J-GAAP: Accounting Changes

On 4 December 2009, the Accounting Standards Board of Japan (ASBJ) has issued ASBJ Statement No. 24, Accounting Standard for Accounting Changes and Error Corrections.

According to ASBJ Statement 24, accounting changes are defined those including:

• Changes in accounting policies,
• Changes in presentation methods, and
• Changes in accounting estimates.

Error corrections are defined separately form accounting changes.

An entity changes should not change its accounting policies unless justifiable reasons for doing so. If an entity changes its accounting policies in accordance with new accounting standards, its should comply with the provisions in that standard. If an entity changes its accounting policies with other justifiable reasons, it should apply the new accounting policies retrospectively so as to restate the prior-year financial statements as if they were already applied in previous years..
If an entity changes its presentation method so that its financial statements are more faithfully representative, it should restate its prior-year financial statements retrospectively.
If an entity changes its accounting estimates, it should account for:

• Such change during the period when the change affects the financial statements in that period; and
• Such change over the periods prospectively when the change affects the financial statements in following more than one periods.

If an error in the amounts previously reported is found in the period, it should be reflected retrospectively in the prior-year financial statements.

The ASBJ provides a summary in English here.

News: Government to Encourage Non-amortization of Goodwill

The Nikkei Newspaper reported on 27 January 2014 that the Ministry of Economy, Trade and Industry (METI) will recommend in its forthcoming report in March that the Accounting Standards Board of Japan (ASBJ) amend its accounting standards to allow non-amortization of goodwill.

The existing Japanese GAAP requires entities to amortize goodwill over the years within 20 years. The balance of goodwill should be written down when certain impairment recognition criteria are met.
Occasionally, amortization of goodwill is criticized because Japanese companies are not able to complete in an equal playing field with competitors that use IFRS or US GAAP, which do not allow amortization of goodwill. For example, Takeda Chemical switched its accounting standards in use to IFRS, because it wants not to amortize its goodwill.

Currently, qualified Japanese companies are allowed to use IFRS. However, the switching to IFRS is not easy because of implementation cost. Moreover, reportedly, the endorsed IFRS, which may have certain modifications to IFRS as issued, would likely to require amortization of goodwill.

J-GAAP: Statement of Comprehensive Income

On June 30, 2010, the Accounting Standards Board of Japan (ASBJ) issued ASBJ Statement No. 25, Accounting Standards for Presentation of Comprehensive Income. Since March 2011 financial reporting, the entities that are required to prepare their consolidated financial statements by the Financial Instruments and Exchange Law must present statements of comprehensive income as a part of consolidated financial statements. Separate (parent-only) financial statements must not include a statement of comprehensive income.
A different approaches to consolidated financial statements and separate financial statements were very controversial. However, it might be understood that the consolidated financial statements prepared in accordance with Japanese GAAP should be comparable with those prepared in accordance with IFRS, whereas the separate financial statements should be prepared for domestic regulations.

Comprehensive incomes is defined as net changes during a period in shareholders equity arising from non-owner transactions. ASBJ Statement 25 requires an entity to present its comprehensive income in addition to net income. Net income is a traditionally determined bottom line number, which is not changed regardless of this Statement.
Differences between comprehensive income and net income should be displayed as "other comprehensive income (OCI)." The components of OCI include:

• Changes in fair value of available-for-sale securities.
• Changes in deferred gains and losses on hedging instruments.
• Changes in foreign currency translation adjustments.
• Changes in accumulated actuarial differences on post-retirement benefits.

Any reclassification from accumulated other comprehensive income to net income should be included in other comprehensive income during the period when the reclassification occurs. Each components are generally displayed as a net amount, i.e., the reclassification adjustments would likely not to be displayed as a separate line item.

This Statement allows two alternative formats: the two statements format and the single statement format.
As amended in September 2013, this Statement requires displays of net income and comprehensive income as follows:
In the two statements format, the statement of income should present the net income during the period, which is followed by the net income attributable to non-controlling interest, and present the net income attributable to the parent's shareholders. In the statement of comprehensive income, the net income should be followed by the other comprehensive income, displaying the comprehensive income.
In the single statement format, the statement of net income and comprehensive income should present the net income during the period, which is followed by the other comprehensive income, and display the comprehensive income as well. The net income attributable to non-controlling interest and the net income attributable to the parent's shareholders should be attached to the total number of net income. The comprehensive income attributable to non-controlling interest and the comprehensive income attributable to the parent's shareholders should be attached to the total number of comprehensive income.
Traditionally, Japanese GAAP defined the net income as that attributable only to the parent's shareholders. However, the IASB defines the profit and the comprehensive income as those attributable both to the parent's shareholders and the non-controlling interest. The September 2013 amendment allows an entity to display the net income in a way of being compatible with IFRS. This practice will be applied first to March 2016 financial reporting.

