The limitations above will have an effect on the further research of study and work of the Author
Chapter 2
“Critical Literature Review”
2.1 Introduction of CAS/PRC GAAP
After decades of unremitting hard work and improvements, China has finally formed an inclusive accounting standards system, which is shortened to PRC GAAP (General Accepted Accounting Principles of the People’s Republic of China) in this essay. PRC GAAP has been reformed from a number of sources, which includes the State Council, National People’s Congress, the Ministry of Finance (MOF), and for the companies which are listed, the China Securities Regulatory Commission (CSRC).
PRC GAAP, as shown in Table 1, has been divided mainly in five components, they are:
(1) Laws, i.e. Securities, Accounting, Bankruptcy - Laws, etc;
(2) Chinese accounting standards (CASs), including the Specific Standards and Basic Accounting Standards.
Up till now, all together Sixteen Specific standards have been issued; every single one has a detailed guidance on implementation. The Ministry of Finance (MOF) is planning to issue more than 40 Chinese Accounting Standards (CASs), together with the modification of the existing 16 standards in 2005;
(3) Relevant regulations i.e., Accounting Guideline for the Enterprises which are Engaged in the Business of Publication, Accounting System for the Co-operative Economical Organizations, Accounting System for the Not-for-Profit Organizations, etc;
(4) The Accounting system for such enterprises, which primarily includes Business related Enterprises, and also an Accounting System for the Small Enterprises and for the Financial Institutions;
(5) And lastly the Questions and the Answers issued by the Ministry of Finance (MOF).
2.2 Introduction to IFRS/IAS
International Financial Reporting Standards (IFRS) are the interpretations and the standards, which has been issued by the International Accounting Standards Board (IASB). The main components are:
(a) International Financial Reporting Standards has been issued by IASB;
(b) International Accounting Standards issued by predecessor of IASB known as International Financial Standards Committee (IASC);
(c) Interpretations are originated by the former, Standing Interpretations Committee (SIC) or the International Financial Reporting Interpretations Committee (IFRIC).
Hence, international accounting standards system which has been set by IASC/IASB is known as IAS/IFRS. It contains the Preface to International Financial Reporting Standards, Framework showing the Preparation and the Presentation of the Financial Statements, IFRIC Interpretations, different Accounting Standards, IASB Questions and Answers and much more. IASC/IASB has created a framework and preface by, 30th June, 2005, are 7 IASs, 41 IFRSs and 34 interpretations.
2.3 An Analysis for the Formal Differences in accounting standards’
The compelling force by IFRS, formed by IASB is the reason for the harmonization trend between the different accounting standards. Generally in two different ways the countries or/and regions react towards the trend of global harmonization between accounting standards, are (1) Gradual & (2) Radical Way. In Gradual way, the implementation applies in different phases which are the explanations and instructions provided by the related own national bodies, which set the regional accounting standards. It is opposite, in Radical way, where the national accounting standards fully replaced by the IFRS, adopting fully International Accounting Standards. Currently, the huge number of the countries across the world is adopting the gradual way. And, China is one of such countries, to adopt the gradual way to improve its own regional accounting standards. To change the old system step by step, gradual way, the first step, which has been taken, is to develop the series of new institutional set ups. This is the track to reach the target to reform the entire accounting standards gradually with a continuous development and also narrowing the space of old system in new institutions.
According to a survey ‘2000 World GAAP Research Report‘, national standard of Cyprus is the closest from IFRS and national standard of Russia, is the most different from IFRS. China’s is on 22nd place. In the last few years China issued new 8 accounting, which is a gradual move closer to IFRS, but there are still many differences exist between IFRS and CAS.
2.3.1 Analysis of Systematic Differences
- Differences in Conceptual Framework (CF)
CF, according to the definition by US Financial Accounting Standard Boards (FASB) (1994), is an inter-connected system, with an inherent relationship to logic, which includes fundamental principles, a set of objectives and a constitution. Also, with the complex situation and development of global economy, more and more countries have started to engage, the importance of fundamental theory of the accounting, considering mainly the investigation on Conceptual Framework of Financial Accounting (CF).The system can be a direction for the steady accounting standards, and provides an indication towards the nature, limitations and also the role of the financial statements and the financial accounting statements and financial accounting standards. Therefore, the fundamental conceptual or theoretical framework is not only being a base to evaluate and consider the accounting principles, but also provides solid guidelines for a very effective use of the accounting standards.
IASC, in April, 1989, approved ‘The Framework of Preparing Financial Report’, which was brought out in July, 1989 and had been adopted in April, 2001. Looks like the majority number of Western accounting standards system, so as IASB is treating CF as a (or a number of) separate documents of accounting, which has been independently released than the accounting standards. There are also no existence of specific individual standards and any fundamental standards in IFRS. Clearly indicated by, ‘The Framework of Preparing Financial Report’, that CF neither belong to any content from accounting standards not have any effect of it.
On 1st July, 1993, ‘Basic Accounting Standards’ came in practice, for that China Ministry of Finance was entirely responsible about the explanation of the standards which was also revised in 2006. During the procedure of setting up ‘Basic Standards’, it is treated generally as a CF’s role. Although in the definition for the contents in ‘Basic Accounting Standards’, the concept of ‘Financial Accounting Conceptual Framework’ has not been mentioned. On the other hand, there are a significant amount of differences in specific areas exist between the concept of conceptual structure and the conceptual framework of IFRS as it can be seen in table below.
Table 2-1
Comparison of Conceptual Framework between the
‘Basic Standards’ of CAS
And
‘The Framework of Preparing Financial Report’ based on IFRS.
Source: According to ‘2002 International Accounting Financial Reporting Standards’ and ‘2006 Enterprise Accounting Standards – Basic Standards’.
By evaluating both standards above, we can see that, the structure of Basic Standards is based on foundation of ‘The Framework of Preparing Financial Reports’ , also it has added some of the component of its own. Therefore, it is a mixture of Basic Standards and the conceptual framework. The quality features are relatively unclear with the relationship of accounting information provided. Hence, China should do the efforts to improve the situation and to go for conceptual framework regard to the basic standards and try to set its own CAS Conceptual Framework as soon as it can. After which, CAS can become more consistence also internally as well, in the line of international practice.
