2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

6 Months Ended

Feb. 28, 2015

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF ACCOUNTING AND PRESENTATION

The accompanying consolidated financial statements have been prepared on the accrual basis of accounting. The unaudited consolidated financial statements for the three and six months ended February 28, 2015 and 2014 include China Tianfeihong Wine, Inc., Fanwei Hengchang, Changshi Tongrong, Changshitong Consulting and its VIE, Fujian Tianfeihong. All significant intercompany accounts and transactions have been eliminated in consolidation.

The unaudited interim consolidated financial statements of the Company as of February 28, 2015 and for the three and six months periods ended February 28, 2015 and 2014 have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules and regulations of the Securities and Exchange Commission (the “SEC”) which apply to interim financial statements. Accordingly, they do not include all of the information and footnotes normally required by accounting principles generally accepted in the United States of America for annual financial statements. In the opinion of management, such information contains all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results for the periods presented. The interim consolidated financial information should be read in conjunction with the consolidated financial statements and the notes thereto, included in the Company’s Form 10-K filed with the SEC. The results of operations for the three and six months ended February 28, 2015 are not necessarily indicative of the results to be expected for future quarters or for the year ending August 31, 2015.

All consolidated financial statements and notes to the consolidated financial statements are presented in United States dollars (“US Dollar” or “US$” or “$”).

VARIABLE INTEREST ENTITY

Pursuant to the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810, “Consolidation” (“ASC 810”), the Company is required to include in its consolidated financial statements the financial statements of its variable interest entities (“VIEs”). ASC 810 requires a VIE to be consolidated by a company if that company is subject to a majority of the risk of loss for the VIE or is entitled to receive a majority of the VIE’s residual returns. VIEs are those entities in which a company, through contractual arrangements, bears the risk of, and enjoys the rewards normally associated with ownership of the entity, and therefore the company is the primary beneficiary of the entity.

Under ASC 810, a reporting entity has a controlling financial interest in a VIE, and must consolidate that VIE, if the reporting entity has both of the following characteristics: (a) the power to direct the activities of the VIE that most significantly affect the VIE’s economic performance; and (b) the obligation to absorb losses, or the right to receive benefits, that could potentially be significant to the VIE. The reporting entity’s determination of whether it has this power is not affected by the existence of kick-out rights or participating rights, unless a single enterprise, including its related parties and de facto agents, have the unilateral ability to exercise those rights. Fujian Tianfeihong’s actual stockholders do not hold any kick-out rights that affect the consolidation determination.

Through the VIE agreements disclosed in Note 1, the Company is deemed the primary beneficiary of Fujian Tianfeihong. Accordingly, the results of Fujian Tianfeihong have been included in the accompanying consolidated financial statements. Fujian Tianfeihong has no assets that are collateral for or restricted solely to settle their obligations. The creditors of Fujian Tianfeihong do not have recourse to the Company’s general credit.

The following financial statement amounts and balances of Fujian Tianfeihong have been included in the accompanying consolidated financial statements.

	February 28, 2015		August 31, 2014
	(Unaudited)

TOTAL ASSETS(1)	$	11,467,054	$	6,175,646
TOTAL LIABILITIES(1)	$	4,478,205	$	781,126

(1)

Total assets and liabilities of the VIE are reported net of intercompany balances that have been eliminated with the VIE consolidation.

	For the three months ended February 28,				For the six months ended February 28,
	2015		2014		2015		2014
	(Unaudited)		(Unaudited)		(Unaudited)		(Unaudited)

Revenue	$	7,639,171	$	2,882,195		10,775,557	$	4,814,573
Net income (2)	$	1,167,667	$	398,663		1,603,796	$	687,211

(2)

Under the Exclusive Technical Service and Business Consulting Agreement, 95% of the net income is to be remitted to WFOE.

	For the six months ended February 28,
	2015			2014
	(Unaudited)			(Unaudited)

Net cash provided by operating activities	$	1,552,236		$	1,265,516
Net cash (used in) investing activities		(9,694	)		(852	)
Net cash provided by financing activities		46,312			26,880
Effect of exchange rate changes on cash		(19,240	)		15,875
Net increase in cash		1,569,615			$$1,307,419

The Company believes that Changshitong Consulting’s contractual agreements with Fujian Tianfeihong are in compliance with PRC law and are legally enforceable. The stockholders of Fujian Tianfeihong are also the senior management of the Company and therefore the Company believes that they have no current interest in seeking to act contrary to the contractual arrangements. However, Fujian Tianfeihong and its stockholders may fail to take certain actions required for the Company’s business or to follow the Company’s instructions despite their contractual obligations to do so. Furthermore, if Fujian Tianfeihong or its stockholders do not act in the best interests of the Company under the contractual arrangements and any dispute relating to these contractual arrangements remains unresolved, the Company will have to enforce its rights under these contractual arrangements through PRC law and courts and therefore will be subject to uncertainties in the PRC legal system.

