Comparison of the United States, United Kingdom, and Chinese Accounting Systems, Accounting Standards, Accounting Practices
This report discusses the accounting practices of the following countries the U.K, U.S.A and China. An analysis of these different accounting systems will be conducted on issues such as the growth and background, social, economic and fiscal pressures that have led to each nations current characteristics. Concluding on the direction each nations accounting systems and practices seem to be heading towards.
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Introduction The main characteristics of U.K accounting is that it is highly dominated by the organised accounting profession, which only relates to limited liability companies, no other such entity. A separate fiscal accounting has been developed entirely from commercial accounting. The public sector in the U.K follows its own different rules in accounting.
The U.K was one of the initial and first countries in the world to develop and have Companies acts containing provisions and also one of the first professional accounting bodies was established in the U.K. Professional accountants and company law play a key role in dominating the U.K corporate financial reporting and play a significant influence varying from external and domestic factors. Britain’s financial market is structured around a “capital financial market based financial system” where the stock market funds large scale businesses, trading securities and pricing role.
The stock exchange and taxation system have very little influence on financial reporting. Having said that, the stock market has involvement in developing financial reporting standards for listed companies. Although the U.K seems to have developed its own companies act and regulations, it still has received indirect foreign influence from member states of the European Union through EU directives and from the U.S.A with their new accounting standards.
Financial reporting and accounting in the U.S.A seem to have a large and dominant influence on accounting in the world today with its largely consistent standards promulgated by the international accounting standards committee. However, U.S.A accounting is very similar to U.K accounting due to the fact that our accounting was initially an export from the U.K, which is often known to be the founding fathers of US accounting. For example, many of the largest accounting firms in the US such as Ernst & Young and ICPMG were expatriate Britain.
The U.S.A has taken that initial guidance and is becoming the accounting sector leaders in their accounting standards by exploring and developing rapidly in the accounting field. Standards have become largely voluminous and detailed due to the litigious-ness of American society and intense rivalry among accounting firms for business.
China on the other hand compared to U.K and U.S.A has seen large-scale impacts of the influence of political and economic change on its rules and practices. Although it is one of the few communist regimes to still be intact, it is significantly the largest. The main communist party in the country has developed a “socialist market economy” which has resulted in a huge rapid economic growth.
Recently there have been many western countries that are becoming interested in Chinese accounting both in academic and practical aspects. Chinese accounting over the last decade has seen a proliferation of accounting regulations replacing existing uniform accounting systems therefore bringing Chinese accounting in line with internationally accepted practices. This view can be backed up with china in joining the ISCA in 1997in an attempt to make her accounting standards consistent with the IAS.
The most up to date development and the recent one in China is the development of her own accounting standards, which include the MOF (Chinese Ministry of Finance) that has revised the existing five accounting standards operated. The MOF has encouraged other enterprises to adopt the new system at an early stage with the provision that only state-owned enterprises seeking to adopt early would be required to obtain approval from the relevant government authority.
The three government entities in China that are involved in regulating the accounting sector include the following: MOF – Ministry of Finance CSRC – China Securities Regulation Committee CICPA – Chinese institute of certified public accountants From the above three the MOF governs the accounting law, therefore, one could say is the key factor that dictates the sector. The MOF has also received loans from the World Bank to reform the accounting profession and to extend the accounting statements in China.
Company Law and Standards The UK have developed and issued only a few numbers of accounting standards. The standards that have been introduced evolve around the set of forth-broad principles. The main current legal instrument used in the U.K to govern the accounting practices of limited liability companies is the Companies Act 1985 amended in 1989, introducing the provision of the EC 7th directive.
Reporting requirements in the U.K are governed by the FRS (financial reporting standards) issued by the ASB (accounting standards board) that introduce the basic provisions contained in company law in the U.K The companies act consists of a number of statutes which broadly govern the activities of U.K companies. These acts are frequently updated and amended therefore seem to be developing further.
The major change seen in the Companies Act which was consolidated in 1985 and revised in 1989, was that small and medium-sized business needed to explain any drift seen in their accounts away from accounting standards. Another aspect that was also introduced was a true and fair concept.
This related to the way companies treated their accounts and were left to their own judgement of the profession. The companies needed to display a true and fair indicator in their financial statements of the companies true financial position. This principle is still today very difficult to define in accounting terms but clashes with the requirements of company law to the extent that additional information should be added to the accounts when needed.
