| SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Basis of presentation The accompanying consolidated financial
statements are prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”). The consolidated financial statements
include the financial statements of SunCar and its subsidiaries. All intercompany transactions and balances among SunCar and its subsidiaries
have been eliminated upon consolidation. For consolidated subsidiaries where the Group’s ownership in the subsidiary is less than
100%, the equity interest not held by the Group is shown as non-controlling interests. (b) Use of estimates The preparation of the consolidated
financial statements in accordance with US GAAP requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities, related disclosures of contingent assets and liabilities at the balance sheet date, and the reported revenues
and expenses during the reported periods in the consolidated financial statements and accompanying notes. Significant accounting estimates
include, but not limited to, the allowance for doubtful accounts, useful lives and impairment of long-lived assets, and valuation allowances
of deferred tax assets. Changes in facts and circumstances may result in revised estimates. Actual results could differ from those estimates,
and as such, differences may be material to the consolidated financial statements. (c) Cash Cash consist of cash on hand and cash
in banks. The Group maintains cash with various financial institutions in China. The Group has not experienced any losses in bank accounts
and believes it is not exposed to any risks on its cash in bank accounts. (d) Restricted cash Restricted cash represented a guaranteed
deposit required by China Banking and Insurance Regulatory Commission (“CBIRC”) in order to protect insurance premium appropriation
by insurance agency which is restricted as to withdrawal for other than current operations. (e) Accounts receivable, net Accounts receivable, net are stated
at the original amount less allowances for doubtful accounts. Accounts receivable are recognized in the period when the Group has provided
services to its customers and when its right to consideration is unconditional. The Group reviews the accounts receivable on a periodic
basis and makes general and specific allowances when there is doubt as to the collectability of individual balances. The Group considers
many factors in assessing the collectability of its receivables, such as the age of the amounts due, the customer’s payment history,
credit-worthiness and other specific circumstances related to the accounts. An allowance for doubtful accounts is recorded in the period
in which a loss is determined to be probable. Accounts receivable balances are written off after all collection efforts have been exhausted. (f) Short-term investment The Group invested in certain trust
products and bank financial products, with various interest rates and are restricted as to withdrawal and use before maturity. The Group
classifies the trust and financial products as held-to-maturity securities. The original maturities of the short-term investments are
longer than three-months, but shorter than one year. The carrying amount of these short-term investments approximate their fair values
due to the short-term maturities of these investments. The Group reviews its short-term investments
for other-than-temporary impairment (“OTTI”) based on the specific identification method. The Group considers available quantitative
and qualitative evidences in evaluating the potential impairment of its short-term investments. If the carrying amount of an investment
exceeds the investment’s fair value, the Group considers, among other factors, general market conditions, expected future performance
of the investees, the duration and the extent to which the fair value of the investment is less than the carrying amount, and the Group’s
intent and ability to hold the investments. OTTI is recognized as a loss in the consolidation statements of operations. No impairment
charge was recognized for the years ended December 31, 2020, 2021 and 2022. (g) Software and equipment, net Software and equipment are
stated at cost less accumulated depreciation and impairment, if any, and depreciated on a straight-line basis over the estimated useful
lives of the assets. Cost represents the purchase price of the asset and other costs incurred to bring the asset into its intended use.
Estimated useful lives and residual value are as follows:
Category Estimated useful lives Residual
Vehicles 3-5 years 5%
Office equipment and furniture 3-5 years 5%
Electronic equipment 3 years 5%
Computer software 5, 10 years nil
Leasehold improvements Over the shorter of lease term or the estimated useful lives of the assets nil
Others 3-10 years 5% Computer software Acquisition costs associated with internal-use
software are capitalized and include external direct costs of services principally related to platform development, including support
systems, software coding, designing system interfaces, and installation and testing of the software. These costs are recorded as software and equipment and are generally amortized beginning when the asset is substantially ready for use. Costs incurred for enhancements
that are expected to result in additional features or functionalities are capitalized and amortized over the estimated useful life of
the enhancements. Costs incurred during the preliminary project stage, as well as maintenance and training costs, are expensed as incurred. Repair and maintenance costs are charged
to expenses as incurred, whereas the cost of renewals and betterment that extends the useful lives of software and equipment
are capitalized as additions to the related assets. Retirements, sales and disposals of assets are recorded by removing the costs, accumulated
depreciation and impairment with any resulting gain or loss recognized in the consolidated statements of operations and comprehensive
loss. (h) 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, which is the excess of carrying
amount over the fair value of the assets, which is determined through various valuation techniques
including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary. (i) Long-term investments Beginning on January 1, 2018, the
Group’s equity investments without readily determinable fair values, which do not qualify for the existing practical expedient in
ASC Topic 820, Fair Value Measurements and Disclosures (“ASC 820”), to estimate fair value using the net asset value per share
(or its equivalent) of the investment (“NAV practical expedient”), and over which the Group does not have the ability to exercise
significant influence through the investments in common stock or in substance common stock, are accounted for under the measurement alternative
upon the adoption of ASU 2016-01 (the “Measurement Alternative”). Under the Measurement Alternative, the carrying value is
measured at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for identical
or similar investments of the same issuer. All gains and losses on these investments, realized and unrealized, are recognized in the consolidated
statements of operations and comprehensive income/(loss). The Group makes assessment of whether an investment is impaired based on performance
and financial position of the investee as well as other evidence of market value at each reporting date. Such assessment includes, but
is not limited to, reviewing the investee’s cash position, recent financing, as well as the financial and business performance.
