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Part A: Usefulness of IFRS for sustainable reporting

Discuss about the Accounting Theory and Contemporary Issues for Utopian Sustainable Accounting.

This report aims to provide an insight into the benefits of IFRS in sustainability reporting by an organization. IFRS are the global standards, which are necessary for creating a sound and sustainable financial reporting system across the business world. A sustainable reporting is required by internal as well as external stakeholders of a company in order to evaluate its overall performance. The report incorporates a literature review to summarize and clarify the importance of adopting IFRS framework for an organization. A brief description of current and potential uses of accounting standards in China has also been included. Finally, the report presents with a brief conclusion about the use of IFRS across the world in order to meet modern business needs.

Part A

Usefulness of IFRS for sustainable reporting:

According to Bensadon and Praquin (2016), IFRS (International Financial Reporting Standards) refers to a single set of accounting standards, which has been recognized as a common global language by IASB (International Accounting Standards Board) in today’s business era. Sustainable reporting refers to a form of organizational report, which communicates necessary information about the social, economic, environmental, and corporate activities and policies of business to its users. Few years before, companies used to produce sustainability report, using their own made standards, due to which the users found it difficult to make comparison of a company with another one across the borders and jurisdictions. In the view of Ramin and Reiman (2013), whether an organization is small or large, IFRS helps them by providing key global guidelines so that they can make and provide sustainable report easily. In today’s modern corporate world, the need of sustainability reporting has become a major issue for the organizations. In 21st century, people usually want to do business with the companies if the financial statements of that company are reliable and designed using IFRS framework. Because, there comes various legal hurdles in the implementation of sustainable reporting, IFRS designs a widely used framework to assist companies in the preparation of sustainability reports and required disclosures to create value for existing and potential users.

The management and the government of countries need to invest more and more time and resources on issue of sustainability. Traditionally, financial reporting of most of the companies was used to be influenced by the limitation of time and resources, along with unpredictable changes and emergence of new standards. Over the recent years, many companies around the world have taken a move towards IFRS framework and experienced its advantages for the future success of their business. IFRS enables an organization to deliver other benefits in its reporting system like financial transparency, reliability, high quality, great speed and accuracy. In support of this, Sisaye (2015) states that acceptance of these standards brings process efficiency, consistency, and comparability in sustainability report preparation of a company and develops confidence and trust among its management and stakeholders. Sustainability reporting is useful not only for the users, but also for the entire organization, as it increases its productivity and improves all over performance and reputation of the organization. Companies around the world, now try to fill the difference between their reporting standards and sustainable data by using IFRS practices.

Part B: Evolution of Accounting Standards in China


Adoption of IFRS framework minimizes accounting compliance cost of a firm because the framework is concise than GAAP. IFRS also provides some exceptions which eliminate confusion and conflicts among various organizations while comparing their financial statements. As per James (2015), IFRS is mainly based on principles rather than rules, which facilitates the organization to arrive at reasonable valuation. It proves to be more flexible so that company owners can modify it according to their business situations. Moreover, IFRS system is free from any legal or other national constraints and interventions. Fox et al (2013) also depicts that IFRS enables the companies to report a more clear and understandable picture of a business to its users. The framework also facilitates the management and external auditors to deliver professional judgement on the basis of sustainability report of the company. A better understanding of risks and opportunities of a business can be easily gained by IFRS framework used in sustainable report. In support of this, Dumay (2016) portrays that the sustainable report can further help the management in designing long-term business strategy and policy and business plan. IFRS allows the companies to establish a positive relationship between financial and non-financial performance of a business.

IFRS brings harmonization in accounting standards applied by companies worldwide for minimizing errors, so as to enhance company’s credibility and reliance of stakeholders. Implementation of IFRS results in reducing cost of capital and raising market liquidity by lowering transaction costs for the investors of a company. It also facilitates extensive capital formation and cash flows on the global level. Greatest economic benefits are achieved by the countries, where IFRS framework is adopted, as it increases market value of shares.  Sustainable reports produced by companies using IFRS framework, improves perception of society towards the companies. Apart from this, the framework also allows improvements in culture and technological sustainability of a company.

