Tax & Accounting Blog

New Accounting Methodologies for Processing Trade

Blog, Global Trade, ONESOURCE March 4, 2016

On the 6th of November 2015, China’s General Administration of Customs released the ‘Announcement on Developing Work order Write-off (WOW) of the Processing Trade’ (Announcement No. 53 [2015]), to develop the practice and clarify the management method of work order write-off for processing trade.

By definition, work order[1] write-off means enterprises can file their trade customs declaration forms, manifests and work order data from their ERP systems directly to customs. Customs will generate an electronic account based on material consumption from the work order and declaration manifests consistent with declaration forms, and then calculate and verify the bonded part number level, raw materials, work in progress (WIP) and finished goods balance based on the import, export, consumption, and transfer and storage information.

In comparison to the traditional consumption based processing trade management method, the new WOW methodology is a big upgrade. This new methodology improves the bonded material consumption control from the BOM level to the work order level.  This new process helps enterprises eliminate discrepancies between the actual material consumption and registered unit consumption by sending work order information directly to the customs platform.

Under the traditional processing trade management methodology, a processing trade enterprise is required to register unit bonded material consumption (flat BOM) of finished products to customs and customs calculates inventories. This requires the registered consumption to be accurate and the production process to be in strict accordance with the registered consumption.   Otherwise the enterprise will have a discrepancy between calculated inventories and actual inventory. Customs will allow enterprises to explain and justify those discrepancies, but the historical record and analysis of the entire evidence collected will be very complicated, leading to a long-standing problem with unit consumption management of processing trade.

This problem has had an adverse impact on enterprises with business development, diversity, versatility and stability of raw materials, because products have increased in difficulty of unit consumption management. In order to reduce the complexity of unit consumption management, grouping similar items during the customs declaration has become a common practice. While this reduces the part of the registration frequency it increases the difficulty of internal management and the complexity of retroactive reconciliation on part number level material consumption.

China Customs introduced the concept of work order write-off of the processing trade to improve the currently experienced challenges through supervising part number level calculated inventory though work order information provided by the enterprise. The new process includes scrap and defects into the write-off to improve the accuracy of reconciliation. This is a huge step forward for processing trade.

Firstly, enterprises will no longer have to calculate the flat BOM to register the unit consumption; they just need to provide the real time work order data.  Secondly, the scrap information is included in the work order, which will greatly help enterprises manage this part of unclear information[2] to improve internal controls.  Finally, the formulation of WOW is simpler than the traditional methodology by increasing the performance of the customs management platform.

China Customs through the implementation of WOW is improving the processing trade enterprise management philosophy, and setting forth the requirements for enterprises. To participate, the applicant’s Authorized Economic Operator (AEO) level needs to be General Credit Enterprise (GCE) or above, use ERP and other systems to provide complete information, and have management of procurement, production, storage, sales, tracing and managing bonded materials consumption though work order processes in place.  The applicant must have established a computer management system that is line with regulatory requirements of customs, ability to submit relevant data to customs’ supporting systems (platforms) based upon those regulatory requirements and so on.  All these customs regulations will increase automation, a requirement to the enterprise who wants to implement the work order write-off methodology.

It is apparent with these initiatives that WOW will improve the bonded materials management process through the part number level, by providing traceability and visualization management capabilities.  Wow will also help reduce discrepancy calculated inventory and actual inventory for processing trade, in order to reduce compliance risk and enhance the compliance management image for enterprises.  There will be new demands for the ERP and compliance system, which makes deployment of an effective compliance management solution an important strategic plan for the enterprises.

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Sources

GAC announcement: http://www.customs.gov.cn/publish/portal0/tab49564/info777332.htm

http://www.kpmg.com/CN/en/IssuesAndInsights/ArticlesPublications/Newsletters/ChinaAlerts/Documents/China-tax-alert-1511-32-General-Administration-of-Customs-Work-Order-Write-off-Announcement.PDF

[1] “Work order” means that which the processing trade enterprise uses in the actual production management to indicate the detail of materials consumed for a certain batch of corresponding finished products, reflecting the detail of materials consumed for each production process transformed to multi-level semi-finished products in the enterprise’s processing process.

[2] The scrap information is usually provided every 6 months through a manual process.  With the new methodology, this data will be provided to customs automatically from the ERP  providing timely visibility for both the company and Customs  to control scrap