The Group recognizes an impairment loss equal to the difference between the carrying value and fair value in the consolidated statements
of operations and comprehensive income/(loss) if any. On November 20, 2019, Jiaxing Hanchao
Equity Investment Partnership (L.P.) (“Jiaxing Hanchao”) was incorporated. Pursuant to the partnership agreement, SUNCAR Online
invested $290, accounting for 5% of the total investment as a limited partner. The investment was accounted for under the cost method
as the Group had no significant influence over the investee and Jiaxing Hanchao had no readily determinable fair value. (j) Accounts payabl e Accounts payable is payable to suppliers
in the procurement of service to automotive after-sales service providers to customized services for end consumers of the enterprise clients,
and promotional service to channels. (k) Short-term loan Short-term loan represents the Group’s
borrowings from commercial banks for the Group’s working capital. Short-term loan includes borrowings with maturity terms shorter
than one year. (l) Related Party Parties are considered to be related
if one party has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party
in making financial and operating decisions. Parties are also considered to be related if they are subject to common control or significant
influence, such as a family member or relative, stockholder, or a related corporation. (m) Fair value measurement Accounting guidance defines fair value
as 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. Acc ounting
guidance establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of
unobservable inputs when measuring fair value. A financial instrument’s categorization within the fair value hierarchy is based
upon the lowest level of input that is significant to the fair value measurement. The three levels of inputs are:
● Level
1—Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
● Level
2—Include other inputs that are directly or indirectly observable in the marketplace.
● Level
3—Unobservable inputs which are supported by little or no market activity. Accounting
guidance also describes three main approaches to measuring the fair value of assets and liabilities: (1) market approach; (2) income
approach and (3) cost approach. The market approach uses prices and other relevant information generated from market transactions involving
identical or comparable assets or liabilities. The income approach uses valuation techniques to convert future amounts to a single present
value amount. The measurement is based on the value indicated by current market expectations about those fut Financial assets and liabilities of
the Group primarily consist of cash, accounts receivable, other receivables included in prepayments and other current assets, short-term
borrowings, accounts payable, other payables included in accrued expenses and other current liabilities. As of December 31, 2021 and 2022,
the carrying amounts of other financial instruments approximated to their fair values due to the short-term maturity of these instruments. The Group’s non-financial assets,
such as software and equipment, would be measured at fair value only if they were determined to be impaired. (n) Revenue recognition The Group’s revenues are mainly
generated from providing automotive after-sales service, insurance intermediation service, technology service and financial leasing service. The Group recognizes revenue pursuant
to ASC 606, Revenue from Contracts with Customers (“ASC 606”). In accordance with ASC 606, revenues from contracts with customers
are recognized when control of the promised goods or services is transferred to the Group’s customers, in an amount that reflects
the consideration the Group expects to be entitled to in exchange for those goods or services, reduced by Value Added Tax (“VAT”).
