NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial
statements have been prepared in conformity with accounting principles generally accepted in the United States of America. The
Company's functional currency is the Chinese Yuan Renminbi; however the accompanying consolidated financial statements have been
translated and presented in United States Dollars.
Principles of Consolidation
The consolidated financial statements
include the accounts of the China Pediatric Pharmaceuticals, Inc., its wholly owned subsidiaries, China Children Pharmaceuticals
Co. Limited, and Xi'an Coova Children Pharmaceuticals Co., Ltd. as well as Shaanxi Jiali Pharmaceuticals Co., Ltd., a variable
interest entity (VIE) for which the Company is the primary beneficiary. All inter-company accounts and
transactions have been eliminated in consolidation.
Foreign Currency Translation
The Companys reporting currency
is the U.S. dollar. The Companys operation in China uses Chinese Yuan Renminbi (CNY) as its functional currency. The
financial statements of the subsidiary are translated into United States Dollars (USD) in accordance with ASC 830, Foreign
Currency Matters. All assets and liabilities were translated at the current exchange rate, stockholders
equity was translated at the historical rates and income statement items were translated at the average exchange rate for the period. The
resulting translation adjustments are reported under other comprehensive income in accordance ASC 220, Comprehensive Income. Foreign
exchange transaction gains and losses are reflected in the Consolidated Statements of Operations and Comprehensive (Loss) Income.
Use of Estimates
The preparation of financial statements
in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those
Comprehensive income is defined as the
change in equity of a company during a period from transactions and other events and circumstances excluding transactions resulting
from investments from owners and distributions to owners. For the Company, comprehensive income for the periods presented
includes net income, foreign currency translation adjustments.
Certain conditions may exist as of the
date the financial statements are issued, which may result in a loss to the Company but which will only be resolved when one or
more future events occur or fail to occur. The Companys management and legal counsel assess such contingent liabilities,
and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings
that are pending against the Company or un-asserted claims that may result in such proceedings, the Companys legal counsel
evaluates the perceived merits of any legal proceedings or un-asserted claims as well as the perceived merits of the amount of
relief sought or expected to be sought.
If the assessment of a contingency indicates
that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated
liability would be accrued in the Companys financial statements. If the assessment indicates that a potential
material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of
the contingent liability, together with an estimate of the range of possible loss if determinable and material would be disclosed.
Loss contingencies considered to be
remote by management are generally not disclosed unless they involve guarantees, in which case the guarantee would be disclosed.
There were no contingencies at September 30, 2012 and December 31, 2011.
Cash and Cash Equivalents
Cash and cash equivalents include cash
in hand and cash in time deposits, certificates of deposit and all highly liquid debt instruments with original maturities of three
months or less. As of September 30, 2012 and December 31, 2011, cash and cash equivalents were mainly denominated in CNY and were
placed with banks in the PRC. These cash and cash equivalents may not be freely convertible into foreign currencies and the remittance
of these funds out of the PRC may be subjected to exchange control restrictions imposed by the PRC government.
Management periodically reviews the
composition of accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current
economic trends and changes in customer payment patterns to evaluate potential credit losses on accounts receivable. The Company
grants 90 days payment terms to all credit sales customers.
The accounting estimates regarding provision
for doubtful accounts was changed during the fourth quarter in 2011. Bad debt expense increased as accounts receivable turnover
increased over 300 days during the three and nine months ended September 30, 2012. Historically, we did not make any provision
for bad debt as all our accounts receivable were collected within 90 days. Provision for doubtful accounts is now estimated as
follows: i) 50% on accounts that are outstanding between 91 and 180 days, ii) 75% on accounts that are outstanding between 181
to 365 days, and iii) 100% on accounts that are outstanding for over 365 days.
Inventories are valued at the lower
of cost (determined on a weighted average basis) or market. The Company compares the cost of inventories with the market
value and allowance is made for writing down their inventories to market value, if lower.
Property, Plant & Equipment
Property and equipment are stated at
cost. Expenditures for maintenance and repairs are charged to earnings as incurred; additions, renewals and betterments
are capitalized. When property and equipment are retired or otherwise disposed of, the related cost and accumulated
depreciation are removed from the respective accounts, and any gain or loss is included in operations. Depreciation
of property and equipment is provided using the straight-line method for substantially all assets with estimated lives of:
|Plant and equipment
Goodwill represents the excess cost
of a business acquisition over the fair value of the net assets acquired. Under the provisions of ASC 350, we are required
to perform an annual impairment test of our goodwill. Goodwill impairment is determined using a two-step process. The
first step of the goodwill impairment test is used to identify potential impairment by comparing the fair value of a reporting
unit, which we define as our business segments, with its net book value or carrying amount including goodwill. If the
fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired and the second
step of the impairment test is unnecessary. If the carrying amount of a reporting unit exceeds its fair value, the second
step of the goodwill impairment test compares the implied fair value of the reporting unit's goodwill with the carrying amount
of that goodwill. If the carrying amount of the reporting unit's goodwill exceeds the implied fair value of that goodwill,
an impairment loss is recognized in an amount equal to that excess. The implied fair value of goodwill is determined
in the same manner as the amount of goodwill recognized in a business combination. The fair value of the reporting unit
is allocated to all of the assets and liabilities of that unit including any unrecognized intangible assets as if the reporting
unit had been acquired in a business combination and the fair value of the reporting unit was the purchase price paid to acquire
the reporting unit.
