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New accounting rules may prompt big profits
By Zhang Ran (China Daily)
Updated: 2006-02-17 08:31
With the adoption of new accounting rules, domestic-listed companies are
expected to disclose a 20 billion yuan (US$2.5 billion) profit surplus in their
2006 results.
China Securities News reported yesterday that listed companies' 2006 annual
financial performances would probably result in a combined US$2.5 billion profit
increase due to the new accounting rules that focus more on a firm's current
operating business rather than unusual gain and loss.
The rules, released by the Ministry of Finance (MOF) on Tuesday and formally
effective in January 2007, have been revised to reflect international standards
of companys' accounting and auditing practices.
The new standards, which ask firms to record gains from non-cash equity trade
into annual profit account, will probably garner a combined 7.5 billion yuan
(US$926 million)'s profit surplus to domestic-listed firms, the newspaper said.
A company can also record its gains from exempted debt into current profit, a
move that will probably earn domestic-listed firms a combined 6.3 billion yuan
(US$777 million) in profit.
Other regulations on asset provisions and expenses will also likely have a
large effect on the firm's profit result, bringing an estimated 6.2 billion yuan
(US$765 million) profit surplus.
"Investors should pay careful attention to a firm's profit changes at the
turning point. Some listed firms used to manipulate profit with the existing
rules," Shen Guoquan, member of Public Offering Review Committee with China
Securities Regulatory Commission, told China News Securities.
"The new accounting rules will make listed companies' financial report more
real and objective. Space to manipulate financial reports will surely shrink,"
Shen said.
The Shanghai-based newspaper also reported that foreign investors' confidence
in the A shares will increase with the issue of the new accounting and auditing
rules, quoting Cai Hongping, head of the investment bank, BNP Paribas
Peregrine's Asia department's comments.
"In the A share market, we used to choose stocks of those listed firms who
also issue H shares or B shares, because under that situation, those firms'
financial reports are disclosed under the requirement of international
standards, which are more reliable to us," Cai told the newspaper.
"But now since China's accounting and auditing standards are more in line
with international standards, investors will soon see an unified financial
report with one public company, " Cai added.
The issuance of the news rules has also affected professional accounting
service industry.
Industry professionals widely believe the rules will further improve listed
companies' transparency and increase investors' confidence in the capital
market. PricewaterhouseCoopers (PwC), the world's largest accounting firm,
commented on the rules as a "revolution."
"The word 'revolution' can indeed portray what will happen as China's
accounting and auditing standards undergo fundamental change and Chinese
companies make preparations to adopt these new standards over the next year,"
the firm said yesterday.
"There is no question that the convergence of China Auditing Standards (CAS)
with International Financial Reports Standards (IFRS) represents a significant
milestone in the development of China's financial markets," said Yvonne Kam,
director of PwC Assurance Practice.
"Transparent financial reporting is the foundation of investor confidence and
China's bold initiative here will enable a broader base of investors to consider
investment in more Chinese companies."
There will, however, continue to be a small number of differences between the
revised CAS and IFRS to reflect unique circumstances in China.
"Although the new CAS, due to consideration of factors specific to the
Chinese environment, still comprise certain differences with IFRS, these
differences do not hinder the formulation of a comprehensive framework of
Chinese accounting standards," Baolang Chen, a PwC partner, said. "In effect, it
will replace the currently rules and become the basis of preparation for all
financial reporting."
(China Daily 02/17/2006 page11)
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