International Developments in
Accounting
Assignment 1
ACFI 3217
Name: Cong Yi
P Number: P1*******
Date: 02/19/2015
Word count: 2857
The developments of accounting systems could be divided into five main stages in general:
1949: The foundation of PRC
With the advent of planned economy, all wealth of production in the country owned by the state, state ownership was considered to be the ideal. Besides, the information and financial results should be reported for implementing the national economic policies and resource allocation. The only model available was the Soviet one with almost no major changes and the central government was the sole user of financial statements. Additionally, the economy was run by a compulsory comprehensive economic plan, the industry-specific regulation has been issued. (Lardy, 2002) The only role of the accounting regulations was to offer information to the central government for planning purposes, for resource allocation and for controlling the plan.
1978:The economic reform
As an increasing amount of Chinese enterprises owned by foreign companies and local private investors, as well as China's previous planned economy was replaced by the market-oriented economy, serious attempts to align China's accounting system with international practices started. The drastic changes of the reform made the number of Sino-foreign joint venture increased, moreover, foreign investors were actually encouraged to become the majority equity holders or to found the wholly owned business in China since the mid of 1980s.(Solas and Ayhan, 2008)Therefore, not only the state would served by the accounting system but also international shareholders. According to this, a serious …Accounting Regulations for Sino-Foreign Joint Ventures? and …Charts of Account and Accounting Statements for Industrial Sino-Foreign Joint Ventures? has been issued in 1985 which is the first accounting system connected to international regulations to ensure the new accounting system in China. (Clarke, 2003)
1992: EAS
To strengthen the regulation and monitoring of the stock market, and to raise capital for the poorly-performing state owned enterprises that were seemed having difficulty in surviving in competition with local private and foreign enterprises, the SSE and SZSE established in 1990 and 1991. Since then, the Chinese capital market has attracted more capital market participants, and the accounting information has been utilized by more participants. In the year 1992, Deng Xiaoping allowed market-based approach, since then the idea of ASBE was issued in 1992 to unify the accounting systems used by various industries and to shift financial accounting towards international accounting practices.
Furthermore, in respond to the development of foreign exchange markets, to fulfill legal and profit measurements, to provide information for shareholders about financial performance and practicality, to provide information for directors making decisions and to provide an operation structure based on the careful processing of numerical data, the first accounting standard, on disclosure of related party relationship and transactions was promulgated in 1997. (The Times 100) The ASC was set up in October 1998 in order to bring Chinese accounting into line with international standards, even though industry-specific guidelines still exist. (Roberts, Weetman and Gordon, 2008)
2001: Joined the WTO
To engage in global competition and gain benefits in the global market, China marked a clear commitment —"an enormous multilateral achievement" towards multilateralism when it joined the WTO in 2001 (Lee and Lardy, 2008) .
In order to join in the WTO membership, China had to make sure their accounting system could satisfy the requirement of the global market and was accepted by the foreign investors and enterprises in the global competition (Rawski, G.T, 2008). Therefore, some reasonable changes based on resemble IASB Framework adapted by Chinese accounting system, for instance, several newly promulgated standards were adopted by public companies. The PRC GAAP was taken placed by the ASBE01, which contains one basic standard and 16 specific standards and very much in line with the IFRS since 2001. (S.J. Grand, 2011) In 2005, both CASC and IASB agreed that it is sensible to establish and develope a single set of high quality global accounting standards, so that convergence is the basic objective of standard setting programme, and the companies under CASs ought to provide the same financial statements as the companies under IFRSs. As a result, CASs for business enterprises are improved by adapting the standards that were equivalent to the IFRSs. (Roberts, Weetman and Gordon, 2008) After that, the Minister of Finance announced that China was entering a new era of globalization in its financial reporting practices coordinating with the revised ASBE including 38 standards and a new conceptual framework in February 2006, China accounting system has faced its turning point.
2007 till now: Converged with IFRS
The year 2007 was a milestone in Chinese accounting regulation, as the accounting standards became compulsory for selected companies, the nationwide and unified accounting standards aiming at promoting the sustainable development of enterprises, as well as improving capital markets. In addition, the government and some practitioners concern that the standards may allow the companies to manipulate their income and fiscal revenue in
order to cheat the investors or gain competitive advantages by providing unreliable positive financial statements. As a result, China adopted a new set of Chinese accounting standards(CAS). The accounting standards were implemented by listed enterprises at first, then the coverage extended to non-listed state-owned enterprises, non-listed commercial banks, securities companies, and non-listed insurance enterprises in 2008, which indicated that Chinese Accounting Standards will continue to be updated in line with IFRS developments.
