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New accounting and audit rules began on Monday after months of preparation and training by firms to ease the transition.

"The transition may bring about the undulation of corporate accounting profits and thus influence the results of 2006 financial reports and activate the market revaluation," said Cao Deming, head of Renmin University of China's accounting department.

The accounting reform will initially target listed companies. But the Ministry of Finance (MOF) has also asked other non-listed companies such as insurers to kick off the accounting change.

Enterprises owned by the central government will also adopt the new accounting rules. Among them, 24 giants such as China Mobile and China Telecom will pioneer the new system, while the rest will follow suit before the end of 2008.

The banking industry will be most affected by the change, and the new rules are expected to greatly impact performance indices such as net profits and assets.

"Preparations for the link-up of the old and new accounting rules should be done before December 31, 2006," said a Bank of China (BOC) spokesman.

Staff members at BOC have been busy revising its corporate accounting manual and redesigning, testing and adjusting its accounts system.

China Construction Bank (CCB) has spent the past month intensively training its financial staff for the change. It invited professionals from IBM to help debug the financial software system. "Due to the nature of the change, the system readjustment is complicated," said a CCB employee.

The new rules require banks to adopt a unified accounting approach that registers all business operations in terms of one specific currency. They will drop the old separate accounting system, which recorded business operations in terms of the original foreign currency and converted the sum total into renminbi.

The complicated change has required a great deal of preparation and resources to adjust the existing separate accounting and calculation system.

A source familiar with the banking industry said BOC and CCB filed an application to the MOF early last year, asking it to postpone unified accounting "due to the huge cost of altering the system".

The MOF responded in its November 6 corporate accounting guidelines. It said financial institutions that frequently deal with foreign currencies can adopt separate accounting in their daily registrations, but the final calculation of the sum total must accord with the results under unified accounting.

This means foreign exchange gains or losses will have to be recorded in a profit statement instead of a balance sheet as before. "It makes the financial statement more reliable and limits the possibility of companies manipulating profit," said Cao.

(China Daily January 4, 2007)