AA Global Academy

Understanding Company Accounts and Reports

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TABLE OF CONTENTS

TASK 1

1.1 The Conceptual Framework for Financial Reporting published by the IFRS
Foundation sets out several desirable qualitative characteristics of financial reports. Do
you agree with these objectives and views? Why or why not?
TASK 2

2.1 Generally accepted accounting principles in China have led to certain differences
with the desirable qualitative characteristics of financial reports as set out in the IFRS
Conceptual Framework for Financial Reporting. Outline the reasons for these
differences.
2.2 Identify the significance of the reporting differences with respect to the following:
(A) the IFRS, (B) Chinas regulator, and (C) Chinese companies.
2.3 Discuss the likely response from China toward existing and future pronouncements
issued by the IFRS, such as IFRS discussion papers and IFRS reporting standards.
References

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TASK # 1:
The Conceptual Framework for Financial Reporting published by the IFRS Foundation
sets out several desirable qualitative characteristics of financial reports. Do you agree with
these objectives and views? Why or why not?
Yes agreed with these objectives because the purpose of common principle of financial reporting
is to endow with financial knowledge about the reporting body that is constructive to presented
and probable financiers, lenders and other debt holders in creation of decisions concerning on
condition that capital to the body. Such decisions engross trade, promotion or investment
impartiality and debt instruments, and given that or reconciling loans and other outline of
acknowledgment. Allen, A. and Ramanna, K., 2013The pronouncement by accessible and
plausible creditors and other debt holders about stipulation or reconciling loans and other
diversity of debt consist on principles and interest disbursement or extra earnings which they
foresee. Supporter, debtors and other debt holders prospects about revenue consisted on their
measurement of the quantity, instance and indecision of future total cash inflows to the
individual. Accordingly, accessible and impending financier and other debt holder require
knowledge to facilitate them to evaluate the prediction for coming total cash flows to an
organization. Andr, P., Dionysiou, D. and Tsalavoutas, I., 2012
Information about the environment and total of documenting corporations economic possessions
and emphasize can assist consumer to recognize the reporting entitys monetary potency and
limitations. That information can help users to assess the reporting entitys liquidity and
solvency, its needs for additional financing and how successful it is likely to be in obtaining that
financing. Information about priorities and payment requirements of existing claims helps users

to predict how future cash flows will be distributed among those with a claim against the
reporting entity. Allen, A. and Ramanna, K., 2013
Diverse kinds of economic possessions influence a users evaluation of the exposure entitys
prospects for potential cash entering ways in organization in a different way. Some potential
currency in ways results unswervingly from presented economic possessions, such as money
recovery from market. Andr, P., Dionysiou, D. and Tsalavoutas, I., 2012Its objective is result
from using numerous possessions in amalgamation to fabricate and market commodities or
offerings to consumers. Even though cash flows are not acknowledged with personage
financially viable possessions (or alleges) consumers of financial statements and documentations
require to be acquainted with the nature and quantity of the property accessible for utilize in
documentation entity operations.
Accretion accounting illustrates the belongings of transactions and other proceedings and
conditions a reporting entitys profitable possessions and alleges in the epoch in which those
property crop up, yet if the consequential cash proceeds and expenditure take place in a diverse
phase. Allen, A. and Ramanna, K., 2013It is significant for the reason that statistics about a
documenting bodys financial funds, asserts and transformation in its economic possessions and
allegations throughout a phase endow with a improved base for evaluating the organizations
precedent along with the prospect working than knowledge exclusively about currency revenue
and expenses throughout that phase. Ewert, R., and A. Wagenhofer. 2005
Information regarding an exposure bodys financial works for the duration of a phase, imitate by
transforming in its profitable possessions and allegations additional than by acquiring
supplementary resources straightly from financiers and lenders, is constructive in evaluation the
history and prospect capability to engender total cash in ways. That information specifies the
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degree to which the documenting body has augmented its obtainable monetary possessions, and
therefore its aptitude for producing total cash entering throughout its process moderately than by
acquiring supplementary resources straightly from financiers and lenders.
Information about a documenting body economic work throughout a phase may in addition
specify the degree to which proceedings such as transformation in marketplace cost or capital
cost have augmented or decreased the entitys economic resources and allegation, by this means
disturbing the entitys capability to produce total money earned by the company. Holthausen, R.
W. 2003
Information regarding documenting cash earned by the organization within a phase also
facilitates consumer to evaluate the organizational capability to produce prospect money earned.
It specifies in what way the documenting bodies acquire and splurge money, counting
information concerning its lending process and reimbursement of debit, money payment or other
money disbursement to financier including features that may influence the organizations fast
convert asset into cash or bankruptcy. Ewert, R., and A. Wagenhofer. 2005 Statistics and
numerics regarding money s revenue and expense facilitates consumers to comprehend the
maneuver tasks, calculate its economics and endow tasks evaluate its money conversion process
and construe other relevant knowledge regarding monetary generation statements and tasks. The
QC of constructive monetary information categorize the kind of information which are probable
to be nearly all practical to the accessible and probable investors, debt holders and investors for
constructing the decisions concerning the documenting bodies on the base of information in its
economic statement. Holthausen, R. W. 2003

