International Financial Accounting: The Bank of China - Essay Example

International Financial Accounting The Bank of China Section A: Mandatory and Voluntary content For this work it has been decided to analyze the Bank of China. Unfortunately, the Annual Financial Report for the Bank of China for 2013 is not available yet, only its interim version. For this reason, there was analyzed the Annual Financial Report of the Bank of China for 2012. Annual Financial Report of the Bank of China is not supplemented by a review. Mandatory and voluntary disclosures are different sets of information; however both are effective ways to reveal information to shareholders (Yuen et al., 2009). China Securities Regulatory Commission requires two main mandatory disclosures, including the no. 2 format and content of publicly-listed companies, and the 2002 code of corporate governance for listed companies (Yuen et al., 2009). Voluntary disclosure is highly encouraged in Chinese companies as it allows protecting the interests of public investors and other stakeholders. Below is presented a breakdown between mandatory and voluntary content of Annual Report of the Bank of China for 2012, supplemented with comments that consider the differences between the two types of disclosure (mandatory and voluntary) and their relative importance for impression management. Section Mandatory/ Voluntary Comments Statement of directors’ responsibilities for the financial statements V This disclosure item is recognized to be voluntary for Chinese public organizations (Yuen et al., 2009, 128). However, the Annual report 2012 of the Bank of China does contain this information Development Strategy V Development strategy provides readers with the insight of the Banks plans for the future and its strategy Honours and Awards V While this type of information disclosure is voluntary, it enables readers of the annual report consider the Bank’s achievements and thus to build more positive image Corporate information V Message from the Chairman V Important information and further analysis is presented in Section 3 Message from the President V Text supplemented with the photography of the senior manager might be useful for potential readers, especially in the culture where hierarchy is so important Message from the Chairman of the Board of Supervisors V Text supplemented with the photography of the senior manager might be useful for potential readers, especially in the culture where hierarchy is so important Management Discussion and Analysis V It is very useful section as it delivers and communicates some critical financial and business information in more simple and user-friendly manner Financial Review V Clarifications supported with comparative historical financial data reinforce the Banks’ achievements or slowdowns Business Review V Clarifications supported with comparative historical business/operational data reinforce the Banks’ achievements or slowdowns Risk Management M Important information where management identifies major risks and threats that might have adverse effect on the Bank’s financial position Organizational Management, HR Development and Management Outlook V Information disclosed about company’s human resource policies, workplace development activities, as well as internal management structure is considered to be voluntary. The Bank of China reveals information about its employees, including the following: allocation of labour force, information about training initiatives, talent development programs, etc. Corporate Social Responsibilities This type of content is voluntary, however, the Bank of China reported about its activities and efforts regarding: social responsibilities, contributions to the community, charitable activities and donations, as well as environmental protection (Bank of China 2012, 69). Voluntary environmental reporting is increasing its weight and becomes more important issue for various stakeholders and potential investors. In addition to public pressure put on companies in China, the Ministry of Finance, China Securities Regulatory Commission and the State Environmental Protection also increase the amount of mandatory environment disclosure to be reported by the China-based companies (CSR Asia 2005). Changes in Share Capital and Shareholdings of Substantial Shareholders V Directors, Supervisors and Senior Management Members V Here the Bank of China voluntary presents the following items: list of the names, year of birth, dates of position held for both current and former directors, supervisors and senior management members; remuneration of directors, supervisors and senior management members paid in 2012; Also, there is provided information about directors, independent directors, and other senior management members of the Bank of China, revealing their qualifications (academic and professional) and work experience. Corporate Governance M While Corporate Governance is considered to be mandatory item in the annual financial report, the Bank of China disclosed some voluntary information, such as director’s attendance at shareholder meetings, convening board meetings, audit committee with the details