According to the brief history of the development of Chinese accounting standard, it is obviously that the Chinese accounting standards are substantively convergent with IFRS, however the way it implemented is quite different due to various institutional and cultural factors. (Ding and Su, 2008) The influence of political and economic system, unique legal system, the changes of capital markets, the various of taxation systems and the differences of the accountants education background all are the institutional actors that may cause problems in implementing IFRS.
One of the major factor that may cause problems to China's current accounting regulations in implementing IFRS is the Chinese unique political and economic system. As the government significantly shaped the accounting framework in the management of the economy and the adaptation of combination of IFRS together with the Chinese economic system and foreign economic system, the admissions of the Chinese government are vit al. China?s “socialist market economy” make the accounting regulations generally depends on state-led enforcement mechanisms (Opper, 2003). Additionally, the Egalitarian-authoritarian system is fully adapted by the Chinese society while the UK government prefer to govern under the Liberal-democratic system. Apart from westerns' market-based economy, Chinese centrally-planned economic system made the range of related party entities excludes most of Chinese SOEs. Differently, all the SOEs are considered as related parties under IFRS, as a result the conflict of interests between the government and the directors leads most of the SOEs lack of independence in the whole regulatory system. Another concern is the blurred role of the government in accounting system. Based on previous discussion, China adopted centrally planned economic system that the state has the authority to dominate Chinese accounting regulations even behind the country's 30-year economic reform (Ding and Su, 2008). Not only does it has a great amount of shares in most of the large listed companies to gain the controlling shareholding, it also has the controlling power on the allocation of the resources in various channels such as bank loans and public listing. Therefore, the state may sometimes maximize
their own wealth but ignore the companies' wealth if the new accounting regulations are applied in accordance with the IFRS, hence some companies find the new accounting regulations are unfavourable.
To make the economic reform even succeed, a complete legal system and protections need to be developed in accordance with the new market structures. However, some state characteristics related to the Chinese legal system are potentially facilitate accounting fraud. Since the Chinese government dominated by the Chinese communist party, party organizations and members at all levels should obey the laws of the state, and follow the Party's rules and the Party's disciplines (Xinhua, 2014). It is difficult to make the new accounting system employed by various industries, because based on the previous accounting systems different industries' accounting regulations various a lot, and the adaptation of the westernized system means the abortion of all industry-specific rules and move them to the uniform accounting standards. Moreover, Wu Bangguo, the departing Chairman and Party Secretary of the Standing Committee of the National People's Congress, asserted that China will not follow the common law system of the western countries and will consistently adopt the code law system which is represented by its people. In 2009, Wu also denied the possibility that China would ever allow multiple parties(BBC Chinese, 2013). Consequently, most of the state owned enterprises will continually operate under the control of the state with low disclosure and no transparency, which shows a conflict with the implementing of IFRS. Additionally, the qualified accountants need to be trained to be familiar to the new legal regulations, that is to refresh their educational background. However, Chinese accounting staff?s educational background is incomparable to that in developed countries. With the rising international economic exchanges and the introduction of the international accounting standard pattern, the differentiations in accounti ng staff?s professional quality would cause problems in applying the IFRS, because the traditional accountants may work inefficiently or even wrongly under the new accounting standards, besides, the human recourses and money would be wasted in auditing the financial statements.
The changes of capital markets would also lead to problems in implementing IFRS as the definition of assets differs a lot between Chinese accounting regulations and IFRS. According to the IFRS, assets are defined as the estimation of “future economic benefits” while the Chinese law regard assets as neither the existence nor the future economic benefits, but measured by money value(ASBE Art.22). Therefore, the blurred definition of assets may have impact on the decisions made by the stakeholders, for instance, shareholders use accounts to evaluate the health of operations, and the dividends available to them. (Zhang and Ding, 2006) Furthermore, since the legal system is designed to satisfy government-imposed requirements
including calculating taxable income and the taxation system often change in accordance with the accounting system, IFRS convergence would cause confusions in the taxation systems. The tax rates not only affect individual company accounts, but also have impacts on the investments of foreign investors, for example, the foreign investment enterprises belong to PRC or joint ventures with foreign investment ownership are eligible to pay at least 5 per cent as the foreign enterprise investment tax on worldwide income. (Roberts, Weetman and Gordon, 2008)Additionally, the implementation of IFRS requires the government to complete the legislation on taxation, to revise tax laws, accelerate the foundation of tax law system, in order to make the IFRS convergence be compatible with the socialist market economic system. These improvements and variances allow foreign investments in different geographical areas or industries pay diverse national tax rates, and many other types of Chinese tax involving VAT, consumption tax, individual income tax, namely customer duty, business tax made the implementation of the taxation system even complex. As a result, many foreign investors may feel confused and refused to invest in such a complex market which may lead China lose foreign enterprises even further. To tackle this problem, the Chinese government have thought out several methods including offering incentives to the enterprises in special economic zones and reduce national rate to encourage export, whereas, new problems would occurred based on these changes(Blake and Gao, 1995). It is obviously that, the specific tax rates relating to different economic zones may lead to the complain of unfair competition between domestic companies and multinational companies.
