Roadmap to Future Mandatory Application of IFRS in Japan: from the Perspective of Financial Statements Preparers. Yao Jun Chitoshi Koga

Transcription

1 Roadmap to Future Mandatory Application of IFRS in Japan: from the Perspective of Financial Statements Preparers Yao Jun Chitoshi Koga

2 Roadmap to Future Mandatory Application of IFRS in Japan: from the Perspective of Financial Statements Preparers Yao Jun (Kobe University) Chitoshi Koga (Kobe University) *contact mail address: Abstract After ten years efforts on producing high-quality accounting standards which can represent Japanese style of business activities and on exploring its own way to converge with global financial reporting standards, Japan makes a major step forward towards adopting International Financial Reporting Standards (IFRS) by publish the Interim IFRS Roadmap. This shows a stance for acceptance of adoption. However, there are still quite a lot issues to be taken into consideration before the last determination of mandatory application of IFRS is made. The current research explores these issues from the perspective of financial statements preparers in this paper, accounting managers or CFOs in leading Japanese companies which are most possible to be subject to mandatory application. The background of Japan stepping towards adoption is introduced, the feature of Japanese accounting that might influence the adoption by Japanese companies are analyzed. Based on the this analysis, a survey was made investigating their opinions on IFRS implementation, as well as the source of finance of and actual application in these companies at the present time. The results of the survey acquired in the current paper are expected to have implications for regulation making and IFRS adoption training programming. *We are thankful to Hajime Yasui, the director of Aarata Institute of PWC Japan for helping us make the survey. like to thank Professor Norio Igarashi, Yokohama National University for his kind comments for this paper.. We would also 1

3 1.Introduction The current research tries to investigate issues concerning the adoption of international accounting standards (refers to IAS or IFRS) from the perspective of financial statements preparers. When we were preparing this paper, the Interim Report: Application of International Financial Reporting Standards (IFRS) in Japan (the Interim IFRS Roadmap ) was published which is based on the exposure draft published on February 4, It seems that after ten years efforts on producing high-quality accounting standards which can represent Japanese style of business activities and on exploring its own way to converge with global financial reporting standards, Japan makes a critical step forward towards adopting International Financial Reporting Standards (IFRS). The main points of the report concern the acceptance of voluntary adoption of IFRS in consolidated financial statements from fiscal years ending 31 March 2010 for companies with global financial / operating activities and the considerations for the possibility of mandatory application of IFRS in Japan. As we know, there are two-pronged approaches to achieving a single set of global accounting standards: adoption and convergence. Japan, as well as U.S. has been regarded as examples of convergence countries. However, The Interim IFRS Roadmap indicates a future approach foreseeing the possibility that IFRS can be used and that Japan should adopt IFRS in some way in the future. Therefore, the issuance of the Initial IFRS Draft Roadmap would signify great regulatory change and proposes some important issues that should be considered and dealt with. For example, before the final decision on mandatory adoption is made, questions such as whether to adopt IFRS in both consolidated financial statements and non-consolidated financial statements or only adopt IFRS in consolidated financial statements, what kind of companies should be required to prepare financial statements in compliance with IFRS, the incentive and obstacles of companies to implement IFRS and other related questions should be answered based on comprehensive investigation. Since these issues are closely related to preparers of financial statements, it is relevant to explore their understanding of IFRS and opinion towards the adoption of IFRS and preparation for the application. 2

4 We made the survey investigating leading Japanese companies view on IFRS application before the publication of the Initial IFRS Roadmap when Japan still stood on the crossroad of convergence and adoption. We aimed to provide evidence for adoption or against adoption from the standpoint of preparers of financial statements. However, this result of our survey is also quite relevant right now because it provides reference for the issues proposed in the Interim IFRS Roadmap. The result of the survey is expected to provide implications for future standards setting concerning mandatory application of IFRS and provide evidence for the establishing training and supporting program for the application of IFRS in Japanese companies. The following section firstly introduces background of Japan moving towards IFRS adoption to indicate the importance of strategy about the structuring of accounting system based on comprehensive understanding of situation of Japanese company and accounting context. Then section 3 specifies the significance of Interim IFRS Roadmap and important issues concerning adoption that is to be taken into consideration. In section 4, the most important influential factors that effect accounting practices of Japanese company, the feature of Japanese accounting and difference between IFRS and Japanese GAAP which direct relate to the problems concerning application of IFRS in Japanese companies. In section 5, based on the analysis in section 3and 4, we investigate Japanese managers opinions on issues concerning IFRS application and the perceived proper way of application. Finally, some problems facing companies will be identified and concluding remarks are provided.. 2. Background --Accounting development towards adoption Since 1997, Japanese government made the decision on the basic policy of Japanese Financial Big Bang, trying to sweep away the lack of transparency that has been said to characterize the Tokyo market and to improve the globalization by a constant devotion to global standards instead of a focus on domestic logic. In the following ten years, Japan has conducted extensive reforms in its accounting system and commercial code towards the International standards, which is well known as 3

