Accounting Reform and Development in China

FENG ShupingAssistant Minister,Ministry of FinancePeople's Republic of China

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Reform and Development of Reform and Development of Accounting Practices in ChinaAccounting Practices in China

Feng ShupingFeng ShupingAssistant Finance MinisterAssistant Finance Minister

Ministry of Finance of the P.R.CMinistry of Finance of the P.R.C

®TopicsTopics

Administrative System of Accounting

Practice in China

The System of Accounting Rules and

Regulations in China

Opening up of Chinese Accounting

Services Market

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Administrative System of Administrative System of Accounting Practice in ChinaAccounting Practice in China

“Centralized Leadership and

Layered Administration”

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Responsibilities of financial Responsibilities of financial Departments Departments

Formulate and issue national unified accounting systems

Supervise and inspect the implementation of national

unified accounting systems

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Reduce formulating costs

Shorten formulating cycle

Implementation driven by

government authority

The Chinese Accounting The Chinese Accounting Standards Are Formulated Standards Are Formulated by the Government: Benefitsby the Government: Benefits

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Due Process of Accounting Standard Setting

Define agenda Draft research papers

(With consultancy provided by international accounting firms)

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Due Process of Accounting Due Process of Accounting Standard Setting Standard Setting

Draft discussion papers

Draft exposure drafts

(Extensive participation by stakeholders)

Promulgate (continued)

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Accounting Supervision and Inspection

Whether financial accounting

information is true

Whether financial accounting

information is complete

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Managerial System of Managerial System of CPA industryCPA industry

Institutes of CPAs are self-disciplinary

professional organizations

Financial departments conduct

supervision over and provide guidance

for CPAs, accounting firms and

Institutes

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Supervision and Guidance bySupervision and Guidance by Financial Departments Financial Departments

Formulate rules and procedures for

national unified examination of CPA

Maintain a register of certified public

accountants (continued)

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Supervision and Guidance by Supervision and Guidance by Financial DepartmentFinancial Department

Responsible for administrative review

Approve the establishment of

accounting firms

(continued)

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approve practicing standards and rules

proposed by the CICPA

Impose penalties on CPAs and

accounting firms for irregular practices

(continued)

Supervision and Guidance by Supervision and Guidance by Financial DepartmentFinancial Department

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Supervision and Guidance by Supervision and Guidance by Financial DepartmentFinancial Department

Review and approve applications from

foreign accounting firms to set up

institutions in China (the Ministry of Finance

has the sole authority to approve the

applications)

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Responsibilities of Institutes Responsibilities of Institutes of CPAsof CPAs

Organize national unified

examinations of CPAs

Process CPAs’ registration

(continued)

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Responsibilities of Institutes Responsibilities of Institutes of CPAs of CPAs

Propose and constitute practicing

standards and rules of CPAs (details

are conducted by the CICPA)

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The System of Accounting Rules The System of Accounting Rules

and Regulations in Chinaand Regulations in China

The Accounting Law of the People’s

Republic of China

Regulations on financial accounting

reports of Enterprises

Accounting standards and accounting

systems for business enterprises

®The Accounting LawThe Accounting Law

Set forth the basic requirements on the accounting practices of enterprises

®Regulation on financial accounting Regulation on financial accounting reports of Enterprisesreports of Enterprises

Specify requirements for financial Specify requirements for financial accounting reports in the Accounting accounting reports in the Accounting

LawLaw

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Formulated in accordance with the

Accounting Law and Regulation on

Financial Accounting Reports of

Enterprises

Formulated and promulgated by Ministry

of Finance (continued)

Accounting Standards andAccounting Standards andAccounting Systems for business Accounting Systems for business enterprisesenterprises

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Accounting Standards andAccounting Standards andAccounting Systems for business Accounting Systems for business enterprisesenterprises

Important parts of accounting laws and

regulations

Compulsory for applicable enterprises

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Development of Chinese Development of Chinese Accounting StandardsAccounting Standards

Refer to IASs

Have formulated basic standard as well

as 16 specific standards

(continued)

®Development of Chinese Development of Chinese Accounting Standards Accounting Standards

Chinese Accounting Standards are

consistent, or converge with IAS in

many aspects

®Convergence with IASConvergence with IAS The objective of financial statements –

meeting the needs of investors and creditors as well as management and government

The quality of financial information – especially relevance and reliability (continued)

®Convergence with IASConvergence with IAS Definitions of the elements of

financial statement are consistent with the IASB Framework

Asset, liability, equity, revenue, etc. Recognition and measurement

principles are generally similar to those in IAS (continued)

®Convergence with IASConvergence with IAS

The Chinese financial reporting system is similar to the financial report in IAS 1:

Same basic financial statements and note disclosures.

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We recognise the importanceWe recognise the importanceof serving the securities marketof serving the securities market

Our objective is to improve the quality of financial information, and

To reduce the need for adjustments: for example, minimise the adjustments

needed for B share or H share listings and for commercial bank listings within China for which IAS financial statements are required.

