Response of Japan (Japanese Industry) to IFRS Current Situation and Issues

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1 Response of Japan (Japanese Industry) to IFRS Current Situation and Issues November 2011 Nobuyuki Hiratsuka Director, Corporate Accounting, Disclosure and CSR Policy Office, Economic and Industrial Policy Bureau, Ministry of Economy, Trade and Industry

2 1. Recent IFRS-related developments in Japan s industry Nippon Keidanren (one the business organisations representing Japan) has this year set up Committee on Corporate Accounting (chaired by Mr. Hirose, Vice Chairman of Sumitomo Chemical). At its first meeting on 29 June 2011, the Committee put forward a policy proposal calling for deliberations on the use of international accounting standards to take place in a prompt manner. The Committee has conducted a survey on international accounting to gather views of industries and is now preparing the results for publication. Policy Proposal of Nippon Keidanren (published on 29 June 2011) It is necessary to make the decision on the mandatory use of IFRS taking into account relevant factors such as those listed below, so as to ensure that the decision is in the interest of Japan and consistent with the state of affairs in Japan. Reviewing recent developments in other countries. The method, procedure and scope of use of IFRS, if its mandatory use is to be required. Use of Japanese GAAP for consolidated and separate financial statements. Deliberating on the entire disclosure system, including how laws and regulations affected by IFRS should be adjusted. The following measures should be taken, if the mandatory use of IFRS is to be required. Ensure a sufficient transition period (for example, 5 to 7 years). Continue to have in place the special measure where companies are allowed to file their financial statements prepared in accordance with US GAAP. It is, therefore, necessary to start comprehensive deliberations at Business Accounting Council at once. Also, in order to ensure that Japan s views are appropriately reflected in the development of IFRS, it is necessary to enhance the communication with relevant parties abroad. 1 1

3 2. Japan s response to IFRS In June 2011, Mr. Jimi, Minister for Financial Services, decided to resume deliberations on IFRS at Business Accounting Council, in response to recent international developments and in order to meet the request from industry and labour organisations to address their concerns over IFRS. Deliberations at Business Accounting Council focus on the following 11 items (so far, BAC has had 4 meetings on 30 June, 25 August, 18 October and 10 November). <Main items for deliberations at this juncture (11 items)> How Japan s accounting standards and disclosure system should be. Analyses of developments and foreign policies of other countries, as well as analyses of international expectations and requirements. How accounting should contribute to economic activities. Impact of principles-based accounting standards. Impacts on regulatory environment (industry regulations and regulations relating to public procurement) and contract environment. Impacts on unlisted companies and small and medium-sized enterprises, and approaches to accounting standards these companies use. Communication between investors and companies. Measures and approaches audit firms take. Study of voluntary use of IFRS. How the setter of national accounting standards (ASBJ) should be. Governance of the International Accounting Standards Board (IASB). 2

4 3. Issues identified by Japan s industry 1. Response to principles-based accounting standards Need to have in place an environment where companies can make accounting choices and their choices are respected. Need to consider not just the impact on investor protection but also the impact on the system as a whole, including audit and regulatory approaches. 2. Overall design of domestic regulatory/contractual framework Impact of IFRS on the tax system and industrial regulations (eg. regulation of electricity rates) and contracts (eg. bank loan covenants). Need to separate the accounting standards applied to separate financial statements from the accounting standards applied to consolidated financial statements. 3. Costs and benefits To address issued noted above, companies may be required to follow complicated procedures that are not aligned with actual practice. Need to study whether financial information prepared under IFRS will be sufficiently reliable and bring benefits to investors. 3

5 3. Issues identified by Japan s industry (continued) Accounting standards that contribute to economic activities From Japan s corporate management perspective which places an emphasis on the fact that companies are going concerns, the following principles are of particular interest. (1) In Japan, the principle of prudence (conservatism) has been adopted, in order to protect companies from future risks and ensure their financial health (however, excessive conservatism is prohibited). (2) Profit or loss is the extremely important measure of economic activities. (3) A system has been adopted whereby income tax is calculated based on profit/loss accounts, restraining the recognition of false profit and mitigating administrative costs to companies. (4) Fair value accounting contributes to increased volatility of performance measures, depressing them even further in an economic downturn. 4

6 4. Design of National accounting systems Scope of IFRS Application ConsolidatedF/S of Listed Companies Many countries either maintain national standards and converge them with IFRS or use IFRS within defined boundaries. Link between accounting and tax in major countries Use of IFRS for Separate F/S Difficult to entirely rely on IFRS for dividend calculation (company law) and income tax calculation (tax law) purposes. Each country has developed its own coping measures. Design of Japan s Accounting System Consolidated Accounting (securities law) Separate F/S (company law) Tax calculation basis (tax law) Japan US UK Germany France IFRS? * 1 J GAAP? J GAAP? IFRS? * 1 IFRS * 2, 3 National tax code National tax code IFRS * 2, 4 IFRS * 2, 5 International expectation for accounting harmonisation German GAAP French GAAP : Separation (between either consolidated and separate F/S or accounting and tax) *1:WhetherandhowtouseIFRSisnowbeingdeliberatedon. *2: IFRS is mandatory for consolidated F/S of companies listed on EU-Regulated Markets. Other companies use either national GAAP or IFRS. *3:SeparateF/ScanbepreparedinaccordancewitheitherUKGAAPorIFRS. *4: Of the 10,800 companies listed in Frankfurt, IFRS is mandatory for about 600 companies(october 2011). *5:Ofthe1,000companieslistedinParis,IFRSismandatoryforabout600companies(October2011). Listed companies (about 4,000 companies) Consolidated F/S Separate F/S Conformity Non-listed companies (about 2.5 million companies) Small and medium-sized companies Income tax law, company law (income tax and dividend calculation ) 5