| SIGNIFICANT ACCOUNTING POLICIES | 2. SIGNIFICANT ACCOUNTING
POLICIES
Basis of presentation and use of estimates
The accompanying consolidated financial statements have been
prepared in accordance with accounting principles generally
accepted in the United States of America (“U.S.
GAAP”).
The preparation of consolidated financial statements in conformity
with U.S. GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities, disclosures of contingent assets and liabilities at
the balance sheet dates and the reported amounts of revenues and
expenses during the reporting periods. Significant estimates and
assumptions reflected in the Group’s financial statements
include, but are not limited to, revenue recognition, consolidation
of VIE, income tax, allowance for doubtful accounts, impairment of
goodwill and long-term assets and share-based compensation
expenses. Actual results could materially differ from those
estimates.
Principles of consolidation
The consolidated financial statements include the financial
statements of the Company, its subsidiaries, its VIE and
VIE’s subsidiaries. All transactions and balances among the
Company, its subsidiaries, its VIE and VIE’s subsidiaries
have been eliminated upon consolidation.
Foreign currency translation and transactions
The Company, DL Education, CDEL Hong Kong, Pencil, China Healthcare
Investment and China Healthcare Education’s functional
currencies are United States dollars (“US$”). The
Company’s PRC subsidiaries, VIE and VIE’s subsidiaries
determine their functional currencies to be the Chinese Renminbi
(“RMB”). The Company uses the US$ as its reporting
currency and uses the monthly average exchange rate for the year
and the exchange rate at the balance sheet date to translate the
operating results and financial position of its PRC subsidiaries
and its variable interest entities, respectively. Translation
differences are recorded in accumulated other comprehensive income,
a component of consolidated statements of changes in equity.
Transactions denominated in foreign currencies are remeasured into
the functional currency at the exchange rates prevailing on the
transaction dates. Foreign currency denominated financial assets
and liabilities are remeasured at the balance sheet date exchange
rate. Exchange gains and losses are included in the consolidated
statements of comprehensive income.
Cash and cash equivalents
Cash and cash equivalents consist of cash on hand and highly liquid
investments which are unrestricted as to withdrawal or use, and
which have an original maturity of three months or less when
purchased.
Term deposits
Term deposits consist of deposits placed with financial
institutions with an original maturity of greater than three months
and less than one year.
Restricted cash
Restricted cash represents deposits not readily available to the
Company. Restricted cash as of September 30, 2015 mainly
represented cash pledged as security of bank borrowing.
Inventories
Inventories, consisting of paper and professional examination
reference books, are stated at the lower of cost or market value.
Cost is determined using the first in, first out method.
Fair value
Fair value is the price that would be received from selling an
asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. When
determining the fair value measurements for assets and liabilities
required or permitted to be recorded at fair value, the Group
considers the principal or most advantageous market in which it
would transact and it considers assumptions that market
participants would use when pricing the asset or liability.
Authoritative literature provides a fair value hierarchy which
prioritizes the inputs to valuation techniques used to measure fair
value into three broad levels. The level in the hierarchy within
which the fair value measurement in its entirety falls is based
upon the lowest level of input that is significant to the fair
value measurement as follows:
Level 1
Level 1 applies to assets or liabilities for which there are quoted
prices in active markets for identical assets or liabilities.
Level 2
Level 2 applies to assets or liabilities for which there are inputs
other than quoted prices included within Level 1 that are
observable for the asset or liability such as quoted prices for
similar assets or liabilities in active markets; quoted prices for
identical assets or liabilities in markets with insufficient volume
or infrequent transactions (less active markets); or model-derived
valuations in which significant inputs are observable or can be
derived principally from, or corroborated by, observable market
data.
Level 3
Level 3 applies to assets or liabilities for which there are
unobservable inputs to the valuation methodology that are
significant to the measurement of the fair value of the assets or
liabilities.
The Group’s financial instruments consist of cash
equivalents, term deposits, restricted cash, accounts receivable,
other current assets, and other current liabilities. The carrying
amounts of these instruments approximate their fair values due to
their short-term maturity.
