IFRS-JGAAP comparison. English version 2.0 [equivalent of Japanese version 3.0]

Transcription

1 - comparison English version 2.0 [equivalent of Japanese version 3.0]

2 Contents Contents... 2 Introduction... 3 Presentation of Financial Statements, Assets Held for Sale and Discontinued Operations... 4 Consolidation, Equity Method & Joint Ventures... 8 Business Combinations Inventory Intangible Assets and Research and Development Costs. 20 Fixed Assets Investment Property Impairment of assets Leases Foreign Currency Income Tax Provisions and Contingencies Revenue Recognition, Construction Contracts Share-Based Payments Employee Benefits, excluding Share-Based Payments Financial Instruments Appendix-The Development of

3 Introduction Today, in a move towards improving the comparability of financial statements and to reducing the costs of raising capital in international markets, countries are converging their national accounting standards with International Financial Reporting Standards ( ) or are adopting itself. In Japan too, The Accounting Standards Board of Japan ( ASBJ ) and the International Accounting Standards Board ( IASB ) concluded the Tokyo Agreement in August 2007 and agreed to the acceleration of convergence. Specifically, it is planned that the significant differences between Japanese generally accepted accounting principles ( ) and would be eliminated by the end of 2008 and that the remaining differences will be eliminated by 30 June Through the convergence project consistent with that agreement, the differences between and are being eliminated considerably. Furthermore, in February 2009 the Financial Services Agency of Japan issued a proposed road map for adopting, and serious consideration of adoption of in Japan has commenced. It is expected that a decision will be made around 2011 and already since March 2010, companies meeting certain criteria are permitted to voluntarily adopt. Despite the convergence project, there are still a number of differences between and because convergence based on the Tokyo Agreement is ongoing and as revisions continue to be made and new standards issued in. In this booklet, we outline the differences between the two sets of standards by accounting topic. It is not possible to describe comprehensively every difference which could arise in accounting for all transactions, and we have focused as much as possible on those differences which are considered to be most common. We have taken care in preparing this booklet. However as the information is summarised, this booklet is intended to be used as general guidance only and is not intended to be used as detailed advice or in place of professional judgment. Please refer to the original text for the detailed wording. Also, we recommend that you consult with specialists about particular transactions. Ernst & Young ShinNihon LLC, Ernst & Young Global and any member firm thereof, will not be responsible should any damages or losses arise as a result of the use of this booklet. The information contained herein is based on accounting standards effective as at 1 April

4 Presentation of Financial Statements, Assets Held for Sale and Discontinued Operations Significant Differences Accounting periods required to be presented (Regulation for Terminology, Forms and Preparation of Consolidated Financial Statements: Presentation) The prior period and the current period consolidated financial statements must be presented comparatively. (IAS1.38, 39) Comparative information, at a minimum for one previous period, shall be disclosed for all amounts reported in the financial statements. Components of financial statements Presentation of extraordinary gains and losses (Regulation for Terminology, Forms and Preparation of Consolidated Financial Statements: Presentation) The following statements must be prepared: Consolidated Balance Sheet Consolidated Profit and Loss Statement Consolidated Statement of Changes in Shareholders Equity Consolidated Cash Flow Statements Consolidated Supplementary Information Based on the proposed Standard for Presentation of Comprehensive Income (draft), a statement of comprehensive income will have to be prepared after the new standard becomes effective. (Regulation for Terminology, Forms and Preparation of Financial Statements 62,63) Items related to extraordinary gains and losses are presented by category in accordance with the nature of the items. (IAS1.10) The following statements must be prepared: Statement of Financial Position Statement of Comprehensive Income Statement of Changes in Equity Statement of Cash Flows Accounting Policies and Other Explanatory Information Titles other than those listed above may be used for these statements. The Statement of Comprehensive Income may be presented as a single statement or in two statements. (IAS1.87) Extraordinary items shall not be presented in the statement of comprehensive income or in the notes. 4

5 Presentation of profit/loss and comprehensive income attributable to minority interests Changes in accounting policies Changes in accounting estimates (Regulation for Terminology, Forms and Preparation of Consolidated Financial Statements 65.3) Profit (or loss) attributable to minority interests is presented in the Consolidated Profit and Loss Statement. However, according to the proposed Standard for Presentation of Comprehensive Income (draft), the amount of comprehensive income attributable to owners of the parent and to minority interests will be disclosed as allocations in the consolidated financial statements. (Regulation for Terminology, Forms and Preparation of Consolidated Financial Statements 14) The amounts of prior periods are not restated, the effect of the change of accounting policy is disclosed in the notes only. This disclosure is of the impact of the change on the period in which the change takes place and is the amount that would have been recorded had the previous accounting policy been used in the current period. (Regulation for Terminology, Forms and Preparation of Consolidated Financial Statements 15) The effect of the change is adjusted in the profit and loss of the year in which the change in accounting estimate is made only. <Changes in method of depreciation> A change in the method of depreciation is considered to be a change of accounting policy and therefore, the above required disclosures are given. (IAS1.83) Profit (or loss) and total comprehensive income for the period attributable to non-controlling interests shall be disclosed. (IAS8.22) Changes in accounting policies are applied retrospectively by adjusting the opening balance of each component of equity for the earliest period presented as if the new policy had always been applied. (IAS8.32, 36-38) Changes in accounting estimates are not adjustments to prior periods or corrections of errors. They shall be adjusted in the current period and future periods, as appropriate, only. <Changes in method of depreciation> Under, a change in the method of depreciation is considered to be a change of accounting estimate. 5

6 Corrections of errors Departure from a requirement in order to give fair presentation Non-current assets classified as held for sale (and disposal groups) Depreciation of non-current assets (or disposal groups) classified as held for sale (Corporate Accounting Principles 2 Note 12) (Financial Instruments and Exchange Law 24.2, 7, 9, 10) There is no specific rule regarding corrections of material errors, however corrections of errors to prior periods financial statements are recorded as extraordinary items (adjustments in relation to prior period) in the profit and loss statement of the period in which they are found. Note: for material misstatements, the financial statements must be reissued. No such rule exists. There is no specific rule. However, under the Standard for the Impairment of Fixed Assets, note 2, as examples of indicators of impairment, disposal of a business operation and restructurings, early disposal, changes in purpose of use etc. are given. There is no specific rule. However, impaired assets must be depreciated from the book value from which the amount of impairment loss is already deducted (Standard for the Impairment of Fixed Assets 3.1). (IAS8.42) Except for when it is impracticable to determine the period-specific effect or the cumulative effect, a material error shall be corrected retrospectively by: restating the comparative amounts in the prior period in which the error occurred; or if the error occurred before the earliest period presented, restating the opening balances of assets, liabilities and equity for the earliest period presented. (IAS1.19) In the extremely rare circumstances in which compliance with a requirement in an would be so misleading that it would conflict with or be contrary to the Framework for the Preparation and Presentation of Financial Statements, it is necessary to depart from that requirement (the true and fair override ). (5.6,15) If the carrying value of assets will be recovered principally through a sale transaction rather than through continuing use, the asset (or disposal group) shall be classified as held for sale and shall be measured at the lower of carrying amount and fair value less costs to sell. (5.25) Non-current assets (or disposal groups) classified as held for sale are not depreciated. 6

7 Presentation of discontinued operations First time adoption There is no specific rule. There is no clear required treatment. However, where companies which have not previously prepared financial statements prepare these for the first time, with respect to the opening consolidated balance sheet, there are many cases in which the notes state that there are no comparatives to the financial statements in the first year of presentation. (5.30,33) The following amounts must be separated from the amounts arising from continuing operations in the statement of comprehensive income (profit and loss statement): the post-tax profit or loss of discontinued operations; the post-tax gain or loss recognised on the measurement to fair value less costs to sell or on disposal of the assets (or disposal group). (1) In principle, all effective accounting standards at the end of the reporting period must be applied in the first financial statements. By way of exception however, there are certain retrospective applications of standards which may be exempted and there are others which are prohibited. 7

8 Consolidation, Equity Method & Joint Ventures Significant differences Scope of consolidation (Accounting Standard for Consolidated Financial Statements 6, 13) The scope of consolidation is based on the concept of control. A parent company controls another company when it has control over the body which makes the financial, operating and business decisions (the decision making body) of that other company. (IAS27.12,13,14) The scope of consolidation is based on the concept of control. Control exists when the parent entity is able to govern the financial and operating policies of another entity so as to obtain benefits from that entity s activities. When assessing whether an entity has control over another entity, potentially exercisable or convertible instruments with voting rights are considered. Scope of consolidation (exception) Special purpose entities (SPEs) (Accounting Standard for Consolidated Financial Statements 14) The following entities are excluded from the scope of consolidation: subsidiaries where control is temporary; subsidiaries which, if consolidated, would give rise to the risk of substantially misleading the judgment of interested parties (Treatment of the revision of the scope of consolidation of subsidiaries and affiliated companies) (Treatment in practice regarding the control and the influence standards in relation to investment vehicles) Certain SPEs which meet certain conditions are presumed not to meet the definition of subsidiaries. The scope of consolidation of investment vehicles is in principle judged based on the existence of control over operations. (IAS 27. 4, 12) All entities, which are in substance controlled must be consolidated, there are no exceptions similar to the exception. (SIC12.8) SPEs shall be consolidated when the substance of the relationship between an entity and the SPE indicates that the SPE is controlled by the entity. 8

9 Uniform accounting policies of consolidated subsidiaries Presentation of profit or loss attributable to non-controlling interests/ minority interests Allocation of subsidiary loss to non-controlling interests (Accounting Standard for Consolidated Financial Statements 17) (Practical Interim Solution on Unification of Accounting Policies Applied to Foreign Subsidiaries for Consolidated Financial Statements) Accounting policies and procedures for like transactions in similar circumstances applied by the parent and the subsidiary, in principle, shall be unified. However, if the financial statements of the foreign subsidiary are prepared in accordance with or USGAAP, they can be used for the time being after adjustment of six specific items. (Accounting Standard for Consolidated Financial Statements 39) Profit (or loss) attributable to minority interests is presented as a deduction from net profit for the period after tax. However, according to the proposed Standard for Presentation of Comprehensive Income (draft), the amount of comprehensive income attributable to owners of the parent and to minority interests are to be disclosed as allocations in the consolidated financial statements. (Accounting Standard for Consolidated Financial Statements 27 ) If the proportionate losses of subsidiaries relating to the minority interests share exceeds the amount that the minority interests are obliged to bear, any such excess amount is charged to the parent company. (IAS 27.24, 25) Consolidated financial statements shall be prepared using uniform accounting policies for like transactions and other events in similar circumstances. If a member of the group uses accounting policies other than those adopted in the consolidated financial statements for like transactions and events in similar circumstances, appropriate adjustments are made to its financial statements in preparing the consolidated statements. (IAS1.83) Profit or loss and total comprehensive income for the period attributable to non-controlling interests (minority interests) and to the parent company are disclosed as allocations for the period in the statement of comprehensive income. (IAS 27, 28) Even though non-controlling interests are negative, total comprehensive income is attributed to both non controlling interests and the parent company. 9

10 Loss of control of a subsidiary Changes in a parent s ownership interest in a subsidiary that do not result in a loss of control (Accounting Standard for Consolidated Financial Statements 29 ) (Accounting Standard for Business Separations 38, 48(1)1) (Application Guidance on Accounting Standards for Business Combinations and Business Separations 276, 288(2)) As the result of a disposal, when the remaining investment represents an investment in an associate, the investment is valued using the equity method. When the remaining investment is not an associate, it is valued based on its carrying value in the separate financial statements of the parent. As the result of a business combination, when a subsidiary becomes an associate, the investment is valued using the equity method. When a subsidiary does not become an associate, the investment is valued based on the carrying value in the separate financial statements (which is in principle the fair value of the shares in the combined entity after the business combination). (Accounting Standard for Consolidated Financial Statements 28-30) (Accounting Standard for Business Separations 48, 38,17-19, 39) For purchases of an increased share in a subsidiary, any difference between the value of the interest acquired and the amount invested is recognised as goodwill (or negative goodwill). For disposals, any difference between the reduction in the interest sold and the reduction in the investment amount is recorded as a profit or loss on disposal of shares in a subsidiary. For increases or decreases in interests in a subsidiary as a result of stock issues etc. or business 10 (IAS27.34) The parent company recognises any remaining interest at its fair value at the date that control is lost. (IAS ) Changes in a parent s ownership interest in a subsidiary that do not result in a loss of control are accounted for as equity transactions.

