The Impact of IFRS-based Chinese Accounting Standards on Accounting Conservatism

In 2007, China implemented mandatory accounting standards reforms in an effort to converge with the IFRS (International Financial Reporting Standards). The new accounting system in China is undergoing rapid change in order to adapt to the increasingly complex economic situations. The tremendous changes in the standards related to conservatism mean the stakeholders of the financial reporting, especially the standards-setting board, investors and government, cannot neglect how the IFRS convergence accounting standards affects the conservatism of Chinese-listed enterprises. Therefore, this thesis employs listed Chinese enterprises as a research sample to empirically examine the correlation between accounting system reforms, and the conditionally and unconditionally conservative financial statements of Chinese public enterprises. For the conditional conservatism, this thesis takes the listed Chinese companies from 2002 to 2010 as a sample and uses the accrual cash flow model (2005) and Basu model (1997) to investigate the impact of IFRS convergence standards in 2006 on conditional conservatism. This thesis finds that after the implementation of IFRS-convergent standards, Chinese-listed enterprises employ less conservative accounting policies because the IFRS convergence altered the ex-ante information asymmetry and monitoring costs of China’s listed firms. This empirical finding is significant and robust under both the accrual cash flow model and Basu model. Further, this thesis explores the in-depth mechanism of the effects of the new standards, which has the following findings: 1. After the implementation of IFRS convergence, the decrease in the degree of conditional conservatism is higher for enterprises with the more complex business model (or more information asymmetry), which supports the assumption that IFRS convergence increases the comparability of financial reports and disclosure environment and reduces information asymmetry. 2. After following IFRS convergence, the reduction in the degree of conditionally conservative accounting is higher for non-state-owned enterprises compared with companies with state-owned enterprises. 3. The reduction in the degree of conditionally conservative accounting is higher for firms with more debt-monitoring costs than firms with less monitoring costs, which supports the assumption that IFRS convergence reduces monitoring costs of debt holders. 4. After following Chinese new standards, the reduction in the degree of conditionally conservative accounting is higher with firms who borrow from state-owned banks compared with firms who borrow from non-state-owned banks. For unconditional conservatism, this thesis also tests and finds the existence of unconditional conservatism among China’s listed companies in the sample period (2002-2010) and the IFRS convergence accounting standards have improved the unconditional conservatism level of the listed companies in China. Before 2006, there were serious idle fixed assets that were not depreciated for the listed Chinese companies under former standards. Changes in the requirements of the IFRS-based standards for this issue will increase unconditional conservatism. In addition, this thesis finds that the increase in the degree of unconditionally conservative accounting after the implementation of the IFRS-based standards is higher with state-owned enterprises compared with companies with non-state-owned. The main reason leading to this result is that the state-owned enterprises had more serious idle fixed assets issue before 2006.