Category: Business Report

Introduction

China adopted new accounting rules in 1985 and made some revisions in 1993. The country empowers Division of Administration of Accounting Affairs (DAAA) to set standards that all businesses need to follow. Since that time, DAAA has developed accounting standards for the country that enhance the development of the accounting profession. In the last decade of the 20th century, China wanted to adopt a modernization plan but its accounting standards could not conform to the demands of the new financial models of the country (Barth, Landsman & Lang, 2008). During that time, the country had invested much in capital and technology, including 303,000 project from external investors. The old accounting standards for the country could not provide the required information for all the stakeholders in the economy (Gillis, 2014). As a result, the country revised its accounting models so that they could conform to the international standards.

The initial standard was called the Basic Accounting Standard and it had some similarities with the Financial Accounting Standards Board’s requirements. The change in the accounting approach initiated a period of accounting transition that ensured that the accounting practices of the country were at par with the international standards. After analysis of the Chinese accounting systems progress, it is evident that the country has not fully adopted the principles of the International Financial Reporting Standards but the country has made considerable progress.

The Status of IFRS

China has continued to revise its accounting principles so that they could conform to the International Financial Reporting Standards (IFRS) requirements. The Accounting Law adopted by the country in 2006 has helped the country adopt accounting practices that conform to the IFRS standards (Gillis, 2014). As a result, all the firms in the country are required to comply with the new China Accounting Standards since 2007. Apart from the private companies, the country is working hard to ensure that the state-owned corporations adopt the new standards (Godfrey & Chalmers, 2007). Currently, the level of the Chinese accounting standards revision in order to conform to the IFRS requirements is estimated to be 90-95%.

Implications on Multinational Companies

Due to the Chinese Government adopting the new accounting standards, the multinational companies will find it harder because they must prepare three sets of financial statements (Gillis, 2014). For example, a company that sells stock in another country, such as the United States, will be required to first conform to the Chinese GAAP, thus requiring the company to prepare the statements using the Chinese Accounting Standards (CAS) (Barth, Landsman & Lang, 2008). The enterprises have to prepare the statements as per the IFRS for conformation to the international standards. Moreover, the companies will also need to prepare the statements using the United States GAAP in order to ensure that the United States investors are able to make the relevant financial decisions.

China’s Financial Reporting and GAAP

In general, all international companies located in China must prepare their financial statements using the Chinese Accounting Standards. Therefore, the companies need to use the Chinese GAAP in the process. The framework of CAS is generally based on three standards (Gillis, 2014). The first standard is the Accounting Standards for Business Enterprises (ASBE), which most of the firms in the country use. ASBE has some similarities with the United States GAAP and the IFRS. The ASBE applies the principles of IFRS in a bid to come closer to the internationally recognized standards (Godfrey & Chalmers, 2007). Despite the IASB coming to an agreement with the United States FASB to converge the two, the United States GAAP still differs from the CAS and to some extent from IFRS.

Differences between CAS and United States GAAP, and IFRS and Possible Tensions

The major differences occur in the presentation of the statements, their consolidation and other aspects involving the recording of the assets. The accounting field basically has three categories, namely, the measurement, auditing and the disclosures related to the financial statements (Shamrock, 2012).

Measurement

Measurement generally refers to the process of quantifying transactions for easy presentation. Consistency is a general requirement for all financial statements (Barth, Landsman & Lang, 2008). China often applies the responsibility system concept, which requires accountants to provide information that can be relied in making decisions of financial nature. However, issues arise in the country where the government accuses some of the enterprises for presenting false accounting figures for their own benefits (Shamrock, 2012). The country has experienced an increase in fraud cases regarding the financial reporting of different enterprises. As a result of the cases, the Chinese Government declared that reliability should be preferred to relevance.

Depreciation Rule

China recently adopted the new tax law that ensures treating accounting for depreciation using the straight-line method. If a business wants to modify the treatment of depreciation, the State Tax Administration must consent. In America, the rules allow the application of both the straight-line and accelerated methods (Barth, Landsman & Lang, 2008). The main determinant of the depreciation period is the economic viability.

Valuation of Inventory

In China, the recording of inventory is done by using the historical cost of acquiring the inventory. The book value of the inventory does not undergo adjustments to cater for the fluctuations in the market value. China allows the basic methods of valuing stock, such as FIFO and LIFO (Fu, 2010). In America, enterprises use the historical costs during the valuation of all types of assets. The standards in the country do not allow for revaluation of the assets, except for an acquisition. The country allows all the valuation methods just as China (Shamrock, 2012). However, the federal tax system requires firms to use the LIFO method, thus making it the most common method used in financial reporting.

Research and Development

In China, such costs are recognized when they incur. However, in some situations firms can capitalize the associated costs (Fu, 2010). In the United States, the system recognizes that the associated future benefits due to the current research and development activities are uncertain, thus requiring firms to record the expenditures when incurred.