The Group reviews goodwill for impairment annually or more
frequently if events or changes in circumstances indicate the
possibility of impairment. Other intangible assets, and other
long-lived assets are measured at fair value on a nonrecurring
basis when there is an indicator of impairment, and they are
recorded at fair value only when impairment is recognized.
Allowance for doubtful accounts
An allowance for doubtful accounts is recorded in the period in
which a loss is determined to be probable based on an assessment of
specific evidence indicating doubtful collection, historical
experience, account balance aging and prevailing economic
conditions. Allowance is reversed when the underlying balance of
doubtful accounts are subsequently collected. Accounts receivable
balances are written off after all collection efforts have been
exhausted.
Property, plant and equipment, net
Property, plant and equipment are stated at cost and are
depreciated using the straight-line method over the estimated
useful lives of the assets, as follows:
Category Estimated useful life Estimated residual value
Buildings 35 years 5-10 %
Electronic and office equipment 5 years 5-10 %
Motor vehicles 5 years 5-10 %
Leasehold improvement and building improvement
Shorter of lease term or 5 years
—
Repair and maintenance costs are charged to expense as incurred,
whereas the cost of renewals and betterment that extends the useful
lives of property, plant and equipment are capitalized as additions
to the related assets. Retirements, sales and disposals of assets
are recorded by removing the cost and accumulated depreciation from
the asset and accumulated depreciation accounts with any resulting
gain or loss reflected in the consolidated statements of
operations.
Goodwill
Goodwill is not amortized, but tested for impairment annually or
more frequently if event and circumstances indicate that it might
be impaired.
The excess of the purchase price over the fair value of net assets
acquired is recorded on the consolidated balance sheet as goodwill.
The guidance permits the Company to first assess qualitative
factors to determine whether it is “more likely than
not” that the fair value of a reporting unit is less than its
carrying amount as a basis for determining whether it is necessary
to perform the two-step goodwill impairment test. Absent from any
impairment indicators, the Group performs its annual impairment
test on the last day of each fiscal year.
For the years ended September 30, 2014 and 2015, the Group
performed its annual impairment test using a two-step approach. The
first step compares the fair value of a reporting unit to its
carrying amount, including goodwill. If the fair value of the
reporting unit is greater than its carrying amount, goodwill is not
considered impaired and the second step is not required. If the
fair value of the reporting unit is less than its carrying amount,
the second step of the impairment test measures the amount of the
impairment loss, if any, by comparing the implied fair value of
goodwill to its carrying amount. If the carrying amount of goodwill
exceeds its implied fair value, an impairment loss is recognized
equal to that excess. The implied fair value of goodwill is
calculated in the same manner that goodwill is calculated in a
business combination, whereby the fair value of the reporting unit
is allocated to all of the assets and liabilities of that unit,
with the excess purchase price over the amounts assigned to assets
and liabilities representing the implied fair value of
goodwill.
Other intangible assets, net
Other intangible assets are amortized using the straight-line basis
over the estimated useful lives as follows:
Category Estimated useful life
Computer software 3~5 years
Trademarks and domain names 10~11 years
Courseware 1~5 years
Website 5 years
Business contracts 3~5 years
Copyrights 5 years
Platform 3.5 years
Impairment of long-lived assets
The Group reviews its long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying
amount of an asset may no longer be recoverable. When these events
occur, the Group measures impairment by comparing the carrying
value of the long-lived assets to the estimated undiscounted future
cash flows expected to result from the use of the assets and their
eventual disposition. If the sum of the expected undiscounted cash
flow is less than the carrying amount of the assets, the Group
would recognize an impairment loss based on the fair value of the
assets.
If the intent is to hold the asset for sale and certain other
criteria are met (i.e., the asset can be disposed of currently,
appropriate levels of authority have approved sale, and there is an
actively pursuing buyer), the impairment test is a comparison of
the asset’s carrying value to its fair value less costs to
sell. To the extent that the carrying value is greater than the
asset’s fair value less costs to sell, an impairment loss is
recognized for the difference. Assets held for sale are separately
presented on the balance sheet and are no longer depreciated.