- Differences in Systematic Structure
IFRS is a sort of unitary standard system, which is new and also can change towards the further improvement and developing the economy of International Markets. The current IASS includes 38 financial reporting standards,(including 31 standards formed by the former standard setting body but still in effect by now.) with 11 interpretation announcements (which includes all such announcements set by international Reporting Interpretation Committee (IFRIC) and predecessor).
Relatively speaking, China is adopting the accounting standard system, which is a combined accounting standard system. The components of this system are, regulations, (Enterprise Financial Accounting Reporting Regulations), Law (Accounting Law), accounting system (includes accounting methods, 13 industrial accounting systems), accounting standards (specific individual and basic standards) and disclosure of information (Provided by China Security Regulatory Commission Regulations). The chart 2-1 below shows the detail
Chart 2-1
China Accounting Standard System Structure
Source: This chart is according to China Ministry of Finance net (http://www.mof.gov.cn).
From the chart above it is clear that, China is adopting a parallel accounting system with accounting standards. In this combined system, the accounting standard is consisting of the accounting norms and some other forms of accounting system. In practice, at a large extent enterprises, prefer an accounting system, with technically said to be implementation of the accounting standards this will be detrimental, in a long run if CAS choose to harmonize with IFRS.
2.3.2 Reviewing the formal differences in
Accounting Standards
In reality, any differences occur due to certain root causes. Throughout the comparison of the formal differences in accounting standards, we can come to conclusion as below:
First of all, the requirement of supervision is the leading purpose of CAS settlement. Therefore, the common principle of the CAS setting is based on the foundation of the authenticity. However the IFRS-setting mainly focus on the usefulness and importance of the information. The relevance, comparability, reliability and consistency, are main components, which IFRS is taking into consideration. This is the reason why China ignores the revaluations and fair value. Although at some extent, with avoiding the fair value use, present national condition of China enables CAS to IFRS, with further more differences between accounting standards and the trend of development Internationally, keeping out of the step. On the other hand, CAS owns a very little coverage and also there are certain newly arrived problems which also have not been included.
At last, IFRS focused on complications of ‘concept’ and the reviewed the treatment in accounting standard in detail, in opposite CAS focused on the ‘boundaries’, for instance 25% margin between equity method in investment and cost method in finance lease boundary of 30% lease and so on.
2.3.3 Analyses of the differences between specific content of The Two Accounting Standards.
- Analyses of the differences in Specific Individual Provisions
At present in China the accounting system is outstandingly different than it was 20 years back. The main element of the transformation of Chinese Accounting Standards is a very perceptible flow towards the harmonization of accounting standards internationally. The MOF is continuously working to reach the convergence of PRC GAAP with IAS/IFRS, by providing the support for the harmonization of international accounting standards. As a result of continuous reform, China has made a significant performance towards the globalization of accounting standards.
Nonetheless, there are a number of differences are still existing between the two accounting standards. To discover the main differences, Deloitte (2005), had created a very systematic contrast research on it, which can be seen in Appendix 1. The results, indicate that there are more than 100 differences exist between IAS/IFRS and PRC GAAP. Only the common differences had been shown in table 2.2
Table 2-2
Differences of Specific Individual Provision between
IFRS and PRC GAAP
Source: According to Deloitte (2005), ‘Comparison between PRC GAAP and IFRS’.
- Analysis of the differences between Standard items
Opposite to IAS, where there are 29 IASs and 8 IFRSs, China only has one basic and 34 individual specific standard. Which indicates that CAS is not as good in the items as it is specified in IFRS. Also it clearly points out that the carrying out standards of China is very much far from it is in IFRS. The very first implementation been made in IFRS was in 1975, on the other hand, the first implementation of Chinese Accounting Standard was made in 1997, after a long period of 22 years, which was a ‘Related party trading and relationship’; The speed for revising CAS is so much far away from IFRS. The table below shows the comparison of items and effective date between CAS and IFRS.
Table 2-3
Items and Effective Date between
CAS and IFRS
Source: According to (IASB net) and (China Ministry of Finance net).
2.4 Review of the Relevant Empirical Research
Since last century, from 1990’s, with rising voice of the harmonization of
CAS with IAS/IFRS, the intellectual field has been paid more and more attention towards comparing the analysis between IFRS & CAS. The studies on the comparable analysis IFRS and CAS are classified mainly into the 4 aspects, they are as following;
2.4.1 The formal Differences analysis
According to Dongping, L (2000) the formal differences between IFRS and CAS are represented mainly on 11 various treatments of accounting items.
In 2001, seven leading accounting firms known as THE BIG 7, together issued the ‘2001 Report of General Accepted Accounting Principles’ and has been said that the differences between IFRS and CAS are mainly reflected on the certain items, like the lack of measurement criteria and specific reorganization, not fair value for such items, and discontinued operations of particular disclosure rules, financial leasing, the scope for deals of mergers, and much more on.
Xianguao, W and Mingming, L (2003) indicates the differences between IFRS and CAS, on the perspective of the system, is primarily expressed on the fair value, a numeral amount of specific accounting treatments, as well as the requirement of information disclosure.
From the point of view of Jiping, W (2004) thinks that, during 2003, the differences between IFRS and CAS has the effect on the net profit, includes method of depreciation of the fixed assets. The expenses reorganization, adjustment in tax, capitalization of expense, and so on.
2.4.2 The Difference of B-shares or AB-shares
Listed companies
By the use of the differences of B-shares or AB-shares, accounting earnings of listed companies, as the leading research subjects, to analyse the differences of the methods and degree of the earnings of the same companies accounting system, in a different reports.
One company’s based on IFRS and used for the stock exchanges overseas, on the other hand, one based on CAS and only used for the regional stock exchanges. This is not including the differences of the statistic test.