11 Non-coterminous reporting periods Equity methodscope combinations and such like, the difference between the increase in the interest and increase in the vestment are treated as goodwill (or negative goodwill) and the difference between the decrease in the interest and the decrease on the investment are treated as differences arising on change in interest (i.e. within equity). (Accounting Standard for Consolidated Financial Statements Note 4) When the difference between the end of the reporting period of the subsidiary and that of the parent is less than three months, the financial statements of the subsidiary can be used as they are for consolidation purposes. In that case, adjustments shall be made for the effects of significant intragroup transactions. (Accounting Standards for Investments, Using the Equity Method 6) Non-consolidated subsidiaries and investments in associates are, in principle, accounted for using the equity method. (IAS , 23, 41(c)) The financial statements of the parent and its subsidiaries used in the preparation of the consolidated financial statements shall be prepared as of the same date. When the end of the reporting period of the parent is different from that of a subsidiary, the subsidiary prepares, for consolidation purposes, additional financial statements as of the same date as the financial statements of the parent unless it is impracticable to do so (after making every reasonable effort). In the case that it is impracticable to align the reporting period ends,, adjustments shall be made for the effects of significant transactions or events that occur between that date and the date of the parent s financial statements (the gap period is limited to no more than three months). (IAS28.1,3,4,13) In principle, all investments in associates are accounted for using the equity method. 11

12 Equity methodscope (exception) Uniform accounting policies of associates (Application Guideline on determining the scope of consolidation for subsidiaries and associates 25, 26) The following investments are excluded from the application of the equity method: associates where control is temporary; associates, which, if the equity method were to be applied, would give rise to the risk of substantially misleading the judgment of interested parties (Accounting Standards for Investments, Using the Equity Method 9) (Practical Interim Solution on Unification of Accounting Policies Applied to Foreign Affiliates for Consolidated Financial Statements) Accounting policies and procedures for like transactions in similar circumstances used by the investor and the associate (including its subsidiaries), in principle, shall be unified. Also, the Practical Interim Solution on Unification of Accounting Policies Applied to Foreign Affiliates for Consolidated Financial Statements may be applied to foreign associates as an interim measure. If it is extremely difficult to obtain information for unification of accounting policies, this is considered to be a rational reason for not using uniform accounting policies as outlined in the Audit Guidance on the Practical Interim Solution on Unification of Accounting Policies Applied to Foreign Subsidiaries for Consolidated Financial Statements. (IAS28.13,14) All entities over which an entity has significant influence are accounted for using the equity method. However, investments which are classified as held for sale in accordance with 5 are accounted for in accordance with 5. (IAS 28.26, 27) The investor s financial statements shall be prepared using uniform accounting policies for like transactions and events in similar circumstances. If an associate uses accounting policies other than those of the investor for like transactions and events in similar circumstances, adjustments shall be made to conform the associate s accounting policies to those of the investor when the associate s financial statements are used by the investor in applying the equity method. 12

13 Treatment when the end of the reporting period is different between the investor and the associate Impairment of associates (and joint ventures accounted for using the equity method) (Accounting Standards for Investments, Using the Equity Method 10) The most recent available financial statements of the associate are used by the investor in applying the equity method. When the end of the reporting period of the investor is different from that of the associate, necessary adjustments are made or notes given for the effects of significant transactions or events. (Practical Guidance on Accounting Standards for Investments Using the Equity Method 9) (Practical Guidance on Consolidation Procedures 32) Where an investor recognises an impairment loss in respect of an associate in its separate financial statements, and the resulting book value after the recognition of the impairment loss is below the book value in the consolidated financial statements, any goodwill is immediately depreciated for the amount of difference. (IAS ) The most recent available financial statements of the associate are used by the investor in applying the equity method. When the end of the reporting period of the investor is different from that of the associate, the associate prepares, for the use of the investor, financial statements as of the same date as the financial statements of the investor unless it is impracticable to do so. When it is impractical to align the period ends, adjustments shall be made for the effects of significant transactions or events that occur between that date and the date of the investor s financial statements (limited to a gap of no more than three months). (IAS ) Goodwill forms part of the carrying amount of an investment in an associate and is not separately recognised. Therefore it is not tested for impairment separately. Instead, the entire carrying amount of the investment is tested for impairment as a single asset, whenever application of the requirements in IAS 39 indicates that the investment may be impaired. The impairment test itself shall be carried out in accordance with IAS 36. Any reversal of that impairment loss is recognised to the extent that the recoverable amount of the investment subsequently increases. 13

14 Discontinuance of equity method Joint ventures Separate financial statements: subsidiaries, associates and jointly controlled entities (Accounting Standards for Investments, Using the Equity Method 15) (Accounting Standard for Business Separations 41(2), 48(1)1) (Application Guidance on Accounting Standards for Business Combinations and Business Separations 278(2), 290(2)) When an entity ceases to be an associate as the result of a sale or another event, any remaining investment in shares is valued at the carrying value of the investment in the separate financial statements of the investor. When an entity ceases to be an associate or jointly controlled operation as the result of a business combination, the shares of the acquirer or acquiree are valued at the carrying value in the separate financial statements of the investor (in principle at the market value of the shares of the combined entity after the business combination). (Accounting Standard for Business Combination 39 (2)) Jointly controlled entities are accounted for using the equity method. (Accounting Standard for Financial Instruments 17) Investments in subsidiaries and associates are recorded at cost in the balance sheet of the separate (non-consolidated) financial statements. (IAS28.19) When equity accounting is discontinued, the investment is accounted for as a financial asset in accordance with IAS39 and the fair value of the investment at the date it ceases to be an associate is its fair value on initial recognition. (IAS31.30,38) Within joint ventures, jointly controlled entities are accounted for by either of the following methods: proportionate consolidation; or equity method. (IAS27.38) In the separate financial statements of the investing entity, investments in subsidiaries, associates and jointly controlled entities are accounted for either: at cost; or in accordance with IAS39. However, when investments are classified as held for sale in accordance with 5, they are accounted for in accordance with 5. 14

15 Business Combinations Significant differences Definition of a business combination (Accounting Standard for Business Combinations 5) A business combination is when an entity (company or similar entity) or a business operation, which forms an entity, combines with another entity or business operation, which forms an entity, to become one reporting unit. (3R Appendix A) A business combination is a transaction or other event in which an acquirer obtains control of one or more businesses. Accounting for business combinations Timing of measurement of the consideration (shares) Contingent Consideration Expenses directly related to the business combination (Accounting Standard for Business Combinations 17) The purchase method is applied for business combinations other than jointly controlled entities and operations. (Accounting Standard for Business Combinations 24) Measured, in principle, based on stock prices on the date of the acquisition. (Accounting Standard for Business Combinations 27) The acquirer recognises and adjusts goodwill after delivery or excange is fixed and market value is reasonably determinable. Adjustment is not limited to a tentative reporting period. (Accounting Standard for Business Combinations 26) Included in the cost of the business combination (as a result a part of goodwill). (3.4) The acquisition method is method applied, the pooling method is not allowed. (3.27) Measured at acquisition date, the date on which the acquirer effectively obtains control of the acquiree. (3.39, 58) The acquirer shall recognise the acquisition-date fair value of contingent consideration as part of the consideration transferred in exchange for the acquiree. Aside from changes as a result of additional information that the acquirer obtains after the acquisition date about facts and circumstances that existed at the acquisition date within the measurement period, no change is made to consideration or to goodwill. (3.53) Expensed as a cost when the services are received. 15

16 Recognition of contingent liabilities Accounting for intangible assets Rights reacquired through a business combination (for example, trademarks previously sold by the acquirer) Initial recognition of goodwill and measurement of non-controlling interest (minority interests) (Accounting Standard for Business Combinations 30) Contingent liabilities are recognised when they are expenses or losses for certain conditions estimated to occur after acquisition and likelihood of occurrence is reflected in measurement of consideration. (Accounting Standard for Business Combinations 28, 29) Intangible assets must be recognised separately from goodwill. There is no specific guidance. (Accounting Standard for Business Combinations 31) Goodwill is the amount by which the acquisition cost of the entity or the business acquired exceeds the net amount which is allocated to the assets acquired or the liabilities assumed (the so-called purchased goodwill approach ).. (Accounting Standard for Consolidated Financial Statements20) Assets and liabilities of subsidiaries are measured at their fair values on acquisition date and minority interest s are recorded as the minority interest share of the fair value of net assets at acquisition date (the so-called full market value method ). (3.22) Contingent liabilities which are obligations arising from past events are recognised regardless of likelihood of occurrence when fair value can be measured reliably. (3.13, IAS38.33) Intangible assets must be recognised separately when they meet the definition in IAS38 and in a business combination, reliable measurement criteria is always considered to be satisfied. (3.29) Where the rights meet the criteria for recognition, they are recognised as intangible assets separately from goodwill based on the remaining contractual term. (3.19,32) One of two methods may be selected: 1) the fair value of the entire entity acquired is measured including the non-controlling interest s share, and goodwill is recognised including that relating to the non-controlling interest s share (the so-called full goodwill approach ); or 2) non-controlling interests (NCI) are measured as the NCI s share of the fair value of the net assets of the acquiree, and goodwill is recognised only in respect of the acquirer s share (the so-called purchased goodwill approach ). 16

17 Amortisation of goodwill Negative goodwill Business combinations achieved in stages (Accounting Standard for Business Combinations 32) (Accounting Standard of Consolidated Financial Statements 24) In principle, goodwill must be amortised within 20 years using the straight line method or any other rationale method. When amount is insignificant, it is possible to expense goodwill in the period in which it arises. When there is an indicator that the goodwill is impaired, the need to recognize an impairment loss must be considered. (Accounting Standard for Business Combinations 33) (Accounting Standard of Consolidated Financial Statements 24) After reassessing the identifiable assets, liabilities and allocation of the acquisition cost, negative goodwill is recognised as a gain. (Accounting Standard for Business Combinations 25) In the consolidated financial statements, the cost of the acquisition is measured as the market value at the date of the business combination of the entire holding when control over equity interests is obtained. Any difference between the resulting acquisition cost and the total of the cost of each transaction to date is recorded in profit or loss (therefore current is similar to ). Minority interests are measured as outlined above in Initial recognition of goodwill and measurement of non-controlling interest (minority interests). (3. B63, IAS36.90, 124) Goodwill is not amortised but is subject to an impairment review in each reporting period. Reversals of previous impairments of goodwill are prohibited. ( ) After reassessing the identified assets, liabilities, contingent liabilities and the acquisition cost, negative goodwill is recognised as a gain. (3. 42) The previously held equity interest is remeasured at acquisition date fair value and the resulting gain or loss recorded in comprehensive income, and the remeasured interest is considered in the measurement of goodwill at acquisition date. Non-controlling interests are measured as outlined above in Initial recognition of goodwill and measurement of non-controlling interest (minority interests). 17