To achieve the core principle of this standard, we applied the following five steps:
1. Identification of the contract, or contracts, with the customer;
2. Identification of the performance obligations in the contract;
3. Determination of the transaction price;
4. Allocation of the transaction price to the performance obligations in the contract; and
5. Recognition of the revenue when, or as, a performance obligation is satisfied. Automotive after-sales service
The Group defines enterprise clients
as the Group’s customers and the Group sells automotive after-sales service coupons to enterprise clients, which each coupon represents
one specific automotive after-sales service. There are various service types including vehicle washing, waxing, maintenance, driving service
and road assistance, and the Group only provides one specific service among various service types for each specific service coupon. The
Group identifies each specific service coupon as a contract that establishes enforceable rights and obligations for each party. The Group
charges the service fee at a fixed price per service when the service is performed. For service coupons with limited duration, the Group
either charges the service fee at a fixed price per service when the service is performed or when the coupon expires, whether or not the
service has been performed. The Group considers each service coupon is a distinct service that is capable of providing a benefit to the
customer on its own according to ASC 606-10-25-14(a). Therefore, the Group identifies only one performance obligation under a contract,
which is to provide a specific service or to stand-ready to perform a specific service within a limited duration. The Group acts as a
principal as the Group controls the right to services before the services are provided to customers and the Group has the ability to direct
other parties to provide the services to customers on the Group’s behalf. Specifically, the Group has the ability to choose service
providers, is primarily responsible for the acceptability for the service meeting customer specifications, bears inventory risk after
transfer of control of services to customers, and has the discretion in establishing the price with customers and with service providers
and bears credit risk. The Group recognizes revenue in the gross amount of consideration at a point of time when the service is provided,
or when the service coupon expires. The Group does not provide refunds to customers when a coupon is expired but not used. Insurance intermediation service The Group provides insurance intermediation
service distributing primarily vehicle insurance on behalf of the insurance companies and charges insurance companies for intermediation
service commissions. Insurance intermediation services are considered to be rendered and completed, and revenue is recognized, at the
time an insurance policy becomes effective, that is, when the signed insurance policy is in place and the premium is collected from the
insured. The Group has satisfied the performance obligation to recognize revenue when the premiums are collected by the respective insurance
companies and not before, because collectability is not ensured until receipt of the premium. Accordingly, the Group does not accrue any
insurance intermediation service commission and fees prior to the receipt of the related premiums. No allowance for cancellation has been
provided for intermediation services as cancellation of policies rarely occurs. Technology service The Group provides technology service
including technical software and consulting related to automobile services and insurance, such as customer relationship management (CRM),
order management, finance management and visual analysis systems. The Group charges service fee based on fixed price per month for service
provided, and recognizes revenue over time during the service period. The Group’s revenue are disaggregated
by timing of revenue recognition as follows:
For the years ended December 31,
2020 2021 2022
Revenue recognized at a point of time $ 238,399 $ 244,646 $ 266,934
Revenue recognized over time 526 4,589 15,479
Revenues $ 238,925 $ 249,235 $ 282,413 Contract Balances Timing of revenue recognition may
differ from the timing of invoicing to customers. Accounts receivable represent revenue recognized for the amounts invoiced and/or prior
to invoicing when the Group has satisfied its performance obligation and has an unconditional right to the payment. Contract assets represent
the Group’s right to consideration in exchange for goods or services that the Group has transferred to a customer. The Group has
no contract assets as of December 31, 2021 and 2022. The contract liabilities consist of
deferred revenue, which represents the billings or cash received for services in advance of revenue recognition and is recognized as revenue
the performance obligation is satisfied. The Group’s deferred revenue amounted to $1,901 and $3,569 as of December 31, 2021 and
2022, respectively. During the years ended December 31, 2020, 2021 and 2022, the Group recognized $3,328, $1,053 and $1,901 that was included
in deferred revenue balance at January 1, 2020, 2021 and 2022, respectively. (o) Integrated service cost Integrated service cost primarily
includes the service fee paid to suppliers undertaking and performing the automobile service to the users of customer, and outsourcing
service fee paid to the third party for technological development. The service fee is determined based on the actual services rendered
and recognized in the period incurred. (p) Promotional service expenses Promotional service expenses represent (i) promotional
service fee to explore extensive networks of automotive after-sales service and insurance intermediation; and (ii) service fees to promotion
channels, including but not limited to offline after-sales networks, online platforms, and emerging new energy vehicle original equipment
manufacturers (“NEV OEMs”) and service providers. These channels have their own users, who are potential business customers.
Promotional service expenses are recognized in the period incurred. (q) Research and development expense Research and development expenses
consist primarily of payroll and employee benefit for research and development employees, rental expense, utilities and other related
expenses related to design, develop and maintain technology service platform to support the Group’s internal and external business.
