Finance Office [ 2015 ] 14 Number

Finance Departments (Bureaus) of all provinces, autonomous regions, municipalities directly under the central government, and cities under separate planning; Finance Bureau of the Xinjiang Production and Construction Corps; Fiscal Inspection Commissioner Offices of the Ministry of Finance stationed in all provinces, autonomous regions, municipalities directly under the central government, and cities under separate planning; General Offices (Offices) of relevant ministries and commissions of the State Council and their directly affiliated institutions; Relevant units. :

　　To thoroughly implement the Enterprise Accounting Standards, address issues arising in their application, and achieve ongoing convergence and equivalence with international accounting standards, we have drafted the “Interpretation No. [Number] of the Enterprise Accounting Standards.” 7 Document No. (Draft for Comments). Local authorities are requested to organize and solicit opinions from relevant entities within their regions, including listed companies, state-owned enterprises, other enterprises, and accounting firms, and to submit these comments by [date]. 2015 Year 7 Moon 10 Please provide feedback to our Accounting Department at your earliest convenience. Meanwhile, we welcome valuable comments and suggestions from all relevant parties!

　　Contact: Department II, System Division, Accounting Department, Ministry of Finance 　Liu Lihua

　　Mailing address: No. 3 Alley, South Sanlihe, Xicheng District, Beijing 3 Number, 100820

　　Contact phone number: 010-68552896

Email: liulihua@mof.gov.cn

　　Department of Accounting, Ministry of Finance

　　2015 Year 6 Moon 1 day

Attachment:

Interpretation No. of Enterprise Accounting Standards 7 Number

(Draft for Solicitation of Comments)

　　I. If an investor’s shareholding percentage declines due to an increase in capital contributions to its subsidiary by other investors, resulting in the loss of control but allowing the investor to exercise joint control or significant influence, how should the investor account for this situation?

　　Answer: The investor should distinguish between individual financial statements and consolidated financial statements when performing the relevant accounting treatment.

　　(1) In the individual financial statements, the long-term equity investment should be reclassified from the cost method to the equity method. First, the original long-term equity investment should be adjusted as if it had been accounted for using the equity method since the date of acquisition. Then, based on the new shareholding ratio, the investor should recognize its share of the increase in net assets of the subsidiary resulting from the capital increase and share expansion. The difference between this recognized share and the amount of the long-term equity investment adjusted under the equity method corresponding to the portion of the shareholding ratio that has decreased should be recognized in the current period’s profit or loss.

　　(2) In the consolidated financial statements, it shall be prepared in accordance with "Accounting Standards for Business Enterprises No. [number]." 33 Number —— Accounting treatment shall be performed in accordance with the relevant provisions of the “Consolidated Financial Statements.”

　　II. How should the changes arising from the remeasurement of the net liability or net asset of a defined benefit plan, which are recognized in other comprehensive income, be accounted for when they are transferred within equity in subsequent accounting periods?

　　Answer: Changes in the net liability or net asset of a defined benefit plan that are remeasured are not allowed to be reversed into profit or loss in subsequent accounting periods. Upon termination of the plan, such changes must be fully transferred within equity to retained earnings. Plan termination refers to the situation where the plan no longer exists—that is, the entity has discharged all future obligations arising from the plan.

　　III. If a subsidiary issues preferred shares or other equity instruments, how should this be accounted for in the parent company’s consolidated income statement? “ Net profit attributable to shareholders of the parent company ”？

　　Answer: If a subsidiary issues cumulative preferred shares or other equity instruments, regardless of whether dividends on these instruments are declared in the current period, when calculating and presenting the consolidated income statement of the parent company, ... “ Net profit attributable to shareholders of the parent company ” Dividends that are accumulable and attributable to holders of other equity instruments should be deducted in the current period.

　　If a subsidiary issues non-cumulative preferred shares or other equity instruments, when calculating the consolidated income statement of the parent company, it should: “ Net profit attributable to shareholders of the parent company ” Dividends declared and distributed in the current period that are non-cumulative and attributable to holders of other equity instruments shall be deducted accordingly.

　　Before the issuance of this explanation, in the parent company’s consolidated income statement... “ Net profit attributable to shareholders of the parent company ” If a project is not reported in accordance with the above-mentioned provisions, the data for comparable periods shall be adjusted accordingly.

　　IV. If a wholly-owned subsidiary directly controlled by the parent company is converted into a branch, how should the parent company handle the accounting treatment?

