As of April 30, 2009, except for (200041) Shenzhen Benelux Enterprise Co., Ltd., all of the 1,624 domestic listed companies had disclosed their annual reports of 2008 as scheduled. The principal of the Accounting Department of the China Securities Regulatory Commission (CSRC) has recently made his remarks on the investors’ concerns for the disclosure and supervision of the listed companies’ annual reports of 2008 and the problems existing in the accounting.

I. Q: What is the general status of the listed companies according to their disclosed annual reports of 2008?

A: According to the preliminary statistics, with regard to the business scale, 1,624 listed companies materialized a business income of RMB11,302.4 billion in total, with a year-on-year increase of 16.77%. In terms of the realized profit and its constituents, 1,370 listed companies gained profit (accounting for 84.36% of the total of the listed companies), and 254 listed companies suffered losses (with a year-on-year increase of 7.99%). After offsetting the profit against the losses, a net profit of RMB820.8 billion was realized, with a year-on-year decrease of 16.82%. Thereinto, the investment income was RMB212.6 billion, with a year-on-year decrease of 33.59%; the assets impairment losses were RMB396.3 billion, approximately 2.5 times those in 2007; the profit and loss resulted from changes in fair value was changed from the profit in the same period of the year before into a loss, with a loss of RMB50.0 billion. In terms of the profitability, the average earning per share was RMB0.34 and the average return on net assets was 11.53%, with the year-on-year decreases of 20.93% and 22.52% respectively. With regard to the cash flow, the net cash inflow from the operating activities of the listed companies in 2008 was RMB2,621.1 billion, with a year-on-year increase of 40.28%, and about 3 times the net profit in the very year. In terms of the auditor's opinion of the annual report, among the 1,624 listed companies, 1,511 companies’ auditor’s opinions were standard unqualified opinions, accounting for 93.04% of the total of the listed companies; 77 companies’ auditor’s opinions were non-standard unqualified opinions with stressed issues, accounting for 4.74%; 17 companies’ auditor’s opinions were qualified opinions, accounting for 1.05%; and 19 companies’ auditor’s opinions were disclaimer of opinion, accounting for 1.17%. The non-standard unqualified opinions mainly concerned issues like continuous operating capability, placing cases on file for investigation, litigation, significant outward investment, failure to withdraw the capital occupied by major shareholders, etc.

II. Q: What supervisory measures were taken by the CSRC on the disclosure of the financial information in the listed companies’ annual reports of 2008?

A: 2008, the second year for the implementation of the new accounting standards in the listed companies, witnessed the profound change in the domestic and international economic environment. In the year, the global financial crisis increasingly exerted its influence on China’s real economy, and the risk and profit pressures on the listed companies grew more intense. Under such circumstances, a series of supervisory measures were taken by the CSRC to ensure that the listed companies’ compilation of their annual reports of 2008 and their financial information disclosure accord with the requirements of the new accounting standards and the regulations on financial information disclosure and the quality of the listed companies’ financial information disclosure is improved.

Firstly, supervision and guidance strengthened in advance. Prior to deploying the compilation and disclosure of the listed companies’ annual reports of 2008, the CSRC earnestly summarized its experience in supervision over the listed companies’ annual reports of 2007, conducted a thorough investigation into the problems occurring in the listed companies’ implementation of accounting standards, and made specific stipulations on the following six issues: 1. the measurement and information disclosure of fair value; 2. the confirmation, measurement and information disclosure of financial instruments; 3. the confirmation of the scope of the consolidated financial statements; 4. the direct and indirect donations by the controlling shareholders to the listed companies; 5. the differences in domestic and overseas accounting; and 6. the definition and disclosure of the extraordinary profit and loss.

Secondly, importance to the specialized guidance attached. The specialized guidance on the accounting supervision of the CSRC agencies and the stock exchanges was offered by issuing supervision letters and printing and distributing the “Answers to Questions concerning Supervision over Listed Companies’ Implementation of Accounting Standards for Business Enterprises”. In the process of preparation and disclosure of the listed companies’ annual reports of 2008, the CSRC Accounting Department issued a total of 41 letters for the significant accounting supervision cases including “Relevant Accounting Treatment for Back Door Listing” and “Confirmation of the Fair Values of the Derivative Financial Instruments without Open Market Quotation System or Standardized Valuing Model”, and printed and distributed 3 issues of “Answers to Questions concerning Supervision over Listed Companies’ Implementation of Accounting Standards for Business Enterprises”, which involved 15 serious accounting supervision problems. In addition, the Accounting Department urged all its agencies and stock exchanges to promptly inform the listed companies and the accounting firms of the released policies on accounting supervision by way of training, special meetings and network publication, with an aim to help the listed companies with an accurate understanding and strict implementation of the requirements of the relevant supervision policies.