5 Accounting Big Bang. By these reforms, Japanese accounting becomes quite similar to the IAS / IFRS. Notwithstanding, there are still some difference left in specific accounting standards. However, since there was a lack of a clear strategy about the structuring of the accounting system, the regulator s opinion towards IAS/IFRS adoption kept changing. In 2002 and 2003, Japanese Financial Services Agency, the Ministry of Justice and Nippon Keidanren 1 expressed negative opinion towards the adoption of IAS. In contrast, there appeared a international trend of convergence with IFRS during that time and this trend spread since then. On 29 October 2002, the International Accounting Standards Board and the US Financial Accounting Standards Board jointly issued a memorandum of understanding formalizing their commitment to the convergence of US and international accounting standards. Moreover, in the following year 2005 which might be seen as the beginning of a new era for financial reporting, International Accounting Standards (IAS)/ International Financial Reporting Standards(IFRS) were required to be applied in EU countries. Then in this trend, in Japan on March 2005, a joint project on the convergence of Japanese GAAP and IFRS was established to analyze and discuss the equivalent of Japanese GAAP and IFRS (Koga and Rimmel 2006). Nippon Keidanren changed its opinion in favor of convergence with IAS in 2006, 3 years after they expressed negative opinion towards adoption. But there was still no real progress. In 2007, the publication of SEC s Concept Release on Allowing U.S Issuers to Prepare Financial Statements in Accordance with International Financial Reporting Standards (the Concept Release) and its proposal, Acceptance from Foreign Private Issuers of Financial Statements prepared in accordance with International Financial Reporting Standards without Reconciliation to US GAAP, made Japan find itself dropping out in the global trend. Therefore, generally speaking, after the Big Bang, Japan seems lagged behind compared with its European and US counterparts in converging with IAS / IFRS. The changing opinion of the regulators seems to caused by external 1 Nippon Keidanren (Japan Business Federation) is a comprehensive economic organization born in May 2002 by amalgamation of Keidanren (Japan Federation of Economic Organizations) and Nikkeiren (Japan Federation of Employers' Associations). Its membership of 1,662 is comprised of 1,343 companies, 130 industrial associations, and 47 regional economic organizations (as of June 22, 2007). 4

6 influences of international trend and the lack of strategy based on comprehensive understanding of the state of Japanese company, its accounting environment. 3. The publication of Interim IFRS Roadmap What represent Japan s major step towards adoption is the publication of the Interim IFRS Roadmap which represents positive attitudes of the Financial Service Agency towards the adoption of IFRS. The Business Accounting Council (BAC), a key advisory body to the Commissioner of the Financial Services Agency (FSA), approved the roadmap for the adoption of International Financial Reporting Standards (IFRSs) in Japan. Sir David Tweedie, Chairman of the IASB commented on announcement: this is a landmark decision, both for Japan and for IFRSs. For Japan, it signals the eventual adoption of IFRSs. For the IASB, adoption of IFRSs by the world s second largest national economy underscores the truly global nature of IFRSs and the acceptance of these standards by all major economies. In the Interim IFRS Roadmap, continuing convergence is emphasized. At the same time, the directions for Japanese GAAP are indicated, covering topics on issues concerning the application of IFRS in Japan and the required approach. These issues include optimal application and considerations for the mandatory application of IFRS in Japan, for example, scope and methods for mandatory application, treatment on non-consolidated financial statement and etc. One of the arguments for adoption of IFRS is that adopting IFRS can improve the comparability of accounting information and improve the transparency. The mission of IASB is to develop a single set of high-quality, global accounting standards that are accepted worldwide. Though IFRS provide possibility to improve the comparability, it should be noted that comparability should not be confused with uniformity as comparability means that like things should look alike and different things should look different(barth 2008). It is obvious that there are major international differences existing in accounting practices and the possible causes of differences might not be completely deleted even if we adopt the international accounting standards(alexander, 5

