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US GAAP vs.

PRC GAAP Comparison

Semiconductor Manufacturing International Corporation

Framework for Financial Reporting


US GAAP
SFAS, FASB Interpretations, APB Opinions and ARB FASB Technical Bulletins, EITF AICPA Industry Audit and Accounting Guides, AICPA Statements of Position SEC SAB PCAOB standards

PRC GAAP
Financial Accounting and Reporting Rules for Enterprises (FARR) Accounting Standards for Business Enterprises Accounting System for Business Enterprises (ASBE) Accounting Systems for Various Industries MOF Interpretations, Implementation Guides

Semiconductor Manufacturing International Corporation

Major Areas of GAAP Differences


Inventories Investment & Consolidation Assets held for sales Amortization of intangible assets Land use Rights Assets impairment Preoperating Expenses Effects on changes in foreign exchange rates

Semiconductor Manufacturing International Corporation

Major Areas of GAAP Differences


Borrowing Costs Quantifying Contingencies Revenue Recognition Subsidy income Income Taxes Appropriated Staff Welfare and Bonus Funds Cash Flow Statement Presentation

Semiconductor Manufacturing International Corporation

Inventories
US GAAP
Inventories to be stated at the lower of cost and market value ( market is the lower of replacement cost and NRV minus normal profit margin). Reversal of inventory write downs is prohibited. Write down for LCM is recorded in cost of goods sold

PRC GAAP
Inventories to be stated at the lower of cost and net realizable value. Reversal of inventory write downs required if certain criteria are met LCM provision is recorded in G& A expenses

Semiconductor Manufacturing International Corporation

Investment & consolidation


US GAAP
Consolidation, equity, and cost methods applied based on definitions of control and significant influence Consolidate special purpose entity based on equity risk Variable Interest Entities (VIE) should be consolidated according to FIN 46
Semiconductor Manufacturing International Corporation

PRC GAAP
Consolidation of controlled subsidiaries is optional for some subsidiaries

Assets held for sales


US GAAP
longlived assets to be disposal by sale shall be classified as held for sale The valuation of the assets shall be determined by the lower of its carrying value or the fair market value less any cost to sell should not be depreciated any further Any gain or loss in result of the sale activity shall be included in income from continuing operation before income taxes

PRC GAAP
No requirement

Semiconductor Manufacturing International Corporation

Amortization for Intangible Assets


US GAAP
Amortize if the asset has a finite life Do not amortize if the asset has an indefinite life, but test regularly for impairment

PRC GAAP
Amortize over the shorter of the estimated useful life and the contractual or legal life If no contractual or legal life, amortize over the estimated useful life, but not more than 10 years.

Semiconductor Manufacturing International Corporation

Land use Rights


US GAAP
Classified as a longterm operating lease

PRC GAAP
Classified as intangible assets before selfused construction or development and begin amortization Upon construction, the carrying amount of the land use right is transferred to the cost of fixed assets under construction Transfer to fixed assets and depreciate

Semiconductor Manufacturing International Corporation

Assets impairment
US GAAP
Impairment triggered if an asset's carrying amount exceeds the expected future cash flows to be derived from the asset on an undiscounted basis. Measured based on fair value Reversal is prohibited

PRC GAAP
Impairment triggered if an asset's carrying amount exceeds the higher of the assets valueinuse (discounted present value of the assets expected future cash flows) and net selling price. Measure based on the recoverable amount (the higher of the assets valueinuse and net selling price). Reversal Required, if certain criteria are met.

Semiconductor Manufacturing International Corporation

Pre-operating Expenses
US GAAP
Preoperating expenses are expensed as incurred

PRC GAAP
Preoperating expenses are accumulated until the entity commences operations, and are then expensed

Semiconductor Manufacturing International Corporation

The Effects of Changes in Foreign Exchange Rates


US GAAP
Record initially at the rate of exchange at the date of the transaction (use of averages permitted if a reasonable approximation of actual).

PRC GAAP
Record initially at the rate of exchange at the date of the transaction or on the first day of the month in which the transaction occurs.

Semiconductor Manufacturing International Corporation

The Effects of Changes in Foreign Exchange Rates( continued)


US GAAP
Exchange gains or losses are included in the determination of net income for the period. PRC GAAP
Net exchange differences arising during the setup period are deferred until the entity commences operations. Exchange differences relating to projectspecific borrowing for the construction of fixed assets to be capitalized to the extent that it arises before the completion of the fixed asset. Others are expensed.

Semiconductor Manufacturing International Corporation

The Effects of Changes in Foreign Exchange Rates( continued)


US GAAP
foreign currency gains and losses relating to operational activities (receivables, payables, etc.) within income from operations. the foreign currency exchange gains and losses related to debt , investment and cash in other income and expense. .

PRC GAAP
Foreign currency gains and losses recorded in financial expenses

Semiconductor Manufacturing International Corporation

Borrowing Costs
US GAAP
Generally includes only interest All interest cost incurred during the assets' acquisition periods Adjustment on borrowing selection consolidated level or own level

PRC GAAP
Includes interest, amortizations of discounts or premiums,certain ancillary costs, exchange differences Only interest of project specific loan can be capitalized

Semiconductor Manufacturing International Corporation

Quantifying Contingencies

US GAAP
Low end of the range of possible amounts

PRC GAAP
Undiscounted amount of the best estimate to settle the obligation

Semiconductor Manufacturing International Corporation

Revenue Recognition
US GAAP
Completion of percentage method only used for long term construction type contracts More detail guidance, such as SOP 97 2, software revenue recognition, EITF 00 21, Revenue Arrangement with Multiple Deliverables , etc Sales discounts net off with sales
Semiconductor Manufacturing International Corporation

PRC GAAP
Completion of percentage method Required whenever costs to complete can be reasonably estimated, and project crosses an accounting period Sales discounts recorded separately

Subsidy income
US GAAP
Subsidy received based solely on a capital expenditure, can reduce the cost of the asset by the amount of the grant or treat the amount of the grant as a deferred credit and amortizing it over the useful life of the asset on the same basis used to depreciate the asset Grants related to income are sometimes presented as a credit in the income statement

PRC GAAP
Technology development subsidy from the government is recorded in capital surplus after the project and the related assets were finished Grants related to assets, recorded in capital surplus Grants related to income, recorded in income statement

Semiconductor Manufacturing International Corporation

Income Taxes
US GAAP
Current tax asset or liability for taxes payable or refundable for current year Deferred tax asset or liability resulting from temporary differences Measurement based on enacted tax laws Deferred tax asset reduced to amount expected to be realized

PRC GAAP
May use either (a) tax payable method (deferred taxes are not recognized) or (b) tax effect accounting using an income statement approach (deferred tax assets and liabilities are recognized for differences in amounts recognized in the income statement and on the tax return) Measurement based on either current tax rate or expected tax rate

Semiconductor Manufacturing International Corporation

Appropriated Staff Welfare and Bonus Funds


US GAAP
Estimated and accrued in Statement of Operations on a prorata basis during period

PRC GAAP
Appropriated directly from Retained Earnings after Board of Directors resolution

Semiconductor Manufacturing International Corporation

Cash Flow Statement Presentation


US GAAP
The Direct Method is encouraged, while the Indirect Method is permitted Interest received and paid be classified as an operating activity

PRC GAAP
The Direct Method of presentation with a supporting note reconciling operating result to cash flows arising from operations is the only permitted method Interest paid classified as a financing activity Interest received depends on its nature

Semiconductor Manufacturing International Corporation

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Semiconductor Manufacturing International Corporation