IFRS update spring 2006 - China closes in

With all the focus on European and US efforts to put the international into
international financial reporting standards, the reforms taking place in
China have been pretty well
overshadowed.

Link: Access IFRS –
PwC’s IFRS resource centre

But all that changed last month when finance minister Jin Renqing announced
that the world’s fastest-growing economy had achieved a ‘milestone’ by bringing
its accounting and auditing practices in line with IFRS, moving China towards ‘a
more modern economic model’ and helping investors make ‘more sensible
decisions’.

But is that milestone more hot air than real achievement? For all the giant
economic strides China has taken in the last decade, it can still take a
frustratingly long time for an overseas investor to make tangible progress in
Beijing and beyond.

Encouragingly, Jin’s view is not confined to the Chinese government. ‘An
important step for the development of the Chinese economy and its place in the
world’s increasingly integrated capital markets,’ is how IASB chairman Sir David
Tweedie describes the move. Sir David has spent much of the last year shuttling
between Beijing and London and so speaks with some authority on the issue.

There is optimism across the Beijing business community too. Lou Jiwei,
vice-minister of finance and chairman of the China Accounting Standards
Committee (CASC), argues that the new regime will provide decision-useful
accounting information to investors and the public.

Liu Zhongli, president of the Chinese Institute of Certified Public
Accountants (CICPA), says China’s accountants are right behind the new system.
And the messages from the likes of the deputy auditor-general of the National
Audit Office, the China Securities Regulatory Commission and the Bank of China
are no less enthusiastic.

Prospective investors can draw further comfort from the fact that this is no
overnight sensation. Thousands of companies in China are already using IFRS.

All listed Chinese companies that sell shares to foreign investors have had
to prepare accounts in accordance with China GAAP and international standards
for a number of years. Financial institutions are obliged to do so too, while
many others have elected to provide IFRS-compliant numbers for some time.

China has also been developing its own standards ­ largely modelled on IFRS ­
for the best part of 10 years. Include preparation and you can add a further
decade to that. China has always been a big fan of global standards.

Developing its own accounting standards was always seen as unnecessarily
costly while adopting another country’s was diplomatically and politically
problematic. Even before the EUembraced a set of global rules, China saw the
merits.

So convergence starts now and international investors are expected to look on
favourably. A local PricewaterhouseCoopers paper says the resulting investor
confidence in China’s capital markets and financial reporting ‘will be an
additional spur for investment from both domestic and foreign sources of
capital’.

For local companies, which PwC points out are increasingly playing a global
role, the acceptance of the new standards should also reduce the cost of
complying with the accounting regimes of the different jurisdictions in which
they operate.

Few disagree that convergence will be anything other than a spur to
international investment. The only question is how fast it comes and how far it
goes.

David Cairns, secretary general of the International Accounting Standards
Committee from 1985 to 1994, sounds a note of caution. ‘There is probably a much
greater risk of differences in the Chinese version of international standards ­
because they are very definitely modified as part of their process for IFRS ­
than in, say, versions created in the EU,’ he points out.

So what’s next? The goal is that, from 1 January 2007, a company applying
Chinese accounting standards should produce financial statements that are the
same as those of a company that applies IFRS.

China has already overtaken the US as the biggest recipient of foreign
investment, and that will be further boosted by overseas investors being able to
rely on accounting standards with which they are fully familiar. Meanwhile, the
wave of Chinese companies raising capital outside China’s borders is likely to
become a flood.

The specifics

China’s convergence project involves integrating IFRS principles into Chinese
accounting standards and will result in the amendment of all existing standards
and the issuance of an additional 22 specific standards.

The revised standards will not be a literal translation of IFRS, but their
scope will include all IFRS principles. They will first be applied to listed
companies from 1 January 2007 and gradually be extended to other entities.

There will, however, continue to be a small number of differences between the
revised Chinese accounting standards and IFRS to reflect unique circumstances in
China, largely reflecting relationships between the state and corporate
entities.

Phase one of the project takes in 39 Chinese accounting standards for
business enterprises and 48 auditing standards for certified public accountants.

Link: For the latest news and analysis on IFRS, updated
every week, visit Access IFRS –
PwC’s IFRS resource
centre.