Although the first attempt by the UK to establish technical guidelines in accounting in 1942 disappeared from the literature of U.K accounting. The U.K set up its own self-regulatory organisation the ASSC (Accounting Standards Steering Committee) in 1970, which was later over time known as Accounting Standards Committee (ASC) that was the first recognizable standard-setter in modern terms. It was renamed again in 1990 to the Accounting standards board (ASB).
Along with the 7th directive the 8th directive was introduced in 1989 and led to a new regulatory body called the financial reporting council (FRC). The FRC is supported by the FRRP (Financial Reporting Review Panel) and ASB. The ASB role is to provide the FRC with the funding and guidance on public concerns, also to amend or withdraw accounting standards. In this situation, The (UITF) acts as a fighting force on issues as guidance help on new technical problems that emerge.
As a result of all these accounting standards committees and regulation being established since the 1850s, the accounting profession in the UK has seen a large amount of independence due to the wants of individual businesses. This is not the case no more as a more developed and regulated accountancy profession are now receiving influence from accounting standards, governmental pressures not to mention harmonisation from fellow European countries.
In contrast, the US system is a bit more complex than that of the UK. To understand accounting standard setting in the US, one must start with the SEC (Securities and Exchange Commission) which is a regulatory agency established in 1934 by congress. Before this, no national regulations existed to govern the data flow of communication to investors. SEC has been given the statutory authority to promulgate accounting principles.
Although it consists of its own policy, it does rely on the private sector in the US to establish financial reporting standards. Its role of standard-setting on financial reporting and accountancy principle guidelines is backed with its powerful influence. Another standard-setting board is the FSAB with its role to develop accounting standards outside the profession by encouraging “the equality of financial statement requirements for foreign and domestic companies in their utilization of US capital markets” (Walton, Haller)
Therefore the main source for accounting standards in the US internally is GAAP ( Generally accepted accounting principles) which is moulded by an authoritative pronouncement by the FASB (Financial accounting standards board). The role of the FSAB is to establish financial accounting and reporting standards in the US. The FSAB framework is very influential around the world today as the “IASC’s framework and UK statement of principles are clearly derive from it” (Nobes, Parker)
The US version of UK’s “true and fair” directive exists in the securities act of 1933 that required investors to be fully informed of all information to assure and prevent any malpractices and encourage fair transactions. This act involved the sale of securities, stock, bonds and certificate of interests to provide a registration statement to the SEC before the sale of the asset can commence.
Overall US accounting seems to be more complex and detailed than UK accounting with many guidelines relating to accounting rules and interpretations being issued. Making it difficult for new error-prone situations to occur as almost every possible situation is addressed. She also is rapidly being seen as abiding with IAS On the other hand china is still undergoing a change from a socialist market economy to a mature market economy.
Although the Chinese accounting system was initially based on the Soviet system of uniform accounting. Economic reforms have taken place particularly in an attempt to encourage foreign investors. In 1992 the ministry of finance with the given power introduced new accounting regulations. Two significant regulations are the accounting regulations of the people’s republic of china for enterprise with foreign investment and the ASBC (Accounting standards for business enterprises) that came into impact in 1933.
These regulations are reasonably close and similar to US and IASC precedents but consist of errors such as failing to refer to the primary users and purpose of financial statements. The ASBE is structured on historic cost without revaluation allowed in U.K and IASC.
Nevertheless, the Chinese system has now emerged to recognise the business and equity concept. The government seems to be developing towards an equity market economy with shares by the public. Where on the other hand an Anglo American system seems to suit the needs of foreign investors. The accounting society of china researches new issues and releases recommendations on accounting standards.
The Chinese institute of certified public accountants (CICPA) supervises accounting practitioners. Although China is aware of other countries accounting systems, its system seems to be geared towards the directives of its social-economic objectives. For instance, current accounting practices are being reformed and changed to new developments in the economic sphere. Also, the theories and practices of other countries are being re-evaluated.
Another significant change occurred in 1995 when new regulations required all companies whether government-owned, private or the product of foreign investment to adopt new accounting standards that apply. Western accounting methods, namely the double-entry method. This sweeping move to establish nationwide accounting standards is aimed at promoting economic reform and internationalising the economy. Indicating Chinese reforms to harmonise their accounting system with the IASC.