From the point of view of Shuhua, L (1997) indicates, the some obvious differences between various reports (One company’s based on IFRS and used for the stock exchanges overseas, on the other hand, one based on CAS and only used for the own regional stock exchanges.) in same company, which was based on the study for 76 different companies listed on Shanghai and Shenzhen Stock exchanges who issued A and B shares. The study was based on the sample taken in 1996. The study indicated that, companies (14.67%) out of 76 had higher net profit in overseas reports than in domestic reports. On the other hand, 69.33% about 52 companies, had a vice versa with, domestic reports net profit higher than overseas reports.
Charles, J.P. Chen and Xijia, S (1999) had taken A-shares and B-shares as the samples from Shanghai Stock Exchange, during the period of 1994-1997. The founding’s indicated that accounting earning based on CAS, are nearly 20% -30% superior than the one according to IAS/IFRS. That resulted into the international loss for 15% of companies’ domestic earnings after adjustment as in IAS/IFRS.
Quanjing net () had taken in account the differences in the net profit amongst the 122 listed companies in 2003, in their annual reports, which uses the both CAS and IFRS accounting standards. The research found out that net profit is 47 billion RMB Yuan less based on CAS than it is based on IFRS which gives in average of 38 million RMB Yuan loss for each company.
2.4.3 Analyse the accounting earning differences as variables Of B-shares companies
The section is going to analyse the differences between the accounting earnings as the variable by using the B-shares companies. It is going to examine the differences and various information contents on the earning of accounting data, which is based on different accounting standards. Mainly the information of accounting after it had been adjusted by IFRS. There are two different kinds of conclusions, which both are opposite to each other. Some scholars has a belief in the fair value which is related to CAS is not any less, than it is in IFRS, on the other end, some scholars thinks that the fair value is very much higher than in CAS, as in IFRS.
Haw, Qi and Wu (1998) researched that rate of return of B-share Company and profit according to CAS has major co-relations where on the other hand under IAS/IFRS there is no such co-relation statistically between two of those. And there is n information in additional for the profit adjusted for the B-shares investors, under IAS/IFRS.
Elizabeth, E and Healy (2000) had pointed by analyzing the samples taken during 1993-1997, that to explain the future cash flow and the Return of Capitals. It is much easier to apply CAS. Also it has been pointed that to use IAS/IFRS in China will be meaningless.
Based on the annual reports data of 83 listed companies of overseas and domestic, who had issued A-shares and B-shares, in Shanghai and Shenzhen stock exchanges simultaneously in 2002, Xiuli, W (2002) has used the Return Model (Easton and Harris (1991) ) and Price Model (Ohison (1995) ) to study it empirically and managed to found the systematically differences in the accounting earnings data under CAS and IAS/IFRS and the adjustment in the earnings under IFRS with no additional information for the investors.
In 2001, for A-shares and B-shares companies Linyun, Chen and Lihua, Lin (2003) had compared the corrections of fair values of accounting earnings by different accounting standards in various markets. Result showed that for A-shares exchanges it is easier to describe the earning data than it is for B-shares exchanges. Therefore, they recognized that the structure of CAS should be based on the national situation and the whole IFRS should not be copied by China.
Xiagiang, Li (2004) mentioned that for either A-shares of B-shares Exchanges opposite to the accounting information as per as in CAS, there is no such fair value correction are pointed for the accounting information as per in IFRS. But on the contrary base, compare to the role of IFRS, CAS is a lot stronger.
Chapter 3
“Methodology and Methods”
3.1 Research Design
Until now the qualitative analysis has been done on the formal differences existing between CAS and IFRS. On the other hand, in next chapter, we will be performing the quantitative analysis of the significant differences existing between the accounting standard, which can also be known as the ‘empirical analysis method’. We will also be using the procedure of SPSS which is explorer statistical software, some of the functions from Microsoft excel procedures, and also we will be using the Wilcoxon Matched Pair Rank Test for analysing the samples of the data we have researched and found.
3.2 Research Context
It has been 17years, since 1992, China had allowed few of the enterprises, to issue the foreign shares, i.e. B-shares to public. ‘The provisions of the State Council on the listed companies issuing foreign shares’ (State Council Decree No. 189) and ‘Implementation Details’ (The certificate had issued in Committee [1996] No. 9) of it, are providing that : the company should submit the financial reports in the interim reports and annual reports, under CAS. At the same time, it must also provide an adjusted financial statement according to IAS/IFRS or in according to the accounting standards of the country where the company is issuing the shares. If there are certain differences exist, which are very significant between the two financial reports prepared according to different accounting standards, then they should be very clearly described in the financial reports of the company.
On November 7, 2001 The China Securities Regulatory Commission (CSRC) had issued, ‘Financial Reporting Differences and Disclosures based on the Domestic and International Accounting Standards‘(CSRC [2001] No. 60), shows that: the companies which are listed should always treat the financial reports in accordance to CAS as the foundation, and treating the net assets and net profits in the financial reports as an adjustment target to prepare an adjustment sheet showing and explaining the differences, which must be disclosed as it indicates on the note for the financial report in accordance to CAS.
At the moment, there is a form of the special listed companies, which are issuing A-shares as much as the B-shares also, simultaneously. As in according to the provision of China’s information disclosure, there is a need for the listed companies, which are simultaneously issuing A-shares and B-shares, must provide two different copies of the financial information in accordance to CAS and IFRS, that the investor of both A and B shares will be able to receive the two copies of the financial reports and two different financial information at the same time. That is why this paper will focus on the differences between the financial information based on CAS and IFRS, of the listed companies which are simultaneously issuing A-shares and B-shares.
3.3 Research Procedure
The paper is going to use a number of integrated methods and theories, such as management science, economics and also statistics and so on, in relation to China and some relevant foreign studies and researches based on a very in-depth study on the significance at CAS and IFRS, to provide a comparable analysis between both accounting standards.