18 Inventory Significant Differences Cost of inventories (Regulation for Terminology, Forms and Preparation of Financial Statements 90, and related guideline 90) Purchase discounts are treated as non-operating income. (IAS2.11) Trade discounts, rebates and other similar items are deducted in determining the costs of purchase. Cost methods Allocation of fixed production overheads (normal capacity) (Accounting Standard for Measurement of Inventories 6-2, 34-4) (Methods for determining balance sheets values) Specific identification method, FIFO, average cost method, retail cost method In certain situations, the latest purchase price method is allowed. (Cost Accounting Standard 4(1)2, 47(1)3) The allocation of fixed production overheads is based on scheduled capacity or normal capacity etc. Relatively high cost variances due to actual prices being different to expected price are allocated to cost of sales and to inventories at the end of period. (IAS ) (Cost methods) Specific identification method, FIFO, weighted average (Cost measurement techniques) The actual cost method is the principle, however the standard cost method and the retail cost methods are also given as examples in IAS2. The standard cost method and retail cost method are allowed for convenience if the results approximate cost. (IAS2.13) The allocation of fixed production overheads is based on the normal capacity of the production facilities. Allocation of fixed production overheads is not increased, in periods of low production, but such unallocated overheads (unfavourable variances) are recognised as an expense in the period in which they are incurred (not included in period end inventory). In periods of abnormally high production, the amount of fixed overhead allocated to each unit of production is decreased (favourable variances are allocated to period end inventory). 18

19 Inclusion of borrowing costs in cost Measurement of inventories Reversals of write-downs ( Statement of Position 130, Industry Specific Audit Research Group 460) Interest costs, which meet certain criteria, may be included in cost in respect of property development operations. (Accounting Standard for Measurement of Inventories 7, 15, 16) When net sales value is below acquisition cost, the difference shall be recognised as a current period expense. Inventories held for trading are carried on the balance sheet at an amount based on market price, and any difference is recognised as a current period expense. Note, the specific guidance is similar to the treatment for financial instruments held for trading in the Accounting Standard for Financial Instruments. (Accounting Standard for Measurement of Inventories 14, 17) It is possible to select a policy of reversal of previous write downs or a policy of non-reversal. However, in extraordinary circumstances even if a policy of reversal is selected, reversal is not allowed. (IAS23.7-8) For those inventories which meet the conditions in IAS23, in principle, borrowing costs must be included in cost. (IAS2.6,9,34) Inventories shall be measured at the lower of cost and net realisable value. Net realisable value is the estimated selling price less the estimated costs of completion and the estimated costs necessary to make the sale. The amount of write-down, in principle, shall be recognised as an expense in the period the write-down occurs. (IAS2.33) Where the circumstances that previously caused inventories to be written down no longer exist, or when there is clear evidence of an increase in net realisable value caused by changed economic circumstances, the amount of the previous write-down is reversed (i.e. limited to the amount of the original write-down). 19

20 Intangible Assets and Research and Development Costs Significant differences Acounting standard There is no one comprehensive accounting standard which deals with intangible fixed assets. (IAS38) The basis of recognition and measurement of intangible assets differs depending on whether they are purchased individually or acquired through a business combination, or whether they are internally generated. IAS38 covers all three situations. Definition Initial recognition and measurement (recognition rules) (Regulation for Terminology, Forms and Preparation of Financial Statements 28) There is no separate definition for intangible assets, however the following are given as examples: goodwill patents land lease rights (including surface rights) trademarks utility model rights design rights mining rights fishing rights(including common of piscary) software leased intangible assets and similar There is no clear guidance in respect of the recognition of intangible assets. (IAS38.8,13,17) The definition of an intangible asset includes all the following: an asset controlled by the entity as a result of past events; an asset from which future economic benefits are expected to be received; and an identifiable non-monetary asset without physical substance. (IAS38.18,21) Intangible assets shall only be recognised if they meet the definition of an intangible and if, and only if: it is probable that the expected future economic benefits from the asset will flow to the entity; and the cost of the asset can be measured reliably. 20

21 In-process research and development acquired in a business combination Internally generated intangible assets: research and development expenses Measurement after recognition (Accounting Standard for business combinations28, 29) For identifiable assets at the date of the acquisition, acquisition cost is allocated based on the market price of the date of the acquisition. Intangible assets such as transferable legal rights are considered to be identifiable assets. (Accounting Standard for research and development costs 3 and Note 3) Expenditure on research and development shall be recognised as an expense when incurred. The parts of software development and production costs, which relate to research and development are also recognised as an expense when incurred. (Corporate Accounting Principles 3.5,4(1)B) The acquisition cost of the intangible asset must be allocated over its useful life each fiscal year using a depreciation method. Unamortised balance shall be disclosed (revaluation is not allowed). (IAS38.34,42,43) An acquirer recognises as an asset, separately from goodwill, in-process research and development costs of the acquiree when the definition of an intangible asset is met. The definition of an intangible asset is met when: it meets the definition of an asset; and it is separately identifable. Subsequent expenditure on the above is treated in the same way as for internally generated intangible assets below. (IAS ) Expenditure on research shall be recognised as an expense when incurred. Development costs are recognised as intangible assets but only if the technical feasibility, the intention to use or sell the asset, and other conditions can all be demonstrated (if the conditions cannot be demonstrated, the costs must be expensed). There is no separate guidance relating to the development of computer software. (IAS38.72,75) An entity chooses either the cost model or the revaluation model for subsequent measurement. The revalued amount of an intangible asset is its fair value at the date of revaluation less any subsequent accumulated amortisation and any subsequent accumulated impairment losses. To apply the revaluation model, fair values can only be determined by reference to an active market. 21

22 Amortisation (useful lives) Advertising cost In practice, intangible assets are generally amortised on a straight line basis in accordance with the tax regulations (however, there is a specific rule for the amortisation of software in the standard relating to research and development costs 4,5). There are no specific rules for advertising costs. (IAS38.88,89) The useful life of an intangible asset is determined as finite or indefinite. An intangible asset shall be regarded as having an indefinite life when, based on an analysis of all of the relevant factors, there is no foreseeable limit to the period over which the asset is expected to generate net cash flows for the entity. An asset with a finite useful life is amortised over its useful life. An asset with an indefinite useful life is not amortised but is subject to an impairment test each period. (IAS38.67,69,69A,70) Advertising costs shall be recognised as an expense when incurred. An asset is only allowed for prepaid advertising costs if payment is before advertising goods can be used or advertising services are received. 22

23 Fixed Assets Significant differences Measurement of cost of asset acquired by exchange (Guidance on auditing advanced depreciation by reduction of book value of assets) In exchanges of dissimilar assets, in principle, either the asset given up or the asset received is measured at fair market value. In exchanges of assets of a similar nature or for similar purposes, the asset received is measured at the book value of the asset given up. (IAS16.24) Assets acquired in exchange for another asset (or in a combination of exchange for monetary and non-monetary assets) are measured at fair value unless: a) the exchange transaction lacks commercial substance; or b) the fair value of neither the asset received nor the asset given up is reliably measurable. If the acquired item is not measured at fair value, its cost is measured at the carrying amount of the asset given up. Capitalisation of borrowing costs ( Statement of Position 3 Depreciation of Fixed Assets 1,4,2) (Self-constructed property) When an entity constructs its own property, it shall calculate manufacturing cost based on the Cost Accounting Standard, and acquisition cost shall be calculated based on that. Interest on borrowings required for construction and for the period before operation can be included in acquisition cost. (IAS23.5) A qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its intended use or sale. (IAS23. 8) Borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset shall be included in the acquisition cost of the asset. Other borrowing costs shall be recognised as an expense when they are incurred. 23

24 Dismantling, disposal and restoration costs etc. (Accounting Standard for Asset Retirement Obligations 3,6,11,14 Guidance on Application of Asset Retirement Obligations) Asset retirement obligations are recorded where there is a legal obligation or similar based on the laws relating to the retirement of fixed assets or contractual requirements. The discount rate is determined at the time the liability is recorded and is not subsequently changed (note where there is an increase in the estimated future cash flows, the discount rate is changed at that time, but where there is a decrease in the cash flows, the discount rate is not changed (i.e. original rate is used) ). The periodic adjustment to the obligation (unwinding of the discount) is classified in the profit and loss account in the same way as the depreciation of the fixed asset to which the asset retirement obligation exists. Where a rental deposit (shikikin) is recorded as an asset, the amount, which is not expected to be refunded using a short cut method, may be reasonably estimated and such portion as is allocated to the current period is charged to the profit and loss account. There is no specific rule. Normally, expenditure which extends the useful life of an asset or which improves its operating capacity is capitalised, and expenditure which maintains an asset s current level of operation is treated as maintenance costs. (IAS16.16(c),18, IAS37.10,14,19,45,47, IFRIC1.3,8) A provision shall be recognised when an entity has a present obligation (legal or constructive) as a result of a past event, and the amount of a provision shall be the present value in accordance with IAS37. A provision shall be re-estimated for changes in the current discount rate, and (when the cost model is used) the acquisition cost shall be adjusted. The periodic unwinding of the discount shall be recognised as a finance cost as it takes place. The exceptional treatment of rental deposits in is not allowed. (IAS16.7,12,13) Subsequent costs are capitalised if it is probable that they will give rise to future economic benefits to the entity and they can be measured reliably. In all other cases they are expensed as incurred. 24

25 Government grants related to assets Subsequent measurement Unit of depreciation (components approach) Revision of residual values, useful lives and depreciation methods Changes of depreciation method (Corporate Accounting Principles Note 24) Government subsidies and construction related proceeds from users etc. can be deducted from cost of the related assets. (Guidance on auditing advanced depreciation by reduction of book value of assets) When the company records advanced depreciation as an appropriation of profit through a transfer to reserves, this accounting method also can be considered to be appropriate by auditors. Carried at cost less any accumulated depreciation and any accumulated impairment losses (Revaluation model is not permitted). There is no specific rule. (Audit and assurance committee report No. 81 2) In accordance with the rule that depreciation is determined on a rationale basis, depreciation must be carried out each period in a planned and systematic way. (Regulation for Terminology, Forms and Preparation of Financial Statements 8.2) Changes in the method of depreciation are changes in accounting policy and when a change is made, they are treated as such. (IAS20.24) Government grants related to assets are presented either as deferred income or are deducted from the book value of the related asset. (IAS16.29,31) Either the cost model or the revaluation model must be selected as an accounting policy and that policy must be applied to an entire class of assets. When the revaluation method is used, revaluations shall be made regularly to ensure that the carrying amount does not differ materially from the fair value at the end of each reporting period. (IAS16.43) Each part of an item of property, plant and equipment with a cost that is significant in relation to the total cost of the item shall be depreciated separately. (IAS16.56,61) The residual values, useful lives and depreciation methods shall be reviewed at least each financial year-end. (IAS16.61) Changes in the method of depreciation are treated as changes in accounting estimates. 25

