Disclosure requirements and Compliance Quality for Financial Reporting of Business Combinations in China

Our study analyses corporate compliance with the China Accounting Standard (CAS) No. 20, 'Business Combinations'. Using a sample of 448 deals from Chinese listed companies initiating business combinations in 2007, 2014, and 2021, we investigate to which extent these companies have complied with CAS No.20 specific requirements and whether the following main factors influence their compliance quality: temporal evolution; transaction type and related accounting method (under common control-BCUCC, or not under common control-BCNUCC); auditor type; transaction location (domestic or foreign); and government involvement. To assess the compliance level, a Business Combination Disclosure Index (BCCI) was developed. Annual financial reports were collected and analysed for each company, coding transaction information from these primary sources. Univariate and multivariate empirical analyses were used to examine the five main factors. Our results show that temporal evolution, transaction types and auditor types were factors that influenced the level of compliance, contrary to deal location and government involvement. In particular, compliance levels improved from 2007 to 2021, while BCUCC deals showed better compliance levels than BCNUCC ones. The auditor types appear to have some influence on the compliance quality, but only in specific cases. Among other factors beyond our hypotheses, sectors, acquirer size, the relative size of the target over the acquirer, and consideration paid structure appeared to affect the compliance level. Our results provide some useful evidence to inform preparers and policy-makers concerned with compliance quality in financial reporting of business combinations.