The paper is going to analyze the founding step by step as shown below:
Chart 3-1
Idea of Research
3.4 Research Structure
In the research, as a starting point for the research we will be using the comparable differences of IFRS and CAS to carry out the research to analyse the harmonization issues of accounting standards. We will divide the paper in five different sections as shown below:
The Section One will be Introduction. This part will be providing the research rationale, the background of research and consequences of the study; and also the section will give an outline of the research objectives and the questions we will be resolving and at the end of the section it will indicate the innovation of the paper and provide an introduction to the limitations of the research for the paper.
Section No. 2 will be the Literature Review. This section will provide an introduction of CAS and IFRS. It will also provide a theoretical analysis, on the differences existing between this two accounting standards. the aim of the section is to focus on the recent changes, in IFRS, latest released of PRS GAAP in China and the individual 17 specific accounting standards and also the reformation programme of China. It will also describe the differences between CAS and IFRS on the structural out look, from the perspective of conceptual framework and from the specific provision perspectives. By comparing the differences, the paper will try to find out about the large formal differences which still exist and whether China is in need to continue to speed up the pace of setting new standards and to harmonize with IFRS. And at the end it will review the results of the studies performed previously in the academic spheres.
Section No. 3 will be Methodology and The Methods. This section will provide the research design, context and also the procedures and structures of the research. And at the end it will explain the methods of data collection and analysis of the data, for the section after which is empirical analysis.
Section No. 4, at last will be the Results and Findings of the analysis. Firstly, by doing the research of the net profit, net assets and also return on equity in the Index of 84 listed companies which are simultaneously issuing A-shares and B-shares in Shenzhen and Shanghai stock exchanges, which are prepared in accordance to two different accounting standards. And by using the Wilcoxon Matched Pair Rank test we are able to find that in the recent years, the differences of the net profit has been narrowed down. There is also a significant difference between the financial information prepared in accordance to two different accounting standard systems. At the second place, with use of yield compensation model, to examine the relationship, between undulation of prices of A-Shares and the EPS (Earning Per Share) we can see that the two accounting earning according to two accounting standards contains the contents of financial information and there is also an increment of information for decision making of investors by disclosing the differences between two financial reports prepared based on CAS and IFRS. At the end, the conclusion will indicate that there is this substantial differences existing between this two difference financial reports prepared under two different accounting standards. It is important to disclose the both financial information under CAS and IFRS at the same point of time. Provided by two different accounting standards the accounting information is complementary exclusive than mutual.
Finally, it will be the last section which will be Conclusion & Recommendations. This section will indicate the possibility and the suggestions about narrowing down the differences based on the empirical test and theoretical analysis, to realize the harmonization.
3.5 Methods of data collection
In the following empirical research, we have chosen the companies which are listed on Shenghai and Shenzhen stock exchanges as the sample. The valid samples which are refereeing to the companies, will meet the guidelines below:
-
Should be existed from 1st January 2002 – 31st December, 2007 and issuing A-shares and B-shares simultaneously in Shanghai & Shenzhen stock exchanges.
- From 2002-2007 they should have provided enough information like annual reports each year for results.
- Should have provided the financial reports in accordance to CAS and IFRS, especial the net assets and net profits or should have provided the reconciliation reports between CAS and IFRS in disclosed to financial statements.
According to the guidelines shown above, we had chosen 44 listed companies which are simultaneously issuing A & B shares in Shanghai stock exchange, where, S T Qinggi B (900946) has prepared its financial reports based on HK GAAP (Hong Kong Generally Accepted Accounting Standards), which should be removed, which gives the final number of 43 companies are remaining. And we have chosen 42 companies which are listed and issuing simultaneously A-shares and B-shares in Shenzhen Stock Exchange in which, the financial statements of Shennandian B (900 946) has been prepared based on HK GAAP, and it has to be removed, that is why the final number of the companies is 41. We have got 84 samples remaining which are valid after we have rejected 2 invalid samples, which is shown in Appendix 2 in detail.
We will be considering the data of the net profit and net assets from the annual reports, respectively on the basis of both IFRS and CAS during 2002-2007. In the paper, ‘net profit’ will refer to the net profit which has been reduced the minor shareholders’ equity, ‘net assets’ will refer to the equity of shareholders which has been reduces the minority shareholders’ equity.
All the data of the samples above had been found from the annual reports of the companies in Shanghai stock exchange (http://www.sse.com.cn) and Shenzhen Stock exchange (http://www.sse.org.cn).
3.6 Methods of Data Analysis
This paper will carry out the research by the use of an explore procedure of SPSS 11.5, a statistical software, some of the MS Excel functions procedures, and also The Wilcoxon Matched Pair Rank Test to examine the data of the companies which have been chosen as samples.
The definitions for the variable in the research we will be proposing are as below:
Samples of the companies’ net profit or net assets in accordance to IFRS is less than the samples of the companies’ in accordance to CAS is the difference between the net profit or net assets. We can put this definition in the formulas as shown below.
Difference Net Profit = Net Profit based on IFRS – Net Profit based on CAS
Difference Net Assets = Net Assets based on IFRS – Net Assets based on CAS
If the difference is positive, than it indicates that net profit or net assets based on IFRS is more than CAS, which means CAS is more prudent that IFRS. Vice versa, if the difference is negative than it indicates opposite. But if the result shows the difference is zero means the standards are equal.
The ratio of differences in the net profit or assets for the sample companies divided by the net profit or net assets respectively based o CAS. In the formula it can be presented as under:
Difference between the net profits
Difference Ratio Based on IFRS and CAS
Of = ________________________________
Net Profits Net Profit based on CAS
Difference between the net assets
Difference Ratio Based on IFRS and CAS
Of = ________________________________
Net Assets Net Assets based on CAS
The level of disparity between the two different accounting standards will be reflected by the ratios above, the meaning for the results of the ratios, positive or negative, is going to be the same as we explained it above. To avoid the positive and negative contra between the ratios differences in the analysis, the absolute difference ratio will be used. The lower the difference is, the smaller the extent of disparity between CAS and IFRS. To explain the extent of disparity of the ration of absolute difference can be divide in four different intervals, such as, high influence, which is more than 10% but less than 50%, low influence, which is less than 10%, a significance influence which is more than 50% and less than 100% and at very end abnormal influence which is higher than 100%.
