REGULATIONS
Accounting Standards Converge: Ministry of Finance Agrees to New Levels of Transparency for Chinese Companies
April 26, 2006
John Rieger, CPA

The adoption of international standards, recently announced by the Chinese Minister of Finance, should bring a new level of transparency to Chinese companies, according to John Rieger, AFP's director of financial accounting. Yet, differences will continue to exist, based upon China's unique circumstances.  Interpretive guidance is being issued with regard to certain transactions and certain industries, such as the petroleum industry.  Western companies should understand the implications.

At a February ceremony in Beijing, Jin Renqing, the Chinese Minister of Finance, announced that China would adopt new accounting standards, Chinese Accounting Standards (CAS), which will converge substantially with International Financial Reporting Standards (IFRS).

Jin announced that all listed companies shall apply the new accounting standards for business enterprises from January 1, 2007, and all accounting firms in China also shall apply international auditing standards from January 1, 2007.

The CAS currently are composed of one Basic Standard and 16 Specific Standards, most of which were issued between 1996 and 2001. The process of convergence will involve integrating the IFRS principles into CAS and will require amendments of all existing standards and the issuance of an additional 22 Specific Standards.

The revised CAS reportedly will not reflect a literal translation of IFRS, but their scope will include all IFRS principles. In addition, they will contain interpretive guidance to address the accounting for specific types of transactions, such as combinations of companies under common control, and specific industry accounting issues, such as extraction of petroleum and natural gas.

A small number of differences, however, will continue between the revised CAS and IFRS to reflect unique circumstances in China. These differences, among others, relate to a prohibition of the reversal of asset impairment once it has been made, the accounting for certain government grants and related party disclosures between State-owned enterprises that have no direct investment relationship.

The adoption of international standards should bring a new level of transparency to Chinese companies. For example, international rules on impairment will require Chinese companies to better reflect the fair value of their companies in the balance sheet, which historically have been recorded only at cost.

With such a short transition schedule in such a large country, the concern will be whether the accounting systems and the accounting knowledge base will have adequate time to transition.

John Rieger is AFP’s director of financial accounting and reporting. He can be reached at jrieger@chinaforum.com

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