Japan

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Japans Progress Toward Convergence

• Ikuo Nishikawa, vice-chairman
• Accounting Standards Board of Japan

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1. Introduction

• Basic position of the ASBJ on international
  convergence
• Current situation surrounding the ASBJ
• Joint convergence project with the IASB
• Representative meeting with the FASB

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2. Basic position of the ASBJ on international
convergence

• Medium-term operating policy of the ASBJ in
  July 2004
• The ASBJ agrees with the objective of
  international convergence to achieve high-quality
  accounting standards, since it is beneficial to
  respective capital markets around the world
• The convergence should be attained through the
  process of assessment and selection by market
  participants from international accounting
  standards which are mutually accepted in major
  capital markets.
• In order to promote international convergence
  into high-quality accounting standards, the ASBJ
  will establish closer relationship with other
  accounting standard setters around the world.

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3. International Situation (1)

• Technical advice on equivalence of the third
  country GAAP (Japan, U.S. and Canada) was issued
  by CESR in July 2005.
• Three countries GAAP are, taken as a whole,
  equivalent to IFRSs.
• Remedies required (Japan26, US19, Canada14)
• Draft proposal for postponement of the
  equivalence decision between IFRS and US GAAP,
  Japanese GAAP and Canadian GAAP for two years
  issued by European Commission in April 2006.
• The ASBJ released Statement on Japans progress
  toward convergence between Japanese GAAP and
  IFRSs on January 31, 2006.

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3. International Situation (2)

• Discussion on roadmap between EU and SEC in
  April 2005
• The IASB and the FASB released the new
  convergence plan in February 2006.
• Progress of other countries
• CanadaCanadian standards (for public companies)
  will be converged to IFRS by 2011.
• ChinaStarted the convergence project with the
  IASB

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4. Capital Markets in Japan

• Further globalization
• Total value of Japanese stock markets US
  5trillion
• (comparable with those in the U.S.
  and European markets)
• Overseas investors share of equity trading
  33.7
• Overseas investors share of ownership
  23.7
• (2004 Survey of Tokyo Stock Exchange)

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5. Development of Japanese GAAP(1)

• Accounting standards developed by the ASBJ in
  2005 will contribute to the convergence.
• (e.g.)
• Share-based payments
• Presentation of net assets in the balance sheet
• Statement of changes in net assets

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5. Development of Japanese GAAP(2)

• The following major accounting standards are also
  effective or to be effective this year.
• Impairment of Fixed Assets(effective for FY
  beginning after April 1,2005)
• Business Combination(effective for FY beginning
  after April 1,2006)

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6. Importance of Convergence Dramatically
Increased

• Joint convergence project with the IASB
• Convergence needs to be accelerated, in
  consideration of changes in surrounding
  environments.

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7. Joint Project with the IASB (1)

• Progress to date
• Convergence meeting has been held semiannually in
  Tokyo and London since March 2005.
• 6 issues are selected for the first phase.
• Exchange of views on the basic concepts of
  accounting standards has been made continuously.

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7. Joint Project with the IASB (2)

• Issues discussed in the first phase
• Valuation method of inventories (IAS2)
• Segment reporting (IAS14)
• Related party disclosure (IAS24)
• Uniformity of accounting policies on overseas
  subsidiaries (IAS27)
• Investment property (IAS40)
• Cost of issuing new shares (IAS32)
• Added at the second meeting (Recognized as an
  expense or as a deduction from owners equity)

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7. Joint Project with the IASB (3)

• (1-1) Additional topics for the first phase
• Asset retirement obligation(ARO)
• ARO Dismantling and removing cost assumed at the
  retirement or the decontaminating cost required
  by existing laws or contracts
• Under IFRS and U.S. GAAP, estimated cost is
  capitalized as a part of the cost of the PPE
  while ARO is recognized as a liability.
• Deliberate recognition of ARO under Japanese GAAP

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7. Joint Project with the IASB (4)

