Institutional Factors Influencing China’s Accounting Reforms and Standards

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MACAU UNIVERSITY OF SCIENCE AND TECHNOLOGY

ACT301 Intermediate Accounting

Chapter 1  

Case 1-5  

1. In your library or from some other source, locate the indicated article in Accounting Horizons, June 1998.

Institutional Factors Influencing China’s Accounting Reforms and Standards

Bing Xiang

2.Briefly describe the economic reform that led to the need for increase external financial reporting in China.

The development and practice of accounting in the China are influenced by its environmental factors. The article of BING XIANG has analyzed the changes of China’s accounting from 1978 to 1998. Our group has also searched for the information about the reforms of China’s Accounting standards in other periods. According to the article and other information we have gone through, we divide the reform of China’s accounting in five phases. We have provided the focuses of each reform of China’s accounting standard together with the backgrounds and reasons. The significant influences of those reforms will also be included in this report.

Phase I (Before 1978)

The policy and economic was at the beginning step in China before 1978. Few international transactions happened in the Chinese companies. The most firms of China were state-owned enterprises before 1978. Meanwhile, China just adopted traditional state-monopolized revenue，expenditures and balanced fund accounting model. Because most transactions conducted internally, the reforms of accounting system just started from simple to complex. Accounting frameworks and standards remained the same situation for quite a long period，referring little to international accounting system.

Phase II (1978-1992) The beginning of the international accounting standards.

In 1978，China adopted an "open-door" policy. In order to attract foreign capital and technology, and also incentivize foreign firms to cooperate with Chinese companies.，China’s recent economic reforms, particularly the enterprise reform, have profoundly altered the country’s accounting environment. The ownership structures of industrial and commercial enterprises in China are now highly diverse. By the end of 1984, China had absorbed U.S.$3 billion of foreign direct investment. In response, China’s accounting reform commenced in March 1985 with the establishment of “The Accounting Regulation for Joint Ventures”. The 1985 regulation provided necessary accounting guidelines and attracting further foreign investment. The second regulation was “Rules for Experimental Shareholding Corporation” was applicable to all corporatized companies. And established the basis of the international accounting system.

Phase III（1992-2001）The initial stage of accounting standards.

In1990s, the Third Plenary Session of the 14th Central Committee Determined to Develop the Socialist Economy. China has carried out a series of economic reforms. Especially the business reform, that we formally put forward the reform objectives of state-owned enterprises (SOEs), which are establishing a modern enterprise system, separating the ownership and management, improving the legal structure and so on. It means that not only to reform the foreign-invested enterprise accounting system, but also to all enterprises to reform the accounting system, requiring an objective response to the financial situation under diversification of corporate investment. As the result, China’s first “accounting standard”, the Accounting Standards for Business Enterprises (ASBE) was issued in 1992 and became effective on July 1, 1993. Under ASBE, all SOEs are required to follow the international accounting practice, eliminating the difference in practices between corporatized SOEs and those used under the common reporting standard.

This reform completely ended the accounting system based on the three-step argument framework which is formed on the planned economy. And also achieved the initial convergence between Chinese accounting system and the international cross-level guidelines.

Phase IV (2001-2005) The stage of Chinese accounting standards vigorously developed.

In 2001, China formally signed an agreement to join the WTO, the development of various industries should consider international peer practice, especially the accounting reform. April, 2001, International Financial Reporting Standards Committee completed the reorganization and implemented a convergence plan around the world. In addition, foreign business direct investment and foreign Mergers & Acquisitions (M&A) increased rapidly. These have promoted the further development of China's accounting reform. Sub-industry, sub-business accounting system led to the convergence between the accounting system is a big problem. In order to adapt to multiple systems, by the end of 2005, all the central enterprises under the supervision of the SASAC fully implemented the Enterprise Accounting System. And due to banks, insurance companies, securities companies, investment companies and fund companies are more special, so the state separately developed Financial Accounting Standards in 2001. And in 2005,the state also issued the Small-Business Accounting Standards.

In conclusion, accounting system from the original 13 industry accounting system into three systems, it basic covered all types of enterprises.

Phase V (2005-2013) 20 new criteria were proposed for the need of “Market economy”

Due to the demand for adapting to China’s market economy and developing further on the policies towards outside international world, our financial administration addressed that it was just the right time to establish an accounting standard system of our own country. Based on the original 17accouting standards, More than 20 new criteria were proposed in 2006. And this did contribute a lot to the successful establishment of the accounting system which was consistent with our socialist market economy and also coordinated sufficiently with the international financial reporting standard.