The financial accounting system is an important part of supporting policies and regulations of the futures market. China's existing financial accounting policies for the futures market are largely comprised of the Interim Provisions of Financial Management on Commodity Futures Trading issued in 1997 by the Ministry of Finance as well as the Accounting Law and relevant provisions of the Accounting Standards for Enterprises, there are yet no unified accounting standards specific for the futures industry. Most of these provisions were formulated during the cleaning up and consolidating period of the futures market, and certain parts of the contents are not compatible with present needs of the futures market growth, therefore, there are urgent needs to revise and perfect them. These mainly include the following specific aspects:
First, certain parts in the Interim Provisions of Financial Management on Commodity Futures Trading (hereinafter referred to as the Interim Provisions) are in need of revision. For an instance, Article 38 of the Interim Provisions specifies that "the state-owned or state holding enterprises shall not borrow from banks and non-bank financial institutions specifically for futures trading", however, in accordance with Article 44 of the Administrative Regulations on Futures Trading, enterprises have the right to use credit capital to do futures trading under the premise of non-illegality. Another instance is that Article 21 specifies the futures brokerage institutions shall abide by the Corporate Financial Policies for Tourism and Catering Services, but relevant documents from the State Council have explicitly defined futures companies as modern financial corporations, and requested them to be strictly managed in accordance with the modern financial corporation policies. The third example is Article 2 from the Interim Provisions defines gains or losses from position unwinding as "realized gains or losses as calculated based on the initial and closing prices of the contract", which is quite different from the provision of the prevailing rules used in futures trading (i.e. gains or losses from position unwinding as calculated based on the closing price and the previous day contract settlement price), and easily lead to unnecessary legal disputes. In addition, since no relevant provisions are yet available to govern the financial management of financial futures trading, it is advisable to broaden the application scope to include financial futures when revising the interim provisions.
Second, the accounting criteria applicable to hedging need to be improved. The Corporate Accounting Standards No. 24 - Hedging has specified hedging criteria, however, besides a clear specification of a numerical value to the "validity" criterion, the majority of criteria are too abstract, which may lead to big differences due to subjective interpretation in actual implementation, resulting in the same type of business to be counted as hedging by some companies and not as hedging by other companies. Even the rationality of the validity criterion, which is clearly defined by a numerical value, also needs to be scrutinized. The accounting criteria specify a numerical value of 80% -125% for the validity criterion, when exceeding the upper variation range of 125%, even if the enterprise conducts hedging in strict accordance with the hedging strategy, hedging can also be rendered as invalid. Thus the hedging capital cannot be accounted as revenue items in the main businesses, the charts of accounts, therefore, will contain large amounts of risk investments and investment incomes, which is not conducive to reflect the true state of stable operations for enterprises.
Third, the ledger settings of futures exchanges are not uniform. At present, the accounting matters of China's futures exchanges are largely based on the Accounting Law and corporate accounting standards. However, for the Accounting Law and corporate accounting standards are universally applicable to all types of market entities, the accounting rules do not specifically and practically target the futures industry. The ledger settings of futures companies are currently uniformly specified in the Interim Provisions on Accounting Treatment of Commodity Futures Business for Futures Brokerage Companies, but much of the futures exchange businesses has no corresponding accounting requirements, so there are gaps in relevant regulations, which has led to distinct ledger settings in specific businesses in actual accounting practices among various futures exchanges and thus incomparability of accounting information between different exchanges.
To address the above-mentioned issues of the existing financial accounting policies for the futures market, we propose:
(a) to revise as soon as possible provisions in the Interim Provisions of Financial Management on Commodity Futures Trading that are incompatible with the reality of the futures market;
(b) to further improve relevant provisions on hedging, to effectively guide accounting practices for the futures market through improvement of operability and suitability of hedging treatment criteria;
(c) to uniformly standardize ledger settings based on the business type and scope of futures exchanges.
