On August 8, 2007, the Accounting Standards Board of Japan (ASBJ) and the International Accounting Standards Board officially announced "Tokyo Agreement" on convergence of accounting standards.
More specifically, major differences between Japanese GAAP and IFRS would be eliminated by 2008, and the remaining differences would be eliminated on or before June 30, 2011.
For their press releases, please visit the web sites of the boards.
On August 4, 2007, Nikkei Newspaper reported that the Accounting Standards Board of Japan (ASBJ) and the International Accounting Standards Board (IASB) agreed, in major respects, that the ASBJ will work on eliminating all of the existing differences between Japanese GAAP and IFRS by 2011. Nikkei says that the agreement would be announced next week.
More specifically, one of the major differences between two standards is accounting for business combinations. Japanese GAAP requires entities that either the purchase method or the pooling-of-interest method be applied depending on the economic substance of such transactions. If a business combination is judged as “uniting of interest” as a result of applying the specific criteria, the pooling-of-interest method should be applied; otherwise, the transaction is deemed as “acquisition of other entity,” to which the purchase method should be applied. Moreover, any goodwill recognized as a result of applying the purchase method should be amortized over no more than 20 years.
Nikkei reported that the ASBJ is expected to eliminate the pooling-of-interest method from the alternatives, and prohibit amortization of goodwill, as required by IFRS and U.S. GAAP.
On August 11, 2006, the Accounting Standards Board of Japan (ASBJ) issued its Practice Bulletin No. 19, Tentative Treatment on Deferred Charges.
The Commercial Code and its Regulation on Corporate Accounts had long been specified what items are allowed to be carried as deferred charges on the company’s balance sheet. However, the Company Act, which was enacted in May 2006, states that deferred charges may be carried as assets if the generally accepted accounting principles recognizes that such charges are appropriate to be carried as assets. So, the ASBJ was expected to issue some interpretation on deferred charges.
Practice Bulleting 19 carried forward from the previously promulgated accounting requirements of the Commercial Code. It identifies 5 types of deferred charges: founding cost, start-up cost, development cost, stock issuance cost, and debt issuance cost.
Generally, those costs should be charged to expense when incurred. However, those costs have some contributions to future earnings. Based on the “matching” principle, those costs are allowed to be deferred and carried as assets on the balance sheet unless they are expected to have no contributions to future earnings. If a company defers such costs, those costs should be amortized consistently over the predetermined period.
Founding cost and start-up costs are defined as costs that incur when a company is founded and under start-up activities for business. Those costs may be deferred, and, if so, should be amortized over no more than 5 years.
Development cost is defined as cost that incurs when a company is doing activities related to restructuring for adopting new organization, research for entering new market, and exploration for new resources. It should be noted that “research and development costs,” which are mandatorily charged to expense when incurred, are not included in the “development cost,” which is allowed to be deferred. If such cost is deferred, it should be amortized over no more than 5 years.
Stock issuance cost is defined as cost that incurs when a company issues new stock or resells treasury stock for the purpose of financing. Such cost may be deferred, and, if so, should be amortized over no more than 5 years.
Debt issuance cost is defined as cost that incurs when debt securities are issued. Such cost may be deferred, and, if so, should be amortized over the periods to maturity.
Overview
In December 2006, the ASBJ agreed to issue Discussion Paper, Conceptual Framework of Financial Accounting. Many have asked what is conceptual framework in Japan. Discussion Paper (tentative translation version) can be downloaded at:
http://www.asb.or.jp/html_e/asbj/begriff/ConceptualFramework200612.pdf.
Discussion Paper states that it summarizes fundamental premises and concepts underlying financial accounting. It also states that it facilitates communication among related parties and would enhance their predictability of financial accounting in future.
One of the expected roles of Discussion Paper is that it enhances communication with standard-setters in the world. It has contents similar to IASB/FASB conceptual framework, so as to make it easy to deliberate common interests in financial accounting: objectives of financial reporting; characteristics of accounting information; elements of financial statements; and recognition and measurement in financial statements.
Discussion Paper is originally drafted in 2004 by a working group, which is comprised of members from ASBJ Board and staff, academics, and public accounting, and others. The ASBJ Board adopted it as its own document in December 2006. Discussion Paper is still an exposure document, because the IASB and the FASB are now reviewing their concept statements toward setting a common set of framework and the ASBJ intends to continue its discussion on the conceptual issues.
Objectives of Financial Reporting
Discussion Paper on conceptual framework first sets forth, in its Chapter 1, objectives of financial reporting. As other conceptual frameworks do, Discussion Paper states that objectives of financial reporting is to provide information useful for decision making by investors and other financial statement users. More specifically, Discussion Paper says that the information should be focused on an entity's financial positions and performance. It also emphasizes that earnings is important to communicate with users the entity's past performance, so that users can establish their own prospects for the entity's future performance and, therefore, the entity's firm value.
Discussion Paper states that the principal role of financial reporting is to provide information about the entity's financial history rather than fortune tale. Based on such information, investors make their own investment decision at their own risk.
Qualitative Characteristics of Accounting Information
Chapter 2 of Discussion Paper addresses qualitative characteristics of accounting information.It identifies qualitative characteristics that make information useful for users' decision making. Decision Usefulness is supported by two fundamental characteristics: relevance and reliability.
On the other hand, decision usefulness should be achieved in consideration for comparability and internal consistency. Those two characteristics are regarded as restrictive constraints in reaching for decision usefulness. Internal consistency is defined as a quality in which information is consistent with the existing fundamental concepts underlying accounting standards and practices.
Elements of Financial Statements
Chapter 3 of ASBJ's Discussion Paper addresses issues related to elements of financial statements. It identifies the following elements: assets; liabilities; net assets; shareholders' equity; revenue; expense; comprehensive income; and net income.
You may be curious why Discussion Paper identifies similar two elements of net assets and shareholders' equity. Net assets are defined as the excess of assets over liabilities, while shareholders' equity is defined as shareholders' interest in claims to assets. Difference between net assets and shareholders' equity includes changes in fair value of certain financial instruments, translation adjustments, minority interest, and stock options.Comprehensive income and net income are identified as separate elements of financial statements. Comprehensive income is defined changes in net assets during the period from non-owner transactions. Net income is the excess of revenue over expense, as recognized based on the concept of "release from risk," which is slimier concept of realization or matching.
Recognition and Measurement in Financial Statements
Chapter 4 of ASBJ's Discussion Paper addresses recognition and measurement in financial statements. It generally explain when an element of financial statements should be recognized, and identifies various measurement attributes that are used in current practice. Recognition criteria is described based on the analysis for what is a trigger for recognition. Measurement attributes are more widely identified than in FASB/IASB conceptual framework.