Due to China's long traditional culture, the integrated structure of social power make Chinese believe in the sense of hierarchy and accustomed to following the superio r?s determination and acting according to laws and regulations, hence reconstruct the accounting system would cause conflicts between the traditional Chinese culture and the foreign culture. (Gray, 1988) Under China?s traditional cultural background, the lack of innovation sense and the highlight of interpersonal relationships lead to accountants? failure to efficiently and decisively dealing with latest matters(Alwyn, 2000). However, deeply impacted by western culture, the majority of the IFRS and western countries? accounting standards are established and publicized merely on behalf of some regulations on business accounting and leaving them great decision-making power within the given accounting systems when tackle specific accounting problems and setting of accounts.( BBC Monitoring Asia Pacific, 2003) The most famous models in evaluating the impacts of culture are Hofstede's cultural dimensions and Gray's model. These models have clearly defined culture to be individualism or collectivism, large or small distance, strong or weak uncertainty avoidance, whereas, it has been proved that Hofstede's model may mislead research when applied extensively and blindly because the model rely on strong assumptions. (Baskerville, 2003)
Hofstede defines culture as “the collective programming of the mind that distinguishes one category of people from another” (Hofstede and Hofstede, 1980). Indeed, Hofstede's Dimensions of culture model has a wide variety of theoretical research and practical experiences in consumer marketing contexts. Craig and Douglas (2006) claim that Hofstede's examination of culture is no longer as relevant as the national culture due to the development of the relationship across national borders. Based on the two graphs above, China's Power Distance Index is much higher than the western countries, which indicates that Chinese people accept the inequalities of power, so that the hierarchy structure no matter in the society or business environment will still exist. However, the westerns adapt the small power distance that is to realize the equalization of power and treat everyone fairly in the same business group. Therefore, the problems may occur due to the culture differences when the higher executives need to give up some of their power and lose several management advantages in the operations. (Liu and McClure, 2001) As the development of the Chinese business and the application of western management strategy, most of large enterprises in China realize equalization of power, so the gap between the UK index and the Chinese one becomes shorter than before. Similarly, Hofstede is resolute to distinguish different levels of culture at the national, group or organizational level, and personality at the individual level. (Bhimani and Gosselin, 2005) China has a really weak individualism index while UK's index was almost 8 times as large as the Chinese ones. Since the Chinese individuals prefer to work under collectivism, the implementation of IFRS make broke the relationship or "Guan Xi" in particular. Therefore, some of the executives' wealth may be broken and the conflicts of interests may happened because of the segregation of responsibilities and the transparency of the inside management group.
In Gray's model, the conservatism accounting dimension can be connected closely to Hofstede?s uncertainty cultural dimension, whereas masculinity and individualism are seen as less vital (Gray, 1988). Various contrasting factors of accounting values may impact the improvement of accounting systems in different directions are characterized by Gray?s dimensions. Conservatism is recognised as an traditional accounting value related to care, caution and prudence. Meanwhile, it leaves little room for innovation or new ways of tackling accounting problems. (Borker, 2012)
To conclude, since China is a developing country whilst IFRS are established based on the economic conditions of developed countries, their economic and international business environment makes China cannot adapt to the IFRS completely as those developed countries. As China stays in the elementary stage of market economy, the weak capital market, irregular inter-enterprise transaction and insufficient market competition, China has a long way to improve their accounting systems and other relevant changes to the potential institutional and cultural factors in order to guarantee of the future development in the global market. As the bank may use the statements to determine the amount of loan they would offer to the company, and government would set the proper taxation level to specific industry based on the statements, any further change of taxation systems or business operating strategies and decisions may affect the adaptation of the IFRS(Lardy and Lee, 2008). Then, since the legal system is he fundamental system to guarantee the daily social activities, it is hardly to change the legal system in accordance with the implementation of the IFRS, as a result the conflict between the western legal system and the Chinese one may often exist. However, it would be easy to make sure accounting staff?s professional quality is adaptable the IFRS, because the modern techniques enable the online training or even aboard studying available to most of the accounting professionals. According to China's over 2000years' history, it is hard to tackle the culture impact problems in a short period of time. However, the objective of IFRS is to make the global trading more convenient and set a set of accounting standards to ensure the equality of power, hence, it is believed that the enterprises would be able to change their traditional attitudes towards the conservatism or collectivism with the intention of maximizing their profits in the global competition. Though more efforts need to be made on the way to the IFRS convergence, we believe that China?s pace towards international accounting coordination would be constantly accelerated in the future (Zhang , 2010).
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