Though basic principles of accounting remain the same the world over, region specific cultural influences and centuries old practices of accountants tend to make minor differences in the manner in which accounts are kept in a particular country. It is the intention of International Financial Reporting Standards (IFRS) to have universally accepted and practiced Generally Accepted Accounting Principles (GAAP), there are differences in China GAAP and US GAAP that have at time lead to a war of words between the two parties. This article will attempt to look at some of these differences as it is not possible to analyze both GAAP in totality in a small article.
Fixed assets capitalization threshold
In China GAAP, fixed assets related to production and operations of a company with a service life of more than a year are capitalized and other fixed assets having a value of more than 2000 Yuan with an estimated life of more than 2 years should be capitalized.
In US GAAP, companies have the liberty to determine their own materiality threshold above which expenditure is capitalized.
Borrowing costs
As part of cost of construction of a tangible fixed asset, borrowing costs on project specific borrowings should be capitalized as far as China GAAP is concerned.
In US GAAP, interest expense during construction depending upon the amount of investments in a project gets capitalized irrespective of source of financing but is limited to the amount of interest expenditure incurred.
Major Overhauls
In China GAAP, cost of a major overhaul is accrued and is capitalized and expended over the period leading up to the next major overhaul. On the other hand, in US GAAP, it is normally expended as incurred except when the organization has identified as a separate component of the asset.
Impairment
In China GAAP, impairment is carried at the lower of net book value and the recoverable amount on a single item basis, the recoverable amount is the higher of net selling price and present value of estimated future cash flows from continuous use and ultimate disposal.
In US GAAP, when conditions indicate possible impairment, it is tested and the test is based upon asset groupings where cash flow can be identified. Impairment gets identified only if undiscounted future cash flows are below book value.