Chief Accountant, China Securities Regulatory Commission Current Status and Challenges of Adopting the New Chinese Accounting Standards for Business Enterprises (“CAS”) Zhong Hui Zhou Chief Accountant, China Securities Regulatory Commission

Background, Framework and Comparison with IFRS Contents Background, Framework and Comparison with IFRS First-time adoption of CAS Issues encountered on first-time adoption Challenges in adopting CAS Recent activities 2019/2/27

I A. Background of CAS Adoption Integration with the global economy Development of domestic economy Strengthen market supervision 2019/2/27

I B. Framework of CAS First level: Basic Standard Second level: Specific Standards (38) Third level: Application Guidance (32) The three levels within the hierarchy above form separate yet inter-related system that is fully integrated 2019/2/27

Hierarchy of CAS CAS: Basic Standard Specific Standards and Application Guidance Interpretations (being formulated) IFRS: Framework IFRSs Interpretations 2019/2/27

C. Comparison with IFRS 1. Substantive convergence On 8 November 2005, Mr Wang Jun, Vice-Minister of Finance, and Sir David Tweedie, Chairman of International Accounting Standards Board (IASB), signed a joint statement, confirming the achievement of substantive convergence of CAS with International Financial Reporting Standards. 2019/2/27

2.Principles of convergence: progress and development trend C. Comparison with IFRS 2.Principles of convergence: progress and development trend does not mean simple equivalence process interactive 2019/2/27

C. Comparison with IFRS 3. Remaining differences A limited number of differences remained Disclosure of related party relationships and transactions Reversal of provisions for impairment of long-term assets Relevant rules are not the same Business combinations between parties under common control Extraction of Petroleum and Natural Gas, Insurance and Re-insurance contracts Measurement of fair value Non-current assets held for sale and discontinued operations Accounting of post employment or post retirement benefits Accounting in hyperinflationary economies 2019/2/27

II. First-time adoption of CAS A. Initial preparation for first-time adoption 1.Training 2.Field study 3.Preparation by enterprises 4.Driving the implementation of CAS B. Impact of first-time adoption C. Responses to matters arising during first-time adoption D. Critical success factors 2019/2/27

A. Initial preparation – training Standard setters, regulators and the entire profession took part in training: Ministry of Finance (MOF) and Accounting Society of China (ASC) China Securities Regulatory Commission (CSRC) Chinese Institute of Certified Public Accountants (CICPA) CPA firms 2019/2/27

A. Initial preparation – Field Study CSRC 29 listed companies selected for simulation Discussions held with financial personnel and audit firms Potential issues identified and analyzed Solutions formulated for some Other issues reflected with the MoF 2019/2/27

A. Initial preparation – Preparation by enterprises Information system Process for preparation of financial statements Management framework 2019/2/27

A. Initial preparation – Driving the implementation of CAS Other Driving Efforts Behind Implementing New CAS: Communication with the public 24 Significant State-owned enterprises piloted On-going discussion with the State Administration of Taxation (SAT) 2019/2/27

B. Impact of first-time adoption 2006 annual reports of 1,457 listed companies examined: A net increase of Rmb 14.18 billion ( 0.43%) in shareholders’ equity 46% of respondents has less than 1% change in shareholder’s equity Items that have the most significant impact: Increase -> Financial Assets carried at FV Decrease -> Goodwill Most pervasive -> Income taxes 2019/2/27

C. Responses to matters arising during the first-time adoption MoF - Team of Experts on Implementation Issues of CAS – Issued 2 expert opinions on 20+ issues Accounting Department of CSRC – Issuance of guiding opinions Simulation performed on 29 listed companies CSRC – Revised 17 standards on information disclosures Guidance on preparation of 2007 annual report Stock Exchanges – Issued 9 working memos 2019/2/27

D. Critical Success Factors National wide training and public communication; Cooperation and coordination between various government authorities; Listening to concerns of preparers and users and react quickly by providing necessary guideline and interpretations 2019/2/27

III. Issues encountered on first-time adoption Business combinations under common control Classification, measurement and disclosures of financial instruments Capitalization of development costs in the pharmaceutical and software development industries Share-based payment Asset impairment testing Valuation technique used in the measurement of fair values 2019/2/27

IV. Challenges in adopting CAS Accounting concept and application of professional judgment Bringing principles to practice International convergence 2019/2/27

IV. Challenges — concept and judgement Accounting concept From complying specific rules to professional judgment based on principles Professional judgment, e.g.: （1）Measurement of fair value （2）Impairment provisions （3）Financial instruments （4）Endowment and post-retirement and post-employment benefits 2019/2/27

IV. Challenges — bring principles to practice Massive education and training needs Improvements in internal management systems Changes in performance measurement indices Reconciliation with tax policies 2019/2/27

IV. Challenges — international convergence CAS achieved substantive convergence with IFRS However, IFRS may continue to change due to: Convergence with US GAAP; Accommodating the real economic needs of EU etc. CAS responds to challenges brought by changes in IFRS 2019/2/27

V. Recent activities A. Plan to issue implementation guidance MoF: Interpretations CSRC: Accounting Principles Bulletins B. Investigate and analyze based on 2007 semi-annual report In the works C. Guidance on preparation of 2007 annual reports Plan to issue, along with SZSE and SSE, relevant guidance according to 2007 semi-annual report 2019/2/27

Thank You