discussion 2(a) opinion

One of the key differences in CPCC’s results between PRC GAAP and IFRS is related to depreciation of oil and gas properties.   PRC GAAP requires the use of straight-line depreciation for oil and gas properties, whereas the units of production method is utilized under IFRS (Doupnik & Perera, 2015).  Under the units of production method, a per unit calculation is developed from determining how much production is expected from the equipment, and then dividing that number into the depreciable basis of the machine (less any salvage value.)  The per unit figure is then applied to the output for the accounting period.  This method causes depreciation to vary over time, as opposed to straight-line depreciation which is more consistent.  With the financial statements presented, depreciation was adjusted $1.784 RMB million, indicating that the straight-line method allowed for more depreciation under PRC GAAP than the units of production method under IFRS.

Effective January 1, 2016, the IASB published a “Clarification of Acceptable Methods of Depreciation and Amortization (Amendments to IAS 16 and IAS 38)”.  In this clarification the IASB noted in part that an appropriate method of depreciation is one that reflects the “pattern of consumption of an asset’s expected future economic benefits” (IASB, 2014.)  This statement would support the use of the units of production method, and the need for this adjustment in the CPCC reconciliation.

Another key difference between PRC GAAP and IFRS is the disposal of oil and gas properties.  This caused a loss of $1.26 RMB million under PRC GAAP to be added back under IFRS.  PRC GAAP recognizes related gain or loss when a component of the property is disposed of.  Under IFRS, any loss would not be recognized on a portion of an oil and gas property, but would be delayed until the entire property was disposed of.  Only accumulated depreciation and the carrying cost of the asset would be effected by the disposal of a component. (Doupnik & Perera, 2015).

The key differences between IFRS and U.S. GAAP are in depreciation on revalued property ($3.998 RMB million) and disposal of property ($1.316 RMB million.)  Under U.S. GAAP, revaluation of assets is not allowed.  Per IAS 16, if an asset is revalued, the entire class of assets it belongs to must also be revalued.  Revaluation must be done regularly so that fair value is represented as of the balance sheet date.  With the reconciliation, depreciation on these revalued assets is being added back to net income, as the revaluation would not occur under U.S. GAAP.  The adjustment for the revaluation is reflected on the shareholders’ funds report as well, decreasing equity by $12.943 RMB million.  It appears that the adjustment for disposal of property is also related to the revaluation, as U.S. GAAP considers the historical remaining basis when calculating gain or loss on disposal, rather than gain or loss calculated on the revalued amount.  This is represented in the $1.316 RMB million adjustment, adding the loss back to net income.

I think that users in the United Kingdom would find the reconciliation between PRC GAAP and IFRS useful.  According to Doupnik and Perera, “in general, UK accounting standards are very similar to IFRS, as international standards have been heavily influenced by British accounting.”  For instance, revaluation of tangible assets is allowed.  The subsequent reconciliation of IFRS to U.S. GAAP would be more confusing to readers from the United States.  These users need to first interpret the differences between PRC GAAP and IFRS, and then the differences between IFRS and U.S. GAAP.  (I found that highly confusing!)  However, because so many more countries are utilizing IFRS (or a closely related version of it), and the IFRS/U.S. GAAP differences are more easily identifiable due to the convergence project, the multiple standards approach appears to be much easier than trying to identify the differences between U.S. GAAP and each individual country’s GAAP.

Sources:

Doupnik, T. & Perera, H.  (2015.)  International Accounting (4^th ed.).  New York: McGraw-Hill.

IASB Clarifies Depreciation and Amortisation.  (May 12, 2014.)  Retrieved August 16, 2016 from, http://www.iasplus.com/en/news/2014/05/depreciation

IAS 16, Property, Plant and Equipment.  (n.d.)  Retrieved August 17, 2016 from, http://www.iasplus.com/en/standards/ias/ias16

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