Editorial: Nikkei Discusses Convergence

During September 6-8, 2007, Nikkei Newspaper discussed convergence of Japanese accounting standards with IASB standards in its series of articles.

Nikkei described in detail how Tokyo Agreement announced on August 8, 2007 was reached. It reported that Chairman Tweedie of the IASB recommended that Japanese companies should have an option to adopt IFRS as an alternative set of acceptable standards for the purpose of preparation of their financial statements that are filed with the Financial Services Agency in Japan. Such initiative was not included in the final agreement, but the next issue became clear.

One of the issues that would be revisited under the agreement is accounting for goodwill. The existing Japanese GAAP requires companies to amortize goodwill that are recognized when the purchase accounting is applied to certain business combinations. Amortization is widely accepted in Japan, mainly because amortization is tax-deductible when companies amortize goodwill in their accounting statements. Prohibiting amortization by accounting standards would require negotiation with tax authority.

Another is performance reporting. Japanese standard setter has repeatedly insisted that net income is necessary to provide information about entity's sustainable financial performance. Nikkei says that on international arena, comprehensive income, which is defined as net change in shareholders' equity, is focused as primary performance indicator. Especially, Japanese companies do not want to include changes in fair value of investments in the periodic net income, which is sometimes boosted by cherry picking unrealized gains on the investments. Comprehensive income is not affected by such practice, because realized and unrealized income is included in it regardless of whether the investment is selectively sold. Business community says that net income (realized income) still should be disclosed even when comprehensive income is disclosed.

Anyway, Tokyo Agreement was announced. Standard-setting process is moving toward international convergence. Recently, the ASBJ issued two exposure drafts on construction contracts and segment reporting, which are essentially the same as IASB standards.