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Some inconsistencies between Some inconsistencies between IAS and Chinese standardsIAS and Chinese standards

Some inconsistence still exist: For example, cost or carrying

amount sometimes is used for measuring special transactions that IAS would measure at estimated fair value.

®Obstacles for ConvergenceObstacles for Convergence

China is still in the process of economic transition:Many related party transactions (many

enterprises are still state owned).Transaction prices are sometimes not

market prices.Special capital structures.

(continued)

®Obstacles for Convergence Obstacles for Convergence

lack of effective corporate governance Special structure of users of financial information:

Government is now the important investor and user of financial information.

A shortage of experienced financial analysts (continued)

®Obstacles for ConvergenceObstacles for Convergence

Some regulatory requirements of financial information focus on minimum past performance:IPO, profit for the past three years.For new issues after listing, weighted

average return on net assets should be 10% or higher for recent past three years, etc.

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Situations in other countriesSituations in other countries

These obstacles probably exist in other developing countries, especially those economies in transition.

Similar obstacles may exist in certain periods in developed countries.

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A sensible approach A sensible approach for China todayfor China today

On the one hand, take account of its realities, and

On the other hand, do its best to get in line with IAS/IAS.

Try to balance these two approaches in its work to improve financial reporting in China.

®Our objectiveOur objective

Build a core Chinese accounting standards system in about three years.

(continued)

®Our objectiveOur objective

Keep in line with IAS, except in cases where some IASs contradict with Chinese law, or obviously don’t suit Chinese realities.

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Opening of China’s Accounting Opening of China’s Accounting

Services MarketServices Market

China’s Accounting Services

Market already is widely

opened.

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Current approaches to Current approaches to Open Accounting MarketOpen Accounting Market

Allow foreign accounting firms to set

up representative offices in China

Allow international accounting firms to

develop Chinese member offices

(continued)

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Current approaches to Current approaches to Open Accounting Market Open Accounting Market

Allow overseas accounting firms to perform ad hoc auditing services in China

Allow Non-Chinese Nationals to take the Chinese national unified CPA examinations

(continued)

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Allow overseas members of

the CICPA to apply to register

as Chinese certified public

accountants

Current approaches toCurrent approaches toOpen Accounting Market Open Accounting Market

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Non-Chinese Nationals Non-Chinese Nationals Becoming Chinese CPAsBecoming Chinese CPAs

Pass the national examinations

get registered as a Chinese CPA

according to relevant stipulation

(continued)

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Non-Chinese Nationals Non-Chinese Nationals Taking the ExaminationsTaking the Examinations

Qualifications for taking the

examinations

Sign up at the CICPA or Hong

Kong Society of Accountants

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Non-Chinese Nationals Taking Non-Chinese Nationals Taking the Examinations the Examinations

Exam subjects: accounting,

audit, financial cost

management, economic law

and tax law (continued)

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Non-Chinese Nationals Taking Non-Chinese Nationals Taking the Examinations the Examinations

Each subject is on a 100-point

scale, with 60 points as the

passing line.

Scores of individual subjects are

valid within 5 years.

(continued)

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Non-Chinese Nationals Taking Non-Chinese Nationals Taking the Examinationsthe Examinations

The examination is conducted in

Chinese. If passing all the

examinations, the applicants will be

qualified to apply for membership with

the CICPA.

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An Overseas Non-Practicing Member An Overseas Non-Practicing Member

Become A Practicing MemberBecome A Practicing Member

Preconditions are required

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China’s independent auditing China’s independent auditing standards systemstandards system

Introduction

Basic standards (continued)

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China’s independent auditing China’s independent auditing standards systemstandards system

27 specific standards

10 practice statements

(continued)

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China’s independent auditing China’s independent auditing standards systemstandards system

4 practicing guidelines

(continued)

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China’s independent auditing China’s independent auditing standards systemstandards system

The system of independent

auditing standards is consistent

with the international auditing

standards in all material respects.

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Roadmap of Chinese Independent Roadmap of Chinese Independent Auditing StandardsAuditing Standards

Formulate new standards and guidelines,

such as Instructions on the professional

Ethics for Chinese Certified Public

Accountants.

Supplement and revise the framework of the

independent auditing standards and improve

the standards.

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Further Opening the Accounting Further Opening the Accounting Services MarketServices Market

Market access:

foreign accounting firms will be allowed

to establish member firms in China

(continued)

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Further Opening the Further Opening the Accounting Services Market Accounting Services Market

National treatment:

granted in all aspects except

restrictions on the entry and

residence of individuals

®The Chinese accounting communityThe Chinese accounting community

is willing to is willing to join the professions join the professions

from other countries, to work towards a bright from other countries, to work towards a bright

future for our profession future for our profession

in the new centuryin the new century!!