The purchase method must be used in order to account for
business combinations. A positive manner is the difference between the cost of the purchase
and the fair values from the assets and liabilities acquired. It is examined for impairment on
a yearly basis. The equity technique is used for investments in affiliates, those over
which the investee offers significant influence. The equity method is also used to
account for joint ventures. All subsidiaries under the control of the parent are consolidated.
The financial statements of an overseas subsidiary are translated based on
the primary economic environment in which it operates. If it is the local (overseas)
atmosphere, the balance sheet is converted at the year-end exchange rate, the actual
income statement is converted at the average-for-the-year exchange rate, and then any
translation difference is proven in equity. If it is the parent’s environment, monetary
items are translated at the year-end exchange rate, nonmonetary items are translated
at the relevant transaction-date exchange rate, and revenues and expenses are translated
at the transaction-date rate (or the appropriate average rate for the period). The
translation difference is included in income.
Historical cost is the basis for valuing tangible property; revaluations are not
allowed. They are depreciated over their expected useful lives, normally on a
straight-line basis. Accelerated and units-of-production depreciation are also acceptable.
FIFO and average are acceptable costing methods, and inventory is written
down for price declines and obsolescence. Acquired intangibles are also recorded at
cost. Those with a finite life are amortized over the periods achieved positive results based on the
pattern in which the advantages are consumed. Intangibles with an indefinite life are notamortized but are impairments tested at least annually. Because land and much of
the industrial property in China are owned by their state, companies that acquire the
right to make use of land and industrial home rights show them as intangibles. Property
are revalued when a change in possession takes place, as when a state-owned business
is privatized. Certified asset assessment firms or CPA firms determine these
valuations.
Research costs are expensed, but improvement costs are capitalized if technological
feasibility and price recovery are established. Finance leases are capitalized. Deferred
taxes are provided in full for all temporary differences. Employee benefits are expensed
as they are earned rather than when paid. Contingent obligations are provided with regard to
when they are both probable as well as their amount can be reliably believed.
