3. Summary of Significant
The following is a
summary of significant accounting policies:
Cash and Cash Equivalents
TheCompany considers all highly liquid debt instruments purchased with maturity period of three months or less to be
cash equivalents. The carrying amounts reported in the accompanying consolidated balance sheets for cash and cash equivalents approximate
their fair value.
Credit periods vary substantially across industries, segments, types and size of companies in the PRC where we operate
our business. Because of the niche products that we process, our customers are usually also niche players in their own respective
segment, who then sell their products to end product manufacturers. The business cycle is relatively long, as well as the credit
periods. The Company offers credit to its customers for periods of 60 days, 90 days, 120 days and 180 days. We generally offer
longer credit terms to long-standing recurring customers with good payment histories and sizable operations. Accounts receivable
are recorded at the time revenue is recognized and are stated net of allowance for doubtful accounts.
Allowance for Doubtful
Accounts The Company maintains an allowance for doubtful accounts based on its assessment of the collectability of
the accounts receivable. Management determines the collectability of outstanding accounts by maintaining regular communication
with such customers and obtaining confirmation of their intent to fulfill their obligations to the Company. Management also considers
past collection experience, our relationship with customers and the impact of current economic conditions on our industry and market.
However, we note that the continuation or intensification of the current global economic crisis may have negative consequences
on the business operations of our customers and adversely impact their ability to meet their financial obligations. To reserve
for potentially uncollectible accounts receivable, management has made a 50% provision for all accounts receivable that are over
180 days past due and full provision for all accounts receivable over 1 year past due. From time to time, we will review these
credit periods, along with our collection experience and the other factors discussed above, to evaluate the adequacy of our allowance
for doubtful accounts, and to make changes to the allowance, if necessary. If our actual collection experience or other conditions
change, revisions to our allowances may be required, including a further provision which could adversely affect our operating income,
or write back of provision when estimated uncollectible accounts are actually collected. At September 30, 2012 and June 30, 2012,
the Company had $4,655,538 and $3,231,613 of allowances for doubtful accounts, respectively.
Bad debts are written
off for past due balances over two years or when it becomes known to management that such amount is uncollectible. There was a
provision for accounts receivable bad debts of $1,373,000 and $nil recognizedfor the three months ended September 30, 2012 and
Inventories are stated at the lower of cost or market. Cost is determined using the
weighted average method.Cost of inventories comprises all costs of purchases, costs of conversion and other costs incurred
in bringing the inventories to their present location and condition. Costs of conversion of inventories include fixed and variable
production overheads, taking into account the stage of completion.
and Amortization Intangible assets represent land use rights in China acquired by the Company and are stated at cost
less amortization and impairment, if any. Amortization of land-use rights is calculated on the straight-line method, based on the
period over which the right is granted by the relevant authorities in China.
Advances to Suppliers
In order to ensure a steady supply of raw materials, the Company is required from time to time to make cash advances
to its suppliers when placing purchase orders, for a guaranteed minimum delivery quantity at future times when raw materials are
required. The advance is seen as a deposit to suppliers and guarantees our access to raw materials during periods of shortages
and market volatility, and is therefore considered an important component of our operations. Contracted raw materials are priced
at prevailing market rates when the advance purchase contracts are entered into. Advances to suppliers are shown net of an allowance
which represents potentially unrecoverable cash advances at each balance sheet date. Such allowances are based on an analysis of
past raw materials receipt experience and the credibility of each supplier according to its size and background. In general, we
do not provide allowances against advances paid to those PRC state-owned companies as there is minimal risk of default. Our allowances
for advances to suppliers are subjective critical estimates that have a direct impact on reported net earnings, and are reviewed
quarterly at a minimum to reflect changes from our historic raw materials receipt experience and to ensure the appropriateness
of the allowance in light of the circumstances present at the time of the review. It is reasonably possible that the Companys
estimate of the allowance will change, such as in the case when the Company becomes aware of a suppliers inability to deliver
the contracted raw materials or meet its financial obligations. As of September 30, 2012 and June 30, 2012, the Company had made
allowances of advances to suppliers of $4,675,112 and $4,623,323, respectively.
for advances to suppliers are written off when all efforts to collect the materials or recover the cash advances have been unsuccessful,
or when it has become known to the management that there is no intention by the suppliers to deliver the contracted raw materials
or refund the cash advances. To date, we have not written off any advances to suppliers.
