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)