In addition to this, Atkins (2015) states that implementation of IFRS facilitates full disclosure of material accounting information in the financial statements and allows trading based on private information to a large extent. It has been observed over the last few years that cost of equity is relatively low for weak institutional infrastructural companies which adopt IFRS practices and thereby, results in lower cost of borrowing equity capital. In support of this, Kaya, and Koch 2015) depicts that sustainable report enables a company to assess its own operations and competitive benchmarking. Since the banking crisis, IFRS has gained more significance in the sustainable reporting of companies, particularly in those, where business assets and liabilities are required to be measured on fair value. It has been observed that many companies around the world don’t want to spend on introducing their own standard-setter bodies, so they take a long-term move towards IFRS adoption. Also, Tan et al (2016) examined that the internal politics of companies has influenced their decision to adopt IFRS framework, instead of their domestic standards. Efficiency of capital markets can be increased by harmonization of accounting standards through IFRS. Most of the companies which operate in a country where foreign trade is considered as an important part are expected to adopt IFRS practices, in order to increase their share of foreign capital.

A move towards International Standards

Evolution of Accounting Standards in China:

The role and significance of accounting standards cannot be overlooked in developing the economy of China. Chinese accounting standards have been proven to be a milestone in the history of Chinese accounting structure, since 1990s. In the history of Chinese accounting, accounting practices have found their root from the Maoist ideology. After 1990, People’s Republic of China came into being, which marked an emergence of a new phase of Chinese accounting. Accounting in the context of budgetary management, and capital accounting has analysed the sociological conditions of Chinese economic structure (Chen et al., 2014). Accounting standards in China has extended its application to bookkeeping and capitalism. The development of accounting standards has influenced both cultural and environmental aspect of China. It also resulted in a significant contribution to the adoption of International Accounting Standards. Thus, China has experienced a historic evolution of accounting standards which can be seen in the writings and actions of Confucius philosophers of China. The philosophers contended that accounting must be proper in order to prepare and present sustainable reporting. One of the main characteristics of which led to the popularity of Chinese accounting standards was the evolution of bookkeeping by Chinese companies (Xu et al., 2014). Also, an increased innovation in the styles of bookkeeping changed the social and cultural traditions of accounting in China. In 20th century, Ministry of finance of China had announced listing of more than 1000 companies to be listed on the Shenzhen and Shanghai stock markets in order to come closer with International Accounting Standards.

A move towards International Standards:

In 1980, a significant transformation took place in Accounting Society of China. More liberal economic policies were developed by the government of China in order to take the economy towards a market-oriented economy from a socialist economy. With the increased number of foreign companies, most of the companies started to operate their business in China through joint ventures and other forms of mergers. Later in 1993, in order to bring harmonization and uniformity, many accounting standards of China were integrated with International Accounting Standards (Li, and Guo, 2016). The Ministry of Finance, then also declared that all small and medium enterprises need to incorporate newly developed accounting standards into their existing accounting principles. It was declared so as to minimize or completely eliminate inconsistency of different accounting principles used by different companies and to enable companies to produce more reliable and sustainable reports. Again in 2006, the Ministry of Finance of China issued a series of revised accounting standards for business enterprises, which had a positive impact on market economy of China. These standards were introduced in the light of socio-legal factors and macro-economic approach of the country.   

Uses of Accounting Standards in China:

There does not exist any universal standard on sustainability reporting. Different countries issue their own accounting standards framework, suiting their economy. In China, all enterprises have to prepare their financial statements using Chinese Accounting Standards (CAS). The CAS structure is generally based on Accounting Standards for Business Enterprises (ASBE). An important characteristic of ASBE is that it is very much similar to IFRS (Noronha et al., 2013). This similarity provides CAS a chance to come closer to International Accounting Standards in order to provide sustainable reporting.  Because, Chinese Accounting Standards are evaluated in a period when China was the only owner of the industry, these standards are peculiar in nature. However, when it had changed to a market economy, a need of high-quality accounting report was aroused. In order to attract new foreign investors and foreign capital, new accounting standards were developed. In 2006, a new accounting standard 38 was incorporated in Chinese accounting standards to ensure sustainable reporting (Ieng Chu et al., 2012). They were taken from IFRS, which were approved and affirmed by IASB (International Accounting Standards Board).  The new CAS includes every aspect of IFRS, except a few principles which are applied according to Chinese circumstances. It enhances the confidence of foreign investors in Chinese financial market and sustainable reporting.

