Global Business

The Long March

FASB tries to help China speak the language of accounting.
Alan RappeportMay 9, 2008

The Financial Accounting Standards Board, America’s maker of accounting rules, reached out to China last week in an effort to nudge it closer to the fold of countries converging toward an international accounting standard.

In a memorandum of understanding signed by FASB chairman Robert Herz and his Chinese counterpart Liu Yuting, the two agreed to work together to better understand the technical differences between their accounting standards. Moreover, FASB and the China Accounting Standards Committee will have an exchange program, of sorts, where Chinese officials will come to FASB’s Connecticut headquarters to study U.S. generally accepted accounting principles and America’s efforts toward converging with international financial reporting standards (IFRS). FASB officials will also travel to China to learn how accounting rules are being used there.

Herz said a common standard would help to “facilitate economic relations between the U.S. and China.”

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China already has agreed to embrace international accounting standards to an extent, but the country still has a long march ahead to converged standards. In 2006 China agreed to adopt the principles of IFRS and translate them into its own code. One big change for the country is moving to fair-value accounting principles, and though it has embraced the concept, it also has made some exceptions: for instance, state-owned enterprises are exempt from related-party disclosures. In addition, China has been reluctant to allow assets to be easily revalued.

Even with the progress, China still has some catching up to do on accounting. “We should not expect that by adopting IFRS or signing a memo with FASB, China’s accounting quality will improve overnight,” T.J. Wong, an accounting professor at Hong Kong University, told CFO.com. “Research has found that a country’s accounting quality is largely dependent on the underlying institutions, and standards can play a small part.”

What’s more, convergence of standards within China remains elusive. Central-level, state-owned enterprises and larger Chinese companies must adopt the country’s version of IFRS by 2009, but small and midsize enterprises, which represent the bulk of Chinese companies, do not. Thus, Wong said, the adoption of IFRS may create a false expectation that all firms should be measured the same way.

The uniqueness of China’s markets could create other obstacles, particularly making fair value work in an environment where the state still controls the prices of some assets. Wong noted that with China’s legal system, corporate structures, and business culture less developed than those of most other industrialized countries, some Chinese firms may have trouble successfully implementing international accounting standards.