All of these contractual arrangements are governed by PRC law and provide for the resolution of disputes through arbitration in the PRC. Accordingly, these contracts would be interpreted in accordance with PRC law and any disputes would be resolved in accordance with PRC legal procedures. As a result, uncertainties in the PRC legal system could limit the Company’s ability to enforce these contractual arrangements, which may make it difficult to exert effective control over Fujian Tianfeihong, and its ability to conduct the Company’s business may be adversely affected.

USE OF ESTIMATES

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect certain 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 periods. Actual results could differ from those estimates.

FOREIGN CURRENCY TRANSLATION

Almost all Company assets are located in the PRC. The functional currency for the majority of the Company’s operations is the Renminbi (“RMB”). The Company uses the United States Dollar (“US Dollar” or “US$” or “$”) for financial reporting purposes. The financial statements of the Company have been translated into US dollars in accordance with FASB ASC 830, “Foreign Currency Matters.”

All asset and liability accounts have been translated using the exchange rate in effect at the balance sheet date. Equity accounts have been translated at their historical exchange rates when the capital transactions occurred. Statements of income amounts have been translated using the average exchange rate for the periods presented. Adjustments resulting from the translation of the Company’s financial statements are recorded as other comprehensive income (loss).

The exchange rates used to translate amounts in RMB into US dollars for the purposes of preparing the financial statements are as follows:

	February 28, 2015		August 31, 2014

Consolidated balance sheet items, except for stockholders’ equity, as of the periods end		0.1621		0.1625

	For the three months ended February 28,				For the six months ended February 28,
	2015		2014		2015		2014

Amounts included in the statements of income, statement of changes in stockholders’ equity and statements of cash flows for the periods		0.1626		0.1636		0.1627		0.1632

For the three months ended February 28, 2015 and 2014, foreign currency translation adjustments of $(37,777) and $76,490, respectively, have been reported as other comprehensive (loss) income. For the six months ended February 28, 2015 and 2014, foreign currency translation adjustments of $(28,870) and $109,246 have been reported as other comprehensive income. Other comprehensive income of the Company consists entirely of foreign currency translation adjustments. Pursuant to ASC 740-30-25-17, “Exceptions to Comprehensive Recognition of Deferred Income Taxes,” the Company does not recognize deferred U.S. taxes related to the undistributed earnings of its foreign subsidiaries and, accordingly, recognizes no income tax expense or benefit from foreign currency translation adjustments.

Although government regulations now allow convertibility of the RMB for current account transactions, significant restrictions still remain. Hence, such translations should not be construed as representations that the RMB could be converted into US dollars at that rate or any other rate.

The value of the RMB against the US dollar 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 the RMB may materially affect the Company’s financial condition in terms of US dollar reporting.

REVENUE RECOGNITION

Revenues are primarily derived from selling fruit wines to contract distributors and retail establishments. The Company’s revenue recognition policies comply with FASB ASC 605 “Revenue Recognition.” The Company recognizes product revenue when the following fundamental criteria are met: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred, (iii) the price to the customer is fixed or determinable and (iv) collection of the resulting accounts receivable is reasonably assured. The Company recognizes revenue for product sales upon transfer of title to the customer. Customer purchase orders and/or contracts are generally used to determine the existence of an arrangement. Shipping documents and the completion of any customer acceptance requirements, when applicable, are used to verify product delivery. The Company assesses whether a price is fixed or determinable based upon the payment terms associated with the transaction and whether the sales price is subject to refund or adjustment.

The Company has no product returns or sales discounts and allowances because goods delivered and accepted by customers are normally not returnable.

The Company recognizes gift sample products as cost of goods sold in compliance with ASC 605-50-S99. As such, when the Company gives a customer a free product, the expense associated with this free product at the time of sale is classified as cost of goods sold.

SHIPPING COSTS

Shipping costs incurred by the Company are recorded in selling expenses. Shipping costs for the three months ended February 28, 2015 and 2014 were $320,972 and $125,154, respectively; shipping costs for the six months ended February 28, 2015 and 2014 were $454,812 and $210,148, respectively.

CASH AND CASH EQUIVALENTS

The Company considers all demand and time deposits and all highly liquid investments with an original maturity of three months or less to be cash equivalents.

ACCOUNTS RECEIVABLE

Accounts receivable are recorded at the contract amount after deduction of trade discounts, allowances, if any, and do not bear interest. The allowance for doubtful accounts, when necessary, is the Company’s best estimate of the amount of probable credit losses of accounts receivable. The Company determines the allowance based on historical write-off experience, customer specific facts and economic conditions.

Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company does not have any off-balance-sheet credit exposure related to its customers. As of February 28, 2015 and August 31, 2014, the Company considers accounts receivable to be fully collectible and has no allowance. For the periods presented, the Company did not write off any accounts receivable as bad debts.

INVENTORY

Inventory, comprised principally of bottled wine, is valued at the lower of cost or market value. The value of inventories is determined using the first-in, first-out method.

The Company periodically estimates an inventory allowance for estimated unmarketable inventories. Inventory amounts are reported net of such allowances, if any. There were no allowances for inventory as of February 28, 2015 and August 31, 2014.

FAIR VALUE OF FINANCIAL INSTRUMENTS

FASB ASC 820, “Fair Value Measurement,” defines fair value as the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction between market participants at the measurement date and in the principal or most advantageous market for that asset or liability. The fair value should be calculated based on assumptions that market participants would use in pricing the asset or liability, not on assumptions specific to the entity.

FIXED ASSETS

Fixed assets are recorded at cost, less accumulated depreciation. Cost includes the prices paid to acquire the assets, and any expenditures that substantially increase the asset’s value or extends the useful life of an existing asset. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Major repairs and betterments that significantly extend original useful lives or improve productivity are capitalized and depreciated over the periods benefited. Maintenance and repairs are generally expensed as incurred. The estimated useful lives for fixed asset categories are as follows:

Computers and equipment 3 years

Motor vehicles 4 years

Fixture and furnitures 5 years

IMPAIRMENT OF LONG-LIVED ASSETS

The Company applies FASB ASC 360, “Property, Plant and Equipment,” which addresses the financial accounting and reporting for the recognition and measurement of impairment losses for long-lived assets. In accordance with ASC 360, long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company may recognize the impairment of long-lived assets in the event the net book value of such assets exceeds the future undiscounted cash flows attributable to those assets. No impairment of long-lived assets was recognized for the periods presented.

INCOME TAXES

The Company accounts for income taxes in accordance with FASB ASC 740, “Income Taxes” (“ASC 740”), which requires the recognition of deferred income taxes for differences between the basis of assets and liabilities for financial statement and income tax purposes. Deferred tax assets and liabilities represent the future tax consequences for those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. As of February 28, 2015 and August 31, 2014, the Company has no deferred tax assets or liabilities.

ASC 740 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, the Company 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 would be measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. ASC 740 also provides guidance on de-recognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, and accounting for interest and penalties associated with tax positions. As of February 28, 2015 and August 31, 2014, the Company does not have accruals for uncertain tax positions.

The income tax laws of various jurisdictions in which the Company and its subsidiaries operate are summarized as follows:

United States

The Company is subject to United States tax at graduated rates from 15% to 35%. No provision for income taxes in the United States has been made as the Company had no U.S. taxable income for the three and six months ended February 28, 2015 and 2014 because it is the Company's intention to indefinitely reinvest such earnings in its foreign subsidiaries. If such earnings were distributed, the Company would be subject to additional U.S. income tax expense. Determination of the amount of the unrecognized deferred income tax liability related to these earnings is not practicable.

PRC

Changshitong Consulting and its VIE, Fujian Tianfeihong are subject to an Enterprise Income Tax of 25% and file their own tax returns. Consolidated tax returns are not permitted in China.

BVI

Fanwei Hengchang is incorporated in the BVI and is governed by the income tax laws of the BVI. According to the current BVI income tax law, the applicable income tax rate for the Company is 0%.

Hong Kong

Changshi Tongrong is incorporated in Hong Kong. Pursuant to the income tax laws of Hong Kong, the Company is not subject to tax on non-Hong Kong source income.

Advertising Costs

Advertising costs are charged to operations when incurred. For the three months ended February 28, 2015 and 2014, advertising expense was $375,606 and $94,888, respectively. For the six months ended February 28, 2015 and 2014, advertising expense was $530,402 and $135,782, respectively.

Statutory Reserve Funds

Pursuant to corporate law of the PRC, a company is required to transfer 10% of its net income, as determined under PRC accounting rules and regulations, to a statutory reserve fund until such reserve balance reaches 50% of the company’s registered capital. The statutory reserve fund is non-distributable other than during liquidation and can be used to fund previous years’ losses, if any, and may be utilized for business expansion or used to increase registered capital, provided that the remaining reserve balance after use is not less than 25% of registered capital. As of August 31, 2014, the statutory reserves for Fujian Tianfeihong had been fully funded.

- Definition

The entire disclosure for all significant accounting policies of the reporting entity.

+ References+ Details

China Tianfeihong Wine Inc 10-Q