International Developments in Accounting

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ACFI 3217

International Developments in Accounting

IFRS in China

PIN number: p11005895

Words number: 1,983

Brief History

The changes of Chinese accounting are in the wake of the historical development of Chinese history. In 1949 the People’s Republic of China was founded that China adopted communist accounting due to the influence of Soviet (Lodhia, 2013). But in Great Leap Forward the accounting was changed to ‘people accounting’ which ‘cherry pick’ the figure and data on behalf of political target from 1958 to 1959 (Gao and Handley 2003, p.61). During 1960 to 1966 there was a significant achievement in Chinese accounting because it combined Soviet system with western system basic on domestic Chinese characteristics (Gao and Handley 2003, p.62). In the decade of Cultural Revolution there were not only no development of accounting but also cause the lack of education for people who want to be an accountants.

In 1978, Chinese economic incurred qualitative leap thanks to ‘The Reform and Open Policy’ initiated by Deng Xiaoping that Chinese accounting reform to accept the western accounting practises to match up the knowledge they learn from foreign and the capital investment by foreigner (Ding and Su 2008, p.2). As Gao and Handley (2003, p.62) indicated that “In 1985, The Accounting Law of the People's Republic of China was adopted at the Ninth Session of the Standing Committee of the Sixth National People's Congress.” It is particularly significant because was a wide range reforms of fund accounting in the direction of international practices. Until 1992 Deng Xiaoping allowed market-based approach that a new financial reporting system was established under ‘socialist market economy with Chinese characteristics’ (Ding and Su 2008). During 1990 to 1991, the Shanghai Stock Market and Shenzhen Stock Market were founding that mean the economic market of China was more open and capital mobility will more freedom. In 1992, Enterprise Accounting System (EAS) regulate the reporting for external users and Ministry of Finance (MoF) quitted the “fund system” which learning from Soviet (Qu and Leung 2006, p.247). MoF established the Accounting Standards Committee (ASC) in 1998 in order to set the scene for Chinese GAAP (Robert et al. 2008, p.644).

In 2001 December, China joined WTO that MoF used it as a trigger to participate in international accounting affairs enthusiastically and strive for having a place in IASC. Due to the perspective of China economy that attracted a great quantity of foreign direct investment that demands a more standard and common accounting (Qu and Leung 2006, p. 242). Since 2007, all the companies which listed in Shenzhen and Shanghai stock markets have to report under a new Chinese Accounting Standards that were identify by the IASB and the stock market to be supervised by China Securities Regulatory Commission (CSRC) (Lee et al. 2013, p.5). It is a landmark in the development of Chinese accounting that attitude toward IFRS (Ding and Su 2008, p.1).

Culture and Institution factors

There are many elements will influence the implementing of IFRS but this article will make critical discussion of culture and institutional factors point in China.

On the one hand—culture, these sections will analysis the culture effect through Hofstede’s work combine with Gray’s model when carry out of IFRS. First of all, China is a country with highly collectivism that putting more efforts in the group than themselves. Especially, as Herrmann-Pillath (2009, p19) stated that “Guanxi are an ideal-typical case of relational collectivism” that each step of Chine converge to IFRS is significant influence the relationship between different people. Therefore, the process Chinese accounting of convergence to IFRS is a long and tortuous road. Secondly, China has large power distance that Chinese work in a hierarchy structure situation. In other words, it favors convergence IFRS through top-down approach. Moreover, China has a strong uncertainty avoidance culture because they like to step by rules-based but the IFRS is the principle- based. Fourth, China is masculine society which means has low nurture (The Hofstede Centre, nd.b). This phenomenon was expressed from people study in school to working in the society that they driven by achievement so they need to pay the price for success for example less leisure time with family (Borker, 2012). Last but not least, China gets high score in long-term orientation and has restraint stands in its country development that they need to implement a relatively maturity accounting system just as IFRS (The Hofstede Centre, nd.a).

Accounting value is the reinforcement of societal values and they have directly relationship. Gray’s model identified accounting values to four dimensions that Integration of China cultural dimension and relationship to accounting values that Chinese accounting value is “statutory control, uniform practices, a conservative measurement approach and secrecy in disclosure” (Qu and Leung 2006, p.245). As the level of secrecy is high which mean the public disclosure is lower that need strong uncertainty avoidance and high power distance (Qu and Leung 2006, p.244). The Confucian culture had significant influence in Chinese accounting collectivism and uniformity because it emphasis harmonization (Lodhia, 2013, p.45&55). That will causes the China accounting standards change relatively slowly but they are willing to accept the innovation of government announcement.

On the other hand—institutional factors which including Political and Economic; Legal; Taxation; Corporate financing; Accounting profession. China is market socialism system that only governed by Chinese Communist Party and its government-business relations is very clutter (Ding and Su 2008, p.5). Chinese accounting standards are set by MoF and it is also the fountainhead of every department concern with finance that is cloudy between monitoring and observance (Ding and Su 2008, p.3).Therefore, the process of implementing IFRS in China is relatively difficult when it will influence the political leadership. The accounting information disclosures are entirely through the government prescription and due to the traditional Chinese cultural that it is hard to request the transparency of corporate transaction especially the public ownership sectors. The enterprises owned by Chinese government which are by comparison, they are disclose more financial data in Stock Exchange of Hong Kong (SEHK) (Qu and Leung 2006, p.245). However, China was work out the new accounting system for business enterprise based on IAS to meet the global trading requests when joined WTO in 2001(Li and Ma, 2001).

