China’s Accounting Framework and Economy

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China’s accounting practices have continued to employ traditional standards of the past. With the consideration of international standards, there has been a need to reform the accounting framework. Some of the main needs of the reforms include enhancement of information quality and standardization of the local and international practices. Under the new system, the regulatory authorities were unified and the process of formulation of accounting principles and assumptions centralized (Caperchione 2000, p.12).

The manner of preparation of financial statements and their presentation was standardized. As a result, flexibility and transparency prevailed within enterprises and among international organizations. Despite the initial challenges in implementing the reforms such as insufficient expertise and resources, appropriate strategies have been incorporated to comply with the changes. For these reasons, the accounting framework has been crucial towards economic growth and development.

Initially, the joint venture law promoted the growth of the business by the use of traditional systems. This law was formulated after the failure of the fund accounting concept. Under the system, research and development required enhancement through the consolidation of firms’ resources. In 2006, a new set of accounting standards was presented. This set was known as the Accounting Standards for Business Enterprises (ASBEs) (Huang 2001, p.35).

The new accounting and auditing principles and assumptions were in line with the International Financial Reporting Standards (IFRSs). Therefore, the reforms wiped out China’s earlier Generally Accepted Accounting Principles(GAAP). However, the streamlining of China’s accounting standards is still a challenge to impose since the economy is wide and has one of the largest populations (Bosworth & Collins 2007, p.31).

Based on the complexity of China’s economy, several laws have been formulated to address the issue. Initially, the Accounting law (1999) outlines multiple accounting principles and assumptions that are legal in-country. With the dynamism of the economy, the law has undergone review overtime to meet the changing needs. Some of the critical laws enforced include the Standard Rules for Enterprise Accounting (2001) and the Accounting Standards for Business Enterprises (2006).

Through this process, different enterprises comply with the provisions. Under the formulation or reviewing of China’s accounting standards, the ministry of finance is independently responsible for the act. On the other hand, the Accounting Society of China (ASC) or the Chinese Institute of Certified Public Accountants (CICPA) is responsible for the regulation and improvement of China’s accounting profession. In addition, CICPA serves as the bridge between the government and practicing accountants (Hui & Ng 2003, p.55).

The ministry of finance (MOF) liaises with various segments such as the State Administration for Taxation (SAT), State Administration of Industry and Commerce (SAIC), External Audit Firm (CPA), and Ministry of Commerce (MOC) (Wang & Hu 2004, p.68). The SAT is responsible for collecting tax and auditing accounts. Similarly, SAIC issues business licenses and analyses annual financial reports of enterprises.

The External Audit Firm (CPA) conducts mandatory auditing on enterprises. In addition, the Ministry of Commerce (MOC) is always responsible for dividends distribution issued by corporations. As a result, multiple enterprises within the government improve the accountability and transparency in financial matters (Nandakumar 2010, p.95).

Based on the valued principles of accounting, joint ventures are highly regarded business ventures in China. In this case, there exist two types of joint ventures. These are equity and contractual joint ventures. This is mainly because china’s large population demands that people pool their resources and share profits from their investments.

Though this form of investment depicts traditional practices, it stimulates growth through sharing of resources and local knowledge. In addition, this form of investment has adopted the new accounting standards outlined in the new reforms and enhanced research and development. However, to comply fully with the needs of new reforms, China had adopted WOFEs to stimulate international business as joint ventures’ substitute. This type of venture has contributed immensely to international trade growth (Yuen 2002, p.128).

In the analysis of firms, multiple accounting principles were instituted in the new reforms that allow distinction of firms. In this regard, the whole economy is considered as a single firm with segments of varied enterprises. The enterprises are categorized based on the ownership, sources of finance, managers’ decisions and senior managers’ objectives.

Therefore, the common enterprises include state enterprises, Township and Village Collective Enterprises (TVES), Sino-foreign Joint Ventures (JVS), Wholly Foreign Owned Enterprises (WOFEs) and private enterprises. These forms of enterprises have stirred the economy through the adoption of uniform accounting systems that reflect international standards. For the government, it has been possible to administer its taxation policies with flexibility due to the streamlining of accounting principles and standards (Tsang & Ng 2005, p.114).

After the alignment of business enterprises, changes in the accounting principles affected business conduct. The new accounting principles changed the traditional submission of all profits to the government. In addition, the issuance of a zero-interest loan by the government ended (Wang & Hu 2004, p.84).

Through these changes, the government had to incorporate the taxation of profits and subjection of loans to interest rates. This implied that the incentives for investment and profits generation improved. In this regard, enterprises had to adopt accounting principles such as going concerned, accounting period and unit of measurement. As a result, the local investment and banking market advanced (Camfferman & Zeff 2007, p.74).

Another crucial element envisioned in China’s accounting framework is the conduct of international trade. Through the consideration of foreign trade, as an important factor towards the growth of the economy, the new policies emphasized principles and assumptions that boost the practice. In this case, the reforms addressed the need for a unit of measurement and practices that would promote standardization of international financial statements.

Essentially, the IFRS and FABS were adopted leading to an improved level of accounting in the country. In addition, the reforms modified the traditional standards in relation to the US/UK systems (Wu 2009, p.78). Based on these crucial factors, the accounting regulation for international firms is similar to those of the local enterprises. Consequently, small enterprises were able to expand and grow to reach the international platform.


Bosworth, B., & Collins, S. M. (2007). Accounting for growth: comparing China and India. Cambridge, Mass.: National Bureau of Economic Research.

Camfferman, K., & Zeff, S. A. (2007). Financial reporting and global capital markets: a history of the International Accounting Standards Committee, 1973-2000. Oxford: Oxford University Press.

Caperchione, E. (2000). Comparative issues in local government accounting. Boston: Kluwer Academic.

Huang, A. (2001). Accounting in China in transition, 1949-2000. River Edge, N.J.: World Scientific.

Hui, W. F., & Ng, P. H. (2003). Accounting in Hong Kong: regulatory framework and advanced accounting practice. Hong Kong: City Polytechnic of Hong Kong, Centre for Continuing Education.

Nandakumar, A. K. (2010). Understanding IFRS fundamentals: international financial reporting standards Hoboken, N.J.: Wiley.

Tsang, W., & Ng, P. P. (2005). Accounting in Hong Kong: regulatory framework and advanced accounting practice (13th ed.). Hong Kong: School of Continuing and Professional Education, City University of Hong Kong.

Wang, S., & Hu, A. (2004). The political economy of uneven development: the case of China. Armonk, N.Y.: M.E. Sharpe.

Wu, Z. (2009). Financial sector reform and the international integration of China. London: Routledge.

Yuen, S. L. (2002). The institutional framework of accounting for Hong Kong (3rd ed.). Hong Kong: Goodman Publisher.

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