on the names and qualifications of its members, role and function of the committee, number of committee meetings, and report of completed work. Information on the audit committee is considered to be very important as it provides objective information to the readers of the annual reports (Yuen et al., 2009). Sound corporate governance indicates on strong management and better monitoring in place (Lan et al. 2013,269). Report of the Board of Directors M Significant Events V Highlights of important events that might give clarification to the readers and stress significance Independent Auditor’s Report M Income Statement (+OCI) M Balance Sheet M Statement of Changes in Equity M Very important information which enables readers to understand the changes in equity made during the financial year Statement of financial position M Statement of Cash flow M Notes to the Consolidated Financial Statement M Unaudited Supplementary Financial Information M Reference for Shareholders V Organizational Chart V For Chinese culture hierarchy is common, and organizational chart might be not only helpful for the readers but also it is perceived as “should be” Table 1. The breakdown between mandatory and voluntary content of the Annual report of the Bank of China Section B: Signs of impression management (IM) 1. Narratives The Impression management is commonly found in annual reports. The reason of such occurrence might not be absolutely ethical but definitely has some logic as organizations strive to present themselves in a favourable light by using data selectively (Clatworthy & Jones 2006). According to Clatworthy & Jones (2006) such manipulation of facts is particularly evident among firms, whose performance is poor. In order to analyze the signs of impression management in the 2012 Annual Report of the Bank of China there will be used a specific accounting narrative - the chairman’s statement. Clatworthy and Jones believe that very unprofitable companies tend to discuss board changes rather than their results, acquisitions and disposals. Based on these criteria the Chairman’s statement in the 2012 Annual report of the Bank of China can be referred to the category of unprofitable organizations as there is devoted the whole paragraph to the Board changes and not much is said about specific results, only general words. Also, it is interesting to note that the message of the Chairman of the Bank of China XIAO Gang is dated by the 15 March 2013, and in the footnote of the Chairman Statement is Mr. XIAO Gang ceased to be serve as the Chairman of the Board of the Directors as of 17 March 2013. While the reason of this decision is not clarified, for the readers of the report it might be a bad sign. Other criteria identified by Clatworthy and Jones for evaluating the chairman’s narrative include: availability of more quantitative and personal references, reference to key financial indicators (sales, EPS and dividends, EBITDA, etc.), use of active voice rather than passive, and less emphasis on the future. Judged according to these criteria, the Chairman’s Statement of the Bank of China would not make its readers believe that the organization is highly profitable, as there were used no key financial indicators, only general words. Also, there is a whole paragraph devoted to the general plans for the future, however, all these words do not sound optimistic, as there is a note that Chairman ceased to take his position two days after the Statement was published. Also, it is believed that writing styles also indicate on the company’s profitability, especially when the Chairman’s statement contains personal references. In the Chairman’s statement there are no personal references, such as “we”. Instead, all the results and summary of the last year are achieve through the Bank: the Bank has vigorously promoted, the Bank has achieved, the Bank fulfilled, the Bank continued, etc. Such writing style is more likely to be perceived as distancing authors from the text. The only time when the Chairman used personal reference, saying on behalf of him was when he expressed his appreciation to some individuals and gratitude to various stakeholders. Another important characteristic of the Chairman’s Statement is its readability. According to the Lix index, the readability of the Chairman’s Statement in the 2012 Annual financial report of the Bank of China is difficult, as the Lix index is equal to 52. However, Courtis (1998, 468) states that “variability of readability is pervasive”. Thus, the readability varies between three separate passages. According to the Courtis findings (1998), in over half of the chairman’s statements, the first 100 words were the easiest to read of the three passages. If the middle passage is the most difficult for reading, it is believed that “management would use the middle passages of this address to “bury” adverse and negative news through a writing style that is more difficult to read than the introduction and conclusion passages of the narrative (Courtis 1998, 465). Applying this decoding approach to the Chairman’s statement of the Bank of China, it is possible to assume that this organization might be trying to mislead its readers and might fail to present its financial results in a fair manner. 