Report. Supplementary Progress Report on the equivalence of Chinese Accounting Standards with International Financial Reporting Standards

Transcription

1 Report Supplementary Progress Report on the equivalence of Chinese Accounting Standards with International Financial Reporting Standards 12 April 2011 ESMA/2011/Annex 1

2 Date: 12 April 2011 ESMA/2011/116/Annex 1 Table of Contents I Requirements with respect to equivalence in the European Union 4 II Previous reports on equivalence 4 III Institutional framework in China 5 IV Evolution in the process of convergence of ASBEs to IFRS 6 V Enforcement experience of the ASBEs 7 VI Co-operation with other parties 10 VII Preliminary conclusions 11 Annex I: Roadmap for continuing convergence of the Chinese Accounting Standards for Business Enterprises with the International Financial Reporting Standards. Annex II: List of detailed differences between the Chinese Accounting Standards for Business Enterprises and the International Financial Reporting Standards - as prepared and provided by the MoF. List of abbreviations and acronyms used in this report ASBEs CASC CESR CSRC ESMA HK CPA HK Ex HK FRC HK SFC IASB IFRS MoF PRC Accounting Standards for Business Enterprises Chinese Accounting Standards Committee Committee of the European Securities Regulators Chinese Securities Regulatory Commission European Securities and Markets Authority Hong Kong Institute of Certified Accountants Hong Kong Exchanges and Clearing Hong Kong Financial Reporting Council, Hong Kong Securities and Futures Commission International Accounting Standards Board International Financial Reporting Standards Ministry of Finance of the People s Republic of China People s Republic of China ESMA avenue de Friedland Paris France Tel. +33 (0)

3 Executive Summary Following European Regulation No 1095/2010 of the European Parliament and of the Council, the Committee of the European Securities Regulators (CESR) has been transformed into the European Securities and Markets Authority ( ESMA ) with effect from 1 January As the successor organisation to CESR, ESMA will complete all engagements entered into by CESR in existence at the transition date. This report fulfils a mandate received by CESR from the European Commission in June 2010 to provide it with an update on the adoption or convergence programmes in several countries. The mandate aims to put the Commission in a position to provide a progress report to the Council and the European Parliament in line with its obligations under Commission Regulation (EC) 1569/2007 passed by the Parliament in December The mandate received in 2010 from the Commission identified the need to make on-thespot investigations in China. In March 2008, at the European Commission request, CESR provided advice on the equivalence of Chinese accounting standards to International Financial Reporting Standards (IFRS). In June 2009 and November 2010, CESR prepared update reports on the progress made by China in its process of convergence to IFRS. This report supplements the update report issued in November Consequently this report is intended to be basically factual in nature, providing for information purposes much of the source material that has been used to prepare it, and should not in any way be considered a formal advice or opinion on the progress achieved in China towards convergence with IFRS. As this report is designed to update, it should be read in conjunction with the reports CESR has produced previously. In preparing this report, ESMA has had recourse to information provided during or in conjunction with a meeting held in January 2011 with representatives of the Chinese Ministry of Finance and the Chinese Securities Regulatory Commission. ESMA s work indicates that China has taken a number of further steps in pursuit of its convergence programme and in particular with respect to the following: a. The Accounting Regulatory Department of the MoF has continued to work on the elimination of the differences between the ASBEs and IFRS. With the exception of one major difference with respect to the reversal of impairment, only a few minor differences remain, so the level of convergence achieved could be considered satisfactory. b. In terms of enforcement, significant steps have been undertaken to monitor entities leading to improvements in the application of the ASBEs by companies. c. China is continuing its active involvement in IASB activities and will monitor the development of the standards currently under revision in order to take the necessary steps to further converge ASBEs to IFRS Further detail on the actions China has taken in the areas of convergence of its accounting standards and in its enforcement processes are given in dedicated areas of this report. This report should not be considered to constitute further advice by ESMA on the equivalence of the converged accounting standards concerned. 3

