Yuedong Li, Professor, The School of Accounting at the Southwestern University of Finance and Economics, was the first academic to benefit from a research fellowship programme through ICAEW, in partnership with the China Accounting Standards Committee.

Having previously compared German and Chinese internal auditing approaches, she was well placed to conduct a comparative analysis of small company reporting in China and the UK. She was provided the support of academic adviser Professor Chris Nobes. 

The report makes a number of international comparisons, with a focus on China and the UK. The two countries have certain distinct differences around small company reporting that made for an interesting study. The report looked at how International Financial Reporting Standards (IFRS) applies in the UK and explores whether China should adopt a similar approach.

It also examines several aspects of the financial reporting by small companies, including how a small company is defined, the users of small company financial reports, UK and Chinese GAAPs and whether the GAAP should change.

“We interviewed several accountants from accounting firms of various sizes – from sole practitioners to medium to large firms,” says Li. “In the UK, we conducted a round table chaired by Alison Dundjerovic from ICAEW. I then conducted interviews with Chinese accountants over the course of two months with help from ICAEW China.”

Alongside these interviews, Li drew on other academic literature, analysis of the laws and standards, international standard-setting and approaches in other countries.

China introduced a GAAP loosely based on IFRS, the Accounting Standard for Business Enterprises (ASBE) in 2006 for the reporting of listed companies and unlisted financial institutions. It is now also required for large and medium-sized private companies. Small companies can use ASBE, but the majority use the Accounting Standard for Small Business Enterprises (ASSBE).

UK financial reporting is not based on size but on listing status. Listed companies – and any unlisted financial institutions – must use IFRS for consolidated reporting. All other reporting, irrespective of company size, can use either IFRS UK GAAP. This comprises two parts: the Companies Act 2006 (based historically on EU Directives) and FRS 102 (based on IFRS for SMEs).

“The definitions of small business are quite different in both countries,” says Li. “While China’s small business reporting rules cover a broad scope of businesses and are based on size, the UK has more distinctions around types of business, taking some out of scope of the reporting requirements.”

Chinese rules require small enterprises to prepare financial statements even if they are not published, unlike UK rules. The report’s British interviewees saw limited use in the publication of the financial statements of small companies, but said that the annual discipline of creating a report is good for managers, the tax authorities and lenders. Chinese interviewees said that managers, banks and government departments, including the tax office, were users of financial statements. Published statements could be useful for potential investors.

ICAEW’s Research Fellowship Programme is partnering with several academics to produce studies such as Li’s, to help deliver clarity on reporting requirements in China, the UK and the rest of the world.

“The ICAEW Fellowship was a great support to me,” says Li. “I really valued Professor Nobes’ insights and ICAEW HQ’s help in finding UK-based accountants to interview. The insights that we gathered as part of this project give us a snapshot of the variations in small company reporting, where international alignment is useful and where it isn’t necessary. I’m very happy with the final work that we produced.”