Factors influencing international differences in corporate reporting

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The two Asian giants and the world most populated nations, China and India, have registered outstanding growth performances in recent years. More importantly, their continued economic expansion has been much anticipated to help sustain world economic growth as economic prospect in the industrial world darkens.

For three decades, China's economy has grown by nearly 10% a year to become the world's second largest measured in purchasing power parity terms. Between 2000 and 2006, China contributed 15% of the total increase in world GDP. Likewise, India's economy has also grown rapidly in recent years, by more than 8% a year since 2003.

There are major international differences in accounting practices and corporate financial reporting of India and China. This is mainly due to 4 factors: Cultural, Social, legal and economical systems of the country.

Socio - Culture

Some of the many social and cultural elements that can influence a company's corporate reporting in China and India are:

Individualism/Collectivism

Both in India and China, it is based on collectivism. In India there is no standard for rewarding individuals of a company that are proactive in their career advancement. Religion is not the reason for individualism. Some religions have a greater set of rules that need to be followed. Doing business in India involves building relationships. Indians only deal favourably with those they know and trust - even at the expense of lucrative deals. The Chinese collectivism is mainly reflected in loyalty towards the family. Chinese collectivism should be categorized into the dimensions of vertical collectivism and horizontal collectivism (Singelis et al., 1995) in different Chinese-majority societies.

Power distance

In both India and China, social hierarchies are very much in place and even at work it is not easy to be friendly with one's boss in most organizations. India's Power Distance score was very high for culture, with a ranking of 77 and China's significantly higher Power Distance ranking of 80 compared to a world average of 56.5. The high power distance indicates a high level of inequality of power and wealth within the society. This condition is not necessarily subverted upon the population, but rather accepted by the population as a cultural norm.

Uncertainty Avoidance

In india, the rank in the Uncertainty Avoidance dimension is 40. The population may have fewer rules and regulations with which to attempt control of every unknown and unexpected event or situation, as is the case in high Uncertainty Avoidance countries.

China scored lower, at just 32, indicating an even more liberal society. While China may not always place great emphasis on laws (this emphasis has changed radically in the last 20 years) and the official religion is atheism, the cultural expectancy placed on everyone tends to control behavior. That is, you may not be thrown in jail for breaking a law or rule, you-and your family-will be disgraced and shunned.

Masculinity/Feminine

India has Masculinity as the third highest ranking Hofstede Dimension at 56, with the world average just slightly lower at 51. The higher the country ranks in this dimension, the greater the gap between values of men and women. It may also generate a more competitive and assertive female population, although still less than the male population.This is the one dimension in which China most aligns itself to the rest of the world, and yet, it is often totally missed by Western businessmen, who think that the women in China are, for the most part, ignored. To the contrary, There are very powerful and inspiring women in China.

Long Term Orientation

India's Long Term Orientation Dimension rank is 61, with the world average at 48 India has a very high score meaning that their culture is more persistent and thrifty. It is expected that the Indian businessperson will need to plan further out in their business plans because of their need for Long-Term Orientations. Geert Hofstede analysis for China has Long-term Orientation (LTO) the highest-ranking factor (118), which is true for all Asian cultures. This Dimension indicates a society's time perspective and an attitude of persevering; that is, overcoming obstacles with time, if not with will and strength.

Economy

China's economy grew by 7.9% in 2008. The Chinese government is determined to continue to carry out more proactive fiscal policies. Over the past few years, the government has issued billions of RMB of additional treasury bonds to fund infrastructure construction. The government investment has effectively stimulated demand and laid a solid foundation for future economic growth. 

China's state central Bank is attempting to maintain a steady value for the RMB in order to aid its transition from a soft currency into a full fledged hard currency, capable of being traded in the global money market.

 In China, despite the rise in consumers spending, the effect of increased competition in most markets and with consumers highly cost conscious means that price inflation has slowed helping the economy form over heating allowing an increase in GDP(gross domestic product) in recent years.

India's diverse economy encompasses traditional village farming, modern agriculture, handicrafts, a wide range of modern industries, and a multitude of services. Services are the major source of economic growth, accounting for more than half of India's output with less than one third of its labour force.

The Indian economy has posted an average growth rate of more than 7% in the decade since 1997, reducing poverty by about 10 percentage points. India achieved 9.6% GDP growth in 2006, 9.0% in 2007, and 6.6% in 2008, significantly expanding manufactures through late 2008. India also is capitalizing on its large numbers of well-educated people skilled in the English language to become a major exporter of software services and software workers.