4 I Requirements with respect to equivalence in the European Union 1. Following European Regulation 1095/2010 of the European Parliament and of the Council, the Committee of the European Securities Regulators (CESR) has been transformed into the European Securities and Markets Authority ( ESMA ) with effect from 1 January ESMA will complete all previous engagements entered into by CESR. Consequently this report has been prepared pursuant to a mandate received by CESR in June Under both the European Prospectus and Transparency Directives, third country issuers who have their securities admitted to trading on an EU regulated market or who wish to make a public offer of their securities in Europe, are required to produce financial reports using either International Financial Reporting Standards ( IFRS) adopted pursuant to EC Regulation 1606/2002 (hereinafter EU IFRS ) or a third country s national accounting standards ("third country GAAP") deemed equivalent to those standards. 3. In December 2007 the European Commission published Regulation (EC) 1569/2007 Commission Regulation establishing a mechanism for the determination of equivalence of accounting standards applied by third country issuers of securities pursuant to Directives 2003/71/EC and 2004/109/EC of the European Parliament and of the Council ( Commission Regulation on the mechanism ). This Regulation established the conditions under which the GAAP of a third country can be considered equivalent to IFRS pursuant to a definition of equivalence set out in article 2. The Regulation also set out conditions in article 4 under which the accounting standards of other third countries could be considered acceptable for a limited period expiring no later than 31st December The aim of granting this transitional period was to allow the standard setters and regulators of those countries concerned more time to pursue their existing programmes either to converge their accounting standards with or to adopt IFRS. The countries concerned were Canada, China, India and South Korea. In 2008, at the European Commission s request, CESR provided advice on the equivalence of the accounting standards of those four countries. 5. The Regulation also requires the European Commission to update the European Parliament at regular intervals on the progress that is being made by these countries with regard to their respective programmes. Consequently, CESR has undertaken work and prepared advice or update reports at regular intervals on the adoption or convergence of these third country GAAPs to IFRS. 6. Within ESMA, the operational group designated as the Corporate Reporting Standing Committee chaired by Fernando Restoy, Vice-Chair of the Spanish CNMV, has been charged with fulfilling the European Commission s request with respect to advice or progress reports on equivalence of third country accounting principles to IFRS. II Previous reports on equivalence 7. The aim of this report is to supplement information provided previously regarding the process of convergence in China. This update report is part of an on-going process of assessment of the equivalence of Chinese GAAP which permits Chinese issuers to access European markets using financial statements prepared under Chinese GAAP. 4

5 8. In its March 2008 advice ( CESR/08-179), CESR recommended the European Commission to postpone a final decision on the equivalence of Chinese GAAP until there was more information on the application of the new Chinese accounting standards. This recommendation was based on CESR s belief that evidence of adequate implementation was important in the context of an outcome-based definition of equivalence. CESR however also recommended that the Commission allow Chinese issuers to continue to use Chinese GAAP when accessing EU markets and therefore to accept Chinese GAAP under article 4 of the Commission Regulation on the mechanism until such time as there was adequate evidence to enable a decision to be made under article 2 thereof. 9. In June 2009, CESR provided the European Commission with an update report on the progress made by China in the process of applying the converged Chinese standards. That report was approved and endorsed by the European Parliament in June In June 2010, CESR received a request from the European Commission to produce a second update report. The new mandate made clear that CESR was required to have regard in its work to publicly available information or to information made available by the regulators concerned upon request in writing. It identified the potential need to make on-the-spot investigations in China. 11. In November 2010 and in response to the European Commission request, CESR provided a second report on the progress made in Canada and South Korea towards adopting IFRS and in India and China towards converging with IFRS (CESR ). The information related to China included in that report was based only on publicly available information, an exchange of written information with representatives of the Chinese authorities and a meeting with a representative of the IASB. 12. As stated in the introduction to this report, the European Commission has specifically requested CESR to undertake limited additional work to assess whether Chinese Accounting Standards for Business Enterprises (ASBEs) are being properly applied by Chinese issuers. In order to do this, ESMA was required to obtain appropriate evidence relating to the application of ASBEs by Chinese issuers. Although ESMA s report on ASBEs will be used by the Commission to supplement the information contained in earlier reports made by CESR when it updates the European Parliament, this report will not be considered to constitute further advice by ESMA on the equivalence or otherwise of ASBEs. 13. Consequently this report, aimed at fulfilling ESMA s obligations under the mandate received in June 2010, is intended to be basically factual in nature, providing for information purposes much of the source information that has been used to prepare it, and does not in any way seek to opine on the progress towards convergence achieved by China In order to fulfil the request made by the European Commission in the above mentioned mandate and consequently to supplement its November 2010 report, ESMA has met with representatives of the Chinese Ministry of Finance, the Chinese Securities Regulatory Commission and various Hong Kong authorities in January III Institutional framework in China 15. The institutions playing a role in the implementation and enforcement of accounting standards in China are the Ministry of Finance (MoF) of the People s Republic of China and the Chinese Securities Regulatory Commission (CSRC). 5

