Translation of Japanese language Supplement to IFRS Outlook, June 2009 2 Decision on the Financial Services Agency of Japan s Roadmap regarding the adoption of IFRS by Japanese companies Introduction On June 11, 2009 at the 16 th session of the Planning and Coordination Committee, the Business Accounting Council of the Financial Services Agency ( FSA ) discussed the Draft Interim Report: Application of International Financial Reporting Standards (IFRS) in Japan (the Initial IFRS Draft Roadmap ), published on February 4, 2009, and made revisions to that exposure draft. At the same time, an initial draft of revisions to the Regulation for Terminology, Forms, and Preparation of Consolidated Financial Statements (the Consolidation Regulation ) was also published by the Planning and Coordination Committee (the Initial Draft of the Revised Consolidation Regulation ). As a result of the meeting, the publication of a formal Interim Report (the Interim IFRS Roadmap ) based on the February 4, 2009 revisions was decided and, on June 16, 2009, the FSA posted the Interim IFRS Roadmap on its website. The Interim IFRS Roadmap is expected to be submitted to the meeting of the Business Accounting Council around the end of June. With the continuing spread of IFRS with the United States and other countries outside the European Union adopting IFRS or moving towards adoption, there is a possibility of IFRS being used in all major markets except Japan. In the light of this situation, the Interim IFRS Roadmap indicates a future approach foreseeing the possibility that IFRS can be used and that Japan should adopt IFRS in some way in the future.
The main points of the Interim IFRS Roadmap are as follows (illustrated in figure 1) The acceptance of voluntary adoption of IFRS in consolidated financial statements from fiscal years ending 31 March 2010 for companies with global financial / operating activities as defined in the Initial Draft of the Revised Consolidation Regulation. The consideration of the possibility of application of IFRS in Japan with a decision on this to be made around 2012. Through the allowance of a period of at least three years to ensure proper preparation and practical implementation, if application of IFRS is decided around 2012, application beginning from 2015 or 2016. Whether any such application should be required by all companies at the same time or in a step-by-step approach will be examined further. The scope of any such application would relate to listed companies. The approach regarding separate financial statements and the consolidated financial statements of non-listed companies will be examined further. figure 1 Japan voluntary final decision Mandatory?? preparation period big bang or step by step 2009 2010 2011 2012 2013 2014 2015 2016 voluntary U.S. Mandatory? final decision preparation period step approach 2
Major revision points to the Initial IFRS Draft Roadmap 1.Voluntary adoption (1) Clarification of timing The Interim IFRS Roadmap states that allowing voluntary adoption for fiscal years ending March 31, 2010 is appropriate. The Initial IFRS Draft Roadmap stated that it could be considered to be appropriate from that time and so this has been made clearer. (2) Clarification of the criteria for companies allowed to voluntarily adopt The consolidated financial statements of companies with global financial / operating activities (and the consolidated financial statements of the listed subsidiaries etc. of those companies) are dealt with, and it is stated that it is appropriate for the FSA to determine whether to widen this scope depending on the improvements etc. in IFRS. Global operating activities have been added to the criteria from the Initial IFRS Draft Roadmap, which had only included international financial activities. Further, the Initial IFRS Draft Roadmap included the criteria of companies etc. of a certain size which are well known in the marketplace, this has been eliminated in the Interim IFRS Roadmap. In the Initial Draft of the Revised Consolidation Regulation, the following examples of conditions for companies with global financial / operating activities are given: companies that disclose information about their business etc. in accordance with IFRS based on overseas laws or capital market rules; or companies with share capital above a certain amount that have an overseas subsidiary(ies). (3) The IFRS for voluntarily adoption The Interim IFRS Roadmap considers that for voluntary adoption, basically IFRS as issued by the IASB without adjustment would be used. The Initial IFRS Draft Roadmap stated that it might be appropriate for Japan to consider processes to assess each IFRS standard for application in Japan, however this has been deleted. References to the Japanese language version of IFRS have been omitted. (4) Notes The following disclosures in consolidated financial statements prepared under IFRS are required by the Initial Draft of the Revised Consolidation Regulation: statement that the consolidated financial statements have been prepared in accordance with IFRS; statement that the company meets the conditions of a company with global financial / operating activities and an explanation thereof; and explanation of the significant differences between the consolidated financial statements under the previous accounting rules and IFRS. 3
