As commonly acknowledged, accounting, as a social science, a language of economy, is affected by the environment in which it stays; In the meantime, it also brings impact on this environment (Cerne 2009). There are numerous factors that affect the accounting system of a country, such as culture, politics and economy and other non-accounting factors (Nobes & Parker 2010). China is one of the most populous countries in the world, and it has maintained a rapidly growing economy since 1990s. In the meantime, UK is a typical capitalist country, which joined European Union on 1st January 1973, and its GDP is mostly created by services.
In this report, a comparative analysis of financial reporting between UK and China will be demonstrated. This article aims at analyzing accounting system of China by enumerating key influential factors, which will be discussed and compared with that of UK. Then, the analysis of regulatory framework of China will be illustrated. After that, a conclusion will be given to summarize the differences or similarities of financial reporting and accounting rules and methods prescribed by law or standard. Business Environment Socio-culture Culture plays a critical role in the development of accounting.
According to the Hofstede’s (1984) four cultural dimension, China is a highly collectivist culture where collective interests always have the higher priority than those of individuals. The development of Chinese accounting system is dominated by the Chinese government, and the accounting information was collected for government needs.
Chinese society is a large power distance society, and the degree of centralization is very high. it has a rigid social hierarchy, and the state takes a top-down approach, the Chinese accounting standards was mainly established by the Ministry of Finance of the government, and influence on the development of accounting standards from academia and accounting practice is very weak. Uncertainty avoidance in China is relatively high, accounting can be used as a means of reducing uncertainty, based on the ‘need-based’ philosophy, and the accounting system is designed to be more detailed and specific. In contrast, the UK is an individualism culture in which the power distance is small and its uncertainty avoidance is low.
The development of accounting significantly depends on the market, and accounting information is provided primarily for investors, and to satisfy the market needs. Economic System Accounting system is influenced by the economy in which it is created, and they are also correlated. China has made a successful transition to socialist market economy, and through decades of economic development, it now has become world’s second largest economy. It has been a major recipient of Foreign Direct Investment (FDI) from all over the world in recent years. FDI takes up 4.
1% of national tax revenue, 58% of foreign trade, and 27% of the value added production. More than 190 countries from around the world invest in China. (Poncet 2009) Compared with China, there has been an overall climb in yearly flows of investment funds from the UK during the period of 2002 and 2006 reaching ? 49 billion in 2006. The UK became 4th largest worldwide source of outbound FDI. (JNCC 2008) As the economic globalization has become the trend of global economic development, it is critical that financial accounting information asymmetry should be reduced or eliminated to help international investors make important investment decision.
Apparently, the international convergence of accounting standards is urgent and important. Politics In China, government plays a vital role in the economic development, and it often directly or indirectly affects the market to achieve economic purposes. The early 1990s witnessed the establishment of two stock exchanges in China, with the Shanghai Stock Exchange in 1990 and the Shenzhen Stock Exchange in 1991 respectively. Since then, the Chinese stock markets started developing at a rapid rate, making enormous contribution to China’s economic growth.
After the establishment of stock exchanges, A-shares were authorized to be issued only to domestic investors. The listed companies which had issued A-shares were allowed to issue B-shares to overseas investors in 1992, and then the Chinese government issued an accounting regulation for listed companies, since then, four sets of accounting regulations (1998, 2001 and 2006) were issued for reducing important discrepancies between Chinese GAAP and IAS which was replaced by IFRS in 2001, thereby easing overseas investors’ concerns regarding the lack of high quality accounting standards in China.
(Lim, Habibullah & Hinich 2009) Regulatory Framework An accounting standard is a guideline for financial accounting practices, such as how a company discloses its business income and expenditure, assets and liabilities. The Generally Accepted Accounting Principles consists of a large collection of individual accounting standards. In 1993, a project was launched by the Ministry of Finance (MOF) to develop the Chinese Accounting Standards (CAS) in accordance with internationally used accounting and financial reporting practice, the project was funded by the World Bank.
MOF then issued a series of supplementary standards during the following few years. On 15th February 2006, the Ministry of Finance of People’s Republic of China issued the Accounting Standards for Business Enterprises (ASBE) which comprised a new Basic Standard and 38 Specific standards. All listed companies were requested to adopt ASBE mandatorily from 1st January, 2007, meanwhile other companies were also encouraged to use ASBE. The implementation of ASBE significantly improved the comparability of financial information. (Deloitte 2005)
Additionally, the MOF has issued a new Accounting System for Financial Institutions (ASFI) and a new Accounting System for Small Business Enterprises (ASSBE). All listed domestic and foreign financial institutions are required to apply the ASFI from 1st January, 2002, and unlisted non-foreign invested security companies were also required to follow the ASFI. Meanwhile the ASSBE would cover all small enterprises from 1st January, 2005. (Deloitte 2005) The ASBE used International Financial Reporting Standards (IFRS) as a reference in order to gradually harmonize with international accounting standards.