Chapter 4
“Findings and Results”
-
“An Empirical Analysis”
4.1 Differences between the indicators
Of
Financial Information
One of the most important financial information is the ‘Net Profit’ indicator for evaluating the financial information of the companies which are listed. The requirement of China Securities Regulatory Commission (CSRS) shows, that the listed companies which are simultaneously issuing A-shares and B-shares have a need to provide the net profit in financial information in accordance to CAS as well as IFRS. And the differences of those two as in CAS and IFRS should reflect on the net profit in the financial reports.
4.1.1 Difference of net profit - An Empirical Analysis
4.1.1.1 Descriptive analysis of the Statistics
- Description of the Absolute Numbers
The paper will gather the net profits of the 84 listed companies prepared in accordance to CAS and IIFRS during 2002-2007 as we can see in the table below:
Table 4-1
The sheet of Net Profits in accordance to
CAS and IFRS
From
2002-2007
(Source: Number according to the Shenzhen stock exchange (http://www.sse.org.cn) and the Shanghai stock exchange (http://www.sse.com.cn) and tables been made with the use of MS Excel and SPSS 11.5 with the profit as it is in annual reports of the company)
As the statistics show, from 2002-2007 above, from the net profit of the sample companies, numbers are varied quite a lot on minimum, maximum and average on the basis of different accounting standards. If we take 2007 as an example, the net profit of the sample company was -732 million in RNB and the amount 238.903 million is the maximum amount and we get the average of 143.6. But after adjusting it based on IFRS the minimum profit goes to -145.18 which are about 14.58 million RNB less than it is in CAS; and the amount which is the maximum was 247 million RNB. Moreover, from the difference of net profit of sample companies we can see it in the chart below:
Chart 4-1
Changes in Net Profits’ Average
From
2002-2007
In 2002, the chart above indicates, the net profit of the companies which has taken as samples is in accordance to CAS was 20,000 in RMB which was less than that based on IFRS. However, in 2003, it was 4.17 millions more than it was based on IFRS, which shows that as a whole, the net profit of 84 companies taken as samples, was 35.034 million higher than it was in IFRS; but in 2004, the net profit was 7.54 million more based on CAS than it as in IFRS, which was double the difference than it was last year. But in 2006 the difference was negative, with 6.23million less than it based on IFRS, similar to 2007, the net profit was negative by 6.21 million, less than it is in accordance to IFRS. Looking at the fluctuating change of the difference in net profit, it has gone up according to different standards, respectively in 2003, 2004, 2005. And the net profit was continuously going higher than it was based on IFRS. But it has shown negative differences in year 2006 and 2007. By taking the detailed situation into account of the sample companies’, the number of the samples as a whole, which had been profitable in accordance to CAS but had been a loss when it has been adjusted in accordance to IFRS at the same point of time, and was decreasing year to year? We can see that in chart following:
Chart 4-2
Changes in Profit of the Samples Companies
From
2002-2007
The chat from 2002-2007 above, indicates, the place of the companies according to drop from profit to loss from 9-1, except the number 6 in year 2003. The difference between two accounting standards indicates the fact that the differences is reducing every year.
- Description of the Relative Numbers
By using the ratio of the net profit difference, we can explain the net profit difference of sample companies by showing the relative numbers.
Difference between the net profits
Difference Ratio Based on IFRS and CAS
Of = ________________________________
Net Profits Net Profit based on CAS
According to degree of the differences in net profit, there are nine grades it can be divided into nine grades, to the statistic of the sample numbers. We can see it in the table below:
Table 4-2
Distribution Table of Differences degree
Of
Sample Companies’ Difference Degree
By looking at the chart above, the degree of difference disclosed from the annual reports of each sample companies was fasten on +/- 20 percent. We can see the detail in the table below:
Table 4-3
The Number and Percentage of Sample Companies
+/-20% and +/-20% to +/-50%
The table above shows, the number of the companies taken as sample with strong differenced in the degree, which was dropping from 14 in 2002 to 5 in 2007, particularly from 2005 as it shows in chart 4-3 below. It shows that with more and more of convergence between IFRS and CAS, the differences between the net profits between two standards has been decreased at some degrees.
Chart 4-3
The trend of the sample companies’
Number changes
Difference degree > ‘1’
4.1.1.2 The Statically Analysis Test
According to the numerical outcome as it shows above, for the indicator of ‘net profit’ in the financial reports, the degree of the differences between CAS and IFRS has been decreasing every year, but the difference of absolute numbers is much more bigger. That produced a question that, does it indicate that there is a significant difference between the net profits of CAS and IFRS? We will be conducting the statistical test in this part to answer the question.
- Analysis of General Check
Firstly, we will be conducting an analysis on general check, separately on Shanghai and Shenzhen stock exchanges as shown in the table below:
Table 4-4
Wilcoxon Matched Pair Rank Test
And
Outcome of ‘net profit’ Differences
In
Shanghai and Shenzhen Stock Exchanges
Looking at the table above, there is a significant difference in net profit every year in the sample companies in Shanghai Stock Exchange based on CAS and IFRS, expect it is in 2002. On the other hand, the figure in Shenzhen Stock Exchanges indicates that from 1999, all p-values of the companies taken as samples are more than 0.1 which indicates there isn’t any statistically significant difference. But the outcome is different with the comprehensive two different ‘net profit’ of the sample companies in both stock exchanges as it shown below:
Table 4-5
Wilcoxon Matched Pair Rank Test and Outcome
Of
Differences of ‘net profit’
The table 4-5 indicates, ‘positive differences’ and ‘negative differences’. The positive differences are referring to the sample companies’ number which has their net profit are more based on CAS than based on IFRS. On the other hand, ‘Negative differences’ are referring the reverse. And if the net profit in accordance to CAS and IFRS are same than it will be ‘none’ difference. The result of the tests indicates that, the number of the positive samples is decreasing every year and the number of negative samples is increasing. Also, in year 2005 the very first time the number of the samples which is negative exceeding the number of samples which is positive. Meanwhile, the p-value between 2002-2004 were less than 0.05 at a significant level, which shows that there is a significant difference between ‘net profits’ based on two accounting standards. the p-value from 2005 to 2007 were showing more than 0.1, which means there is not any significant difference on the net profit based on two accounting standards.