7 and Nobes 2009). Therefore, IFRS, if to be adopted in Japan, must faithfully reflect the economic reality of businesses and trade practices in Japan, as well as the global financial and capital market. So the continuing convergence is still emphasized in the Interim IFRS Roadmap. On the other hand, though the interim IFRS Roadmap show a stance of acceptance of IFRS, there still left a lot of problems to be tackled including the above issues indicated in the report because of existing differences between IFRS and Japanese GAAP and the cause of the difference which may not be deleted entirely. As we know, accounting standards can be regarded as fully functional only if financial reports are appropriately prepared. Therefore, when the way of adoption, especially mandatory application is to be determined, the feature of Japanese accounting, the situation of Japanese companies, the difference between IFRS and Japanese GAAP, and other related issues should be understand, just as it is made clear in the Interim IFRS Roadmap: Japan must be prepared to take on the issue of mandatory application of IFRS from a broad range of perspectives, defining the path to be taken in the case of making the use of IFRS by a certain range of Japanese companies mandatory, while attending to the various aforementioned conditions in Japan and abroad 4. The feature of Japanese accounting In this section, we will analysis the major environmental factors that influence companies accounting practices to be specific, factors that directly influence the incentive to implement IFRS, the feature of Japanese accounting, and the major difference between IFRS and Japanese GAAP so that we can acquire an understanding of relevant issues which should be considered in making the final decision on whether and how IFRS should be required to be complied with. First, a large list of possible causes of international differences can be found in the writings of previous researchers (e.g. Choi and Meek, 2005, Nobes C and R Parker, 2008). For example, the most frequently referred factors that might influence the accounting development are cultures, legal environment, providers of finance, taxation, profession of accounting profession and other external influences such as economic, political events and international influences. Though international 6

8 influence seems to be the most influential factor which spurred the adoption of IFRS in a world wide scope, in both countries with a strong equity market and weak equity market, however accounting standards are not set to follow the fashion. Among all the above factors that affect accounting development, financing system, to be specific, the providers of finance, apart from international influences has been regarded as the main explanatory variable for the most important international differences in financial reporting. In countries, where capital provided by banks or family company is very important, the banks or family company may nominate directors and thus be able to obtain restricted information and to affect decisions. In this case, the need for published information is much smaller because of this access to private information. In other countries where the major source of corporate finance has been the share capital and loan capital provided by large numbers of private investors, especially foreign investors, there is relatively strong requires for unbiased information about the success of a business and its state of affairs. It is reasonable to assume that companies with different capital structures might have different opinion on IFRS. Japan seems to be a unique case. It has a fairly important equity market, although not as important as that in the US or the UK. Furthermore, many Japanese companies own shares in each other, and so the total number of listed companies and market value is exaggerated when making an international comparison. Thus, to understand the major finance resource of Japanese company and their perception on the importance of domestic and foreign equity market is a way to decide whether there is a need for mandatory adoption. Second, Japan accounting has both German and US features. The Japanese accounting system consists largely of a commercial code borrowed from Germany in the late nineteenth century, overlaid with US-style securities laws imposed in the late 1940s. Japan accounting standards are characterized as rule-based which are similar to U.S. GAAP, while contrast to IFRS which are characterized as principle-based. In converging an accounting standard to the IAS, there are two approaches: the Principle based approach and the Rule based approach. Under the former, the 7

