Framework and Implementation of Chinese Accounting Standards System for Business Enterprises

1. Framework and Implementation of Chinese Accounting Standards System for Business Enterprises Li Hongxia Accounting Regulatory Department Ministry of Finance, P.R. China May 22, 2006

2. Main Contents • The Framework of Chinese Accounting Standards for Business Enterprises (CASs) • The Characteristics of Chinese Accounting Standards for Business Enterprises (CASs) • Experience Gained from the Development of CASs • Implementation of CASs

3. Background On 15 Feb, 2006, Chinese MoF released 1 Basic Standard and 38 specific standards, effective on Jan. 1, 2007 first in listed companies and extended to large and medium-sized enterprises gradually

4. Background • Marks the official establishment of Chinese Accounting Standards System for Business Enterprises • Suits the development process of market economy of China • Achieves convergence with IFRSs in terms of principles on accounting recognition, measurement and reporting • Prescribes special provisions for transactions given domestic situations, eg., related party disclosures ----Result of experiences summarized from Chinese economic and accounting reform and cooperation between CMoF and IASB

5. Background • Standardize business behaviors • Enhance the quality of accounting information • Reduce cost of raising capital • Improve corporate governance structure • Facilitate business enterprises to implement “coming in” and “going out” strategy

6. I. Framework and Characteristics and Chinese Accounting Standards for Business Enterprises (CASs)

7. The Framework of Chinese Accounting Standards System(1) • The Chinese Accounting Standards System for Business Enterprises Consists of 1 Basic Standard and 38 specific standards which are divided into two levels: • First level: the Basic Standard • Second level: specific standards

8. The Framework of Chinese Accounting Standards System(2) • The Framework of Chinese Accounting Standards System First Level Second Level

9. The Framework of Chinese Accounting Standards System(3) • Basic Standard • Plays a leading role • Mainly stipulates the objectives of financial reporting, recognition and measurement principles, underlying assumptions of accounting, primary characteristics of accounting information, recognition, measurement of accounting elements • It is equivalent to the IASB’s Framework for the Preparation and Presentation of Financial Statements and the FASB’s Concept Statements

10. The Framework of Chinese Accounting Standards System(4) • Specific Standards • Formulated according to the Basic Standard • Divided into three categories – accounting standards for general businesses, accounting standards for specific businesses in special industries and reporting standards

11. The Framework of Chinese Accounting Standards System(5) • Accounting Standards for General Businesses • Mainly stipulate recognition and measurement requirements for general economic businesses that are broadly applicable to all kinds of enterprises • Include: Inventory, Fixed Assets, Investment Property, Leases, Revenues, Employee Benefits, Share-based Compensation, Income Taxes, Foreign Currency Translation, Borrowing Costs, Investment, Corporate Annuity, Earnings Per Share, Intangible Assets, Impairment of Assets, Contingencies, Recognition and Measurement of Financial Instruments, Transfer of Financial Assets, Hedging Transaction, Presentation and Disclosure of Financial Instruments, and Business Combinations, etc.

12. The Framework of Chinese Accounting Standards System(6) • Accounting Standards for Specific Businesses • Mainly stipulate recognition and measurement requirements of specific businesses in special industries • Include: Oil and Natural Gas Extraction, Biological Assets, Insurance Contract and Reinsurance Contract , etc.

13. The Framework of Chinese Accounting Standards System(7) • Reporting Standards • Mainly stipulate formats and contents for general-purpose statements that are widely applicable to all kinds of enterprises • Include: Presentation of Financial Statements, Cash Flow Statements, Consolidated Financial Statements, Interim Financial Reporting, Segment Reporting, Related-party Disclosures , Earnings per share etc.

14. II. The Characteristics of Chinese Accounting Standards System for Business Enterprises (CASs)

15. Characteristics of CASs (1) • Achieved substantial convergence with IFRSs • Except very few differences in related party disclosure and reversal of asset impairment, it has achieved substantial convergence with IFRSs • JS signed by CASC and IASB identified: convergence with IFRSs was one of fundamental objectives to set CASs with an attempt to bring the same result for those applying CASs as those applying IFRSs • IASB Chairman commented at the Release Conference of CASs “ CASs realized substantial convergence with IFRSs” • A successful cooperation and attempt between CMoF and IASB in promoting international convergence proactively

16. Characteristics of CASs (2) • Suits the development process of market economy of China • Enterprises restructuring frequently occurs. Employee stock option piloted. Rapid development of financial and insurance market make it increasingly urgent to guard against and control the financial control • CASs system covers standards for business combination, share-based payment, recognition and measurement of Financial instruments, direct and re-insurance contracts etc. • Prescribes not only accounting for business combinations involving entities not under common control, but also those under common control, being the former identical to IFRS 3, while the latter a complement to IFRS 3 • Share-based payment and derivative financial instruments are required to recognize in financial statements. • Vigorously promote reform of SOEs and strengthen supervision and control over financial risk