Revenue recognition
Revenues are recognized when the following four criteria are met:
(i) persuasive evidence of an arrangement exists,
(ii) the service has been rendered, (iii) the fees are
fixed or determinable, and (iv) collectability is reasonably
assured.
Online education services
The online education service provided by the Group to its customers
is an integrated service, including audio-video course content,
mock examinations and online chat rooms during the subscription
period. Audio-video course content, mock examinations and online
chat rooms are not practical to be sold on standalone basis and
have never been sold separately.
The Group earns revenues by providing online education services to
customers pursuant to two types of revenue models - non-refundable
course model and refundable course model.
The on-line courses using the non-refundable course model are
mainly comprised of regular classes and premium classes. The
revenues for the regular classes are recognized on a straight line
basis over the subscription period from the month in which the
customers enroll in the courses to the month in which subscribed
courses terminate. For premium classes, if participants fail to
pass the course examination and certain pre-agreed conditions are
met, the participants can be offered by certain course fee discount
to retake the same premium course. As such, the discount is
proportionately applied as a deduction to revenue recognized for
each of the premium classes that participants take.
For on-line courses using the refundable course model (i.e. elite
classes), if the participants complete the courses and fail the
professional exams and their scores are within a range provided for
in the agreement, they are entitled to either a full refund or the
right to retake the course. The participants must notify the Group
within a pre-agreed period after the professional examinations
scores are released in order to be eligible for the refund or the
right to retake the course. The proceeds from the refundable course
model are initially recorded as “refundable fees”.
Revenues are recognized upon the expiration of the
participants’ right to receive a refund or ratably over the
retake course period when the participants decide to retake the
course before the expiration of such right.
Most of the course participants pay course fees via online payment
systems provided by third parties including internet debit or
credit card payment systems and other third-party payment systems.
Some participants may choose to enroll for on-line courses through
the use of prepaid study cards which are purchased from
distributors. The Group sells to its regional distributors prepaid
study cards at a discount to the face value of the cards. Revenues
are recorded using the after-discount-selling-price of the cards
and recognized over the period the on-line course is available to
the customers, which generally is from the enrollment date to the
completion of the relevant professional examination date. Sales of
prepaid study cards that are not activated for course enrollment
are recognized as revenues upon expiration of the cards. Prepaid
study cards that have been activated but have not been used to
enroll on-line courses do not have an expiry date and will be
deferred until they are used to enroll in on-line courses.
Participants who enroll with the Company directly are eligible to a
refund within a 7-day trial period. Revenues from direct enrollment
with the Company are recognized over the period from the lapse of
the 7-day trial period to the completion of the relevant
professional examination date.
The Group may, at times, offer volume discounts to its regional
distributors for purchases over a specified amount of prepaid cards
during a specified period of time, generally, one year. The amount
of future rebates relating to these volume discounts cannot be
reasonably estimated and accordingly a deferred revenue balance is
recognized for the maximum potential amount of volume discount. If
the number of purchases specified in the volume discount provisions
is not reached upon the expiry of the volume discount period, the
deferred revenue relating to such volume discount for each study
card is recognized as revenue over the remaining period the on-line
course is available to the user who enrolls using the study card or
recognized as revenue immediately if the related on-line course has
been completed or the study card has expired.
The Group provides student enrollment services and online platform
to government agencies which use the Group’s online platform
to conduct continuing education services. The Group earns service
fees as a percentage of total tuition fees based on the agreements
entered into with the government agencies. Service fees are
initially recorded as deferred revenue and are recognized as
revenue when course participants complete the stipulated study
hours and take the examinations, or on a straight line basis over
the subscription period based on the terms of the agreements.
The Group also operates an Online Open Learning Platform, a
proprietary education platform that allows other parties to share
their educational content or deliver live courses online. After
passing the Group’s quality control reviews, experts and
scholars of various fields can either record their own lectures and
post them on the Open Learning Platform website, or deliver
real-time audio-video courses. The group offers coaching services
to these lecturers and deploys a user evaluation system to ensure
that these courses meet its quality and effectiveness standards.
