The new procedures of Chinese Accounting Standards


China is a country known to everybody breathing on this Mother Earth. Apart from other companies and multinationals, which spend millions and billions of dollars on their branding, China has developed its name as a brand itself. This year has marked up a large step forward for the continuous integration between world trade and capital markets, alongwith China in the in the process of adopting a considerable number of the standards of accounting which had been laid out by the International Accounting Standards Board (IASB). The local Chinese local Chinese GAAP, called as Chinese Accounting Standards (CAS) has been radically replaced by the well known International Financial Reporting Standards (IFRS), so that China could be brought more in line with the rest of the countries. The new procedures which became law in the starting of 2007, on 1st of January, have had remained the fruit of a lot of protracted debate and discussion, involving the Chinese Ministry of Finance, different representatives of the International Accounting Standards Board and members of some audit and consultancy firms. Deloitte Touch‚ Tohmatsu, the renowned firm for professional services, has been serving the provision of consultancy services to the Chinese Ministry of Finance since 1993, advising on how best implement a new methodology of accounting techniques, and how would they be suitable to the accounting system of China. The consultations finally bore fruit on February 15th in 2006, when the Finance Ministry of China informed the world that China is to usher in a new era of Chinese accounting by introducing Accounting Standards for Business Enterprises, or ASBEs. The ASBEs cover almost all of the major topics one can find in the literature regarding International Financial Reporting Standards, inclusive with some exceptions worthy of notice, which have been implemented upon all the listed local Chinese companies since the starting of the year 2006. In the future, it is expected and highly assured that similar other firms are probably going to be mandated for conformation to the restructured standards in the Chinese MoF's plans. Unlisted companies have been advised strictly for adaptation to the newly introduced measures, or at least carry out IFRC framework.

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Ever since 1949 with the establishment of People's Republic of China until the opening-up and economic reform introduced in 1978, China was substantially ruled by Mao Tse-Tung's regime. The Soviet accounting model provided important guidelines for the Maoist regime (Hilmy 1999).

As a typical phenomenon at the time, the battleground of accounting research was not vested in academic or practical considerations, but in politics. The political reality was Mao's philosophy that strong central leadership and nationally upheld principles are prerequisite for building a powerful socialist country (Mao 1993). Under the premises, the dominant political ideology under Maoism was characterized by class struggle primacy, public ownership and central planning.

The class struggle primacy which has orientated by the Marxist notion of struggle of class had generated distinct debates on accounting between China and the West. While the early 20th century Anglo-American accounting theorists proposed great interests towards the relationships between accounting and economics (e.g. see Hatfield 1922; Paton 1927; Gilman1929; Carton 1939), early Chinese accounting practitioners had been debating whether 'foreign' accounting methods should be adopted based on the consideration that whether accounting is based upon class or culture. In 1951, a famous academic scholar Huang, Shou-ding (1951) published an article named "How to develop an accounting theoretical basis for the new China". In the first issue of the journal "New Accounting", Huang claims that "…different socio-economic systems brought different accounting modes…Capitalism has its accounting theory suitable to its own capitalist system …the new PRC adopts a socio-economic system distinct to the Capitalism which requires a different accounting theoretical basis …". Under the political climate at the time, this claim was re-interpreted into debates such as "different classes should have different accounting systems", "accounting belongs to class" and "accounting is class-based". Some academics argued that accounting theory in capitalism and practice suit and protect the capitalist economic system. Some academics argue that accounting functions as a means of accelerating class exploitation (Xin and Huang 1951).

Practitioners had a belief that socialist accounting should have been based upon Marxist political economy and began to ask questions. Among those questions were: Whose interest does accounting cycle serve? Who actually controls accounting?" (Ezzamel et al. 2007, p. 677) The justified and legitimized view was that the main purpose of accounting information is to meet the needs of working class or proletariats rather than those stake holders such as managers or investors (Grady 1965; Paton and Littleton 1970).

