International Accounting, T. Doupnik ch 5

World’s largest country with population of over 1.2 billion
People’s Republic of China (PRC) established in 1949
Politically: Communist, one-party state
Economically: Until the 1980s, all firms state-owned
Currently in transformation to socialist market economy
World’s fourth largest economy and fastest growing among large economies, and is world largest recipient of FDI - foreign direct investments - 500,000 FDI entereprises; 1/3 of totla among developing countries, and 15% FDI inflows worldwide.
- developing a capital market

First securities regulations adopted in 1984
Two major stock exchanges, Shanghai and Shenzhen established in 1990 and 1991
Government controls capital market via Chinese Security Regulatory Commission (CSRC) similar to SEC to monitor and regulate the stock market.
the 2d largest market in Asia, after Japan
- 90% of listed companies are still state owned
- outside trade - 100 companies
Domestic companies list four types of shares: A, B, C, H.
Market characterized by speculation, high share turnover
-short term investments: 1 day - few months => validity and reliability of disclosure is not very important!

Domestic companies list four types of shares: A, B, C, H
A - 90%: can own only by citizens
B - by foreigners + institutional investors (only 5%)
C - nontradable, held bu GOV and other SOEs
H - can be owned only by foreigners

- Chinese companies can not be owned by foreigners!
- Qualified Foreign Institutional Investor scheme - 2002 => foreign companies can purchase chines shares listed on the market, incl type A.

- historically accounting education was unformalized and laking of conceptual structure and international outlook. => almost litigation free accounting environment.
Collectevism-oriented society values, low degree of professionalism => luck of independence, respect for individual decisions, and of responsibility for decisions
Profession less prestigious than in U.S./U.K.
Accounting and auditing have developed separately: audit - domestic firms, accounting - on companies using foreign investments. Have different rules issued by different gov departments
Chinese Institute of Certified Public Accountants (CICPA) and Chinese Association of Certified Practicing Auditors (CACPA) merged in 1998.
Economic reform and the large number of joint ventures with foreigners has led to emergence of the audit profession.
In October 2007, the ICAEW (Institute of Chartered Accountants in England and Wales) and CICPA launched a joint project for cooperation between the professional bodies in the two countries.
Most domestic private Chinese accounting firms are still NOT independent and “hooked up” to a government-sponsoring body, although the government has encouraged independence of auditing.
- luck of supporting professional accounting bodies mechanisms (trainings education)
“Guanxi” or tight, close-knit networks, is common way of doing business, but may collide ethically for accountants.

Government continues to act as accounting regulator.
Recent activity is focused on harmonizing variety of domestic systems which vary by industry.
Committed to converging with IFRS, spurred by desired membership in World Trade Organization (WTO)
Audits of financial statements widely required
Death penalty in an accounting fraud case suggests that it is taken very seriously.
Ministry of Finance (MoF) in similar role as FASB.
MoF has issued several pronouncements to achieve harmony.

Computation of taxable income is of primary importance.
Conservatism is criticized as a method by which owners can understate income and justify low wages.
Lack of conservatism is still a major difference with IFRS.
Lack of accounting infrastructure contributes to the gap between accounting principles and practice.
Accounting System for Business Enterprises (ASBE) is followed by over 500,000 firms, including all listed companies.

Property, plant, and equipment -- historical cost, whereas IAS 16 permits revaluations.
Asset impairments – Chinese standards are silent, whereas IAS 36 requires impairment test and recognition of loss.
Preoperating expenses – deferred, then expensed when operations begin, whereas, under IAS 38, expense immediately.
Business combinations – no specific rules, whereas IAS 22 specifically discusses accounting for business combinations.

European Union’s largest country, population 83 million
West Germany and East Germany established in 1949, were reunified in 1990.
Historically, banks have been primary source of finance via both loans and equity.
Since reunification, the economy has been affected by internationalization.
German companies increasingly listing on foreign exchanges, e.g., New York Stock Exchange.
Most common business forms are Aktiengesellschaft (AG) and Gesellschaft mit beschrankter Haftung (GMBH).
AG are publicly traded/GMBH are non-publicly traded
Historically had significant influence on accounting systems in a number of other countries
Japan’s commercial code is modeled on Germany’s

Profession has traditionally been less influential than in U.S./U.K.
Auditing is dominant part of profession and certified auditors title of Wirtschaftprufer (WP) was created in 1931
Institut der Wirtschaftprufer similar to the AICPA
Obtaining WP title is extremely rigorous
Wirtschaftpruferkammer (WPK) is a state-sponsored group that oversees auditing profession.

Commercial code and tax laws are main sources of accounting rules.
Traditionally has not used a system of independent institutional oversight
Stock exchange rules have less influence than in U.S.
Prudence (conservatism) is fundamental--recognition of revenues only when realized, losses when they appear possible.
Began change away from creditor orientation in 1960s towards shareholder orientation
Starting in the 1980s, EU directives began having major influence.