Thirdly, supervision over auditing enhanced. The CSRC Accounting Department made unified arrangements for the supervision over the auditing of the listed companies’ annual reports of 2008, requiring that the CSRC agencies carry out comprehensive supervision and guidance on the accounting firms’ practicing activities through the whole processes of accepting the business of auditing the listed companies’ annual reports of 2008, formulating the auditing plan, carrying out the audit, collecting evidence and completing the audit and encourage the CSRC agencies to make their listed company supervision records, which fully uncovered the risks and potential dangers found during the supervision over the listed companies, available to the accounting firms, with an aim to improve the auditing quality of the accounting firms and enhance the credibility of the listed companies’ annual reports of 2008.

Fourthly, supervision policies related to the accounting standards further accomplished. With regard to such issues as donations by shareholders and confirmation of the income from debt restructuring due to bankruptcy organization, which have drawn attention from all the market participants, the CSRC Accounting Department timely released the relevant accounting supervision policies, deterring the listed companies from tampering with the profit figure through the equity transactions and effectively curbing the listed companies’ profit manipulation.

Fifthly, the implementation of the supervision policies monitored. As to the listed companies named in the “Letters of Reply to Accounting Issue”, we kept a close watch on them and urged them to perform implementation through the relevant securities regulatory bureaus and stock exchanges in order to achieve a full execution. Judging by the actual implementation results, the accounting supervision policies were basically enforced and the quality of the listed companies’ financial information was improved.

III. Q: What accounting problems were revealed in the process of preparation and disclosure of the listed companies’ annual reports of 2008?

A: As a whole, most listed companies disclosed their annual reports in strict accordance with the new accounting standards and the requirements of the CSRC’s regulations on financial information disclosure. However, in the process of compiling the annual reports, we found some problems: some reports confirmed the profit and loss through the equity transactions; some failed to confirm the goodwill before the back door listing according to relevant accounting standards; some were not prudent enough when confirming the income from the debt restructuring due to bankruptcy reorganization; some failed to confirm the vesting periods of the equity incentives according to the relevant accounting standards and contracts on equity incentive, and failed to allocate the equity incentive expenses in different accounting periods in the light of the actual implementation; some didn’t treat the purchase dates in the complex economic transactions with due care; and others need to improve their retaining of provisions for assets impairment, confirmation and measurement of foreign currency financial instruments and definition of extraordinary profit and loss. Among the above-mentioned problems, the confirmation of the profit and loss through the equity transactions, the relevant accounting treatment for back door listing and the confirmation of the income from the debt restructuring due to bankruptcy organization were especially outstanding, and became the key points of the supervision over the disclosure of the listed companies’ annual reports of 2008. We, under the principle of “rectifying upon discovery”, strived to solve the above problems at their early stage and before the disclosure of the annual reports. While dealing with the special accounting cases of the listed companies, we also timely promulgated the relevant policies and guidelines to the agencies and the stock exchanges with an aim to prevent the recurrence of the similar problems.

IV. Q: How do you deal with the problem of confirming the profit and loss through the equity transactions in your supervision over the annual reports of 2008?

A: The equity transactions cannot be used to confirm the profit and loss. However, according to the incomplete statistics, 14 listed companies manipulated their profit through debt repayment, debt exemption and direct asset donations by their major shareholders in 2007. Among the said companies, 9 found their shares imposed with de-listing risk alert and 4 witnessed their shares with other special treatment. Besides, manipulating the profit through unfair connected transactions with their controlling shareholders was also a means to fake favorable performances. Therefore, the quality of the listed companies’ accounting information will never be improved unless the problem of confirming the profit and loss through the equity transactions is solved. For this problem, the CSRC issued a public notice (2008) No.48 at the end of 2008 and formulated special provisions on the equity transactions involving the shareholders’ donations: the listed companies shall consider the economic transactions with the nature of capital injection as the equity transactions, with the income counted into the owners’ equity.

However, solving the problem of utilizing the equity transactions to confirm the profit and loss in practice is no simple matter. Because the companies, which manipulated their profit through the equity transactions, were mostly listed companies with their shares imposed on delisting risk alert. They were not only faced with the risk of delisting but also the interests of the parties concerned were involved. With an inappropriate disposal, their individual risk is prone to trigger the systematic risk of the market. Thus, after a lot of in-depth research and survey we issued the supervisory policies on the equity transactions with a nature of donation by shareholders, and made proper arrangements for the transition. From the perspective of the disclosure of the annual reports, our supervisory policies achieved satisfactory results, effectively cracking down on the confirmation of the profit and loss through the equity transactions.

