Difference in accounting standards followed in USA & CHINA
The Environmental factors
The accounting standards that are been followed in USA and China are different. In China, it is mandatory for the companies to follow the Chinese Generally Accepted Accounting Principles (GAAP), also known as Chinese Accounting Standards (CAS) whereas in US following of International reporting financial standards (IFRS) is mandate. The structure that has been followed in the Chinese Accounting Standards (CAS) is more or less similar to what has been provided in the IFRS and in US GAAP.
The Chinese accounting standards are probably very different as compared to other standards that have been followed all across the globe. Any company who is expecting to start sales operations in China are likely to face some initial difficulties in terms of getting the accounting correct and bring them in line with the Chinese accounting standards.
There are some specific customs that have been followed my any person who is running is operations in China. For example: The companies in China are expected to file financial statements and the business tax returns on monthly basis and most importantly in Chinese language. The corporate income tax in China is required to be filed every quarter. The employee agreement in China is required to be signed in Chinese language where is across the globe there is no such mandate.
With the passage of time the Chinese accounting standards have adopted themselves and bring them up in line with the International reporting standards. However there are still few differences which make the Chinese accounting standards unique in it.
Valuation of Fixed Assets: In IFRS, the valuation of fixed asset is more flexible. The valuation of the assets can be done through the help of historical method of through the help of revaluation of assets. However, in case of Chinese Accounting Standards (CAS), the valuation can be done only through the help of historical method. (Dezan Shira & Associates, 2017)
The rules that have been provided in the CAS are very detailed and specific at times when the same is compared with the rules that have been provided in the IFRS. For Example: In case there are two companies that are getting merged which are been controlled by same entity and have similar interest, as per CAS, the companies are required to reinstate there comparative figures as well, whereas no such action is required to be taken in case of IFRS.
It doesn’t means that the provided IFRS is not detailed. There are some uncommon points such as employee benefits which are handled in a very better way in IFRS as compared to CAS.
As per the Chinese accounting standards, the Chinese accounts of the companies are required to be classified based on functions, on the other hand, in case of companies following the international reporting financials standards are required to get classified based on nature.
The statutory control that has been post by the Chinese accounting standards is not that flexible enough to encourage the foreign companies. The company established in China are required to deal directly with the ministry of finance at times when there's a meeting their financials in China. On the other hand, any financial transactions that have been taken place by a company established in China are required to get converted in RMB based on the rates that has been provided by the government website. Even the companies are required to inform about the identities of the business partner to the Ministry of Finance China. (Lee, 2016)
The accounting rules that have been provided by the Chinese accounting standards are not common across China. The accounting rules are likely to differ from one City to another and even from one district to another district in China, making things difficult for the Chinese accountant. This is ideally not the case with the International reporting financial standards where the accounting rules are common in all cities, districts and States making it easy the accountant to monitor and follow.
The auditing requirement in China is also different then what is mean followed in United States. In case of United States, the companies are subject to audit which has been carried across my external auditor, who has been assigned the responsibility of expressing an opinion about the financial health of the company and about the fairness and truthfulness of the financial statements of the company. On the other hand the audit in China is not legal requirement but is been provided in the regulation itself. In China the auditor will conducted with an intention to ensure that the transaction that is being carried out by a Chinese company are in line with the regulations provided in the state laws. The auditors in China are expected to ensure that interest of the company and the state at protected at the same time. (Krostewitz, 2018)
International financial reporting standards followed in United States have given some exceptions where the companies can divert from the regulations that have been provided in the international reporting financial standards, making it flexible for the companies. If the management of the company feels that compliance with the requirements of IFRS will defeat the basic objective of preparing the financial statements as provided the framework, the company can divert from the regulations. On the other hand the Chinese accounting standards do not allow the companies to divert from the regulations provided in the standards to any means. This ensures that reporting standards followed in United States are more flexible as compared to what we have provided in China.