6 16. The responsibilities of the MoF include developing principles, issuing regulations, setting standards, ensuring compliance with financial reporting requirements, providing directions and setting requirements for the accounting and auditing profession. The Accounting Law provides the legal framework under which all corporate entities are required to prepare and present financial statements in compliance with nationally unified accounting standards set by the MoF. 17. The Accounting Regulatory Department of the MoF is in charge of the specific work related to drafting and implementation of accounting standards, unifying the accounting system, and analysing the implementation of the standards. The Accounting Regulatory Department also supervises the quality of accounting information and regulates the accounting profession. The Supervision Department of the MoF is in charge of the supervision of the financial reporting of all entities, within the Chinese territory, including listed companies. The MoF also supervises all auditing firms within Chinese boundaries including those firms that provide audit services to listed companies. 18. The CSRC is responsible for regulating China s securities and futures markets, approving direct or indirect issuance, or listing or trading, of securities by Chinese companies, establishing mechanisms for cooperation with securities regulators in other countries or regions on cross-border regulation, and reviewing and approving, together with the MoF, applications from accounting firms for licenses to practice securities and futures business. The CSRC supervises listed entities in accordance with the provisions set out in the Securities Law which requires listed companies to disclose their annual and interim financial statements to the CSRC. The Accounting Department of the CSRC focuses on examining the integrity of the financial reports of listed companies to ensure that public investors get a thorough understanding of the financial information published by listed companies. IV Evolution in the process of convergence of ASBEs to IFRS 19. According to the statutory framework, the MoF is primarily responsible for regulating accounting practices in China. The responsibilities of the MoF include setting standards, a function which is performed by the Accounting Regulatory Department and the Chinese Accounting Standards Committee (CASC). In 2006, the CASC and the IASB signed a joint communiqué on convergence of accounting standards. Members of the CASC have worked together with IASB members to ensure that the objective of convergence is achieved. In April 2010 the MoF issued a Roadmap for Continuing Convergence of ASBEs with IFRS (Annex I) which reiterates the MoF s commitment to continue the process of convergence to IFRS. 20. The ASBEs comprise one Basic Standard, 38 specific standards and Implementation Guidance which contain all the principles mentioned under IFRS. The Implementation Guidance follows IFRS principles, with less detailed content in some cases. The Implementation Guidance is part of the legislation promulgated by the MoF and is therefore mandatory for all companies that apply the ASBEs. In addition, the Accounting Regulatory Department of the MoF has issued an Interpretation Book of AS- BEs, containing examples of how the standards are applied which were included in the IFRSs themselves but were not included in the Chinese standards and Implementation Guidance. All these individual items taken together (including the implementation Book) of ASBEs are substantially identical to the IFRSs. 21. As of 31 December 2010, almost all differences between the ASBEs and the IFRS have been eliminated. The major difference remaining relates to the reversal of impairment of long-term assets, which is not 6

7 allowed by the ASBEs. Retention of this difference is mainly due to analysis done by the Accounting Regulatory Department of the MoF which concludes that there is significant potential for companies to use the reversal of such impairment charges as a means of manipulating earnings. Consequently the MoF does not expect to eliminate this difference in the near future. Other more minor differences exist as well, a complete list of which has been provided to us by the Accounting Regulatory Department of the MoF and is attached as Annex II to this report. Most of the remaining differences relate to the removal of alternative treatments in some standards or some missing requirements in cases where the type of transactions concerned does not exist in China. Such differences are not considered to amount to non-compliance with IFRS. 22. The MoF has indicated to us that all current IFRS standards with an effective date before 1 January 2011 are subject to adoption as ASBEs. The Accounting Regulatory Department is continuously monitoring developments in IFRS to ensure continued convergence with all newly issued standards. The MoF has set up research teams to discuss issues and perform a preliminary impact assessment based on feedback received from companies and in cooperation with the CSRC and related regulators in the banking and insurance areas. 23. Although not identical to IFRS, the ASBEs nonetheless adopt the principles contained in IFRS. As part of the convergence process, a number of accounting issues have been identified and raised with the IASB which result from the unique circumstances and environment that exist in China. Such issues include the disclosure of related party transactions, fair value measurements and business combinations of entities under common control. The IASB officially released the revised IAS24 Related Party Disclosures on 4 August 2009 which fundamentally removed the remaining barriers to convergence between ASBEs and IFRSs in this particular area. 24. Representatives of the MoF meet with the IASB twice a year and Chinese members sits on the IFRS Trustee, IASB, IFRS Advisory Council and IFRS Interpretation Committee. The MoF has been encouraging companies and accounting firms to comment to the IASB exposure drafts and discussion papers and to become more heavily involved in the debate regarding IFRS. This international exchange of experience is thought to be vital for international convergence and should not, as far as the Chinese are concerned, be a one way process. The IASB has also identified a number of accounting issues where China, because of its unique circumstances and environment, could be particularly helpful in finding high quality solutions for IFRSs. 25. China maintains its involvement in the IASB s accounting projects. Regarding IFRS 9 Financial instruments, the MoF has expressed some concerns about the impairment model currently proposed in the standard. The MoF is closely following developments in the other phases of the financial instruments project and will decide whether to adopt IFRS 9 when the whole project is finalised.. Other projects currently on the IASB s agenda regarding revenue recognition and lease accounting are also being carefully analysed in China and comment letters are being prepared for the IASB. V Enforcement experience of the ASBEs 26. The role of supervising the financial information issued by entities in China to the market is performed by the MoF and the CSRC. The supervision function is performed by the MoF pursuant to the Accounting Law and its scope comprises all entities filing financial reports. The CSRC supervisory function 7

