Accounting & Tax

China to Adopt IFRS

State enterprises will be exempt from the "related-party" disclosure provisions.
Stephen TaubFebruary 16, 2006

Chinese government officials have announced that companies will adopt International Financial Reporting Standards (IFRS) used by nearly 100 countries, including those in the European Union, according to The Financial Times. Lou Jiwei, Beijing’s vice finance minister, said China would adopt “one basic accounting standard,” according to the report.

The new rules will apply to listed companies beginning January 1, 2007.

Experts assert that the move will help boost credibility in China-based companies and attract more foreign investors, noted the FT. In addition, members of the global accountancy profession say the move would affect other Asian countries, such as South Korea, that are mulling a similar change.

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“There is going to be a chain reaction as a result of this,” David Tweedie, chairman of the International Accounting Standards Board, told the paper. “The decision happened very fast in the end. They are almost there (as far as accounting standards go) and they are determined to get there.”

The FT stressed that China plans to take a principles-based approach to the new accounting rules and then translate them into its own code, the Chinese Accounting Standards System. Lou said the system would embrace “fair-value” accounting principles, which is in sync with international practice, added the paper.

However, the fair-value provision will not be easy to implement, noted the FT, mainly because the government controls the price of certain assets — such as unlisted securities — so there will be trouble finding independent parties to assess the assets.

Some Chinese entities will garner IFRS exceptions. For example, state enterprises will be exempt from the “related-party” disclosure provisions because of the dominance of government enterprises, said the FT. “You can understand why they would do that, because otherwise 95 percent of the economy would be a related party,” a foreign adviser to the Chinese told the paper.

China’s rules will also be different from those of the IFRS when it comes to the “impairment of assets” provisions, which allow companies to write down the value of businesses, physical assets, and goodwill, as well as revalue assets upward if conditions change. The Chinese are said to be uneasy about revaluing assets for fear that it would lead to manipulation of company financials, the report noted. In fact, even U.S. accounting rules prohibit upward revaluations of assets already written down, adds the paper.