In July 2017, MoF amended Accounting Standard for Business Enterprises No. 14 - Revenue ("the New Revenue Standard") with Caikuai [2017] No.22. The new standard supersedes the original Accounting Standard for Business Enterprises No. 14 - Revenue and Accounting Standard for Business Enterprises No. 15 - Construction Contract. While the new revenue standard is implemented by phases, but allows enterprises to start earlier than scheduled.
I. Implementation Timetable of the New Revenue Standard
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Business enterprises
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Start time
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Overseas listed companies
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January 1, 2018
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Domestic listed companies
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January 1, 2020*
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Non-listed business enterprises that adopt Accounting Standard for Business Enterprises
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January 1, 2020*
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*Earlier start is allowed.
II. Key Amendments of the New Revenue Standards
(1) Both revenues and construction contract in the original standards are incorporated into a single revenue recognition model. The new revenue standard specifies three conditions. Revenues that meet any one of these conditions are recognized within a certain period of time. Otherwise, they are recognized at a particular time point.
(2) The transfer of control instead of risk premiums is used as the basis to determine specific time point of revenue recognition. The revenue standard (2016 Edition) requests that revenue from goods sold be separated from that from service provided, stressing that revenues from goods sold are recognized when the primary risks and rewards of ownership of the goods have been transferred to the buyer. The amended revenue standard breaks the boundary between goods and services, stipulating that revenues shall be recognized when a company's contract obligations have been fulfilled, i.e., when its customer obtains control of the underlying goods (or services).
(3) More explicit guidance is provided for accounting treatment of contracts with multiple transactions. The new standard introduces a new concept--"contract fulfilling obligations", and specifies how to identify the existence of "multiple obligations", and how to spread transaction costs across such "multiple obligations". The amended revenue standard requests business enterprises to evaluate a contract, identify the contract fulfilling obligations, spread the transaction costs across these obligations based on the relatively independent prices of the goods (or services) committed, and recognize relevant revenues on the day that contract becomes effective.
(4) Explicit provisions are provided for the recognition and measurement of certain transactions (or activities). The amended revenue standard provides explicit provisions for the recognition and measurement of certain transactions (or activities).
(5) How to determine transaction costs. The new standard provides detailed provision on how to determine transaction costs, particularly in case of variable cost, significant financing, non-cash cost, or cost paid to clients.
(6) Contract acquisition cost, e.g., sales commission paid. Any additional cost of contract acquisition that can be recovered shall be recognized as an asset item for the acquisition of the contract, amortized on the same basis of revenue recognition and stated as current-term profits/losses.
(7) The difference between "key responsible party" and "agent", i.e., that between the total amount method and the net amount method. The standard stipulates that revenues should be recognized either in total amount or in net amount, depending on whether a business enterprises is a key responsible party or an agent in a transaction, and provides detailed guidance. As such detailed guidance is not available in the existing standard, the change might have significant impact on the revenue of some business enterprises.
(8) Other changes. The new standard specifies accounting treatment principles for 8 types of transactions, including sales with return provisions, sales with warrant provisions, the application of the total amount method and the net amount method, customers' option for additional purchase, intellectual property rights licensing, buy-back after sale, advance received and non-refundable initial expenses.
These are the biggest changes and highlights of the new revenue standard. They are expected to affect not only accounting treatment, but also business process re-engineering.
Finally, it should be noted that, as a national accounting system, the revenue standard has different purpose and methodologies from those of the Tax Law. Except in special circumstances, accounting system amendments do not affect the tax-related matters of tax payers. Revenue, VAT taxable sales, and VAT taxable land income of business enterprises shall be determined in accordance with relevant tax policies.
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