　　Answer: If a wholly-owned subsidiary directly controlled by the parent company is converted into a branch, it should be accounted for in accordance with the following provisions:

　　(1) The original parent company (which, following the restructuring, becomes the head office) shall, based on the book values of the relevant assets and liabilities of the original subsidiary (which, following the restructuring, becomes a branch), continuously calculate such asset and liability book values from the date of acquisition by the original parent company up to the beginning of the year in which the subsidiary was reclassified as a branch. After offsetting any unrealized gains or losses arising from internal transactions between the original parent company and the original subsidiary, these amounts shall be transferred into the books of the original parent company. In addition, certain special items shall be handled according to the following principles:

　　1 If the difference between the acquisition cost incurred by the original parent company when acquiring the original subsidiary and the share of the fair value of identifiable net assets obtained in the merger is less than zero, the difference shall be recognized as retained earnings. If the acquisition cost incurred by the original parent company when acquiring the original subsidiary exceeds the share of the fair value of identifiable net assets obtained in the merger, the excess shall be transferred to the original parent company’s goodwill at the book value of goodwill recorded in the original parent company’s consolidated financial statements for the merger with the subsidiary.

　　2 Other equity instruments issued by the original subsidiary, such as preferred shares, which are recognized as equity instruments, shall be transferred to the original parent company’s other equity instruments at the book value of the original subsidiary. Preferred shares and other equity instruments issued by the original subsidiary that were purchased by the original parent company shall be transferred to the original parent company’s treasury stock at the original parent company’s book value.

　　3 The safety production fees or general risk provisions extracted by the original subsidiary but not yet used shall be recorded as special reserves or general risk provisions at the book value of the original subsidiary.

　　4 The net profit or loss realized by the former subsidiary from the date of acquisition (or the date of merger) up to the beginning of the year in which the former subsidiary was reorganized into a branch shall be transferred to the retained earnings of the original parent company. Among these, the book value of the surplus reserve already provided by the former subsidiary shall be transferred to the surplus reserve of the original parent company.

　　5 The other comprehensive income realized by the former subsidiary from the date of acquisition (or the date of merger) up to the beginning of the year in which the former subsidiary was reorganized into a branch shall be transferred to the parent company’s other comprehensive income at the beginning of that year.

　　6 The difference between the book value of the original parent company’s long-term equity investment in the original subsidiary and the amount obtained by transferring the original subsidiary’s assets, liabilities, and other items into the books of the original parent company according to the principles described above shall be transferred to capital surplus. The nature of such capital surplus and its subsequent treatment shall be determined based on the reasons for its formation.

　　(2) After the original parent company transfers the relevant assets, liabilities, and other items from the original subsidiary, it shall treat the original subsidiary’s business activities from the beginning of the year in which the subsidiary was converted into a branch office up to the date of such conversion as the original parent company’s own business activities for that year, and recognize the related revenue, expenses, other comprehensive income, and transfer the associated costs.

　　(3) During the process of transforming the original subsidiary into a branch office, any differences arising from the discrepancy between the book values of various assets and liabilities and their tax bases shall be handled in accordance with “Enterprise Accounting Standard No. [number]”. 18 Number — Accounting treatment shall be performed in accordance with the relevant provisions of the “Income Tax Law.”

　　V. How should enterprises account for equity incentive plans that grant restricted stocks? During the vesting period, how should enterprises take into account the impact of restricted stocks on the calculation of earnings per share?

　　Answer: (1) Accounting Treatment for Granting Restricted Stocks

　　In equity incentive plans involving restricted stock issued by listed companies, a common practice is for the listed company to grant a certain number of its shares to eligible participants through a non-public offering, with specified vesting and lock-up periods. During these lock-up and vesting periods, the shares may not be traded or transferred on the public market. Once the vesting conditions are met, the shares can be unlocked. If all or part of the shares remain unvested and become forfeited or invalid, the company will repurchase them at a pre-agreed price—most commonly at the original grant price.

　　For equity incentive plans that grant restricted shares, if the restricted shares issued to employees have undergone the required registration and capital increase procedures in accordance with relevant regulations, on the grant date, the enterprise shall recognize share capital and capital surplus (share premium) based on the subscription payments received from employees. At the same time, the enterprise shall recognize a liability for the repurchase obligation (treated as treasury stock acquisition). During the vesting period and the unlock period, the enterprise shall follow “Accounting Standards for Business Enterprises No. [number]”... 11 Number —— Account for it in accordance with the relevant provisions of “Share-Based Payment.”