8 arises from the Securities Law and its scope is limited to listed entities and securities and futures companies. 27. The ASBEs were applied for the first time by Chinese listed entities for financial years commencing on or after 1 January The scope of their application has been extended progressively each year to now include all large and medium sized non-listed state owned enterprises, all non-listed commercial banks, related financial institutions and all non-listed commercial insurance companies, rural credit cooperatives and all other large and medium sized enterprises. Ministry of Finance enforcement activities 28. Enforcement of financial reporting requirements is undertaken by the Supervision Department of the MoF which has a structure comprising some 35 commissioner officers and local offices employing around 1200 inspectors. Commissioner offices are responsible for the supervision of the financial reporting on behalf of the MoF at the national level, while local financial departments supervise at the local level. The Supervision Department of the MoF co-ordinates the enforcement process performed in the territories by preparing guidance on how the process should be conducted. In addition, the Supervision Department also ensures co-ordination of enforcement activities for listed companies with the CSRC. The commissioner offices focus on the application of the ASBEs by listed companies and stateowned enterprises, and the audit practices of accounting firms which perform audit for listed companies. Since 2006, the commissioner offices have reviewed about 300 listed companies. 29. The selection of entities subject to the review process is based on different criteria including random selection, specific situations or macro trends identified by both the Accounting Regulatory Department and the Supervision Department of the MoF. The inspections consist generally of full reviews of the financial statements and the preparation of reports on the internal controls of the companies selected. If infringements are detected, the inspection might be further extended to the audit firm of the company under review. Actions available to the enforcer range from corrections of the financial statements and public announcements to requests to modify the audit opinion, cash penalties for practitioners and enterprises, and revocation of the qualifications of accountants, auditors or accounting firms. 30. The MoF conducts quality reviews of accounting information and of the operations of accounting firms each year, and publishes an annual Accounting Information Quality Review Report regarding the implementation of the Accounting Law of the PRC, of the Certified Public Accountants Law of the PRC, the ASBEs, and the Practice Guidelines for Certified Public Accountants. The quality reviews are organized by the MoF, and conducted by the commissioner offices and local financial departments. The MoF has already published 19 reports and those documents are available on the MoF s website ( As stated in Reports no.18 and no.19 published by the MoF on 9 November 2010, the commissioner offices of the MoF have reviewed 78 enterprises and 43 accounting firms, and local offices have reviewed 17 o89 enterprises (listed and non-listed) and 543 accounting firms. The review concluded that most of the companies concerned had established effective internal control systems, had complied with the Accounting Law of the PRC and the ASBEs, and that the risk management and operating quality of the accounting firms had been enhanced. Only a few enterprises were found to have deficiencies in their implementation of the regulation, and more specifically in the areas of internal control, financial management and the application of accounting principles. 31. The Accounting Regulatory Department of the MoF also plays a role in the assessment of the application of accounting standards by reviewing a selected number of individual and consolidated financial statements of listed and large or medium-sized companies. On the basis of this review, the Accounting 8

9 Regulatory Department issues a report every year on the implementation of the ASBEs. The conclusions of the review are discussed with the Supervision Department to identify areas where the enforcement process on the financial information reported for the following year should be concentrated. 32. The most recent report available is the Analysis Report on the Implementation of Accounting Standards for Business Enterprises by Companies Listed in Mainland China in The main conclusions of this report were included in our progress report published in November 2010 (CESR ). The report indicates that the ASBEs had been effectively implemented by over listed companies and that the process had been smooth and effective over the past three years. The report also identified some areas where improvements were required, such as: fair value measurement and disclosure, impairment of assets, business combinations, recognition of provisions for restructuring and onerous contracts, capitalisation of development costs. CSRC enforcement activities 33. The CSRC is the regulator of the Chinese securities and futures markets. It has established an integrated supervision system consisting of three levels: a. The Accounting Department of CSRC charged with the identification of the main issues and trends and with providing technical guidance to and ensuring co-ordination of the CSRC s regional offices or branches and the stock exchanges, and which organizes inspection teams to perform regular on-site comprehensive inspections or special inspections of audit firms, while maintaining continuous off-site supervision of firms; b. The CSRC regional offices (36 branches): in charge of monitoring compliance by listed entities and the general supervision of audit firms; and c. The stock exchanges (Shanghai and Shenzhen): responsible for reviewing and checking the financial information provided by listed entities and who have the power to perform further enquiries into the companies concerned. 34. In terms of monitoring of the annual reports of the issuers, the CSRC has established a regional responsibility jurisdictional system via a 3-tier system. The first tier is the Stock Exchange and their responsibility includes monitoring compliance with information disclosure requirements by means of an online review of the annual reports issued by listed companies, by urging listed companies to disclose significant information on a timely and proper basis and carrying out detailed desk-top reviews after the completion of annual report disclosure. The second tier of the process is the regional offices whose responsibility includes on-site inspections of target companies after publication of their annual reports. The regional offices will determine which companies will be subjected to on-site inspections based on any significant doubts raised as a result of the reviews of annual reports conducted elsewhere under the regulatory system as well as on the basis of any reasonable doubts harboured by the regional offices themselves. The third tier of the system is represented by the Accounting Department of the CSRC, which carries out individual reviews of the financial reports issued by listed companies. Such reviews are conducted largely in accordance with guidelines which identify the key regulatory considerations for the year in respect of disclosures of financial information relating to the implementation of the AS- BEs. 35. The selection of the entities to be reviewed in any particular year is performed on the basis of the following principles: the stock exchanges and regional offices review the annual reports (including annual 9

