Mainland cash flow buoys HK exchange

Hong Kong's decision to accept mainland accounting standards is expected to boost liquidity on the bourse, encouraging more firms from across the border to raise capital here and enhance the international status of the city's stock exchange.

'This move is only natural for the Hong Kong stock market in a bid to attract as many quality mainland companies as possible to raise capital. Given our inherent and natural edge in terms of speaking the same language and proximity, we can't afford to lose such listing opportunities to other jurisdictions,' says Clement Chan, managing partner of BDO.

Benny Liu, partner-in-charge of audit at KPMG China, says the move was to be expected as there are only slight differences between mainland and international accounting standards. 'If you compare the financial statements of Chinese companies that are listed on the mainland and in Hong Kong, you will not find significant differences between their results prepared under the two sets of standards. It is understandable to make such a move.'

Hong Kong's prominence as a listing centre has been growing, fuelled mainly by listings from mainland firms, that have skyrocketed from 142 in 2000 to 592 last year.

'Mainland firms looking to expand their global operations are attracted to Hong Kong given its international reputation. Reducing the burden on companies to audit their books twice, in Hong Kong and on the mainland, will significantly improve efficiency and streamline practices,' says Winnie Cheung, CEO of the Hong Kong Institute of Certified Public Accountants (HKICPA).

The mainland's Ministry of Finance has so far approved 12 firms to audit the books of Hong Kong-listed H-share companies. Though this may result in some loss of work for Hong Kong's accounting industry, the fallout is expected to be minimal.

'Prior to the move, these same firms - including joint ventures of the big four international accounting firms and firms with affiliates in Hong Kong or under the same international accounting network with a Hong Kong practice - were already auditing 85-90 per cent of these companies' books, so the reduction of work is not expected to be significant,' says Philip Tsai, an audit partner at Deloitte who is also the president of HKICPA.

Far more pertinent, however, is the additional work for Hong Kong firms, expected to be generated as a result of new listings.

'More Chinese companies will, in the long run, list in Hong Kong and that will create greater demand for professional services in the areas of IPOs [initial public offerings], consulting, corporate finance, mergers and acquisitions, corporate governance and tax planning,' Cheung says.

Others believe the decision will raise the standard of the profession on the mainland, prompting closer collaboration between mainland firms and their Hong Kong affiliates.

'This is a catalyst decision that will encourage more Hong Kong accountants to integrate with their PRC [China] accounting practices, encouraging mutual recognition and collaboration,' says Roy Lo, vice-president of CPA Australia for Greater China.

The mainland has been working to converge its accounting standards with international financial reporting standards (IFRS) for several years and has now reached a point where there are only minor differences between the two.

'Hong Kong and China's accounting standards have both converged with the IFRS, so, in terms of accounting principles, it is basically the same.

'In terms of application, there are slight differences, mostly to address the bigger and more complicated business environment on the mainland. Over time, these differences will likely be eliminated,' says Terence Ho, Ernst & Young's Greater China strategic growth markets leader.

The only point of difference, Chan notes, is in the area of reversal of impairment loss. Under mainland standards, companies cannot ever write back the impairment loss of long-lived and intangible assets and property, equipment and plant.

This is to minimise the risk of companies using the write-back option as a tool to manipulate profit figures. Under the IFRS, firms with good reason can reverse these losses at a later stage.

The challenge, according to industry sources, lies not in the accounting standards but how they will be digested by investors.

'Investors in both markets will need time to familiarise themselves with the relevant accounting standards and gain understanding over the practices adopted by the regulators in both jurisdictions regulating the auditing firms,' says Thomas Lo, a partner at PricewaterhouseCoopers.

'I think it will take time for the market to accept this, in particular overseas investors who may not be familiar with recent fast developments in China's accounting standards,' Liu says.

Right now it remains too early to tell just how many H-share listed companies will switch to using mainland accounting standards in Hong Kong. 'A lot of companies are maintaining a wait-and-see approach in terms of how this is being received by the investment community,' Tsai says. 'We will see minimal impact in the 2010 reporting season. The impact will become evident for the interim 2011 reporting period.'