Accounting Reform and Development in China FENG Shuping Assistant Minister, Ministry of Finance People's Republic of China

® Reform and Development of Accounting Practices in China Feng Shuping Assistant Finance Minister Ministry of Finance of the P.R.C

® Topics Administrative System of Accounting Practice in China The System of Accounting Rules and Regulations in China Opening up of Chinese Accounting Services Market

® Administrative System of Accounting Practice in China “Centralized Leadership and Layered Administration”

® Responsibilities of financial Departments Formulate and issue national unified accounting systems Supervise and inspect the implementation of national unified accounting systems

® Reduce formulating costs Shorten formulating cycle Implementation driven by government authority The Chinese Accounting Standards Are Formulated by the Government: Benefits

® Due Process of Accounting Standard Setting Define agenda Draft research papers (With consultancy provided by international accounting firms)

® Due Process of Accounting Standard Setting Draft discussion papers Draft exposure drafts (Extensive participation by stakeholders) Promulgate (continued)

® Accounting Supervision and Inspection Whether financial accounting information is true Whether financial accounting information is complete

® Managerial System of CPA industry Institutes of CPAs are self- disciplinary professional organizations Financial departments conduct supervision over and provide guidance for CPAs, accounting firms and Institutes

® Supervision and Guidance by Financial Departments Formulate rules and procedures for national unified examination of CPA Maintain a register of certified public accountants (continued)

® Supervision and Guidance by Financial Department Responsible for administrative review Approve the establishment of accounting firms (continued)

® approve practicing standards and rules proposed by the CICPA Impose penalties on CPAs and accounting firms for irregular practices (continued) Supervision and Guidance by Financial Department

® Review and approve applications from foreign accounting firms to set up institutions in China (the Ministry of Finance has the sole authority to approve the applications)

® Responsibilities of Institutes of CPAs Organize national unified examinations of CPAs Process CPAs’ registration (continued)

® Responsibilities of Institutes of CPAs Propose and constitute practicing standards and rules of CPAs (details are conducted by the CICPA)

® The System of Accounting Rules and Regulations in China The Accounting Law of the People’s Republic of China Regulations on financial accounting reports of Enterprises Accounting standards and accounting systems for business enterprises

® The Accounting Law Set forth the basic requirements on the accounting practices of enterprises

® Regulation on financial accounting reports of Enterprises Specify requirements for financial accounting reports in the Accounting Law Specify requirements for financial accounting reports in the Accounting Law

® Formulated in accordance with the Accounting Law and Regulation on Financial Accounting Reports of Enterprises Formulated and promulgated by Ministry of Finance (continued) Accounting Standards and Accounting Systems for business enterprises

® Important parts of accounting laws and regulations Compulsory for applicable enterprises

® Development of Chinese Accounting Standards Refer to IASs Have formulated basic standard as well as 16 specific standards (continued)

® Development of Chinese Accounting Standards Chinese Accounting Standards are consistent, or converge with IAS in many aspects

® Convergence with IAS The objective of financial statements – meeting the needs of investors and creditors as well as management and government The quality of financial information – especially relevance and reliability (continued)

® Convergence with IAS Definitions of the elements of financial statement are consistent with the IASB Framework Asset, liability, equity, revenue, etc. Recognition and measurement principles are generally similar to those in IAS (continued)

® Convergence with IAS The Chinese financial reporting system is similar to the financial report in IAS 1: Same basic financial statements and note disclosures.

® We recognise the importance of serving the securities market Our objective is to improve the quality of financial information, and To reduce the need for adjustments: for example, minimise the adjustments needed for B share or H share listings and for commercial bank listings within China for which IAS financial statements are required.

® Some inconsistencies between IAS and Chinese standards Some inconsistence still exist: For example, cost or carrying amount sometimes is used for measuring special transactions that IAS would measure at estimated fair value.

® Obstacles for Convergence China is still in the process of economic transition:  Many related party transactions (many enterprises are still state owned).  Transaction prices are sometimes not market prices.  Special capital structures. (continued)

® Obstacles for Convergence lack of effective corporate governance Special structure of users of financial information:  Government is now the important investor and user of financial information.  A shortage of experienced financial analysts (continued)

® Obstacles for Convergence Some regulatory requirements of financial information focus on minimum past performance:  IPO, profit for the past three years.  For new issues after listing, weighted average return on net assets should be 10% or higher for recent past three years, etc.

® Situations in other countries These obstacles probably exist in other developing countries, especially those economies in transition. Similar obstacles may exist in certain periods in developed countries.

® A sensible approach for China today On the one hand, take account of its realities, and On the other hand, do its best to get in line with IAS/IAS. Try to balance these two approaches in its work to improve financial reporting in China.

® Our objective Build a core Chinese accounting standards system in about three years. (continued)

® Our objective Keep in line with IAS, except in cases where some IASs contradict with Chinese law, or obviously don’t suit Chinese realities.

® Opening of China’s Accounting Services Market China’s Accounting Services Market already is widely opened.

® Current approaches to Open Accounting Market Allow foreign accounting firms to set up representative offices in China Allow international accounting firms to develop Chinese member offices (continued)

® Current approaches to Open Accounting Market Allow overseas accounting firms to perform ad hoc auditing services in China Allow Non-Chinese Nationals to take the Chinese national unified CPA examinations (continued)

® Allow overseas members of the CICPA to apply to register as Chinese certified public accountants Current approaches to Open Accounting Market

® Non-Chinese Nationals Becoming Chinese CPAs Pass the national examinations get registered as a Chinese CPA according to relevant stipulation (continued)

® Non-Chinese Nationals Taking the Examinations Qualifications for taking the examinations Sign up at the CICPA or Hong Kong Society of Accountants

® Non-Chinese Nationals Taking the Examinations Exam subjects: accounting, audit, financial cost management, economic law and tax law (continued)

® Non-Chinese Nationals Taking the Examinations Each subject is on a 100-point scale, with 60 points as the passing line. Scores of individual subjects are valid within 5 years. (continued)

® Non-Chinese Nationals Taking the Examinations The examination is conducted in Chinese. If passing all the examinations, the applicants will be qualified to apply for membership with the CICPA.

® An Overseas Non-Practicing Member Become A Practicing Member Preconditions are required

® China’s independent auditing standards system Introduction Basic standards (continued)

® China’s independent auditing standards system 27 specific standards 10 practice statements (continued)

® China’s independent auditing standards system 4 practicing guidelines (continued)

® China’s independent auditing standards system The system of independent auditing standards is consistent with the international auditing standards in all material respects.

® Roadmap of Chinese Independent Auditing Standards Formulate new standards and guidelines, such as Instructions on the professional Ethics for Chinese Certified Public Accountants. Supplement and revise the framework of the independent auditing standards and improve the standards.

® Further Opening the Accounting Services Market Market access: foreign accounting firms will be allowed to establish member firms in China (continued)

® Further Opening the Accounting Services Market National treatment: granted in all aspects except restrictions on the entry and residence of individuals

® The Chinese accounting community is willing to join the professions is willing to join the professions from other countries, to work towards a bright future for our profession in the new century !