1 framework and implementation of chinese accounting standards system for business enterprises li...

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Framework and Implementation of Chinese Accounting Standards

System for Business Enterprises

Li HongxiaAccounting Regulatory Department

Ministry of Finance, P.R. China

May 22, 2006

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Main Contents

The Framework of Chinese Accounting Standards for Business Enterprises (CASs)

The Characteristics of Chinese Accounting Standards for Business Enterprises (CASs)

Experience Gained from the Development of CASs

Implementation of CASs

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Background

On 15 Feb, 2006, Chinese MoF released 1 Basic Standard and 38 specific standards, effective on Jan. 1, 2007 first in listed companies and extended to large and medium-sized enterprises gradually

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Background

Marks the official establishment of Chinese Accounting Standards System for Business Enterprises

Suits the development process of market economy of China

Achieves convergence with IFRSs in terms of principles on accounting recognition, measurement and reporting

Prescribes special provisions for transactions given domestic situations, eg., related party disclosures

----Result of experiences summarized from Chinese economic and accounting reform and cooperation between CMoF and IASB

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Background

Standardize business behaviors Enhance the quality of accounting

information Reduce cost of raising capital Improve corporate governance structure Facilitate business enterprises to

implement “coming in” and “going out” strategy

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I. Framework and Characteristics and Chinese Accounting Standards for Business Enterprises (CASs)

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The Framework of Chinese Accounting Standards

System(1)

The Chinese Accounting Standards System for Business Enterprises

Consists of 1 Basic Standard and 38 specific

standards which are divided into two levels:

First level: the Basic Standard

Second level: specific standards

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System(2) The Framework of Chinese Accounting Standards System

Basic Standard

Objectives of financial reporting

Underlying assumptions of accounting

Characteristics of accounting

information

Recognition&measurementprinciples of

accounting elements

Specific standards

Accounting standards

for general businesses

Accounting standards for specific businesses

in special industries

Reporting standards

First Level

Second Level

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System(3)

Basic Standard Plays a leading role

Mainly stipulates the objectives of financial reporting, recognition and measurement principles, underlying assumptions of accounting, primary characteristics of accounting information, recognition, measurement of accounting elements

It is equivalent to the IASB’s Framework for the Preparation and Presentation of Financial Statements and the FASB’s Concept Statements

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System(4)

Specific Standards

Formulated according to the Basic Standard

Divided into three categories – accounting standards for general businesses, accounting standards for specific businesses in special industries and reporting standards

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System(5) Accounting Standards for General Businesses

Mainly stipulate recognition and measurement requirements for general economic businesses that are broadly applicable to all kinds of enterprises

Include: Inventory, Fixed Assets, Investment Property, Leases,

Revenues, Employee Benefits, Share-based Compensation, Income Taxes, Foreign Currency Translation, Borrowing Costs, Investment, Corporate Annuity, Earnings Per Share, Intangible Assets, Impairment of Assets, Contingencies, Recognition and Measurement of Financial Instruments, Transfer of Financial Assets, Hedging Transaction, Presentation and Disclosure of Financial Instruments, and Business Combinations, etc.

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System(6)

Accounting Standards for Specific Businesses Mainly stipulate recognition and

measurement requirements of specific businesses in special industries

Include: Oil and Natural Gas Extraction, Biological

Assets, Insurance Contract and Reinsurance Contract , etc.

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System(7)

Reporting Standards

Mainly stipulate formats and contents for general-

purpose statements that are widely applicable to all

kinds of enterprises Include:

Presentation of Financial Statements, Cash Flow

Statements, Consolidated Financial Statements,

Interim Financial Reporting, Segment Reporting,

Related-party Disclosures , Earnings per share etc.

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II. The Characteristics of Chinese Accounting Standards System for Business Enterprises (CASs)

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Characteristics of CASs (1)

Achieved substantial convergence with IFRSs Except very few differences in related party disclosure

and reversal of asset impairment, it has achieved substantial convergence with IFRSs

JS signed by CASC and IASB identified: convergence with IFRSs was one of fundamental objectives to set CASs with an attempt to bring the same result for those applying CASs as those applying IFRSs

IASB Chairman commented at the Release Conference of CASs “ CASs realized substantial convergence with IFRSs”

A successful cooperation and attempt between CMoF and IASB in promoting international convergence proactively

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Suits the development process of market economy of China

Enterprises restructuring frequently occurs. Employee stock option piloted. Rapid development of financial and insurance market make it increasingly urgent to guard against and control the financial control

CASs system covers standards for business combination, share-based payment, recognition and measurement of Financial instruments, direct and re-insurance contracts etc.

Prescribes not only accounting for business combinations involving entities not under common control, but also those under common control, being the former identical to IFRS 3, while the latter a complement to IFRS 3

Share-based payment and derivative financial instruments are required to recognize in financial statements.