Financial Reporting In the UK and US, the main objectives of financial statements are to ØReport to shareholders on the director’s management and control of the business.
Provide information needed by shareholders and potential investors to make informed investment decisions.
The overriding principle in both countries is that the financial statements should present a fair view of the company’s operating results and financial position. Whilst in China, the objective of financial reports is to reflect the financial position and operating results of an enterprise. The difference between IAS and UK, USA and China is shown in Appendix I. British, American and recently Chinese companies are obliged by law to show the balance sheet, Profit and Loss account and Cash flow statement.
Balance Sheet US and China tend to have some standard elements like assets are shown on the left of a two-sided balance sheet (see Appendix III and IV) while UK uses Companies Act 1985 format and the current assets precede fixed assets (see in Appendix V).
Profit and Loss USA and China refer to Profit and loss account (UK terminology) as “income statements”. Another difference in the terminology USA refer to STRGL (statement of total recognised gains and losses) as “statement of other comprehensive income.” This statement appears as a note or as a separate statement (similar to the UK) or as a single statement of comprehensive income.
In addition, the UK does not consider realisation of gain or loss as income whilst the Americans treat again as an increase in income and reduction in other comprehensive income. The difference in the profit and loss account layout can be noticed in Appendix VI, VII, VIII).
Cashflow UK, USA and China are obliged to show cashflow under FRS1, SEC and MOF respectively. There are three headings in the statement – operating, investing and financing. Unlike the UK statements, SFAS 84 statements start with post-tax profit and so tax is not shown as a use of cash.
In addition, the USA has different terminology for some accounting terms (Appendix II).
Differences in accounting standards It is logical to come to the opinion that accounting standards still differ extensively from country to country. Individuals among these countries are proud and developed around their own accounting rules. Change and adaptation to other country rules may not seem to nations as appropriate. This is the challenge laid to harmonisation.
There are many factors that can explain why accounting standards are not the same everywhere. This includes external environment and cultural factors in countries. It affects the way an individual would like to perceive their society to be structured and how they would interact with its substructure. Accounting can be related to being one of the substructures.
Another factor is legal systems that focus and operate around statute law e.g. the UK and the USA who have obtained it from the UK. These factors are amongst many that cause differences in accounting on many types of transactions and are often striking.
To expand on this, we are going to illustrate these differences and its effects to account for tangible assets, impairment, goodwill, inventories and research & development in the U.K, U.S.A and China Even among highly developed economies with relatively sophisticated standards, the differences in accounting for a particular type of transaction are often striking. To illustrate this, consider the different rules, and their effect used to account for the tangible asset, impairment, goodwill, research and development and inventories in the UK, US and China.
Tangible Asset UK -Tangible fixed assets should initially be measured at cost. Revaluation is permitted of individual classes of such assets, but all assets in the class must be revalued. Revaluation gain is recognised in STRGL, not in PL account. All tangible fixed asset other than investment properties must be depreciated using the common approach ie straight-line method. SAP 19 requires investment properties to be shown in balance at open market value and any change in the value are to taken to an investment revaluation reserve via STRGL in order to show true and fair view.
USAThey believes that the financial statement carrying values of property, plant and equipment are not increased on the basis of appraisals or changes in prices because those events are not TRANSACTIONS. The asset is depreciated using the straight-line method where one allocates “the cost or other basic value of tangible capital assets, less salvage (if any) over the estimated useful life.” There are no exceptions to this rule as there are in the UK like investment properties.
China fixed asset should be measured at a cost which includes transportation, installation and taxes. Depreciation method should reflect the pattern of consumption benefits and can include straight line, accelerated and units of production.
Impairment UKBy contrast UK and IASC rules have no test of impairment using undiscounted cash flows. They measure impairment by comparing the carrying value of a market value and a value in use (ie discounted cash flows).
USSFAS 121 requires assets to be examined at each balance sheet date for any indication of impairment. If there is any indication, a calculation must be made to compare their carrying value with the sum of the expected cash flows from the use and sale of the asset (undiscounted and without interest) If b) is lower than a), then an impairment loss should be recognised. The loss is measured as the excess of the carrying amount of the fair value.
Fair value means the amount that willing buyers and sellers would exchange the asset for, in an arm’s length transaction. If there is no market, the impairment loss is measured by reference to discounted cash flows as an estimate of fair value.
