Fixed assets

All FIE fixed assets should be recorded at cost or revalued amounts in accordance with the approved FIE contract, then approved by the local national administration bureau of state-owned assets or local finance bureau if the assets were state-owned before they were eventually contributed to the FIE. When computing the depreciation, a residual value of not less than 10 percent should be taken into account. If not, the rate needs to be approved by the relevant tax bureau. All construction in progress items should be transferred into fixed assets when they are put into use with any interest expenses and associated exchange gain/loss also being capitalized.

Intangible and other assets

Intangible assets are amortized on a straight-line basis over the beneficiary/investment period or not less than 10 years (there is no set term for other deferred expenses). Intangible assets should be recognized and recorded at an objective value, i.e. for purchased assets at the purchase price, for self-built assets at cost except for research expense. Intangible assets are recorded at the lower book value and recoverable amount. If the recoverable amount is lower than the book value, provision for impairment on intangible assets should be made for the difference.

Pre-operating expenses

Such expenses and exchange losses for FIEs during the start-up period can be charged to the profit and loss account in one lump sum during the first month after commencing operations.

Deductible entertainment expenses

Entertainment expenses are allowed but no more than 0.5 percent of turnover for manufacturing companies with annual turnover of less than 15 million yuan, and 0.3 percent for those with annual turnover of more than 15 million yuan.

Reserve funds

For WFOEs, not less than 10 percent of the after-tax profit should be appropriated to the General Reserve Fund. Appropriations to other funds should be made in accordance with the Articles of Association and a board resolution.

Mandatory company fund allocations

Prior to the annual audit, and the subsequent settlement of taxes with the tax bureau, there are items that need to be calculated and presented in the accounts as mandatory fund dispersals. These include amounts to the company's enterprise expansion funds, the reserve fund and staff and workers' welfare and bonus fund.

By law, WFOEs do need to specify the amount for the reserve fund, which must be not less than 10 percent of after-tax profits. The other amounts do not need to be specified.

Special attention to stock inventories

For both trading and manufacturing companies, inventories must form a significant proportion of total assets. Auditors will therefore pay close attention to the existence and valuation of such stocks. The inventories valuation can be clearly identified from the purchase invoices or cost calculation sheet. But auditors will also take care to confirm the existence of the inventory and how stocktaking is carried out. The following steps should be followed:

-- Observe whether the stocks are neatly kept, whether bins are properly labeled, and whether large items are properly piled and marked;

-- Check that counting is systematic and that precautions are taken to ensure everything is counted and counted just once;

-- Pay attention to high value items;

-- Investigate where discrepancies arise between the physical count and stock records; and

-- Note any items that appear to be damaged, obsolete, slow moving, so as to ascertain whether adequate provisions for loss have been made.