　　(2) Accounting Treatment for Cash Dividends Paid During the Lock-up Period and Calculation of Basic Earnings Per Share

　　During the lock-up period, the accounting treatment for cash dividends distributed by enterprises and the calculation of basic earnings per share should adopt different methods depending on whether the cash dividends distributed are revocable.

　　1. Cash dividends are revocable; that is, once the vesting conditions are not met, holders of repurchased restricted shares will neither receive nor be required to return any cash dividends they were entitled to (or had already received) during the vesting period. During the vesting period, cash dividends allocated by the company to holders of restricted shares should be accounted for as profit distributions. Subsequently, any cash dividends already distributed but subsequently revoked due to failure to meet the vesting conditions shall be added back to retained earnings.

　　When calculating basic earnings per share during the vesting period, the numerator should exclude cash dividends declared and paid during the current period to holders of restricted shares; the denominator should not include the number of restricted shares.

　　2. Cash dividends on restricted shares are irrevocable; that is, regardless of whether the vesting conditions have been met, holders of restricted shares remain entitled to receive (or are not required to return) any cash dividends they were entitled to (or have already received) during the vesting period. During the vesting period, when accounting for cash dividends payable to holders of restricted shares, enterprises should make a reasonable estimate of the likelihood that future vesting conditions will be satisfied. For holders of restricted shares for whom vesting is expected in the future, the cash dividends that the enterprise is expected to distribute should be accounted for as profit distribution. For holders of restricted shares for whom vesting is not expected in the future, the cash dividends that the enterprise is expected to distribute should be included in current-period costs and expenses. If subsequent information indicates that the number of restricted shares expected to become vested differs from the previously estimated amount, such difference should be treated as a change in accounting estimate and adjusted until the actual number of vested restricted shares is determined on the vesting date.

　　When calculating basic earnings per share during the vesting period, anticipated future vesting of restricted shares should be treated as other equity instruments that participate together with common shareholders in the distribution of remaining profits. The numerator should exclude net profit attributable to the anticipated future vesting of restricted shares; the denominator should not include the number of shares underlying the restricted shares.

　　(3) Calculation of Diluted Earnings Per Share During the Lock-Up Period

　　When calculating diluted earnings per share during the vesting period, different methods should be adopted depending on the nature of the vesting conditions:

　　1. If the vesting condition is solely based on the service period, the enterprise should assume that all restricted shares not yet vested as of the balance sheet date have been fully vested as of the beginning of the current period (or the grant date later than the beginning of the period), and refer to “Accounting Standards for Business Enterprises No. [number]”. 34 Number —— The relevant provisions on share options in “Earnings Per Share” take into account the dilutive effect of restricted shares. Specifically, the exercise price is the issue price of the restricted shares plus the employee services not yet rendered as of the balance sheet date, in accordance with “Accounting Standards for Business Enterprises No. [number]”. 11 Number —— The fair value determined in accordance with the relevant provisions of “Share-Based Payment,” less the cumulative cash dividends per share already declared and distributed to holders of restricted shares.

　　2. If the vesting conditions include performance-based criteria, the enterprise should assume that the balance sheet date is the vesting date and use this date to determine whether the actual performance as of the balance sheet date meets the performance-based vesting requirements. If the performance criteria are met, the diluted earnings per share should be calculated in accordance with the relevant provisions applicable to vesting conditions that consist solely of service period requirements. However, if the performance criteria are not met, the impact of these restricted shares need not be taken into account when calculating diluted earnings per share.

　　If restricted shares were not handled in accordance with the above provisions prior to the issuance of this interpretation, retrospective adjustments shall be made, and earnings per share for each reporting period shall be recalculated, unless such retrospective adjustments are impracticable.

　　VI. Commercial banks or their subsidiaries (hereinafter referred to as) “ Commercial bank ” How should financial products issued in accordance with the relevant regulations of the Banking and Insurance Regulatory Commission be accounted for and reported?

　　Answer: If a commercial bank reports the assets and liabilities of wealth management products in its individual financial statements, it shall account for these wealth management products in accordance with the relevant enterprise accounting standards.

　　If a commercial bank does not disclose the assets and liabilities of wealth management products in its individual financial statements, it shall comply with "Accounting Standards for Business Enterprises No. [number]." 33 Number —— Consolidated Financial Statements” (hereinafter referred to as 33 Number guideline ” ) the relevant provisions to determine whether it exercises control over the wealth management product. If a commercial bank exercises control over the wealth management product, it shall comply with... 33 The provisions of the Accounting Standards require that this wealth management product be included in the scope of consolidation. Regardless of whether it is included in the consolidated financial statements of the commercial bank, this wealth management product shall be treated as a separate accounting entity and accounted for and presented in accordance with the Enterprise Accounting Standards.

