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The Stock Market Development The Stock Market Development and Accounting Reformand Accounting Reform

the case of Chinathe case of China

The Stock Market Development The Stock Market Development and Accounting Reformand Accounting Reform

the case of Chinathe case of China

May 2006

Lu XiongyingLu Xiongying

Shanghai Stock ExchangeShanghai Stock Exchange

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1. 1. The process of China’s stock market deThe process of China’s stock market development and the accounting system rvelopment and the accounting system reformeform ；；

2. 2. The issues of China’s stock market devThe issues of China’s stock market development and the accounting system refelopment and the accounting system reform orm ；；

Two contentsTwo contents

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The first section

The process of China’s stock mThe process of China’s stock market development and the accoarket development and the acco

unting system reformunting system reform

The first section

The process of China’s stock mThe process of China’s stock market development and the accoarket development and the acco

unting system reformunting system reform

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On May 1992, in order to meet investors’ needs to understand the financial information of public companies;

The Ministry of Finance established and issued the “Accounting System of Selected Joint-Stock Companies” 。

First landmark eventFirst landmark event

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•On September 1982 China took a small step to market economy ；•In 1984,the shareholding economy emerged in China. the shareholders are employees of the stock companies, no need for accounting information ；•On January 1985 ， the first stock trading counter of New China established;

The process of landmark 1The process of landmark 1

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•On December 1990,Shanghai Stock Exchange established. 8 listed companies,6 different accounting systems ；•On June 1991, “Performance specification” as 1990 annual financial statement semipublicly released in "Shanghai Stock Exchange special issue” ；

The process of landmark 1The process of landmark 1

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•On June 25th, 1992, 《 People’s Daily 》 published “Accounting System of Selected Joint-Stock Companies”, requiring implementing from March 5th, 1992 。

The process of landmark 1The process of landmark 1

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During 1992 to1995, in need of going abroad for domestic enterprises, Ministry of Finance issued a series of supplementary rules based on “Accounting System of Selected Joint-Stock Companies”

Second landmark eventSecond landmark event

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• On 21st February, 1992, first B Share Company issued in the Shanghai Stock Exchange. • On November,1992 and April,1993, Ministry of finance issued a series of supplemental regulations based on “Accounting System of Selected Joint-Stock Companies”, regulating the accounting work of H share companies

The process of landmark 2The process of landmark 2

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• On April, 1996, Ministry of finance issued a supplementary regulation, stating "financial accounting of the companies which listed in other offshore Stock Exchanges should conform to the accounting regulation of Hong Kong public company". ；•On February 1995, “Provisions on combined statements” 。

The process of landmark 2The process of landmark 2

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On Jan 27th, 1998, based on the “Accounting System of Selected Joint-Stock Companies ", Ministry of finance issued “joint stock Company accounting system”. In 2000, based on “joint stock company accounting system”, Ministry of finance issued “accounting system of enterprise", populating the accounting experience and method in the stock market to the whole society.

The third landmarkThe third landmark

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• on Jan 1998, “ Joint stock Company accounting system” replace “Accounting System of Selected Joint-Stock Companies” ;

•At the end of 1998, Explanations about problems in the process of implementing of “joint stock Company accounting system ” ；•On Dec 29 2002, "Accounting System of Business Enterprises” 。

The process of landmark 3The process of landmark 3

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in 1997, issued the first concrete accounting standard, thus forming a Chinese accounting reforming model that accounting system and standard coexist. On Feb 15, 2006, Ministry of finance issued a system of corporation accounting standards, including 1 basic standard and 38 specific standards 。

The fourth landmark eventThe fourth landmark event

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•On May 22, 1997, "Accounting Standards for Business Enterprises-Relationship between Affiliated Parties and Disclosure of Their Transactions”, "Accounting Standards for Business Enterprises-Events Occurring after the Balance Sheet Date”•On Feb 15, 2006, Ministry of finance issued the new accounting standards for business enterprises, including 1 basic standard and 38 specific standards.

The process of landmark 4The process of landmark 4

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Reform of accounting system satisfies the need of the development of security market, and promotes its development to some level as well. 。

SummarySummary

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The second section

The issues of China’s stock marChina’s stock market development and the accounket development and the accoun

ting system reformting system reform.

The second section

The issues of China’s stock marChina’s stock market development and the accounket development and the accoun

ting system reformting system reform.

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In China's stock market one of the most serious problems is the financial swindle which most irritate investors and distress regulators. The reform of accounting system should be the focus of the reform of the stock market

FocusFocus

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• Before 2002, Net assets yield ≥10 ％；• In 2003 ， loss 139 million Yuan, net asset per share 4.08 Yuan ；•At the end of June,2004, loss 1.444 billion Yuan ， earning per share -5.04 Yuan ， net asset per share -1.21 Yuan 。

Case 1 ： malicious swindle Case 1 ： malicious swindle

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•Can Hiring international accounting firms to audit resolve such issues?

•The solution lies in more severe penalties and strengthened internal control systems of listed companies ；•Must handle the relationship between costs and benefits properly, when establishing rules.

Case 1 ： malicious swindleCase 1 ： malicious swindle

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Summary : strict regulatory measures are necessary, but must consider the costs and benefits, to prevent excessive measures 。

Case 1 ： malicious swindleCase 1 ： malicious swindle

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•In 1998, Company A and Company B invested 396 million Yuan in a securities company together ；•At the end of 2004 ， Company A withdraw 396 million Yuan, and company B only 59.4 million Yuan.

Case 2: Withdrawal of depreciation reserve

Case 2: Withdrawal of depreciation reserve

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•This case raises a question: what kind of accounting system is better, principled or detailed? ；•if it is too detailed, it may lead to financial accounting information so opaque that can not meet fair disclosure rule requirements ；•if it is too principle, under operation, the regulatory agencies need make a variety of interpretations, which could affect the accuracy and effectiveness of information disclosure;

Case 2: Withdrawal of depreciation reserve

Case 2: Withdrawal of depreciation reserve

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Summary: accounting system should pay attention to the principle, also to operability .

Case 2: Withdrawal of depreciation reserve

Case 2: Withdrawal of depreciation reserve

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•In 1999 ， earnings from debt restructurings could be counted in current profits ；•In 2001, earnings from debt restructuring could be counted in capital reserve ;

Case 3: accounting treatment of debt restructurings

Case 3: accounting treatment of debt restructurings

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•To a large extent , this change makes accounting guidelines to prevent profit manipulation.

Case 3: accounting treatment of debt restructurings

Case 3: accounting treatment of debt restructurings

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Summary: the essential of accounting is a rational reflection of economic activities. It is unpractical to solve all financial fabrication by means of accounting system reform. This attempt will even have a negative impact on the advance of accounting information.

Case 3: accounting treatment of debt restructurings

Case 3: accounting treatment of debt restructurings

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• Reform of Chinese accounting system started from China’s stock market, whose new problems and situations has promoted the reform process very much. In return, the reform of accounting system has also offered powerful policy guarantee and technical support to the development of China’s stock market.

SummarySummary

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• Through the reform of accounting system, the rationality and seasonality of accounting information are much improved; but not every problem in financial fabrication can be solved during the reform process. 。

SummarySummary

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Thank you ！Thank you ！

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