Starting from the year 2016 (105th year in the Republic of China calendar), the financial statements of small and medium-sized enterprises are prepared in accordance with the Enterprise Accounting Standards (EAS) instead of the original ROC GAAP (Generally Accepted Accounting Principles). The EAS is primarily influenced by IFRS (International Financial Reporting Standards) and the IFRS for Small and Medium-sized Entities, taking into account the simplified version of IFRS developed for our country’s corporate practices.

1. Differences between EAS and ROC GAAP

The main differences lie in changes to the formats of the four major financial statements and adjustments to accounting items. In the balance sheet, assets and liabilities are classified into current and non-current categories. The income statement is renamed as the comprehensive income statement, divided into current income and other comprehensive income. Other comprehensive income includes items that were previously directly recognized in shareholders’ equity and are now presented in the comprehensive income, helping users of the financial statements understand the performance of management, unrelated to the current income, and hence not affecting the calculation of earnings per share. Additionally, the statement of changes in equity is renamed as the statement of changes in equity, and the cash flow statement separately presents interest, dividends received and paid, and income taxes paid. Other common differences include:

• Excluding term deposits exceeding three months from cash and cash equivalents.
• Recognition of benefits from bargain purchases.
• Inclusion of dismantling, removal, and restoration costs in the cost of property, plant, and equipment.
• Prohibition of revenue recognition for construction companies using the percentage-of-completion method.
• Treatment of incentive points and similar items as integral components of sales transactions.
• Addition of investment properties and biological assets as separate items.
• Amortization of goodwill and indefinite-life intangible assets or annual impairment testing.

2. Transition Treatment for Initial Application

According to EAS 2.22, when transitioning from ROC GAAP to EAS reporting for the first time, two methods are available: the retrospective adjustment method and the non-retrospective adjustment method.

• 1. Retrospective Adjustment Method According to the first part of EAS 2.22, when companies first apply EAS, they should make retrospective adjustments in accordance with EAS provisions. This is done to determine the initial amounts of assets, liabilities, and equity as of the beginning of the reporting period for the first-time application. For example, – The first-time application in 2016 (105th year), if a retrospective adjustment is made, the assets, liabilities, and equity at the beginning of the year 2016 should be adjusted according to EAS. The difference in assets and liabilities that are adjusted should be directly recognized in the retained earnings or other equity items as of the beginning of the year 2016.
• – It’s important to note that retrospective adjustment does not involve restating amounts compared to the financial statements of December 31, 2015. However, reclassification is an exception; for instance, deferred income tax assets and liabilities should be reclassified as non-current assets and liabilities in the balance sheet for the comparative period in 2015 as per EAS, although the amounts remain consistent with ROC GAAP.

The retrospective adjustment method cannot be used as impractical, except for the following two exceptions:

• – Capital surplus: Treatment as required by laws and regulations, no adjustment, or elimination of capital surplus to retained earnings. – Functional currency change: The adoption of the new functional currency for the initial date of application.
• 2. Non-Retrospective Adjustment Method According to the second part of EAS 2.22, when companies first apply EAS on January 1, 2016, they have the option to choose the non-retrospective adjustment method, for example, for financial instruments that already existed, as per the six exceptions outlined. However, based on Letter No. 10800614920 from the Ministry of Finance, for first-time application of EAS after January 1, 2017 (106th year onwards), the retrospective adjustment method should be applied, and the non-retrospective adjustment method cannot be used.

3. Tax Effects of Initial Application

According to the Directive No. 10800614920 of the Ministry of Finance, starting from the year 2018 (107th year in the Republic of China calendar), the changes in the initial retained earnings due to the adoption of the new accounting standards should be included in the calculation of corporate income tax.”