Legal

Legal factors include areas such as tax policy, labour law, environmental law, trade restrictions, tariffs, and political stability. Political factors may also include goods and services which the government wants to provide or be provided and those that the government does not want to be provided.

In China, legal rules have been applied on new share issues to public listed companies. The proceeds of share issues by listed companies except for financial type listed companies may not be used for investment in financial institutions such as commercial banks and securities companies.

In India there is a Tax policy which is different from other nations frameworks, Deferred Tax assets and liabilities should be recognised for all timing differences subject to consideration of prudence in respect of deferred tax assets. Unrecognised deferred tax assets are reassessed at each balance sheet date and are recognised to the extent that it is certain that such previously unrecognised deferred tax assets will be realised. Deferred tax assets and liabilities are measured using tax rates that have been enacted or substantively enacted by the Balance Sheet date.

The comparison of the financial statements and annual reports in 2 different countries which are (i) TATA Power Company limited in India and (ii) China Shenhua Energy Company Limited in China.

In the year 2008, the financial statements (Appendix) are prepared by China Shenhua Energy Company Limited (CSEC) in accordance with the China Accounting Standards for Business Enterprises (2006) issued by the Ministry of Finance of the People's Republic of China (Appendix).

Whereas, the consolidated financial statements (Appendix) of an Indian company, which is TATA Power Company limited (TATA) have been presented in accordance with Indian Generally Accounting Accepted Principles (Indian GAAP) (Appendix).

Since the both countries are using the difference accounting policy, please find the below disclosures which are some key differences and similarities between China Accounting Standards for Business Enterprises (2006) and Indian GAAP, based on standard and interpretations.

But this year, Chinese Accounting Standards (CAS) were largely replaced by the International Financial Reporting Standards (IFRS), to bring China more in line with the rest of the world. However not all companies have started adopting it yet.

India is also slowly changing form Indian GAAP to IFRS as early as 2010. This process began in 2008 and has been used by many companies to be in line with the rest of the world.

Balance Sheet

There are some different standard elements in the balance sheet between CSEC and TATA as following examples.

For CSEC, according to China Accounting Standards, Under the assets, they are segregated into current and fixed assets. Besides that, the items under non-current liabilities also clearly listed down. Hence, those shareholders who are unprofessional also able to read and understand the report.

In TATA, there is a clear Separate presentation of fixed assets and current assets. Fixed assets are stated at the cost of acquisition, less accumulated depreciation. Direct costs are capitalized till the assets are ready to be put to use. These costs include financing costs relating to specific borrowings attributable to fixed assets. It is divided into 2 segments: funds employed and application of funds. The details are attached in the notes to account. They have not clearly list down the items in the report. Therefore, their format are not especially well adapted for reading by non-technical shareholders.

Income Statements

The TATA income statement tends to be more detailed than CSEC. The titles for the both companies are varying in this point. The title of income statement for TATA is Profit and Loss Account, but for CSEC, it is Consolidated Income Statement.

Under Indian AS 21, two years of figures which is one preceding years' comparative figures are required to be present in the TATAs report. Similarly in CSEC, there is one preceding year of figures in the income statement for comparative purpose.

In TATA, the Statement of Comprehensive Income is not required according to the standards but an analysis of expenses was given in schedule 2. For TATA, Statement of changes in equity were not required according to the standards but the details of the movement in share capital, retained earnings and other reserves were shown in a separate schedule. The statement of recognised gain and losses is shown as part of the reserves. but Statements of Changes in Equity was presented in CSEC report after their consolidated profit and loss statement.

Cash flow Statements

Only companies listed on Indian stock exchanges and non-listed enterprises whose turnover exceeds Rs. 500 million are required to furnish cash flow statements. The cash flow statement also requires the two years of figures in the income statement in TATA.

There are three main headings in the statement which are operating, investing and financing. The CSEC's statement is started with profit before. Similarly, the TATA's statement, the cash flow statement started with the profit before tax, and so tax is not shown as a use of cash.