Historical cost attribute for measuring tangible assets is strictly adhered to.
Traditional focus on creditor protection is at odds with the true and fair view concept.
Importance of tax laws led to the reverse authoritative principle which requires expenses to be deducted from accounting income if they are to be tax deductible.
Differences between accounting and tax income are minimal, thereby reducing need for deferred taxes

In contrast to China, conservatism has been used to resist labor unions' wage demands.
Highest in the world labor cost!
Standards allow for income stability, frequently accomplished via early recognition of losses, and allowing firms to smooth there profit over time. They were using the hidden or silent reserve of liability from the previous years to off set income in a bad years.
That means that the firms were allowed to use accounting options available withing accounting law to generate the desired amount of reported profit over time.
EU fourth directive requires true and fair view, but Germans have a unique interpretation of the concept. Germany increased the required not disclose as a way of achieving the true and fair view without changing the tax-based, income - smoothing approach for fin reporting.
Commitment to globalization reflected in rule that allows public companies to use IFRS for consolidated statements.
Main intention of German Accounting Law Modernization Act is conformity with IFRS

Differences with IFRS
Goodwill – deducted immediately against equity, whereas, under IFRS 3, accounted for as an indefinite life intangible asset.
Internally generated intangibles – not recognized, whereas, under IAS 38, recognized as an asset under some conditions.
Leases – accounting uses tax rules, with capitalization rare, whereas IAS 17 criteria result in more frequent capitalization.
Accounting for subsidiaries – allow exclusion of dissimilar subsidiaries, which are consolidated under IAS 27.

Population 127 million, world’s third largest economy
Banks are primary source of finance via both loans and equity, and cross-corporate equity ownership is also common.
Keiretsu (and predecessor Zaibatsu) emphasize close business ties and reflect cultural value of collectivism.
1990s recession led to an increase in Japanese firms’ attempts to obtain capital internationally.

Certified Public Accountants Law (1948) established the profession.
JICPA is one of the nine founding members of the IASC.
Profession is significantly less influential than in U.S./U.K. and is also much smaller in numbers than U.S.
Obtaining CPA title is extremely rigorous, as in Germany.
Low status within Japanese society vs. engineers and scientists
Collectivism leads to lack of trust of auditors.
Tax advising is a much larger, separate, profession.
(MACRO BASED)

Government influences accounting via Commercial Code, Corporate Income Tax Law and Securities and Exchange Law.
Similar to Germany, strong creditor orientation and accounting rules closely tied to tax rules
Big Bang financial reforms are leading to harmonization with international standards.
These reforms included requirements for consolidation and fair value accounting for tradable securities.
Business Accounting Principles issued by Ministry of Finance consist of 7 guidelines (the equivalent of a conceptual framework)

!!! In contrast to U.S., net income is less a measure of performance and seen more as funds available for dividends.
Since providers of financing tend to be close to the firm, there has historically been little pressure for disclosure.
Lack of disclosure is apparent in segment reporting.

Differences with IFRS
Revaluation of Land – allowed, but updating not required, whereas, under IFRS 16, revaluations require regular updating.
Preoperating costs – capitalization is allowed, whereas, under IAS 38, expensed immediately.
Construction contracts – completed contract method is allowed, whereas IAS 11 essentially requires percentage-of-completion.
Provisions – allows for provisions prior to actual obligation, whereas IAS 37 only allows for present obligations based on past transaction.
In August 2007, IASB and Accounting Standards Board of Japan agreed to accelerate convergence between Japan GAAP and IFRS with goal to eliminate all differences by June 2011.

Background
Population of about 60 million, comprised of England, Northern Ireland, Scotland, and Wales
Among the five countries in this chapter, its financial structure is closest to the U.S.
15,000 Private Limited Companies (PLCs) with about 2,500 of these listed on the London Stock Exchange.

Accounting Profession
World’s first association of professional accountants, The Society of Accountants in Edinburgh, established in 1853
Six professional chartered bodies coordinated through Consultative Committee of Accountancy Bodies (CCAB)
accounting more technical - The profession developed in response to the needs of industry and has influenced the development of professions in a number of other countries.
- dont require education for certification

Compared to the U.S. the certification requirements focus more on work experience and less on university education

The Companies Act, accounting pronouncements, and stock exchange rules comprise accounting regulation.
Similar to the U.S., and unlike Germany and Japan, tax rules do not significantly influence financial reporting.
Standard-setters have historically taken a principles-based approach using a statement of principles as a conceptual framework.
Has not historically had a strong, SEC type agency, but recent scandals have led to increased regulation.

MICRO BASED = US
A primary objective of accounting is to support an effective capital market.
The true and fair view principle is paramount.
True and fair view override requires that companies not comply with standards that would result in misleading financial statements.
Professional judgment is essential additional component to true and fair view