ACCA - The global body for professional accountants
IFRS convergence is a good example of how Chinese policymakers have matched and integrated accounting reforms with economic ones – it is actively helping China achieve more balanced, equitable and sustainable growth led by the private sector. Like most recent reforms of the accountancy profession in the country, convergence has been closely associated with the China’s development as a market economy
—Manos Schizas, senior economic analyst, ACCA

New research commissioned by ACCA (the Association of Chartered Certified Accountants) has found that convergence to International Financial Reporting Standards (IFRS) has benefited the Chinese economy, by making accounting earnings more informative and therefore more useful to domestic and international investors

The independent report, Does IFRS Convergence Affect Financial Reporting Quality in China was prepared by Dr Edward Lee and Professor Martin Walker of Manchester University, together with Dr Colin Zeng from the University of Bristol. 

The researchers examined all Chinese companies listed on the Shanghai and Shenzhen stock exchanges between 2003 and 2009 in order to understand whether IFRS convergence made their reported earnings more informative for investors.

The study looked for changes to the value-relevance of earnings – the degree to which changes in reported earnings affect share prices – and found that this increased following IFRS convergence in 2007, and was almost certainly the result of convergence itself. 

Manos Schizas, senior economic analyst at ACCA, explained: 'The researchers took advantage of something close to a natural experiment, set up unintentionally by Chinese policymakers. Although IFRS-converged Chinese Accounting Standards (CAS) only came into force in 2007, many companies (issuers of ‘B’ shares intended largely for foreign investors) were required to provide IFRS reconciliations for years long before this. By observing differences between them and other listed companies, they were able to distinguish changes brought about by IFRS convergence from changes brought about by other trends in the Chinese and global economies.'

The research also revealed that IFRS convergence led to companies improving the quality of disclosures only where there were other strong incentives for them to do so, such as:

  • A high level of dependence on the equity markets for funding 
  • Being outside of direct Government control and lacking access to Government subsidies
  • Being based in a less-developed region 
  • Having significant foreign ownership  
  • Being a manufacturer.

Manos Schizas added: 'IFRS convergence is a good example of how Chinese policymakers have matched and integrated accounting reforms with economic ones – it is actively helping China achieve more balanced, equitable and sustainable growth led by the private sector. Like most recent reforms of the accountancy profession in the country, convergence has been closely associated with the China’s development as a market economy.'

For ACCA, the findings give further weight to the importance of IFRS as the international standard for financial reporting, with Manos Schizas concluding: 'We’ve always argued that global standards benefit investors; convergence has worked for China, and other markets are sure to take notice.'

Professor Martin Walker of Manchester University commented: 'Other studies have suggested that emerging economies such as China would not necessarily benefit from IFRS convergence because of their legal enforcement and investor protection frameworks are still incomplete. This study shows that IFRS convergence has been beneficial where companies have had appropriate legal, governance and commercial incentives to provide high-quality disclosures; and that seems to have been the case for most, but not all, companies. As China’s capital markets continue to develop, the benefits of IFRS convergence will grow.'

ACCA believes that these findings vindicate the views of such stakeholders as the Chinese Institute of Certified Public Accountants (CICPA), who argue that local application of international standards is of paramount importance and will remain a challenge for years to come. ACCA shares the belief that, in order to consolidate and build on the benefits of convergence, the legal and regulatory framework applicable to the accountancy profession will need to be enhanced on a continuous basis.

  • The full academic research report is supported by a policy summary which discusses the importance of value relevance, the research methodology and China’s capital markets’ performance relative to other advanced and emerging economies, as assessed by the World Economic Forum (WEF) 2013.