Comparative Accounting - China & India

7/30/2019 Comparative Accounting - China & India

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Gurmeet Singh (2556)

Madhur Malik (2557)

Mehak Sharma (2558)

Phuntsog Galex (2559)


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CHINA


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History of Accounting in China Accounting in China has a long history. It can be detected as far back as 2200 B.C.

during the Hsiu Dynasty, and documents show that it was used to measure wealthand compare achievements among dukes and princes in the Xia Dynasty (2000 to1500 B.C.).

The principal characteristics of accounting in China today date from the found- ing

of the Peoples Republic of China in 1949. China installed a highly centralizedplanned economy, reflecting Marxist principles and patterned after the system inthe Soviet Union.

The state controlled the ownership, the right to use, and the distribution of allmeans of production, and enacted rigid planning and control over the economy.Production was the top priority of state-owned enterprises. Their sales and pricing

were dictated by the states planning authorities, and their financing and productcosting were administered by the states finance departments.

The purpose of accounting was to serve the needs of the state for economicplanning and control. A uniform set of standardized accounts was developed tointegrate information into the national economic plan. The uniform accountingsystem contained all-inclusive accounting rules that were mandatory for state-owned enterprises across the country.


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Cont. Financial reporting was frequent and detailed. Financial reporting emphasized the

balance sheet, which reflected the source and application of funds.

Focused on stewardship and accountability, or the fulfilling of production and othergoals, as well as compliance with governmental policies and regulations.

Accounting emphasized counting quantities and comparing costs and quantities.Although accounting focused more on managerial than financial objectives, its rolein decision-making by the managers of individual enterprises was neverthelesssubordinated to the central authorities.

The recent economic reforms involve privatizations, including the conversion ofstate-owned enterprises into share-issuing corporations. New accounting rules havehad to be developed for newly privatized companies and other independent limited

liability companies, as well as for foreign business entities, such as joint ventures.The role of the government has been changing from managing both the macro- andmicro economy to one managing at the macro level only. Accounting standards

were needed to reflect this new reality.


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Cont. The Ministry of Finance, supervised by the State Council, formulates

accounting and auditing standards.

Besides accounting and auditing matters, the ministry is responsible

for a wide range of activities affecting the economy. Generally, theseactivities include formulating long-term economic strategies andsetting the priorities for the allocation of government funds.

More specifically, the ministrys responsibilities include:

1. formulating and enforcing economic, tax, and other finance-related

policies.2. preparing the annual state budget and fiscal report

3. managing state revenue and expenditure

4. developing the financial management and tax system


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Cont. In 1992 the Ministry of Finance issued Accounting Standards forBusiness Enterprises (ASBE)- a conceptual framework designed toguide the development of new accounting standards that wouldeventually harmonize domestic practices and harmonize Chinesepractices with international practices.

The ASBE was a landmark event in Chinas move to a market economy.Before the ASBE, more than 40 different uniform accounting systems

were in use, varying across industries and types of ownership.Although each one of these could individually be labeled as uniform,taken together they resulted in inconsistent practices overall. Thus, onemotive for issuing the ASBE was to harmonize domestic accounting

practices. Moreover, existing practices were incompatible withinternational practices and unsuited for a market-oriented economy. After the issuance of the ASBE, the Ministry of Finance replaced the

more than 40 uniform accounting systems mentioned previously with13 industry-based and two ownership-based accounting systems. Thesesystems were viewed as transitional until specific accounting standardscould be promulgated that would apply to all enterprises operating inChina. A revised ASBE was issued in 2001.


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Cont. The China Accounting Standards Committee (CASC) was established in 1998 as the

authoritative body within the Ministry of Finance responsible for developing accountingstandards.

The standard-setting process includes assigning necessary research to task forces, the issuanceof exposure drafts, and public hearings.

CASC began issuing standards on such issues as the cash flow statement, debt restructuring,revenue, nonmonetary transactions, contingencies, and leases. All of these standards wereaimed at converging Chinese accounting standards with International Financial ReportingStandards.

Finally, in 2006, a new set of Accounting Standards for Business Enterprises was issued. Thisnew ASBE consists of one basic ASBE and 38 specific ASBE.

