Brief Introduction on Government Subsidy in China
- Definition of Government Subsidy
Government subsidy refers to the monetary or non-monetary assets received by enterprises from government, which mianly includes gratuitous appropriations for enterprises, tax refunds, financial discounts and non-monetary assets to enterpises gratis.
- Gratuitous Appropriations
Financial gratuitous appropriations refers to the funds allocated by government to enterprises gratis, which is usually specified the purposes when the appropriation is made. For example, special funds for the purchase and construction of fixed assets or technological transformation, incentive payments for encouraging enterprises to place employees in employment, fixed grain subsidies allocated to enterprises, and funds allocated to enterprises for Research & Development.
- Tax Refunds
According to relevant regulations, government will refund taxes to enterprises by adopting methods of returning after collecting or levy and refund, which is regarded as a government subsidy given in the form of preferential taxation. However, some economic resources which are not involved direct trasferation of assets will not be regarded as government subsidies, such as direct reduction on tax, exemption, increase tax deduction, partial tax credit and so on.
- Financial Discount
Financial discount refers to government subsidies to enterprises for interest on bank loans to support the development of specific fields or reregions, in accordance with the country’s macroeconomic and policy objectives. The forms of subsidies include direct payment to beneficiary enterprises and payment to lending banks.
- Non-monetary assets to enterprises gratis
Mainly administration allocation for usage rights of land, wildwood and so on.
- Classification of Government Subsidies and Accounting Treatment
- Government subsidies related to assets
It refers to government subsidies obtained by enterprises for purchase and construction or to form long-term assets in other ways.
Accounting treatment:
The government subsidies related to assets should offset the book value of that related assets or be recognized as deferred income. If the relevant assets is recognized as deferred income, it should be included in the profit and loss in stages according to a reasonable and systematic method within its useful life. If the government subsidies is measured at nominal amounts, it should be directly included in the current profit and loss. If the relevant asset is sold, transferred, scrapped or damaged before the end of its useful life, the undistributed balance of relevant deferred income should be transferred to the current profit and loss of asset disposal.
- Government subsidies related to income
All other government subsidies are classified into income-related except the aforementioned one. Such subsidies are mainly usedto compensate enterprises for expenses or losses that have occurred or are about to occur.