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Peeling the Onion

Convergence of China GAAP to IAS

New ASBE Issuance

On 15 February 2006, the Ministry of Finance of the People’s Republic of China (the ‘MoF’) formally announced the issuance of the long awaited Accounting Standard for Business Enterprises (‘ASBE’). The ASBE consists of the Basic ASBE and 38 Specific ASBEs. These standards, which will be applied effectively from 1 January 2007, will become mandatory for all listed Chinese enterprises. Other Chinese enterprises are also encouraged to apply these standards. The ASBE replaces the existing Chinese Accounting Standards (CASs) and an earlier version of the ASBE. The applicability of the CASs and the older version of the ASBE are not changed except for those entities required or electing to adopt the new ASBEs. The new ASBEs mark China’s determination and effort to converge to IAS. They are substantially in line with IFRSs, except for certain modifications that reflect China’s unique circumstances and environment.

Actually, the new ASBEs result from China’s long-term struggle and progress to market economy. Since the stock market began, China has planned to replace the accounting model adopted under the planned economy by a set of standards that is more suitable for an evolving market economy. In 1992, China issued an Accounting System for Business Enterprises (ASBE), which is symbol beginning of accounting reform. Since then, China has issued 20 exposures and 16 specific accounting standards. In 2005, China issued 17 exposure drafts including Insurance Contract etc.

Convergence to IAS

In the process of formulating its own accounting standards, China has always referred to IAS, so in many aspects CAS is consistent with IAS. Chinese Ministry of Finance has much contact with IASB to find the ways to diminish some essential differences with IFRS, such as the opinion of reliability of fair value etc. On November 8, 2005 Mr. Wang, secretary of Chinese Accounting Standards Committee, signed a joint declaration with Sir David Tweedie, Chairman of the IASB, which marked the Chinese effort to converge to IAS. The number of adjustments required to convert the financial report prepared under CAS to an IAS report has reduced over the years. As a result of the accounting reform over the recent years, China has almost now harmonised with IAS.

On the other hand, globalised markets require a common language and convergence to IAS. To promote the convergence to IAS, IASB has encouraging their countries to enlarge the range of IFRS or harmonise their national GAAP with IAS, rather than simply replace them. However there are no voices from developing countries in IASB, partly because capital markets in developing countries are limited and the quality of information is lower. This provides a good opportunity for China to cooperate with IASB and to persuade IASB to consider the characteristics associated with developing countries. Such a role could assist IASB in their understanding and their applicability and effectiveness of accounting regulations IAS. It is also probable that China might seek to take a seat on the IASB.

Difference Between CAS and IAS

Although the new ABSE shows more convergence to IAS, there are still some differences between CAS and IAS.

First of all, the accounting policies of certain economic activities prescribed under CAS are designed to focus on truthfulness and prudence, since the environment of market economy is not mature enough in China. For example, to prevent listed companies from polishing their financial statements through non-monetary transactions, China has issued Accounting Standard for Non-monetary Transactions, which prescribes the respective accounting treatment of non-monetary transactions involving exchange of similar and dissimilar assets. There is not a similar standard in IAS.

Secondly, China prefers historical cost to fair value as a measurement. But IAS 39 and IAS 40 include financial assets and investment property in the realm of fair value, which are the main part of assets in listed companies. It is rather difficult to acquire the information of fair value in China, because the capital market is relatively small and other commodity markets also need further improvement.

Thirdly, sometimes the same activities may have different effects on current profit. For example, the profit of annual financial report of Bank of Communications in 2004 based on CAS was 0.9 billion Yuan, which was only 57% of that reported in their prospectus based on IAS. The most prominent difference between them was the transfer of a non-performance loan to China Cinda Asset Management Corporation, which increased profit by 1.2 billion Yuan according to IAS.

Finally, most stakeholders of Chinese listed firms do not care much about public accounting information, due to questions on accuracy and transparency. From the perspectives of performance evaluation and supervision, laws and regulations in China have paid too much attention to net income, so it is not easy to replace it with comprehensive income as per IAS.


Confirming with the global capital market, China should provide high quality, transparent and comparable information in capital markets. Chinese standard setting bodies should provide specific problems and suggest solutions directly to IASB to converge with IAS actively.