Development of financial reporting and accounting system in China

Keywords: China Accounting Standards (CAS), Historical perspectives and CAS development, IFRS convergences in China, Factors hinder the implementation of IFRS in China, Forces of accounting standard setting in China, Expected future changes and influencing factor, Accounting Assignment Writing


Alali and Cao (2010) stated that the language used by companies to communicate the performance of the business over the specific period is called ‘financial reporting’. Companies prepare financial statements and reports in recognition with accounting standards. The financial statements are a useful resource for investors and creditors and other stakeholders to provide information for decision-making. The relevance of accounting standards becomes significant in the global business environment to facilitate cross-border business and investment decisions.

The development of International Financial Reporting Standards’ (IFRS) is a global accounting standard, which are implemented in more than 140 countries, and provides credible and reliable accounting standards (Beke, 2013).

However, China has a taken dramatic step to achieve convergence from IFRS and implement China Accounting Standards (CAS) which is similar but not identical to IFRS (Zhang, Uchida and Bu, 2013). China’s accounting system is largely influenced by political, social and legal forces, which affect the development and implementation of accounting systems in the country (He, Wong and Young, 2012).

This essay presents the dynamic analysis of Chinese accounting and financial reporting system to analyse and evaluate the past, present and future trends. The first section of essay enclosed accounting historical perspectives and accounting changes in China. The second section highlights the political, cultural, economic and legal factors, which hinder the implementation of IFRS. The third section discusses the future changes and influencing factors for accounting standards in China.

Historical perspectives and accounting changes in China

The three main eras’ highlight the development and changes of accounting system in the China are  ‘Mao phase’ from 1949-1979, which marks the establishment of ‘Republic of China’; ‘Deng Phase’ from 1979-2000, which defines the reforms in accounting system, third phase 2000 to present is characterised the convergence phase of accounting system and development of Chinese Accounting Standards (CAS). Mao phase involves the development of uniform accounting system for the state own capital (Peng and Bewley, 2010).

Peng and Smith (2010) highlighted that the accounting system during this period is influenced by the ideology, which focuses on central planning, class struggle and public power. However, the practices based on western accounting standards were prohibited. During the period from 1950-1980 Chinese followed the planned economic model and accounting system from the Soviet Union. Russian accounting system allowed controlling of the state funds to support central planning, state ownership and self-reliance economy.

According to Anderson (2015), the period from 1979-2000 under the leadership of Deng was the foundation for the socialist market economy. This raised the need for accounting standards, which support the market, based economy and improve financial reporting to increase the confidence of foreign investors. This era marks the development of ‘Accounting standards division’ as well as accounting law for the Republic of China was published in 1985.

The western accounting system adoption under socialist market structure was practised and implemented during the period.  The development of two stock exchanges prompts the need of ‘Chinese accounting standards’, which was managed by ‘Accounting standard for business enterprises’ (ASBE) (Lin, Figueiredo and Stagliano, 2014).

Therefore, the financially integrated reporting system was developed and implemented in China based on the combination of the Chinese accounting standard and international accounting standards. Ministry of Finance (MOF) in 1992 issued new accounting standards, which completely replace the Soviet accounting system, and offered unified accounting system. The old accounting standards for business enterprises (ASBE) were applicable to all ownership structure, which provides foundation for accounting system in the country (Previts and Wolnizer, 2011).

According to Borker (2012), the convergence phase of accounting system in China was started with access to World Trade Organisation (WTO) in 2001. The increase of foreign direct investment (FDI) in China after (WTO) required adaptation of the ‘Public Republic of China’ PRC GAAP. The new set of accounting standards for business enterprises (ASBE) was implemented in 2006 and companies in China are subject to apply ASBE standards for preparation of financial statements. The new accounting system (new ASBE) were presented by MOF which addresses the all relevant topic from IFRS and encouraged the companies to adopt the new set of accounting principles (He, Wong and Young, 2012).

IFRS convergences in China

According to Blake and Gao (2013), companies are not allowed to implement IFRS standard published by IASB. The China GAAP was based on the historical cost and measurement methods. The ASBE 2006 has managed to meet the financial reporting need of modern socialist economy through offering comprehensive structure and content for Chinese financial reporting system in line with IASB requirement.

Convergence involves a dynamic process, which allows the consistency between ‘China accounting systems’ (CAS) with IFRS for accounting principles. Convergence is known as a process to achieve consistency between IFRS based on substance of accounting principles and procedures. Nevertheless, in 2010, a new set of accounting standards were developed with objectives to achieve convergence with IFRS. The recent accounting standard allowed introducing fair value for assets and liabilities recognition and move closer to IFRS.