As we can see that the statistic outcome here can prove that it has been more and more convergence between CAS and IFRS in recent years. Does it show that the convergence has been realized in 2008? We have drawn a different conclusion through the test on EPS (earning per share) .The Wilcoxon Matched Pair Rank Test and outcome for the difference in EPS has shown below:
Net profit
EPS = -----------------------------
Total Capital (Shares)
Table 4-6
Wilcoxon Matched Pair Rank Test
And
Outcome of EPS Difference
Table 4-6 above shows there are a number of significant differences on EPS except in year 2005 and 2006. The p-value were less than 0.05 at significant level in 2002 and 2007, but even less than 0.1 in 2003 and 2004. All these values can be treated as a significant difference of EPS in accordance to CAS and IFRS.
To observe the further characteristics of the differences, it is essential to use a group check analysis, based on general check analysis. Year 2007 has been used as the base year for this paper, in accordance to see whether the samples are negative or positive in year 2007. We will be classifying it in two groups, (1) Positive Group containing 33 sample companies, (2) Negative Group containing 48 sample companies, and at last analysing them as it is shown in the table below:
Table 4-7
Statistical Outcome
Of
Positive and Negative Difference Group
Table 4-7, shows that the average value of the group of negative differences is certainly less that it is in positive difference group. This means that, when the net profit based on CAS have been adjusted in accordance to IFRS, the average of adjusting number of the negative difference group is less than positive difference group. In 2002 and 2006 the average values of negative difference group are both negative, indicating that the average of net profit under IFRS is more than CAS. And in other years, in both negative and positive difference group the average net profit under CAS is more than IFRS. Except in 2005, by looking at p-value we can see that in the negative difference group there was a significant difference between the CAS and IFRS. But in the positive difference group, there is no such significant difference is on the profit under CAS and IFRS.
4.1.2 Difference of Net Assets – An Empirical Analysis
4.1.2.1 Descriptive analysis of the Statistic
The paper has collected the net assets of the 84 listed companies which have been taken as samples, based on CAS and IFRS from year 2002-2007 as it has shown in the table below:
Table 4-8
Sheet for Net Assets based on CAS and IFRS
From
2002 to 2007
(RMB Hundred Million Yuan)
The table above indicates that, from 2002-2007, sample companies difference been divided according to, minimum, maximum and average. If we take 2007 as an example, and compare the differences of the sample companies’ net assets based on CAS and IFRS, the former was 3 million RMB less than the latter on the minimum amount; the formal was 61 million RMB less than it was the latter on maximum amount. However, the former was 77 million RMB more than the latter of average. By looking at the average of the difference of annual net assets in chart 4-4 it can be seen that the average difference of net asset shows a ‘U’ curve change trend.
Chart 4-4
The Trend of the average of Net Asset
Changes from 2002-2007
The average difference started to decrease from 1.8 million RMB from year 2002 as we can see from the chart above. And there are two negative differences existed in 2004 and 2005 (which was the average net assets based on CAS that less than that is based on IFRS). But it was started to increase again from year 2002, and then in year 2007 and has been reached on its highest peak of 7.70 million RMB.
4.1.2.2 Tests of Statistics
The paper will also be conducting some statistical tests, based on the descriptive statistics on the differences of net assets based on different accounting standards.
Table 4-9
Wilcoxon Matched Pair Rank Test
And
Outcome of ‘net assets’ Difference
The numbers shown in the table 4-9 above indicates, that in 2003 and 2004 the p-value was more than 0.1, which indicates that there are no significant differences are existing between the net assets based on CAS and IFRS; but there are differences which are significant, existing in year 2002,2005, 2006, and 2007 between these two accounting standards. In meanwhile, the paper has also conducted a number of statically tests on the net assets per share based on CAS and IFRS, shown below:
Net Assets
Net Assets per Share = --------------------------
Total Capital (Shares)
Table 4-10
Wilcoxon Matched Pair Rank Test
And
Outcome of Net Assets per Share Difference
Table 4-10 above shows that in the year 2003,2004 and 2005 the p-values of net assets per share were more than 0.1, which means there are no significant difference in these years, but opposite in year 2002, 2006, 2007 p-values were less than 0.005 showing the significant differences in those years.
4.1.3 Analysis of Comprehensive Tests
The previous part has analyzed the differences in financial indicators such as net profit and net assets. That’s why to provide a comprehensive consider this part will be introducing one more financial indicator which is Return on Equity (ROE). The ROE descriptive statistics sheet below is based on CAS and IFRS from 2002 to 2007.
Net Profit
ROE = ------------------
Net Assets
Table 4-11
ROE Descriptive Statistics Sheet
Based
On CAS and IFRS from 2002 to 2007
By looking at the outcome of descriptive statistic, we can see that there are a huge number of differences on ROE indicator based on CFS and IFRS. For instance, in year 2004, under CAS the minimum ROE was -5.27, but after adjusting under IFRS, the minimum ROE was become -0.89, which shows the difference of -4.38; In 2003 as well the maximum ROE based on CAS was 1.14, but after adjusting in accordance to IFRS, the maximum ROE based on IFRS became 56.67. After looking at such a big difference, we should use the Test of Wilcoxon Matched Pair Rank to analyse the difference existing between two standards.
Table 4-12
Wilcoxon Matched Pair Rank Test
And
Outcome of ROE Difference
Except for 2005, the table 4-12 above indicates that the p-values of ROE in the rest of the years were less than 0.1, and in 2002, 2003, 2004 even less than0.01 which is clearly indicating the significant difference of ROE based on CAS and IFRS.
For consideration comprehensively and to reduce the one sidedness, in the paper, we will draw a table for analysing the situation we have analyze comprehensively above.
