| With the development of the global economy, the | | | | government in economy activities becomes quite |
| pace of globalization has increased dramatically | | | | necessary. Otherwise, the newly published |
| within the past two decades. To prevent the | | | | standard could be in favor of those |
| risk of financial crisis, increase multinational | | | | government-controlled companies and become |
| business activities or reduce the cost, international | | | | obstacles for other companies to follow as the |
| convergence of accounting seems to be one of | | | | result of government controlling most capitals and |
| the most effective ways. For developed | | | | nearly all major listed companies (Firth, 2006). |
| countries, the accounting techniques have been | | | | Another concern is the lack of experiences and |
| adopted for a long time, therefore they already | | | | trainings for Chinese accountants in making |
| have reached a high professional level. However, | | | | professional and ethical judgments. IFRS standard |
| for a developing country, such as China, | | | | allow companies to make their own judgments |
| convergence of IFRS (international Financial | | | | based on economic substance of a company's |
| Reporting Standards) and local GAAP (Generally | | | | activities. However, most Chinese accountants |
| accepted accounting principles) are often seen as | | | | used to only follow the government rules and |
| a double-edged sword that brings both | | | | were rarely encouraged to perform judgment. |
| opportunities and challenges. | | | | As a result, playing "number game" in order to |
| China's financial report practices can be traced | | | | meet the profit target could happen easily under |
| back more than 2000 years ago. Before 1800s, | | | | certain circumstance. Other concerns may include |
| China has its own primal accounting system and | | | | immature policies, worries from Chinese |
| regulations developed from a Feudal society. After | | | | companies, etc. |
| the Sino-British Opium War in 1848, China began | | | | Although China is facing challenges related to IFRS |
| its progress of importing the western accounting | | | | adoption, we still have many reasons to believe |
| system along with the western culture and | | | | that the convergence of China's Financial |
| technology. Since the establishment of the | | | | Reporting and IFRS could also bring great |
| People's Republic of China in 1949, China quickly | | | | opportunities on China's economy growth in the |
| adopted the Soviet-type planned economy and its | | | | future. First of all, China is now a member of |
| related accounting regulations and practices. | | | | World Trade Organization. The effective |
| However, from the 1978 reform, China's | | | | implementation of IFRS in the country would |
| accounting system has undergoing a dramatic | | | | attract more foreign investments and enhance |
| change from a central rigid account rule which is | | | | the development of China's capital market. The |
| mainly assisting the macro-economic planning for | | | | compatibility between Chinese and International |
| the government, to a mixed system which is | | | | financial reports will greatly reduce the accounting |
| helping decision-making for both government and | | | | cost and increase the confidence for the foreign |
| investors. After 1992, with the development of | | | | creditors. Second, IFRS can help Chinese |
| economics and capital markets, China speed up its | | | | companies to improve their financial management |
| pace to harmonizes its accounting system with | | | | and decision planning by using a universal |
| international practices by declaring and applying | | | | accounting language. The companies' decision |
| more new accounting standards (Ding, 2008). | | | | makers would be provided more comprehensive |
| International Financial Reporting Standards (IFRS) | | | | asset-liabilities reports instead of the old-style |
| is a set of accounting standards issued by the | | | | reports which may only focus on short-term |
| Board of the International Accounting Standards | | | | benefits. Third, IFRS would benefit China's external |
| Committee (IASC) after 2001. Comparing to | | | | trade activities by providing Chinese with a |
| China GAAP, IFRS standards are more focus on | | | | powerful weapon on dealing with trade fightings. |
| transparency of financial information and | | | | For example, in the investigation of illegal dumping |
| substance of transaction other than uniformity of | | | | charges, a copy of clear and independent |
| practices. For example, In China's GAAP, Fixed | | | | accounting book which follows international |
| assets should be capitalized only when it is related | | | | regulations would give solid anti-dumping evidence. |
| to operations of an enterprise with estimated | | | | Forth, unlike China GAAP, IFRS allow that the |
| service life of more than one year or when other | | | | research and development expenses could be |
| fixed assets have a value over 2,000 RMB | | | | capitalized. This could be an effective stimulant for |
| (approximately US $ 300) with service life of | | | | Chinese companies to promote product innovation |
| more than two years. Unlike China GAAP, | | | | and technological upgrading, which used to be a |
| principle based IFRS allow judgment to exist when | | | | relatively weak point for developing countries. |
| applying the standards to a company's financials. | | | | China is holding his concept of 'Scientific |
| Companies could have their own professional | | | | Developing' and having his own way of |
| judgment to determine a threshold above which | | | | convergence with IFRS. This way is rather unique |
| expenditure should be capitalized based on | | | | and quite different with United States or other |
| economic substance of a company's activities. | | | | countries. Chinese government is showing both |
| (Zhang, 2008) | | | | ambitions and cautions because the convergence |
| On October 29, 2009, China's Vice Finance Minister | | | | progress will have essential impacts on the China's |
| Li Yong said that the current Chinese Accounting | | | | economy in the future years. |
| Standards with International Financial Reporting | | | | |
| Standards has achieved a substantial convergence | | | | |
| through his "China Accounting and Auditing | | | | References: |
| Assessment Report". Although China has made | | | | 1. China Accounting Standards Committee. 2006. |
| more progress to convergence with IFRS, only | | | | China Enterprise Accounting System ( |
| selected companies are required to adopt these | | | | 2. Firth, M. Fung, P., Rui,O., 2006. Corporate |
| new rules (China Accounting Standards | | | | performance and CEO compensation in China. |
| Committee, 2006). To successfully adjust the gap | | | | Journal of Corporate Finance 12, 693-714. |
| between local GAAP and IFRS, some practical | | | | 3. Zhang, S., Lei, W. 2008 Analyzing Chinese |
| problems and obstacles need to be solved and | | | | Financial Reporting. Beijing Review, February 28, |
| overcome. One of the problems is that Chinese | | | | 2008 |
| government is still playing a combined central role | | | | 4. Ding, Y., Su, X., 2008. Implementation of IFRS in |
| in both economy policies and economy practice. | | | | a regulated market. J. Account. Public Policy. |
| Clarification on the role of Chinese central/local | | | | 27:474-479. |