　　(1) Accounting Accounting

　　For financial instruments held or issued by wealth management products, when applying "Enterprise Accounting Standard No. [number]"... 22 Number —— Recognition and Measurement of Financial Instruments (hereinafter referred to as) 22 Number guideline ” )、Enterprise Accounting Standards No. 37 Number —— Presentation of Financial Instruments (hereinafter referred to as) 37 Number guideline ” ) and “Enterprise Accounting Standards No. [number]” 39 Number —— Fair Value Measurement” (hereinafter referred to as 39 Number guideline ” ) At that time, at least the following aspects should be considered:

　　1 . Classification

　　For financial assets or financial liabilities held in wealth management products, accounting treatment shall be applied based on the holding purpose or intention, whether there is a quoted price in an active market, and the cash flow characteristics of the financial instrument, according to... 22 Classify financial assets or financial liabilities appropriately in accordance with the classification principles stipulated in the relevant standards.

　　For example, if the non-derivative financial assets held by a wealth management product are difficult to sell in the market due to their illiquidity (such as non-standardized debt assets), it is generally difficult to demonstrate that these financial assets are held for trading purposes—for instance, to be sold in the near term, or to be part of a separately identifiable portfolio of financial instruments managed in a centralized manner and supported by objective evidence indicating that the portfolio has been managed recently with a short-term profit-taking approach. Consequently, such assets should not be classified as financial assets held for trading.

　　For example, if an investment in equity instruments held by a wealth management product does not have a quoted price in an active market and its fair value cannot be reliably measured, such investment may not be designated as a financial asset measured at fair value with changes recognized in profit or loss for the current period.

　　For example, if it is impossible or difficult to reliably assess the fair value of financial assets or financial liabilities held by wealth management products—for instance, due to an imperfect valuation process, a lack of valuation expertise, or the inability or difficulty in effectively utilizing third-party valuations—it is generally challenging to demonstrate that management and evaluation are based on fair value. Consequently, such products may not be eligible for accounting treatment based on fair value. 22 Paragraph (2) of Article 10 of the Standard classifies financial assets or financial liabilities held as financial instruments measured at fair value with changes recognized in profit or loss for the current period.

　　Financial instruments issued by wealth management products shall be governed according to... 37 In accordance with the relevant provisions of the Accounting Standards, classify the equity instruments or financial liabilities of wealth management products.

　　When accounting for wealth management products, accounting subjects shall be used in compliance with the relevant provisions of the Enterprise Accounting Standards; the use of terms such as... is prohibited. “ Agency wealth management investment ” Subject names that may cause ambiguity.

　　2 ．Measurement

　　For financial assets or financial liabilities held in wealth management products, they shall be accounted for according to... 22 Number guidelines, 39 measured in accordance with the Accounting Standards for Business Enterprises and other relevant accounting standards. Among them:

　　( 1 Fair value measurement

　　For financial assets or financial liabilities measured at fair value, they shall be accounted for in accordance with... 39 The fair value of such instruments shall be determined in accordance with the relevant provisions of the accounting standards. For example, in general, the cost at initial recognition of a financial instrument does not meet the requirements for subsequent measurement at fair value, unless there is sufficient evidence or justification to demonstrate that this cost still represents an appropriate estimate of fair value as of the measurement date.

　　( 2 Impairment

　　Financial assets held by wealth management products, other than those measured at fair value with changes recognized in profit or loss for the current period, shall be accounted for in accordance with: 22 In accordance with the relevant provisions on impairment of financial assets in the accounting standards, assess whether there is objective evidence of impairment, determine the amount of impairment loss, and perform the corresponding accounting treatment.

　　(2) Presentation

　　Commercial banks (or other managers of wealth management products) are the statutory entities responsible for preparing the financial statements of wealth management products. If applicable laws and regulations or regulatory authorities require the preparation, submission, or public disclosure of financial statements for wealth management products, the statutory entity responsible for preparing such financial statements shall ensure that the prepared financial statements comply with the requirements of the Accounting Law of the People’s Republic of China and the Enterprise Accounting Standards. Specifically, compliance with the Enterprise Accounting Standards means that the financial statements of wealth management products must, on the basis of adhering to the provisions of the Enterprise Accounting Standards, also follow “Enterprise Accounting Standard No. [number]”. 30 Number —— Presentation of Financial Statements, Accounting Standards for Business Enterprises No. 31 Number —— Statement of Cash Flows, 33 Number guidelines, 37 The presentation and disclosure requirements stipulated in the Accounting Standards for Business Enterprises and other relevant accounting standards.

