Examine the Advantages and Disadvantages for China of Harmonization of Accounting Standards Under the Current Economic and Social System

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Question: Examine the advantages and disadvantages for China of harmonization of accounting standards under the current economic and social system.

With the development of economic globalization and capital markets, accounting standards based on a national system cannot satisfy the needs of users whose decisions are increasingly international. Therefore harmonization of accounting standards has become an inevitable choice for many countries. The Chinese government has introduced four sets of accounting standards and efforts continue to be made to bring its domestic accounting standards in line with international accounting standards, as a result of which numerous benefits have been brought about by the harmonization of accounting standards for China. However, due to China’s unique economic and social system, certain problems have also arisen. This essay will evaluate the advantages and disadvantages of harmonization of accounting standards for China. Specifically, the essay will address the issues of: quality and credibility of accounting information, the participation in economic globalization, technological innovation, cost, chaotic management and damage to national interests.

The improvement of quality and credibility of Chinese accounting information is the most obvious advantage brought about by harmonization of accounting standards. The harmonization of accounting standards makes Chinese accounting standards similar to those used in market based economy, rather than as a method of implying macroeconomic plans, contributing to the uniformity in financial reports, consistency and comparability in the data between and within enterprises. Furthermore, more comparable and understandable accounting information can be produced by the convergence of accounting standards, which in turn helps international investors and creditors to make correct and efficient economic decisions about global concerns (Turner1983; IASC 1989; Wyatt 1989; Beresford 1990, cited in Ge & Lin 1993). For instance, not only listed companies but also non-listed companies are required to adopt harmonizing accounting standards to make their financial reports transparent to international investment, which assists investors in becoming more confident about their decisions and the quality and credibility of Chinese accounting information. In a survey study which assessed the effects and possible improvements of the accounting system, Lin et al (2001) point out that the understandability and comparability of accounting information provided by Chinese companies have been substantially improved.

The harmonization of accounting standards has not only enhanced the capacity of absorbing foreign investment, but also eliminated international trade disputes. The convergence between Chinese accounting standards and international accounting standards assists in the optimum foreign investments for China. Investors are able to achieve a more efficient portfolio of investments by comparing the results and financial positions of companies on an international scale as well as on a Chinese scale, especially after the set of accounting standards in 2006. This concurs with Amount of Foreign Investment (China’s Statistics Yearbook 2008, 2009) which reveals that the amount of foreign investment in 2008 was 952.53 billion, almost 1.4 times that of 2006. Moreover, the harmonization of accounting standards, to some extent, can avert international trade disputes. The dumping cases are typical examples, the cost of production in the determination of dumping is calculated by accounting records that are independently audited on the basis of international accounting standards. Owing to the fact that Chinese accounting standards are getting similar to international accounting standards, the anti-dumping investigations have declined in current years. Recent evidence from WTO (2010) demonstrates that 23 investigations were directed at Chinese exports during January to June 2010,...
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