Research and development expenses are expensed as incurred. Software development costs are recorded in “Research and development”
as incurred as the costs qualifying for capitalization have been insignificant. (r) Government grants Government grant is recognized when
there is reasonable assurance that the Group will comply with the conditions attach to it and the grant will be received. Government grant
for the purpose of giving immediate financial support to the Group with no future related costs or obligation is recognized in “other
income” in the Group’s consolidated statements of comprehensive loss when the grant is received. For the years ended December 31, 2020,
2021 and 2022, the Group received government grants from the local PRC government authorities aggregately of $1,566, $1,897, $3,753, respectively,
among which the government grants related to achievement of annual income tax filling target and value-added tax deduction were $1,322,
$1,729, $3,426, respectively, and the awards to high-tech enterprises were $244, $168, $327, respectively. (s) Share-based compensation The Group grants restricted share
units (“RSUs”) of SunCar’s subsidiary, SUNCAR Online, to eligible employees and management. The Group accounts for share-based
awards issued to employees and non-employees in accordance with ASC Topic 718 Compensation – Stock Compensation. The Group recognizes
compensation cost for an equity classified award using the straight-line method over the applicable vesting period based on the fair value
of restricted shares granted on the date of the grant. Awards of subsidiary equity is recognized in “non-controlling interest”
in the consolidated entity. (t) Employee benefits SunCar’s subsidiaries in PRC
participate in a government mandated, multiemployer, defined contribution plan, pursuant to which certain retirement, medical, housing
and other welfare benefits are provided to employees. PRC labor laws require the entities incorporated in the PRC to pay to the local
labor bureau a monthly contribution calculated at a stated contribution rate on the monthly basic compensation of qualified employees.
The Group has no further commitments beyond its monthly contribution. (u) Leases The Group leases facilities in the
PRC under non-cancellable operating leases expiring on different dates. On January 1, 2022, the Company adopted ASU No. 2016-02
(Topic 842) “Leases” using the optional transition method. Results and disclosure requirements for reporting periods
beginning after January 1, 2022 are presented under Topic 842, while prior period amounts have not been adjusted and continue to be
reported in accordance with our historical accounting under Topic 840. Under Topic 842, lessees are required to recognize assets and
liabilities on the balance sheet for most leases. At inception of a contract, the Group assesses whether a contract is, or contains,
a lease. A contract is or contains a lease if it conveys the right to control the use of an identified asset for a period of time in
exchange of a consideration. To assess whether a contract is or contains a lease, the Group assesses whether the contract involves
the use of an identified asset, whether it has the right to obtain substantially all the economic benefits from the use of the asset
and whether it has the right to control the use of the asset. The main impact of the adoption of
the standard is that assets and liabilities amounting to $972 and $939, respectively, were recognized beginning January 1, 2022 for leased
office space with terms of more than 12 months. The Company accounts for short-term leases with terms less than 12 months in accordance
with ASC 842-20-25-2 to recognize the lease payments in profit or loss on a straight-line basis over the lease term and variable lease
payments in the period in which the obligation for those payments is incurred. The adoption of the standard did not have a significant
impact on the Group’s consolidated financial statements. Right-of-use (“ROU”) assets
represent the Group’s rights to use underlying assets for the lease term and lease liabilities represent the Group’s obligation
to make lease payments arising from the lease. Operating lease ROU assets and lease liabilities are recognized at commencement date. Lease
expense for lease payments is recognized on a straight-line basis over the lease term. Operating lease ROU assets The right-of-use assets are initially
measured at cost, which comprise the initial amounts of the lease liabilities adjusted for any lease payments made at or before the commencement
date, plus any initial direct costs incurred and less any lease incentive received. Operating lease liabilities Lease liabilities are initially measured
at the present value of the outstanding lease payments at the commencement date, discounted using the discount rate for the leases. As
most of the Group’s leases do not provide an implicit rate, the Group uses its incremental borrowing rate based on the information
available at lease commencement date in determining the present value of lease payments. The Group’s lease terms may include options
to extend or terminate the lease when it is reasonably certain that the Group will exercise that option. Lease liabilities are measured at
amortized cost using the effective interest rate method. They are re-measured when there is a change in future lease payments, if there
is a change in the estimate of the amount expected to be payable under a residual value guarantee, or if there is any change in the Group
assessment of option purchases, contract extensions or termination options. (v) Income taxes The Group accounts for income taxes
under ASC 740. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between
the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets 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 including the enactment date. 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 Group considers positive and negative evidence when determining whether a portion or all of its deferred tax
assets will more likely than not be realized. This assessment considers, among other matters, the nature, frequency and severity of current
and cumulative losses, forecasts of future profitability, the duration of statutory carry-forward periods, its experience with tax attributes
expiring unused, and its tax planning strategies. The ultimate realization of deferred tax assets is dependent upon its ability to generate