　　For wealth management products newly issued after the date of issuance of these Regulations and not yet reported in the individual financial statements of commercial banks, their accounting treatment as independent accounting entities shall be governed by these Regulations.

　　7. How should commercial banks determine whether they have control over the wealth management products they issue?

　　Answer: When determining whether it controls wealth management products issued by the commercial bank that are not reported in the commercial bank’s individual financial statements, the commercial bank should comprehensively consider its own direct ownership as well as its indirect ownership through all subsidiaries (including controlled structured entities), including rights, variable returns, and related party relationships.

　　Variable returns typically include the compensation and other benefits received by decision-makers from commercial banks for providing management services to wealth management products. The former includes various forms of wealth management product management fees (including fixed management fees and performance-based incentives, among others) and may also encompass compensation paid to decision-makers under the guise of sales fees, custody fees, and other service charges. The latter includes various forms of direct investment income, compensation or remuneration obtained for providing credit enhancement or support, losses that may arise or be borne as a result of providing such credit enhancement or support, variable returns derived from engaging in other transactions with wealth management products or holding other interests in such products, as well as sales fees, custody fees, and other service charges under various other headings. Among these, credit enhancement includes guarantees (such as guaranteeing the principal or returns of wealth management product investors or providing guarantees for the debts of wealth management products) and credit commitments; support encompasses financial or other types of assistance, such as liquidity support, repurchase commitments, providing financing to wealth management products, purchasing assets held by wealth management products, and entering into derivative transactions with wealth management products.

　　When analyzing the variable returns to which it is entitled, commercial banks should, in addition to considering... 33 In addition to the factors specified in the guidelines for assessing whether an investor controls the investee, it is also necessary to analyze whether the costs and benefits of wealth management products can be accurately accounted for (if they cannot be accurately accounted for, it may indicate that the commercial bank has assumed risks). Furthermore, it is important to determine whether transaction pricing complies with market or industry norms (for instance, if fees for services and other charges are unfairly set, it may suggest that the commercial bank has taken on risks). Additionally, one should examine whether there exist other circumstances that could ultimately lead the commercial bank to bear losses from these wealth management products. In particular, commercial banks should carefully consider whether, in the absence of contractual obligations, they have previously provided credit enhancements or support for wealth management products with similar characteristics.

　　When determining whether to exercise control over a wealth management product, at least the following aspects related to historical credit enhancements or support should be taken into account:

　　1 · The events that trigger the provision of such credit enhancement or support, along with their underlying causes, as well as the likelihood and frequency of similar events occurring in the future.

　　2 The reasons why commercial banks provide such credit enhancement or support, as well as the internal control and management processes underlying this decision; whether credit enhancement and support will continue to be provided in the event of similar triggering events in the future (this assessment should be based on the commercial bank’s response mechanisms for such events, as well as its internal control and management processes, and should take into account historical experience).

　　3 Whether the consideration received from wealth management products for providing credit enhancement or support is fair, and whether there is uncertainty in collecting such consideration, as well as the extent of that uncertainty.

　　4 The extent of the risk of loss faced due to providing credit enhancement or support.

　　For wealth management products issued, if commercial banks comply with... 33 The standard judgment indicates that no control exists; however, during the term of this wealth management product, the commercial bank provided credit enhancement or support to the product. Even if the commercial bank had no contractual obligation to provide such credit enhancement or support, it should at least take the above-mentioned factors into account and reassess whether it has actually established control over the wealth management product. Following such reassessment, it was determined that... 33 For wealth management products that are subject to the control standards stipulated by the guidelines, commercial banks shall include such products within the scope of consolidation. At the same time, for other wealth management products already issued that exhibit similar characteristics (such as similar contractual terms, underlying asset composition, investor composition, and the structure in which commercial banks participate in wealth management products and thereby receive variable returns), commercial banks shall also reassess them in accordance with the principle of consistency.

　　If the first-time adoption of the above-mentioned provisions results in a change in the scope of consolidation, commercial banks shall make retrospective adjustments, unless such retrospective adjustments are impracticable. For wealth management products over which control had already been lost during the comparative periods, no further retrospective adjustments shall be made.

　　8. Unless otherwise specified in this Interpretation, the accounting treatment provisions for other issues shall apply. 2015 Year 1 Moon 1 Transactions or business activities that occur from the date onward.

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Interpretation No. of Enterprise Accounting Standards 7 No. (Draft for Soliciting Opinions) .pdf