Financial reports provide information about the reporting entitys economic resources, claims
against the reporting entity and the effects of transactions and other events and conditions that
change those resources and claims.
According to Hothouse, R. W. 2003 quantities of economic reports also contains illuminating
substance about managements prospect and approach for the reporting body, and additional kind
of futuristic information.
QC of constructive economic information is appropriate to monetary information make available
in monetary operational statements, along with it to monetary statistics endow with in further
ways. Outlay, which is a persistent limitation on the documenting bodys capability to endow
with constructive financial information, concerned correspondingly. Fields, T.D., Lys, T.Z. and
Vincent, L., 2001
TASK # 2:
2.1 Generally accepted accounting principles in China have led to certain differences with
the desirable qualitative characteristics of financial reports as set out in the IFRS
Conceptual Framework for Financial Reporting. Outline the reasons for these differences.
From the point of FASB, 2010, Qualitative description of economic information is conversed in
the theoretical scaffold of the standard-setter; to that kind of task they are vital and centralized.
On the other hand, QCs are also imperative in the perspective of the preference and transform of
accounting procedures by firms. Empirically the utilization of it by directors along with all staff
of firms is on which we deem that no confirmation has formerly been accessible. The preeminent
setting for this is strategy transform in the situation of exposure under IFRS, because it permits

additional policy preference than GAAP, and it entail discovery and rationalization of policy
transform that have a substance effect.
The mainly recurrently declared QC is comparability, predominantly industry comparison. Other
imperative characteristics are significance, dependable demonstration; comprehend ability and
lucidity (not honestly declared in the Framework). Another vital reason was near the beginning
adoption of adjustments to accounting principles. We stumble on that these are referred to more
frequently for dimension changes and by outsized firms. Our results illustrate no significance of
the ordinary/code officially permitted dichotomy but a momentous alliance flanked by exploits
of QCs and a gauge of a countrys precision. There is a universal credence in the financial
commune and in strategy consultation that principles-based ideology, if functional appropriately,
perk up the eminence of accounting information by concentrating on financially viable substance
of communication over outline, daunting financial configuration and same accounting conduct
for divergent transactions. Fields, T.D., Lys, T.Z. and Vincent, L., 2001Dependable with other
research, it is expected superior prominence on the exploit of proficient verdict to improve
significance and steadfastness of accounting statistics. The benchmark also endow with
comprehensive performance supervision which promotes the suspected frame of mind,
accentuate form over cost-effective matter, and avert managers from implementing suitable
specialized decision in the preference of accounting principles. FASB, 2010
As such, this measure frequently grades in the replacement of functioning charters for
investment charters depending on directors intention. In adding, rules-based principles be
inclined to be superseded speedily in the existing vigorously changing business world. It is note
down that rules-based structure trade off profitable matter of communication for the structure and
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comfort comparability and reliability of accounting statistics across firms and eventually. John,
P., M. Pincus, and S. O. Rego. 2003. They squabble that a regulations based system persuades
managers to connect in financial formation and scandals under the pretext of conforming to the
rules. Because regulations serve up as the explanation and validation along with the auditors
aptitude to thwart financial disgraces is settled.
Relevant financial information is capable of making a difference in the decisions made by users.
Information may be capable of making a difference in a decision even if some users choose not
to take advantage of it or are already aware of it from other sources. EFRAG, 2013b
Financial information is capable of making a difference in decisions if it has predictive value,
confirmatory value or both. Information is material if omitting it or misstating it could influence
decisions that users make on the basis of financial information about a specific reporting entity.
In other words, materiality is an entity-specific aspect of relevance based on the nature or
magnitude, or both, of the items to which the information relates in the context of an individual
entitys financial report. . FASB, 2010Consequently, the Board cannot specify a uniform
quantitative threshold for materiality or predetermine what could be material in a particular
situation, Faithful representation does not mean accurate in all respects. Free from error means
there are no errors or omissions in the description of the phenomenon, and the process used to
produce the reported information has been selected and applied with no errors in the process. In
this context, free from error does not mean perfectly accurate in all respects. EFRAG, 2013b For
example, an estimate of an unobservable price or value cannot be determined to be accurate or
inaccurate.

