China: CAS 21 Compliance: Impacting Key Growth Sectors

Last Updated: 27 November 2019
Article by Jessie Ye

CAS 21 affects foreign invested enterprises in China and their subsidiaries who are required to follow CAS. The changes will have a significant impact particularly on businesses involved in retail, property, shipping and aviation.

China's efforts to more closely integrate its massive economy and dynamic markets with the rest of the world's remains an ongoing exercise. As the two become more closely linked, efforts are underway to adapt China's Generally Accepted Accounting Principles (GAAP)1, also known as Chinese Accounting Standards (CAS), to global guidelines, such as the International Financial Reporting Standard 16 (IFRS 16).2

When the International Accounting Standards Board's new IFRS 16 rule became effective in January 2019, China followed suit with CAS 21, which affects foreign invested enterprises (FIEs) in China and their subsidiaries who are required to follow CAS. The changes will have a significant impact on any business that uses lease arrangements to access high-value assets, particularly those involved in the retail, property, shipping and aviation sectors.

The stakes are especially high considering that China is seen to be the world's premier shipping nation3 and its retail sector is expected to become the world's largest as early as this year.4 Meanwhile its aviation sector is set to overtake the US to become the world's largest by 2022.5 This makes it even more important to ensure successful compliance. And to do so means to recognise that switching to CAS 21 is a significant undertaking that requires a detailed understanding of the new standard and an in-depth evaluation of the resources needed to make the transition.

Understanding CAS 21

Compliance deadlines for the new standard vary. Companies operating in China and listed on both Chinese and foreign stock exchanges were required to adopt CAS 21 beginning January 2019 while other Chinese companies will start using CAS 21 from January 2021.

Firms with parent companies or subsidiaries listed on foreign exchanges have the option to adopt CAS 21 once they are in compliance with CAS 22, which addresses the recognition and measurement of financial instruments and requires financial assets and liabilities to be initially assessed at face value; and CAS 14, which addresses the fair value accounting of revenue.6

It's also helpful to understand that while IFRS 16 and CAS 21 have many similarities, they differ in important ways. For instance, while IFRS 16's scope extends to include an investment land lease, CAS 21 does not. Also IFRS 16 allows the lessee to use the cost model for the subsequent calculation of a right-of-use asset. It also allows the lessee to use the fair value model or revaluation model for subsequent calculations of the right-of-use asset that meets certain conditions. However CAS 21 only allows the use of the cost model for subsequent calculations of the right-of-use asset.

Other differences have to do with disclosure. While CAS 21 specifies that lease liability shall be presented separately for non-current liabilities due within one year, IFRS 16 does not do so.

CAS 21 also specifies that the principle and interest paid be recorded under financing activities of the cash flow statement while IFRS 16 does not require this.

CAS 21



The land use right acquired by assignment, allocation and transferred, shall apply to PRC GAAP No. 6 - Intangible asset

Land use right applies to IFRS16

Excludes Investment land lease

Includes Investment land lease

Subsequent measurement of right-of-use asset

After the lease begins, the lessee shall, in accordance with the provisions of article 21, article 22, article 27 and article 29 of these standards, adopt the cost model to carry out the subsequent measurement of the right-of-use asset

IFRS16 allows the lessee to use the cost model for subsequent measurement of the right-of-use asset, and allows the lessee to use the fair value model or revaluation model for subsequent measurement of the right-of-use asset that meet the conditions, while Chinese accounting standards only allow the use of the cost model for subsequent measurement of the right-of-use asset


Specifies that lease liability shall be presented separately for non-current liabilities due within 1 year

Does not define that lease liability shall be presented separately for non-current liabilities due within 1 year

Specifies that the principle and interest paid shall be recorded in Financing Activities of the cash flow statement

Does not define that the principle and interest paid shall be recorded in Financing Activities of the cash flow statement

If the lessee adopts the investment property measured by the fair value model in international accounting standards no. 40 - investment real estate, then the right-of-use asset that meets the definition of investment real estate shall also be measured by the fair value model and presented in the subject of investment real estate

Ensuring compliance

At the outset from an accounting perspective, there is a need to clearly define and identify what constitutes a lease, and the reporting and disclosure requirements must be well understood.

Companies should consider modifying their operational strategies to account for the impact of the new accounting standard on the balance sheet, such as the negotiation process, which will determine the structure of future leases.

Further, a significant investment of resources may be needed to gather all the relevant information from the various leases held by an organisation – an onerous undertaking. This is especially true of companies that handle multiple leases spread across various geographic locations, which make it exponentially more complicated to analyse key contractual information, such as the value of leases, their start and end dates, and lease payment schedules.

The process of capturing, collating and analysing all the lease data requires a significant amount of computing power. This means organisations will need to adapt or enhance their internal data processes and IT systems to accommodate the new requirements, such as identification and disclosure, and the constant and consistent monitoring and valuation of leases.

Companies should also obtain a detailed understanding of the costs involved in selecting the most appropriate approach that serves the needs of the various stakeholders in moving to the new accounting system. For instance, companies with operations in multiple countries should be clear on whether the standards are applicable in all relevant jurisdictions and engage with both internal and external entities to communicate the direct and indirect impact that CAS 21 has on their lease strategy and tax reporting systems, as well as other internal processes and key performance indicators.

Given these considerations, it's possible that organisations will find their internal resources stretched or inadequate to ensure compliance. It's advisable to seek assistance from experts that not only understand the intricacies and nuances of the overall accounting system and the new accounting standard but also possess a strong grasp of China's regulatory landscape.

Talk to us

At TMF Group, our goal is to keep you compliant with local tax and accounting obligations through the entire corporate lifecycle, from redefining internal functions to rapid expansion in new markets. Whether you need help with statutory bookkeeping, consolidated account preparation or international management reporting, we can manage your accounting processes across any jurisdiction without any conflict of interest.

TMF China has the geographical reach and in-depth knowledge of the various cities in China to help clients navigate an array of administrative operations and procedures. From our offices in Shanghai, Beijing, Chengdu, Shenzhen, Tianjin and Guangzhou we help our clients with cost efficiency, operation simplification and regulatory compliance.

On CAS 21, we can help with the following.

  1. Transition assessment and compliance: our global team of in-house experts in more than 80 jurisdictions can assess your current and past reporting for IFRS 16 compliance, and offer direct and indirect tax compliance support for registration, returns, calculations and recovery.
  2. Accounting and reporting: we can help maintain your books and records in accordance with IFRS 16 accounting standards in multi-currency formats and meeting relevant accounting policies used for management reports (including IFRS 16, local GAAP).

Need more information? Contact us today.

Download the free report Beyond the books: Strategic implications of IFRS 16 for Asia Pacific enterprises.



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