26 Investment Property Significant differences Property used for more than one purpose (Accounting Standard for Disclosures about Fair Value of Investment and Rental Property 7) The portions of the property can normally be separated into rental property and others based on cost accounting and other reasonable methods. When the proportion of the property used as rental property is high, the property could be presented as rental property and others. When the proportion of the property used as rental property is low, the property as a whole could be booked as fixed assets and is outside the scope of rental property disclosures. (IAS40.10) If the portions of the property could be sold separately or leased out separately under a finance lease, an entity accounts for the portions separately. If the portions could not be sold separately, the property is investment property only if an insignificant portion is held for own use. Properties under development (Accounting Standard for Disclosures about Fair Value of Investment and Rental Property 6) Rental property (investment property) includes property under development, which is intended to be used as rental property in the future, and property under redevelopment, which is intended to continue to be used as rental property. (IAS40.8(e)) Property which is being constructed or developed to earn rentals for future use as investment property is accounted for as investment property. Ancillary services associated with a property (Accounting Standard for Disclosures about Fair Value of Investment and Rental Property 28) When it is difficult to judge the significance of ancillary services offered to tenants, the classification of the property may be judged on the basis of form alone. Investment property which is rented out is subject to disclosures as rental property. However, property which is rented as part of a business operation is outside the scope of rental property disclosures (i.e. hotels etc). (IAS40.11,12,14) When the services are insignificant to the arrangement as a whole, the related property is treated as an investment property. When the services are significant, the property is treated as an owner-occupied property. When the above determination is difficult, disclosure must be made of the criteria used in making the judgment. 26

27 Measurement on initial recognition Fair value measurement Determination of fair value The cost model is the only method allowed (there are no specific rules for fair value accounting as fair values are disclosure items only). There are no specific rules. (Guidance on Accounting Standard for Disclosures about Fair Value of Investment and Rental Property 11) The market value of rental properties at year end is usually measured by observable market prices and if market prices are not observable, reasonably calculated prices are used. Reasonably calculated prices related to rental properties are calculated by the method described in Real Estate Appraisal Standards (Ministry of Land, Infrastructure, Transport and Tourism) or similar method. (IAS40.30) The cost or the fair value model may be selected. (IAS40.33,35,53, 53A,53B,54) If the fair value model is chosen, all investment properties must be fair valued, except in the specific situation where fair value cannot be reliably determined. Changes in fair values are recorded in the profit and loss for the period in which they arise. The same principles apply to investment property under construction. (IAS40.32,36) The fair value of an investment property is the price at which the property could be exchanged between knowledgeable, willing parties in an arm s length transaction. It is recommended but not required that the valuation of an independent valuer with a certain level of experience is used. 27

28 Impairment of assets Significant differences Indicators of impairment long lived assets (Guidance for the application of the standard on the impairment of fixed assets 11-17) More precise numerical indicators are used than in (for example: if market value falls below 50% of book value). (IAS36.12) As the indicators are of a broad nature, there is tendency for an indication of impairment to be judged to exist earlier than would be the case under. Further, one of the examples of an indicator of impairment given is when the carrying value of net assets is more than an entity s market capitalisation. Impairment review process Reversal of impairment losses (Accounting Standard for the impairment of fixed assets 2 2,3) 2 step approach: 1. Recoverability test (the carrying value of the asset is compared to the undiscounted cash flows through the use of the asset and on its final disposal). 2. As a result, if the carrying value is higher than the undiscounted cash flows, the carrying value is considered to be not recoverable. An impairment loss is then recognised for the difference between the carrying value and the amount of the discounted cash flows. (Accounting Standard for the impairment of fixed assets 3 2) Reversal of impairment losses are prohibited for all fixed assets. (IAS36.59) 1 step approach: When there is an indicator of impairment, an impairment loss is determined as the amount by which the carrying value of an asset exceeds its recoverable amount. Recoverable amount is the higher of (i) fair value less costs to sell and (ii) value in use (the present value of future cash flows derived from using the asset, including its residual value). (IAS36.110,117,124) Reversals relating to goodwill are prohibited however, for other assets, at the end of each period assessment must be made as to whether there is any indication that the impairment no longer exists. When appropriate, the impairment loss is reversed to the extent that it does not exceed the carrying amount that would have been determined (net of amortisation of depreciation) had no previous impairment been reversed. 28

29 Allocation of goodwil (Accounting Standard for the impairment of fixed assets 2 8) When judging the recognition of an impairment loss, goodwill shall be included with several asset groups of the business to which the goodwill relates, at a generally higher level. If the carrying amount of goodwill can be allocated to asset groups of the related business based on some reasonable criteria, recognition of an impairment loss can be judged after the goodwill has been allocated to each asset group. (IAS36.80,84) Goodwill shall be allocated to each of the acquirer s cash generating units, or groups of cash-generating units. Each unit or group of unit s to which the goodwill is allocated shall: Represent the lowest level within the entity at which the goodwill is monitored for internal management purposes, and Not be larger than an operating segment as defined by paragraph 5 of 8 Operating Segments before aggregation. If the initial allocation of goodwill cannot be completed before the end of the annual period in which the business combination is effected, that initial allocation shall be completed before the end of the first annual period after the acquisition date. 29

30 Leases Significant differences Definition of a finance lease (Accounting Standard for Lease Transactions 5, Implementation Guidance on Accounting Standard for Lease Transactions 9) Finance leases are non-cancelable and require full payout, which means meeting the following conditions: the present value of the total lease payments over the term of the non-cancelable lease is 90% or more of the estimated cash purchase price of the asset; or the lease term is approximately 75% or more of the economic useful life of the related asset. (IAS17.4,8,10) Finance leases are leases which transfer substantially all the risks and rewards of ownership of an asset regardless of whether or not title is transferred. Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than the form of the contract. Lessee accounting for finance leases convenient method (kanben hou) (Implementation Guidance on Accounting Standard for Lease Transactions 22,34,35,37) Lease assets and lease liabilities are measured as follows: <lessor s purchase price is clear> Transfer of ownership: lessor s purchase price No transfer of ownership: the lower of the lessor s purchase price and the present value of the minimum lease payments <lessor s purchase price is unclear> The lower of the present value of lease payments (including the value of any rights to purchase at a discount) and the lessee s estimated cash purchase price. If any of the conditions below are met, the convenient method, which allows accounting for the lease as an operating lease may be used: leases for depreciable assets, which are insignificant; the cost of the lease is expensed when the assets are acquired; and the total lease payments is below a set amount; 30 (IAS17.20) At the commencement of the lease term, the assets and liabilities are recorded at the lower of the fair value of the leased assets and the present value of the minimum lease payments. There is no convenient method as in the Japanese standards.

31 Lessor accounting for finance leases insignificant transactions Depreciation of finance leases Operating lease-incentives leases with a lease term of less than 1 year; or leases where the total lease payments are less than JPY 3 million and it is clear from the operations that they are not significant (aside from those which transfer ownership). (Implementation Guidance on Accounting Standard for Lease Transactions 59,60) Where a lease does not transfer ownership and is insignificant to the lessor, it is possible to allocate the interest receivable on a straight line basis over the lease term. (Accounting Standard for Lease Transactions 39) It is possible to select a different depreciation policy than for own fixed assets depending on the actual circumstances. There is no specific rule. (IAS17.39) The recognition of finance income shall be based on a pattern reflecting a constant periodic rate of return on the lessor s net investment in the finance lease. There is no convenient method as in the Japanese standards. (IAS17.27) The leased asset is depreciated by the lessee over the lease term on a basis consistent with the depreciation policy adopted for its own depreciable assets. (SIC15) Incentives shall be recognised by lessors and lessees as part of the net consideration for the use of the leased asset over the lease term, on a straight-line basis. If there is another systematic basis rather than straight line, which more appropriate, it is used. 31

32 Foreign Currency Significant differences Determination of functional currency Functional currency is not clearly defined. (IAS ) Management must determine the functional currency considering the primary economic environment in which the entity operates. Foreign currency transactions Classification of foreign operations (Accounting Standard for Foreign Currency Transactions Note 1) A transaction for which trading price or other transaction price is denominated in a foreign currency (transactions denominated in the currency other than Japanese yen). (Accounting Standard for Foreign Currency Transactions 2,3) Foreign operations are classified into foreign branches or foreign subsidiaries and similar. (IAS21.8,20) A transaction that is denominated or requires settlement in a currency other than functional currency (IAS21.8) A foreign operation is an entity that is a subsidiary, associate, joint venture or branch of a reporting entity, the activities of which are based or conducted in a country or currency other than those of the reporting entity. A foreign operation is not classified into foreign branches or foreign subsidiaries as in. 32

33 Translation of foreign operations (Accounting Standard for Foreign currency transactions 2,3) Branches Foreign currency transactions of foreign branches are accounted for in the same way as the transactions of the head office, in principle, except for the following: Income and expenses can be translated at average rates for the period. Under certain conditions, the closing rate at the date of the balance sheet can be used for balance sheet items. In this case, income and expenses can also be translated at the same rate. The exchange differences arising from the use of a translation method other than that used by head office are recognised as exchange gains or losses in the income statement. Subsidiaries Assets and liabilities in foreign subsidiaries and similar are translated into yen at exchange rates at the date of the balance sheet. Equity related items acquired by the parent are translated at the exchange rate at the time of the acquisition and subsequently acquired items are translated at the date of each transaction. Revenue and expenses are translated at average rates in the period in principle, however the closing rate at the date of the balance sheet can also be used. Transactions with the parent are translated using the parent s exchange rate, any differences which arise are recognised as exchange gains or losses in the income statement. Exchange differences are recognised as a separate component of equity. 33 (IAS21.39,40,44) The results and financial position of foreign operations shall be translated into the presentation currency after recognition in functional currency in the following way, where the functional currency is not the currency of a hyperinflationary economy. Assets and liabilities for each balance sheet presented shall be translated at the closing rate at the date of that balance sheet. Income and expenses for each statement of comprehensive income (income statement) shall be translated at exchange rates at the dates of the transactions. Average rates for the period are often used if the rates do not fluctuate significantly. All resulting exchange differences arising from the above translation shall be recognised as a separate component of equity.

