Accounting News
- Firms brace for accounting changes
Date: 12-Feb-2007 Sources: (Shenzhen Daily)
CHINA has embarked on a plan to bring the books of mainland-listed firms closer to international accounting standards, a move that is set to improve transparency but create profit volatility too.
All of China's more than 1,400 listed companies must publish their 2007 financial reports using stricter criteria - moving them much closer to International Financial Reporting Standards (IFRS).
'The new accounting standards could create greater volatility in profits from period to period as the valuations of investments and assets change with market fluctuations,'said Hong Kong-based Ryan Tsang, the director of financial services ratings at Standard & Poor's.
The 38 new accounting principles, which must also accompany 2006 reports to give investors a preview, will provide an avalanche of detailed information.
'In principle, they are very close to IFRS,'said Isaac Yan, a risk management partner at KPMG based in Beijing.
'But there is less guidance than IFRS, allowing more leeway in implementation. It will depend on how individual managers and auditors interpret the new rules.'
China's nascent accounting profession is governed more by broad principles than hard and fast rules, making it difficult to assess how the changes will be interpreted and implemented at the corporate level, accountants say.
One of the biggest changes with the new Chinese Accounting Standards will affect companies that have large holdings of financial instruments.
'The new standards will force companies to more accurately state these financial instruments at today's value,'said Yvonne Kam, director of accounting consulting services at PricewaterhouseCoopers based in Shanghai.
'Investors will see a huge difference.'
However, fixed assets, the largest asset category for many firms, can still be valued at historic cost, she said.
The changes will also make it harder to juggle the reporting of impaired assets, a common practice previously that allowed firms to raise or lower profits depending on their tax situation.
'Companies that had manipulated their impaired assets could show big changes in their profit,'said Roy Lo, a partner at Shinewing (HK) CPA Ltd. based in Hong Kong.
Still lagging
The new rules continue accounting reforms begun in the 1990s and will bring Chinese book-keeping to within about 80 percent of IFRS standards, accountants say.
Given the current state of Chinese financial accounting, the effort required from firms and the State is significant. China's top number cruncher (???)said last year that statisticians should not falsify figures to please local officials or their bosses.
'The country is going through massive training,'Kam said.
To handle the extra workload, PricewaterhouseCoopers will add at least 1,800 new staff to its 7,000-strong China team this year.
The government is also requiring listed companies to publish their 2006 books - a process that has just begun - along with notes explaining how the new standards would have affected them.
As China cleans up its financial reporting, investors will be able to base buy/sell decisions more on corporate fundamentals and less on rumors and fudged data.
Profit volatility
The old accounting rules reduced financial reports to little more than a vague outline of the company, but that hasn't kept investors from pouring into the world's hottest major market.
Last year, the benchmark Shanghai index shook off a four-year slump to rocket 130 percent, a rally fuelled by a strong economy and stock market and corporate reforms.
The government's commitment to the new standards is highlighted by the intense training that has been offered to accountants and companies across China over the past few months.
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