J-GAAP: Source of Japanese GAAP

The Financial Instruments and Exchange Law (FIEL) prescribes that the registrants comply with the generally accepted accounting principles (standards) unless the related Cabinet Ordinances specifies certain treatments.
The Cabinet Ordinances specifies that the generally accepted accounting principles consists of (1) accounting principles that are set forth by the Business Accounting Council (BAC) and (2) accounting standards that are set forth by qualified independent standard setting body. The Accounting Standards Board of Japan (ASBJ) is designated as such a qualified independent accounting setting body.

The Company Act requires that companies comply with the generally accepted accounting practice in preparing their accounts. Because the FIEL specifies that the BAC's accounting principles and the ASBJ's accounting standards are part of the generally accepted accounting principles, such accounting principles and standards are also part of the generally accepted accounting practice under the Company Act.

The IFRS designated as generally accepted by the Commissioner of the Financial Services Agency is also another set of generally accepted accounting principles for preparing consolidated financial statements under the FIEL.

Other sources of generally accepted accounting principles or practice includes various documents of accounting and auditing guidance set forth by the Japanese Institute of Certified Public Accountants.
The ASBJ's discussion paper on conceptual framework does not represent an accounting standard.

J-GAAP: IFRS in Japan

In August 2007, the International Accounting Standards Board (IASB) and the Accounting Standards Board of Japan (ASBJ) agreed that major differences between IFRS and Japanese GAAP should be eliminated by 2008, and that other minor differences should be eliminated by 2011. Since then, the ASBJ actively worked on projects for eliminating those differences, and as a result, Japanese GAAP has become more compatible with IFRS.

In June 2009, the Business Accounting Council (BAC), an advisory body to the Financial Services Agency (FSA), issued a tentative statement, "An Opinion on How to Treat IFRS in Japan." In this statement, it provides a roadmap for voluntary and mandatory adoption of IFRS.

As for voluntary adoption, certain qualified companies are allowed to prepare their consolidated financial statements in accordance with the "designated IFRS." A qualified company should meet certain conditions:

• It must operate international financing and business activities.
• It must be a listed company.
• It must be equipped with .

Each IFRS should be designated by the FSA through a public due process.
As for mandatory adoption, the BAC's statement set forth a deadline for decision making by end of 2012, and will be implemented for 2015 or 2016 financial reporting.

Since March 2010 financial reporting, the qualified companies are allowed to prepare consolidated financial statements in accordance with the designated IFRS. The number of companies that actually utilize IFRS is 20 as of May 2013, and is increasing.

On June 2011, the Minister of Financial Services issued a statement that postpones the mandatory adoption, which must not be implemented until 2016. Based on his instruction, the BAC resumed its deliberation on the mandatory adoption of IFRS since then.

On June 2013, the BAC issues another statement, "Tentative Policy on How to Cope with IFRS." In this statement, it proposes:

• To relax the conditions for qualified companies that are allowed to use IFRS.
• To allow a use of another set of IFRS, which is endorsed by the FSA with certain possible modifications.

Within 2013, the conditions for qualified companies are relaxed by the FSA. As a result, they just have to be equipped with an an appropriate system that assures fairness of consolidated financial statements in accordance with IFRS (i.e., they do not have to be an multinational enterprise or a listed company). The procedure for endorsement of IFRS is currently (January 2014) discussed by a working group, which is formed in the ASBJ.

In summary, a qualified Japanese listed companies would have several options in preparing consolidated financial statements:

• Japanese GAAP
• U.S. GAAP, for SEC registrants.
• Designated IFRS, for (relaxed) qualified companies
• Endorsed IFRS with certain possible modifications. (under development)

Editorial: Personal Update

I have not updated this blog for a while. After I have been quite busy and I have lost a backup email address due to some technical problem, I have been unable to access to the setting page. Recently, I finally succeed to change my setting, and I am here now.
I apologize to all of you who tried to post messages and comments. I just could not give any approval to post.
Since 2007, accounting standards in Japan has changed significantly. There are many stories that you might be interested in, including how Japan incorporates IFRS. I will try to update information posted in 2007, and upload new information as well.