Chinese law is the code law system and its legal environment also are highly controversial due to it relationship with political also set up by the MoF with low disclosure (Zhang and Liu, 2010). Thus, there is not chance for profession and independence accounting body participate in the regulation and enforce the IFRS more smooth. Just because of these differences that Chinese accounting standards and IFRS are treat offerings per share, land use right, pension and staff’s welfare differently (Lee et al. 2013, p.201).

Chinese enterprise taxation system was simplified since 1994 and the rules between tax and accounting were become more different. Chinese enterprises were taxed their profits until the economic reforms and the foreign investments were treated differently. The Chinese government want to encourage foreign investment but there are various kinds of tax applicable to foreign investors and the regulation change frequently that obstacle the investment (Robert et al. 2008, p.626). So the government should simplify the tax rules and separate the tax law and accounting rules that let it relatively easy to understand for foreign investor and corresponding strengthen the efforts to implement IFRS (Nobes, 2011).

In corporate financing system side of China, different types of shares in different market: A-shares only can trade by Chinese investor and its financial reporting need to follow the rules of Chinese GAAP; B-shares not only can sold by foreign investor but also Chinese investor follows the rules of international accounting standard; H-shares listed in Hong Kong that only can trade in HK dollars (Qu and Leung 2006, p.252). There are virtually two-thirds of companies which listed in Shenzhen and Shanghai Stock Exchanges are controlled by government that they purposes are attend to the political instead of the outside investors and the business organizations is complexity (Liang and Useem, 2009). Allen (2005) indicated that government subsidy is one of the four most important sources of Chinese state-owned enterprise especially the sector concern the energy, aerospace/defence, and high-tech industries. In the issue, the IFRS convergences not only will less impression on these firms than the others firms which reliance the investors funding but also it can offer the high quality financial data that promoting the capital formation and flow, decrease cost of standard setting (Lee et al. 2013, p.9). Moreover, increasing Chinese companies are listed in overseas stock market likes New York and London, so it should be pressed for carrying on IFRS.

Chinese accountant lack appropriate training before that lead to accounting profession lower due to the political influence the gap of lack education. The first accounting body—The Accounting Society of China (ASC) was establish in 1980 in order to promote accounting standards (Robert et al. 2008, p.635). Chinese Institute of Certified Public Accountants (CICPA) was set up in 1988 as the main accounting professional body but the problem is its chairmen is the MoF Vice Minister which mean it is also under the control of government (CICPA, 2012). On the side, China had keep update the accounting systems and standards in the past few years but there is to less time for the accountant to learn and familiar the new knowledge (Lee et al. 2013, p.201).

Further changes and Influence

With the development of the society, Chinese culture gradually changing from collectivism to individualism. Accompany with Chinese market economics, people can more follow with interest in their ownership and wealth that will increase the professionalism (Qu and Leung 2006, p.245&246). More and more investors work as community request the transparency of the firm finance and individual shareholders look for participate into company (Khanna and Zyla, 2010). The breakthrough point is the shareholders try to use lawsuit mechanism to seek compensation from companies for their financial losses due to misleading financial disclosure (Qu and Leung 2006, p.251). The problem of Chinese accounting profession will get resolved in the future because many students learn accounting overseas especially in UK, Australia and US. This is worthy although the cost of financial statement users and preparer use to adapt the international accounting standard is high that is the short term cost compare with the long term investment opportunity (Kimura and Ogawa 2007, p.218). The survey make by ACCA reveal there are more and more CFO and investor had increase the support attitude with global convergence of accounting standards after 2008 financial crisis (Tan, 2012). After joint WTO, China are more depend on international trade that the ACCA global council President Dean Westcott said convergence IFRS will strength the transparency and uniformity of accounting practices, recover and increase the confidence of the investors for capital market, increase the enthusiasm of cross-border investment (Deloitte, 2010b)

In conclusion, implementing IFRS in China is not means adopt it simply that they need to act according to circumstances. As China is a developing country and especially its economics is socialist economy with Chinese characteristics and political is only govern by Chinese Communist Party. Chinese traditional cultures are also deeply influence of people thought and behaviour that they are conservatism but uniformity, so it is hard to start the IFRS but after that people acceptable due to uniform. On the whole, China had achieve a significant progress in convergence with the IFRS but still have long way to go. Because the implementing process has developed to a certain degree that will reach bottleneck, then just learn and adjust the standard to suit for the environment is not enough. The China government need to consider release the power control of the accounting community and separate the formulation power and monitoring power. When the accounting standard is become internationally that will benefit for the economic domestic and overseas (Lee et al. 2013, p.202). In a word, it is more good than bad for China convergence IFRS which with high quality and substance over form accounting system.


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