Goodwill as of September 30, 2012 and
December 31, 2011 were $nil. Goodwill was arisen from acquisition of assets and liabilities of Baoji facility in fiscal
year 2000. During the year ended December 31, 2011, the Company recognized an impairment loss equal to the carrying amount of goodwill.
Intangible assets are amortized using
the straight-line method over their estimated period of benefit, ranging from ten to fifty years. Management evaluate
the recoverability of intangible assets periodically and take into account events or circumstances that warrant revised estimates
of useful lives or that indicate that impairment exists. No impairments of intangible assets have been identified during
any of the periods presented. The land use rights will expire in 2056 and 2058. All of the Companys
intangible assets are subject to amortization with estimated lives of:
|Land use right
|| 50 years|
|| 10 years|
The Company accounts for long-lived
assets in accordance with ASC 360, Property, Plant, and Equipment. The Company periodically evaluates the carrying
value of long-lived assets to be held and used, impairment losses are to be recorded on long-lived assets used in operations, when
indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the
assets carrying amounts. In that event, a loss is recognized based on the amount by which the carrying amount exceeds
the fair market value of the long-lived assets. Loss on long-lived assets to be disposed of is determined in a similar
manner, except that fair market values are reduced for the cost of disposal. Based on its review, the Company believes that, as
of September 30, 2012 and December 31, 2011, there were no significant impairments of its long-lived assets.
Fair Value of Financial Instruments
In accordance with FASB ASC 820, fair
value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the exit price)
in an orderly transaction between market participants at the measurement date.
In determining fair value, the Company
uses various valuation approaches. In accordance with GAAP, a fair value hierarchy for inputs is used in measuring fair
value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable
inputs be used when available. Observable inputs are those that market participants would use in pricing the asset or
liability based on market data obtained from sources independent of the Fund. Unobservable inputs reflect the Fund. Unobservable
inputs reflect the Funds assumptions about the inputs market participants would use in pricing the asset or liability developed
based on the best information available in the circumstances.
The fair value hierarchy is categorized
into three levels based on the inputs as follows:
||Level 1 -
||inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.|
||Level 2 -
||inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the assets or liability, either directly or indirectly, for substantially the full term of the financial instruments.|
||Level 3 -
||inputs to the valuation methodology are unobservable and significant to the fair value.|
Derivative Financial Instruments
Derivative financial instruments, as
defined in Financial Accounting Standard, consist of financial instruments or other contracts that contain a notional amount and
one or more underlying (e.g. interest rate, security price or other variable), require no initial net investment and permit net
settlement. Derivative financial instruments may be free-standing or embedded in other financial instruments. Further,
derivative financial instruments are initially, and subsequently, measured at fair value and recorded as liabilities or, in rare
instances, assets. The Company generally does not use derivative financial instruments to hedge exposures to cash-flow,
market or foreign-currency risks.
Value Added Tax Payable
The Company is subject to a value added
tax rate of 17% on product sales by the Peoples Republic of China. Value added tax payable is computed net of
value added tax paid on purchases for all sales in the Peoples Republic of China.
The Company's revenue recognition policies
are in compliance with FASB ASC Topic 605, "Revenue Recognition."
Revenue of the Company is primarily
derived from the sales of OTC medicines in China. Sales are recognized when the following four revenue criteria are met: i) persuasive
evidence of an arrangement exists, ii) shipment has occurred, iii) the selling price is fixed or determinable, and iv) collectability
is reasonably assured. Sales are presented net of value added tax (VAT) and net of sales rebate.
There are two types of sales upon which
revenue is recognized:
- Credit sales: revenue is recognized
at the date of shipment. Sales arrangements are FOB shipping point.
- Payment received before all of the
relevant criteria are satisfied: Cash received is recorded as deposits from customers, and revenue is recognized
when the products have been shipped to the customers.
Advertising expenses consist primarily
of costs of promotion for corporate image and product marketing, costs of direct advertising. The Company expenses all
advertising costs as incurred.
Rebates are paid to customers every
quarter and we recorded customer rebates as customers earned. They are classified as a reduction of revenue according
to ASC 605-55-64.
Shipping and Handling Costs
The Company incurs certain expenses
related to preparing, packaging and shipping its products to its customers, mainly third-party transportation fees. All costs related
to these activities are included as a component of selling, general and administrative expenses in the consolidated statement of
operations. For the three months ended September 30, 2012 and 2011, the Company incurred shipping charges of $nil and $25,187 respectively.
For the nine months ended September 30, 2012 and 2011, the Company incurred shipping charges of $983 and $71,352 respectively.
