Posts Tagged ‘IFRS’

The big talking point last week was undoubtedly the New York Times article that laid out the personal wealth of Wen Jiabao’s family in great detail. It was a piece of reporting very reminiscent of the earlier Bloomberg piece regarding the wealth of Xi Jinping’s immediate family, and the result of both articles has been the same: immediate blocking of the entire site inside China. But there are other potential repercussions because of this as well, and they have the potential to harm investors and Chinese stocks listed overseas.

Both stories used Chinese records to build and confirm the bulk of the data they presented, this is also commonly done when conducting due diligence on Chinese companies. These are the SAIC filings where you can find a lot of data about a company to help guide your due diligence process. It used to be that you could get all manner of economic data from the SAIC files, but access rights were severely restricted earlier this year, which forced due diligence professionals to adapt their processes.

It was widely speculated that the restricting of access to the SAIC files was a response to them often being used as a first stop when the now infamous short sellers were putting together reports on Chinese companies. The theory then went that because these reports were having a negative effect on Chinese stocks overall, as the perceived fraud risk increased, the political class stepped in to try to limit the short reports and decrease the downward pressure on Chinese stocks. It may even have been the case that the reason for the political class to move on the issue was that they were themselves losing too much money because of the stock decline.

The risk we face, now that these reports have been put together, at least to some extent, based on the SAIC filings is that access will be restricted even further. This would cause a multitude of problems for conducting due diligence in China, and it would add uncertainty to the market for China concept stocks as it would become even harder to confirm holdings, or even simple things like ownership.

This is especially problematic for people who trade Chinese stocks on the IFRS exchanges, as disclosures from companies on these exchanges tend to be much less detailed. The classic example for me in this is the fact that you can still report a VIE as a subsidiary under IFRS. The classic check on this would be to pull the SAIC filings to find out who were the actual registered equity owners of the entity in question, if you remove this option then investors truly are flying blind.

What’s more, this will probably also increase the costs of performing due diligence in China, which would harm smaller investors more that institutional players who have enough money involved to warrant the outlay. With the easy option of checking SAIC filings for suspicious discrepancies gone investors will need to find other ways of red flagging potential investments, it will also increase the value of having a good network set up for conducting due diligence.

Further, In my opinion it’s quite the opposite of what the overseas listed Chinese companies, especially the small- and mid-cap companies, need right now. many of them appear to be legitimately undervalued and would benefit greatly from increased transparency to help soothe investors concerns regarding them.

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I’ve talked previously about the issue of VIE disclosures under IFRS, and how they are leaving investors clueless as to the nature of VIE “subsidiaries”.

Well it looks like there will be some movement on this front with new rules for consolidation and disclosures under IFRS, although they don’t come into effect until 2013.

The rules in question are IFRS 10, 11, and 12, where IFRS 10 and 11 deal with consolidation and Joint-venture/Joint-operations consolidation, and IFRS 12 deals with new disclosure requirements. The rules can be used before 2013, but must be adopted as a package, apart from the disclosure rules in IFRS 12, which can be adopted on their own.

These new disclosure requirements should mean a company has to account for the control mechanisms for any subsidiary, which is not consolidated based on equity ownership. So it would seem we can expect disclosures on the IFRS exchanges more in line with what is currently available under US GAAP.

Investors will undoubtedly welcome any reform that will bring greater clarity to VIE structures on IFRS exchanges, but the extent to which these disclosures will go in practise is still uncertain. As IFRS is a framework based on principles it is doubtful whether there will be precise enough requirements to ensure all relevant information investors need to have at their disposal is available.

The time leading up to the implementation of these rules is a chance for the relevant authorities for exchanges with a heavy Chinese VIE presence to set up their own more precise rules and guidelines on what information should be included in the new IFRS 12 disclosures.

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In this post I’ll outline why I think Chinese stocks listed on TSX and TSXV are potentially very interesting for international investors. I might also follow up this post with some more specific examples of interesting features I’ve found whilst looking through these companies.

The businesses are obviously interesting in themselves, but at this moment there is a more encompassing reason to look at Canada-listed VIEs, namely that the accounting standards are transitioning from Canadian GAAP to IFRS.

As I’ve stated in a previous post, finding a VIE under IFRS is significantly harder than under, say US GAAP. This is because VIEs have to be declared under US and Canadian GAAP, but can be counted as a “Subsidiary” under IFRS without any further clarification. What’s interesting now is to see how the change in accounting standards in Canada will affect the disclosures of VIEs.

It has to be said that the disclosures in Canada are not quite up to par with their US equivalents, even at this stage. For instance the risk sections are nowhere near as exhaustive, and the details of the VIE agreements are non-existent in many cases.

This switch will give investors a good way to understand how disclosures differ between the systems in regards to VIEs, and as such perhaps provide some insight into what to look for to find VIEs under IFRS. At the very least it might provide incentives to push for more disclosure on the matter under IFRS, perhaps similar to what we saw on the Lashou IPO filings.

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