9 accounting standards are set based on general principles and the professional judgment of the financial statements makers while under the latter the accounting standards are set based on more detailed and clear rules. Continuing convergence with IFRS should solve the confliction between rule-base and principle-based accounting standards. On the other hand, complete adoption of IFRS might mean a change from rule-based to principle-based accounting standards which are assumed to have great impact on financial statement preparers. Third, the major difference in accounting standards between IFRS and Japanese GAAP are concerning recognition of revenue, R&D, financial instrument, lease accounting and etc. These differences are rooted in basic accounting idea in the two set of accounting standards. The basic ideas of IFRS are principle-based, statement of financial position-focused, and fair value accounting, while Japan accounting are rule-based, attach great importance to income statements. While the resulting concrete differences in standards have different importance to Japanese companies, it is relevant to understand the relative importance of all the difference in accounting standards. 5. Investigation on manager s opinion on IFRS adoption With the above consideration in mind, we made a survey trying to acquire some knowledge on the necessity of adoption and possible problems concerning adoption from the view of financial statement preparers in this paper, we refer to CFO and accounting managers of Japanese companies. In a postal questionnaire, we asked questions investigating their understanding of and attitude towards IFRS adoption and present situation of IFRS application in Japanese companies. 5.1 structure of investigation questionnaire Since provider of finance is one of the most important factors that influence the accounting practice, it is helpful to know the capital structure and major finance sources of investigated companies. It is also relevant to understand how the accounting managers are prepared for adoption, for example to explore how important they think of the difference in accounting standards between domestic accounting standards and IFRS, how they prefer IFRS to be adopted, present 8

10 adoption of IFRS in their company, the difficulties or other considerations that concerning the application of IFRS. Furthermore, as Japanese accounting are rule-based while IFRS are principle based, if IFRS is to be adopted, this contradiction should be relieved. It is also important to understand the accounting manager s opinion on principle-based and rule-based accounting because the character of accounting standards directly affects manager s judgment and their accounting practice. Therefore, our questionnaire was made up of four parts: (1) Major finance sources and users of financial statements (2) attitude towards and opinion on the adoption of IFRS (3) the present situation of IFRS application (4) The convergence approach of accounting standards 5.2 Sample selection and collection of responses The sample selection and collection of responses of each investigation are summarized as follows. The investigation selected 500 companies within which 67 are Japanese companies according to the sales rank of Fortune Global 500 of The questionnaires were sent to the CFO or senior managers of these companies. 115 useful responses were received (the response rate 23%) within which 57 are Japanese companies (response rate is 89%). In the current paper, we only analyze the data of Japanese companies. The companies which are permitted to optimally apply and are possible to be required to apply IFRS to their financial statements in the Interim IFRS Roadmap are those which have global financial or business activities. The investigated companies are possible to fall into the scope of optimal application and future mandatory application of IFRS. 5.3 Results and analysis The respondent percentages reported in this paper are based upon the total number of responses to the questions. The design of the questionnaire allowed multiple answers for some questions. Consequently, the combined responses for some questions may exceed 100 percent. 9

11 (1) Major finance sources and users of financial statements The first question asked the managers views on the importance of domestic and overseas stock markets to their companies, as well as the importance of the stock market and bond market. 5 point Likert scale was used for measurement ranging from 1= not important at all, 3=not so important. 5= very important). As is shown in Figure 1, domestic market was regarded by the largest category, 65% respondents, as being very important to their business activities. 42% respondent indicated that domestic bond market was very important. 23% respondent rated the overseas stock market as either important or very important. Though the majority of respondents rated the overseas markets not as of the same importance as the domestic markets, in general, they do regarded overseas market as important. Figure 1 Importance of markets to Japanese business operations (2008) Table 1 Importance of Markets 2008 average Domestic stock market Domestic bond market Overseas stock market (n=56) Overseas bond market (n=56) 10

12 Compared with domestic market, the perceived less importance of overseas markets may suggest that Japanese companies are relatively lack of attention to overseas users of financial statements that may lead to the lack of incentive to adopt international accounting standards. To confirm this, the second question in the questionnaire use 5point Likert scale as previously described, to sought how CFOs or senior managers view on the importance of financial statements to various users. Figure2 Perceived Importance of Financial Statements to Users (2008) Table2 Comparison of Perceived Importance of Financial Statements to Users 2008 average Domestic institutional investors stock market Domestic institutional investors bond market (n=56) Domestic individual investors stock market Domestic individual investors bond market (n=56) Overseas institutional investors stock market Overseas institutional investors bond market (n=56) Overseas individual investors stock market Overseas individual investors bond market (n=56) 11

