ISSUES IN ACCOUNTING EDUCATION Vol. 22, No. 4 November 2007 pp. 685–708
China Eastern Airlines: People’s Republic of China Accounting Standards, International Financial Reporting Standards, or U.S. Generally Accepted Accounting Principles?
John L. Haverty
ABSTRACT: China Eastern Airlines, headquartered in the People’s Republic of China, has been listed and traded on the New York Stock Exchange since 1997. In its 2005 annual report, China Eastern Airlines presents two sets of ﬁnancial statements: one prepared under People’s Republic of China accounting regulations, and a second set prepared under International Financial Reporting Standards. In addition, as a listed company on the New ...view middle of the document...
She felt these two positive developments would be lasting, while two negative developments, the outbreak in China and Asia of Severe Acute Respiratory Syndrome (SARS) and the downturn in international travel due to terrorism, would both be temporary. Walt started researching and discovered two Chinese airlines traded on the New York Stock Exchange, China Eastern Airlines and China Southern Airlines. Since Walt’s knowledge of Chinese companies was very limited, he tried to ﬁnd some simple performance measures—such as net income, return on equity, and the current ratio—to establish trends. Walt looked on
John L. Haverty is an Associate Professor at St. Joseph’s University. 685
some websites and downloaded some annual reports. He did ﬁnd some background information about China Eastern Airlines. He started to take a look at China Eastern Airlines’ 2005 annual report and was searching for net income. This is where his confusion started. Walt went back to Susan and reported: ‘‘I found two different income statements with two different net income amounts reported. The statements were in English, but they were in the Chinese currency, RMB yuan. One of the income statements shows a proﬁt for 2005, and the other shows a loss. I’m not sure why there are two income statements here, and I am certainly not sure which one to use. I also downloaded some material from the United States’ Securities and Exchange Commission showing an even larger loss for China Eastern Airlines in 2005. I was trying to calculate some ratios and compare them to some airlines in other countries, and I am really not sure where to begin. Can I trust these things?’’ Susan suppressed a chuckle and said cryptically, ‘‘Welcome to the wild, wonderful world of international accounting. I think you need to learn a little bit about international accounting and also see how they do things in the People’s Republic of China. Then tell me what you think of China Eastern Airlines ﬁnancial statements. Keep me informed about how your research is going. Let’s meet on this early next week.’’ International Financial Accounting Diversity and International Financial Reporting Standards One challenging aspect of international accounting is the fact that no two countries have exactly the same accounting standards or procedures (Gernon and Meek 2001). What this means is that a ﬁnancial statement such as a balance sheet or an income statement prepared in the United States (U.S.) is prepared under a different set of rules than a balance sheet prepared in some other country, such as the United Kingdom (U.K.). Even though these balance sheets might look the same on the surface, making comparisons between the two might be fraught with peril. For example, U.S. accounting procedures require that the value of plant and equipment on a balance sheet be shown at the historical cost of the asset. U.K. accounting procedures, however, permit plant and equipment to be revalued to current value....