China Accounting Disclosures
In China, the Ministry of Finance (MOF) is regulating the Chinese accounting framework. MOF has been in the first line to develop the Chinese Accounting Standards that will align with the US GAAP and International Financial Reporting Standards (IFRS). As a result, the ASBE (Accounting Standards for Business Enterprise) has been established to be adopted by public companies in China. Companies prepare financial statements according to the guidelines of MOF. Foreign companies are required to have financial statements in the Chinese language. The paper aims to discuss disclosed and undisclosed items in the financial statements.
The disclosed financial items include the income statement, balance sheet, and statement of cash flow. The income statement provides information relating to revenue, expenses, profitability, and Earnings per Share (EPS) to the public. Investors and potential investors are interested in this information. For example, high EPS will encourage the potential to buy shares of the firm. In the balance sheet, the public is interested in knowing the value of assets, liabilities, and equity of the firm; it helps the people estimate the firm’s market capitalization. The statement of cash flow shows the cash generated from financing activities, investing activities, operating activities. Besides, it indicates the opening and closing cash and free cash flows. The data is useful in understanding the financial strength of the company.
The Chinese Accounting Systems some of the items are undisclosed in the financial statements such as tax rates, ownership, assets, revenues, and liabilities. The country’s accounting law requires minimum disclosure of the maintenance of journals, that is, the general journal and supporting sub-journals. Besides, the law requires the maintenance of records. Hence, the firms are not required to maintain a complete set of financial statements to meet the minimum requirements.
The tax rate of the Chinese varies for the corporation and value-added tax (VAT). The standard corporation tax rate is 25%; however, some companies pay a subsidized tax rate of 15%. The government determines the quality to be charged to the various corporation. If the corporation is in the Hi-tech industry or integrated circuit, they are given an incentive to pay a tax rate of 15%, while other companies pay at a standard rate of 25%. On the other hand, some large companies can offset VAT tax by claiming more input tax. The differing tax rates make it difficult for Chinese companies to disclose tax rates in financial statements.
Chinese companies’ ownership is not disclosed in the financial statements; ownership indicates the shareholding of the owners. The majority of the Chinese companies are family controlled. The financial statements fail to disclose the family’s ownership percentage; this can be attributed to hiding the company owners’ identity.
The value for revenues, liabilities, and assets may be misstated in the financial statements. The firm may tend to inflate income to have higher profitability. The support can be overstated, and liabilities understated to create a favorable financial position. The firm does misstate revenues, liabilities, and assets to defraud the shareholders and indicate good performance.
Chinese Accounting Systems are controlled by the ministry of finance (MOF). The ministry is responsible for influencing the financial reporting framework of the country. The corporations are required to disclose minimum accounting disclosures; however, some of the data are not disclosed to the public being as fraud or creating a favorable financial position.