China rules are consistent with those in IAS 36, Impairment of Assets – impairment occurs when the carrying amount of an asset exceeds its recoverable amount (ie higher of net selling price and the value in use). An enterprise should reverse, wholly or partly, an impairment loss recognised in prior years only if the indicators of impairment no longer exists.
Goodwill UKU.K. companies are permitted to write off goodwill directly against reserves rather than having to capitalise and amortise it against income. There has been a major source of controversy both in the U.K. and around the world. The attractiveness of this treatment for U.K. companies is in the enhancement of reported earnings.
US Goodwill is capitalised and amortised by charges to earnings over not more than 40 years, China generally using the straight-line method.
Research and Development UKDevelopment expenditure may be capitalised in special circumstances. SAP 13 on research and development requires research to be written off as incurred but allows capitalisation of development costs in defined circumstances. Disclosure is required of research and development costs written off and of movements in unamortised deferred development costs.
The US All expenditures are charged to earnings as outlined in FSA2.
ChinaAll expenditures are charged to earnings as outlined in FSA2.
Inventories UKSSAP 9 on stocks (inventories) states that inventories should be valued at lower of cost and net realisable value but LIFO method cannot be used as a measure of cost.
There is no particular difference in theory between UK and USA except that LIFO is allowed for inventory valuation for tax purposes.
It uses the US GAAP approach to inventories such as FIFO, weighted average, moving average, specific identification and LIFO are accepted for determining cost.
Auditing standards are the rules governing how an audit is performed. An auditor is an independent person who gathers data in order to come to a conclusion on how well the financial statements conform to GAAP.
The Companies Act in the UK requires every company to appoint an independent qualified auditor. The acts 8th directive states that auditors of companies must be registered auditors. Only private companies that have an annual turnover of not more than £1 million are exempted from audit. However, the audit report has changed over the time over wording, a mixture of the statutory requirement and of what the audit practices board (APB) consider being the function of an audit.
The audit report desires that the financial statement should provide a true and fair view and prepared in accordance with the Companies Act. Also, an independent auditor must be a member of one of the five specified accounting professional organisations in the UK.
Nevertheless in the USA has no national statutory requirement of any audited accounts like the U.K. Only large companies with more than 500 shareholders and assets over $5 million are required to have their annual financial statements audited. The standard form of the audit report (designed by AICPA) in the US is fairly similar to audit reports in the UK. The keywords used in US audit report are ” fairly … in conformity with GAAP”.
This is quite similar to the UK where companies are required to be compliance with Company law and accounts show a true and fair view. Although a detailed analysis of law cases is required to establish the exact interpretation. However, the reference to GAAP in the US report may reflect a greater reliance than in the UK on authoritative literature.
In contrast, China requires an audit to be conducted on many enterprises including foreign-funded, limited liability and state-owned companies. The auditing profession in china includes state auditors, internal auditors and independent CPA auditors. Despite the rise of the big five international accounting firms in China, there are some limits on practices on them. For instance, audited reports can generally only be signed by Chinese CPA (Certified Public Accountants), but some foreign members of CICPA are being allowed to sign under certain conditions.
Conclusion In conclusion Chinese financial reporting has been transformed mainly through economic reforms but the state still seems to process influence over the country. Chinese accounting regulations are reasonably close to the USA and IAS and continue to become even closer. Despite the UK accounting system is moving closer to US GAAP and IAS, she still wants the true and fair concept to remain valid. There has been a vast improvement in the quality of financial reporting in the UK but still is out of step when you compare the U.K to other developed countries especially in areas such as goodwill.
It is quite difficult to predict the course U.K accounting is heading towards but British accounting is being to be seen as more and more eccentric. There has been quite a big change in U.S accounting until very recently the U.S has operated in an isolation situation from the rest of the world especially when related to accounting policy-making bodies. However, there is now an intertwined action by us on accounting issues making U.S accounting difficult to separate from the rest of the world and continues to explore and develop further improvements in the accounting profession.
Bibliography Comparative International Accounting – Christopher Nobes & Robert Parker International Accounting – Peter Walton, Axel Haller and Bernard Raffournier Accounting, An International Perspective – Mueller, Gernon, Meek Readings In International Accounting – John Blake, Mahmud Hossain Advances In International Accounting – Timothy s. Doupnik Students Guide to Accounting and Financial Reporting Standards – Geoff Black
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