Principles familiar to investors worldwide put country on a level playing field

PUBLISHED : Friday, 25 April, 2008, 12:00am
UPDATED : Friday, 25 April, 2008, 12:00am

The development of new mainland accounting standards is being viewed as an important step for the growth of mainland China's economy and its place in the world's increasingly integrated capital markets.

And the adoption of the new accounting system under the mainland's Accounting Systems for Business Enterprise (ASBE) also brings about substantial convergence between the mainland's reporting standards and International Financial Reporting Standards (IFRS), as set by the International Accounting Standards Board (IASB).

The ASBE system includes one 'basic standard' based on the principles of IFRS, on top of 38 separate standards for different business sectors and 48 auditing benchmarks. The standards were adopted by more than 1,400 listed companies on January 1 last year and are scheduled to be extended to all medium-to-large enterprises over the next three years.

Previously, the mainland used a rules-based accountancy system based on a set of specific details designed to address potential contingencies. The use of principles-based accounting standards is based on 'fair value' and is designed to produce accounting statements that more accurately reflect a company's actual performance.

To help the mainland implement its accounting standards, Hong Kong accountancy professionals and industry bodies, including the Hong Kong Institute of Certified Public Accountants, worked closely with its mainland counterparts to produce a convergence system which is closely aligned with the Hong Kong Financial Reporting Standards system of the IFRS.

Following a year-long comparison and convergence project, mainland financial statements are now prepared in accordance with the mainland's ASBE. They are essentially the same as those prepared in accordance with the Hong Kong Financial Reporting Standards.

To achieve the convergence, thousands of hours of discussion, debate and analysis took place between accountancy professionals and regulatory bodies in the two jurisdictions.

Raphael Ding, assurance partner at Grant Thornton, said the convergence of the two accounting standards removed many uncertainties that overseas investors or companies saw when looking at financial statements produced using an accounting process they were not familiar with.

'By adopting the internationally recognised accountancy standard, it will be easier for mainland companies to achieve cross-border listing objectives,' said Mr Ding.

He said mainland companies that produced financial reports based on the fair value principles system should meet the listing requirements of any stock exchange in the world. ASBE would also ensure mutual recognition of auditing practices of mainland and Hong Kong companies conducting business in both jurisdictions, eliminating the need for two sets of auditing procedures.

'The long-term impact for the Hong Kong accountancy profession could be faster integration with the mainland than we have seen over the past 10 years. The shortage of mainland accountants coupled with Hong Kong accountants' experience and understanding of the IFRS system will continue to produce plenty of new opportunities for professional Hong Kong accountants,' he said.

Chen Baolang, assurance partner at PricewaterhouseCoopers said the mainland had taken significant steps to ensure full convergence with international standards since the decision was made by the government to adopt the principles-based accounting system in 2005. The mainland has joined nearly 100 countries that use accounting systems closely aligned with IFRS principles-based accounting systems.

Mr Chen said the benefits of the new accounting reforms could be considerable. For example, the new standards that incorporate accounting principles familiar to investors worldwide could boost investor confidence in the mainland's capital market and financial reporting systems. Also, foreign investors' confidence in the A-shares was expected to increase as they would now be able to get a unified financial report for each public company.

In addition, as mainland companies play an increasingly bigger role in the global business community, the acceptance of the new standards should also reduce the cost of complying with the accounting regimes of different jurisdictions in which they operate. Mr Chen said PricewaterhouseCoopers had been helping clients prepare their internal financial systems to comply with the new accounting rules.

Isaac Yan, partner in charge of the professional development and risk management department at KPMG China, said the new accounting requirements made use of fair value and principle-based processes instead of a rule-based system. He said under the ASBE system, accounting professionals needed to have sufficient knowledge and understanding of the new requirements. 'The processes of adopting the IFRS systems are designed to increase reliability of financial information. This matters because trustworthy accounts are seen to facilitate economic growth,' said Mr Yan.

He said the new accounting standards were only one component of the financial reporting supply chain. 'You also need good corporate governance, availability of reliable information to put into the formula, and qualified auditors and users who understand the information.'

He said applying the new IFRS standards was likely to present challenges just as it had when they were implemented elsewhere in the world. The mainland accountancy sector also faces its own unique challenge of struggling to cope with an ever-increasing workload.

'The mainland's economic engine keeps on running at top speed, creating more work than the undermanned industry can cope with,' Mr Yan said. A lack of properly trained accountants and the need to understand the IFRS system would ensure demand for Hong Kong accountants to work with mainland clients for the next 10 years and beyond.