The basic standard established the framework, and the specific standards set out broadprinciples and detailed implementation guidance on such areas as fixed and intangible assets,inventories, leases, income taxes, consolidations, and segment reporting. Together theyrepresent a comprehensive set of Chinese accounting standards that are substantially in line

with IFRS. The new ASBE applies to all Chinese companies (except small ones), phasing outthe industry and ownership standards referred to above.

Forty-eight new auditing standards, similar to the International Standards on Auditing issued

by the International Auditing and Assurance Standards Board, were issued at the same time.All Chinese accounting firms and CPAs are required to follow these audit standards.


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Chinas Accounting Standards for Business

EnterprisesBasic Standard General provisions: stewardship, economic decision making,

going concern, accrual basis.

Qualitative requirements of accounting information:

faithful representation, relevance, understandability,comparability, substance over form, prudence.

Definitions of elements: assets, liabilities, owners equity,revenue, expenses, profit.

Accounting measurement: Generally, historical cost; if

elements are measured at replacement cost, net realizable value,present value, or fair value, the enterprise shall ensure that suchamounts are available and can be reliably measured.

Financial reports: balance sheet, income statement, cash flowstatement, and notes.


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FINANCIAL REPORTINGThe accounting period is required to be the calendar year.

Financial statements consist of:

1. Balance sheet

2. Income statement3. Cash flow statement

4. Statement of changes in equity

5. Notes


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Financial Reporting (Continued) Additional statements are required disclosing asset impairments, changes

in capital structure, appropriations of profits, and business andgeographical segments.

The notes include a statement of accounting policies which discusses

matters as contingencies, important post-balance sheet events, andrelated-party transactions.

A management discussion and analysis is required discussing theenterprises operations, financial position, results, cash flows, and itemsaffecting them.

Financial statements must be consolidated, comparative, in Chinese, and

expressed in the Chinese currency, the renminbi. The annual financialstatements must be audited by a Chinese CPA.

Listed companies must assess their internal controls and engage anexternal auditor to evaluate the controls and comment on the self-assessment report.


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Chinese Culture through Hofstede Model


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Power distanceThis dimension deals with the fact that all individuals in societies are notequal it expresses the attitude of the culture towards these inequalities

amongst us.Power distance is defined as the extent to which the lesspowerful members of institutions and organisations within a

country expect and accept that power is distributed unequally.

At 80 China sits in the higher rankings of PDI i.e. a society that believesthat inequalities amongst people are acceptable. The subordinate-

superior relationship tends to be polarized and there is no defense againstpower abuse by superiors. Individuals are influenced by formal authorityand sanctions and are in general optimistic about peoples capacity forleadership and initiative. People should not have aspirations beyond theirrank.


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IndividualismThe fundamental issue addressed by this dimension is the degree ofinterdependence a society maintains among its members. It has to do

with whether peoples self-image is defined in terms of I or We.InIndividualist societies people are supposed to look after themselves and theirdirect family only. In Collectivist societies people belong to ingroups thattake care of them in exchange for loyalty.

At a score of 20 China is a highly collectivist culture where people act in theinterests of the group and not necessarily of themselves. In-groupconsiderations affect hiring and promotions with closer in-groups (such asfamily) are getting preferential treatment. Employee commitment to theorganization (but not necessarily to the people in the organization) is low.

Whereas relationships with colleagues are cooperative for in-groups they arecold or even hostile to out-groups. Personal relationships prevail over taskand company.


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Masculinity / FemininityA high score (masculine) on this dimension indicates that the society will be driven bycompetition, achievement and success, with success being defined by the winner / bestin field a value system that starts in school and continues throughout organisationalbehaviour.

A low score (feminine) on the dimension means that the dominant values in societyare caring for others and quality of life. A feminine society is one where quality of life isthe sign of success and standing out from the crowd is not admirable. The

fundamental issue here is what motivates people, wanting to be the best(masculine) or liking what you do ( feminine).

At 66 China is a masculine societysuccess oriented and driven. The need to ensure

success can be exemplified by the fact that many Chinese will sacrifice family andleisure priorities to work. Service people (such as hairdressers) will provide servicesuntil very late at night. Leisure time is not so important. The migrated farmer workers

will leave their families behind in faraway places in order to obtain better work and payin the cities. Another example is that Chinese students care very much about theirexam scores and ranking as this is the main criteria to achieve success or not.