Vigorously promote reform of SOEs and strengthen supervision and control over financial risk

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A logically consistent system, with Basic Standard having legal authority The newly issued Basic Standard plays an equivalent role to Con

ceptual Framework of IASB. The difference is that It is part of national administrative regulation, while IASB Framework does not consist part of so-called IFRSs

Specific standards stipulate based on Basic Standard, which make CASs system a logically consistent, coherent system

Objective of financial reporting: reflect management accountability and decision making usefulness

Qualitative characteristics: reliability, relevance, understandability, comparability

Measurement attributes: historical cost, fair value, RC,NRV, PV Meet the economic development at present and well beyond thus

protect interests of investors and the public

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Properly introduced fair value measurement attribute and break through historical cost

For investment property, financial instruments, business combinations involving entities not under common control, debt restructuring and non-monetary asset exchange, fair value is adopted provided certain criteria satisfied. When adopting fair value to measure investment property, the prerequisite is the existence of active market and continuing availability of fair value information regarding the asset

Introduction of fair value contributes to the faithful representation of value of assets and liabilities, timely reflect the movement of market and thereby realize the objective of financial reporting

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Establishes a complete system of financial reporting and implement full disclosure principle

Under CASs system, enterprises are required to prepare, as a minimum requirement, balance sheet, income statement, cash flow statement, statement of changes in owner’s equity, and notes

All subsidiaries are required to incorporate into consolidated financial statements of the group. Segment information based on business and geographic locations and interim financial reporting are also formulated

These reporting standards implement full disclosure principle and establish a comprehensive financial reporting system to facilitate the communication between enterprises, investors and creditors, thus increase market efficiency and promote effective supervision.

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III. Experiences Gained from the Development of Chinese

Accounting Standards for Business Enterprises (CASs)

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Experiences From Developing CASs (1)

A good understanding of international convergence of accounting standards and implemented consistently during the whole processConvergence is a progress and development

trend of current financial accountingConvergence does not mean being identical

word for word. Convergence is a bilateral or multilateral

interaction between NSS and IASBConvergence is not the terminal but a new

starting point

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A sound cooperation and communication mechanism for achieving convergence has been established Domestically, there are 22 CASC members and 160 c

onsulting experts representing academia, preparers, analysts, auditors providing technical support to development.

Internationally, regular meeting both policy and working level with IASB

New appointments in IASCF Trustees and SAC: President of CICPA and Secretary-General of CASC

Second a senior staff to IASB to participate in IFRSs setting process.

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Substantial convergence with IFRSs was highlighted during the development process

Substantial convergence means that the principles of recognition, measurement and reporting are same as those in IFRSs, with the intention to produce same result in financial statements of enterprises either applying IFRSs and CASs

Being a part of national legal system, structure, style of writing and wording of sentence of CASs were adapted in a way to comply with the language style of Chinese legal system and easily understood by the pratitioners.

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Experiences from Developing CASs (4)

Special provisions conforming to domestic situation were formulated SOEs that are only under state control but not subject to

control, common control, significant influence are not regarded as related parties, thus exempt from disclosing transactions occurring between them. IASB has put IAS 24 revision on its May Board meeting agenda.

While IFRS 3 is silent on accounting for business combinations involving entities under common control, the equivalent CAS provides accounting treatment applied to this broadly-existent business combinations in China

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IV. Implementation of Chinese Accounting Standards for

Business Enterprises (CASs)

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Implementation of CASs (1)

Draft and release Implementation GuidanceIG comprises two types of contents: Interpretation to standards: mainly focus on the key

points, difficult implementation issues in standards, coupled with illustrative examples

Chart of accounts and financial statements: set up a number of accounts consistent with CASs and covered different sectors, provide sample format of financial statements and preparation interpretation

IG is an integral component of CASs system and to be issued by CMoF by this August

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Conduct training in a planned and well scheduled manner

Training to listed companies, CPA firms and regulatory departments such as CSRC, CBRC, CIRC etc.

Training to local financial bureau—branches of MoF, as mentors in their respective jurisdictions

Purpose: To ensure proper understanding and consistent application of CASs

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Implementation of CASs (3) Select some listed companies to conduct mock

testing before effective date

Choose some listed companies, jointly with CSRC, to conduct mock testing prior to implementation to verify the practicability of CASs system and estimate the impact on net assets and P/L of companies

Identify problems that might arise in the first-time adoption of the System and work out the solutions and countermeasures as early as possible

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Coordinate with regulatory departments to strengthen supervision over the implementation of CASs in listed companies Strengthen supervision over the implementation with

relevant government departments Give full play to the role of auditors in auditing

financial statements applying CASs Accelerate setting internal control system within

business enterprisesTo ensure smooth transition to CASs system and

implementation of the System in 2007.

1 framework and implementation of chinese accounting standards system for business enterprises li...

Documents

accounting recognition

reporting standards

accounting reform

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specific businesses

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