New Financial Reporting Requirements Highlight Importance of R&D Expenses in China

On June 15th, 2018, the Ministry of Finance issued a notice titled 'Notice of the Ministry of Finance on Revising and Issuing the General Enterprise Financial Statements Format for the Year 2018' (CaiKuai [2018] No.15), which made revisions to the format of financial statements for general enterprises. One of the revisions included in the new profit statement format is that research and development expenses are no longer disclosed as a secondary item under management expenses in the notes to the financial statements, but are instead reported as a separate item in the profit statement to reflect the costs incurred in the research and development process. Additionally, for listed companies, items related to research and development are no longer disclosed as a separate item under management expenses in the notes to the financial statements, but are instead disclosed separately as components of the amount of research and development expenses in the profit statement. It is evident that the new revised financial statement format places greater importance on reporting research and development expenses, thereby enhancing the disclosure requirements for such expenses in enterprise financial statements and standardizing the quality of information disclosed in relation to costs associated with research and development activities.