Letter from... China

China has made a bold move in the right direction by bringing into line its accounting and auditing standards with international rules. Peta Tomlinson reports

By deciding to bring its accounting and auditing standards into line with international rules, China may well have overcome the greatest challenge to inward investment.

Many foreign investors who have not yet taken the plunge are desperate for a share of this fast-growing economy, and the Government’s decision, announced in February following a 10-year review, could well provide the confidence boost they need. As Sir David Tweedie, chairman of the International Accounting Standards Board, pointed out, accounting principles that are familiar to investors worldwide will be an additional spur for investment from both domestic and foreign sources of capital. For Chinese companies that are increasingly playing a global role, the new standards should also reduce the cost of complying with the accounting regimes of the different jurisdictions in which they operate.

Transparent financial reporting is the cornerstone of investor confidence, and China has been widely hailed for its “bold move” in adopting 39 Chinese Accounting Standards for business enterprises that are based on the International Financial Reporting Standards (IFRS) now used in almost 100 countries, including the EU member states. At the same time, China adopted 48 auditing standards based on the International Standards on Auditing developed by the International Auditing and Assurance Standards Board, an arm of the International Federation of Accountants. The new rules apply to listed companies beginning 1 January 2007, and will gradually be applied to other types of entities.

Paul Pacter, director, IFRS Global Office at Deloitte in Hong Kong, said the move towards convergence was a huge step for China, where companies had “a history of accounting shortcomings”. “Chinese standards have been weak and incomplete, but if you consider that China only became a market economy in 1978/79, it has made enormous progress from the old Soviet-style system which had no concept of profit.” Adopting the international standards will be “like a revolution there”, he added.

Yet how will this work in practice? Much of the world may be familiar with what IFRS involves, but the standards are written in complicated English, and require difficult interpretations of broadly framed guidelines. “A literal translation is difficult enough even for a Westerner to understand. To a Chinese eye, it would be impossible,” said Yvonne Kam, director at PricewaterhouseCoopers’ Assurance Practice in Shanghai. China is therefore interpreting the IFRS rules into its own code - called the Chinese Accounting Standards System - in a way that can be understood by local practitioners. In this code, Kam stressed, “the principles of IFRS have been re-written unmodified”.

For the Big Four firms who already adhere to international standards, transition should be comparatively easy. For the rest, China’s Ministry of Finance is holding a year-long mass training roadshow in all major cities and some regional centres. This is a huge undertaking, given China has 1,400 listed companies and a countless number of auditors. Kam says it demonstrates China is serious about its commitment to joining the global economy. “Convergence towards compatible high-quality global accounting standards will raise transparency and comparability, and is beneficial for capital markets in China and around the world,” she said. “For this reason, China’s accounting standards convergence could not have come at a better time.”

Pacter expects a flow-on effect, particularly from Korea and Japan, which have until now “snubbed their noses at IFRS”. “They were quite surprised at the speed with which China has adopted international standards,” Pacter said. “Both countries are now thinking long and hard about what they will do now that China has passed them in the marathon. It will have a favourable impact on other countries in Asia.”

Peta Tomlinson is a freelance journalist who writes for the South China Morning Post and the Hong Kong Trade Development Council.