The new accounting standards represent high degree of convergence from IFRS in terms of adopting standards and rule in equivalence of IFRS and it enhanced the comparability and credibility of accounting systems in the country (Luo, 2016).

Taplin, Yuan and Brown (2014) explained the difference between the IFRS and CAS is based on a number of factors. The foremost difference is the legal status. The compliance to certain law and regulation in compulsory for corporation and CAS as accounting system enable the companies to meet the legal standards. IFRS would make the accounting statement fail to comply with local law and regulation and thus consider as illegal behaviour. The accounting element is another important difference between CAS and IFRS because expenses and revenues have different treatment under CAS. The presentation of the profit under the CAS is a legal requirement because IFRS does not a distinction for gains and losses (Cascino and Gassen, 2015).

Moreover, Zhang and Andrew (2016) asserted that IFRS does not deal with accounting record and companies chose recognition and measurement aspect. Whereas in CAS the focus is on accounting and business transaction recognition as well as legal element highlight the measurement and maintaining of accounting records. The significant difference is that CAS is based on the principle-based approach, which is supplementary by the rules whereas IFRS are generalised rules for business transactions.

Factors hinder the implementation of IFRS in China

Lyu et al (2014) analysed the factors, which hinder the implementation of IFRS in China and these factors are based on political, economic, cultural and institution context. In China, CAS is used to prepare the financial statement and financial reporting which is convergence from IFRS. The important point is that convergence involves neither direct implementation nor adoption.

According to Botzem (2012), the socialist market economy of China is a major element in the international convergence of Chinese accounting standards because public ownership is different when compared with western economies. The economic evolution has influenced the resource allocation and thus impact the accounting standards implementation. The state-owned enterprise’s control reflects the equities market in the country is not matured which helps them to achieve the fair value. The economic system and business practices vary considerably in China, which has limited the applicability of IFRS in China (Lyu et al., 2014).

The strong government control and weak investor protection highlight the low demand for international accounting standards. The equity market is the weak and primary sources of credit in China are state-owned banks. Despite the WTO and private investors, the private funding has remained small portion of financing in the China (Brandt, Ma and Rawski, 2014).

Borker (2012) mentioned that there are two stock exchanges, one future exchange and three commodities exchanges are present in the country but they are managed and control by the China Security Regulator. The market securities in China include investment funds, securities, bonds and future commodities and it is estimated that China is the world second leading country after the US in terms of the amount of capital raised. However, strict government control, the monopoly of state-owned banks and the complex legal system requires companies to follow Chinese accounting standards for a financial statement.

The control economic and market system in which represent intervention of government and policies to control market requires company to implement CAS to meet the need of external stakeholders (Ramanna, 2013).

Culture is an important factor, which attributes to ethical decision-making and present ‘true and fair’ view of financial information for the stakeholders. The ethical judgement and cultural influence is a prominent factor and lack foundation in Chinese accounting standards and audit practices (Chapman, Hopwood and Shields, 2011).

Forces of accounting standard setting in China

According to Qu and Zhang (2015), the mandatory force for accounting standard setting in China is MOF and corporation are required to prepare the financial statements and report in accordance with CAS, which leaves no space for professional judgement and fair value accounting policies. The basic accounting standards are based on the force of law which raises the difference in address various accounting standards such pension, share capital and revenues and expenses treatment.

Strauss (2014) added that Chinese legal system is complex, which is managed, and control by communist government. There are two types of legal system and one is known as common law such as UK and US and second is called the codified Roman law, which is applicable in a country such as France, Japan and Germany.

Chinese communist party codifies itself as implementing a Roman code of law. The accounting system in China is influenced by the codified Roman law and its effect is that state tax law and corporation law in China are written in the light of Rules like other laws in the country. Therefore, to implement these laws, it is vital companies follow CAS to comply rather IFRS, which fails to meet the local legal requirements (Hooper, Sinclair and Huang, 2013).

According to Cieslewicz (2014), the Chinese characteristic is prominent in the development of CAS based on the social power and deeply rooted sense of hierarchy position, which makes people follow the law and regulation unconditionally. The traditional perspective, as well as cultural and historical background, defines the interpersonal relationships in the country, which limited the professional and ethical judgement.

