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IASB & its predecessor organisation have as a stated objective to narrow worldwide...

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calvin85sg | Student, Undergraduate | eNotes Newbie

Posted January 14, 2010 at 11:12 PM via web

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IASB & its predecessor organisation have as a stated objective to narrow worldwide differences in accounting practices & the presentation of

financial info.

In Feb 06 at a ceremony, the China's Ministry of Finance announced the adoption of new accounting standards that bring about substantial convergence between them and the IASB's IFRS. These are the excerpts made during the ceremony by Sir David Tweedie, chairman of the IASB:

"I'm..an important step for the development of the Chinese economy & its place in the world's increasingly integrated capital market. The adoption of the new Chinese accounting standards system brings about convergence between Chinese standards and (IFRSs), as set IASB.

The new Chinese standards that incorporate accounting principles familiar to investors worldwide will encourage investor confidence in China’s capital markets and financial reporting and will be an additional spur for investment from both domestic and foreign sources of capital. For Chinese firms that are increasingly playing a global role, the acceptance of the new standards should reduce the cost of complying with the accounting regimes of the different jurisdictions in which they operate"

A. Why might it be beneficial to narrow international differences in accounting practices? Are there any disadvantage associated with convergence?

B. Elaborate how the convergence of Chinese accounting standards & IFRS can benefit Chinese investors who invest only in Chinese firms.

C. Explain how the convergence of Chinese accounting standards & IFRS can benefit the US investor who sometimes invest in Chinese firms.

 

2 Answers | Add Yours

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted January 14, 2010 at 11:22 PM (Answer #1)

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A.  If all countries have the same (or close to the same) accounting standards and practices, then it will be easier for investors from one country to evaluate the financial health of firms in other countries.  The only disadvantage would be if some countries are forced to have less strict standards than they used to have.

Really, this answers question C as well.

As for B:

The main benefit would be that Chinese investors will probably get a more appropriate price for the stocks of Chinese firms.  As foreign investors get better information, they will cause the price of Chinese firms' stocks to go up or down depending on that new information.  This will mean that the stock prices will be closer to what they "should" be and Chinese investors will benefit from this because they will be less likely to overpay for a given stock.

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krishna-agrawala | College Teacher | Valedictorian

Posted January 15, 2010 at 9:57 AM (Answer #2)

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IASB (International Accounting Standards Board) is an organization committed to development of uniform accounting practices and standards across different countries so that the same set accounting data is understood easily by investors and other stakeholders from different countries easily, and they can use it to compare performance and position of  companies from different countries.The set of standards released by them is called IFRS (International Financial Reporting Standard).

Specifically, when adopted by Chinese companies, it is likely to benefit also the Chinese investors, investing in Chinese companies only. This statement is made on the assumption that an international standard is will be better than current local standards because of addition care that goes into making of such international standards.

Convergence of Chinese accounting standards and IFRS would mean that the the American investors will get information on Chinese companies in the same format and having the same degree of reliability as the information they get on American companies. This will benefit the US investors investing in Chinese company by making it easier for them to evaluate performance and position of Chinese companies.

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