The Ministry of Finance has issued the Interpretation No. 19 of the Accounting Standards for Business Enterprises (the "Interpretation No. 19"), providing explicit guidance on the accounting treatment for complex transactions such as business combinations and financial instruments. The main contents are as follows:

1. Accounting Treatment of Compensatory Assets in a Non-common Control Business Combination

• Definition and Distinction

Where a contract between the seller and the purchaser stipulates that the seller will provide compensation to the purchaser for certain contingencies of the acquirer or the uncertain outcomes of specific assets or liabilities, the purchaser thereby obtains a compensatory asset.

The distinction between a compensatory asset and contingent consideration lies in the fact that a compensatory asset arises from compensation for specific uncertain outcomes existing at the acquisition date, rather than price adjustments based on the acquirer’s future performance.

• Common Examples of Compensatory Assets:

1. Matters related to contingent liabilities — pending litigation, third-party guarantee obligations, etc.;
2. Matters related to specific assets or liabilities — significant receivables with uncertain collectability, inventory impairment risks, post-sale compensation for goods sold by the acquirer prior to the acquisition date, etc.;
3. Matters related to taxation — tax disputes prior to the acquisition date, historical tax issues that may result in future demands for additional tax payments, etc.

• Recognition, Measurement, and Financial Statement Presentation

• Transitional Provisions: Compensatory assets existing as of January 1, 2026 shall be retrospectively adjusted.

2. Capital Reserve Related to the Disposal of a Subsidiary Previously Acquired in a Business Combination Under Common Control Shall Not Be Transferred to Current Profit or Loss or Retained Earnings

• Accounting standards stipulate that in a business combination under common control, the difference between the carrying amount of the net assets acquired and the carrying amount of the consideration paid by the combining party shall be adjusted against capital reserve. Interpretation No. 19 explicitly stipulates that upon disposal of a subsidiary acquired under common control, the related capital reserve shall not be reclassified out to current profit or loss or retained earnings. It shall remain within the capital reserve.
• Transitional Provisions: This shall be applied retrospectively as a change in accounting policy and disclosed in the notes to the financial statements.

3. Derecognition of Financial Liabilities Settled Using Electronic Payment Systems

• For electronic payment transactions with extended settlement intervals (e.g., cross-border electronic payment transactions), an accounting policy choice is provided to derecognize a financial liability at a point earlier than the settlement date. An entity settling a financial liability with cash via an electronic payment system may elect to derecognize it early only when the entity has initiated the payment instruction and all of the following specific conditions are met. This accounting policy choice shall be applied consistently to all settlements made through the same electronic payment system. The specific conditions are:

1. The entity has no practical ability to withdraw, stop, or cancel the payment instruction;
2. The entity has no practical ability to access the cash that, as a result of the payment instruction, will be used for settlement;
3. The settlement risk associated with the electronic payment system is insignificant.

• Transitional Provisions: Upon initial application, the cumulative effect shall be retrospectively adjusted to the opening balance of retained earnings and other relevant items as of January 1, 2026. Prior period comparative figures are not required to be adjusted.

4. Assessment of the Contractual Cash Flow Characteristics of Financial Assets (the 'SPPI Test') and Related Disclosures

• Refinement of Judgement Criteria for Interest Components in the SPPI Test: The assessment of interest should focus on what the entity is being compensated for.
• Entities need to assess the impact of contractual terms that could change the timing or amount of contractual cash flows due to contingent events on the conclusion of the SPPI test.
• Transitional Provisions: Upon initial application, the cumulative effect shall be retrospectively adjusted to the opening balance of retained earnings and other relevant items as of January 1, 2026. Prior period comparative figures are not required to be adjusted.

5. Disclosure for Equity Instruments Designated as Fair Value Through Other Comprehensive Income ('FVOCI')

• According to the standards, changes in the fair value of FVOCI equity instruments are recognized in other comprehensive income. Upon derecognition, the cumulative gain or loss is transferred directly to retained earnings, not recognized in current profit or loss. This characteristic of FVOCI instruments means their fair value changes and disposal gains/losses bypass the income statement. To enhance the transparency and comparability of accounting information for this class of financial assets, Interpretation No. 19 further refines the disclosure requirements for FVOCI equity instruments as follows:

① Disclose FVOCI equity instruments at least by class;

② Disclose the fair value at the end of the reporting period and changes in fair value during the reporting period;

③ Distinguish between changes arising from derecognized investments and those from investments still held;

④ Disclose the transfer out of cumulative gains or losses upon derecognition of investments during the reporting period.