If the world's capital markets could use a harmonized accounting framework it would not be necessary for a comparison between two or more sets of accounting standards. However, there is much to do before this becomes reality. This article aims to present a general overview of China's General Accepted Accounting Principles (GAAP), U.S. General Accepted Accounting Principles and International Financial Reporting Standards (IFRS), and to analyze the differences among IFRS, U.S. GAAP and China GAAP using fixed assets as an example.

General overview of the IFRS

IFRS is the term used to indicate the whole body of the International Accounting Standards Committee (IASC) authoritative literature. IFRS is designed for use by profit-oriented entities.

The IASC came into existence in 1973 as a result of an agreement by accounting bodies in a number of countries. There are now 95 member organizations from all major countries. At the time, however, there was no actual "committee" of that name, although the predecessor standard-setting board was known as the IASC Board.

The IASC has as its objectives the formulation and publication of accounting standards; the promotion of their worldwide acceptance; and the harmonization of regulations, accounting standards, and procedures relating to the presentation of financial statements. Up until now, the IASC has published 29 applicable international accounting standards (IAS). Although critics would argue that the standards issued to date have been too flexible and are often a compromise between British and U.S. standards, it has succeeded in reducing the number of alternative accounting treatments permitted in its standards.

The structure of the IASC

In the past, accounting standards were set by a part-time, volunteer IASC Board that had 13 country members and up to three additional organizational members. In addition to the board, other parts of the old IASC structure were:

- Consultative Group: an advisory body representing a wide range of international organizations with an interest in accounting;

- Standing Interpretations Committee: developing and inviting public comment on interpretations of IASC Standards, subject to final approval by the IASC Board;

- Advisory Council: supervision body;

- Steering Committees: expert task forces for individual agenda projects.

In 2000, the IASC published a restructuring plan, which was expected to integrate the roles of the IASC and those of national standard-setters.

Although the IASC has no effective legal power, according to EC directives that do have legal force on EU members, all listed companies were required to use IFRS by 2005 in preparing their consolidated accounts.

Overview of China GAAP

China has experienced remarkable growth since it began reform and opening up in 1979. Accounting development in China mirrors changes in its environment, specifically, the historical environment that has affected its accounting standard setting in aspects of China's economic, political and social evolution. The new accounting system is largely based upon IAS, and the accounting system is experiencing great changes as is implemented.

China's Accounting Law (last revised on July 1, 2000) is of the highest authority in Chinese accounting system.

The law sets out the general principles of accounting for all enterprises and also empowers the Ministry of Finance (MOF) to administer accounting affairs and establish uniform accounting regulations and systems. Under the mandate of Accounting Law, the MOF has issued various accounting regulations that apply to different categories of enterprises. It issued the first Chinese Accounting Standard (CAS) in 1997 with another 16 standards following this, in order to develop a body of CAS that is broadly in line with IAS. In January 2001, the MOF further adopted a comprehensive accounting system for business enterprises. The most updated accounting standards (38 standards) were issued by the MOF on February 15, 2006 and became effective on January 1, 2007. Listed companies must adopt the new rules, and non-listed companies are encouraged to adopt them as well.

Overview of U.S. GAAP

U.S. GAAP is the term used to indicate the body of authoritative literature that comprises accounting and reporting standards in the United States.

Unlike IFRS, U.S. GAAP is designed for use by both profit-oriented and non-profitable entities, with additional accounting standards that are specifically applicable to non-profitable entities.

Like IFRS, any entity claiming compliance with U.S. GAAP must abide by all standards and interpretations, including disclosure requirements. However, unlike IFRS, a statement of explicit and unreserved compliance is not required.

U.S. GAAP does not use bold-and-plain-type paragraphs. However, like IFRS, all paragraphs of a standard have equal authority and must be complied with.

Unlike IFRS, the objective of financial statements is fair presentation in accordance with U.S. GAAP. Like IFRS, a hierarchy of alternative sources is specified when U.S. GAAP does not deal with a particular issue. This hierarchy includes industry practice in some instances.

In Issue No. 9 we will discuss differences between China GAAP and IAS on fixed assets