10 financial statements) of all listed companies. The Department of Accounting of the CSRC performs hot reviews on key areas identified in circulars and on special transactions considered to have a significant influence on the financial performance of an entity. For 2010, the key areas monitored included: impairment of assets, equity transactions, deferred tax recognition, revenue recognition and measurement, presentation of comprehensive income, business combinations, disclosure of transactions with related parties. In 2008, 2009 and 2010, 1547, and entities respectively were reviewed by the stock exchanges and regional offices and 609, 665 and entities reviewed by the CSRC. In terms of infringements identified and actions taken, the statistics provided by the CSRC indicate 37 infringements identified about which the CSRC communicated with the companies and required correction or future improvements to the financial statements. 36. In terms of the process of enforcement, the CSRC and MoF meet regularly to discuss complex issues. Information on the main accounting issues identified during the enforcement process performed at the level of the regional branches and the stock exchanges is collected and analysed by a Task Force in the Accounting Department of the CSRC. This information is subsequently used for identifying trends and areas for attention in future periods. 37. The Accounting Department of the CSRC has created a database which contains accounting issues and enforcement cases related to the application of the ASBEs. Based on enforcement experience in 2010, the main issues arising relate to the following areas: a. accounting estimates, mainly related to impairment recognition on long-term assets (such as goodwill and intangible assets) and credit loan provisions; insufficient disclosures of the recoverable amount and reasons for impairment; b. fair value recognition and measurement, such as the recognition and measurement of the fair value for restricted shares is inconsistent in practice amongst companies; and c. classification of financial instruments. 38.Following the issuance in October 2009 by the World Bank of its report entitled Report on the observance of standards and codes (ROSC) Accounting and Auditing in which the Bank identified a number of areas of non-compliance in term of disclosures, the CSRC published several alerts and announcements to ensure companies took corrective measures. VI Co-operation with other parties 39. The CASC and the China Auditing Standards Board signed joint declarations with the Hong Kong Institute of Certified Public Accountants (HKICPA) on 6 December 2007 which officially record the mutual recognition of each jurisdiction s accounting and auditing standards. According to the information provided in the Report prepared by the MoF, differences between the two sets of accounting standards had gradually been reduced, promoting access by enterprises from Mainland China to the Hong Kong capital market. We have been informed that as of 31 December 2010, due to the joint efforts of members from the two parties the differences between ASBEs and HK GAAP have been eliminated. 40. Regulators in Mainland China and Hong Kong have been jointly exploring a possible mechanism whereby financial statements prepared and audited under the rules applicable in one jurisdiction would 10

11 be accepted for the purpose of listing on a stock exchange in the other. Hong Kong Exchanges and Clearing Limited (HKEx) announced its decision on 10 December 2010 to accept Mainland Chinese ASBEs, auditing standards and audit firms for Mainland incorporated companies listed in Hong Kong. The Financial Reporting Council of Hong Kong has established co-operation arrangements or mechanisms with the MoF and the CSRC. 41. In practice, formal investigations into Mainland audit firms are carried out by the MoF and the CSRC, either acting on a direct complaint or at the HK FRC s or HK SFC s (the Securities and Futures Commission) request, to the extent permitted by Mainland laws. The responsibility for taking appropriate disciplinary action and sanctions against Mainland audit firms also rests with the MoF and the CSRC, which are government bodies independent of the profession. 42. Based on information received during a meeting held with the Hong Kong authorities (the Securities and Futures Commission, the Financial Reporting Council, the Hong Kong Exchanges and Clearing Houses and the Institute of Certified Accountants) we understand that in 2010 there were 163 Chinese issuers listed on both Chinese and Hong Kong stock exchanges. In previous years, Chinese issuers have had to file financial statements prepared under Hong Kong GAAP together with a reconciliation of any financial information prepared using ASBEs to Hong Kong GAAP if issuers chose to include such information in their Hong Kong filings. As 2011 will be the first year when Chinese issuers will be permitted to file financial statements prepared only using ASBEs, the HK FRC has indicated that they intend to review all reports filed by Chinese issuers for that year. VII Preliminary conclusions 43. On the basis of the information received during the meeting in China and subsequently, we can conclude that significant progress has been made in the process of convergence, and in particular with respect to the following: a. The Accounting Regulatory Department of the MoF has continued to work on the elimination of the differences between the ASBEs and IFRS. With the exception of one major difference with respect to the reversal of impairment, only a few minor differences remain, so the level of convergence achieved could be considered satisfactory. b. In terms of enforcement, significant steps have been undertaken to monitor entities leading to improvements in the application of the ASBEs by companies. c. China is continuing its active involvement in IASB activities and will monitor the development of the standards currently under revision in order to take the necessary steps to further converge ASBEs to IFRS. 11

