Mainland accounting standards take a big step forward

by David Kwong

Stephen Taylor, partner, Deloitte Touche Tohmatsu
Photo: Edde Ngan

New Chinese accounting rules bring new challenge

In order to bring Chinese accounting standards more into line with international practices, the Ministry of Finance issued a series of new regulations early last year, and these came into effect for mainland-listed companies as from January 2007. This is seen as a major step towards creating a system of corporate accounting which provides clear and comparable financial data, but the changes are also likely to present a number of challenges during implementation.

"China is committed to convergence and has been very supportive of the process," says Stephen Taylor, a partner with Deloitte Touche Tohmatsu, who specialises in China accounting matters and heads the firm's centre of excellence for applying the International Financial Reporting Standards (IFRS) in the Asia-Pacific region. Over the last few years, he has also acted as an adviser to the mainland authorities responsible for formulating and drafting the new standards.

The process, he explains, has been ongoing since the mid-1990s, but was given further impetus by China's accession to the WTO and the parallel need to have the financial infrastructure to support fast-growing capital markets. This had to include stringent accounting and auditing standards, a clear legal framework, sufficient education for individuals, and a regulatory environment that sets the right tone of compliance from the top.

"When you get institutional investors coming in and Chinese companies expanding in the global market and wanting to list, it moves the quality issue forward," Mr Taylor says. "But it has to be a combined effort which includes everything. This is a big change and will only work if the governance system is in place to create a level playing field, as well as the necessary education."

Using principles

The new standards are, like the IFRS, principle-based rather than rule-based, but not the same in all respects. On some issues, where the IFRS allows for options, the Chinese authorities have gone with the one they think best suits current mainland practices or economic trends. For example, the Chinese standards stipulate that borrowing costs must be capitalised — eliminating the IFRS option of showing them as expenses — and they have modified the disclosure standards for related-party transactions to give more guidance around state-controlled industries. In addition, for biological assets evidence of "fair value" is required before it can be used, while under IFRS it is assumed to exist.

"Most of these things are in the margins and we are not expecting to see any significant differences in practice," Mr Taylor says.

However, one area of concern is that, so far, only limited supporting guidance is available in Chinese. Translating material, originally drafted in English, can be a long and laborious process. That is because the work requires people who understand both the basic concepts and the business environment, who can ensure precision and a consistent interpretation of the various technical terms.

"China has been very aggressive with the implementation plan, but there has been limited guidance for users," he notes. "There is a lot of training going on to make sure professional accountants get things right. Ultimately, though, responsibility rests with the companies themselves."

Next stage

Although no timetable has been set, it is likely that the large state-owned enterprises will be the next group of companies formally required to adopt the new standards, and then other entities. Anticipating this, some are already gearing up accordingly.

To cope not just with the latest changes but also with overall business expansion, Deloitte expects to hire around 1,000 mainland graduates and, in Hong Kong, a further 250 or so.

"Hong Kong is vibrant but quite stable in terms of numbers, and it is also possible to bring in qualified CPAs from the UK, Australia or Singapore," Mr Taylor says. "To qualify in the mainland, though, you need to take written exams which are 100 per cent in Chinese. Even some of our best Hong Kong accountants find that difficult."

He suggests the mainland may need to "revisit" that requirement, since it is a restriction for many overseas-trained professionals who could otherwise contribute to the development of the sector.

Pointing out that accountancy firms typically have a pyramidal structure, Mr Taylor says the major problem at the moment is recruiting people with five to 10 years of experience in the China market. He notes, though, that mainland universities are producing some very high-quality graduates, who now recognise that the accountancy profession offers good salaries, exciting career opportunities and the chance to acquire wide-ranging financial expertise. To prepare for future growth, the firm is giving around 50 mainland graduates a year the chance to train and work in the UK, and other offices around the world are also keen to participate in the scheme.

New accounting standards

  • New accounting standards apply for companies listed in China as from January 2007
  • The regulations are closely based on international standards but with some modifications to reflect mainland conditions
  • Successful implementation will require ongoing education for accountancy firms and the companies involved
  • Deloitte will need up to 1,250 mainland and Hong Kong graduates to meet demand in 2007
  • Around 50 mainland graduate recruits are given training and work opportunities in the firm's offices around the world

Taken from Career Times 19 January 2007
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