The use of fair value in the Chinese Accounting System

Abstract

This study is focused on the use of fair value in the Chinese Accounting System. It can be affirmed without any doubt that the introduction of fair value marks a crucial moment in the history of Chinese Accounting and its use has brought significant and radical changes in the way assets and liabilities are measured. As a matter of fact, fair value accounting, unlike historical cost accounting, uses current market values to estimate the value of the assets and liabilities considered. Fair value can therefore be defined as the price at which an asset can be sold or a liability can be settled in an orderly transaction to a third party under current market conditions. The objective of this study is to depict a faithful portrait of the use of fair value in the Chinese Accounting System by presenting the regulation that has been emanated by Chinese authorities concerning fair value, the literature and the studies produced by scholars and accounting experts on the matter and the findings of this study in analyzing annual reports published by companies in the years when a change of regulation occurred. The complicated history behind the adoption of fair value in China has been described in the first chapter of this study. The use of fair value in China was forbidden since 2001 as some companies had used fair value measurement in order to manipulate profits and to present false information to stakeholders. In 2006, with the issuance of new standards by the Chinese Ministry of Finance, the use of fair value was reintroduced as many of these standards required or permitted it. Finally, in 2014, a new standard only concerning the use of fair value has been provided, namely CAS 39. According to scholars, there are many reasons for the reintroduction of fair value, which are exposed in the second chapter of this study. Nevertheless, its technical strength, the growing globalization of accounting standards and the development of the Chinese market are believed to be the crucial ones. Unfortunately, there are also some limits that prevent companies from applying fair value measurement correctly. For instance, it has been argued that the main troubles related to the use of fair value may be avoided allowing accountants to receive a better education on how to use fair value and strengthening the control of authorities over companies in order to prevent the use of fair value to produce false information. Some scholars also claimed that to overcome major limits concerning the use of fair value the completeness of the regulation and the presence of theoretical studies could play a fundamental role. Therefore, to verify if the issuance of new and more complete regulation has really favored the correct use and disclosure of fair value, in the third chapter the annual reports of companies for the years 2007 and 2014 have been analyzed according to the requirements of CAS 39. This analysis is a fundamental part of the study as it compares the annual reports of year 2007 with those of year 2014 and can underline the differences between them.