The issue of convergence of accounting standards has been a subject of increasing academic debate Chan, 2010. The aim of converging accounting standards is to reduce the differences in financial reporting practices between nations for comparability and interpretation in international financial statements (Appah Edimobowei, 2012). Although the newest Chinese GAAP was issued in 2006, the convergence process is still continuing (Lou Hong, 2012).
20 years has passed since the Chinese government has decided to convergent Chinese GAAP with IFRS. There are still many differences between Chinese GAAP and IFRS (Songlan Peng and Joyce van der Laan Smith, 2010). People want to know the direction of convergence process. For detail, why Chinese Government has not directly copy the IFRS, what is the extent of convergent, what are differences, the reasons causes those differences. Many researchers have made studies on this issue. The aim of choosing this issue is to synthesize and present those researchers studies and given answer to those questions.
Regulatory Framework of China
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According to the Accounting Law (1999) of People's Republic of China, the Minister of Finance (MOF) is delegated to set accounting standards. In the Liu Yuting's (2010) report, it is stated that the New Chinese GAAP consist a basic standard, 38 Specific Standards and Application Guidance.
The Convergence process
Songlan Peng and Joyce van der Laan Smith (2010) mentioned that the convergence process has 4 stages. They have also calculated the full convergence rate. The first stage started from 1993 with 13% full convergence rate. The second stage started from 1998 with 20% full convergence rate. The third stage of development stated from 2001 with 32% full convergence rate. The fourth stage of development started from 2006 with 65% full convergence rate.
Four main differences between Chinese GAAP and IFRS
In Jiao Li and Ruizi Sun's (2011) report, they point out four main differences between Chinese GAAP and IFRS.
The Adoption of fair value: After 2006, the accounting measurement basis of Chinese GAAP changed from historical cost into fair value. However the application of fair value is still relatively cautious (Songlan Peng, Kathryn Bewley, 2010).
The accounting for the company combinations: Under IFRS, only the business combination among companies under the common control is considered. However, in Chinese GAAP, business combination on both common control and non-common control are considered (C. Richard Baker, Yuri Biondi, Qiusheng Zhang, 2010).
Impairment of assets: IFRS requires that assets impairment occurred when the impairment loss happened and the provision for impairment of value of assets will recover later when the value of the appreciation can be reversed. While in China, reverse the impairment in the future is not allowed (Ran Zhang, Zhengfei Lu, Kangtao Ye, 2010).
The disclosure of the related parties' transaction: The IFRS believe that the state-owned enterprises should also do fully disclosure according to the related party transactions. Under Chinese GAAP, only on some cases should the state-owned companies' disclosure the information (Yan-Leung Cheung, Lihua Jing, Tong Lu, P.Raghavendra Rau, Aris Stouraitis. 2009).
Four Reasons for the differences between Chinese GAAP and IFRS
In Hongman Zhang's (2010) report, she gives 4 reasons which cause the differences between Chinese GAAP and IFRS. Those are:
Economic Environment: The economic system of China is socialist market system which mainly based on public ownership (Mahmoud Ezzamel, Jason Zezhong Xiao, Aixiang Pan, 2007). However, the economic system of most western country is free market system which mainly based on private market system.
Legal Environment: In China, accounting standards established and issued by the Ministry of Finance have mandatory force. There is little space leaved for accountants' professional judgment. Most western countries rely more on the professional judgment of accountants in the comparison and interpretation of legal rules.
Staff Quality: Chinese accountants have a lack of professional judgement ability which needs to be improved. At the same time, accounting standards and systems change constantly in the recent years, they do not have enough time to absorb and grasp new knowledge.
Five dimensions of culture Value:
In the study of Hofstede (1980), the 5 dimensions of culture are given: Power distance (PDI), Individualism (IDV), Masculinity (MAS), Uncertainty avoidance (UAI), Long-term orientation (LTO) (Hofstede, Minkov, 2010).
Four Dimensions of Accounting Value:
Based on Greet Hofstede (1980) theory, S.J.Gray (1988) identified 4 accounting value dimensions known as: Professionalism vs. Statutory Control, Uniformity vs. Flexibility, Conservatism vs. Optimism, and Secrecy vs. Transparency.
The connection between Culture Value and Accounting Value Dimensions:
Always on Time
Marked to Standard
S.J.Gray (1988) also provided the connection between five dimensions of culture value and four dimensions of Accounting Value:
The higher a country ranks in individualism and the lower it ranks in uncertainty avoidance and power distance then the more likely it is to rank highly in professionalism.
The higher a country ranks in uncertainty avoidance and power distance and the lower it ranks in individualism then the more likely it is to rank highly in uniformity.
The higher a country ranks in uncertainty avoidance and the lower it ranks in individualism and masculinity then the more likely it is to rank highly in conservatism.
The higher a country ranks in uncertainty avoidance and power distance and the lower it ranks in individualism and masculinity then the more likely it is to rank highly in secrecy.
The Five Dimensions Scores of China
The score of five cultural value dimensions of China could be found from the website geert-hofstede.com (2013). The Power Distance score of China is 80. The Individualism score is 20. The masculinity score is 66. The uncertainty avoidance score is 30. The long term orientation score is 87.
Compare the four main differences between Chinese GAAP and IFRS to Greet Hofstede's five cultural value dimensions
The adoption of fair value in China: The lower China ranks in professional and the higher it ranks in conservative then the more likely to adopt fair value in a limited scope.
Accounting method for the company combination: The higher China ranks in uniformity and the higher it ranks in conservative then the more likely it is to distinguish accounting methods for the company combination between the common control and the non-common control.
Impairment of asset: The higher a country ranks in conservative and the higher it ranks in Long-term orientation then the more likely it is to limit the recovery of the impairment.
The disclosure of the related parties' transactions: The higher a country ranks in secrecy then the more likely it is to limit related parties transactions.
Since the Chinese convergence Chinese GAAP with IFRS, the full convergence rate is rising every time the new standard been issued (Songlan Peng, Joyce van der Laan Smith, 2010). However, the economic, legal and culture environments between China and most western counties are different, along with the accountant quality. So, the Minister of Finance will not directly copy the IFRS into Chinese GAAP (Hongman Zhang and Xianfeng Liu, 2010). In the future, the convergence process will continue (Lou Hong, 2012).
Convergence of accounting standards does not always lead to convergence of accounting practices.