Plant and Equipment Property, plant and equipment are stated at cost less accumulated depreciation. The cost of an
asset comprises its purchase price and any directly attributable costs of bringing the asset to its present working condition and
location for its intended use.
is computed on a straight-line basis over the estimated useful lives of the related assets for financial reporting purposes. The
estimated useful lives for significant property and equipment are as follows:
||Plant and machinery
maintenance costs are normally charged to the statement of operations in the year in which they are incurred. In situations where
it can be clearly demonstrated that the expenditure has resulted in an increase in the future economic benefits expected to be
obtained from the use of the asset, the expenditure is capitalized as an additional cost of the asset.
of Long-Lived Assets The Company accounts for impairment of property, plant and equipment and amortizable intangible
assets in accordance with ASC Topic No. 360 Property, Plant and Equipment (ASC 360), which requires
the Company to evaluate a long-lived asset for recoverability when there is an event or circumstance that indicates the carrying
value of the asset may not be recoverable. An impairment loss is recognized when the carrying amount of a long-lived asset or asset
group is not recoverable (when carrying amount exceeds the gross, undiscounted cash flows from use and disposition) and is measured
as the excess of the carrying amount over the assets (or asset groups) fair value. We primarily use the income valuation
approach to determine the fair value of our long-lived assets, with fair value being the price that would be received from selling
an asset in an orderly transaction between market participants at the measurement date.
Interest The Company capitalizes interest cost on borrowings incurred during the new construction or upgrade of qualified
assets. Capitalized interest is added to the cost of the underlying assets and is amortized over the useful lives of the assets.
During the three months ended September 30, 2012 and 2011, the Company capitalized $nil interest to construction-in-progress.
Plant and production lines currently under development are accounted for as construction-in-progress. Construction-in-progress
is recorded at acquisition cost, including land rights cost, development expenditure, professional fees and the interest expenses
capitalized during the course of construction for the purpose of financing the project. Upon completion and readiness for use of
the project, the cost of construction-in-progress is to be transferred to property, plant and equipment.
Liabilities and Contingent Assets A contingent liability is a possible obligation that arises from past events and
whose existence will only be confirmed by the occurrence or non-occurrence of one or more uncertain future events not wholly within
the control of the Company. It can also be a present obligation arising from past events that is not recognized because it is not
probable that outflow of economic resources will be required or the amount of obligation cannot be measured reliably.
liability is not recognized but is disclosed in the notes to the financial statements. When a change in the probability of an outflow
occurs so that outflow is probable, the contingency is then recognized as a provision.
asset is a possible asset that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence
of one or more uncertain events not wholly within the control of the Company.
are not recognized but are disclosed in the notes to the financial statements when an inflow of economic benefits is probable.
When inflow is virtually certain, an asset is recognized.
Advances from Customers
Advances from customers represent advance cash receipts from customers and for which goods have not been delivered
or services have not been rendered at each balance sheet date. Advances from customers for goods to be delivered or services to
be rendered in the subsequent period are carried forward as deferred revenue.
Revenue from the sale of goods and services is recognized on the transfer of risks and rewards of ownership, which
generally coincides with the time when the goods are delivered to customers and the title has passed and services have been rendered.
Revenue is reported net of all VAT taxes. Other income is recognized when it is earned.
and Translating Financial Statements The Companys principal country of operations is the PRC. Our functional
currency is Chinese Renminbi; however, the accompanying consolidated financial statements have been expressed in United States
Dollars (USD). The consolidated balance sheets have been translated into USD at the exchange rates prevailing at
each balance sheet date. The consolidated statements of operations and cash flows have been translated using the weighted-average
exchange rates prevailing during the periods of each statement. The registered equity capital denominated in the functional currency
is translated at the historical rate of exchange at the time of capital contribution. All translation adjustments resulting from
the translation of the financial statements into the reporting currency are dealt with as other comprehensive income in stockholders
Comprehensive Income Accumulated other comprehensive income represents the change in equity of the Company during the
periods presented from foreign currency translation adjustments.
Taxation on overseas profits has been calculated on the estimated assessable profits for the year at the rates of taxation
prevailing in the country in which the Company operates.
China Precision Steel,
Inc. is subject to United States federal income tax at a tax rate of 34%. No provision for income taxes in the United States has
been made as China Precision Steel, Inc. had no taxable income in fiscal years 2012 and 2011.
PSHL and Blessford
International were incorporated in the British Virgin Islands and, under the current laws of the British Virgin Islands, are not
subject to income taxes.
Provision for the
PRC enterprise income tax is calculated at the prevailing rate based on the estimated assessable profits less available tax relief
for losses brought forward. The Company does not accrue taxes on unremitted earnings from foreign operations as it is the
Companys intention to invest these earnings in the foreign operations indefinitely.
On March 16, 2007,
the National Peoples Congress of China passed The Enterprise Income Tax Law (the New EIT Law), and on December
6, 2007, the State Council of China passed the Implementing Rules for the EIT Law (Implementing Rules) which took
effect on January 1, 2008. The New EIT Law and Implementing Rules impose a unified enterprise income tax (EIT) of
25% on all domestic-invested enterprises and foreign invested entities (FIEs), unless they qualify under certain
limited exceptions. Therefore, nearly all FIEs are subject to the new tax rate alongside other domestic businesses rather than
benefiting from the old FIE tax laws, and its associated preferential tax treatments, beginning January 1, 2008.
