accounting standards board of japan 1 japan’s progress toward convergence ikuo nishikawa,...

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Japan’s Progress Toward Convergence

Ikuo Nishikawa, vice-chairman

Accounting Standards Board of Japan

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Basic position of the ASBJ on international convergence

Current situation surrounding the ASBJJoint convergence project with the IASBRepresentative meeting with the FASB

1. Introduction

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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 (Japan:26, US:19, Canada:14)

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 Japan’s 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 2005The IASB and the FASB released the new convergence plan in February 2006.

Progress of other countriesCanada ： Canadian standards (for public companies) will be converged to IFRS by 2011.China ： Started 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 paymentsPresentation of net assets in the balance sheetStatement 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 IASBConvergence needs to be accelerated, in

consideration of changes in surrounding environments.

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7. Joint Project with the IASB (1)

Progress to dateConvergence 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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Issues discussed in the first phaseValuation 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 ）

7. Joint Project with the IASB (2)

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(1-1) Additional topics for the first phaseAsset 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 PP&E while ARO is recognized as a liability.

Deliberate recognition of ARO under Japanese GAAP

7. Joint Project with the IASB (3)

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7. Joint Project with the IASB (4)

(1-2) Additional topics for the first phaseConstruction 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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(1-3) Additional topics for the first phaseDisclosures 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

　　7. Joint Project with the IASB (5)

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(2) Assessment of the first phaseSteady progress in deliberation towards convergence Improved mutual understanding Need for action in light of changing conditions

domestically and internationally

7. Joint Project with the IASB (6)

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(3-1) Current PlanFrom “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)

7. Joint Project with the IASB (7)

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(3-2) Current PlanShort-term items (including 9 items)

Eliminate or find a way to eliminate major differences by 2008

Longer-term itemsDifferences primarily due to conceptual frameworks

or legal restrictions, and items being discussed between the IASB and the FASB

7. Joint Project with the IASB (8) 　　

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Short-term items Issues discussed in the first phase

1. Inventories(valuation method)2. Segment reporting3. Related party disclosures4. Uniformity of accounting policies in overseas

subsidiaries5. Investment properties6. Cost of issuing new shares

7. Joint Project with the IASB (9)

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7.Joint Project with the IASB (10)

Short-term items(cont.) Additional topics for the first phase

7. Construction contracts

8. Asset retirement obligation

9. Disclosure of financial instruments at fair value (footnote)

Other

10. Leases

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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.

7. Joint Project with the IASB (11)

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7. Joint Project with the IASB (12)

Longer-term items (cont.)1. Revenue recognition2. Performance reporting3. Intangibles (including R&D expenses)4. Scope of consolidation (including SPE)5. Fixed assets (impairment, revaluation)6. Provisions7. Fair value measurements8. Fair value option

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7. Joint Project with the IASB (13)

Longer-term items (cont.)9. Financial instruments10. Liabilities and equity11. Government grants12. Insurance contracts13. Retirement benefits14. Uniformity of accounting policies in associated

companies15. Inventories (LIFO)16. Income taxes

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Longer-term items (cont.)

Items on which IFRSs and U.S. GAAP have converged, but which differ from Japanese GAAP

1. Retrospective restatement

2. Business combinations (pooling-of-interest method, goodwill, etc)

7. Joint Project with the IASB (14)

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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

1.Share-based payments

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(4) Efforts by the ASBJShort-term items

Consensus-building among market constituentsLonger-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

　　7. Joint Project with the IASB (16)

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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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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 frameworkPerformance reportingBusiness combination

8. Initiate Representative Meeting with the FASB