34 Net investment in a foreign operation Forward foreign exchange contracts Financial reporting in hyperinflationary economies There is no specific rule relating to the exchange differences arising from net investment in a foreign operation. Accordingly, foreign exchange differences arising on such monetary items are recognised in profit or loss in the separate and the consolidated financial statements of the reporting entity. (Accounting Standard for Foreign currency transactions Notes 6 and,7) The method of translating foreign currency receivables and payables on the basis of rates in the related forward contract (furiate shori) is permitted, as a temporarily allowed treatment. There is no standard relating to financial reporting in hyperinflationary economies. (IAS21.32) Exchange differences arising on a monetary item that forms part of a reporting entity s net investment in a foreign operation are recognised in profit or loss in the separate financial statements of the reporting entity. However, in the consolidated financial statements, such exchange differences are recognised initially in other comprehensive income and reclassified to profit or loss on disposal of the net investment. (IAS39) When hedge accounting is applied, the method described on the left is not permitted. (IAS21.42) The results and financial position of an entity whose functional currency is the currency of a hyperinflationary economy shall be translated into a different presentation currency using the following procedures: All amounts (i.e. assets, liabilities, equity items, revenue and expenses, including comparatives) shall be translated at the closing rate at the date of the most recent balance sheet. 34

35 Income Tax Significant differences Tax effect on goodwill (Practical Guidance on Accounting Standard for Tax effect accounting for consolidated financial statements 27) Deferred tax assets or deferred tax liabilities are not recognised in relation to goodwill. (IAS12.15) Deferred tax liability arising from the initial recognition of goodwill shall not be recognised. (IAS12.21B) However, in some countries the amortisation of goodwill is allowed for tax purposes. A deferred tax liability for taxable temporary differences which arise from the amortisation of goodwill for tax purposes, after the initial recognition of goodwill, is recognised. (IAS12.32A) If the carrying amount of goodwill arising in a business combination is less than its tax base, the deferred tax asset shall be recognised as part of the accounting for a business combination to the extent that it is probable that taxable profit will be available against which the deductible temporary difference could be utilised. 35

36 Recognition of deferred tax assets Tax effect of the elimination of unrealised profit (Practical Guidance on Accounting Standard for Tax effect accounting for separate financial statements 21, Audit committee report No66,3) The recoverability of deferred tax assets relating to deductable temporary differences and any necessary valuation allowance should be thoroughly and prudently determined considering the following: sufficiency of taxable income based on earning power; existence of tax planning; sufficiency of taxable temporary differences When judging recoverability, detailed guidance, which includes numerical criteria (within five years, or within a year etc.) by each category of entity are stipulated. (Practical Guidance on Accounting Standard for Tax effect accounting for consolidated financial statements 16) The criteria in Practical Guidance on Accounting Standard for tax effect accounting for separate financial statements 21 is not applied when considering the recoverability of deferred tax assets arising from the elimination of unrealised profits on consolidation (such deferred tax assets are considered to be recoverable). (Practical Guidance on Accounting Standard for Tax effect accounting for consolidated financial statements 13,14) The amount of deferred tax assets is measured by multiplying the unrealised profit by the effective tax rate which is calculated by the seller to be applied on taxable income for the year. (IAS12.24,27-30) A deferred tax asset shall be recognised for all deductible temporary differences to the extent that it is probable that taxable profit will be available against which the deductible temporary difference can be utilised. A two step approach under which valuation allowance is recognised is not adopted, rather a deferred tax asset is recognised directly for the amount that is determined as the deferred tax which is recoverable after considering the following: sufficiency of taxable income based on earning ability; existence of tax planning; sufficiency of taxable temporary differences Certain guidance is provided for judging the recoverability of deferred tax assets (however, the category of the asset or numerical criteria as in are not given). When considering the recoverability of deferred tax assets arising from the elimination of unrealised profits on consolidation, recoverability is considered based on the general principle (there is no exceptional rule as in ). (IAS12.47) There is no exception as in (above). In principle, deferred tax assets and liabilities shall be measured at the rate which is calculated by the company which holds the assets. 36

37 Recognition of current and deferred tax Classification of deferred tax assets (liabilities) in the statement of financial position (balance sheet) Presentation in the statement of comprehensive income (income statement) There are no specific rules with regard to the presentation of current tax, however, current tax is included in profit or loss for the period except for some exceptions. However, tax effect on items booked directly in the net assets section (equity) shall also be included in the net assets section. (Accounting Standard for tax effect accounting 3,1) Deferred tax assets and liabilities are classified into current or non-current items. (Accounting Standard for Tax effect accounting 3 3) Corporate tax (including inhabitant tax and enterprise tax) and deferred tax expense (deferred tax income) are presented on the face of the income statement separately. (IAS12.58,61A) Current and deferred tax shall be recognised as income or expense and included in profit or loss for the period, except: tax arising from a transaction or event either in other comprehensive income or directly in equity; tax arising from a business combination. Current tax and deferred tax that relate to items that are recognised, in the same or a different period: in other comprehensive income shall be recognised in other comprehensive income. directly in equity, shall be recognised directly in equity. (IAS1.56) When an entity presents current and non-current assets, as separate classification on the face of its balance sheet, it shall not classify deferred tax assets (liabilities) as current assets (liabilities). Deferred tax assets (liabilities) are classified as non-current assets (liabilities). (IAS12.6,77,79.80) Current tax expense (current tax income) and deferred tax expense (deferred tax income) relating to profit or loss from ordinary activities shall be presented as tax expense (tax income) in the statement of comprehensive income. The major components of tax expense (tax income) shall be disclosed separately in the notes. 37

38 Offsetting deferred tax assets and liabilities (Accounting Standard for Tax effect accounting 3 2) Deferred tax assets (liabilities) classified as current assets (liabilities) and non-current assets (liabilities) are offset within each category. (Practical Guidance on Accounting Standard for Tax effect accounting for consolidated financial statements 42) Deferred tax assets and deferred tax liabilities shall be offset if they relate to income taxes of the same taxable entity. (IAS12.74,76) In rare circumstances, if certain conditions are met, deferred tax assets and deferred tax liabilities of different taxable entities are offset. *In, deferred tax assets (liabilities) are classified as current assets (liabilities) and non-current assets (liabilities), and offset within those current/ non-current categories. However, in, all deferred tax assets (liabilities) are classified as non-current assets (liabilities) and therefore there is no restriction of offset within current or non-current as in. 38

39 Provisions and Contingencies Significant differences Criteria for recognition of a provision (Corporate Accounting Principles Explanatory Notes18) A provision shall be recognised when all of the conditions below are met: it relates to a specific future cost or loss; it arises from a past event; it has a high probability of occurrence; and the amount can be estimated reasonably. (IAS37.14) A provision shall be recognised when all of the following conditions are met: an entity has a present obligation (legal or constructive) as a result of a past event; it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation; and a reliable estimate can be made of the amount of the obligation. Constructive obligation Present obligation of provisions There are no specific rules. Even though it is not a present obligation, a provision shall be recognised when it satisfies the above conditions. (IAS37.10) Liabilities include both legal obligations and constructive obligations. A constructive obligation is an obligation that derives from an entity's actions where: (a) by an established pattern of past practice, published policies or a sufficiently specific current statement, the entity has indicated to other parties that it will accept certain responsibilities; and (b) as a result, the entity has created a valid expectation on the part of those other parties that it will discharge those responsibilities. It is not acceptable to recognise provisions unless they represent present obligations. 39

40 Major inspections or repair costs Discounting the provision Environmental clean-up and decommissioning costs Onerous contracts (Corporate Accounting Principles Explanatory Notes 18) Special repair provisions are given as an example of non-current liabilities. The amount of the provision which relates to the current period is recognised as a current period profit or loss. There are no specific rules. (Accounting Standard for Asset Retirement Obligations 6) An asset retirement obligation is calculated based on its discounted value. The discount rate used is risk free pre-tax interest rate which reflects the time value of money. (Accounting Standard for Asset Retirement Obligations 4) Recognition of asset retirement obligations is required for legal or equivalent obligations. There are no specific rules. (IAS16.14) Future costs of major inspections for PPE, which have not yet been carried out, are not permitted to be recognised as provisions. When the recognition criteria are fulfilled, such costs are recognised in the carrying amount of the item of PPE and are included in the depreciation charge. (IAS ) Where the effect of the time value of money is material, the amount of a provision shall be the present value of the expenditures expected to be required to settle the obligation. The discount rate (or rates) shall be a pre-tax rate (or rates) that reflect(s) current market assessments of the time value of money and the risks specific to the liability. The discount rate(s) shall not reflect risks for which future cash flow estimates have been adjusted. (IAS ) The general principles of IAS37 are applied to provisions environmental clean-up and decommissioning costs etc. On other words, if a legal obligation or a constructive obligation exists, a provision shall be recognised. (IAS37.10,66-69) An onerous contract is a contract in which the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received under it. If an entity has a contract that is onerous, the present obligation under the contract shall be recognised and measured as a provision. 40

41 Restructuring costs Contingent assets: definition and disclosure Measurement of provision within expected outcomes There are no specific rules. These are provided for based on the general requirements. There are no specific rules. (Corporate Accounting Principles) As the only a rationale basis is accepted for estimation of a provision, there is no requirement to give explanation of the details of the measurement method. (Accounting Standard for Asset Retirement Obligations 6) An asset retirement obligation is calculated by discounting future cash flows, using either the most likely outcome or the expected value. (IAS ) Provision for a constructive obligation to restructure is recognised under the general rules of IAS37 when an entity: (a) has a detailed formal plan for the restructuring and (b) has raised a valid expectation in those affected that it will carry out the restructuring by starting to implement that plan or by announcing its main features to those affected by it. (IAS37.10,89) A contingent asset is a possible asset that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity. Where an inflow of economic benefits is probable, an entity shall disclose a brief description of the nature of the contingent assets at the end of the reporting period, and, where practicable, an estimate of their financial effect should be disclosed. (IAS37.39,40) Where the provision being measured involves a large population of items, the obligation is estimated by weighting all possible outcomes by their associated probabilities. Where a single obligation is being measured, the individual most likely outcome may be the best estimate of the liability. 41

42 Revenue Recognition, Construction Contracts Significant differences Basic concept (Corporate Accounting Principles 2 3B) Revenue related to the sale of goods or rendering of services should be recognised in accordance with the realisation principle. (IAS18.7) Revenue is the gross inflow of economic benefits during the period arising in the course of the ordinary activities of an entity when those inflows result in increases in equity, other than increases relating to contributions from equity participants. Identification of the transaction Presentation of revenue Aside from the Practical Guidance for Software Transactions and the Standard on Accounting for Construction Contracts, there are no general rules regarding identification, separation or combining transactions. Aside from the Practical Guidance for Software Transactions, there are no general rules regarding the presentation of revenue. The standard specifies requirements for recognising revenue from the sale of goods, the rendering of services, and from interest, royalties and dividends. In addition, practical examples applying the general principles of IAS 18 are given in the in the Appendix. (IAS18.13) It is necessary to apply the recognition criteria to the separately identifiable components of a single transaction in order to reflect the substance of the transaction. On the other hand, more than one transition should be treated as a single transaction when the commercial substance cannot be understood otherwise. (IAS18.8, Appendix21) Amounts collected as an agent on behalf of a principal, which do not bring economic benefits to the entity, do not result in increases in equity and therefore only commission income is recognised. 42

43 Contracts with deferred payment terms (e.g. installment sales contracts) Sale of goods Rendering of services Rendering of services: where outcome cannot be measured reliably (Corporate Accounting Principles Note 6) Even if the difference of the fair value and the nominal amount of consideration has in substance the nature of interest, the interest element does not have to be accounted for separately. Aside from the normal sales method, the due date method and cash basis are also allowed. (Corporate Accounting Principles 2,3B,Note 6) There is no specific definition of realisation nor standard requirements for revenue recognition. In general, realisation refers to economic transactions conducted with third parties, in other words when the goods or services are converted to a form of monetary asset. The realisation principle is applied as the sales principle. However, in practice, delivery basis and shipping basis are applied, and the timing of revenue recognition depends on established commercial practice. There are no specific rules. There are no specific rules. (IAS18.11,IE8) Revenue is measured at the fair value of the consideration received. For transactions with a financial element like installment sales contracts, consideration is determined using an imputed rate of interest and the interest element is separated. The due date method and cash basis are not allowed. (IAS18.14) Revenue from the sale of goods shall be recognised only if: the entity has transferred to the buyer the significant risks and rewards of ownership of the goods; the buyer of the goods controls the goods; the amount of revenue can be measured reliably; it is probable that there will be an inflow of economic benefits to the entity; and the costs incurred can be measured reliably. (IAS18.20) When the amount of revenue and costs can be measured reliably, it is probable that the economic benefits associated with the transaction will flow to the entity, and the stage of completion of the transaction can be measured reliably, revenue associated with the transaction shall be recognised by reference to the stage of completion of the transaction. (IAS18.26) Revenue shall be recognised only to the extent of the expenses recognised that are recoverable. 43