The Group pays the experts and scholars certain percentage of the
service fee they received from the end users. Revenues from Open
Learning Platform are recognized on gross basis, as the Group is
the primary obligor in the arrangement and bears the risks and
rewards, including the quality control and the services
delivered.
For the years ended September 30, 2013, 2014 and 2015, the
Group recognized revenues before business tax and related
surcharges in connection with expired study cards amounting to
US$164, US$114, and US$101, respectively.
The on-line courses service is provided by Beijing Champion and its
subsidiaries which are subject to approximately 3% business tax and
related surcharges. The Group records revenues net of these taxes
in the consolidated statements of operations. Such business tax and
related surcharges for the years ended September 30, 2013,
2014 and 2015 were US$1,986, US$2,699 and US$2,996
respectively.
Books and reference materials
The Group sells books and reference materials to distributors and
end users. Revenues relating to such sales are deferred until cash
is collected. Inventory costs of products delivered to distributors
for which revenues have been deferred are presented as
“deferred costs” on the consolidated balance
sheets.
The Group also sells books and reference materials together with
study cards which allow the customers to take a certain number of
on-line courses for no additional charge. These sales are
considered arrangements with two deliverables, consisting of the
delivery of books and reference material and the on-line courses
service. Because neither vendor-specific objective evidence nor
third-party evidence of fair value of the deliverables exist, the
Group allocates revenue to each deliverables based on their
relative selling price.
Other revenues
Other revenues include sales of offline professional training,
courseware production services, platform production services, and
others.
Revenues from offline professional training are recognized when the
training courses are provided. For offline training sponsored by
government authorities, the tuition fees of the training
participants are subsidized by the government. Qualified
enrollments and the fees to be earned cannot be determined until
the confirmation from government authorities regarding the number
of students and fees is received by the Company, which is after the
completion of services. Therefore, revenues from such services are
recognized upon cash receipt or the receipt of confirmations from
government authorities, whichever is earlier, when all the other
revenue recognition criteria have been met.
Revenues from sales of courseware, which are designed and developed
pursuant to the requests from customers, are recognized when the
courseware or platforms are accepted by the customers. The Company
has no significant remaining obligation with respect to the
courseware or platforms upon the acceptance of the customers.
From time to time, the Group enters into arrangement to provide the
development and maintenance of online platforms to its customers.
After the development of online platforms, the Group provides
support and maintenance services. The development of online
platform and the support and maintenance services have never been
sold separately and they do not have standalone value to the
customers. Accordingly, revenues from such arrangement is accounted
as a single unit of accounting and recognized ratably over the
support and maintenance services period.
Revenues from other services, including magazine content
production, advertising and consulting services, are recognized
over the period when such services are provided.
Value added taxes
On January 1, 2012, the PRC Ministry of Finance and the State
Administration of Taxation officially launched a pilot value-added
tax (“VAT”) reform program (“Pilot
Program”), applicable to businesses in selected industries.
Businesses in the Pilot Program would pay VAT instead of business
tax. The Pilot Program initially applied only to transportation
industry and “modern service industries” (“Pilot
Industries”) in Shanghai and subsequently was expanded to ten
other provinces and municipalities between August and December
2012.
As a result, since September 1, 2012, technical and consulting
service, software licensing and course production services provided
by Champion Technology and Champion Education Technology; and since
July 1, 2014, course production services provided by Champion
Wangge were no longer subject to business tax but VAT instead.
Champion Technology is a VAT general taxpayer. Champion Education
Technology was a VAT small-scale taxpayer but was treated as a
general taxpayer since February 1, 2014. Champion Wangge was a
VAT small-scale taxpayer but was treated as a general taxpayer
since January 1, 2015. The applicable VAT rates are 6% and 3%
for the entities that are general taxpayer and small-scale
taxpayer, respectively.
Entities that are VAT general taxpayers are allowed to offset
qualified input VAT paid to suppliers against their output VAT
liabilities. Net VAT balance between input VAT and output VAT is
recorded in the line item of accrued expenses and other current
liabilities on the consolidated balance sheets.