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Uncertainty avoidanceThe dimension Uncertainty Avoidance has to do with the way that a society deals withthe fact that the future can never be known: should we try to control the future or justlet it happen? This ambiguity brings with it anxiety and different cultures have learnt

to deal with this anxiety in different ways. The extent to which the members of aculture feel threatened by ambiguous or unknown situations and have createdbeliefs and institutions that try to avoid these is reflected in the UAI score.

At 30 China has a low score on uncertainty avoidance. Truth may be relative though inthe immediate social circles there is concern for Truth with a capital T and rules (butnot necessarily laws) abound. None the less, adherence to laws and rules may beflexible to suit the actual situation and pragmatism is a fact of life. The Chinese arecomfortable with ambiguity; the Chinese language is full of ambiguous meanings thatcan be difficult for Western people to follow. Chinese are adaptable andentrepreneurial. At the time of writing the majority (70% -80%) of Chinese businessestend to be small to medium sized and family owned.


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Long term orientationThe long term orientation dimension is closely related to the teachings ofConfucius and can be interpreted as dealing with societys search for virtue,the extent to which a society shows a pragmatic future-oriented

perspective rather than a conventional historical short-term point ofview.

With a score of 118 China is a highly long term oriented society in whichpersistence and perseverance are normal. Relationships are ordered by statusand the order is observed. Nice people are thrifty and sparing with resourcesand investment tends to be in long term projects such as real estate.Traditions can be adapted to suit new conditions. Chinese people recognizethat government is by men rather than as in the Low LTO countries by anexternal influence such as God or the law. Thinking ways focus on the full orno confidence, contrasting with low LTO countries that think in probabilistic

ways.


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History & Background

India has 17 percent of the worlds population, the second most populousnation in the world after China.

India is also one of the most ethnically diverse countries in the world. From 1947 to the late 1970s, the Indian economy was characterized by central

government socialist-style planning and import-substitution industries. Economic production was transformed from primarily agriculture, forestry,

fishing, and textile manufacturing to various heavy industries andtransportation.

However, the lack of competition contributed to poor product quality andinefficiencies in production.

Facing an economic crisis, the government began opening up the economy in1991.

The market-oriented economic reforms adopted since then include theprivatization of some state-owned industries, liberalized foreign investmentand exchange regimes, reductions in tariffs and other trade barriers, reformand modernization of the financial sector, significant adjustments ingovernment monetary and fiscal policies, and safeguarding intellectualproperty rights.


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History & Background

However, a large proportion of heavy industry is still state-owned, and high tariffsand limits on foreign direct investment are still in place.55 The services sector hasproved to be Indias most dynamic sector in recent years, with telecommunicationsand information technology recording particularly rapid growth

Future economic growth is constrained by an inadequate infrastructure, acumbersome bureaucracy and red tape, labor market rigidities, and corruption.

The lack of reliable and affordable infrastructure, especially roads and electricity, isviewed by many as the single most important brake on future growth.

Red tape also imposes heavy costs on business in many parts of the countryforexample, in bribes paid to inspectors.57 Finally, labor laws impose extra costs.58

The reforms that began in 1991 have cut away bureaucratic controls and encouragedthe creation of a more competitive marketplace.

Most observers agree that further reforms and additional investment ininfrastructure are needed to make India a leading economic player, but as noted atthe beginning of this chapter, the same observers are optimistic about Indiasgrowth prospects.


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ACCOUNTING REGULATION AND

ENFORCEMENT

The British influence extends to accounting: Financial reporting is aimed at fairpresentation, and there is an independent accounting profession that setsaccounting and auditing standards.

The two major sources of financial accounting standards in India are companies lawand the accounting profession. The first companies act was legislated in 1857, andthe first law relating to the maintenance and audit of accounting records wasenacted in 1866, along with the first formal qualifications of auditors. Both werebased on British law.

The current Companies Act 1956 is administered and updated by a governmentagency, the Ministry of Company Affairs. The act provides a broad framework forkeeping so-called books of account and the requirements for an audit. According tothe act, books of account

must give a true and fair view of the state of affairs of the company

must be kept on an accrual basis according to the double-entry system ofaccounting.


