China’s financial report practices can be traced back more than 2000 years ago. Before 1800s, China has its own primal accounting system and regulations developed from a Feudal society. After the Sino-British Opium War in 1848, China began its progress of importing the western accounting system along with the western culture and technology. Since the establishment of the People’s Republic of China in 1949, China quickly adopted the Soviet-type planned economy and its related accounting regulations and practices. However, from the 1978 reform, China’s accounting system has undergoing a dramatic change from a central rigid account rule which is mainly assisting the macro-economic planning for the government, to a mixed system which is helping decision-making for both government and investors. After 1992, with the development of economics and capital markets, China speed up its pace to harmonizes its accounting system with international practices by declaring and applying more new accounting standards (Ding, 2008).
International Financial Reporting Standards (IFRS) is a set of accounting standards issued by the Board of the International Accounting Standards Committee (IASC) after 2001. Comparing to China GAAP, IFRS standards are more focus on transparency of financial information and substance of transaction other than uniformity of practices. For example, In China’s GAAP, Fixed assets should be capitalized only when it is related to operations of an enterprise with estimated service life of more than one year or when other fixed assets have a value over 2,000 RMB (approximately US $ 300) with service life of more than two years. Unlike China GAAP, principle based IFRS allow judgment to exist when applying the standards to a company’s financials. Companies could have their own professional judgment to determine a threshold above which expenditure should be capitalized based on economic substance of a company’s activities. (Zhang, 2008)
On October 29, 2009, China’s Vice Finance Minister Li Yong said that the current Chinese Accounting Standards with International Financial Reporting Standards has achieved a substantial convergence through his “China Accounting and Auditing Assessment Report”. Although China has made more progress to convergence with IFRS, only selected companies are required to adopt these new rules (China Accounting Standards Committee, 2006). To successfully adjust the gap between local GAAP and IFRS, some practical problems and obstacles need to be solved and overcome. One of the problems is that Chinese government is still playing a combined central role in both economy policies and economy practice. Clarification on the role of Chinese central/local government in economy activities becomes quite necessary. Otherwise, the newly published standard could be in favor of those government-controlled companies and become obstacles for other companies to follow as the result of government controlling most capitals and nearly all major listed companies (Firth, 2006). Another concern is the lack of experiences and trainings for Chinese accountants in making professional and ethical judgments. IFRS standard allow companies to make their own judgments based on economic substance of a company’s activities. However, most Chinese accountants used to only follow the government rules and were rarely encouraged to perform judgment. As a result, playing “number game” in order to meet the profit target could happen easily under certain circumstance. Other concerns may include immature policies, worries from Chinese companies, etc.
Although China is facing challenges related to IFRS adoption, we still have many reasons to believe that the convergence of China’s Financial Reporting and IFRS could also bring great opportunities on China’s economy growth in the future. First of all, China is now a member of World Trade Organization. The effective implementation of IFRS in the country would attract more foreign investments and enhance the development of China’s capital market. The compatibility between Chinese and International financial reports will greatly reduce the accounting cost and increase the confidence for the foreign creditors. Second, IFRS can help Chinese companies to improve their financial management and decision planning by using a universal accounting language. The companies’ decision makers would be provided more comprehensive asset-liabilities reports instead of the old-style reports which may only focus on short-term benefits. Third, IFRS would benefit China’s external trade activities by providing Chinese with a powerful weapon on dealing with trade fightings. For example, in the investigation of illegal dumping charges, a copy of clear and independent accounting book which follows international regulations would give solid anti-dumping evidence. Forth, unlike China GAAP, IFRS allow that the research and development expenses could be capitalized. This could be an effective stimulant for Chinese companies to promote product innovation and technological upgrading, which used to be a relatively weak point for developing countries.
China is holding his concept of ‘Scientific Developing’ and having his own way of convergence with IFRS. This way is rather unique and quite different with United States or other countries. Chinese government is showing both ambitions and cautions because the convergence progress will have essential impacts on the China’s economy in the future years.
References:
1. China Accounting Standards Committee. 2006. China Enterprise Accounting System (http://www.casc.gov.cn/kjfg/200607/t20060703_337130.htm)
2. Firth, M. Fung, P., Rui,O., 2006. Corporate performance and CEO compensation in China. Journal of Corporate Finance 12, 693-714.
3. Zhang, S., Lei, W. 2008 Analyzing Chinese Financial Reporting. Beijing Review, February 28, 2008
4. Ding, Y., Su, X., 2008. Implementation of IFRS in a regulated market. J. Account. Public Policy. 27:474-479.
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About the Author:
I’m an undergraduate student at West Chester University in Accounting Major.
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