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The principle of conservatism has been brought into the debates through a further political lens (Brunswik, 1952). Capitalists' interests were believed to be protected because "if high profits are desired to be generated, assets have to be valued high whereas if a reduced profit is desired, assets are valued low" (Xin and Huang 1951, pp. 13-14). Conservatism was also claimed to have masked the exploitation of surplus values and to speed up capital accumulation (Yan 1951). Similar viewpoints overwhelm many other counter viewpoints because of the dominance of the political atmosphere. (Lloyd)

The IFRS and its features:

International Financial Reporting Standards (IFRS) are Standards, Interpretations and the Framework adopted by the International Accounting Standards Board (IASB). (Pixley)

Many of the standards integral part of IFRSs are known by their older name of International Accounting Standards (IAS). IASs were issued in the years between 1973 and 2001 by the globally recognized Board of the International Accounting Standards Committee (IASC). On 1 April 2001, the new IASB took over the responsibility from the IASC for setting International Accounting Standards. During its very first meeting the new Board adopted all the existing IAS and SICs. The IASB has, however, continued to develop standards calling the new standards IFRS.IFRS are considered all around the world as a "principles based" set of standards in which they establish broad rules as well as dictating specific and precise treatments.International Financial Reporting Standards comprise:

The Need for and Benefits of New Accounting Standards

Quite simply to say, there are several changes which need to be undertaken. For China there is a need for maintenance of its of its role as a big player in the foreign investment market. Similarly the accounting practices, which have often been considered out of synchronization with the rest of the leading countries. Accounting and business practices have remained as an area which had been criticized widely, because the standards had been falling somewhat short of the ideals that had been set out by the IASB, giving foreign investor an investment slack when looking forward towards performance of due diligence work and other vital procedures on local Chinese firms.( IASB: "IASB Work") Furthermore, now that China has already made considerable approach towards developing itself as a fully-fledged market economy, some methodologies in accounting that had previously been implemented in the previous system of a traditional centrally commanded economy, had gone obselete. The accounting methods that had been designed for measurement of performance of production targets that needed to be met in a planned economy would surely have largely been at odds with what was the requirement of a free market. ( Lloyd)

Modern accounting intensely needs to be able to analyze the financial health of a company in such a way so that it correctly allocates capital and other resources such as labor to its different functional departs. The traditional Chinese system on the other hand, used to be, initially, simply a statement of compilation of the assets under the ownership of a particular company, with no measurement of liquidity, performance or profit and loss. Moreover, there were no written records of the company's receivables, awarding the managers an extremely difficult task of operating a firm profitably since it hinder their way to determine the loop holes from where the firm had been losing money. ( Panosa)

Financiers and investors all around the world have so long called for harmonization of accounting standards around the globe inorder to compare the companies at a common level playing field. Whilst this is highly unlikely to meet such an achievement entirely in the short-term, the accountancy reforms have marked a noteworthy step towards unity in practice, and will assistin increasing the investors' confidence about their decisions. On the other hand, this is also likely to "enable a broader base of investors to consider investment in more Chinese companies," as quoted by PricewaterhouseCoopers' Yvonne Kam, further concreting China's reputation as an attractive place to invest and operate business. (Pixley) 

The New Standards and Potential Pros & Cons: 

Instead of being phased in a gradually over time as has been the situation with many other countries adopting the standardized procedures, China has chosen for adapting to the main standards essentially all in one go. It is difficult to tell how will this pan out and may prove to be a question which only time can answer to. However, this initial shift towards global harmonization is unlikely to be the end of the Chinese accounting reforms and it is expected changes to be ongoing on a continual basis. Chairman of the IASB, Sir David Tweedie has written in a Deloitte Report of 2006, that "convergence is a process" and that the objective of fully uniform accounting standards between other countries and especially the Chinese organizations and firms and those implementing IFRS is attainable "in light of the progress that has been made," though there had been no mention of any additional convergence procedures.( Lloyd)