12 Annex I: Roadmap for continuing convergence of the Chinese Accounting Standards for Business Enterprises with the International Financial Reporting Standards. Roadmap for Continuing Convergence of the Chinese Accounting Standards for Business Enterprises ("ASBEs") with the International Financial Reporting Standards ("IFRSs") Convergence of local national accounting standards with the international standards is an essential tool to facilitate the growth of a nation's economy and to enhance its adaptability to the economic globalization. Since 2005, China has commenced the process of converging the ASBEs with the IFRSs. Subsequent to the broke out of the international financial crisis in 2008, the G20 summits and the Financial Stability Board ("FSB") initiated to establish a single set of high-quality global accounting standards to improve the transparency of accounting information which brought the importance of accounting standards to an unprecedented high level. The International Accounting Standards Board ("IASB"), the IFRSs setter, has taken a series of important actions to improve the quality of accounting standards. In this context, China released the "Roadmap for Continuing Convergence of the ASBEs with the IFRSs" in response to G20 and FSB's recommendations for the implementation of the continuing convergence of the ASBEs with its international counterpart. I. The ASBEs have achieved convergence with the IFRSs In 2005, the Ministry of Finance ("MOF") concentrated its effort in finalizing the system of ASBEs based on the experiences drawn from different aspects of the accounting reforms implemented over the past years. During 2005, IASB sent specialists to work with the Accounting Regulatory Department of the MOF several times. On 8 November 2005, the IASB and the China Accounting Standards Committee ("CASC") signed a joint statement depicted that the ASBE system established by China has achieved convergence with the IFRSs. In addition, the IASB identified a number of accounting issues for which China, because of its unique circumstances and environment, could be particularly helpful to the IASB in finding high quality solutions for IFRSs. These include disclosure of related party transactions, fair value measurements and business combinations of entities under common control. IASB officially released the revised IAS24 Related Party Disclosures on 4 August 2009 which fundamentally removed non-convergence issues between the ASBEs and the IFRSs. In 2001, the IASB through its annual improvements project revised the IFRS 1 First-time Adoption of International Financial Reporting Standards, to allow a company recognizing the revaluation values ascertained during the corporate restructuring process as deemed cost for the preparation of its initial public offering with retrospective restatements. Such revision effectively rectified the accounting issues arising from corporate restructuring revaluations of Chinese enterprises' assets during the initial public offering process. The ASBE system has been applied by all listed companies, certain non-listed financial institutions and significant state-owned enterprises (SOEs) from 1 January The scope of such application has been expanding in steps and it now covers almost all of the large and mediumsized enterprises. The process of the ASBE implementation has been proven to be smooth and effective over the past three years. Such implementation has played an important role in regulating the accounting activities, promoting the quality of accounting information and enhancing the capital market. In May 2008, IASB sent experts to conduct a field study of the ASBE implementation by the listed companies in China. The results further confirmed that the implementation of the ASBE system was smooth and effective. In October 2009, the World Bank also issued an assessment report on the status of the ASBE convergence with IFRSs and the effectiveness of its implementation in China. The report clearly stated that "the 12

13 Chinese strategy for improving the quality of accounting and auditing standards and practices has evolved as a good practice model that may be followed by other countries". Hong Kong has begun to adopt the IFRSs since After the successful convergence of the ASBEs system with the IFRSs and its effective implementation, a joint declaration on the equivalence of the accounting standards of the mainland China and Hong Kong was signed on 6 December 2007 to officiate the mutual recognition of the accounting standards. The European Union ("EU") allowed the listed companies to adopt IFRSs to prepare their financial statements in 2005 for the first time. After making assessment on the progress of the accounting convergence and effectiveness of the related implementation in China by the European Commission, the Commission issued regulation on equivalence with accounting standars of a third country on 12 December 2008, recognizing the equivalence between ASBEs and the IFRSs adopted by EU. In addition, Chinese enterprises are allowed to file their financial statements prepared under the ASBEs when entering the EU capital markets during the transitional period from 2009 to the end of All the aforementioned events clearly demonstrated the facts that full convergence of the ASBEs with the IFRSs and smooth and effective implementation by the listed companies and non-listed large and medium-sized enterprises in China were widely recognized both at home and abroad. II. China supports the establishment of a single set of high-quality global accounting standards in response to the international financial crisis and proactively promotes the continuing convergence of the ASBEs with the IFRSs In response to the international financial crisis, the G20 Washington summit held in November 2008 analyzes and summarizes profoundly root causes of the crisis; put forward action plans which include improving the IASB governance and establishing a single set of high-quality global accounting standards. In June 2009, FSB, restructured from its predecessor Financial Stability Forum ("FSF"), held its inaugural meeting in Basel of Switzerland. FSB decided to set up a Standard Implementation Committee to promote convergence of various countries' national accounting standards with the IFRSs. At the G20 Pittsburgh summit held in September 2009, the G20 again urged the international accounting standard setter to work harder to establish a single set of highquality global accounting standards through the independent standard setting procedures. Based on the requirements of the G20 and FSB, the IASB proactively studied the accounting issues unveiled by this financial crisis. Plenty of work has been carried out to enhance the IFRSs with remarkable achievements which include the followings: (1) the establishment of the Financial Crisis Advisory Group ("FCAG") which put forward the systematic approach to improve the financial reporting in response to the financial crisis; (2) the setting of the accounting standards on fair value measurement which provide a standardized set of guidance for fair value measurement; (3) reducing the complexity of accounting requirements for financial instruments under a comprehensive project with the aim to simplify the accounting standards on classification, measurement, impairments and hedge accounting of financial instruments; (4) the comprehensive revision of accounting standards on financial statements presentation and consolidated financial statements which clarified the accounting treatments of off-balancesheet transactions and special purpose entities; (5) the acceleration of the pace in the standard setting of various projects, such as insurance contract standard. 13