2. Graphs Beattie & Jones (1992) explain that graphs presented in the annual reports also can be misleading and introduce distortions to its readers. There are identified two principal causes of distortion: selectivity of some form and non-compliance with the principles of graph construction (Beattie & Jones 1992, 291). In addition to these two potential biases, graphical data representation can have measurement distortion, which is the violations of the principle of graph design – “representation of numbers, as physically measured on the surface of the graph itself should be directly proportional to the numerical values of the variables being represented” (Tufte 1983, 56 cited by Beattie & Jones 1992, 293). There are various graphical representations in the 2012 Annual report submitted by the Bank of China. An overall effect of these visual aids is positive as it enables readers more easily to perceive the information and visually evaluate the financial indicators of the company. It is possible to conclude that in the light of Beattie and Jones’ work, graphs presented in the 2012 Annual report are a fair representation of the data. 3. Pictures The 2012 Annual report of the Bank of China provides its readers with photographs and various pictures. There are provided photographs of the Chairman (2/3 of the page), of the President (2/3 page), and the Chairman of the Board of Directors (2/3). Taking into consideration the Chinese culture and its hierarchical preference these photographs of the “bosses” might convey a very powerful message. Another page with pictures is devoted to the corporate social responsibility section, where are placed 5 photos of various social and environmental activities. These photos provide powerful message, especially to those stakeholders who are keen on sustainable development. In both cases photographs enable the company to build on impression management among the potential readers of the annual report. Section C: Possible Classification In the 2012 Annual Report of the Bank of China it is mentioned that the financial information presented in the Report was prepared not only in accordance with the IFRS, but also it was prepared in accordance with the Chinese Accounting Standards 2006, and financial statements comply with the disclosure requirements of the Hong Kong Companies Ordinance. Thus, it is possible to conclude that IFRS is permitted and in China IFRS is closely followed by its listed companies (Nobes and Parker 2008), but presentation under national rules is also required. Thus, IFRS are not adopted yet, only partially converged by the Bank of China. It is stated in the Notes to the principal regulator of the Bank is the CBRC and that all operations in other regions and countries are subject to the supervision of local regulators (Bank of China 2012, 133). The report of the Independent Auditor (PriceWaterHouseCoopers) confirms that consolidated financial statements were prepared in accordance with International Financial Reporting Standards (Bank of China 2012, 121). Based on this information, there was summarized the institutional, legal and regulatory background for the possible accounting classification for the Bank of China: External and institutional Egalitarian-authoritarian Legal system Civil law system Tax system Code law - inter-dependent Corporate finance Debt-based; however, equity financing has also began (Nobes and Parker 2008) Accounting profession Gradually is gaining in status and influence (Nobes and Parker 2008) Culture Statutory control; Uniformity; Conservatism; References: Bank of China 2012, Annual Report 2012, Available at: http://www.boc.cn/en/investor/ir3/201304/t20130426_2245145.html Beattie, V, & Jones, M 1992, The Use and Abuse of Graphs in Annual Reports: Theoretical Framework and Empirical Study, Accounting & Business Research (Wolters Kluwer UK), 22, 88, pp. 291-303, Business Source Elite, EBSCOhost, viewed 13 March 2014. Clatworthy, M, & Jones, M 2006, Differential patterns of textual characteristics and company performance in the chairmans statement, Accounting, Auditing & Accountability Journal, 19, 4, p. 493, Publisher Provided Full Text Searching File, EBSCOhost, viewed 13 March 2014. Courtis, J.K. 1998, “Annual report readability variability: tests of the obfuscation hypothesis", Accounting, Auditing & Accountability Journal, Vol. 11 No. 4, pp. 459-71. Nobes, C. and Parker, R. H. 2008. Comparative international accounting. Harlow, Essex, England: Prentice Hall/Financial Times. Peiyuan G., 2005. Corporate Environmental Reporting and Disclosure in China, CSR Asia, School of Public Policy and Management Tsinghua University. Available at http://www.csr-asia.com/upload/environmentalreporting.pdf Lan, Y., Wang, L. and Zhang, X. 2013. Determinants and features of voluntary disclosure in the Chinese stock market. China Journal of Accounting Research, 6 (4), pp. 265--285. Yuen, D. C., Liu, M., Zhang, X. and Lu, C. 2009. A Case Study of Voluntary Disclosure by Chinese Enterprises. Asian Journal of Finance \& Accounting, 1 (2). Read More