by Harold Gellis C.P.A.
The Importance of China to the Global Economy
China, with over 1.3 billion people - more than twenty five percent of the world's population - has a become a major player on the world stage. The country is rapidly becoming an economic superpower with the world's second largest gross domestic product. Its economy expanded by 9.9 percent in 2005 and a similar rate of growth is expected for 2006. China's trade surplus with the U.S. at the end of 2005 was a massive $114 billion dollars. Export growth at the start of 2006 grew at an annualized rate of 28.2 percent.
The importance of China to the well-being of the global economy can not be underestimated. China's influence on the continuing prosperity of the West's economy, especially the United States, is dependent upon the ability of the Chinese economy to continue growing by attracting foreign investment.
Foreign investment in Chinese companies totaled $60.3 billion in 2005 and is expected to remain approximately $60 billion in 2006. Nevertheless, foreign investment is less than three percent of the market share in key industries essential to China's development.
China's demographic characteristics, economy and banking system, capital markets, and accounting and financial reporting systems all affect its investment climate. The country's future growth is based, in varying degrees, on all these characteristics.
But it is China's accounting and financial policies, and their impact on its capital markets that will prove decisive whether the country is considered a favorable market for international investors. In this context, China's recent liberalization of its foreign investing rules, and its commitment to accounting reform is seen as imperative to attracting additional overseas investment.
Geography and Demography: The Challenges of Developing a Unified Accounting System
China is a huge country with 9.6 million square kilometers territory. The country is divided into 23 provinces, 5 autonomous regions, 4 centrally administered municipalities, and 2 special administrative regions. China's four municipalities are: Beijing; Tianjin; Shanghai; and Chongqing. It main cities are: Beijing, the capital; Shanghai; Tianjin; Chongqing; Shenyang; and Wuhan.
There are 56 nationalities in China. The Han people form the largest, numbering 1.1 billion, and comprise 93.3% of the population. The other ethnic groups, known as minority nationalities, total 160 million, or 6.7% of the population.
The Han people live all over the country but are concentrated in the Yellow River Yangtze River and Zhujiang River valleys, and in the Songhua-Liaohe Plain in the northeast. The minority
nationalities inhabit 60 % of the country's total land area, mainly in the border regions. 540 million people live in urban areas. More than 800 million people live in rural areas.
Chinese dialects are divided into seven groups. The Northern dialect is the most widely spoken dialect and is used by over 70 percent of the Han people. The Northern dialect serves as the foundation of common spoken Chinese or Putonghua. It is spoken by people in north and northeast China, and also in the southwest and in parts of the Yangtze valley.
The Wu dialect is spoken in Shanghai. The Min dialect is spoken in south China's Fujian Province. The Xiang dialect is spoken in south China's Guangdong province, and the Gan dialect is spoken in Jiangxi province.
The size of China and the diversity of its population create challenges in implementing a uniform accounting system. Such a system must address the differing needs of its urban and rural populations and be linguistic and economic-specific. For the enterprises providing these populations with goods and services, there must also be a uniform accounting and reporting platform that can provide comparable financial information between enterprises and industries.
Historical Background of Accounting in China
Over four thousand years ago, accounting in China was used in the Hsiu Dynasty in a stewardship role, and, in the Xia Dynasty, to measure wealth. As a manager of warehouses, Confucius kept records of receipts and disbursements, and among his teachings is the requirement to keep a history of accounting records.
When the People's Republic of China was founded in 1949, China implemented a Soviet-style centralized planned economy. Under this Marxist system, the state controlled the ownership of all resources as well as all means of production. Accounting served primarily as a measurement of stewardship and compliance with the government's policies and regulations. The balance sheet was the most important financial report as it reflected the resources used in production and the production generated from the resources.
Accounting in China in the 1990's
The governmental body responsible for setting accounting and auditing standards is the Ministry of Finance (MOF). In 1992, the MOF issued a conceptual framework of accounting designed to ultimately harmonize Chinese accounting with international accounting. The framework was called Accounting Standards of Business Enterprises (ASBE) and became effective on July 1, 1993.
The ASBE established the following accounting guidelines:
1. Matching of revenues and expenses under the accrual basis
2. Use of historical cost for the valuation of assets and separate classifications into current and non-current categories
3. Depreciation methods for fixed assets and amortization of intangible assets
4. Classification of current and long-term liabilities
5. Classification of equity as face value of stock issued, premium on stock, and appropriated and unappropriated retained earnings
6. Requirement of a comparative balance sheet, income statement, statement of cash flows, and notes and explanatory statements
7. Use of the calendar year as the accounting period
The ASBE also replaced more than forty uniform accounting systems representing different industries and ownership with thirteen industry-based and two ownership-based accounting systems. The ASBE's goal was to make domestic accounting practices more uniform across different types of industry, and to attempt to align Chinese financial reporting with internationally accepted financial reporting.
The ASBE was replaced by Chinese Accounting Standards (CAS) and Accounting Regulations for Business Enterprises (ARBE).
The China Accounting Standards Committee (CASC), an authoritative unit within the MOF, was established in 1998 to develop accounting standards. The CASC issued one basic standard and 16 specific standards. Their effective dates ranged from January 1997 to July 2003 and addressed such specific accounting topics such as cash flow statements, related party transactions, investments, intangible assets, inventories, and fixed assets.
The development of these standards was a joint effort of the MOF and the international accounting firm of Deloitte Touche Tohmatsu who were engaged as ongoing consultants on the project. The objective of the development of these standards was to produce a financial reporting system that reflected China's hybrid socialist market economy but also was in conformity with international accounting and financial reporting practice.
ARBE, issued in 2001 and effective in 2002, unified accounting practices for listed companies, joint stock limited enterprises, and foreign investment enterprises. The objective of the ARBE was to enhance the comparability of financial information.
Capital Markets: The Need For Accounting Reform
The China Securities Regulatory Committee (CSRC) is responsible for regulating China's two domestic stock exchanges which are in Shenzhen and Shanghai. The CSRC establishes and enforces regulatory guidelines and exchange rules and issues disclosure requirements for companies that are listed on the exchanges. Accordingly, disclosure requirements for listed companies are establ
Added on August 31, 2007