14 The above convergence projects are to be completed by the end of June China fully praises and supports the unremitting efforts made by the IASB in response to the financial crisis and the implementation of the G20 and the FSB related recommendations. As the largest developing country and emerging market economy in the world, China, has achieved convergence with the international accounting standards and undertaken continuous monitoring of any significant revisions and setting of the relevant accounting standards by the IASB. Certain project teams comprising of selected experts from both areas of accounting theories and practice were formed to carry out in-depth researches with reference to the practical circumstances in China. China also set up the Asian-Oceanian Standard Setters Group ("AOSSG") amongst the accounting standard setter of Asian and Oceanian countries or regions to reflect the local situations and advices. China always insists that the accounting convergence required interaction between the participated countries. China also advocates that in order to improve the quality, insure authoritativeness and gain global recognition of the IFRSs, the prescribed standards should take full account the economic realities of the developing countries and in particular, the emerging market economies. As such, China can maintain its continuing accounting convergence status. III. Schedule for continuing convergence of the ASBEs with the IFRSs Continuing convergence of the ASBEs with the IFRSs will be maintained in line with the pace of the IASB's progress. Relevant improvement projects to the ASBEs are to be accomplished by the end of In the meantime, necessary promotion and training will be conducted to ensure that all listed companies and non-listed large and medium-sized enterprises gain an understanding of the changes to relevant accounting standards and apply them effectively. The revised ASBE system will still consist of three parts, i.e., the Basic Standard, Specific Standards and Implementation Guidance. The Basic Standard establish a conceptual framework of specifying the fundamental requirements for accounting recognition, measurement and reporting and provide the direction in setting the Specific Standards. The Specific Standards prescribe the specific requirements for accounting recognition, measurement and reporting of various types of transactions carried out by the entity. The Implementation Guidance provides illustrative examples and practical guidelines for addressing the important and difficult issues related to the Specific Standards. 14

15 Annex II: List of detailed differences between the Chinese Accounting Standards for Business Enterprises and the International Financial Reporting Standards as prepared and provided by the MoF. ASBE Basic Standard IAS 1 ASBE 2 - Long term Equity Investments IAS/IFRS Equivalent IAS 27 Difference Based on situation existent in 2008 ASBE - states the use of prudence. IAS - states the importance of fair presentation. Separate financial statements of the Parent: ASBE 2 requires subsidiaries to be stated at cost. ASBE 2 requires use of equity method when taking into account associates and jointly controlled entities in the parent's separate financial statements. IAS 27 - account for subsidiaries, associates or JCEs to be stated at cost, and then carried using equity method or in accordance with IAS 39 (fair value). ASBE 2 does not address the accounting treatment for jointly controlled assets. Consolidation: ASBE only allows the equity method to account for a jointly controlled entity. Jointly controlled operations/assets: ASBE 2 does not recognise the accounting treatment for jointly controlled operations/assets Change in IFRS since endorsement date in Europe Amendments to IAS 27: June 2009 It has not been included in the ASBE, but the accounting treatment is the same. Status of difference of ASBE compared to IFRS as of 1 January 2011: Difference eliminated/same difference exist/new difference CAS 30 is the equivalent standard to IAS 1. There s no difference between these two standards. Separate financial statements of the Parent: Same difference exist Jointly controlled operations/assets: Difference eliminated ESMA avenue de Friedland Paris France Tel. +33 (0)