sufficient future taxable income within the carry-forward periods provided for in the tax law and during the periods in which the temporary
differences become deductible. When assessing the realization of deferred tax assets, the Group has considered possible sources of taxable
income including (i) future reversals of existing taxable temporary differences, (ii) future taxable income exclusive of reversing temporary
differences and carry-forwards, (iii) future taxable income arising from implementing tax planning strategies, and (iv) specific known
trend of profits expected to be reflected within the industry. The provisions of ASC 740-10-25, “Accounting
for Uncertainty in Income Taxes,” prescribe a more-likely-than-not threshold for consolidated financial statement recognition and
measurement of a tax position taken (or expected to be taken) in a tax return. This interpretation also provides guidance on the recognition
of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest
and penalties associated with tax positions, and related disclosures. The Group’s operating subsidiaries in PRC are subject to examination
by the relevant tax authorities. According to the PRC Tax Administration and Collection Law, the statute of limitations is three years
if the underpayment of taxes is due to computational errors made by the taxpayer or the withholding agent. The statute of limitations
is extended to five years under special circumstances, where the underpayment of taxes is more than RMB 100,000($14,358). In the case
of transfer pricing issues, the statute of limitation is ten years. There is no statute of limitation in the case of tax evasion. Penalties
and interest incurred related to underpayment of income tax are classified as income tax expense in the period incurred. The Group did not accrue any liability,
interest or penalties related to uncertain tax positions in its provision for income taxes line of its consolidated statements of operations
for the years ended December 31, 2020, 2021 and 2022, respectively. The Group does not expect that its assessment regarding unrecognized
tax positions will materially change over the next 12 months. (w) Value added tax (“VAT”) The Group is subject to VAT and related
surcharges on revenue generated from providing automotive after-sales service, insurance intermediation service, and financial leasing
service. The Group records revenue net of VAT. This VAT may be offset by qualified input VAT paid by the Group to suppliers. Net VAT balance
between input VAT and output VAT is recorded in the line item of other current assets on the consolidated balance sheets. (x) Foreign currency transactions and translations The Group’s principal country
of operations is the PRC. The financial position and results of its operations are determined using RMB, the local currency, as the functional
currency. The Group’s financial statements are reported using U.S. Dollars (“$”). The results of operations and the
consolidated statements of cash flows denominated in foreign currency are translated at the average rate of exchange during the reporting
period. Assets and liabilities denominated in foreign currencies at the balance sheet date are translated at the applicable rates of exchange
in effect at that date. The equity denominated in the functional currency is translated at the historical rate of exchange at the time
of capital contribution. Because cash flows are translated based on the average translation rate, amounts related to assets and liabilities
reported on the consolidated statements of cash flows will not necessarily agree with changes in the corresponding balances on the consolidated
balance sheets. Translation adjustments arising from the use of different exchange rates from period to period are included as a separate
component of accumulated other comprehensive income (loss) included in consolidated statements of changes in equity. Gains and losses
from foreign currency transactions are included in the results of operations. The value of RMB against $ and other
currencies may fluctuate and is affected by, among other things, changes in the PRC’s political and economic conditions. Any significant
revaluation of RMB may materially affect the Group’s financial condition in terms of $ reporting. The following table outlines the
currency exchange rates that were used in creating the consolidated financial statements:
As of December 31,
2021 2022
Balance sheet items, except for equity accounts 6.3726 6.8972
For the Years Ended December 31,
2020 2021 2022
Items in the statements of operations and
comprehensive loss, and statements of cash flows 6.9042 6.4508 6.7290 No representation is made that the
RMB amounts could have been, or could be, converted into U.S. dollars at the rates used in translation. (y) Non-controlling interest A non-controlling interest in a subsidiary
of SunCar represents the portion of the equity (net assets) in the subsidiary not directly or indirectly attributable to SunCar. Non-controlling
interests are presented as a separate component of equity on the consolidated balance sheets and net income/(loss) and other comprehensive
income/(loss) attributable to non-controlling shareholders are presented as a separate component on the consolidated statements of operations
and comprehensive loss. (z) Earnings/(Loss) per share Basic earnings (loss) per share is
computed by dividing net income (loss) attributable to ordinary shareholders, taking into consideration the deemed dividends to preferred
shareholders (if any), by the weighted average number of ordinary shares outstanding during the year using the two-class method. Under
the two-class method, net income is allocated between ordinary shares and other participating securities based on their participating
rights. Shares issuable for little to no consideration upon the satisfaction of certain conditions are considered as outstanding shares
and included in the computation of basic earnings (loss) per share as of the date that all necessary conditions have been satisfied. Net
losses are not allocated to other participating securities if based on their contractual terms they are not obligated to share the losses. The Group’s convertible preferred
shares are participating securities, as they have contractual non-forfeitable right to participate |
