Accounting in China: How Successful Has China Been in Its Bid to Harmonise Its Gaap with IAS? Rui Hua Jiang, Lana Liu and Simon Hussain Report on Their Research into Its "Accounting System for Business Enterprises"
Jiang, Rui Hua, Liu, Lana, Hussain, Simon, Financial Management (UK)
Because its economic boom has generated significant interest from international investors and financial institutions over the past decade or more, China has been trying to change its accounting system from one that's appropriate to a state-controlled economy to one that's more influenced by the needs of investors. In effect, this has entailed moving its Gaap towards international accounting standards (IAS).
In November 2002 China's assistant finance minister, Feng Shuping, gave a speech on this topic at a meeting of standard-setters in Hong Kong. "China has always referred to IAS in the process of formulating its own accounting standards," she said. "We have replaced the accounting model adopted under the planned economy by a set of standards that is more suitable for an evolving-market economy, aiming at convergence with IAS."
Corporate earnings represent the single most important accounting item for current and prospective investors in Chinese businesses--a factor that Shuping acknowledged in the same speech. "Because of the importance of measures of profit for market regulation, the formulation of accounting standards in China focuses on the income statement instead of the balance sheet," she said.
Studies suggest that China's efforts to harmonise its standards with IAS during the nineties were unsuccessful: companies that were required to report under both Chinese Gaap and IAS saw a persistent differential between the two sets of earnings figures throughout the decade. In an attempt to improve the harmonisation process, China introduced the "accounting system for business enterprises" in January 2001.
To determine whether the new system has succeeded in its aim, our research focused on the reconciliation statements of annual reports published on the web site of the Shanghai Stock Exchange for all 51 "B-share" listed Chinese companies between 2000 and 2003.
The previous studies found that, in by far the most cases, earnings reported under Chinese Gaap throughout the nineties were greater than those reported under IAS. …