Chinese Accounting Standards Convergence with ifrs (Dissertation Sample)

Assessment of the impact of the convergence of Chinese accounting standards with IFRS on the financial reporting quality among Chinese MNCs
Literature Review
This main goal of this chapter is to present critical evaluation of studies that have been carried out in previous period relative to the convergence of Chinese accounting standards with IFRS. More specifically the literature review aims at analysing the effect of such convergence on reporting quality among Chinese MNCS.
The formation of MNCS has necessitated has tremendously elevated the number and variation of financial accounting information users to international levels (Yip, 2001). Equally important, the need for quality financial reporting has expanded driven by company stakeholders to comprehend financial information presented in financial reports of such companies. Bath et al (2008) notes that many countries are making changes to their traditional national accounting standards aimed at conforming with the established IFRS to improve the quality of financial reporting to meet the needs of both local and international stakeholders such as investors, shareholders, customers, suppliers, taxing bodies, financial institutions among others.
In recent years, several developing economies have taken great strides aimed at converging their accounting standards with IFRS. Samaha and Khlif (2016) puts forward two major theories behind this move; the economic theory of network and isomorphism. Under economic theory of network Samaha and Khlif (2016) explains that countries are more likely to adopt IFRS if their trade partners are IFRS adopters. With assessment and need to improve product network and values, economies are motivated by the need to minimise domestic bias faced by international investors and facilitate global operations Ramanna and Sletten (2009). The isomorphism theory, countries are compelled by coercive isomorphism where presence of international institutios compel economic actors to adopt IFRS. For instance the International Monetary Fund (IMF) provides foreign aid with a requirement of IFRS adoption. Equally, countries are also compelled by the need for imitation of other countries that are seen as more successful in international business.
The Global trend of national accounting standards-IFRS convergence has elicited several studies comparing the effect and quality of information presentation derived from such convergence. The most common method has been related to evaluating the value of accounting information because high quality earnings are known to reflect a company’s operational economics which are closely linked to stock prices and book value of net assets. According to Ewert and Wagenhofer (2005), high quality financial reporting discourage opportunistic discretion, elevating the accuracy of information dissipated to users and leads to higher worth significance of accounting earnings. But one major thing that stands out is that, the strive towards convergence towards IFRS has not only encouraged transparency in financial reporting but also promoted comparability and consistency in reporting quality across MNCs organisation which minimise the cost of information processing to investors and may lead to improved capital market efficiency. Barth et al (2008) and Cheong et al (2010) also add that since IFRS are based on set financial quality principles issued by International Accounting Standards Board (IASB), they provide more comprehensive, accurate and timely organisation performance information that lead to precise and truthful valuation in equity markets reducing the risks exposed to the investors (Qu et al, 2012) and effective apportionment of financial resources worldwide (Loureco et al, 2015). But while most studies acknowledge positive effects of IFRS Loureco et al (2015) finds that the level of such effects depends on the extent to which IFRS standards are enforced pg 2. Studies have also found that business environmental-specific factors have had a great effect on the swiftness and the effectiveness of convergence to IFRS. According to Zeff (2007), the country specific differences such as shareholder protection levels, auditing cultures, financial culture, regulatory culture, accounting culture and conflict levels between information preparation teams’ incentives and standards.
In early 1950’s China adopted a uniform accounting system designed to deliver information for central control and planning by central government. According to Zhang et al. (2009) the government took control of business production lines, operating costs and distribution channels with any changes associated with accounting and reporting systems completely forbidden and could result into serious political penalties. However, the “opening up policy” established by the national government aimed at transitioning the centrally controlled economy into limited controlled economy saw the ministry of finance implement reforms that saw development of accounting standards with a major aim of improving the quality of financial reporting of Chinese companies. The ministry of Finance together with accounting society of china founded a common project that studied accounting standards that formed a solid ground for harmonisation with international standards (Qu and Zhang, 2010). The involvement of Chinese companies in complex financial transactions owing to fast paced development of capital market and overall economy, called for detailed and specific guidance in application of financial standards. Since then various steps including, the Chinese MOF 2005’s suggestion for further convergence through principles of positive innovation, difference permitting and striving for harmonisation and the 2007’s replacement of the 2001 ASBE and 16 accounting guidelines with revised basic standards saw considerable but not complete convergence. According to Lee et al (2013) as of 2010, the Chinese accounting standards were three quarter way to achieve to achieve full convergence with IFRS whereas convergence continued. As From year 2001, companies in china can issue two classes of shares A and B. Class A shares are intended for domestic market while class B shares which are denominated in Hong Kong or US dollars are meant to target foreign investors and are required to be accompanied with IFRS reconciliations (Qu and Zhang, 2010).
The need for improving reliability and comparability of multinational reports and specifically in china, has attracted fervent interest across global stakeholders including policy makers, professional accountants, regulators, academia among others. Most researches nave been concentrated around comparing the value relevance of accounting information provided by Chinese accounting standards and IFRS. Value relevance is an evaluation as to whether the provided accounting information through financial reporting correlate with the share prices of such companies (Hung, 2000). However, the correlation is never perfect because of fuzzy signal in reported accounting information originating from existing accounting rules, intangible assets, calculation errors and management calculation (Lee et al, 2013).
Eccher and Healy (2009) employed a model that evaluated the relationship between future accruals and cash flow to current cash flow using a sample of 83 companies that report using both IFRS (A-shares) and Chinese accounting standards (PRC) (B-shares) for the period between 1993 and 1997 inclusive. The study found out that. The study finds out that IFRS is not any superior to PRC for both domestic and international investors. But conflicting results are found by Sami and Zhou (2004) when they conduct a similar study considering 1994 to 2000 period. By using a similar selection criteria, this study concludes that the reported accounting information by use of IFRS is superior in value relevant than that reported under PRC accounting standards. A similar study done by Lin and Chen (2005) employing Ohlson (1995) model combined with a lagged-price-deflated returns evaluation for the period in 1995 to 2000 and using a Sami and Zhou (2004) similar company selection criteria conclude that Chinese PRC is more value relevant than IFRS. However, a study carried out by Liu et al. (2011) examining accounting quality including value relevance of new Chinese PRC with a study of 870 firms from 2005 to 2008 conclude the convergence towards IFRS has improved value relevance of accounting measures. A similar study was carried out by Zheng et al (2012) to evaluate convergence through use of financial assets. The study that employed a sample of 453 firms from non-financial industries from 2004 to 2009 concludes that the new Chinese PRC fair value are highly value relevant than the historical costs previously reported. With relation to earnings, Lee et al. (2013), evaluated how the value relevance was affected following the 2007 CAS-IFRS convergence introduction. Through employing a sample of 10,017 of Chinese companies listed on either Shenzhen or Shanghai stock market between yea...