China’s transition from a state-owned to a market-oriented economy has been remarkable for its speed. But one side effect of the headlong race has been that new accounting systems mingle with the old, and the whole business of reporting can seem ambiguous in the extreme. From a CFO’s point of view, the fuzziness is a burden — or a distinct benefit. Take some careful timing plus an even more careful selection of accounting options, add a pinch of deft juggling, and you can significantly improve the performance of a local-market offering.
That is precisely the recipe CFO Xu Jiebo followed for China Southern Airlines’ Rmb1 billion (US$121 million) A-share offering in Shanghai. The ride to market in July was turbulent but ultimately very satisfactory and it remains an object lesson on how to turn accounting diversity to a company’s advantage.
And diverse it certainly is. Currently in China, there appear to be three ways that a company can opt to report if it lists in the A-share market. These include China’s old style of reporting for individual sectors handed down by the state in 1993, newer rules based on International Accounting Standards (IAS) but adapted for China’s home market, called Accounting Standards for Business Enterprises (ASBE), and, as witnessed by the case presented here, a mixture of several options involving picking those that put the company’s net profits and asset size to best advantage (see “So Many Rules, So Little Time” at the end of this article).
Just to add to the confusion, different accounting models are used even within a single industrial sector. The aviation industry is a prime example, in large part because of the way its different finance chiefs handle the thorny problem of asset depreciation.
Airplanes and re-usable parts (called rotable parts in industry jargon) such as turbines and pumps necessarily make up the bulk of an airline’s assets but they are given widely different depreciable lives under different accounting standards. Airline operators with a shareholding structure are using ASBE in their depreciation calculations while others are still using accounting policies promulgated by the Civil Aviation Administration of China (CAAC). And then there is Xu Jiebo and China Southern, which is on a very different flight path.
China Southern is no parvenu in the world of equity financing; it pulled off a dual listing in HongKong and New York in 1997. But timing, coupled with an absence of red ink on the books, were crucial to getting a sweet deal in Shanghai this July. The first, most obvious hurdle was that the China Securities Regulatory Commission (CSRC) normally requires companies to be profitable before listing. No problem there, according to the company’s CFO, but analysts — already jittery about the effect of such a heavyweight issue on a more-or-less stagnant A-share market — were less sanguine about the company’s end-of-year figures.
Despite a forecast of Rmb202.60 million in profit for 2003, they suspected that China Southern might well end the year in the red because it was hit hard by the Sars outbreak. After all, the company suffered a loss of Rmb218.66 million in the first four months of 2003 because of Sars. However, the CSRC decided to give the company the benefit of the doubt and approved its listing application, thus saving it the embarrassment of launching the issue after disclosing losses for the first half in the interim report.