16 16 ASBE ASBE 3 - Investment Property ASBE 4 - Fixed Assets ASBE 5 - Biological Assets ASBE 6 - Intangible Assets ASBE 7 - Exchange of non-monetary assets ASBE 8 - Asset Impairment IAS/IFRS Equivalent IAS 40 IAS 16 IAS 41 IAS 38 IAS 16, IAS 38 IAS 36 Difference Based on situation existent in 2008 IAS 40 has a greater scope and states that uniformity of accounting treatment should be used. Land use rights held for rental purposes can be classified using cost model or fair value. ASBE only allows for the cost model, not the revaluation model. IAS 16 allows for either cost or revaluation model. ASBE 5 states that the cost model should be used, unless there is evidence that the fair value can reliably obtained continually. IAS 41 states that the fair value be used unless it is clearly unreliable. ASBE 6 only allows for cost model whereas IAS 38 allows for cost or revaluation model (where fair value can be determined by pricing in an active market) Exchanges of non monetary assets are dealt with in IAS 16 (propeerty, plant and equipment) and 38 (intangible assets) as the need to create a separate accounting standard was not seen as important. Whilst the exchange of similar non monetary assets in IAS 16 and 38 is similar to ASBE 7 (for the assets to be recognised at fair value, they require the commercial substance test to be applied), this is not extended to IAS 18, which only recognises fair value on exchange of dissimilar non monetary assets. IAS 36 prohibits reversal of impairment loss for goodwill, but ASBE 8 prohibits reversal Change in IFRS since endorsement date in Europe Status of difference of ASBE compared to IFRS as of 1 January 2011: Difference eliminated/same difference exist/new difference Difference eliminated ASBE chooses one model among the two alternatives. ASBE chooses one model among the two alternatives. Accounting principles for exchange of similar or dissimilar non-monetary assets stated in IFRS and ASBE are the same. Same difference exist

17 17 ASBE IAS/IFRS Equivalent Difference Based on situation existent in 2008 of all impairment loss Change in IFRS since endorsement date in Europe Status of difference of ASBE compared to IFRS as of 1 January 2011: Difference eliminated/same difference exist/new difference ASBE 9 - Employee Benefits ASBE 10 - Enterprise Annuity Fund ASBE 11 - Share based payment ASBE 12 - Debt Restructuring ASBE - 13 Contingencies IAS 19 IAS 26 IFRS 2 IAS 39 IAS 37 Does not recognise a defined benefit liability and the resulting expense throughout the service period of related employees ASBE 10 does not recognise defined benefit plans because they do not exist in China. ASBE 11 only covers accounting for sharebased payment transactions for services, whereas IFRS 2 covers services and goods. Equity settled with cash alternatives are not addressed in ABSE 11. IAS 39 is broadly similar to ASBE 12. However, IAS 39 states that financial assets (including debts) should be derecognised when: - the contractual rights to the cash flows from the debt expire - an issuer transfers the debt and transfers in substance the risks and rewards of the debt. ASBE 12 does not cover the above derecognition requirements nor the principles behind it. No significant difference Amendments - Vesting conditions and cancellations (Dec 2008) - Group cash-settled transactions(march 2010) ASBE 9 does not recognise defined benefit liability because defined benefit plan does not exist in China. ASBE 11 only covers accounting for sharebased payment transactions for services, whereas IFRS 2 covers services and goods: currently share-based payment for exchange of goods is not allowed in China. Equity settled with cash alternatives: difference eliminated. Amendments:. Difference eliminated

18 18 ASBE IAS/IFRS Equivalent Difference Based on situation existent in 2008 ASBE - 14 Revenue IAS 18 No significant difference ASBE 15 - Construction Contracts ASBE 16 - Government Grants ASBE 17 - Borrowing Costs ASBE 18 - Income Taxes ASBE - 19 Foreign Currency Translation ASBE 20 - Business Combinations IAS 11 IAS 20 IAS 23 IAS 12 IAS 21 IFRS 3 ASBE - 21 Leases IAS 17 IAS 11 allows the inclusion of direct costs in securing a construction contract as Contract Costs if such costs can be reliably measured and separately identified. ASBE 15 requires these to be expensed as incurred. ASBE 16 only allows deferred income presentation method of recognising the grant. It does not allow the recognition of the carrying amount of the asset less the grant and a reduced depreciation charge. No significant difference No significant difference Chinese Law requires the presentation of all financial statements to be made in RMB, although ASBE 19 is silent on the issue, the law would take precedence. ASBE 20 includes accounting for enterprises under common control e.g. - 2 subsidiaries of a parent combining, which is not considered in IFRS 3. Reverse acquisitions are covered in IFRS 3 but not in ASBE 20. IAS 17 states that certain criteria must be met (in accordance with IAS 40) for a property interest or a leasehold interest in Change in IFRS since endorsement date in Europe Amendments (Dec 2008) Replaced by IFRS 3 Revised (June 2009) Status of difference of ASBE compared to IFRS as of 1 January 2011: Difference eliminated/same difference exist/new difference Difference eliminated ASBE chooses one model among the two alternatives. Common control: Business combinations for enterprises under common control are excluded from IFRS. Since there s such transaction in China, accounting treatment principle is included in ASBE,. Reverse acquisition: difference eliminated Difference eliminated.