Statement of cash flow that is being followed in China and United States different. For example any cash realization from sale and purchase of trading of securities is classified under cash flow generated from operating activities, where is in case of China any cash flow generated from sale and purchase of trading of securities are classified as cash flow generated from investment activities. (Dezan Shira & Associates, 2017)
As per international reporting financial standard any asset that can be recovered or settled within a period of 12 months are classified as current and the one which can be settled after the period of are classified as noncurrent. As per IFRS, every company is required to make this distinction in the financial statement as it becomes easy for the users to understand the cash flow position of the company for the coming one year. As a result of which the investors can make investment related decisions and can determine the short term and long term focus for the investors and the users. This will at the same time will ensure better transparency and secrecy in the financial statement. Chinese accounting standard does not provide any information about segregation of an asset in current and noncurrent.
There are various environmental factors that influences and impacts the accounting standard practices that has been followed in United States and China. The environmental factors includes the political environment factors and economic environment factors. The political and economic environmental factors have a great role to play in influencing the accounting standards in both countries. The economic and political economic factors are positively correlated with the accounting development of the country. (China - Chinese law firm, 2016)
The political environment in China is very complex. The government in China doesn't allow the corporate to function freely. I have too many regulations in place, as a result of which accounting that has been adopted in China it's not very simple and the decision that has been made is not also in the interest of the users. The accounting has become a bit complex and is not also in line with the international accounting standard that has been followed across the globe. There are various examples that can help us in understanding the current situation of accounting in China. The revaluation respect is very important and is is very much in use in various countries across the globe. The inventory and fixed asset are generally been revaluated and the impacts taken in books, where is in case of China the fixed assets are disclosed the historical cost value. Result of the political environment in China, the auditing factor is also been government by the regulation itself.
On the other hand these situations are totally different in United States, where the political environment favors the accounting standards and rules. The government and the regulatory bodies in the country focuses on making the financial statements more transparent which can be helpful to the users and other bodies in making investment and other related decisions about the company. (Ankarath, 2014)
The economic factor also in some or the other way impact the accounting rules of the country. The existing trade wars, the movement in the oil prices and multiple other economic circumstances can at the same time in fact the accounting rules and Standards of the country.
Looking at the overall picture of accounting rules and Standards that has been followed in China and United States, it is clearly visible that the accounting rules and Standards followed in United States are more flexible transparent and are in the interest of the uses. The statutory control that has been put in place in United States is required there is the one that has been followed in China is putting extra pressure on the Chinese companies making it difficult for them manage and adopt.
Ankarath, A. A. (2014). COMPARISON OF IFRS. Retrieved from https://onlinelibrary.wiley.com: https://onlinelibrary.wiley.com/doi/pdf/10.1002/9781119197102.app5
China - Chinese law firm. (2016). What is the difference between Western and China's accounting standards? Retrieved from http://www.lehmanlaw.com: http://www.lehmanlaw.com/resource-centre/faqs/accounting-and-auditing/what-is-the-difference-between-western-and-chinas-accounting-standards.html
Dezan Shira & Associates. (2017). China’s Accounting Standards: Chinese GAAP vs. US GAAP and IFRS. Retrieved from www.amcham-shanghai.org: https://www.amcham-shanghai.org/en/article/chinas-accounting-standards-chinese-gaap-vs-us-gaap-and-ifrs
Hu, W. (2017, may 31). China’s Accounting Standards: Chinese GAAP vs. US GAAP and IFRS. Retrieved from china-briefing.com: https://www.china-briefing.com/news/china-gaap-vs-u-s-gaap-and-ifrs/
Krostewitz, M. (2018). China GAAP vs. U.S. GAAP and IFRS. Retrieved from http://krostewitz.com/: http://krostewitz.com/china-gaap-vs-u-s-gaap-ifrs/
Lee, B. (2016, February 15). 3 Things You Must Know About Chinese Accounting Standards. Retrieved from https://www.hongdaservice.com/: https://www.hongdaservice.com/blog/3-things-you-must-know-about-chinese-accounting-standards
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