This study aims to compare and contrast the international accounting standards with accounting standards prevalent in China. It will compare the old and new Chinese accounting standards. The study seeks to investigate the rationale behind why the Chinese accounting standards do not comply completely with the international accounting standards. It seeks to bring forward a way in which China can bring its accounting standards to correspond closely with the international accounting standards. The reasons for taking this course of action is to assist China in benefiting from compliance with the international accounting standards.
This study will begin by examining the evolution and journey of the Chinese accounting standards from their beginning till the present date. This will include the major events that have contributed to the changes in the accounting standards and the need to bring about changes in the current standards to make them align closely with the international accounting standards. The study will also find out the proposed changes that the Chinese will make in their accounting standards to achieve compliance with the international accounting standards. The benefits and limitations of such actions will also be examined.
1.2 RESEARCH OBJECTIVE
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The objectives of this study are firstly to investigate the ways that will assist in the bringing together of the Chinese accounting standards to align closely with the international accounting standards. Secondly to suggest changes in which China can bring its accounting standards of intangible assets to match closely with the international accounting standards. Thirdly, it seeks to find out the practical applicability of bringing about these changes on companies financial performance and position.
1.3 RESEARCH QUESTIONS
The study seeks to find the answers to the following research questions.
There are inherent dissimilarities between the international accounting standard and the new Chinese accounting standards on intangible assets, namely: IAS 38 & ASBE 6. What are these dissimilarities and what are the ways in which the two accounting standards influence the financial position and performance of companies in China.
Various organizations in China are using the new Chinese accounting standards. What is the timeframe and reasons for this adoption?
What are the distinctive features and attributes of the companies that initially adopted the Chinese accounting standards and those that adopted them at a later date?
This study seeks to fill the gap in current literature on the subject of the adoption of the international accounting standards by Chinese companies. Previous researchers have carried out research on the nature, approach and type of Chinese accounting reforms. Research studies have discussed the various amendments made to the Chinese accounting standards since their inception and adoption. However, this study seeks to find out the inherent variations between the Chinese and international accounting standards with specific attention to intangible standards. It seeks to find out the unique features of companies that adopted these standards early and those that adopted these at a later date. It further addresses the benefits and limitations of the Chinese companies adoption of these standards.
SECTION 2: BACKGROUND INFORMATION
The attainment of the membership of the World Trade Organization (WTO) by China in 2001 attracted many foreign investors to enter the Chinese market. These foreign investors saw China as an ideal location to expand their business operations. The world's largest organizations started becoming partners with Chinese companies to benefit from the economies of scale in China. China also wished its domestic industries to enter and compete in the global capital markets to generate more revenue. Hence in view of such circumstances, the Chinese government emphasized upon bringing its accounting standards at par with the international accounting standards. China witnessed the issuance of new accounting standards by its Ministry of Finance in 2006 for Business Enterprises (ASBEs). These new standards were implemented in China in January 2001. The Chinese accounting standards that were prevalent at the time were for the most part changed by international Financial Reporting Standards (IFRS), to assist China becoming more closely aligned with world's financial standards and markets.
The issuance of the new standards brought about massive changes in the Chinese accounting field. Even though there were still inherent variations from the international Financial Reporting Standards (Christopher & Robert, 2008). China's distinctive accounting standard made it a cumbersome procedure for foreign investors to calculate their year profits / loses. This was because the Chinese standards merely stated the amount of assets owned by an organization and did not give a clear cut way to calculate profits whereas the international standards provided ways to accurately calculate year end profits and losses and to allocate these between the different departments in a company. Furthermore the Chinese accounting systems did not clearly show whether the company was incurring a debt, thus making it a very challenging task for management to operate a profitable organization. Management was unable to ascertain whether the organization was generating profits or losses.