Pursuant to a circular jointly released by Ministry of Finance and
State Administration of Taxation on December 25, 2013, the
Group is subject to a VAT exemption for the proceeds received from
customers for sales related to books and reference materials till
December 31, 2017. As a result, the Group registered a tax
exemption application at state tax bureau in February 2014 and
started to enjoy such tax exemption for the relevant sales since
March 2014. Prior to the filling of tax exemption application in
February 2014, the Group was subject to VAT generally at a rate of
13% on the proceeds received for the sales of books and reference
materials.
Cost of sales
Cost of online education services primarily includes the production
costs of study cards, server and bandwidth leasing fees, lecturer
fees, staff costs involved in the operation of online education
services including network operation and maintenance, course
production and tutor services and other direct costs of providing
these services. These costs are expensed when incurred.
The cost of books and reference materials, including direct
materials used for production of books, authorship fee and printing
cost, are initially deferred and recorded as “deferred
cost”. The deferred costs are recognized as cost of sales
when the related revenue is recognized upon cash receipt.
Advertising expenditure
Advertising expenditure is expensed when incurred and are included
in “selling expenses” in the consolidated statements of
operations. Advertising expenses were US$3,167, US$6,464 and
US$10,377, for the years ended September 30, 2013, 2014 and
2015, respectively.
Shipping and handling costs
Shipping and handling costs of books and reference materials are
classified as a component of “selling expenses” in the
consolidated statements of operations. Shipping and handling costs
classified as selling expenses were US$489, US$703 and US$718, for
the years ended September 30, 2013, 2014 and 2015,
respectively.
Income taxes
Current income taxes are provided for in accordance with the laws
of the relevant tax authorities. Deferred income taxes are
recognized when temporary differences exist between the tax bases
of assets and liabilities and their reported amounts in the
financial statements. Net operating loss carry forwards and credits
are applied using enacted statutory tax rates applicable to future
years. Deferred tax assets are reduced by a valuation allowance
when, in the opinion of management, it is more-likely-than-not that
a portion of or all of the deferred tax assets will not be
realized. The components of the deferred tax assets and liabilities
are individually classified as current and non-current based on
their characteristics. The impact of an uncertain income tax
position is recognized at the largest amount that is
more-likely-than-not to be sustained upon audit by the relevant tax
authority. An uncertain income tax position will not be recognized
if it has less than a 50% likelihood of being sustained. Interest
and penalties on income taxes will be classified as a component of
the provisions for income taxes.
Share-based compensation
Share-based compensation with employees is measured based on the
grant-date fair value of the equity instrument issued and
recognized as compensation expense over the requisite service
period, with a corresponding addition to paid-in capital. The Group
recognizes compensation expense over the vesting term on a
straight-line basis with the amount of compensation expense
recognized at any date not less than the portion of the grant-date
value of the option vested at that date.
Share-based compensation with non-employee is measured based on the
fair value of options at the earlier of the performance commitment
date or the date at which the non-employee’s performance is
complete (hereafter referred to as the measurement date). The Group
recognizes compensation expense using the graded vesting
attribution method.
Share-based compensation awards which require the issuance of a
variable number of shares to settle a fixed monetary amount are
accounted for as liabilities.
Net income per share
Basic net income per share is computed by dividing income
attributable to holders of ordinary shares by the weighted average
number of ordinary shares outstanding during the period. Nonvested
restricted shares are also participating securities as they enjoy
identical dividend rights as ordinary shares. Accordingly, the
Group uses the two-class method whereby undistributed net income is
allocated on a pro rata basis to each participating share to the
extent that each class may share in income for the period. Diluted
net income per share reflects the potential dilution that could
occur if securities or other contracts to issue ordinary shares
were exercised or converted into ordinary shares. The dilutive
effect of outstanding share-based awards is reflected in the
diluted net income per share by application of the treasury stock
method.
Comprehensive income
Comprehensive income includes net income and foreign currency
translation adjustments and is reported in the consolidated
statements of comprehensive income.
