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TABLE OF CONTENTS CHAPTER I GENERAL PROVISIONS CHAPTER II INITIAL MEASUREMENT CHAPTER III SUBSEQUENT MEASUREMENT CHAPTER IV DISCLOSURE CHAPTER I GENERAL PROVISIONS Article 1. For the purpose of regulating the recognition and measurement of long-term equity investments, and disclosure of relevant information, these Standards are formulated in accordance with the Accounting Standards for Enterprises-Basic Standards. Article 2. The following items shall be governed by other relevant accounting standards: (1) The translation of long term equity investments in foreign currencies shall be governed by the Accounting Standards for Enterprises No. 19-Foreign Currency Translation; and (2) The long-term investments which haven't been dealt with by these Standards shall be governed by the Accounting Standards for Enterprises No. 22-Recognition and measurement of Financial Instruments. CHAPTER II INITIAL MEASUREMENT Article 3. The initial cost of long-term equity investment formed by enterprise merger shall be determined according to the following provisions: (1) For the merger of enterprises under the same control, if the consideration of the merging enterprise is that it will make payment in cash, transfer non-cash assets or bear its debts, it shall, on the day of merger, treat the share of the carrying amount of the owner's equity of the merged enterprise as the initial cost of the long-term equity investment. The difference between the initial cost of the long-term equity investment and the payment in cash, non-cash assets transferred as well as the carrying amount of the debts borne by the merging party shall offset against the capital reserve. If the capital reserve is insufficient, the retained earnings shall be adjusted. If the consideration of the merging enterprise is that it will issue equity securities, it shall, on the day of merger, regard the share of the carrying amount of the owner's equity of the merged enterprise as the initial cost of the long-term equity investment. The total par value of the stocks issued shall be regarded as the capital stock, while the difference between the initial cost of the long-term equity investment and total par value of the shares issued shall offset against the capital reserve. If the capital reserve is insufficient, the retained earnings shall be adjusted; and (2) For the merger under the same control, the merging party shall, on the day of merger, regard the merger costs determined under the Accounting Standards for Enterprises No. 20-Merger of Enterprises as the initial cost of the long-term equity investment. Article 4. Except for the long-term equity investments formed by the merger of enterprises, the initial cost of a long-term equity investment acquired by other means shall be determined according to the following provisions: (1) The initial cost of a long-term equity investment obtained by making cash payment shall be the purchase price which is actually paid. The initial cost includes the expenses directly relevant to the obtainment of the long-term equity investment, taxes and other necessary expenses; (2) The initial cost of a long-term equity investment obtained on the basis of issuing equity securities shall be the fair value of the equity securities issued; (3) The initial cost of a long-term equity investment made by an investor shall be the value stipulated in the investment contract or agreement with the exception of those of unfair value as is stipulated in the contract or agreement; (4) The initial cost of a long-term investment obtained by the exchange of non-monetary assets shall be determined under the Accounting Standards for Enterprises No. 7-Exchange of Non-monetary Assets; and (5) The initial cost of a long-term equity investment obtained by debt restructuring shall be determined under Accounting Standards for Enterprises No. 12-Debt Restructuring. CHAPTER III SUBSEQUENT MEASUREMENT Article 5. The following long-term equity investments shall, under Article 7 of these Standards, be measured through the cost method: (1) A long-term equity investment whereby an investing enterprise is able to control the investee enterprise. The term "control" refers to the power to decide the financial and operating polices of an enterprise so as to obtain benefits from its operating activities. If the investing enterprise can control an investee entity, the investee entity is its subsidiary company, it shall list this subsidiary company in the consolidation range of the consolidated financial statements. For a long term equity investment made by the subsidiary company of an investing enterprise, the investing enterprise shall conduct measurement through the cost method as prescribed by these Standards, and shall make an adjustment through the equity method when it makes consolidated financial statements; (2) A long-term equity investment, which the investing enterprise does not exercise joint control or does not have significant influences on the investee entity, for which there is no offer in the active market and of which the fair value cannot be reliably measured. The term "joint control" refers to the contractually agreed sharing of control over an economic activity, which does not exist unless the investing parties of the economic activity reach a consensus on sharing the control power over the relevant important financial and operating decisions. Where an investing enterprise and other parties exercise joint control over an investee entity, the investee entity shall be their joint enterprise. The term "significant influences" means the power to participate in making decisions on the financial and operating policies of an enterprise, but not to control or exercise joint control together with other parties over the formulation of these policies. Where an investing enterprise is able to have significant influences on an investee entity, the investee entity shall be its associated entity. Article 6. When determining whether or not it is able to control or exercise significant influences on an investee entity, one shall take into consideration the investee enterprise' current convertible corporate bonds and current executable warrants held by the investing enterprise and other parties, as well as other factors relating to the voting rights. Article 7. The price of a long-term equity investment measured through the cost method shall be recorded at its initial investment cost. If there are additional investments or repayment of investments, the cost of the long-term equity investment shall be adjusted. The dividends or profits declared to be distributed by the investee entity shall be recognized as the investment income of the current period. The investment