• (1-2) Additional topics for the first phase
• Construction contract
• Under IFRS and U.S. GAAP, the percentage of
  completion method is required.
• Deliberate Japanese GAAP under which both the
  completed-contract method and the percentage of
  completion method are allowed
• Deliberate the case when outcome of a
  construction contract cannot be estimated
  reliably

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7. Joint Project with the IASB (5)

• (1-3) Additional topics for the first phase
• Disclosures of FV of financial instruments
• Under IFRS and U.S. GAAP, FV of all financial
  instruments is disclosed in the footnote.
• Deliberate rationale to expand FV disclosure to
  all financial instruments (ex. loans, non-current
  receivables and loan-payables) in the footnote
  under Japanese GAAP

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7. Joint Project with the IASB (6)

• (2) Assessment of the first phase
• Steady progress in deliberation towards
  convergence
• Improved mutual understanding
• Need for action in light of changing conditions
  domestically and internationally

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7. Joint Project with the IASB (7)

• (3-1) Current Plan
• From phased approach to whole picture
  approach
• Entire picture of convergence process
• Classify short-term project and longer-term
  project
• Review regularly differences and progress of
  deliberation (on-going process)

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7. Joint Project with the IASB (8)

• (3-2) Current Plan
• Short-term items (including 9 items)
• Eliminate or find a way to eliminate major
  differences by 2008
• Longer-term items
• Differences primarily due to conceptual
  frameworks or legal restrictions, and items being
  discussed between the IASB and the FASB

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7. Joint Project with the IASB (9)

• Short-term items
• Issues discussed in the first phase
• Inventories(valuation method)
• Segment reporting
• Related party disclosures
• Uniformity of accounting policies in overseas
  subsidiaries
• Investment properties
• Cost of issuing new shares

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7.Joint Project with the IASB (10)

• Short-term items(cont.)
• Additional topics for the first phase
• Construction contracts
• Asset retirement obligation
• Disclosure of financial instruments at fair value
  (footnote)
• Other
• Leases

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7. Joint Project with the IASB (11)

• Longer-term items
• Items which are currently discussed or will be
  discussed between the IASB and the FASB.The ASBJ
  will make comments on these items to the IASB and
  the FASB on a timely basis from the early stages.

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7. Joint Project with the IASB (12)

• Longer-term items (cont.)
• Revenue recognition
• Performance reporting
• Intangibles (including RD expenses)
• Scope of consolidation (including SPE)
• Fixed assets (impairment, revaluation)
• Provisions
• Fair value measurements
• Fair value option

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7. Joint Project with the IASB (13)

• Longer-term items (cont.)
• Financial instruments
• Liabilities and equity
• Government grants
• Insurance contracts
• Retirement benefits
• Uniformity of accounting policies in associated
  companies
• Inventories (LIFO)
• Income taxes

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7. Joint Project with the IASB (14)

• Longer-term items (cont.)
• Items on which IFRSs and U.S. GAAP have
  converged, but which differ from Japanese GAAP
• Retrospective restatement
• Business combinations (pooling-of-interest
  method, goodwill, etc)

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7. Joint Project with the IASB (15)

• Longer-term items (cont.)
• Standards for which assessment of the market
  should be taken into consideration because of
  their resent developments
• Share-based payments

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7. Joint Project with the IASB (16)

• (4) Efforts by the ASBJ
• Short-term items
• Consensus-building among market constituents
• Longer-term items
• (a) Performance reporting (b) Revenue
  recognition (c) Scope of consolidation(including
  SPE) (d) Intangibles (e) Retrospective
  restatement
• Conceptual Framework
• Authorization of conceptual framework

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7. Joint Project with the IASB (17)

• (5) Next meeting
• It will be held in September 2006 in London.
• Short-term and major long-term issues will be
  discussed.

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8. Initiate Representative Meeting with the FASB

• An initial meeting was held in May 2006 in Tokyo.
• Representatives of the FASB including Chairman,
  Robert Herz, will come to Japan.
• Major long-term issues was discussed.
• Conceptual framework
• Performance reporting
• Business combination