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ENFORCEMENT The act requires an audited balance sheet and profit and loss account,

approved by the board of directors.59 An accompanying directors report mustaddress the state of affairs of the company, its material commitments,recommended dividends, and other information necessary for understandingthe nature of the companys business and subsidiaries.

The Institute of Chartered Accountants of India (ICAI), established in 1949,regulates the profession of chartered accountancy and is responsible fordeveloping both accounting and auditing standards.

Its Accounting Standards Board issues Indian Accounting Standards (AS), andits Auditing and Assurance Standards Board issues Auditing and AssuranceStandards (AAS).

AS have statutory authority, and AAS are mandatory for the practice ofauditing. The institute is supervised by the Ministry of Company Affairs. In

2007, the ICAI announced that it will adopt IFRS in 2011.


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ENFORCEMENT

There are 22 stock exchanges in India, the oldest of whichis the Mumbai (Bombay) Stock Exchange, established in1875 and now listing more than 6,000 stocks.

The regulatory agency that oversees the functioning ofstock markets is the Securities and Exchange Board ofIndia (SEBI), an agency of the Ministry of Finance

established in 1988 and given statutory authority in 1992.In general, the accounting and disclosure requirements forlisted companies are similar to those in the AS.


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FINANCIAL REPORTING

Financial statements consist of two-year balance sheets, income statements,cash flow statements, and accounting policies and notes.

Companies that are not listed are only required to prepare parent-onlystatements, but listed companies must prepare both consolidated and parent-only statements. Neither a statement ofshareholders equity nor a statement of

comprehensive income is required.

Financial statements must present a true and fair view, but there is no true andfair override as there is in the United Kingdom. As noted above, the CompaniesAct requires that a directors report accompany the financial statements.

Companies listed on a stock exchange must also provide a managementdiscussion and analysis covering such topics as the industry structure anddevelopment, opportunities and threats faced by the company, internalcontrols, and risks that affect the performance of business segments orproducts. Listed companies must also provide interim financial results on a

quarterly basis.


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ACCOUNTING MEASUREMENTS Translation of the financial statements of a foreign operation depends on whether it

is integral or nonintegral to the operations of the reporting (parent) entity.

For integral foreign operations, monetary assets and liabilities are translated at theclosing (year-end) exchange rate, nonmonetary items carried at historical cost aretranslated at the exchange rate at the date of the transaction, and nonmonetaryitems carried at fair value are translated at the exchange rate when fair value wasdetermined.

Income statement amounts are translated at the exchange rate on the date oftransaction or weighted average rate for the period. Exchange differences arereported in income.

Assets and liabilities of nonintegral foreign operations are translated at the closingexchange rate, income and expense items are translated at the exchange rates at thedates of the transactions, and the resulting exchange difference is accumulated in aforeign currency exchange reserve on the balance sheet. AS have no provisions forsubsidiaries in hyperinflationary economies.


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ACCOUNTING MEASUREMENTS

Fixed assets are valued at either historical cost or revalued (fair) value.Revaluations must be applied to the entire class of fixed asset, butthere is no requirement that revaluations be performed at regularintervals.

Depreciation is allocated on a systematic basis over the life of the asset.If assets are revalued, depreciation is based on the revalued amount.Intangible assets are normally amortized over no more than 10 years.

Internally generated goodwill or other intangibles (e.g., brand names)

are not recognized as assets. Research costs are expensed as incurred,but development costs may be deferred if the technical feasibility ofthe product or process has been demonstrated and the recoverability ofthe costs is reasonably certain. Inventory is valued at the lower of costor net realizable value. FIFO and average are acceptable cost-flowmethods.


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Power Distance

Power distance is defined as the extent to which the less powerfulmembers of institutions and organizations within a country expect andaccept that power is distributed unequally.

India scores high on this dimension, 77, indicating an appreciation forhierarchy and a Top Down Structure in society and Organizations.

If one were to encapsulate the Indian attitude, one could use thefollowing words and phrases : dependent on the boss or the power

holder for direction, acceptance of un-equal rights between the power-privileged and those who are lesser down in the peckingorder, immediate superiors accessible but one layer above less so,paternalistic leader, management directs, gives reason / meaning toones work life and rewards in exchange for loyalty from employees.


