China is world's second largest economy. Over a period of liberalization Chinese accounting standards have shifted from a centrally control economy to an open market economy. But the developments of Chinese accounting standards have been highly influenced from the political environment of the country. Because of these constraints there are still major differences between Chinese accounting framework and FIRSs of International Accounting Standards (IAS).
In PRC, Ministry of Finance sets out accounting standards. These government-defined standards are often less value relevant as the government has its own political compunctions . This situation is again complicated due to weak capital market infrastructure.
The main areas where there is appreciable difference between PRC GAAP and IFRS includes the valuation of fixed assets over a period of time i.e. depreciation measurements and the amortization of intangible assets, the methods of accounting for income taxes, measuring goodwill and intangible assets, amortization of goodwill and intangible asset, mineral rights, the expenditure to explore develop and extract minerals, and research and development costs .
Though Ministry of Finance (MOF) of Peoples Republic of China is trying to fill in the gaps between Chinese GAAP and IFRS there are still many areas where these two accounting standards are differentiate...
areas of inventory and temporary investment valuation, provision for bad debts, depreciation and revaluation of fixed assets, and amortization of intangible assets. Chinese GAAP rules require the inventories for an organization to be calculated at historical costs whereas IFRS rules evaluate the inventories according to lower of cost and market (LOCAM) principles. According to Chinese GAAP long-term investment companies having less than 50% share holding can choose among cost and equity methods for their financial auditing.
Chinese GAAP is followed for managerial opportunistic purposes though it is quite similar to IFRS in practice. Chinese GAAP allows unrestricted use of accruals by capital expenses for operating leases and unsymmetrical allocation of costs between finished and running work processes.
Ways in which Chinese rules differ from IFRS
There are many differences between Chinese GAAP and IFRS arising due to non-accounting government regulations. Financial Rules for Enterprises framed by MOF of PRC defines the rules for cost depreciation, residual value and useful life of different fixed assets. Chinese GAAP accounting practices are more practical in measuring depreciation of assets; it is based on historical cost of assets or measures the inventory at a planned price, which is in contrast to fare value oriented valuation of IFRS standards .
Financial Rules for Enterprises stases that assets of certain categories should be amortized over a period of minimum ten years, which may be an impractical dictate as these assets needs more than ten years to yield any economic benefits. Many industries related to welfare, pension and other special reserves generally require more than ten years to give any tangible economic benefits.
The way Chinese accounting