Business Combination

Business combinations have become prominent in China, thus enhancing the need to have uniform accounting policies. The combination process should ensure that the uniform policies are followed in order to allow for uniformity in the valuation processes (Fu, 2010). In America, it is legal to use the pooling-of-interests methods. The criteria of combination must meet the specifications of the GAAP (Shamrock, 2012). For example, if an acquisition has to apply the pooling-of-interests method, there must be more than 90% exchange of the common stock.

Intangible Assets

Any intangible asset, such as goodwill, should be amortized across the period so that the business could accrue the benefits (Fu, 2010). The country does not permit the write-off method. In the United States, the FASB made revisions of the goodwill treatment by declaring that the amortization of goodwill is no longer permitted (Shamrock, 2012). FASB does not permit the use of pooling-of-interest method for any business amalgamations that are done after the businesses have issued their financial statements.

Disclosures

The methods of disclosure depend on the legal provisions and the lenders’ requirements. The disclosures can also be affected by the level of country development, the literacy levels and the cultural practices in the nations.

China has a unique way of accounting for disclosures where every industry possesses its own accounting principles, which are generally referred to as the industry-based accounting. The firms that are owned by the state usually report in accordance to the requirements of the government (Godfrey & Chalmers, 2007). The private firms report their financial statements as per the requirements of the Bureau of Line Industries. Therefore, investors in the country take higher risks due to the fact that the firms do not disclose enough information that could be used to make investment decisions. In the United States, it is a general requirement for the corporations to disclose all information to the shareholders (Gillis, 2014). The requirement is opposite in the Chinese system where the companies are more accountable to the providers of finance. Therefore, the United States ensures that the shareholders are more protected than China, thus reducing the risks associated with the process of making investment decisions.

As shown above, there are contentious issues regarding the presentation of the financial statements in two countries. Firstly, the revaluation of assets is prohibited in China, while the United States GAAP allows the revaluation during business combination. The second area of contention is the disclosures section where the Chinese GAAP does not prevent some companies from withholding some financial information that can be used to make financial decisions (Doupnik & Perera, 2007). Lastly, the amortization issue is a contentious problem because the United States GAAP does not allow the practice. On the contrary, China allows the amortization process (Mirza & Nandakumar, 2013). Therefore, unless the two countries under the leadership of IFRS develop a solution, there will still be some differences in the presentation of financial statements between two countries.

Cultural and Educational Influence in Accounting Practices

In China, there exists an environment that promotes collectivism in business operations. Therefore, the accounting policies also portray an aspect of collectivism. The Chinese culture allows for uniformity to reduce the state of uncertainty (Godfrey & Chalmers, 2007). On the contrary, in the United States, individualism is emphasized, meaning that individual businesses portray an aspect of independence. Coupled with higher levels of education, the United States accounting systems tend to be more complex with the required elements that can be used to make the relevant financial decisions (Shamrock, 2012). Therefore, the cultural effect of commonality in China leads to the development of a financial reporting system that is similar in all businesses, which is different in the United States.

The Organization of Accounting Professionals in China

China ensures the regulation of the professionals through the Chinese Institute of Certified Public Accountants (CICPA). The body has the responsibility of ensuring professionalism in the country by admitting qualified accountants for registration (Doupnik & Perera, 2007). The organization also reviews and monitors the activities of the accountants in a bid to regulate the profession. CICPA also develops rules that govern the accounting firms in order to ensure that the set accounting standards are followed. The organization ensures that all the members have passed the relevant accounting examinations, that are administered according to the set standards, in order to promote professionalism in the accounting sector (Mirza & Nandakumar, 2013). In general, any practicing accountant in China needs to be registered by the organization in order to be updated on the current issues affecting the profession.

Emerging Issue of Political Interference

In China, the government exercises more control over the accounting procedures and practices. The government regulates what goes to the public, meaning that the information considered as confidential is not revealed to the third party (Mirza & Nandakumar, 2013). Contrary to China, America allows the business to release more information to the public. The laws that governs the behavior of businesses in the country is the state codes, meaning that the federal government does not have much control over the business practices (Doupnik & Perera, 2007). America is a developed economy, meaning that the accounting systems of the country tend to be more developed than China. Therefore, it is conclusive to say that business operations in the United States are not interfered by the government, thus leading to the release of more information to the shareholders, that is enough to make the relevant financial decisions.

Conclusion

In summary, it is evident that China has made significant steps in ensuring that its accounting policies resemble those of the IFRS. The progress has given results because currently, the currently is at 90% in terms of resemblance. However, for the country to achieve its target of harmonizing the accounting standards, it will need to solve some of the contentious issues, such as the valuation of assets and their treatment in order to correspond to the IFRS.

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