Despite these changes,
the EIT Law gives the FIEs established before March 16, 2007 (Old FIEs) a five-year grandfather period during which
they can continue to enjoy their existing preferential tax treatments, commonly referred to as tax holidays, until
these holidays expire. As an Old FIE, Chengtongs tax holiday of a 50% reduction in the 25% statutory rates expired on December
31, 2008 and it is currently subject to the 25% statutory rates since January 1, 2009; Shanghai Blessfords full tax exemption
from the enterprise income tax expired on December 31, 2009, and it is subject to a 50% reduction for the three subsequent years
expiring on December 31, 2012. Subsequent to the expiry of their tax holidays, Chengtong and Shanghai Blessford will be subject
to enterprise income taxes at 25% or the prevailing statutory rates. The discontinuation of any such special or preferential tax
treatment or other incentives would have an adverse effect on any organizations business, fiscal condition and current operations
Deferred tax assets
and liabilities are recognized for the future tax consequences attributable to differences between the financial statements carrying
amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets, including tax loss and credit carry
forwards, and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes the enactment date. Deferred income tax expense represents the change
during the period in the deferred tax assets and deferred tax liabilities. The components of the deferred tax assets and liabilities
are individually classified as current and non-current based on their characteristics. Deferred tax assets are reduced by a valuation
allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will
not be realized.
The Company follows
the provisions of the ASC Topic No. 740 Accounting for Income Taxes and Accounting for Uncertainty in Income
Taxes an interpretation of FASB Statement No. 109 (ASC 740). ASC 740 requires the recognition of tax
benefits or expenses based on the estimated future tax effects of temporary differences between the financial statements and tax
bases of its assets and liabilities. Deferred tax assets and liabilities primarily relate to tax basis differences on unrealized
gains on corporate equities, stock-based compensation, amortization periods of certain intangible assets and differences between
the financial statements and tax bases of assets acquired.
The Company recognizes
that virtually all tax positions in the PRC are not free of some degree of uncertainty due to tax law and policy changes in the
PRC. However, the Company cannot reasonably quantify political risk factors and thus must depend on guidance issued by current
officials in the PRC.
Based on all known
facts and circumstances and current tax law, the Company believes that the total amount of unrecognized tax benefits as of September
30, 2012 is not material to its results of operations, financial condition or cash flows. The Company also believes that the total
amount of unrecognized tax benefits as of September 30, 2012, if recognized, would not have a material effect on its effective
tax rate. The Company further believes that there are no tax positions for which it is reasonably possible, based on current Chinese
tax law and policy, that the unrecognized tax benefits will significantly increase or decrease over the next 12 months producing,
individually or in the aggregate, a material effect on the Companys results of operations, financial condition or cash flows.
Value added tax
The Provisional Regulations
of the Peoples Republic of China Concerning Value Added Tax promulgated by the State Council came into effect on January
1, 1994. Under these regulations and the Implementing Rules of the Provisional Regulations of the Peoples Republic of China
Concerning Value Added Tax, value added tax is imposed on goods sold in or imported into the PRC and on processing, repair and
replacement services provided within the PRC.
Value added tax payable
in the PRC is charged on an aggregated basis at a rate of 13% or 17% (depending on the type of goods involved) on the full price
collected for the goods sold or, in the case of taxable services provided, at a rate of 17% on the charges for the taxable services
provided, but excluding, in respect of both goods and services, any amount paid in respect of value added tax included in the price
or charges, and less any deductible value added tax already paid by the taxpayer on purchases of goods and services in the same
Peoples Republic of China Tentative Regulations on Value Added Tax became effective on January 1, 2009 with the issuance
of Order of the State Council No. 538. With the implementation of this VAT reform, input VAT associated with the purchase of fixed
assets is now deductible against output VAT.
Benefit Costs According to the PRC regulations on pension, Chengtong and Shanghai Blessford contribute to a defined
contribution retirement scheme organized by municipal government in the province in which Chengtong and Shanghai Blessford were
registered and all qualified employees are eligible to participate in the scheme. Contributions to the scheme are calculated at
37% of the employees salaries above a fixed threshold amount and the employees contribute 11%, while Chengtong and Shanghai
Blessford contribute the balance contribution of 26%. The Group has no other material obligation for the payment of retirement
benefits beyond the annual contributions under this scheme.
For the three
months ended September 30, 2012 and 2011, the Companys pension cost charged to the statements of operations under the plan
amounted to $64,741 and $69,338, respectively, all of which have been paid to the National Social Security Fund.
of Financial Instruments The carrying amounts of certain financial instruments, including cash, accounts receivable,
other receivables, short-term loans, accounts payable, accrued expenses, and other payables approximate their fair values as at
September 30 and June 30, 2012 because of the relatively short-term maturity of these instruments. The Company considers the carrying
amount of long-term loans to approximate their fair values based on the interest rates of the instruments and the current market
rate of interest.
Estimates The preparation of financial statements in accordance with generally accepted accounting principles requires
management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.