However, a representation of that estimate can be faithful if the amount is described clearly and
accurately as being an estimate, the nature and limitations of the estimating process are
explained, and no errors have been made in selecting and applying an appropriate process for
developing the estimate. Fields, T.D., Lys, T.Z. and Vincent, L., 2001
2. Identify the significance of the reporting differences with respect to the following: (A) the
IFRS, (B) Chinas regulator, and (C) Chinese companies
Throughout the epoch subsequent the communalist rebellion, China illustrated its accounting
regulations from the Soviet sculpt. The Soviet replica was insignificantly acknowledged as
communalist accounting. When China instigates to unbolt up to the exterior world during the era
of late 70s discussion proceeded as to compare Western accounting put into practice were
merely a resources of recording financially viable particulars or were as an alternative a capitalist
contrivance of class subjugation. The impression that accounting observation is merely endorsed
scientific management prevail the squabble, and China set out on a conduit to exploit Western
standards to prop up the modification and aperture up of this country. Ewert, R., and A.
Wagenhofer. 2005
Chinas foremost contemporary accounting principles were issued in 90s duration, and in excess
of the subsequently two decades have been recurrently transformed to improve conventional to
intercontinental principles. Authorities of accounting bodies such as IASB contracted with
Chinese controllers that confirmed that Chinese bookkeeping principles had congregate with
IFRS, excluding on some basic clause, these were basically determined in the impending time.
Some industrial bodies such as CASBE are currently abundantly congregate with IFRS.

Appreciably, China has not espoused IFRS, but to a certain extent nearby are no bookkeeping
handlings permitted under IFRS. EFRAG, 2013a.
China may be a excellent representation for the US to obey the rules its principles to IFRS. China
did not dispose of its accounting principles, as an alternative it accepted as traditional standards
by eradicating some points that escort to accounting conduct not satisfactory under IFRS. Barth,
M.E. and Schipper, K., 2008. In one state of affairs commerce with associated party
communication between position holding endeavors, it persuaded to regulate IFRS to obey the
rules according to the Chinese regulations. It, nevertheless, has preserve regulatory regulations
for assured accounting conduct that narrow the prospects obtainable under IFRS, yet still
succumb a result suitable under International principles. Ewert, R., and A. Wagenhofer. 2005
From the statistics of Barth, M.E. and Schipper, K., 2008 Companies programmed in
china big cities characteristically exploit either IFRS or HKFRS. Hong Kong principles are
indistinguishable to International reporting principles apart from few insignificant conversion
regulations that were curtly in consequence when these cities congregated confined principles
with IFRS. Many Chinese companies have programmed in previous mentioned city, by means of
numerous loom. Mainland companies unswervingly registered shares are called HK-shares.
EFRAG, 2013a. Circumstances proscribed mainland companies that list in Hong Kong with an
offshore investment company are described Red Chips. Chinese companies that encompass are
principally secretive relatively than state. Their possession directory throughout offshore article
and are occasionally said to be P Chips. Ball, R., 2006.

