks shall be determined on the basis of the fair value of the relevant investments of its stocks held by the other company.

When the treasury stocks are cancelled, the capital stocks shall be correspondingly reduced on the basis of the amount of the stocks that are cancelled, and the surplus of the cost of treasury stocks over the corresponding capital stocks shall be used to write off the capital reserves, surplus reserves and the undistributed profits of the previous year in sequence; and the capital reserves shall be increased for the deficit of the cost of treasury stocks over the corresponding capital stocks.

When the treasury stocks are transferred, the surplus of incomes incurred from the transfer over the cost of treasury stocks shall be used to increase the capital reserves; and the deficit over the cost of treasury stocks shall be used to write off the capital reserves, surplus reserves and the undistributed profits of the previous year in sequence.

ii.

With respect to the stocks repurchased due to the implementation of employee equity incentive plans, the stocks to be repurchased shall not be more than 5% of the total amount of the stocks the company issues, and the required capital shall be within the amount of profits that can be distributed to the investors in the current term.

Where the date when the general assembly of shareholders adopts the employee equity incentive plans and the date of stock repurchase do not fall in the same year, the company shall preserve the expense for the planned repurchase in the profits that can be distributed to the investors in the current term, and the preserved profits shall not be distributed any more when the employee equity incentive plans are adopted.

When the company repurchases the stocks, it shall transfer all the expenses for stock repurchase into the cost of treasury stocks, and simultaneously transfer the profits to be distributed to investors into the capital reserves in light of the amount of expenses for the repurchase.

iii.

The treasury stocks shall not be used in the profit distribution of the company, and a joint-stock limited company shall reflect it as the deduction item of ownership rights and interests.

IV.

This Notice shall come into force as of April 1, 2006. In case of any problem encountered in the implementation thereof, please timely report it to this Ministry.