The Hong Kong Exchanges and Clearing Ltd's (HKEx) move to promote mutual recognition of accounting standards between the city and the mainland will prove to be a win-win game.

The local bourse operator recently launched a public consultation on its plan to allow locally-listed firms to file financial statements compiled in accordance with Chinese accounting standards (CAS) and audited by mainland auditors.

As a reciprocal arrangement, the mainland will also allow Hong Kong-incorporated companies to conduct financial reporting based on Hong Kong Financial Reporting Standards (HKFRS) or International Financial Reporting Standards (IFRS) when they list their shares there in the future.

On the face of it, Hong Kong will definitely gain most should the scheme push through, as an international financial center will be significantly bolstered.

The implementation of the proposed scheme should help reduce compliance costs for mainland incorporated companies that wish to go public in Hong Kong, encouraging more mainland-listed firms to seek a second listing in the city.

More IPOs and fundraising activities will benefit the local financial services sector in terms of more business.

Investors will also benefit indirectly as lower compliance costs will ultimately translate into higher corporate earnings.

Currently, there are more than 150 mainland-incorporated companies listed in the local bourse as H-share companies, of which around 60 are simultaneously listed in mainland exchanges as A-share firms.

Investors in these A+H-share companies will immediately benefit from the scheme should it push through.

Meanwhile, by sparing companies the process of preparing a separate set of financial statements, the scheme will promote more timely disclosure of information to investors, which in turn will help increase market efficiency, a key consideration for an international center.

The impact of the framework on market efficiency might not be easy to quantify. But one can get a rough idea by taking note of the fact that these A+H-shares currently account for about 27 percent of the total market capitalization of the local bourse, and accounted for nearly half the turnover of the exchange last year.

From the viewpoint of the mainland, the arrangement will also bring about lots of benefits.

First of all, it signifies the formal convergence of the CSA and the IFRS after years of co-operation between the two sides.

"Our proposed framework recognizes that mainland accounting and auditing standards have converged with international standards," said Mark Dickens, HKEx's head of listing.

This recognition will boost overseas investors' confidence in the capital market and financial reporting on the mainland, helping to expand the fundraising channels for mainland firms.

The mutual recognition of financial reporting between Hong Kong and the mainland could lead to wider acceptance of the CAS globally as the HKFRS has fully converged - in 2005 - with the IFRS, which has been adopted or is being adopted by around 115 countries or jurisdictions.

As mainland companies ever-increasingly play an active global role, wider acceptance of the CAS in the global market will reduce their regulatory compliance costs when operating in different jurisdictions.

It will also help shorten the time for mainland firms to complete corporate actions in overseas markets, as financial statements are some of the indispensable documents in many corporate actions such as conducting large investments, spin offs, acquisitions and mergers.

This is particularly meaningful and relevant nowadays as the mainland government encourages domestic enterprises to strategically go abroad for expansion and for snatching up natural resources.

Viewed from a broader perspective, the mutual recognition of accounting standards will also hasten financial integration between Hong Kong and the mainland.

Mainland authorities have signaled their intention to allow foreign firms to list their shares in the Shanghai market in a move to develop the city into an international financial center.

IPO aspirants such as global banking giant HSBC Holdings Plc and Hong Kong-incorporated red-chip telecom giant China Mobile have, literally speaking, run out of patience in their long wait for a debut in the Shanghai bourse.

One of the obstacles cited by market watchers for the long wait is differences in financial reporting.

The mutual recognition of accounting standards will provide the right solution.

Furthermore, as a prelude to the mutual recognition of accounting standards, the Hong Kong Institute of Certified Public Accountants and the China Accounting Standards Committee agreed in December 2007 that the two sides would work on an ongoing-basis to maintain convergence between the two accounting standards.

With the convergence of accounting and auditing standards, further cross-border financial integration will be facilitated.

With all the immediate or potential benefits, it will be very unlikely that the framework of mutual recognition of accounting standards won't be pushed through.

(HK Edition 09/12/2009 page2)