The main purpose of formulating new accounting standards is to enable the Chinese companies to produce sustainability reports, irrespective of which accounting standard system, the companies adopt. The CAS has changed not only the business results and assets valuation of an enterprise but also the presentation of financial statements. For example, earlier, goodwill was used to be amortised but now, it is tested every year for impairment. Also, minority holdings are put besides equity capital and the cost of development are capitalized. CAS contains guidance that enables individuals working in the field of accounting and finance, to take fair judgements (Marquis and Qian, 2013). Fair value management is also incorporated in new CAS while, in the past historical cost method was generally taken into use as a measurement principle for assets. The new accounting standards in China now, demands enhanced disclosure requirements in order to integrate with IFRS framework. Such disclosures include disclosure of risk and disclosure of methods adopted to assess fair value of financial items. It is a noteworthy fact that both voluntary and mandatory approaches in has led to the enhanced demand of sustainable reporting by the organizations in most of the jurisdictions of China. Moreover, in order to improve corporate responsibility, rapid increase in full disclosure of essential items in financial statements has been noticed.


A major factor that determines the sustainability of financial reporting is its quality. The CAS has also identified other factors such as relevant and faithful presentation of information that determine sustainability of financial reports of a company in order to draw meaningful decisions. The new CAS allows the companies to predict accurate value and business outcomes (Turker and Altuntas, 2014). Higher value relevance in financial reporting now, also forms a part of CAS so as to come in line with IFRS framework. It is observed that in the reform process of accounting system of China, IFRS played an important role by introducing International Accounting practices instead of classifying as per government, ownership, and industry rules. The CAS also issues major guidelines for various industries and has made sustainability reporting mandatory for them. The new structure encourages organizations to disclose all material things that may influence stakeholders’ decisions. It leads to creation of value for in the long-run, in relation to cross-border business dealings. The CAS structure in conformity with IFRS allows a degree of transparency to its users in the business dealings, which can lead to efficient decision-making. ABSE has also increased the disclosure requirements. The fundamental changes in CAS have been aligned with Generally Accepted Accounting Principles (GAAP) of China (Martínez‐Ferrero et al., 2015). The uniformity in the standards promotes active participation of various organizations to positively respond to market situations and also reduces the burden of corporate reporting.

Companies in under-developed regions of China have limited finance facility and so they are required more to disclose important sources of raising debt in financial statements than other companies. Foreign investors find earnings more informative and value-relevant due to incorporation of IFRS framework in Chinese accounting system. The new developments in Chinese Standards have created a need to reform old accounting standards into a modern structure so as to take into account the interests of all stakeholders.

Chinese Accounting Standards can be considered as a small part of IFRS framework. This is because everything contained in IFRS framework is also permitted under Chinese Accounting Standards. However, CAS does not deal with a wide range of other advantages, which can be enjoyed under IFRS structure. Approx 95% of accounting in IFRS is similar in CAS structure which assists businesses to produce sustainable reporting. Chinese Accounting Standards contain more rules so it can be said that it has almost the same standing as US GAAP and lies within IFRS structure (Shan, and Troshani, 2016). The accounting standards in China regularly keep on changing so as to align with principle-based IFRS structure. The foreign investors dealing with Chinese business organizations need to know CAS structure fully so that they can prepare a sustainable reporting for their stakeholders across the world. It includes right interpretation of Chinese accounting principles, adopting suitable methods to incorporate Chinese accounting standards in their country’s accounting structure, and risks and opportunities which are associated with Chinese accounting. Chinese companies whose securities are listed in Stock exchange of Hong Kong usually adopt International Accounting Standards, Hong Kong Financial Reporting Standards along with Chinese Accounting Standards in order to provide sustainable reporting.

