ICAS General News

Accounting For Change – The Future of Financial Regulation for Foreign Invested Firms In China

Chinese regulators should continue to phase out preferential treatment offered to foreign invested firms. That’s one of the main conclusions in the ICAS published research report ‘Regulating Accounting in Foreign Invested Firms in China : From Mao to Deng’.

The report, by Cardiff University ’s Mahmoud Ezzamel and Jason Zezhong Xiao, traces the development of accounting regulation in China during the Mao and Deng eras, and examines the implications of how current and future Chinese accounting regulation could affect foreign invested firms working in the world’s fastest growing economy.

The report finds that state-ownership still has an important influence on the organisation and development of accounting standards. Of direct relevance to foreign direct investment and accounting for foreign invested firms is the tension between domestic firms and foreign firms - discriminating tax regulations are perceived to favour foreign firms. Finally, wholly-foreign-owned large multi-national corporations competing against weaker and smaller domestic firms, are becoming a major concern.

The authors find that Chinese regulators have taken significant steps to reform Chinese accounting standards in line with International Financial Reporting Standards (IFRS).  However, due to China ‘s specific culture and context, including a lack of well-developed markets for some assets, there are still some discrepancies between the Chinese standards and IFRS.  Chinese regulators view harmonisation between Chinese GAAP and IFRS as a two-way process that should permit differences and local innovation.

Commenting on the findings of the report, ICAS Executive Director, Technical Policy, David Wood said, “In the light of China’s cultural characteristics and the state of its economic and market development, the international community should recognise the difficulty for China in complying with aspects of IFRS. However, it is economically desirable that China , as the country with the largest amount of foreign investment in the world, harmonises accounting regulation to match international standards as far as possible. Chinese regulators have done a great deal already to achieve that.”