Stock based compensation
The Company accounts for stock based
compensation in accordance to ASC 718. Compensation cost is measured at the grant date based on the fair value of the equity instruments
awarded and is recognized over the period during which an employee is required to provide service in exchange for that award, or
the requisite service period, which is usually the vesting period. For awards to non-employees, the amount of stock-based compensation
expense recognized is based on the fair value of the equity instruments issued or the fair value of the goods or services received,
whichever is more reliably measurable.
The Company utilizes ASC 740, Income
Taxes, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of
events that have been included in the financial statements or tax returns. Under this method, deferred income taxes
are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their
financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which
the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce
deferred tax assets to the amount expected to be realized. Deferred tax assets and liabilities will be recognized, if any.
On January 1, 2007 the Company adopted
the provisions of FASB issued Interpretation No. 48 (FIN 48), Accounting for uncertainty in Income Taxes, included
in the Codification as ASC 740, Income Taxes. The topic addresses the determination of whether tax benefits claimed
or expected to be claimed on a tax return should be recorded in the financial statements. Under ASC 740, we may recognize
the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination
by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial
statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood
of being realized upon ultimate settlement. ASC 740 also provides guidance on de-recognition, classification, interest and penalties
on income taxes, accounting in interim periods and requires increased disclosures.
Statement of Cash Flows
In accordance with ASC 230, Statement
of Cash Flows, cash flows from the Companys operations is based upon the local currencies. As a result,
amounts related to assets and liabilities reported on the statement of cash flows will not necessarily agree with changes in the
corresponding balances on the balance sheet.
Basic and Diluted Earnings (Loss)
per Share (EPS)
Basic EPS is computed by dividing income
available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted
EPS is similarly computed, except that the denominator is increased to include the number of additional common shares that would
have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. Diluted
net earnings per share are based on the assumption that all dilutive convertible shares and stock options were converted or exercised. Dilution
is computed by applying the treasury stock method. Under this method, options and warrants are assumed to have been
exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to
purchase common stock at the average market price during the period.
ASC 280-10-50, Disclosure about
Segments of an Enterprise and Related information requires us of the management approach model for segment
reporting. The management approach model is based on the way a Companys management organizes segments within
the company for making operating decisions and assessing performance. Reportable segments are based on products and
services, geography, legal structure, management structure, or any other manner in which management disaggregates a company. The
Company operates in one segment during the three and nine months ended September 30, 2012 and 2011.
Concentration of Credit Risk
Financial instruments that potentially
subject the Company to concentrations of credit risk are cash, accounts receivable and other receivables arising from its normal
business activities. The Company places its cash in what it believes to be credit-worthy financial institutions. The
Company has a diversified customer base, most of which are in China. The Company controls credit risk related to accounts
receivable through credit approvals, credit limits and monitoring procedures. The Company routinely assesses the financial
strength of its customers and, based upon factors surrounding the credit risk, establishes an allowance, if required, for uncollectible
accounts and, as a consequence, believes that its accounts receivable credit risk exposure beyond such allowance is limited.
Certain items have been reclassified
in the accompanying consolidated Financial Statements and Notes for prior periods to be comparable with the classification for
the periods ended September 30, 2012. The reclassifications had no effect on previously reported net income.
Recent Accounting Pronouncements
In December 2011, the FASB issued guidance
on offsetting assets and liabilities and disclosure requirements in Accounting Standards Update No. 2011-11, Disclosures about
Offsetting Assets and Liabilities (Update 2011-11). Update 2011-11 requires that entities disclose both gross and net information
about instruments and transactions eligible for offsetting the statement of financial position as well as instruments and transactions
subject to an agreement similar to a master netting agreement. In addition, the standard requires disclosure of collateral received
and posted in connection with master netting agreements or similar arrangements. Update 2011-11 is effective for annual reporting
periods beginning on or after January 1, 2013, and interim periods with those annual periods. The implementation of the disclosure
requirement is not expected to have a material impact on the Companys consolidated results of operations, financial position
or cash flows.
On July 27, 2012, the FASB issued ASU2012-02,
Intangibles-Goodwill and Other (Topic 350) Testing Indefinite-Lived Intangible Assets for Impairment. The ASU provides
entities with an option to first assess qualitative factors to determine whether events or circumstances indicate that it is more
likely than not that the indefinite-lived intangible asset is impaired. If an entity concludes that it is more than 50% likely
that an indefinite-lived intangible asset is not impaired, no further analysis is required. However, if an entity concludes otherwise,
it would be required to determine the fair value of the indefinite-lived intangible assets to measure the amount of actual impairment,
if any, as currently required under US GAAP. The ASU is effective for annual and interim impairment test performed for fiscal years
beginning September 15, 2012. Early adoption is permitted. The adoption of this pronouncement will not have a material impact on
the Companys consolidated financial statements.
As of September 30, 2012, there is no
other recently issued accounting standards not yet adopted that would have a material effect on the Companys consolidated