13 Table 2 shows that the respondents as a whole think financial statements are important to most of the users. Generally, the respondents expressed an assessment that financial statements are more important to domestic investors than overseas investors. Even for overseas investors, financial statements are important. 42% respondents think that financial statements are very important to individual investors in stock market, while 70% think that the financial statements are very important to institutional investors. But for investors in the overseas stock market, 60% respondents think financial statements are important to institutional investors while only 26% regard them to be very important to individual investors. We had made a similar survey in 1997, by comparing the result, we find that the managers perception that financial statements are most important to domestic institutional investors compared to other users kept unchanged during the past decade. We also investigate the foreign ownership of each company. Almost 10% respondents stated that their overseas investment are 0 percent while 48% respondents, the largest group, stated that the foreign ownership is within 1~10%, 12% respondents choose 11%~20%, 20% respondents choose 21%~40%, while 10% respondents said their foreign ownership is over 40%. (2) Attitude towards and opinion on the adoption of IFRS The fourth question asked the respondent ways by which they prefer IFRS to adopted. There are show three options. The three options are (1) only adopt IFRS or US GAAP, (2) use both IFRS (for overseas use) and Japanese GAAP (for domestic use), (3) use international accounting standards as supplementation to Japanese GAAP. 41% respondents preferred to adopt only IFRS as the basic financial statements standards. 29% respondents preferred to use IFRS as supplementation to Japanese GAAP. Those who selected to use both IFRS and Japanese GAAP only occupies 11%, that may be resulted from the high cost of using double standards and the complication of practices. Then, the survey asked the respondents understanding of the difference of IFRS and Japanese 12

14 accounting standards. Figure 3 Importance of IFRS versus Japanese GAAP Difference by Areas Table 4 Importance of Differences in Accounting Standards between Japanese GAAP and IFRS Accounting standard Accounting standard (average) (average) Goodwill Allowance Comprehensive income Fixed tangible assets The recognition of revenue Consolidated/SPC Business combination Investment property R&D Foreign currency Financial instrument Lease Impairment * Employee payment* *additional indication by respondents The results show that differences between Japanese GAAP and IFRS which are thought to the most important are standards for goodwill, comprehensive income, recognition of revenue. The different in accounting standards for business combination and R&D are also regarded as important. In addition to those listed in the questionnaire, some respondents indicate that significant differences existing in accounting for standards for impairment and payment to employee are also important. 13

15 We also asked respondents to state their opinions on the change concerning the application of international accounting standards 5 years from now. Most of the respondents expected that IFRS would be increasingly used only in consolidated financial statements or in both consolidated and parent company s separated financial statements. The minority of the respondents considered that IFRS would be adopted only in the parent company s account or and as well as supplementary disclosure. If the expectation of these respondents is correct, they will need to plan for the switch to IFRS. Table 4 Expectation of Future Application of IFRS 2008 average Application only in Consolidated financial statements (n=55) Application only in parent company s separate financial statements (n=53) Application in both consolidated and parent separate financial statements (n=55) Application only in supplementary disclosure (n=53) The survey then asked whether the respondents agree with the statement that it would be difficult to change from Japanese GAAP to IFRS. As is illustrated in the following figure, 55% respondents think that it would be difficult to change from Japanese GAAP to IFRS. Figure4 Views on whether changing from Japanese GAAP to IFRS will be difficult (2008) strongly agree agree slightly agree disagree strongly disagree (3) The present situation of IFRS application Only 2 out of 57 usable respondents reported that they are currently adopting IFRS when asked. There are other 2 Japanese companies answered that they are going to adopt IFRS though they are 14