44 Where the outcome of a construction contract cannot be estimated reliably Resolution of the uncertainty of the outcome Separate identification of transactions (customer loyalty programmes) (Accounting Standard for Construction Contracts 9) The contract completion method is applied. (Implementation Guidance on Accounting Standard for Construction Contracts 3,14) A change to the use of the percentage of completion method should not be made only because of certainty derived from subsequent events. However, this does not apply to subsequent determinations which should have been made at the commencement of the contract. There is no clear rule. In practice it seems that in many cases the full amount of revenue is recorded at the time of sale and a provision for the expected cost of fulfilling the points obligation is recorded. (IAS11.32) A method based on recoverability of construction costs is applied (revenue shall be recognised only to the extent of contract costs incurred for which it is probable that they will be recoverable). (IAS11.35) From the point on which the uncertainties over the outcome of the construction work are resolved, the percentage of completion method is applied. (IFRIC13.3, 5-7) When points are awarded at time a sale is made, the fair value of consideration is divided with reference to the relative fair values of the goods sold and the points awarded. The revenue for the goods sold is recognised at the time of the sale and the revenue in respect of the points awarded is recognised when the points are utilised. 44

45 Share-Based Payments Significant differences In scope transactions and effective date (Accounting Standard for Share-based Payment 17) To be applied to stock options, options such as rights relating to the company s stock and payments made through stock transfers from the implementation of the Companies Act (1 May 2006). (2.53) For equity settled share-based payments, 2 shall be applied to grants of shares, share options or other equity instruments that were granted after 7 November 2002 and had not yet vested at the effective date of 2. Classes of share-based payment transactions Equity-settled share based payments recognition date (Accounting Standard for Share-based Payment 28) Applies to stock options and where consideration for goods or services is given through equity-settled share-based payments. (Accounting Standard for Share-based Payment 6,14,15) Transactions with employees: Stock options granted: grant date Stock delivered as consideration for goods or services: contract date Transactions with parties other than employees: Stock options granted as consideration for goods or services: grant date Stock delivered as consideration for goods or services: contract date (2.2) 2 is applied to equity-settled and cash-settled share-based payment transactions, and transactions which provide a choice of cash or equity settlement. ( ) Transactions with employees: grant date Transactions with parties other than employees: date goods are obtained or services rendered 45

46 Equity settled share based payments measurement If the fair value of the equity instruments granted cannot be estimated reliably Equity instruments with reload feature (Accounting Standard for Share-based Payment 6,14,15) Transactions with employees: Stock options: measure using a widely accepted measurement technique that gives a reasonable estimated value. Delivery of stock: measure at the fair value of the stock on the contract date. Transactions with parties other than employees: calculate using whichever of the below two methods gives the most reliable valuation: a fair valuation of the stock option (or stock) used as consideration; a fair valuation of the goods or services received. (Accounting Standard for Share-based Payment 13) No specific rules. However, for unlisted companies, it is possible to account for stock options based on the estimated intrinsic value per option as a substitute for fair value. In this case, the intrinsic value per option at the grant date is estimated, and is not revised later. No specific rules. ( ) Transactions with employees: measure at the fair value of the equity instruments granted Transactions with parties other than employees: measure at the fair value of the goods or services received. Where the fair value cannot be estimated reliably, measure at the fair value of the equity instruments granted. (2.24) In rare cases, if the fair value of the equity instruments cannot be estimated reliably at the measurement date, measure the equity instruments at their intrinsic value. This is measured initially at the date the entity obtains the goods or the counterparty renders service, and subsequently at each reporting date and at the date of final settlement, with any change in intrinsic value recognised in profit or loss. (2.22) For options with a reload feature, the reload feature shall not be taken into account when estimating the fair value of options granted at the measurement date. Instead, a reload option shall be accounted for as a new option grant, if and when a reload option is subsequently granted. 46

47 Treatment after vesting date Cancellation or settlement of grant Lapse due to non exercise of options (Accounting Standard for Share-based Payment 8) If the option is exercised and new stock is issued, that part of the amount recorded in warranty rights which relates to the exercise of the option, is transferred to paid in capital. No specific rules. (Accounting Standard for Share-based Payment 9) When options lapse because they are not exercised, that part of the amount recorded as share warrants (or options) that relates to those options is transferred as a gain in the profit and loss account. (2.23) The entity shall make no subsequent adjustment to total equity after vesting date. However, this requirement does not preclude the entity from recognising a transfer within equity, i.e. a transfer from one component of equity to another. (2.28) Account for the cancellation or settlement as an acceleration of vesting; Any payment made on the cancellation or settlement shall be accounted for as the repurchase of an equity interest. However, any excess of the payment over the fair value of the equity instruments measured at the repurchase date, shall be recognised as an expense. (2.23) No adjustment is made to the existing equity balance. However, an entity is not precluded from recognising a transfer within equity. 47

48 Employee Benefits, excluding Share-Based Payments Significant differences Defined Benefit Pension Plans Benefit Obligations (Accounting Standard for Retirement Benefits 2, 2 Practical Guidance on Accounting for Retirement Benefits 2) In principle, the value accrued is calculated using the straight line method. Other methods such as the payroll basis, percentage of salary method and the points basis may be used by way of exception. (IAS19.64,67) In principle, the Projected Unit Credit Method (accrued benefit valuation method) shall be used. However, the straight-line method is required if later years have a materially higher level of benefit. Defined Benefit Pension Plans Plan Assets Defined Benefit Pension Plans - Discount rate (Accounting Standard for Retirement Benefits Note 1) When pension plan assets exceed retirement benefit obligations, the difference is recognised as a prepaid pension expense. (Accounting Standard for Retirement Benefits partial revision (3) 2, Notes to the same standard 6) There is no hierarchy through which to consider the discount rate. The discount rate is determined based on the interest rates of highly stable long term bonds. This is the interest rate at period end of long term government, governmental institution and high quality corporate bonds. (IAS19.58) Where there is a surplus of pension plan assets over obligations, an asset is recognised up to the limit of the total of: a) any unrecognised net actuarial losses and past service costs; and b) the present value of any economic benefits available as refunds from the plan or reductions in future contributions to the plan (the asset ceiling). (IAS19.78) The discount rate for post-employment benefit obligations shall be determined by reference to market yields at period end on high quality corporate bonds with a similar currency and term as the obligations. In countries where there is no deep market in such bonds, the market yield (at the end of the reporting period) on government bonds shall be used. For both corporate and government bonds, the currency and the term shall be consistent with the currency and the estimated term of the post-employment benefit obligations. 48

49 Defined Benefit Pension Plans Past Service Cost Defined Benefit Pension Plans Actuarial Gains and Losses (Accounting Standard for Retirement Benefits 3,2) In principle, past service costs are recognised as expenses, amortised over a fixed period within the period of the remaining average service lives. The amortisation period for past service cost and for actuarial gains and losses may be determined separately. For actuarial gains and losses, amortisation may commence from the period following the period in which they arose, however this is not allowed for past service cost. (Accounting Standard for Retirement Benefits Note 11) Past service cost relating to retired employees can be distinguished from other past service cost and can be expensed in full at the time it arises. (Accounting Standard for Retirement Benefits 3, 2) (Accounting Standard for Retirement Benefits Note 9) In principle, actuarial gains and losses are recognised as expenses amortised over a fixed period within the period of the remaining average service lives. The amortisation period for past service cost and for actuarial gains and losses may be determined separately. For actuarial gains and losses, amortisation may commence from the period following the period in which they arose. (IAS19.96) In cases where vesting has occurred, an entity shall recognise past service cost immediately. In cases where vesting is not immediate, an entity shall recognise past service cost as an expense on a straight-line basis over the average period until the benefits become vested. (IAS19.92,93A,93B,93D) It is possible to chose any of the follow accounting policies: The corridor method: actuarial differences within a certain corridor are not recognised. However an entity may recognise these differences in profit and loss faster than over the expected average remaining working lives, provided it uses a systematic method consistently. An entity which selects an accounting policy of recognising the actuarial differences in the period in which they occur, may recognise them outside the profit and loss account in other comprehensive income. 49

50 Minimum funding requirement Defined benefit pensionconvenient method Retirement benefits other than pensions Paid vacation accrual No specific rules exist. (Implementation Guidance on Financial Instruments 34) Small sized entities are permitted to account for retirement benefit obligations using the convenient or short-cut method. No specific rules exist. No specific rules exist. (IFRIC14.BC4,19,23-26) In some cases, to protect employees, minimum funding is required by the plan or law. Such funding requirements are called minimum funding requirements. If the minimum funding requirement is larger than the actual plan assets, the deficiency should be recognised as an additional liability. There is no short-cut method. (IAS19.1,3,6) With the exception of those covered by 2 (Share Based Payment), all employee retirement benefits other than pensions are also within the scope of IAS19. Note: the post-employment benefits of directors are also included. (IAS ) Provisions for accumulating compensated absences are must be recognised. 50

51 Financial Instruments Significant differences Inclusion of transaction costs in acquisition cost (Practical Guidance on Accounting Standard for Financial Instruments 29,56) The related costs of the acquisition of a financial asset are, in principle, included in cost. However, costs, which arise regularly and which are not clearly related to cost of the acquisition, may be excluded. (IAS39.43) For financial assets and liabilities which are not measured at fair value through profit or loss, transaction costs which are directly attributable are included in acquisition cost. Transaction costs are not included for financial assets and liabilities which are measured at fair value through profit or loss. Low or noninterest bearing loans or receivables Loan commitments There is no specific rule. In practice, normally these are recognised at the loan value (amortised cost). (Practical Guidance on Accounting Standard for Financial Instruments 139) The financial institution that is the lender should provide in the notes for bank over-draft contracts or similar and lending commitments, the fact that these exist, the credit line amount or the loan commitment after deducting the amount already loaned. (IAS39.AG64,AG65) Loans with no interest or with off market interest are measured at fair value, which may be based on a discounted cash flow calculation using the prevailing market interest rate of a similar instrument. Any difference between the loan amount and its fair value is accreted to the statement of comprehensive income (profit or loss) using the effective interest rate method, unless the difference qualifies for asset recognition. (IAS39.4,47) Certain loan commitments are recognised as financial liabilities at fair value when the commitment is made. 51