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The Chinese economy has achieved tremendous growth in the last decade and has today become a leading world market economy. The changes in the Chinese accounting standards were necessitated by the demands of the ever-changing economy and to bring its standards at par with global standards so that Chinese firms could easily compete internationally. Foreign investors have requested the Chinese ministry to bring about the necessary changes in the accounting systems. The impact of the changes will be evident in the long run and will greatly help foreign investors seeking investment in Chinese firms. This will considerably enhance China's ability to attract foreign investment and make it an ideal location for conducting business activities.
SECTION 3: LITERATURE REVIEW
There has been much academic debate and discussion on the adoption of international accounting standards by emerging economies such as China. Academics such as Susela, 1999; Banerjee et al., 1998; Larson and Kenny, 1998, 1996; Watty and Carlson, 1998; Hassan, 1998; Al-Rai and Dahmash, 1998; Mirghani, 1998; Carlson, 1997;Wallace and Briston, 1993; Larson, 1993; Hove, 1990 and Perera, 1989) have researched in this field. The argument presented in these studies is that the accounting and reporting systems can function successfully if they portray a true reflection of the context in which they are being performed (Hopwood, 1979; Burchell et al., 1980). Research has proved the accounting environment of the developed Western countries considerably differs from that of the developing countries. From the early 1980s, many different bilateral and multilateral agencies have actively engaged in bringing about synchronisation of Western accounting standards with those prevalent in the developing world. The main reasons for these changes are the increasing internationalisation of western MNCs in eastern countries to benefit from the immense economies of scale, cheap, abundant labour of developing countries (Rahaman and Lawrence, 2001).
Reform in the Chinese accounting systems began in 1993 and is represented by the publication of the Enterprise Basic Accounting Standard and the amendment of the accounting law. The reform brought about changes in the accounting systems in China. These reforms outline a set of standards which will be applied to all the sectors and all types of ownership in China. The aim of these reforms is to bring China at par with the dictates of a more open market economy.
Let us now examine the Chinese efforts of harmonisation in different areas. Firstly, the Basic Accounting Standard formed the framework of basic accounting principles. These principles can be separated into two categories: one is for making certain the quality of information, the other deals with the accounting recognition, evaluation and disclosure. The Basic Standard highlights six requirements for information quality: sincerity, pertinence, comparability, and permanence of method, timeliness and clarity. The second classification involved accounting period, accrual basis, matching, prudence, historical cost, and distinction between income charges and capital charges and full disclosure. These rules provided a reference for determining the specific standards and the accounting rules in companies. Moreover, they harmonise Chinese standards with international standards (Ding 2000).
Secondly, the new rules introduced the internationally recognised equality (assets = liabilities + owners' equity). This allowed a harmonisation with the West, and also provided a better assessment method of enterprises' financial structures and risks. In this case, the Basic Standard discusses five accounting elements: asset, liability, owners' equity, income and charge (Ding 2000).
Thirdly, the new rules introduced bookkeeping methods based on - the debit-credit one. This greatly helped China in understanding the West way of recoding accounting information and also facilitated information exchanges among different sectors in China (Ding 2000).
Fourthly, the new rules revised the system of financial reporting. The new financial reporting system briefly consists of four parts: 1. Replacement of the balance of funds by an Anglo-Saxon-type balance sheet; 2. Introduction of a statement of changes in financial position; 3. Reduction of the number of statements, including the removal of the costs and charges statement; 4. Imposition of the notes accompanied with the ratio analysis. These changes were a rational progression of achieving a more informed understanding of the financial position of a company. It also provides the information in the way investors wish to look at it (Ding 2000).
The underlying benefits of the new system are that they are assisting the country in maintaining and sustaining its development to increase foreign investment. China's updating of its accounting systems is a step towards bringing its accounting systems in complete sync with the rest of the world. The limitations of the new systems are that China is adopting the new systems at once and is not phasing the procedures in slowly and gradually (chinese-accounting-standards 2009).
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Sir David Tweedie, Chairman of the IASB, writing in a Deloitte Report of 2006, remarks that "convergence is a process" and that the goal of fully uniform accounting standards between Chinese firms and those applying IFRS is attainable "in light of the progress that has been made," though no mention is made of any additional convergence procedures (chinese-accounting-standards 2009).