Xu, Cortese and Zhang (2013) emphasizes that the political and legal system have strong influence and i.e. culture has the indirect effect on the accounting system in China. The political and economic environment in China is strongly influenced by the cultural environment and lack of implementation of IFRS can be analysed through Hofstede model. The accounting system in China is based on strong conservative culture, large power distance as well as a preference for uncertainty avoidance

Wong (2016) stated that Chinese accounting system is designed to provide secrecy disclosures, compliance to the local law, statutory control and conservative measurement of the assets and liabilities. The individualism is very low is China which highlight power distribution in China is relatively uneven. The centralisation authority in China maintains the power and people obey instructions from the top-down hierarchy approach. The stakeholders have a limited role in standard setting and law and regulation is followed unconditionally and passively. The low score for uncertainty avoidance highlights that people prefer a less rigid code of behaviours, which leads to less detailed accounting regulation in China.

The business practice in China is based on ‘Guanxi’, which involves developing a close relationship with institution and stakeholders based on monetary and non-monetary benefits. This represents major difference with western business practices. The clash of business ethics and Guanxi raise complication with the integration of IFRS accounting standards. The differences in currencies and accounting treatment for control currency require the local system to control the economic system (Cieslewicz, 2014).

Taplin, Yuan and Brown (2014) evaluated that in institutional context, accounting standard setting in China is based on the involvement of multiple departments. The Ministry of Finance (MOF) in China and China Accounting Standard Committee (CASC), are two main players in setting the accounting standards. The MOF is the political actor and governs the accounting department in China. The role of CASC in standard setting and recommendation is based on the need of local economy and market structure. The establishment of Chinese Regulatory Commission (CSRC) manage the law of securities but it is governed by state council directly.

The objective of the accounting department is to manage the national accounting problems and implement unified accounting standards to meet the legal and political system. The role of professional institutions such as Chinese Institute of Certified Public Accountant (CICPA) is limited which highlight the limited consultation on the drafting the accounting standards (Cieslewicz, 2014).

China is an emerging market and growing economy, the foundation important to manage a convergence of monetary reporting and devised framework, which meet accounting needs (Xu, Cortese and Zhang, 2013).


China is in the process of continuing development for integration into global economy and markets systems and i.e. it requires robust as well as transparent accounting and financial reporting system to support the need of stakeholders. The adoption of Chinese accounting standard based on the convergence of IFRS has the strength the financial reforms. The culture significantly influences the financial statement discourse and financial reporting system.

The convergences of IFRS present limited disclosure and undermine the application of IFRS when viewed in comparison with western standards, which decreases the creditability of Chinese financial statements.

The Chinese accounting standards present similar but not identical accounting and financial reporting standards when compared with IFRS. This presents limited comparability of the Chinese financial statement. The national culture influences translation and convergence and creditability of Chinese accounting system.

The financial reporting system would require detailed and comprehensive disclosure system for financial system and off-sheet information for to meet the need and keep pace with global economic system. In addition, economic system and cultural environment in China require sound measure and accounting system, which increase international credibility and enhance transparency for IFRS convergence to benefit from Chinese economic development.

Expected future changes and influencing factor

Wong (2016) analysed that the expected future changes and influencing factor, which affects the future of accounting system in China, is a change in the accounting education and profession in the country. The accounting profession and education have failed to facilitate the implementation and alignment of an accounting system with IFRS. The accounting education such as CICPA such develops and produces high-quality education standards and test the knowledge and abilities of accountant through its own examinations. The need of professional ethics would harmonise the unification of accounting practices with IFRS.

Luo (2016) evaluated that Chinese government and institutions could play a significant role to overcome the shortages of accounting professional with IFRS knowledge. The involvement of CASC with IASB could provide a new direction for the accounting standards in China. The communication and collaboration on the standard setting process would devise a framework, which allows the better convergence of accounting system and standards in China. The IFRS implementation at corporation levels the companies to set training budget, which facilitates the implementation of the IFRS in an efficient manner.

Zhang and Andrew (2016) asserted that the future changes involve the emergence of the management accounting practices in China to evaluate the performance of the business. The development of the budget for the government offices and IFRS convergence could be managed through cost accounting practices. The application of the responsibility accounting could change the accounting system and practices in China. The management accounting could allow identifying economic opportunities, and evolving towards the market-based economic system.

The adoption of management accounting would allow the government and business to evaluate the internal and external business environment, which address the cultural and legal need of Chinese accounting systems. The auditing standards in China are relatively weak and MOF role could significant in the development of the Accounting and company law, which increase the credibility, and reliability of the accounting system through Auditors. The standards for auditing in China would represent major milestone towards the convergence and evolution of accounting standards in China (Wong, 2016).

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