16 not using at the moment. However, the vast majority(93.0%) of the respondents noted that IFRS are not being adopted and they are not sure whether they will adopt it or not in the future. We asked respondents who indicated that they are not yet adopting IFRS to explore the main reason why IFRS were not being adopted. The reasons suggested by respondents are as follows: (1) the cost is too high (10.5% respondents) (2)there is inadequate staff training system(24.5% respondents) (3)the international accounting standards are inconsistent with Japanese accounting standards (38.5%respondents) (4)there is little benefit from the adoption of International accounting standards (22.8%respondents) (5)it was not legally required to adopt IFRS (52.6% respondents) (6)others (14.0%respondents) Multiple choices are allowed. And respondents could cite other reasons. It became clear that the lack of legal requirement is the main reason for the uncertainty in the future adaptation of IFRS. We then use the 5 point Likert scale to measure the respondents perceived importance concerning the benefit of adopting IFRS. The expected benefits are: (1) improve the trust and understanding of securities investors, (2)improve the trust and understanding of bond investors, (3) make it easier to issue securities in international markets, (4)reduce the cost of raising bond capital, (5)improve the international image of the company (6) reduce the barriers to list in overseas stock market,(7) to reduce the cost of making financial statements. The majority of the respondents perceived that the most important benefits of IFRS adoption were to make it easier to issue securities in international markets(61%), improve the trust and understanding securities investors (58%), reduce the barriers to list in overseas stock market (51%). It is obvious that the greatest benefit of IFRS adoption is related to international market, international status and international fund-raising. Only 9% respondents think reduce the cost of making financial statements as important or very important factors. It is interesting that the perceived benefits over years changes. To be specific, respondents in 2008 investigation think more negatively about the IFRS adoption and they perceived less benefit than those did in For example, in 1997, Japanese managers regarded improve the trust and 15

17 understanding of stock investors as very important benefit while in 2008 they did not attached great importance to it. One of the reasons for it may be that the managers have fully realized the achievement of accounting convergence towards IFRS through the Accounting Big Bang after Table 5 Perceived benefit of IFRS adoption 2008 average Improve the trust and understanding of stock investors Improve the trust and understanding of bond investors Make it easier to issue securities in international markets Reduce the cost of raising bond capital Improve the international image of the company Reduce the barriers to list in overseas markets Reduce the cost of making financial statements Then the questionnaire asked the accounting managers to state their perception on the relationship of cost and benefit. The respondents showed some kind of skeptical about the benefit of IFRS adoption. Indeed, 63% respondents thought that cost would exceed benefit, while 15% indicate that cost would almost equal benefit, only 1.8% expected that benefit would exceed cost should the IFRS be adopted. Figure 5 Cost-benefit analysis of IFRS adoption (2008) benefits greatly exceed costs benefits slightly exceed costs benefits equal costs costs lightly exceed benefits costs greatly exceed benefits 16

18 (4) The convergence approach of accounting standards Furthermore, as for the approach by principle-based approach or rule-based approach to adopt international accounting standards, 60% respondents regarded principle-based approach as more appropriated. The main reason was described as the accounting under principle standards reflects the substance of economy and it is easier to implement IFRS in practice because detailed rules which might impediment usage of IFRS in Japanese context. In contrast, only 25% think rule-based approach is better with the main argument being that the accounting method is clearly prescribed so that it is easier for compliance in practice and the comparability of accounting information will be improved. 4 Conclusion The present research investigated issues concerning the application of IFRS in Japan from the perspective of managers of Japanese companies the preparers of financial statements. In the first 3 sections of the paper, we have indicated that provider of finance, difference in the basic idea and concrete standards between the IFRS and Japanese GAAP might influence the financial statements preparer application of IFRS. These aspects should be taken into consideration when the scope and approach of mandatory application of IFRS are to be decided. By investigating the major finance of leading Japanese companies, the manager s opinions on adoption, and present adoption by Japanese companies and reasons for no adoption, we get to know: (1) Over half of these largest companies have rather low foreign ownership (less than 10%). It is obvious that the greatest benefit of IFRS adoption is related to international market, international status and international fund-raising. Thus the Japanese companies expressed an assessment that financial statements are more important to domestic investors than overseas investors. Though the majority of respondents rated the overseas markets as being not so important relative to the domestic markets, in general, they still regard overseas financing market as important. (2) The major differences in accounting standards concern recognition of revenue, R&D, lease and financial instrument, while the differences thought to the most important by Japanese 17

