J-GAAP: Deferred Charges

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.