ABSE No.33 ‘Consolidated Financial Statements’ was revised on the basis of developments in IFRS. In this new standard, financial statements of investment companies were exempted from being consolidated. Also some special transactions were provided with new guidelines. Similarly ABSE No.40 on ‘Joint Arrangements’ is a newly introduced accounting standard, fully based on IFRS 11, which divided ABSE No.40 into parts, that is joint operation and joint venture (Lee, 2016). According to the new standard joint arrangements are identified and classified on the basis of new requirements and particular accounting standards. A new accounting standard with reference to IFRS structure is also developed, named, ABSE No. 41 ‘Disclosure of Interests in Other Entities’. This accounting standard of China is based on the principles of IFRS 12 – ‘Disclosure of Interests in Other Entities’, which focus on improvement of disclosure of interests in subsidiaries in Chinese accounting standard. The new standard states that organizations preparing both consolidated and individual financial statements should disclose the necessary information in the notes to accounts but these organizations need not to repeat the disclosure of same information in individual financial statements (Cheng, and Kung, 2016). Adoption of new accounting standards in China will definitely bring good opportunities and benefits for Chinese companies. This is because the Chinese companies will be able to produce sustainable reports in the same way as other foreign companies around the world produce reports by complying with IFRS framework. Chinese companies are also playing an important role in the world y accepting new standards. It is due to the fact that IFRS incorporation in Chinese accounting standards reduces cost of complying while operating in various jurisdictions for the companies.

In addition to this, many Chinese companies who have accepted and developed their accounting standards according to International Accounting Standards, get an opportunity to participate in the major activities of International Accounting Standards Board. ABSE has a significant impact on net assets and sustainable reporting system of a Chinese entity (Bao, 2016). For example, land use rights, as per ABSE, are considered as intangible assets. They are not classified as operating assets. However, when accounting is done on the basis of investment property in context of land use rights then in such a case, companies are free to use cost model instead of fair value model.  Another example is of ASBE No.36, which ensures that Chinese companies’ financial statements reflect full disclosures to draw attention of their users as the sustainable financial statements are affected by respective company’s financial position and existing related parties.

Conclusion

From the above discussions, it is concluded that there is no single accounting standard that can be adopted by all countries worldwide. However, in order to bring uniformity and harmony in the standardization at the global level, IASB has issued IFRS, which acts as a common global language for preparing sustainable reporting. The research suggests that formulation of IFRS framework in Chinese economy has made entity’s reporting system more reliable, meaningful and sustainable. It is also reflected that adoption of IFRS in the future can facilitate a balanced and consistent growth of the companies around the world. It is also concluded that IFRS framework offers full transparency to the business users through sustainable reporting system, which in return provides a wide variety of financial and social advantage to the companies.

References

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Bao, C., (2016) The Status, Potentials and Countermeasures of China’s Carbon Audit. Low Carbon Economy, 7(03), p.116.

Bensadon, D., and Praquin, N. (2016) IFRS in a Global World: International and Critical Perspectives on Accounting. Germany: Springer.

Chen, C.J., Ding, Y. and Xu, B., (2014) Convergence of accounting standards and foreign direct investment. The International Journal of Accounting, 49(1), pp.53-86.

Cheng, C.L., and Kung, F.H., (2016) The effects of mandatory corporate social responsibility policy on accounting conservatism. Review of Accounting and Finance, 15(1), pp.2-20.

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Fox, A., Hannah, G., Helliar, C. and Veneziani, M., (2013) The costs and benefits of IFRS implementation in the UK and Italy. Journal of Applied Accounting Research, 14(1), pp.86-101.

Ieng Chu, C., Chatterjee, B. and Brown, A., (2012) The current status of greenhouse gas reporting by Chinese companies: A test of legitimacy theory.Managerial Auditing Journal, 28(2), pp.114-139.

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