HK accounting principles setter attained conformity with mainland principles makers that other
bodies had adequately congregate with it, by means of settlement for two since determined
subject, they could be acknowledged in HK cities. A curriculum was urbanized which flanked by
Main city of counties and main land controllers to permit definite mainland Chinese companies
catalog to show financial announcement that were assessed by an accepted other companies
organization such as mainland.
Succeeding to this conformity China H carve up corporations now exploit cost accounting rules
assessed by their audit organization to informed in Hong Kong. Lots of these organizations are
also programmed to center on Chinas stock market, wherever they utilize the equivalent
financial proclamation. Some companies prolong to endow with financial statements organized
under Hong Kong financial principles or International report principles to the Hong Kong Stock
Exchange, while put forwarding cost accounting rules and policies financial statements to main
exchanges. In a quantity of situations, companies have preferred diverse accounting techniques
for financial statements arranged in IFRS compared to Cost accounting principles, sporadically
leading to ample dissimilarities in reported consequences flanked by the two sets of account.
Almost many Chinese organizations have scheduled on the NYS market and on NASDAQ.
Many more came up to the US during a invalidate amalgamation with a US shell corporation and
trade delicately, if at all, on flexible markets called over the counter. Ball, R., 2006.
There is rejection of exchange prerequisite for Chinese corporation to exploit US GAAP, and the
assessment to do so materialize to be supported on discernment that investors favor declaration
arranged under these main beliefs. The verdict to utilize generally accepted rules frequently
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works adjacent to the company. Many US scheduled Chinese corporations divulge that they have
a substance limitation in financial pedals related to a be short of of competent accountants
specialist in these principles. China has a solemn scarcity of CPAs, and a small number of CFOs
and organizer have experience related to these rules and policies. Where organizations obtain the
opportunity to file financial report arranged under reporting standards, they have a large amount
enhanced squabble that they do not have a substance limitation in accounting proficiency. Since
Cost accounting rules have congregated with international financial standards, a Chinese
experience person about these rules has a good quality argument that he/she has knowledge in
practicing and implementing the IFRS financial statements. EFRAG, 2013a.
3. Discuss the likely response from China toward existing and future pronouncements
issued by the IFRS, such as IFRS discussion papers and IFRS reporting standards.
As solitary of two extraordinary Administrative districts of China HK city has its individual
officially permitted structure, counting its own permissible structure for budding accounting
principles. The HK is the merely body authorised by regulation to broadcast financial reporting,
assessment and moral principles for specialized accountants in HK pursuant to segment of the
specialized Accountants of regulation. HK Reporting principles have been completely
congregated with global Reporting values for yearly reporting phase commenced in 2005.
EFRAG, 2013a.KH standards restrain phrasing indistinguishable to the correspondent
International reporting principles apart from that the intermediary provisions in little standards
that were congregate primarily with consequence from early 2005 were transformed to endow
with the evolution from the desires in the preceding HK accepted principles. Since all HK

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reporting principles concerned have the equivalent IFRS effectual dates and intermediary
requirements.
Familial organizations whose securities deal in a community market are essential to use
HK Financial Reporting principles, which are matching to IFRS, with the subsequent exemption:
A corporation that is domiciled in HK but that is included external of KH is legalized to use
either both principles. John, P., M. Pincus, and S. O. Rego. 2003 Companies whose protections
do not deal in a public marketplace are legitimate to use HKFRS or, if they are included exterior
boundaries of HK, to exploit IFRS. An SME in HK also has the opportunity to espouse the HK
reporting standards for confidential Entities, which is almost indistinguishable to the reporting
principles for SMEs. Furthermore, a HK included company that is not a holding corporation or a
contributory in itself has the selection to exercise the HK SMEs body Financial Reporting
structure and Financial Reporting Standard. Ball, R., 2006
Allen, A. and Ramanna, K., 2013. Towards an understanding of the role of standard setters in
standard setting. Journal of Accounting and Economics, 55 (1), 6690.
Andr, P., Dionysiou, D. and Tsalavoutas, I., 2012. Mandatory adoption of IFRS by EU listed
firms and comparability: determinants and analysts forecasts. ESSEC and University of Stirling,
Working Paper.
Ball, R., 2006. International Financial Reporting Standards (IFRS): pros and cons for investors.
Accounting and Business Research, International Accounting Policy Forum, 36 (Supplement), 5
27.
Barth, M.E. and Schipper, K., 2008. Financial reporting transparency. Journal of Accounting,
Auditing & Finance, 23 (2), 173190.

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Klein, A. 2002. Audit committee, board of director characteristics, and earnings management.
Journal of Accounting and Economics 33 (3):375-400.
Holthausen, R. W. 2003. Testing the relative power of accounting standards versus incentives and
other institutional features to influence the outcome of financial reporting in an international
setting. Journal of Accounting and Economics 36 (1- 3):271-283.
John, P., M. Pincus, and S. O. Rego. 2003. Earnings management: New evidence based on
deferred tax expense. The Accounting Review 78 (2):491.
Ewert, R., and A. Wagenhofer. 2005. Economic Effects of Tightening Accounting Standards to
Restrict Earnings Management. The Accounting Review 80 (4):1101.
EFRAG, 2013a. Getting a better framework: reliability of financial information. Brussels:
European Financial Reporting Advisory Group (and published by national standardsetters).
EFRAG, 2013b. Getting a better framework: prudence. Brussels: European Financial Reporting
Advisory Group (and published by national standard-setters).
FASB, 2010. Statement of financial accounting concepts no. 8: conceptual framework for
financial reporting. Norwalk, CT: Financial Accounting Standards Board.
Fields, T.D., Lys, T.Z. and Vincent, L., 2001. Empirical research on accounting choice. Journal of
Accounting and Economics, 31 (13), 255307

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