52 A regular way purchase or sale of financial assets Derecognition of financial assets Obtaining a new asset or liability as a result of transferring a financial asset (Practical Guidance on Accounting Standard for Financial Instruments 22,26) For contracts to buy and sell securities, if the period between trade date and settlement date is normal in accordance with the market rules or practices, the buyer recognises the marketable securities and the seller derecognises the marketable securities on the trade date. However, by category of investment based on holding purpose, it is permitted for the buyer to recognise only the market movement between trade date and settlement date, and for the seller only to recognise the gain or loss on sale at trade date. Loans receivable and loans payable are recognised when the loan is made and are derecognised when repayment is made. (Accounting Standard for Financial Instruments ) Financial assets are derecognised based on the financial component approach. (Practical Guidance on Accounting Standard for Financial Instruments 37,38,39) Any new asset or liability arising when a financial asset is derecognised is recorded at market value at the date of transfer. If the market value of the remaining interest or a new asset (derivative) arising on the derecognition of another financial asset cannot be reasonably measured, the remaining interest or new asset should be measured at zero and any gain or loss on the transfer should be calculated as if market value is zero. (IAS39.38) Regular way purchases or sales of financial assets shall be recognised and derecognised based on the trade date accounting or settlement date accounting. (IAS39.20) Financial assets are derecognised based on the risk and rewards approach. If an entity neither transfers nor retains substantially all the risks and rewards of ownership, it must determine whether it has retained control. If control is retained, then the entity continues to recognise the asset to the extent of its continuing involvement. (IAS39.25) If as a result of transfer of a financial asset, a new financial asset, liability, or a servicing liability arises, these must be recognised at fair value. 52

53 Accounting for loan participations Accounting for debt assumption (in-substance defeasance) Exchange of financial liability and alteration of a condition Classification of financial assets (Accounting Standard for Financial Instruments 42, Practical Guidance on Accounting Standard for Financial Instruments 41) Only when certain conditions are met, such as almost all the risks and economic rewards of a receivable are transferred, is derecognition of the related receivable allowed. (Accounting Standard for Financial Instruments 42, Practical Guidance on Accounting Standard for Financial Instruments 46) The related bonds may be derecognised only when the likelihood of a retrospective claim to the issuer is extremely low. There is no related rule. (Accounting Standard for Financial Instruments 15-18) Marketable securities are classified as follows: securities held for trading; debt securities held to maturity; shares in subsidiaries and associates; and other marketable securities. 53 (IAS39.16,19,21) Derecognition of part of a financial asset is allowed if, and only if, one of the following conditions is met: the part comprises specifically identified cash flows from the financial asset; the part comprises a fully proportionate share of the cash flows from the financial asset; or the part comprises a fully proportionate share of specified cash flows from the financial asset. (IAS39.AG59) Transfer though a contract alone does not relieve the debtor of its primary obligation in the absence of legal release, and does not meet the criteria for derecognition. (IAS39.40,AG62) When debt instruments are exchanged which have significantly different terms or when the terms are substantially modified, the existing liability is derecognised and a new liability is recognised. (IAS39.2(a),9,45) Financial assets are classified into four categories: financial assets at fair value through the profit or loss; held-to-maturity investments; loans and receivables; and available for sale financial assets. In principle, investments in subsidiaries, associates and joint ventures are outside the scope of IAS39. (New standard ,5.2.1) Financial assets are divided into debt instruments and equity instruments. Debt instruments(bonds loans receivable etc.) Debt instruments are measured at

54 Fair value option There is no related rule. amortised cost only if the business model test and the characteristics of the financial asset test are met and the fair value option is not applied. Equity instruments Only on acquisition can an equity instrument, which is no held for trading, be designated as measured at fair value through other comprehensive income. In all other cases, equity instruments are measured at fair value through the profit and loss account. (IAS39.9,11A-13) For other than those which are held for trading purposes, if certain requirements are fulfilled, financial assets and liabilities can be measured at fair value (the fair value option). Such financial assets and liabilities must then be fair valued every period and the valuation gain or loss recognised. (New standard 9.4.5) An entity may, at initial recognition, designate a financial asset as measured at fair value through profit or loss if doing so eliminates or significantly reduces a measurement or recognition inconsistency (sometimes referred to as an 'accounting mismatch') that would otherwise arise from measuring assets or liabilities or recognising the gains and losses on them on different bases. 54

55 Valuation of other marketable securities: available for sale financial assets Foreign exchange gains and losses on foreign currency denominated available for sale financial assets and other marketable securities Effective interest method (Accounting Standard for Financial Instruments 18) Carrying values are determined using market values, and the differences are recognised after considering deferred tax by one of the following methods: the total amount is directly recorded as part of net assets (not through P&L); valuation gains where market value exceeds acquisition cost are recognised as a part of net assets, while valuation losses where market value is below acquisition cost are recognised as a loss in the current period. (Practical Guidance on Accounting Standard for Financial Instruments 16) For foreign currency denominated other marketable securities, any foreign currency translation differences arising in the cost or amortised amount are treated in the same way as the valuation difference. However, for foreign currency denominated receivables, changes in the value in the foreign currency are treated as valuation differences and any other differences are treated as foreign exchange gains or losses. (Practical Guidance on Accounting Standard for Financial Instruments 70) Amortisation is based on the effective interest rate method in principle, however the straight line method is also allowed as a convenient method providing it is applied consistently. 55 (IAS39.55(b),AG83) Except for amortisation of interest using the effective interest method, impairments and foreign exchange differences, fair value adjustments after considering deferred tax, are taken to other comprehensive income until derecognition. For non-monetary securities (such as equities) foreign exchange differences are recognised in other comprehensive income. (New standard ) The classification of available for sale financial asset is abolished. If the entity makes the election at initial recognition to measure equity instruments at fair value through other comprehensive income, only dividend income is recorded in profit and loss. All other changes are recorded in equity and are not subsequently reclassified to profit or loss. (IAS39.AG83,IAS21.28) If the available for sale financial assets are foreign currency denominated monetary items (ie bonds), any foreign exchange gains and losses are recognised in profit or loss. (IAS39.9,46,47) The effective interest method is used to calculate the amortised cost of certain financial assets and of all liabilities, other than those liabilities that are held for trading or for which the fair value option is applied. (New standard ) Debt instruments that are measured at amortised cost will be treated as in IAS39.

56 Investments in unlisted equities (shares with no market value) Impairment of loans and receivables (Accounting Standard for Financial Instruments19, Practical Guidance on Accounting Standard for Financial Instruments 63) For shares which are not traded and for which there is no market value based on that trading, if market value is extremely difficult to measure, then measurement at cost is allowed. (Standard 27, 28) The doubtful debt amount is estimated depending on the category of financial asset as follows: General receivables: Calculated based on the historical rates of doubtful debts and reasonable assumptions. Receivables with risk of default: Depending on the situation of the receivable, either of the following methods are applied consistently: calculation of the doubtful debt amount based on the amounts remaining after reduction of the amount expected to be collected from collateral and similar. estimation of the amount of doubtful debts as the difference between the present value of future cash flows and book value. Bankrupt, delinquent, and doubtful receivables: The estimated doubtful debt amount is the amount remaining after deduction of amounts expected to be collected through realisation of collateral. (IAS39.AG80,AG81) Except in cases where appropriate models are not available, investments in unlisted equity instruments are measured at fair value. (New standard ,B5.5-B5.8) The above exemption is abolished and all investments in equity instruments must be measured at fair value. However, in limited circumstances, cost may be an appropriate estimate of fair value. There is guidance in the standard as to when that would not be appropriate. (IAS39.58,59,63,66,67) Where there is objective evidence of impairment, the carrying value of financial assets is reduced to the estimated present value of future cashflows and the related loss is recognised in profit or loss. For available-for-sale financial assets, the reduction in fair value recognised in other comprehensive income is reclassified to profit or loss when the asset is impaired. (New standard ,5.4.1, B5.12-B5.15) The separate classification of loans and receivables is abolished, but for those which are measured at amortised cost, impairment is carried out in accordance with IAS39. 56

57 Impairment reversal Valuation of financial liabilities Classification of financial liabilities and equity instruments Marketable Securities held for trading continue to be measured at market value after impairment, however impairments of debt securities held to maturity and other marketable securities may not be reversed. (Accounting Standard for Financial Instruments 26) Balance sheet amounts are based on the amount of the liability at maturity. However, the amortised cost method should be used where the proceeds and the amount of the liability due on maturity differ. There is no comprehensive standard dealing with the classification of debt and equity, however normally classification is based on legal form. (IAS39.65,66,69,70) If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised, the previously recognised impairment loss shall be reversed. However, for equity instruments, for which fair value cannot be reliably measured, for derivative assets linked to such equity instruments, and for equity instrumnets classified as available for sale, impairment losses shall not be reversed. (New standard , B5.12-B5.15) For equity instruments there will not need to be any further issue about impairment or reversal thereof (fair value measurement). For debt instruments measured at amortised cost, there is no change to IAS39 regarding the reversal of impairment. (IAS39.47) With the exception of those valued at fair value through profit or loss, an entity shall measure all financial liabilities at amortised cost using the effective interest method. (IAS32.11,16A-16D,15,18) IAS32 deals comprehensively with the classification of equity and liabilities. Classification is determined based on the substance of the contract and definitions of financial liability (asset) and equity. 57

58 Convertible bonds accounting by the issuer Financial liability issue costs Cost related to equity transactions Transaction costs of compound financial instruments (Accounting Standard for Financial Instruments 36, Implementation Guidance on Corporate Accounting Standards No. 18) Either of two methods may be used: record the bond as a single amount without separation, or separate the bond and share rights portion. (Interim Treatment relating to the Accounting for Deferred Tax Assets 3 (2)) Principle: account as non-operating expenses However, such costs can be accounted for as deferred assets and may be amortised throughout the bond redemption period using the interest method, or straight-line method provided the method is applied consistently. (Accounting Standard Treasury Shares and Reversals of Legal Reserves 14) (TentativeTreatment relating to the Accounting for Deferred Tax Assets 3 (1)) Costs related to the acquisition, disposal, or extinguishment of treasury stock are accounted for as non-operating expenses. Costs related to stock exchanges as part of financial activities to enlarge the business (including stock exchanges as part of a reorganization) should be accounted as deferred assets, and amortised using the straight-line method within three years from the day of the exchange. There are no standards regarding allocation to the liability component and equity component. (IAS32.15,28) After evaluating the terms of the contract, the financial instrument is classified as debt or equity according to the substance of the contract. (IAS32.35, IAS39.9) Bond issue costs are recognised by inclusion in the effective rate of interest and are amortised as interest. (IAS32.35,37) Transaction costs of an equity transaction shall be accounted for as a deduction from equity, net of any related income tax benefit. (IAS32.38) Transaction costs that relate to the issue of compound financial instruments are allocated to the liability and equity components of the instrument in proportion to the allocation of proceeds. 58

59 Derivative - definition Embedded derivatives (Practical Guidance on Accounting Standard for Financial Instruments 6) A derivative is a financial instrument with the following characteristics: The value of the rights or obligations respond to changes in an underlying variable and the contract has 1) an underlying variable and 2) either a fixed nominal amount or determinable settlement amount, or both a fixed nominal amount and a determinable settlement amount. There is no initial net investment or no net investment compared to that which would be required for other similar types of contracts that would have a similar response to changes in market conditions. Net settlement (payment of the difference) of the contract is required or accepted; net settlement can be easily carried out separate to the contract, or even if the physical settlement occurs, in substance it leaves the counterparty in no difference position than if net settlement had occurred. (Accounting Standards for Other Compound Instruments) It is necessary to separate embedded derivatives if all of the following conditions are met: it is possible that the underlying asset or liability could be affected by the risks arising from the embedded derivative; a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative; and the impact of changes in fair value are not reflected in profit and loss. However, where embedded derivatives are separated for management purposes and certain conditions are met, they may be separated. 59 (IAS39.9) A derivative is a financial instrument or other contract with all three of the following characteristics: (a) its value changes in response to changes in an underlying variable (i.e. specified interest rate, financial instrument price, commodity price, foreign exchange rate, index of prices or rates, credit rating or credit index, or other variable), provided in the case of a non-financial variable that the variable is not specific to a party to the contract; (b) it requires no initial net investment or an initial net investment that is smaller than would be required for other types of contracts that would be expected to have a similar response to changes in market factors; and (c) it is settled at a future date. (IAS39.11) An embedded derivative shall be separated from the host contract if all of the below are met: the economic characteristics and risks of the embedded derivative are not closely related to those of the host contract; a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative; and the hybrid (combined) instrument is not measured at fair value with changes in fair value recognised in profit or loss. (New standard ) An embedded derivative with a host contract which is a financial asset

