Listed companies must publish two sets of 2006 reports under revised standards Mainland-listed companies will have to prepare two sets of annual reports for this year after new accounting standards come into effect on January 1. Shanghai and Shenzhen-listed companies will have to publish their 2006 annual reports as before, using the current accounting standards, but will also have to publish an additional report where their results are calculated according to the new international standards. 'The profitability of a lot of companies is going to be affected by the new accounting rules,' said Haitong Securities analyst Zhang Qi. 'Many companies used the old accounting system as a form of window dressing to make themselves look profitable when in fact they were not.' Companies that want to sell shares through initial public offerings or secondary offerings must also use the new accounting standards starting January 1, according to new regulations issued last week by the China Securities Regulatory Commission. If companies apply to sell shares before March 31, they can use the old accounting standards to calculate their previous three years of earnings. However, if they apply after that date, they must provide additional reports detailing any differences if earnings were to be calculated under the new accounting standards. In order to list in the mainland, companies must have been profitable for at least the previous three years. The new regulations introduce 39 new or revised accounting standards, bringing Chinese accounting rules into line with Hong Kong standards. The rules are compulsory for listed companies starting from the first quarter of next year but are optional for all other firms in China. 'Eventually, unlisted companies will choose to introduce the new standards on a voluntary basis, but for them to do so, there will have to be a change in tax regulations,' said Russell Brown, managing partner of LehmanBrown International Accountants. 'Local companies are still subject to a range of archaic tax rules that were established to govern the state-owned enterprise economy and until these are changed, they will be discouraged from switching to the new accounting rules unless they intend to go public.' The new rules are expected to usher in a wave of backdoor listings as companies that report much lower earnings under the new accounting standards become targets for acquisition by companies that no longer meet listing requirements under the new standards. 'We will probably see a lot more backdoor listings rather than a wave of delistings,' Mr Zhang said. The delisting mechanism in China is rudimentary, with just 17 companies struck from the Shanghai Stock Exchange since it was established in 1990.