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To be consider as a whole, the majority of the changes are observed to be in line with IFRS yet the differences that do persist are actually the representatives of representatives of China's unique position in the global economy. This unique standing is characterized by a prohibition to reserve a decision for impairment of an asset; financial statements which incorporate statements which incorporate certain related party disclosures; and government grants awarded to particular state-owned enterprises. Prior to these reforms Chinese Accounting Procedures had a single basic standard and sixteen precise standards, most of which had been adopted fairly recently, between the era 1996 to 2001. This needs to to be increased significantly so as to conform to the IFRS standards. Indeed, twenty two additional specific standards have been added to Chinese Accounting Standards, , more than twice their original number, with the initial sixteen also undergoing slight amendments. ( IASB: "IASB Work")

However, this fact must be regarded seriously that a number of gaps still exist. Sheer volume of financial statements still remains a substantial problem that is in requirement by organizations so that compliance with new regulations can be met. Embedding an almost Embedding an almost totally new accounting system into an economy can prove to be a very complicated task. Addison Everett of PwC has claimed that, his lengthy experience suggested that integration of newer standards into older ones can prove to be highly difficult: "clients who adopted IFRS for the first time could not fully contemplate the amount of financial information that was required to meet their compliance requirements, most of which had not been collected in the past due to common trend and no subsequent need." This increase in information requirements needs to be complimented by introducing training and imparting knowledge of the new systems by those who are responsible for drawing up financial statements. Development of such expertise is neither an easy nor a particularly rapid procedure. It will require huge up shifts not just from accountant's side, but everyone in the financial market from investors to bankers, and also a firms' non-financial workers such as human resources and management.( IASB: "IASB Work")

These discourses have remained in discussion in forms of regulations speeches, and articles by prominent regulators, politicians, academics and practitioners who disseminate political ideology into the domain of accounting. The distinct appraisals of accounting from different ideological lens, (e.g. the nature of capital exploitation under Mao and a technology under Deng), truly reflects that how easily that accounting could be de-legitimized and molded. This notion that accounting is neutral is highly contestable when connected to the context of constitution. There is no doubt that those factors which have been presumed to constitute accounting could reflect accurate and precise images of a concrete reality; instead of producing truth effects in a politically driven way. Ezzamel et al (2007, p. 697) demonstrates that "ideological transition opens up a space that facilitates greater debates of regimes of truth."( Panosa)

Conclusion: The importance and acceptance of IFRS has increased significantly over the past few years. Convergence with this international benchmark is now deemed as a high priority. However, given the specific circumstances and history of individual countries like China, various differences currently exist between Chinese national standards and IFRS. For instance, Chinese firm's recently-published comparison of IAS and US GAAP identified over 80 differences. The MOF clearly supports and synchronizes with international accounting harmonization and has been working to achieve convergence of CAS with IFRS by giving due consideration to IFRS in the process of drafting each CAS. The MOF closely follows IFRS, in line while having due regard to national laws, and the practical issues associated with effective implementation by Chinese enterprises. While it is actively carrying on convergence with IFRS, the MOF necessarily has had to ensure that accounting standards are being appropriately addressed in the country and the national circumstances that exist during this transitional period in the economy.

Specific circumstances that currently exist include a very significant portion of the economy that is dominated by state owned or public enterprises. Even though the enterprises are restructured into joint stock enterprises and have branched out from the government structure, functional or regional government the remaining stakeholders still do exert significant influences over the enterprises and their trading partners and transactions. Related party transactions are said to be pervasive. Many transfers of assets are driven by the government rather than motivated by pure business objectives.

Free markets have not sufficiently developed in many areas of the world. Financial statements are multi-functional, serving not only the needs of the investors but also other stakeholders such as and including the State for supervisory and management purposes. ?Enterprises and professional intermediaries, firms and corporations such as auditors and values are at still under development. During this transitional period, accounting standards must be realistically implemented by the preparers and auditors of financial statements. Deloitte Touch‚ Tohmatsu has newly published a comparison of IFRS and PRC GAAP and it is expected that this will serve to promote a more comprehensive understanding of Chinese GAAP by foreign investors of financial information prepared under PRC GAAP. This comparison is available in electronic form at the following website at (by selecting China from the "Countries" link).