Table 4-13
Significant Differences Tests & Outcome Summary Sheet
In the table 4-13, the sign ‘√’ indicated the existence of the significant differences between the information based on CAS and IFRS. In year 2005 only ‘net assets’ are indicating the differences and also there are three or more indication in the other years which are indicating the differences. Finally we can also see that the, differences between profits are narrowing down year to year, based on CAS and IFRS. In general, there are differences between CAS and IFRS, which is indicating the existence of significant differences of financial information indicators between CAS and IFRS at certain extent.
4.2 The Differences between the contents
Of
The accounting standards information
In section 4.2 we have tried to prove that there will be a significant difference between the financial data based on CAS and IFRS, so do they have a different power for explanation and effect on the stock market? According to the thinking of western empirical accounting theory, if market is very much effective, under the situation of the no other conditional changes, the reactivity co-efficiency of the accounting earning will be increasing with the improvement of the quality of accounting earnings. Therefore, this section will be using yield compensation model, to examine and to analyze if there are differences between the content of information under CAS and IFRS, and also to check if the adoption of IFRS is able to improve the content of information in a significant way or not.
4.2.1 Model Design
A number of empirical researchers have been already made to prove that the release of the accounting annual reports is going to bring a reaction in the stock market, significantly. In 1968, a number of empirical researches had been done by Ball and Brown on the relationship between the figures of profit in the annual reports and the prices of stock. And they have found that there are quite a few significant co-relations between the changes in accounting earnings and the changes in price of stock, which means that, if the company is able to gain no-expected rate of return of stock investors is going to be positive, as on the contrary it is going to be negative. So, it means this proves that the performances information of listed companies will be reflected on the prices of their stock.
Beaver (1968) had used the variance of the non-expected rates of returns and also the changes in the volume of transactions, to examine that the effect of the accounting information of the companies on theirs stock prices. He had also found that during the week of the realised of annual reports of the company the foundation of stock prices, and the volume of transaction were bigger than the other normal weeks of transactions significantly. Therefore, it has been proved that, the accounting information used by investors when they are released, to buy and/or to sell the stocks.
By using the researches above as the base, we will be using the model of yield compensation and also the accounting information at the 36 listed companies which are simultaneously issuing A-shares and B-shares in the Shanghai stock exchange to examine, compare and analyse the differences which are existing between the contents of accounting information based on CAS and IFRS.
(Note: There are 44 listed companies which are issuing simultaneously A-shares and B-shares in Shanghai Stock Exchange, in which, there are 43 listed companies who prepare the annual reports based on both CAS and IFRS. We have rejected 7 listed companies who are ST companies or don’t have enough useful information, so the final number of sample companies are 36.)
CAR j = ∂0 + ∂1UEj + ε (4-1)
In which,
CARj refers to J Company’s cumulative non-expected rate of return;
UE j refers to J Company’s non-expected accounting earnings;
ε refers to the amount of random error.
- Accounting Earning’s Definition
The paper will be choosing the EPS, as its financial indicator to evaluate the earnings of accounting. The formula to calculate the non-expected accounting earning is as below:
UE j, ∂ = E j, ∂ - E j, ∂ - 1 (∂ = 2007; j = 1, 2, 3 …… 36) (4-2)
In which,
E j, ∂ refers to J Company’s actual EPS in 2007;
E j, ∂ - 1 refers to J Company’s actual EPS in 2006
- Rate of return’s Definition
According to the many researchers, the expectation of the Chinese stock market is not strong on the accounting earning, and that is the reason it is not able to be compared with the mature capital stock markets. For example The US Stock market. Yulong, Z (1998) indicates that the effect of the ‘good news’ of the China stock market mainly happened in the third week before the release of Annual reports of the company. This is due to the companies whose performances has been declined to have the trend of keeping confidentiality, and companies with increasing performance with the trend of actively disclosing information.
Here with, the paper is going to define the 16transaction dates, which is (-5, +10), and the discloser of the financial information is 0. If the disclosure date is not the date of transaction, the transaction date of the disclosure date is 0 as shown below: the formula of the non-expected rate of return of the stock as it is shown below:
AR j, t = R j, t - ER j, t (j = 1, 2, 3 ……. 36; t = -5, -4 …… +10) (4-3)
In which,
AR j, t refers to the non-expected rate of return of J stock at t transaction date;
R j, t refers to the actual rate of return of J stock at t transaction date;
ER j, t refers to the expected rate of return of J stock at t transaction date.
So does the formula of cumulative non-expected rate of return is shown as below:
CAR j = ∑AR j, t (4-4)
4.2.2 Statistic Tests
- Analysis of the General check
First of all, we will be conducting the descriptive statistics test on the samples, to gain more and more basic characteristic of the sample data.
Table 4-14
Descriptive Statistics on Non-expected Accounting Earnings (UE)
And
Cumulative Non-expected Rate of Return (CAR) at the end of 2007
Table above, indicates that, UE has been divided in two groups, (1) UV+ (which is the good news group) and (2) UV- (which is the bad news group).
The ‘good news’ indicates that the non-expected accounting earnings are positive, means the EPS in year 2007 was more than EPS in year 2006. On the other hand ‘bad news’ indicates reverse. Here, CAR refers to the non expected rate of return of the A-shares of the companies takes as sample (-5, +10) in year 2007.
We will be conducting a regression analysis, which will be based on the model 4-1 as shown below:
Table 4-15
Outcome of the Regression Analysis
The table above, indicating that the goodness of fit of the equation based on CAS is 5.7%, F-values is 3.096 and P-value is 0.087; Under IFRS it is 7.8%, F-value is 3.695 and the 0.055. Therefore, it shows that this regression analysis is both meaningful. Also, there are two factors of the
∂1 non-expected accounting earning, which both are more than 0, therefore the statistical test is very much significant. Also in the statistic test, it proves that the there is a co relation between the both non-expected accounting earning in A-shares markets based on CAS & IFSR during the 16 transaction dates around with the disclose information date of the annual report. The equation below will be showing the relation between non-expected earning and non-expected rates of return based on CAS.