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Individualism

In Individualist societies people are supposed to look afterthemselves and their direct family only. In Collectivistsocieties people belong to ingroups that take care of them inexchange for loyalty.

India, with a score of 48 is a society with clear collectivistictraits.

This means that there is a high preference for belonging to alarger social framework in which individuals are expected toact in accordance to the greater good of ones defined in-group(s).


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Masculinity / Feminity

A high score (masculine) on this dimension indicates that thesociety will be driven by competition, achievement and success,

with success being defined by the winner / best in field a valuesystem that starts in school and continues throughoutorganizational behavior.

India scores 56 on this dimension and is thus considered amasculine society.

Even though it is mildy above the mid range in score, India isactually very masculine in terms of visual display of success andpower. The designer brand label, the flash and bling that goes

with advertising ones success, is widely practiced.


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Long term orientation

The long term orientation dimension is closely related to the teachingsof Confucius and can be interpreted as dealing with societys search for

virtue, the extent to which a society shows a pragmatic future-orientedperspective rather than a conventional historical short-term point of

view.

The Indians score 61, making it a long term, pragmatic culture. In Indiathe concept ofkarma dominates religious and philosophical thought.Time is not linear, and thus not as important as to western societies

which typically score low on this dimension

Societies that have a high score on Long Term Orientation, typicallyforgive lack of punctuality, a changing game-plan based on changingreality and a general comfort with discovering the fated path as onegoes along rather than playing to an exact plan.


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Grays Framework

Drawing on Hofstedes analysis, Gray proposed a framework linking culture andaccounting. He suggests that four accounting value dimensions affect a nationsfinancial reporting practices. They are :

Professionalism vs. Statutory control: A preference for the exercise ofindividual professional judgment and professional self-regulation, as opposed

to compliance with prescriptive legal requirements.

Uniformity vs. Flexibility: A preference for uniformity and consistency overflexibility in reacting to circumstances.

Conservatism vs. Optimism: A preference for a cautious approach tomeasurement to cope with the uncertainty of future events instead of a moreoptimistic, risk taking approach.

Secrecy vs. Transparency: A preference for confidentiality and the restrictionof business information on a need-to-know basis versus a willingness to

disclose information to the public.


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Interpretation In case of India, the scales seem to be heavier in favor of Statutory control

than Professionalism because of its the appreciation of hierarchy in Indiaand its collectivistic traits

Indian sensibilities seem to bend more towards flexibility than uniformityas is clear with a higher score on LTA which implies that we are comfortable

with a changing game-plan based on changing reality and a generalcomfort with discovering the fated path as one goes along rather thanplaying to an exact plan. Also we score low on uncertainty avoidance whichshows our acceptance of imperfection and deviation from planned path.

We are a fairly optimistic society given our low score on uncertaintyavoidance parameter and a high one in long term orientation

Since we score high on power distance and are a fairly masculine society itcan be safe to say that we prefer secrecy to transparency. We are okay withtop management dispensing news as and when they do and are willing to

conceal information if it helps us getting a step ahead of the competition.


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India China

Power Distance 77 80

Individualism 48 20

Masculinity 56 66

Uncertainty Avoidance 40 30

Long Term Orientation 61 118

Scores for India and China


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Convergence of Indian Accounting


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Convergence of Indian Accounting

Standards and IFRS

Indias convergence with IFRS means that Indian AccountingStandards (AS) and the International Financial ReportingStandards (IFRS) would, over time, continue working together to

develop high quality, compatible accounting standards. Advantages of convergence

Improves investor confidence across the world withtransparency and comparability

Improves inter-unit/ inter-firm/inter-industry comparison

Group consolidation made easy with same standard by allcompanies in group wherever located

Acceptability of financial statements across all stockexchanges, which facilitates entry of any Indian company to

any stock exchange across the globe

H th f


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However there are a few

challenges along the way too..

Training of accounting professionals to adapt to the newstandards

Changes required in accounting software and

information technology systems

Issues related to different legal and regulatoryrequirements

Conversion to Ind-AS or IFRS entails more than merelychanging accounting policies, and companies will needto carefully assess the readiness of their financialreporting systems and the potential business impactbefore making the change.


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Thank You !!!

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Comparative Accounting - China & India