17. Characteristics of CASs (3) • A logically consistent system, with Basic Standard having legal authority • The newly issued Basic Standard plays an equivalent role to Conceptual Framework of IASB. The difference is that It is part of national administrative regulation, while IASB Framework does not consist part of so-called IFRSs • Specific standards stipulate based on Basic Standard, which make CASs system a logically consistent, coherent system • Objective of financial reporting: reflect management accountability and decision making usefulness • Qualitative characteristics: reliability, relevance, understandability, comparability • Measurement attributes: historical cost, fair value, RC,NRV, PV • Meet the economic development at present and well beyond thus protect interests of investors and the public

18. Characteristics of CASs (4) • Properly introduced fair value measurement attribute and break through historical cost • For investment property, financial instruments, business combinations involving entities not under common control, debt restructuring and non-monetary asset exchange, fair value is adopted provided certain criteria satisfied. When adopting fair value to measure investment property, the prerequisite is the existence of active market and continuing availability of fair value information regarding the asset • Introduction of fair value contributes to the faithful representation of value of assets and liabilities, timely reflect the movement of market and thereby realize the objective of financial reporting

19. Characteristics of CASs (5) • Establishes a complete system of financial reporting and implement full disclosure principle • Under CASs system, enterprises are required to prepare, as a minimum requirement, balance sheet, income statement, cash flow statement, statement of changes in owner’s equity, and notes • All subsidiaries are required to incorporate into consolidated financial statements of the group. Segment information based on business and geographic locations and interim financial reporting are also formulated • These reporting standards implement full disclosure principle and establish a comprehensive financial reporting system to facilitate the communication between enterprises, investors and creditors, thus increase market efficiency and promote effective supervision.

20. III. Experiences Gained from the Development of Chinese Accounting Standards for Business Enterprises (CASs)

21. Experiences From Developing CASs (1) • A good understanding of international convergence of accounting standards and implemented consistently during the whole process • Convergence is a progress and development trend of current financial accounting • Convergence does not mean being identical word for word. • Convergence is a bilateral or multilateral interaction between NSS and IASB • Convergence is not the terminal but a new starting point

22. Experiences From Developing CASs (2) • A sound cooperation and communication mechanism for achieving convergence has been established • Domestically, there are 22 CASC members and 160 consulting experts representing academia, preparers, analysts, auditors providing technical support to development. • Internationally, regular meeting both policy and working level with IASB • New appointments in IASCF Trustees and SAC: President of CICPA and Secretary-General of CASC • Second a senior staff to IASB to participate in IFRSs setting process.

23. Experiences From Developing CASs (3) • Substantial convergence with IFRSs was highlighted during the development process • Substantial convergence means that the principles of recognition, measurement and reporting are same as those in IFRSs, with the intention to produce same result in financial statements of enterprises either applying IFRSs and CASs • Being a part of national legal system, structure, style of writing and wording of sentence of CASs were adapted in a way to comply with the language style of Chinese legal system and easily understood by the pratitioners.

24. Experiences from Developing CASs (4) • Special provisions conforming to domestic situation were formulated • SOEs that are only under state control but not subject to control, common control, significant influence are not regarded as related parties, thus exempt from disclosing transactions occurring between them. IASB has put IAS 24 revision on its May Board meeting agenda. • While IFRS 3 is silent on accounting for business combinations involving entities under common control, the equivalent CAS provides accounting treatment applied to this broadly-existent business combinations in China

25. IV. Implementation of Chinese Accounting Standards for Business Enterprises (CASs)

26. Implementation of CASs (1) • Draft and release Implementation Guidance IG comprises two types of contents: • Interpretation to standards: mainly focus on the key points, difficult implementation issues in standards, coupled with illustrative examples • Chart of accounts and financial statements: set up a number of accounts consistent with CASs and covered different sectors, provide sample format of financial statements and preparation interpretation IG is an integral component of CASs system and to be issued by CMoF by this August

27. Implementation of CASs (2) • Conduct training in a planned and well scheduled manner • Training to listed companies, CPA firms and regulatory departments such as CSRC, CBRC, CIRC etc. • Training to local financial bureau—branches of MoF, as mentors in their respective jurisdictions Purpose: To ensure proper understanding and consistent application of CASs

28. Implementation of CASs (3) • Select some listed companies to conduct mock testing before effective date • Choose some listed companies, jointly with CSRC, to conduct mock testing prior to implementation to verify the practicability of CASs system and estimate the impact on net assets and P/L of companies • Identify problems that might arise in the first-time adoption of the System and work out the solutions and countermeasures as early as possible

29. Implementation of CASs (4) • Coordinate with regulatory departments to strengthen supervision over the implementation of CASs in listed companies • Strengthen supervision over the implementation with relevant government departments • Give full play to the role of auditors in auditing financial statements applying CASs • Accelerate setting internal control system within business enterprises To ensure smooth transition to CASs system and implementation of the System in 2007.

30. Thank you!