Significant risks and uncertainties
Foreign currency risk
RMB is not a freely convertible currency. The State Administration
for Foreign Exchange, under the authority of the People’s
Bank of China, controls the conversion of RMB into foreign
currencies. The value of RMB is subject to changes in central
government policies and to international economic and political
developments affecting supply and demand in the China Foreign
Exchange Trading System market. The cash and cash equivalents of
the Group included aggregate amounts of US$110,342 and US$105,865,
which were denominated in RMB, at September 30, 2014 and 2015,
respectively, representing 93.5% and 89.8% of the cash and cash
equivalents at September 30, 2014 and 2015, respectively.
Concentration of credit risk
Financial instrument that potentially expose the Group to
significant concentration of credit risk primarily consist of cash
and cash equivalents, term deposits, restricted cash, accounts
receivable and prepayment and other current assets. As of
September 30, 2015, substantially all of the Group’s
cash and cash equivalents, term deposits and restricted cash were
deposited in financial institutions located in the PRC and Hong
Kong. Accounts receivable are typically unsecured and are derived
from revenue earned from customers in the PRC. The risk with
respect to accounts receivable is mitigated by credit evaluations
the Group performs on its customers and its ongoing monitoring
process of outstanding balances.
There are no revenues from customers which individually represent
greater than 10% of the total net revenues for any year of the
three years period ended September 30, 2015.
Primarily due to the long payment cycles of government agencies,
the Group had one customer that accounted for 21.7% and 13.1% of
the Group’s carrying amount of accounts receivable as of
September 30, 2014 and September 30, 2015
respectively.
Recently issued accounting pronouncements not yet
adopted
In May 2014, the FASB issued, ASU 2014-09, “Revenue from
Contracts with Customers (Topic 606)”. The guidance
substantially converges final standards on revenue recognition
between the FASB and the International Accounting Standards Board
providing a framework on addressing revenue recognition issues and,
upon its effective date, replaces almost all exiting revenue
recognition guidance, including industry-specific guidance, in
current U.S. generally accepted accounting principles.
The core principle of the guidance is that an entity should
recognize revenue to depict the transfer of promised goods or
services to customers in an amount that reflects the consideration
to which the entity expects to be entitled in exchange for those
goods or services. To achieve that core principle, an entity should
apply the following steps:
• Step 1: Identify the contract(s) with
a customer.
• Step 2: Identify the performance
obligations in the contract.
• Step 3: Determine the transaction
price.
• Step 4: Allocate the transaction
price to the performance obligations in the contract.
• Step 5: Recognize revenue when (or
as) the entity satisfies a performance obligation.
The amendments in this ASU are effective for annual reporting
periods beginning after December 15, 2017, including interim
periods within that reporting period. Earlier application is
permitted only as of annual reporting periods beginning after
December 15, 2016, including interim reporting periods within
that reporting period. The Group is in the process of evaluating
the impact of adoption of this guidance on its consolidated
financial statements.
In February 2015, the FASB issued ASU 2015-02, “Consolidation
(Topic 810) — Amendments to the Consolidation
Analysis”. The amendments in Topic 810 respond to
stakeholders’ concerns about the current accounting for
consolidation of variable interest entities, by changing aspects of
the analysis that a reporting entity must perform to determine
whether it should consolidate such entities.
Under the amendments, all reporting entities are within the scope
of Subtopic 810-10, Consolidation – Overall, including
limited partnerships and similar legal entities, unless a scope
exception applies. The amendments are intended to be an improvement
to current U.S. GAAP, as they simplify the codification of FASB
Statement No. 167, Amendments to FASB Interpretation
No. 46(R), with changes including reducing the number of
consolidation models through the elimination of the indefinite
deferral of Statement 167 and placing more emphasis on risk of loss
when determining a controlling financial interest. The amendments
are effective for publicly-traded companies for fiscal years
beginning after December 15, 2015, and for interim periods
within those fiscal years. Earlier adoption is permitted. The
implementation of this update is not expected to have any material
impact on the Group’s consolidated financial statements. |
