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.