By and large the new procedures are in sync with the IFRS but the variations that are present symbolize China's distinctive position in the world economy. Some potential impacts of the new scheme include: The new rules influence different sections of the Chinese society in different ways. Organizations that are going through the process of adopting the new system may find it challenging to provide an accurate reflection of the impact of the change. Implementing a new accounting systems necessitates the development and implementation of a new tax system. New accounting rules may bring instability in a firm's results. In case of such an occurrence, all stakeholders of a company must be informed. This may lead to increasing challenges in obtaining finance as loan capital arrangements tend to become tighter (chinese-accounting-standards 2009).
SECTION 4: RESEARCH METHODOLOGY
As the authors of Management Research say,
Research is about doing something, constructing something new,
comparing your ideas against a bit of social reality ( or others' ideas
of reality), seeing change happen and being present in the moment of
knowledge creation (Carroll 2003).
Data will be collected from companies in China that have published their accounting information using both the Chinese and international accounting standards. The B-share is a type of share that is registered and listed in China with the face value weighted by RMB but sold and traded with foreign currency only. The investors of such companies are either residents or foreigners in Macao, Taiwan, Hong Kong, and the common occupants in China who are entitled to keep foreign currency. Thus, the B-share issue firms must present two kinds of annual reports simultaneously.
This study will study all the 55 B-share companies in Shenzhen Stock Exchange (SZSE) and all the 54 B-share companies in Shanghai Stock Exchange (SHSE). To prove the research questions, the selection sample has to incorporate a wide range of companies. This study will also examine some companies that are located outside mainland of China that have adopted the international accounting standards and also certain companies in
China. The researcher may reduce the total number of company. He will study a minimum of 30 companies from the stock exchange to prove the research questions.
The research philosophy of this study will make use of both inductive and deductive approaches. The inductive approach will be used to sum up the comparison between the Chinese accounting standards and the international accounting standards. This will focus on the thereoretical basis of the research. The researcher will use the deductive approach to examine the application of the new accounting standards for business enterprises to reflect upon Chinese companies adoption of the new rules and the respective benefits and limitation of adoption.
Primary data in this study will be collected by conducting interviews and questionnaires and a general documentation of conversing with experts in the field. The secondary data will be gathered by examining the annual financial reports and the stock exchanges (SZSE & SHSE). Data will also be gathered by visiting useful websites of China Securities Regulatory Commission, China Accounting Standards Committee and the Chinese Government MOF.
This researcher will analyse the data by using qualitative and quantitative methods. Qualitative methods will be used to illustrate appropriate theories about international and Chinese accounting standards. Data will also be gathered that can be used to answer the research questions.
SECTION 5: RESOURCES
The research project will require very few resources and the researcher can conduct it in the allotted time period. The project is relatively inexpensive as it does not need the researcher to travel abroad to access the required information. Local library will provide access to secondary data for the research. Secondary data will be collected from books, academic journals, relevant company and industry reports, trade magazines, the internet. However, getting access to interviews and a high response rate for questionnaires is likely to pose the greatest difficulty for the project.
SECTION 6: TIME PLAN
Detailed below is a time plan that outlines the tasks that needed to be completed and set timescales for their completion.
SECTION 7: CONCLUSION
The rapid rise in globalization and continuous changes in the way organizations carry out their business activities has raised concerns amongst the developed economies about the differences in accounting standards with the developing nations. China has advanced progressively and attracted major investments from multi-national corporations worldwide. Foreign investors are increasingly concerned about Chinese accounting systems due to their inherent shortcomings. Hence the Chinese authorities are under immense pressure to bring about the desired changes in its accounting systems to bring it at par with the rest of the world. Bringing out synchronization in accounting standards assists companies in developing a better understanding of and ability to make useful comparisons. The purpose of this study is to bring about synchronization between the Chinese accounting standards and the international accounting standards. The reasons for this are to encourage foreign investors to invest in China and to fulfill their requirement of getting precise accounting information for effective decision-making.