Disharmony in international accounting standards setting: The Chinese approach to accounting for business combinations

The paper addresses two distinct aspects of disharmony in international accounting standards setting. The first aspect relates to the political economic context of financial accounting standards. This is illustrated by the Chinese standards setters’ decision to allow the pooling of interests method of accounting for business combinations despite the prohibition of this method by both the FASB and the IASB. This decision by the Chinese standards setters appears to have been based on political economic factors related to the need for industrial reorganization in China rather than a desire to serve the needs of global capital markets. The second aspect of disharmony relates to the role played by differential understandings of the fundamental objectives of financial reporting in an international context. The IASB's goal of producing one set of global accounting standards to serve the needs of global capital markets has led to a reduction in the number of permissible accounting methods and a move towards the fair value accounting model. In particular, the IASB concluded that the acquisition method of accounting for business combinations should be the only method allowed for business combinations. In contrast, the Chinese standards setters have recognized the existence of both mergers and acquisitions, and in response they created two different methods of accounting for business combinations. Effectively, the Chinese standards setters developed an alternative approach to accounting for business combinations which challenges the IASB's goal of achieving international accounting convergence through the fair value model.