Since 1990’s , China introduced some changes in accounting policy in order to attract foreign investments . SOE’s in China were starting to be transformed into public companies through IPO and they began to separate financial accounting from tax accounting and adopting accrual accounting for financial accounting , thereby , moving towards the western practices . But China’s government still remained highly controlling and the companies were required to estimate the allowance for bad debt for their accounts receivables .

Over the period from 2000 to 2004 , China recorded a high economic growth , but the Shanghai Stock Exchange Index declined steadily , indicating that while the country's economic progress remained consistent , the operational performance of its companies was not impressive , mainly due to the intervention by the government into the company's management . Also , the government kept the majority of stocks in companies and controlled the management decisions for majority of SOEs.

The performance of Company C during this time declined as well . The increased sales of the company were eclipsed by a swelling accounts receivable and an increasing inventory . The production of the company increased rapidly at a faster rate than they could sell their stock .

Moreover , company C's major sales were overseas to company X , which was unable to convert its accounts receivables into cash or cash equivalents , thereby resulting into a huge balance of accounts receivable for Company . Thus , the total allowance for bad debt would have been 360 million RMB , according to the policy of the government .

But considering the increasing accounts receivable and bad debts , the board decided to set aside RMB 2,597m as bad debt allowance for company X to clear the table . This was the Big Bath , as the Company C , decided to fore go the accounts receivables and