income recognized by the investing enterprise shall be limited to the amount received from the accumulative net profits which arise after the investee entity has accepted the investment. The amount of profits or cash dividends obtained by the investing entity in excess of the aforesaid threshold shall be deemed as recovery of initial investment cost. Article 8. A long-term equity investment whereby the investing enterprise exercises joint control or significant influences over the investee entity shall, under Articles 9 through 13 of these Standards, be measured through the equity method. Article 9. If the initial cost of a long-term equity investment is more than the investing enterprise' attributable share of the fair value of the investee entity's identifiable net assets for the investment, no adjustment will be made to the initial cost of the long-term equity investment. If the initial cost of a long-term equity investment is less than the investing enterprise' attributable share of the fair value of the investee entity's identifiable net assets for the investment, the difference shall be recorded in the profits and losses of the current period and the cost of the long-term equity investment shall be adjusted simultaneously. The fair value of the identifiable net assets of the investee entity shall be determined by reference to the relevant provisions of the Accounting Standards for Enterprises No. 20-Merger of Enterprises. Article 10. After an investing enterprise obtains a long-term equity investment, it shall, according to the attributable share of the net profits or losses of the investee entity, recognize the investment proceeds or losses and adjust the carrying amount of the long-term equity investment. The investing enterprise shall, on the basis of the profits or cash dividends declared to be distributed by the investee entity, calculate the proportion it should obtain, and shall decrease the carrying amount of the long-term equity investment correspondingly. Article 11. An investing enterprise shall recognize the net losses incurred to the investee enterprise until the carrying amount of the long-term equity investment and other long-term rights and interests which substantially form the net investment made to the investee entity are reduced to zero, unless the investing enterprise is obliged to bear extra losses. If the investee entity realizes any net profits later, the investing enterprise shall, after the amount of its attributable share of profits offsets against its attributable share of the un-recognized losses, resume and recognize its attributable share of profits. Article 12. The investing enterprise shall, on the basis of the fair value of all identifiable assets of the investee entity when it obtains the investment, recognize the attributable share of the net profits and losses of the investee entity after it makes an adjustment to the net profits of the investee entity. If the accounting policies and accounting periods adopted by the investee entity are different from those adopted by the investing enterprise, an adjustment shall be made to the financial statements of the investee entity in the light of the accounting policies and accounting periods of the investing enterprise so as to recognize the investment incomes or losses. Article 13. Where a change is made to the owner's equity other than the net profits and losses of the investee entity, the carrying amount of the long-term equity investment shall be adjusted and shall be recorded in the owner's equity. Article 14. For a long-term equity investment for which there is no offer in the active market and of which the fair value cannot be reliably measured, if the investing enterprise does not have joint control or significant influence over the investee entity due to decrease of investment or for other reasons, the cost method shall be adopted in the measurement, and the carrying amount of the long-term equity investment under the equity method shall be the initial investment cost to be measured through the cost method. If it is able to exercise joint control or significant influence, which does not constitute control, over the invested entity due to additional investment or for other reasons, the equity method shall be adopted for the measurement, and the carrying amount of the long-term equity investment measured through the cost method or the carrying amount of investment determined according to the Accounting Standards for Enterprises No. 22-Recognition and Measurement of Financial Instruments shall be treated as initial investment cost as measured by the cost method. Article 15. The impairment of a long-term equity investment which is measured through the cost method as prescribed in these Standards, for which there is no offer in the active market and of which the fair value cannot be reliably measured, its impairment shall be handled in pursuance of the Accounting Standards for Enterprises No. 22-Recognition and Measurement of Financial Instruments. The impairment of any other long-term equity investment measured under these Standards shall be treated under the Accounting Standards for Enterprises No. 8-Asset Impairment. Article 16. When disposing of a long-term equity investment, the difference between its carrying amount and the actual purchase price shall be recognized as the profits and losses of the current period. If any change other than the net profits and losses of the investee entity occurs and is recognized as the owner's equity, the portion previously recorded in the owner's equity shall, when disposing of a long-term equity investment measured through the equity method, be shifted to the profits and losses of the current period according to a certain proportion. CHAPTER IV DISCLOSURE Article 17. An investing enterprise shall, in the notes, disclose the following information relating to long-term equity investments: (1) The name list of its subsidiary companies, joint ventures and associated enterprises, including the name, registration place, and business nature of each investee enterprise, proportion of shares and proportion of voting rights of the investing enterprise in each investee enterprise; (2) The main financial information of the joint ventures and associated enterprises, including the aggregate amounts of assets, liabilities, incomes, expenses, etc.; (3) The information about the restriction of the investee entity' s capacity to transfer fund to the investing entity; (4) The current period and accumulative amounts of unrecognized investment losses; and (5) The contingent liabilities relating to the investments in the subsidiary companies, joint ventures and associated enterprises. |
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