Property, Plant and Equipment(PPE)

In TATA, they Do not use the term Property Plant and Equipment instead uses the term Fixed Assets. They use both the straight line method and reducing balance method according to AS 6 and AS 10. According to schedule J, there are different rates of depreciation rates for different categories of asset. Subsequent expenditure relating to an item must be added to the carrying amount of the asset when it is probable that future economic benefits, exceeding the original standard of performance, will flow to the entity. The cost of a major inspection or overhaul occurring at regular intervals is capitalised where it is identified as a separate component of the asset and the replaced components are fully.

Similarly, In CSEC, PPE are stated in the balance sheet at cost or valuation amount less accumulated depreciation and impairment losses. Valuation amount represents the value of the assets adjusted to the accounting record based on the valuation carried out in accordance with China Accounting Standards.

Impairment of Goodwill

In TATA, they estimated the useful life (according to the standard, normally not exceeding 5 years unless a longer period can be justified) and amortised accordingly. In TATA, the goodwill is originally recognised as an asset at cost and is consequently calculated at cost minus any accumulated loss of impairment. The arising of goodwill on acquisition of a subsidiary is when acquisition cost excess the group interest in the net fair value of the subsidiary's identifiable assets, and contingent liabilities recognised at the acquisition date.

In CSEC, Goodwill is not amortised and is stated at cost less accumulated impairment losses. On disposal of an asset group or a set of asset groups, any attributable amount of purchased goodwill is included in the calculation of the profit or loss on disposal.

Employee Benefits

In TATA, they have 3 employee benefit plans : Post-employment benefit plans, Short-term employee benefits and Long-term employee benefits. According AS15, TATA is charged as expenses for the contribution made to retirement benefit plans. The payments are made to deal with as payments to defined contribution plans where the obligations of Group under the plans are equivalent to those arising in a defined contribution retirement benefit plan. This can be seen from schedule J, (n).

In TATA, they have 4 employee benefit plans : Housing fund and other social insurances, Retirement benefits, Share-based payments, Termination benefits. This can be seen in Notes Pt.3(m).

Auditor's report

The report of auditor is important information for the financial reports' reader. The auditor's report(Appendix) of CSEC which the key words are "conducted our audit in

accordance with China's Auditing Standards for the Certified Public Accountants.... the financial statements comply with the requirements of China Accounting Standards for Business Enterprises (2006) issued by the Ministry of Finance of the People's Republic of China and present fairly, in all material respects".

Unlike CSEC, the auditor report for TATA(Appendix) the words were"conducted our audit in accordance with auditing standards generally accepted in India...... in the manner so required and give a true and fair view in conformity with the accounting principles generally accepted in India"

It is impossible for the readers of CSEC annual report to fully understand of the significance of the words' forms without undertaking a detail analysis of law cases in which they have been interpreted. However, the TATA report may reflect a greater reliance than CSEC on authoritative literature.

NEED for unifying reporting policies and methods

This section of the paper discusses the factors that are influencing the current move towards international convergence.

Increase in the globalisation of businesses

The number and size of "multinational corporations" (MNCs) looking outside their national borders for investment and trade opportunities has increased over recent years. These MNCs favour the application of consistent accounting standards so that comparisons can be made between the performance and financial positions of internal business units and those of competing MNCs.There has also been a huge increase in cross-border transactions. It is beneficial to stockbrokers, analysts and investors if the financial reports they use to make investment decisions apply consistent accounting standards and are therefore comparable.

Recent wave of corporate collapses

The recent wave of corporate collapses in the US, including large organisations such as Enron, has led to a decrease in public esteem for accounting. The dubious accounting that occurred in these cases, which was allowed under the accounting standards in the US was partly blamed for the collapses. There could be another wave of collapses some time in the future, and if critics decide to place some of the blame on accounting standards, then this criticism could be partly deflected away from the national standard setting bodies, such as the IASB.

Enhanced comprehensiveness and comparability

The important need for convergence is that financial reporting practices between countries become the same, and differences in methods of accounting for transactions and events are eliminated. This will result in published financial information about companies operating in different countries being comparable. This is becoming increasingly important as the number of MNC increases and investors take a more global approach to investing. Increasing the comparability of financial information should assist in the free flow of capital around the world to where it is best utilise to gain the best results.

Cost Savings

Another need of unifying the standards is that the adoption of IASs may be a cheaper route for some developing countries than preparing their own standards. It may also be beneficial to domestic and foreign companies with international connections that do business in these countries. A number of developing countries, such as Pakistan and Nigeria have benefited from the adoption of IASs with little or no amendments as their national standards.

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