Until now, except for some discrepancies between ASBE and IFRS in related party disclosure and reversal of asset impairment, the ASBE has achieved substantial convergence with IFRSs. (Li 2006) Compared to China, UK’s accounting standards named Financial Reporting Standards (FRS) are issued by the Accounting Standards Board (ASB) which is an independent standard-setter regulated by the Financial Reporting Council (FRC). There is a mandatory requirement that listed companies must apply the International Financial Reporting Standards (IFRS), other companies which are not listed have the option to report under IFRS or under UK GAAP.
Accounting Rules and Methods Prescribed by Laws or Standards According to the accounting laws, the ASBE and the financial reporting regulations, financial reports should consist of a profit and loss accounts, cash flow statements, balance sheet, notes to the accounts and a profit and loss appropriation account. More specifically, In China, installation, transportation and taxes are included when tangible assets are measured at cost, and the tangible assets are depreciated using common approaches like straight-line method.
Compared to China, in the UK, tangible assets must be initially measured at cost, and their depreciation also use the common way similar to that of China, but it’s inapplicable for investment properties. In China, the occurrence of the impairment is measured by using the method that is consistent with IAS 36, impairment occurs when the carrying amount of an asset exceeds its recoverable amount. However the UK measures impairment by comparing carrying value and value in use. In China, the use of LIFO is allowed as a means of measuring inventory cost, which is consistent with the US GAAP.
Compared with China, the cost of stock in the UK can be measured by using FIFO and AVCO, but the LIFO is prohibited. The recognition of a provision is similar in both China and the UK, a provision should be recognized when an entity has an obligation or it is probable that a transfer or economic benefit will be required to settle the obligation. In China, it is required that companies should use the calendar year, which is 1st January to 31st December, as their financial year.
Compared to China, the financial year in the UK runs from 1st April to 31st March for the purposes of government financial statements and corporation tax. For people who pay personal tax the fiscal year starts on 6th April and ends on 5th April of the next calendar year. Unlike China, the accounting profession in the UK has traditionally operated in a framework where statutory control is limited to prescribing minimum standards only, leaving the profession to determine best practice (Roberts, Weeman & Gordon 2008, P582).
Conclusion By analyzing major influential factors on accounting, comparing regulatory frameworks and rules and methods, it is obvious that the differences in accounting between China and the UK are enormous. In China, the development and practice of accounting are significantly affected by economy and politics. In contrast, the development of accounting in the UK is highly dependent on the market needs and the practices are developed by using professional expertise to satisfy the general requirements of the law.
Chinese accounting standards are directly promulgated by the government, however in the UK, the issuance of accounting standards are conducted by the independent standard-setter called ASB. The Chinese accounting is more likely conservative compared to that of the UK, and the standards are established based on the ‘need-based’ philosophy. This report is dedicated to reveal the significant differences in terms of accounting between China and the UK by analyzing and comparing different aspects of the country’s characteristics that can affect the accounting.
Appendices As for the ‘Inventory’, China accepts the usage of LIFO as a method of cost measurement which is rejected by the UK. The use of different methods may result in the deviation of measurement of cost. Both China and the UK initially measure ‘Tangible Assets’ at cost, but installation, transportation and taxes in China are included during the measurement. References Cerne, K. 2009, Influential Factors of Country Accounting System [pdf] Available at: http://hrcak. srce. hr/file/60064 [Accessed on 25 November, 2013].
Deloitte 2005, Comparison between PRC GAAP and IFRS [pdf] Available at: http://www. iasplus. com/en/binary/dttpubs/2005ifrsprc. pdf [Accessed on 28 November, 2013] Hofstede, G. 1984, Cultures and Organizations: Software of the Mind, London: McGraw-Hill JNCC 2008, Tracking UK Foreign Direct Investment (FDI) Into Selected Overseas Economy [pdf] Available at: http://jncc. defra. gov. uk/pdf/global_trackingUKForeignDirectInvestmentReport1. pdf [Accessed on 5 December, 2013] Li, H. 2006, Framework and Implementation