Issues Affecting Convergence of National Accounting Standards with Ifrs in a Transitional Country: The Case of China
INTRODUCTION The increasing globalization of capital markets and the significant growth of multinational enterprises created demand for a single set of global accounting standards to improve the comparability and transparency of financial reporting worldwide (Barth Schipper, 2008) Enhancing the comparability in financial reporting has been expected to promote capital flow across countries, including foreign direct investment (FDI) (Choi Meek, 2011; Doupnik Perera, 2012) To reduce differences in financial reporting across countries, the International Accounting Standards Board (IASB) has contributed to developing a single set of high quality financial reporting standards, known as International Financial Reporting Standards (IFRS) and promoted worldwide adoption of IFRS. The IASB's survey (1) shows either mandatory or voluntary adoption of IFRS (2) in about 130 countries (as of March 22, 2016) IFRS reflect the Anglo American accounting model, which, in a broad sense, refers to the accounting system widely used in English speaking countries such as the United Kingdom and the United States (Doupnik Perera, 2012) The Anglo American accounting model focuses on investor orientation, extensive application of fair value accounting and accountants' professional judgments (Hellmann, Perera Patel, 2010) Furthermore, this model has been developed over a long period of time in an environment characterized by developed capital markets, common law, and the separation of accounting and income tax scheme (Hail, Leuz Wysocki, 2010b; Doupnik Perera, 2012; Nobes Parker, 2012) The IASB's promotion of IFRS adoption implied that Anglo American accounting values, practices, and principles are superior to national accounting standards, and IFRS can be applied consistently in all countries (Ball, 2006; Hellmann, Perera Patel, 2010) However, numerous studies documented that accounting standards and practices are deeply embedded in each country's context, including its cultural, legal, organizational, political, and economic environments (Doupnik Richter, 2003, 2004; Doupnik Riccio, 2006; Nobes Parker, 2008; Hellmann, Perera Patel, 2010; Chand, Patel Patel, 2010; Chand, 2012; Perera, Cummings Chua, 2012; Drnevich Stuebs, 2013) These previous studies also revealed that contextual factors lead to inconsistent interpretations and applications of IFRS across countries. Thus, it is necessary to clarify distinct contextual factors and their effects on convergence with or adoption of IFRS in individual countries (Hail, Leuz Wysocki, 2010a, 2010b; Bruggemann, Hitz Sellhorn, 2013) Bruggemann, Hitz and Sellhorn (2013, p. 22) argued that "focusing on more specific settings (e.g. a single country or trading segment) is likely to help researchers understand and control for contemporaneous non IFRS effects." This study focuses on convergence (3) toward IFRS in China as a case study. China is in transition from a centrally planned economy to a market based economy and has a different context from Anglo American countries, which includes distinct features such as extensive state ownership of business firms, underdeveloped capital markets, and a deficiency in qualified accounting professionals. Despite these distinct contextual factors, the accounting standard setter in China, the Ministry of Finance (MOF) took a big step toward the global convergence of IFRS by establishing a new set of Chinese GAAP in 2006, which the IASB acknowledged as having achieved "substantial convergence" (4) with IFRS (IASB, 2006) The MOF required all listed companies in China's capital markets to apply the new set of Chinese GAAP for both consolidated and individual financial statements from the beginning of the fiscal year 2007. Since 2011, the current Chairman of the IASB, Hans Hoogervorst, has pressured the MOF to fully adopt IFRS to replace Chinese GAAP.