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Japan wrestles with issue of IFRS adoption Osaka, Japan
Discussions have recently been heating up over whether Japan should adopt the International Financial Reporting Standards system, which has generally been led by European Union member countries in terms of drawing up rules. Debate has been ignited by the policy hammered out late last month by the U.S. Securities and Exchange Commission to allow some listed U.S. firms to adopt the IFRS system for the financial year ending Dec. 15, 2009, or later, and to make it mandatory for listed firms to use the standards for their financial reporting in 2014. The system has been adopted by more than 100 countries, excluding Japan and the United States. If Japan sticks to its own financial accounting standards for domestic companies, it could become isolated internationally, which would have a large impact on the nation's firms and their corporate activities. "The accounting standards environment has changed greatly. If things remain the same, Japan will be frozen out," said Koichi Masuda, chairman and president of the Japanese Institute of Certified Public Accountants. His comments, made at a press conference on Sept. 1, hinted at what was at stake if Japan failed to adopt the IFRS system. Rather than adopting the system, Japan and the United States have continued to use their own accounting standards, while making them more compatible with the IFRS. However, with the recent change in U.S. policy, Japan has been driven into a situation whereby it could end up standing alone as the only industrialized country to employ its own accounting standards. Investors--particularly those based overseas--would be the biggest beneficiaries in terms of adopting the IFRS, as they would be able to accurately gather more information on the profits and financial states of Japanese companies. Conversely, business firms would find it easier to procure funds from abroad. The adoption of the international standards also would energize the mergers and acquisitions of firms, and could effect a marked change in corporate behavior, according to a senior official of the Financial Services Agency. Some experts have said the United States has shifted its stance on the IFRS in response to U.S. firms operating internationally that have strongly requested the change. Presently, the FSA puts priority on "making Japan's financial reporting standards compatible with the IFRS and having the Japanese standards recognized as being equal to the global standards." According to the Japan Business Federation (Nippon Keidanren), calls are intensifying among Japanese firms operating internationally for Japan to adopt the global standards. Therefore, the FSA is expected to have its panels, including the Business Accounting Council--an advisory panel to the director general of the agency--start discussions, as early as this autumn, on the pros and cons of adopting the IFRS, as well as drawing up a road map for the move. In the transitory period before the global standards are fully adopted, huge costs stemming from changes in companies' accounting systems are expected. The standards will not be adopted until 2011, at the earliest, when steps to make existing standards fully compatible with the IFRS would be completed. The IFRS system is characterized by their total permeation of market-value accounting systems. For instance, under the Japanese standards, assets of a merged or acquired company can be evaluated using its book value when a merger or an acquisition takes place. Under the IFRS, however, the assets must be evaluated at their market value. The handling of "goodwill costs," paid for intangible corporate assets such as brand names and manpower, also differs under the two systems. Meanwhile, it might become easier for employees to take paid holidays. Under the global standards, payments to be made for unused paid holidays in a given year and carried over to the next are counted as "allowance for paid holidays" in corporate accounting, becoming part of a firm's liabilities. If the system of allowance for paid holidays is adopted by Japanese companies, firms might have to create an environment in which it will be easier for employees to take this remunerated leave. On the other hand, whether the cultural differences in the European-led standards would fit with Japanese corporate culture also is a major issue for consideration. Under the international standards, market value is emphasized, and the idea of adopting "comprehensive profit" is often discussed. This comprehensive profit includes not only after-tax profits earned through business activities, but also those that reflect the changes in the market value of financial assets. There are voices among manufacturing firms that oppose the possible adoption of these inclusive profits, which would fluctuate markedly with changes in stock prices. Some fear that the system may not reflect a company's performance in its business operations. [Source: The Daily Yomiuri]
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