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1、Convergence of China GAAP to IASConvergence of China GAAP to IASXiaoming Li* Xiaoming Li (1974- ), Ph.D. candidate of Accounting, School of Economics and Management, Tsinghua University, teacher of Accounting Department of South China Agricultural University; Main research field: Accounting Standard
2、s, Behavior Finance, Corporate Governance, etc.; Address: Accounting Department of School of Economics and Management, South China Agricultural University, Guangzhou, China, Postcode: 510642. South China Agricultural UniversityAbstract: With the economic globalization, accounting internationalizatio
3、n is inevitable. By 2006, China will build a complete system of accounting standards, including an Accounting System for Business Enterprises and 38 specific accounting standards, which harmonize with IAS to a degree. Since the making process of the standards is not only concerned with proper accoun
4、ting, but also influenced by the economic consequences, China should try her best to be influential in international accounting field.Key words: accounting internationalization; accounting standards; standards setting 1. IntroductionWith the economic globalization and the development of market econo
5、my in China, convergence of generally accepted accounting principles (GAAP) to international accounting standards (IAS) is inevitable. Financial reports are the most fundamental way in which a company communicates its operating results and financial positions to outsiders. As more and more enterpris
6、es and banks intend to raise funds on the international capital market, it is necessary to provide financial reports that international investors can understand. If financial reports are prepared or provided only in conformity with Chinese accounting standards, which are still different in many aspe
7、cts from IAS, it may be difficult for international investors to understand and compare with other investment opportunities. So communicating solely on the basis of national GAAP can affect the capital raising activities of the enterprise. There are two way to solve this problem. One is that enterpr
8、ises should provide another financial report in accordance with IAS, which would lead to two confusing sets of accounting numbers, the other is that China should develop a set of GAAP convergent to IAS, which is the inevitable trend.2. Development of IAS and CAS2.1 History of Accounting Internationa
9、lizationGlobalized markets make the need for disclosure even more compelling since financial information needs to be understood by market participants around the world. The need for a common language, as well as its exceptional role in preventing financial distress and enhancing the financial sector
10、, accounts for the origin of IAS. Numerous organizations have been engaged in the implementation and promotion of IAS. The most influential organization among them remains the International Accounting Standards Board (IASB), which is responsible for setting the International Financial Reporting Stan
11、dards (IFRS) and promotes their convergence worldwide. IASB was preceded by the Board of the International Accounting Standards Committee (IASC), which operated from 1973 to 2001. IASC was founded in June 1973 as a result of an agreement by accountancy bodies in Australia, Canada, France, Germany, J
12、apan, Mexico, the Netherlands, the United Kingdom and Ireland and the United States, and these countries constituted the Board of IASC at that time.At present the convergence of IAS has made significant progress in the world. IAS has been recommended by International Organization of Securities Commi
13、ssions (IOSCO) to be used by Multi-National Enterprises (MNE) for cross-border listings and offerings and all listed companies in the EU are also required by the European Commission to use IAS for their consolidated financial reports.2.2 History of CASSince the stock market began, China has planned
14、to replace the accounting model adopted under the planned economy by a set of standards that is more suitable for an evolving market economy. In 1992, China issued an Accounting System for Business Enterprises (ASBE), which is the symbol of beginning of accounting reform. ASBE defines the objectives
15、 of financial statements, the qualitative characteristics of accounting information and accounting elements, i.e. assets, liabilities, equity, revenue, expenses and profit. After the accomplishment of ASBE, with the technical assistance funds from the World Bank, China had engaged Deloitte Touche To
16、hmatsu, an international accounting firm as consultant on accounting standards projects. Since then, more than 20 exposure drafts have been issued. These exposure drafts have been revised and amended, and most of them have subsequently been converted into final accounting standards. So far, China ha
17、s issued 16 specific accounting standards, including Disclosure of Related Party Relationship and Transactions, Revenue, Investment, Changes in Accounting Policies and Accounting Estimates, Fixed Assets, Inventories, Leases, Contingencies, Non-monetary Transactions, Events occurring after the Balanc
18、e Sheet Date, Cash Flow Statements, Debt Restructuring, Intangible Assets, Construction Contract, Borrowing Costs, and Interim Financial Report (Feng, 2002). In 2005, China issued 17 exposure drafts including Insurance Contract etc. and the agenda of standards concerning financial instrument is set.