2.Mandatory application (1) Clarity regarding the timing of application There is no change with regard to the timing of application. However, the Interim IFRS Roadmap says that from the date of any decision on application, a period of at least three years for preparation will be given. If a decision is made in 2012, it further gives a clear illustration showing the first year of application in 2015 or 2016. (2) Consideration of step by step application Whether to require application on a step by step basis or by all companies at the same time (big bang) will be considered and decided when any decision on application is made. There is more discussion about step by step application than was in the Initial IFRS Draft Roadmap. In addition, even if a step by step approach is taken, it is stated that at the longest, this would cover a three year period. (3) IFRS for application There is greater clarification about the need to prepare appropriate rules to allow the application of each IFRS standard in Japan through the Consolidation Regulation and so on in the situation that a part of the rules issued by the IASB are distinctly inappropriate and there is no other way but to refrain from the application of that particular part of a requirement. (4) Additional points for regulated industries on application The Interim IFRS Roadmap states that for the regulated industries (bekkijigyou), it is necessary for a separate consideration of the relationship between the regulations and monitoring by the authorities from the viewpoint of the burden of preparing financial statements, and that great care should be accorded to the burden on preparers and also the relationship between the regulations and monitoring by the authorities. (5) Separate financial statements Additional comments are given in the Interim IFRS Roadmap regarding the revision of the rules for separate financial statements and it is stated that a study of the contents of disclosures for separate financial statements will take place. In addition, it can be considered for listed companies which do not prepare consolidated financial statements, that even if they continue to be required to prepare separate financial statements in accordance with Japanese accounting standards ( Japanese GAAP ), the additional preparation of audited separate financial statements in accordance with IFRS and would be required. 4
3. Voluntary adoption by unlisted companies The Interim IFRS Roadmap states that unlisted companies, which are subsidiaries of listed companies with global financial / operating activities, or, which have global financial / operating activities and prepare consolidated financial statements, or, which plan to go public in the near future will be allowed to prepare IFRS consolidated financial statements. 4. Filing of US GAAP consolidated financial statements Currently the Initial Draft of the Revised Consolidation Regulation is no more than a first stage proposal, however the proposal in relation to companies registered with the Securities and Exchange Commission of the United States (FPIs) filing consolidated financial statements as allowed by the Consolidation Regulation, which meet the condition of having global financial / operating activities, is to replace clauses which currently allow the preparation of consolidated financial statements in accordance with US GAAP with clauses which allow the filing of consolidated financial statements in accordance with IFRS. However, as the proposal is in the first stage, we understand that it can be regarded that there is no intention to prohibit the application of US GAAP after this revision for companies already using US GAAP. Ernst & Young ShinNihon LLC About Ernst & Young Ernst & Young is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 135,000 people are united by our shared values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve their potential. For more information, please visit www.ey.com Ernst & Young refers to the global organisation of member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. About Ernst & Young ShinNihon LLC Ernst & Young ShinNihon LLC is a member firm of Ernst & Young. We are the leading audit firm in Japan, with the largest number of people, and with offices throughout the country. We are committed to providing the highest quality audit and assurance services, and to offering a range of other financial advisory services. Together with the Ernst & Young global network, we strive to ensure trust in our capital markets and improve their functioning to achieve the potential of the global economy and our wider communities, which surround Japan. For more information, please visit www.shinnihon.or.jp About Ernst & Young s International Financial Reporting Standards Group The move to International Financial Reporting Standards (IFRS) is the single most important initiative in the financial reporting world, the impact of which stretches far beyond accounting to affect every key decision you make, not just how you report it. We have developed the global resources people and knowledge to support our client teams. And we work to give you the benefit of our broad sector experience, our deep subject matter knowledge and the latest insights from our work worldwide. It s how Ernst & Young makes a difference. Please send enquiries about our IFRS services to: Ernst & Young ShinNihon LLC Hibiya Kokusai Bldg. 2-2-3 Uchisaiwaicho, Chiyoda-ku Tokyo, Japan 100-0011 Tel: 03 3503 3508 (IFRS Department) Email: IFRS@shinnihon.or.jp www.shinnihon.or.jp/ifrs 2009 Ernst & Young ShinNihon LLC All Rights Reserved. This publication and the materials referred to therein contain edited information in summary form and are, therefore, intended for general reference purposes only. They should not be used for specific purposes, or as a substitute for detailed research or the exercise of professional judgment. Neither Ernst & Young ShinNihon LLC nor any other member of the global Ernst & Young organisation can take responsibility for the accuracy, completeness, applicability for purpose or any other aspect of the contents and nor shall they bear any responsibility whatsoever for loss occasioned to any person acting or refraining from action as a result of any material in this publication or the materials referred to therein. 5