Roadmap boosts convergence of global accountancy standard

By Professor Jeong-Bon Kim

Professor Jeong-Bon Kim, Chair Professor and Head, Department of Accountancy describes how changes in accountancy standards, which converge substantially with the International Financial Reporting Standards have been integral to China's successful integration into the global economy. An earlier version of this article appeared in China Daily.

China's economic development over the last three decades is widely viewed as the largest socio-economic expansion in the history of human civilisation. This phenomenal growth would not have been possible and sustainable unless it had been accompanied by concurrent developments of supporting institutional infrastructure. The accounting profession provides important foundations for well-functioning capital markets, effective corporate governance, and the resolution of conflicts of interest among various stakeholders in the economy.

A key success factor in China's development is the Chinese government's continuing effort to further develop, reform and improve the country's accounting standards and practices. Understanding the past development of accounting in China is useful for us to better predict the future of economic development in China and other transitional economies.

Over the last four decades, the Chinese government has restructured or privatised state-owned enterprises as joint stock companies and successfully attracted foreign direct investment. During this period, the demand for external finance has risen dramatically, which in turn has spurred the Chinese government to develop well-functioning stock markets.

In this process, China has undergone fundamental changes in its accounting system. In the old days of the planned economy, accounting in China primarily served the central government. The transition from a centrally controlled to a market-oriented economy created the demand for credible accounting information from various stakeholders, including investors, creditors and financial analysts. As these capital market participants have different information needs, China's regulatory authorities have successfully made various accounting and auditing reforms in response to rapidly increasing demands for reliable, verifiable, auditable, and thus credible accounting information.

Overall, China has made significant progress in improving accounting practices and the accounting profession, which provides the Chinese economy with crucially important institutional infrastructure. For example, in preparation for entry into the World Trade Organization, the Chinese government realised the necessity of accepting international accounting practices.

In response, the Ministry of Finance took a significant step forward for the integration of capital markets and accounting standards by announcing new accounting standards in 2006. The new standards, which converge substantially with the International Financial Reporting Standards (IFRS), contributed much to improving the comparability, reliability and credibility of accounting disclosures in China.

It has been argued that IFRS-based accounting standards can better reflect the underlying economic transactions conducted by business enterprises. Unlike traditional Chinese accounting standards which adhere to the historical cost principle, IFRS is considered fair-valueoriented, and thus helps accounting reports better reflect the underlying economic performance.

In more recent years, the implementation of the "Roadmap for the Continuing Convergence of Chinese Accounting Standards for Business Enterprises with IFRS" has updated the five standards of long-term equity investments, employee compensation, financial statement presentation, consolidated financial statements and financial instrument presentation. It has also formulated the three standards of fair value measurement, joint venture arrangements, and disclosure of interests in other entities.

The roadmap has steadily promoted the construction and implementation of common classification standards for corporate accounting standards, served the economic and social development of enterprises, and provided accounting technology to support the "Go out," "Belt and Road" and "Made in China 2025" strategies. The effort has been backed up by a thorough-going promotion of grassroots accounting work and accounting service markets.

Although it takes time, effort and resources for corporate managers to adapt to the new accounting standards, the adoption of IFRS that is now widely accepted in the global market will benefit China's economic development in the long-run, for example, by allowing enterprises to obtain external finance from outside (particularly foreign) capital suppliers at a lower cost. This benefit accrues largely to those Chinese firms who have cross-listed or seek to cross-list their shares on overseas stock exchanges.

Professor Jeong-Bon Kim
Chair Professor and Head
Department of Accountancy
Message from Professor Jeong-Bon Kim

I am delighted to contribute to this accountancy-themed edition of City Business Magazine. Special thanks go to my colleagues in the Department of Accountancy who have written many interesting articles, as well as to the magazine's editorial team.

Over the last two decades, the accountancy profession has gone through something of a revolution. This includes global convergence of accounting standards via the adoption of International Financial Reporting Standards across many countries around the world. In addition, the use of information technology in transmitting accounting information to outside stakeholders will bring about profound changes in the way accounting will be practiced in the future. Examples of these changes include the adoption of XBRL (eXtensible Business Reporting Language) for financial reporting and the use of social media for disseminating fundamental information about the firm.

Sometimes it is difficult to see the wood for the trees, so we have summarised the main takeaways from this edition.

"Redrawing the bottom line" means:
  • Realising global accounting standards
  • Embracing corporate social responsibility
  • Rolling back "too big to fail"
  • Promoting the sustainability of social enterprises
  • Using new technologies to capture more granular data
  • Rethinking our ideas of "trust"
  • Leveraging accounting synergies across platforms
These are some of the issues we look at in this edition.

We hope you enjoy the read!