19 companies are standards for goodwill, comprehensive income, the recognition of revenue. The different in accounting standards for business combination and R&D are also regarded as important. (3) Most of the respondents expected that IFRS would be increasingly used only in consolidated financial statements or in both consolidated and parent company s separated financial statements. (4) The main reasons why Japanese companies have not adopted IFRS include that there is not legal requirement that IFRS be adopted, there are inconsistence exist between IFRS and Japanese GAAP and inadequate training system. The reason why Japanese companies show negative attitude towards IFRS adoption may be that the Japanese managers expect that the application of IFRS would be difficult. Furthermore, with the convergence of Japanese standards with IFRS, Japanese companies in 2008 are more confident to prepare their financial statement under the domestic standards than before. Even without adopting IFRS, they assume that they can get the trust and understanding of investors. And Japanese managers expected that the cost would exceed the benefit for IFRS adoption. (5) Principle-based accounting is thought to superior to rule-based accounting by managers of Japanese companies. The above survey results provide some implications for regulation consideration and training programming. The following points call attention of regulators. Firstly, though the globalization of Japanese economy and the filtering global standard (accounting standards, corporate governance) has made steady progress, Japanese companies still kept prudent and passive in IFRS adoption. This may be connected with the relative low foreign ownership in leading Japanese companies. Though the investigated companies are all leading companies in Japan, the fund-raising policies and proportion of foreign ownership are various. The Initial IFRS Roadmap suggests a phase-in approach based on criteria such as the gross market value of each company-- a scheme proposed in the US roadmap, the survey result may suggest for the phase-in approach based on criteria of both 18

20 foreign ownership and gross market value, as the greatest benefit of IFRS adoption is related to international market, international status and international fund-raising. Secondly, one of the most important considerations concerning adoption of IFRS is that the cost of adoption is expected to excess the benefit. The adoption of IFRS does not only influence accounting practice, it also has an effect on other aspects of business such as the operating process, management system, strategy making. For example, we have known that there are differences in two set of accounting standards, one of which concerns standards for revenue recognition. In Japanese GAAP, sales revenue is recognized at the time of shipment, while IFRS prescribe that sales revenue can be recognized when risk and benefit of the goods have been transferred to the buyer so that the revenue may not be recognized at the shipment time. If IFRS is required to be adopted, Japanese companies which have recognized sales revenue on a shipment basis might have to change the time of revenue recognition. This might result in changes in the internal control system, information system, distribution system of the company and the amount yearly sales revenue which further influence the business plan and strategy. These costs are beyond the direct costs only related to accounting system. Cost-benefit tradeoff is one of the most important considerations of preparers of financial statement so that it should also be important issues to be considered in deciding mandatory application. Furthermore, the lack of training system has been regarded as an important cause of Japanese companies prudent attitude towards IFRS. The training should not only concentrate on the detailed accounting standards, but also include content concerning the total influence IFRS adoption might have on the whole business. Moreover, principle-based accounting standards are regarded by a majority of companies as reflecting economic substance, thus to be superior. However, it requires higher judgment capacity of preparers of financial statements. This not only requires a comprehensive training program but also increases the cost of adoption. In addition, the investigated companies has indicated several differences in accounting standards that are important to their companies-- goodwill, comprehensive income, recognition of revenue, which imply that in making a decision on mandatory application regarding whether to 19

21 apply IFRS as developed by the IASB or to make partial modifications or exclusions of IFRS, not only the content of IFRS and the status of the setting of IFRS should be reviewed, but also these influence on Japanese companies should be carefully investigated. The current paper is written mainly from the standpoint of preparers of financial statements. There are other perspectives should be taken into consideration when deciding application scope and methods, for example the standpoint of accounting information users, auditors and other interested parties. In addition, research shows some evidence that the adoption of IFRS itself does not lead to high-quality information. Therefore, adoption will not necessarily lead to increased transparency and interested parties trust of accounting information. Effective enforcement combined with high quality standards leads to high value relevance information. Strong equity market is connected with strong investor protection. Overall, international value-relevance of accounting information studies provide some support for the argument that accounting information is more value-relevant in countries with strong legal protection of outside investors(habib 2007). Japan has a unique equity market and accounting system which is discussed in section 4, therefore adoption of IFRS should also be supplemented with taking into consideration of enforcement which can be analyzed in future papers. [ ] Reference Alexander, David, and Christopher Nobes Financial Accounting: An International Introduction. 3 ed: Prentice Hall. Barth, Mary E Global Financial Reporting: Implications for U.S. Academics The accounting review 83 (5): Cabinet Office, Government of Japan(2008) Investigation report on the present state of Japanese market system and corporate governance for new growth, Nikei Research. Choi, Frost and Meek(2005) International Accounting (H),5th Edition, Prentice Hall Habib, Ahsan Legal Environment, Accounting Information, Auditing and Information 20

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