The People’s Republic of China is now one of the fastest growing economies in the world. During the past ten years, economic developments have been accompanied by what can only be described as a revolution in accounting.
Until the 1980s, the function of the accounting system was to enable the socialist government to manage the economy. China had drawn extensively on the USSR experience in designing its accounting system. It was a fund based system, a tool to help the government in its economic planning and allocation of funds to different enterprises. The fund-based balance sheet, the Chinese term for a balance sheet, consisted of a balance between total sources of funds and total application of funds. Detailed rules were laid down in separate accounting regulations for 40 different industries.
After the chaos of the Cultural Revolution, which lasted from 1966 to 1977, government experiments with economic reform began to achieve success.
Enterprises were permitted profits rather than having to pay them over to the government. For the first time, it became possible to set up a company with a share capital. In addition, the government encouraged foreign investment, usually in the form of joint ventures.
Such changes in the economy necessitated changes in the accounting system.
The first accounting law, the Accountancy law of the People’s Republic of China, became effective in January 1985 and the Accounting regulations for joint-ventures using Chinese and foreign investment followed. These were modified in 1992 when Accounting regulations for experimental share enterprises was also issued.
The watershed was 1993 when the ministry of finance issued Accounting standard for enterprises no 1: Basic standard. Although it is described as an accounting standard and has the force of law, it is a conceptual framework or statement of principles. It is applicable to all enterprises established in China and takes precedence over all earlier accounting regulations.
Having developed such a framework, the ministry then focused on the production of a full set of accounting standards and announced its intention to issue some 32 standards.
Exposure drafts of most of these were issued between 1994 and 1997 and, although many draw on international accounting standards, some – such as the exposure drafts on the balance sheet and profit and loss account, issued in 1994 – are distinctly Chinese.
With a conceptual framework in place and exposure drafts issued, the accounting reform has reached a phase of refinement. Once a full set of standards has been issued, Chinese accounting will come closer to that in Britain, although the extent to which Chinese standards will apply throughout the economy to small and medium sized entities remains to be seen. The first standard, Disclosures of related parties and their transactions, which was issued on 22 May last year and applies only to listed companies at this stage, shows the determination of the Chinese government to move closer to international practice.
To provide guidance in the transitional period while accounting standards are being developed, the ministry issued General rules on financial affairs for enterprises in 1993 based on the Accounting standard for enterprises no 1: Basic standard. It also revised the long standing Regulations for different industries, reducing them from 40 to 13 major industries.
But what is the future of these industry regulations once a set of standards become effective? Some accountants argue they will be redundant, while others say such assistance will be needed for some time. If the latter win the day, the transitional regulations will require revision to ensure their consistency with the accounting standards.
Accountants in Britain are concerned about the pace of change in financial reporting here, but this pales into insignificance when compared with developments in Chinese accounting. China is attempting to move from a system of fund accounting to a capitalist system in less than a decade.
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