V. Q: What have you done for the accounting related to the back door listing?

A: Although China’s capital market has grown into its twenties, the cases of counter purchase first emerged only in 2007. In the process of trading, the purchased listed company transferred all its operational assets and business through its major shareholder, with only cash or nominal assets left, and became the commonly called listed shell company. After the completion of the trading, the relevant listed company confirmed the consolidated goodwill according to the relevant regulations on the corporate merger. Some companies proposed that with reference to the relevant international accounting practice, on the premise that the listed company becomes a shell company with no business, the counter purchase is actually a kind of capital transaction rather than corporate merger. In other words, the above-mentioned deal equals to that a non-listed company acquired the listed shell company’s net monetary assets through shares issuance, and then adjusted its capital structure. Under that circumstance, no goodwill or other intangible assets should be confirmed in terms of accounting. However, as market participants had different opinions about whether the shell company arising at certain stage of the process of overall counter purchase is defined in the same way as the shell company is stipulated in foreign rules, the dispute over whether the goodwill should be confirmed in the case of counter purchase of a shell listed company has always existed.

Considering the above situation, the Ministry of Finance issued the “Circular of the Ministry of Finance on Implementing Accounting Standards for Business Enterprises in Enterprises’ Annual Reports of 2008” (Cai Kuai Han [2008] No.60) in late 2008 to specify the principles for accounting in the back door listing. However, after the commencement of the disclosure of the annual reports of 2008, the relevant parties still held different views on the principles during the implementation. Concerning the above issue, we timely collected and analyzed the cases of counter purchase and enumerated several conditions for no need to confirm the goodwill in the counter purchase, thus providing a sound guidance on the relevant work.

VI. Q: How did the supervisory authority deal with the problem arising from the confirmation of the income from the debt restructuring due to bankruptcy reorganization?

A: Since the implementation of the new bankruptcy law on June 1, 2007, the cases of confirming the income from the debt restructuring through the bankruptcy reorganization by the listed companies with their shares imposed with other special treatment have increased. According to the new bankruptcy law, if the application for reorganization complies with the prescriptions in the bankruptcy law upon review, the court shall decree that the debtor shall undergo reorganization. The debtor or administrator shall submit his draft of the reorganization plan to the court and the creditors’ meeting within 6 months from the date of`the court decree on the debtor’s reorganization. As the reorganization plan involves the debts restructuring, a number of listed companies with their shares imposed with other special treatment confirmed their income from the debts restructuring right after the court approved their reorganization plan.

However, it was found during the supervision that there existed a significant uncertainty in the capacity of fulfilling the reorganization plan by the company which entered the procedure of bankruptcy reorganization. For instance, a listed company, which underwent reorganization due to bankruptcy, confirmed the income of approximately RMB2.0 billion from the debt restructuring in its 3rd quarter report of 2008. Just after less than 4 months, it released the announcement on failure to repay the debts as scheduled according to the reorganization plan. But even so in the process of compiling its annual report of 2008, the company still insisted on confirming the income from the debt restructuring. Under that circumstance, we required the company make a professional judgment according to the principle of prudence in the accounting standards for business enterprises. In March 2009, the company announced that as there existed a significant uncertainty in the implementation and the result of the bankruptcy reorganization plan, the company could not confirm the income from the debt restructuring due to the bankruptcy reorganization in 2008. Besides, the company offset the income from the debt restructuring, which had confirmed in the 3rd quarter report of 2008, in its annual report of 2008, disclosed in April 29.  

It should be stressed that the listed companies must make their prudent judgment on the significant professional issues including the confirmation of the income from the debt restructuring due to the bankruptcy reorganization, and must not make their judgment randomly or make no judgment.

In the end, the principal expressed that so far, the CSRC has launched their special research and analysis on the disclosure of the financial reports of 2008, and made further investigation into the problems suspected of violations of accounting standards found in the process of disclosure of the annual reports, and would deal with those according to law upon verification.

The CSRC will attach great importance to the quality of the listed companies’ disclosed financial information as it has been doing. In the days to come, the CSRC will focus on the supervision over the implementation of the new accounting standards by the listed companies, continuously carry out the on-the-spot inspection on the accounting firms with the qualifications for securities and futures business and punish those listed companies severely according to law for their financial malpractices.