19、 Through these reforms, China has made significant progress in the development of China Accounting Standards (CAS) within a short period. It was pronounced by Ministry of Finance that by 2006, China will build a complete system of accounting standards, including an Accounting System for Business Ent
20、erprises and 38 specific accounting standards. 3. Inconsistencies between CAS and IASIn many aspects, CAS is consistent with IAS since China has always referred to IAS in the process of formulating its own accounting standards. But there are still some differences between CAS and IAS. First of all,
21、the accounting policies of certain economic activities prescribed under CAS are designed to focus on truthfulness and prudence, since the environment of market economy is not mature enough in China. For example, there are lots of non-monetary transactions in China, which are related transactions in
22、most cases and are difficult to determine a fair value. To prevent listed companies from taking this opportunity to polish their financial statements, China has issued Accounting Standard for Non-monetary Transactions, which prescribes the respective accounting treatment of non-monetary transactions
23、 involving exchange of similar and dissimilar assets. There isnt similar standard in IAS.Secondly, China prefers historical cost to fair value as the measurement basis. But IAS 39 and IAS 40 include financial assets and investment property into the realm of fair value, which are the main part of ass
24、ets in the listed companies. But it is rather difficult to acquire the information of fair value in China, because the capital market is relatively small and other commodities markets also need further improvement. Another reason for the prudence in the use of fair value is that using history cost c
25、an make it easy to judge whether managers of state-owned companies fulfill the fiduciary responsibilities.Thirdly, sometimes same activities may have different effects on current profit. For example, the profit of annual financial report of Bank of Communications in 2004 based on CAS was 0.9 billion
26、 Yuan, which was only 57 percent of that reported in prospectus based on IAS. The most prominent difference between them was transfer of non-performance loan to China Cinda Asset Management Corporation, which increased 1.2 billion Yuan according to IAS, since the loss of transfer of non-performance
27、loan is debited to expense in CAS, while in IAS that loss is debited to additional paid-in capital. Many key characteristics are determinants of the differences, some of which are specific in China while some are common in developing countries. Firstly, users of accounting information are different
28、from developed countries. Institutional investors are dominant accounting information users in developed countries, but in China they cant play an important role. Most of stakeholders of Chinese listed firms are state holders who dont care public accounting information very much. Secondly, from the
29、perspectives of performance evaluation and supervision, laws and regulations in China have paid too much attention to net income, so it is not easy to replace it with comprehensive income as IAS does. Finally, an open and fair market is still on constructing, so fair value is not reliable in most ca
30、ses (Feng, 2004).4. The Way to Convergence4.1 Proper Convergence to IASAlthough using IAS can reduce cost of capital and deepen finance channels, it should be noticed that convergence to IAS doesnt mean replacing respective accounting standards in all counties with IAS, since there exist specific ch
31、aracteristics in specific country. Leuz (2002) believed for New Market firms in German, US GAAP appears to be comparable with IAS in its ability to reduce information asymmetries. Lee (2004) found the accounting information reported is more relevant according to CAS than IAS, based on a sample of li
32、sted companies in Chinese stock market which issue B-share between 2000 and 2002. Therefore, there is no affirmative evidence to simply replace national or local GAAP with IAS. From the perspective of IASB, the objective of convergence still has different levels. Convergence has been accomplished co
33、mpletely, if IFRS are required for all domestic listed companies or standards are virtually identical but defined as national or local GAAP. By the end of 2005, there had been 65 countries gone into this range. Besides these 65 countries, there are lots of countries where IFRS are permitted, or requ
34、ired in limited circumstances. In China, listed companies which issue B-shares or H-shares are required to prepare a set of IAS reports. There are still many other countries whose national GAAP are influenced by IAS. To promote convergence of IAS, IASB has been encouraging their countries to enlarge
35、 the range of IFRS or harmonize their national GAAP with IAS, rather than simply replace them. Chinese Ministry of Finance contacts with IASB frequently, to find the way to diminish some essential differences with IFRS, such as the opinion of reliability of fair value etc. For example, on November 8
36、, 2005, Mr. Wang, secretary of Chinese Accounting Standards Committee, signed a joint declaration with Sir David Tweedie, chairman of the IASB, which marked Chinese effort to converge to IAS had been admitted by IASB. The number of adjustments required to convert the financial report prepared under
37、CAS to an IAS report has reduced over the years. As a result of the accounting reform over the recent years, China has harmonized with IAS to some extent.4.2 From Passive Convergence to Active ConvergenceThe making process of the standards is not only concerned with proper accounting, but also influ
38、enced by the economic consequences, so political power cant be ignored. For instance, FASB attempted to recognize the reality of stock-option value by issuing proposed statement of financial accounting standards (SFAS) 123 in June 1993, which required measuring the optional value based upon many fac
39、tors that reflected its fair value. A groundswell of massive opposition to this fair value method resulted and led primarily by industries making use of stock options significantly, particularly in the high-technology sector. Opponents to the expensing of stock options included many members of Congr
40、ess. In 1993, Senator Joseph Lieberman introduced a bill that would have mandated the SEC to require that no compensation expense be reported on the income statement for stock-option plans. The powerful interests aligned against it forced FASB to compromise. In 1995, FASB decided to encourage, rathe
41、r than require, the recognition of compensation cost based upon the fair value method.The situation of SFAS can be extended to IAS. Besides IASB, Financial Accounting Standards Board (FASB) also has international power, owing to remarkable capital market in the US. FASB has competed with IAS for a l
42、ong time for the leadership of international accounting standards. Now IAS has come to a compromise with FASB to develop a common conceptual framework, i.e. a single framework that converges and improves upon the existing frameworks of both Boards. This project was added by IASB and FASB to their ag
43、enda in October, 2004.In IASB there are 14 Board members. A half of them are from US and UK, the others are from Canada, German, French, Sweden, Australia, Japan and South Africa. America and Europe occupy the majority of IASB, and it is not surprise that some influential organizations, such as the
44、Financial Accounting Standards Board (FASB) in United States, the Accounting Standards Committee (ASC) and the Accounting Standards Board (ASB) in the UK, can influence the setting process of IFRS. For US and some countries in Europe, the convergence to IAS is really a two-way process (Lawrence, 200
45、2). There are no voices from developing countries in IASB, partly because capital markets in developing countries are limited and quality of information is lower. But it should be noticed there are many specific characteristics in developing countries as I mentioned above. There are many economic ev
46、ents and transactions which are same in form but different in essence or even dont exist in developed countries. On one hand, China should try its best to cooperate with IASB and persuade IASB to consider the characteristics of developing countries, since “taking account of the special needs of emer
47、ging economies” is one of objectives of IASC founding constitution, and a two-way communication is better for IASB. On the other hand, China should persuade IASB to take Chinese accounting standards dealing with economic events and transactions which dont exist in developed countries into IAS. Through their efforts, China will take a seat in IASB. An active convergence to IAS benefits China for a long term.5. Conclusion(to be continued to Page 58)15