Major New Regulation Takes Effect: Revolutionary Reform of Profit and Loss Statement Presentation in Financial Reports

Source Document: Ministry of Finance Notice No. 11 [2026] (officially issued on August 5, 2026) Official Interpretation: 'Notice on Issuing the Accounting Standard for Business Enterprises No. 30 — Presentation of Financial Statements' This revision does not alter accounting recognition, measurement, or journal entry rules; it only reconstructs the financial statement’s hierarchical structure, profit-and-loss classification system, and disclosure requirements. I. Core Rationale Behind This Standard Revision First, under the old P&L statement, sources of profit were mixed and indistinct, making it difficult to distinguish genuine core operations. Under the prior standard, operating profit included all revenues and expenses—such as main business income, investment income from wealth management, gains/losses from fair value changes, asset disposal gains/losses, and equity-method investment income. Many listed companies consistently incurred losses from their core businesses but artificially inflated operating profit by selling fixed assets, real estate, equity investments, or engaging in short-term financial investments—misleading investors, banks, and management. Second, alignment with international standards. The International Accounting Standards Board (IASB) issued IFRS 18, a new presentation standard, in 2024, effective from 2027. To harmonize financial reporting between A-share and H-share companies, eliminate cross-border information discrepancies, and enhance the international comparability of Chinese corporate financial statements, the Ministry of Finance concurrently implemented this localized revision. Third, curbing the chaos of enterprises’ self-defined 'beautified' performance metrics. In the past, many listed companies used non-standard indicators—such as 'adjusted net profit', 'revised EBITDA', or 'core operating profit'—in annual reports and earnings briefings, selectively excluding losses while retaining gains, without disclosing calculation methodologies—resulting in extremely low transparency. This new regulation mandates footnote disclosures for all such self-defined performance metrics. II. Key Logical Comparison Between Old and New P&L Statements (Fundamental Change) 2014 Old P&L: Operating Profit = Revenue from Principal Operations − Period Expenses + Investment Income + Gains/Losses from Fair Value Changes + Gains/Losses from Asset Disposal. 2026 New Standard: All profit/loss items are mandatorily classified into five categories—operating, investing, financing, income tax, and discontinued operations—and introduce three new subtotal line items to achieve transparent, layered disclosure of profit sources. III. New Statement Format The complete standardized format—including row/column layout—is still contained exclusively in the accompanying 'Application Guidelines to the Standard' and has not yet been publicly released in full. The following is an estimated version based on the official notice. I. Operating Income and Expenses Operating Revenue Less: Operating Costs Taxes and Surcharges Selling Expenses Administrative Expenses R&D Expenses Operating Credit Impairment Loss (losses shown as “−”) Operating Asset Impairment Loss (losses shown as “−”) Other Operating Gains II. Operating Profit (Loss shown as “−”) [Pure core operating profit—a newly introduced key metric] Add: Investing Income and Expenses Including: Equity-method investment income from associates and joint ventures Gains/Losses from Fair Value Changes of Financial Assets Gains/Losses from Disposal of Investment Assets Investing-related Impairment Losses III. Operating and Investing Profit [Comprehensive profit from core operations plus external investments—a newly introduced subtotal] Add: Financing Income and Expenses Interest Expense Foreign Exchange Gains/Losses on Financing Activities Other Financing Revenues/Expenses IV. Profit from Continuing Operations (Pre-Tax) [Total pre-tax profit from ongoing, routine operations—a newly introduced subtotal] Less: Income Tax Expense V. Net Profit from Continuing Operations Add: Net Profit from Discontinued Operations VI. Net Profit (1) Net Profit from Continuing Operations (2) Net Profit from Discontinued Operations

Accounting 101 (Taught by a Non-Accountant) – August 28, 2026, by Aswath Damodaran – Study Notes #02

Can you spot the issue here? Although Company A holds only 60% of Company B’s equity, 100% of Company B’s operating cash flow is consolidated into Company A’s financial statements. Accounting standards hold that, since Company A owns 60% and controls Company B, Company A’s CEO can—upon waking each morning—fully deploy that entire $1 million in cash to purchase raw materials, pay salaries, or open new stores. We’re back to the ultimate question: Is management competent? Trustworthy? Visionary? Although the 'Operating Cash Flow (OCF)' line item 'lies', the consolidated financial statements remain a coherent whole. The 40% minority interest in Company B is captured elsewhere in two places: Entry One (Balance Sheet): 'Non-controlling Interests' (NCI), located at the bottom-right corner. If Company B earns $10 million and retains it (i.e., pays no dividends), its net assets increase by $10 million. On Company A’s balance sheet, the full $10 million flows into the left-side 'Cash' account—but simultaneously, the right-side 'Non-controlling Interests' line increases by $4 million. Truth: This signals that $4 million of the cash shown on the left side represents an ownership claim—or 'ownership liability'—belonging to minority shareholders. Entry Two (Income Statement): 'Net Income Attributable to Non-controlling Interests' at the bottom. The income statement shows Company B earned $10 million—but immediately deducts $4 million as 'Net Income Attributable to Non-controlling Interests'. Truth: This deduction explicitly tells investors that although top-line revenue and OCF appear robust, 40% of those earnings were generated on behalf of others. Non-recurring Items: Windfalls (or Losses) Examples: Gains/losses from asset sales, litigation settlements or fines, goodwill impairments. 'If an item is truly “non-recurring”, it should occur very infrequently and vary significantly in amount. If it appears every year—even if it swings between gains one year and losses the next—it is not genuinely non-recurring.' This statement exposes a favorite 'accounting trick' used by corporate management: Many firms reclassify recurring costs—such as annual restructuring charges or yearly severance payments—as 'one-time expenses' to steer investors away from them, thereby making 'operating profit' appear more attractive. The Fog of Government Subsidies: In China’s A-share market, many companies receive government subsidies annually. Though these may be classified as 'other income' (a non-recurring item) under accounting rules, if such subsidies constitute half of net profit—and recur every year—should they really be excluded? Following Damodaran’s logic, if a subsidy exhibits persistence, it arguably should not be treated simplistically as 'non-recurring'. The 'Big Bath': As referenced in the slide—write-offs. Many A-share companies, during poor-performing years, write off all problematic assets at once: bad debts, goodwill, obsolete inventory—recording one massive impairment loss and labeling it a 'one-time, non-recurring event'. Their goal? To 'clean house' now and report explosive profit growth next year. Stock Sales to Survive: At year-end, companies sell shares held in other listed firms (e.g., the 3% or 25% stakes discussed earlier) to offset operating losses. This is a classic A-share tactic for avoiding delisting or achieving 'profit turnaround'. This slide reminds us: Such profits are 'soulless'—they must be excluded when valuing the company.

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