Y = -0.008 + 0.026 X1 + ε (4-5)
The relationship between non-expected accounting earnings and non-expected rate of return under IFRS is
Y = -0.008 + 0.029 X2 + ε (4-6)
X1 refers to the non-expected accounting earnings under CAS, and X2 refers to the non-expected accounting earnings under IFRS.
- Analysis of Grouping Check
Firstly we will classify the companies taken as sample into the 6 groups, such as ‘good news’ based on CAS, ‘bad news’ under CAS, ‘good news’ under IFRS, ‘good news’ under CAS & IFRS, and ‘bad news’ under CAS & IFRS, groups.
Secondly, we will calculate the cumulative non-expected rate of return under (-5, +10) according to the all groups, separately, as we can see if in the table below:
Table 4-16
Descriptive Statistics on Cumulative Non-expected Rate of Return Under 6 Different Groups
CAR + is referring to the positive non-expected rate of return of the sample companies and CAR- is referring the negative. The table above indicates that there are 5 sample companies which is ‘good news’ under CAS but ‘bad news’ under IFRS; and only one Sample Company which is ‘good news’ under IFRS but ‘bad news’ under CAS. Whether its ‘good news’ group or ‘bad news’ group, all the results of cumulative non-expected rate of returns are negative. Also, we can see that the average of the non-expected rate of return in the ‘bad news’ group is always less than it is in ‘good news’ group, whether it is under CAS or IFRS. These results clearly indicate that in A-share stock market the accounting earning information plays a vital role.
In order to prove it further, we will be doing the regression analysis the samples of both ‘good news’ and ‘bad news’ group as below:
Table 4-17 Outcome of Regression Analysis (1)
We can see from the table above that ‘good news’ group based on CAS and IFRS, both quite meaningless in the regression analysis, but the goodness of fits is quite strong in the ‘bad news’ group, which is 39.3% and 36.1% and that’s why they are quite meaningful in the regression analysis.
We can see the relationship between non expected accounting earning and non-expected rate of return based on CAS by equation below:
Y = 0.006 + 0.054 X1 + ε (4-7)
The relationship between non-expected accounting earnings and non-expected rate of return under IFRS is
Y = 0.010 + 0.057 X2 + ε (4-8)
The more, we had introduced that the non-expected accounting earnings based on CAS and the non-expected accounting earnings based on IFRS these two variables into model (4-1), so we can get a new model (4-9) and conduct the regression analysis again.
CAR j = ∂0 + ∂1UEz, j +∂2UEg, j + ε (4-9)
In which,
Suez, j refers to the non-expected accounting earnings under CAS;
UEg, j refers to the non-expected accounting earnings under IFRS.
Table 4-18
Outcome of Regression Analysis (2)
The table above indicates that the goodness of fit is 41.90% where there are ‘bad news’ based on CAS and IFRS, F-value is 4.972 and P-value is 0.035 which is less than 0.05. So it indicates the regression analysis and the equation below is meaningful.
Y = -0.010 – 0.407 X1 + 0.458 X2 + ε (4-10)
The goodness of fit is 9.6% for ‘good news’ under IFRS and CAS. F-value is 3.275 and P-value is 0.081 which is less than 0.01 when we are considering CAS and IFRS, so the regression analysis is meaningful so does the equation below is:
Y = -0.017 – 0.148 X1 + 0.162 X2 + ε (4-11)
For the conclusion, we can notice from the empirical analysis research above, that there is a valuable co relation between the non-expected accounting earning based on CAS and IFRS and ‘good news’ group in the A-share stock market of China. It is necessary for us to disclose the financial information under IFRS as well when we disclose the financial information under CAS.
Chapter 5
“Conclusion and Recommendation”
5.1 Conclusion
With the use of Wilcoxon Matched Pair Rank Test, to analyse the 84 companies taken as samples, from 2002-2007, we are able to conclude that from 2002-2004 the differences between net profit between CAS and IFRS have became significant, and getting less significant from 2005-2007, in other words which means the differences between CAS and IFRS will be narrowed down year by year, in the several years’ of convergence with IFRS. However, after testing the net profit, EPS, net assets, net assets per share and ROE, we can also say that there are still a number of significant differences of the system and contents are there between CAS and IFRS. Which also indicated that the harmonization of CAS with IFRS is still a process and it will need time to convergent entirely with IFRS.
With use of yield compensation method and regression analysis on the instability of the stock price in A-shares stock market of China in 2007, we can also conclude that, in the short term period, there are no differences on the content of financial information between CAS and IFRS, but to disclose the financial information in accordance to both CAS and IFRS would be good for the investors to invest and also good for a stronger the explanation power of financial information. We also can conclude that, although if CAS fully adopts IFRS, it still will not be able to increase the content of financial information, and investors need to consider both financial information in accordance to CAS and IFRS, therefore it is necessary to disclose the financial information under IFRS when the financial information base on CAS is disclosed.
Finally, with help of the contrast analysis and by conducting an empirical research, we can find that there are certain systematic differences between CAS and IFRS. Differences in accounting standards affect both net profit and net assets reporting of listed companies, and also affect net profit more significant way. In some cases, the differences can bring an enormous influence to specific companies (which have been called abnormal samples in this paper). As it’s seen from the trend of change of the past six years, the influence on financial information disclosure has weakened, which indicates that the differences between CAS and IFRS have been narrowed down, and that net profit calculated with CAS is becoming more and more prudent than IFRS. The conclusion indicates that the China has made a remarkable performance towards the globalization of accounting standards through the continuous reform. And also indicates that CAS is moving towards IFRS.
5.2 Recommendations
As the recommendation, the paper would like to suggest that harmonization doesn’t indicate there is no difference. The difference exist their objective, although it is changing and to certain extent it will be narrowed down continuously. However, we need to view the difference in a scientific way. At the same time, we should also treat the different differences in the different way: for temporary differences, we should take the accept mechanism as EU; for permanent differences, corresponding supporting system need to be constructed. In addition, the efforts from both sides are equally needed towards the international harmonization of the accounting standards. We should communicate with, learn from and accept each others constantly.
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