In this section, we aim to provide you with practical insights every quarter. Instead of analyzing standards, the information we offer focuses on “Hot Topics” for future consideration or challenges you may be currently facing.

Changes and challenges in Q1 2023

For middle market clients in China, the accounting standards in 2023 remain constant, with no material changes to apply. However, Chinese entities continue to encounter challenges in implementing the systems and requirements of their Headquarters. We have recently seen various examples of internal control system extensions, compliance systems updated, and preparation for the “Lieferkettengesetz.” All of these topics require local management to provide documentation, information, and judgments. A common challenge we have observed in practice is the lack of the bridge function to lead these new documentation efforts to success. Additionally, Covid restrictions have delayed multiple projects.

During the Covid lockdown and the following months, we received multiple questions regarding cash management. In practice, we encountered two extremely different cases. On the one hand, some companies had an increased need for proper cash planning due to the Chinese New Year, the Covid outbreak, and the challenging 2022. As financing for subsidiaries in China often takes time to become effective (e.g., registration of a loan, capital increase), proper planning is crucial during such challenging times to keep the operation running smoothly.

On the other hand, due to the previous pandemic policies, certain businesses were highly profitable and were able to generate sustainable profits. These profits increased the cash position of the subsidiary in China, and the headquarters decided to keep these profits in China due to the complexity of the situation in China and the low interest rates in Europe. However, with the recent increase in interest rates and changes in Covid policies, the headquarters may now want to reduce the open receivables from China and adjust the cash position in China based on operational needs. This may require a dividend payment.

In both cases, after the Covid restrictions are lifted, an analysis of the business, receivables, and liabilities between Intercompany is recommended to prepare for future challenges.

If you and your company are facing such challenges or would like to discuss them, please feel free to contact us!

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Christian Vogt

Of Counsel

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• christian.vogt@cn.ebnerstolz.com
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