60 Hedge accounting Ineffective portions of hedges (Accounting Standard for Financial Instruments 32) As a general rule, profits, losses or valuation differences related to the hedging instrument are deferred as a part of net assets (equity). However, where other marketable securities are the hedged item, fair value hedges are permitted where the market fluctuations of the hedged item are recorded in profit or loss. (Implementation Guidance on Financial Instruments 172) The ineffective portion of the gain or loss is also able to be deferred where the hedging instrument as a whole is judged to be effective and the requirements for hedge accounting are fulfilled. Where the ineffective portion of the hedge can be separately identified rationally, it may be recognised in profit or loss in the current year. shall not be separated. It is be included with the host contract and shall be measured at amortised cost or fair value through profit and loss depending on the characteristics of the cash flows of the entire contract. Note: for contracts with non-financial asset hosts, the separation criteria of IAS39 continue to apply. (IAS39.86,89,95) There are three types of hedge accounting as follows: Fair value hedges: changes in fair value arising from exposures relating to the hedged item and changes in the fair value of the hedging item, are both recognised in the profit and loss. Cash flow hedges: the effective portion of the changes in fair value of the hedging instrument is recognised in other comprehensive income. Hedges of a net investment in a foreign operation. (IAS39.95(b)) The ineffective portion of the gain or loss on the hedging instrument shall be recognised in profit or loss (this is particularly notable for cash flow hedges). 60

61 Accounting for forecast transactions Using the foreign currency contract rate (furiate shori) Interest rate swap special method Documentation requirements (Implementation Guidance on Financial Instruments 170,338) Deferred profits or losses from such cash flow hedges are recognised as an adjustment to the book value of the asset acquired and are reflected in profit and loss when the cost of the related asset affects profit and loss. However, if the asset acquired is an interest accruing financial asset like a loan, it may be treated as a deferred hedge with profits or losses recorded in net assets (equity). (Accounting Standard for Financial Instruments 43) When the requirements of hedge accounting are met, foreign currency denominated receivables and payables may be translated using the rate in the forward currency contract. (Accounting Standard for Financial Instruments 107) Where certain conditions are met, the interest swap contract is not recognised at market value, but rather the swap interest is directly adjusted to increase or decrease the interest on the relevant financial assets or liabilities. (Accounting Standard for Financial Instruments 31) (Practical Guidance on Accounting Standard for Financial Instruments 144,145) Hedge documentation may be abbreviated if certain conditions are met. (IAS39.97,98) When an asset or liability is subsequently acquired and the gain or loss on the cash flow hedge of the forecast transaction has been recognised in OCI: for non-monetary items, that gain or loss is reclassified to profit or loss as the non-monetary item affects profit and loss, or is reclassified to adjust the carrying amount of the non-monetary item; for monetary items, that gain or loss is reclassified to profit or loss as the monetary item affects profit and loss. There is no such rule and this method is not allowed. There is no such rule and this method is not allowed. (IAS39.88(a) and others) Hedge documentation shall not be abbreviated. 61

62 Assessment of hedge effectiveness (Implementation Guidance on Financial Instruments 143(2),146,156,158) If the main provisions of the hedging instrument and the hedged item are the same and changes in market rates or cash flows are expected to perfectly offset, the hedge effectiveness assessment may be short-cut. If an initial test shows that the hedge is highly effective and even if a subsequent test shows it to be ineffective, if the range of fluctuations is small and are expected to be temporary, hedge accounting may be continued. For hedges which fix cash flows, if the cumulative change in the cash flows of the hedging instrument and the hedged item are highly correlated, they are accepted as effective. (IAS39.88(e),F.4.2,F.4.7,F.5.5 and others) The assessment of hedge effectiveness cannot be short-cut. Expected hedge effectiveness may be assessed on a cumulative basis if the hedge is so designated, and that condition is incorporated into the appropriate hedging documentation. Therefore, even if a hedge is not expected to be highly effective in a particular period, hedge accounting is not precluded if effectiveness is expected to remain sufficiently high over the life of the hedging relationship. Further, in the ongoing assessment of the effectiveness of a cash flow hedge, it is necessary to compare the changes in the fair value of the cash flows of the hedging instrument with the changes in the discounted expected cash flows arising from the hedged item. 62

63 Appendix-The Development of This appendix summarises the major events in the development of International Financial Reporting Standards. Phase I-Prior to : International Accounting Standard Committee (IASC) was established. The IASC was established to improve financial reporting, and to formulate and publish globally acceptable international accounting standards (IAS). The role of the IASC was to prohibit undesirable accounting practices, and so the initial IASs allowed several alternative accounting treatments. 1994: The International Organisation of Securities Commissions (IOSCO) completed reviewing the then current version of IASC standards and reported its view to the IASC. With this review, IOSCO listed necessary areas of improvement for the IASC prior to considering the recommendation for using IAS for cross-border listings and transactions. 1994: The establishment of the IASC advisory committee to supervise and financially manage the IASC was agreed. 1995: IASC decided on the Core Standards Work Programme. Upon completion of this programme four years later, the IOSCO expert committee agreed the a core set of IAS standards. The European Commission (EC) supported the agreement between IASC and IOSCO and their plan for developing wide-ranging globally acceptable accounting standards in cooperation with the European Union (EU). 1997: The Standing Interpretations Committee (SIC) was established in order to provide interpretations of IAS. 1999: IASC s board agreed to combine with the current International Accounting Standards Board (IASB). The newly established IASB organisational structure was composed of: (1) IASC foundation, an independent organisation of 22 trustees for nominating and supervising IASB members, as well as raising funds; (2)IASB including 12 independent full-time members and 2 part-time members, having independent responsibility for establishing accounting standards; (3) Standards Advisory Council (SAC); (4) International Financial Reporting Interpretations Committee (IFRIC) (SIC s successor organisation, which interprets existing IAS and standards, and provides timely guidelines which are not dealt with currently). 2000: IOSCO recommended the use of IAS for companies issuing securities in cross-border offerings and listings. April 2001: The IASB inherited the responsibility for standard-setting from the IASC. The IASB met with representatives from the standard-setting organisations of eight countries in order to modify the agenda, discuss convergence, and adopt the existing IAS standards and related SIC interpretation guidance. February 2002: IFRIC inherited the responsibility for the interpretation of s from SIC. 63

64 Phase II-2002 to 2005 July 2002: In principle, the EC required EU listed companies to prepare consolidated financial statements in accordance with as approved by the EC from 2005 onwards. This was a very important event and a significant factor in the spread of adoption. September 2002: The Norwalk agreement was concluded between the FASB and the IASB. Convergence of the standards through their best efforts was documented in a Memorandum of Understanding (MOU). Both boards agreed to make best efforts to ensure compatibility of the then current financial reporting basis as soon as practically possible and to align future projects to achieve this. December 2004: The EC announced the Transparency Directive. This Directive required companies from non-eu countries listed on stock exchanges within the EU to use, except for those from countries for which the Committee of European Securities Regulators (CESR) had accepted the GAAP of that country to be equivalent to. April 2005: SEC Roadmap announced. At the same time, the SEC s chief accountant introduced the possibility of abolishing the U.S. GAAP reconciliation which was required for Foreign Private Issuers (FPI) reporting under. Once the milestones within Roadmap were achieved, the consideration of abolishing the reconciliation to U.S. GAAP by 2009 at the latest was noted. Phase III-2006 to today February 2006: The FASB and the IASB announced a MOU. This MOU, which was used in capital markets all over the world, reconfirmed both councils common goals of designing high quality and common accounting standards from the time of the Norwalk Agreement. Both Boards continued to pursue convergence through two means: (1) a short-term convergence project for the purpose of resolving key differences in particular areas, and (2) the drafting of new joint standards based on best practices from both sets of GAAP. August 2006: CESR/SEC announced a joint work project. Following certain procedures, CESR and the SEC shared specific issues relating to offerings, and, through a survey of listing documents, agreed on the identification of and U.S. GAAP matters which presented problems from the point of view of high quality and consistent application. This project also agreed the exchange of technical information in order to accelerate the modernization of financial reporting and disclosures. Finally, staff in both regulating authorities agreed to meet about risk management practice. November 2007: The reconciliation to for FPI s using. In June 2007, the SEC requested comments on the proposed rule on the contents of financial statements filed by FPIs using as issued by the IASB submitted to them (in other words without reconciliation). Market participants who submitted comments to SEC mostly approved the proposed rule. In November 2007, the SEC analysed these comments and decided to apply it to financial statements for fiscal years ending after November 15 th November 2008: The SEC announced its proposed Roadmap on the application of International Financial Reporting Standards () by listed companies in the United States. In the proposed roadmap for domestic listed companies, seven milestones were outlined as conditions for the use of. Whilst these milestones included improvements to and other things, the decision on the mandatory application of by domestic enterprises in the United States was set for 2011, to allow time to monitor the state of progress on these milestones. Also, the Roadmap allowed voluntary adoption of for certain domestic companies in the United States for fiscal years ending after December 15 th

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67 Resources Please use our knowledge fully. Ernst & Young Shinnihon LLC website We offer a variety of online resources that provide more detail about as well as things to consider as you research the potential impact of on your company. Ernst & Young Online Ernst & Young s information site for clients that gathers the latest news from around the world, provides web-based learning, model financial statements a variety of other knowledge. A variety of Japanese language tools and publications: Outlook and Supplements to Outlook -These include a variety of publications focused on specific standards and industries. (English versions in GAAIT) Jouhou sensor our magazine combining accounting and tax information. In this magazine the section jitsumu kouza includes articles by EYSN s professionals on the interpretation of for specific topics and in a practical way. International GAAP This comprehensive book from Ernst & Young is updated annually and provides practical guidance for understanding and interpreting on a globally consistent basis. International GAAP - Japanese language Japanese language version of the above. A Complete Comparison: Japanese GAAP and - Japanese language only Detailed explanation by topic with many examples of the differences between the fundamental concepts of Japanese accounting standards and, the resulting differences in accounting treatments, and related practical points. This book also includes differences in presentation and disclosure rules. Web-based learning includes a number of web-based modules that address the basic accounting concepts and knowledge of. Global Accounting & Auditing Information Tool (GAAIT) English only. Subscription fee based. A multinational GAAP research tool that allows continuous access to important International GAAP information: Example option International GAAP online- includes Ernst & Young s International GAAP book, illustrative financial statements and disclosure checklists, all of the official IASB standards, exposure drafts and discussion papers, and full sets of reporting entities annual reports and accounts. Please send enquiries about our services to: Ernst & Young ShinNihon LLC Hibiya Kokusai Bldg Uchisaiwaicho, Chiyoda-ku Tokyo, Japan Tel: ( Department) 67