Does IFRS convergence affect financial reporting quality in China?

This report looks into the way the substantial convergence between Chinese Accounting Standards (CAS) and IFRS in recent years has improved the usefulness of accounting earnings for investors. The findings strongly suggest that IFRS convergence is helping China achieve more balanced, equitable and sustainable growth led by the private sector. (Ref: RR-131).


ACCA research report no. 131

Edward Lee
Senior lecturer in accounting and finance
University of Manchester, UK

Martin Walker
Professor of finance and accounting
University of Manchester, UK

Colin Zeng
Lecturer in accounting
University of Bristol, UK


This report seeks to answer the following overall research question: Does the convergence of Chinese Accounting Standards (CAS) with International Financial Reporting Standards (IFRS) affect the financial reporting quality of listed firms in China? It also examines whether the impact of the IFRS-converged CAS has been conditioned by Chinese political and economic institutional factors.

Since 2007, all listed firms in China have been required to report under a new set of Chinese Accounting Standards. This new set of standards is recognised by the International Accounting Standards Board (IASB) as having achieved ‘substantial convergence’ with IFRS. China is the world’s largest and most influential emerging economy and as such is attracting the attention of academics, regulators and practitioners. Since its reforms began in the late 1970s, China’s economy has grown from one-tenth to two-thirds of the size of the US economy. Thus, the convergence of China’s standards with IFRS is another significant milestone in the process of international accounting harmonisation, following the European Union’s adoption of IFRS in 2005. Before IFRS, China operated a largely rules-based accounting regime. As a set of principles-based accounting standards, IFRS provides Chinese firms with the opportunity to produce more informative financial statements with the potential to give better information to external investors. 

This report evaluates the effects of IFRS-converged CAS by comparing the value relevance of financial statements issued before and after 2007. Value-relevance analysis examines the association between the share price of firms and the accounting information they issue, such as book value and earnings. It is inferred here that the higher the association, the more useful the accounting numbers issued by firms are to the valuation decisions of investors, who are an important group of end-users of financial statement information. Barth et al. (2001) argue that value relevance evidence is important to accounting standard setters because one of the primary purposes of financial reporting is to provide information that is useful for valuing firms. Although there are other measures of financial reporting quality in the accounting research literature, such as discretionary accruals, earnings persistence and timely loss recognition, they do not provide direct evidence of the usefulness of accounting information to its end-users in the capital market. Therefore, this report focuses on value-relevance analyses to evaluate the effect of IFRS convergence in China.

A growing number of studies have examined the relation between the benefits of IFRS adoption and country-specific characteristics, such as the quality of local investor protection and legal enforcement. These studies consistently indicate that the benefits of mandating or converging with IFRS are concentrated in countries with strong legal enforcement and investor protection. Both institutional factors tend to be less developed in transitional economies than developed ones, and China is no exception.

Therefore, the influence of IFRS convergence in China is an interesting but open question. Existing studies of the overall impact of IFRS convergence in China have revealed mixed results. The methodological innovation of the present study is to focus on a number of economic and institutional factors that potentially influence firms’ demand for external capital and thus determine the effects of IFRS-converged CAS. These factors include industry classification, regional development, state control, foreign ownership, delisting regulations and state subsidy.