Report on the Internationalization of Business Accounting in Japan
Study Group on the Internationalization of Business Accounting
Ministry of Economy, Trade and Industry
Table of Contents
1. Effecting Mutual Acceptance ........................................................................................ 6
(1) Perspectives on Mutual Acceptance .......................................................................... 6
(2) Mutual Acceptance with the EU ................................................................................ 6
(3) The Evolution of Japanese Accounting Standards..................................................... 7
(4) Japanese Accounting Standards and IFRS Equivalency.......................................... 10
2. Resolution of the Legend Issue.................................................................................... 14
3. International Convergence: Efforts and Obstacles ...................................................... 15
(1) Efforts to Promote International Convergence ........................................................ 15
(2) Obstacles to International Convergence .................................................................. 16
4. Conclusion ................................................................................................................... 19
Roster of the Members of the Study Group on the Internationalization of Business
(Reference) Roster of Business Accounting Committee Members
Tables of International Comparisons of Accounting Standards
Under the leadership of the International Accounting Standards Board (IASB), efforts are
currently under way to promote international convergence in business accounting, which
comprises the infrastructure of capital markets. In the past, uniform business accounting
methods particular to major markets were developed as shared standards to present data
on enterprise activities to investors and other stakeholders, in formats which were both
objective and which enabled comparison, but as corporate activities become increasingly
globalized, uniformity is now being sought on an international level. This trend was
evident in the1990s, when the IMF imposed the adoption of international accounting
standards as a condition for loans to Asian countries such as Korea, as well as in China’s
actions to revise its practices to conform with international accounting standards when it
joined the WTO.
Traditionally, markets have mutually accepted each other’s business accounting standards
so as to allow international investment and capital procurement to be conducted smoothly.
However, in recent years there has been greater demand for integration of financial
reporting content. In 2000, the International Organization of Securities Commissions
(IOSCO) announced its support of the International Accounting Standards (IAS)
system—which the International Accounting Standards Committee (IASC) had been
working to formulate–as the accounting standards to be applied in multinational fund
raising. As a result, IAS began to be recognized internationally as the actual standards
that apply to corporations. In 2002, the EC1 prescribed the application of International
Financial Reporting Standards (IFRS)2 to approximately 7,000 corporations in its market,
in an effort to standardize accounting practices used in EU3 markets, in connection with
EU market unification.
Business accounting methods developed in the capital markets of individual countries
over a number of years, based on the particular systems and practices unique to each
market. In Japan, business accounting principles were established in 1949. Since then,
Japan’s business accounting system has grown from individual financial statements,
under a triangular system4 in which the Securities Exchange Law, Commercial Code, and
1 The European Commission: the administrative body.
2 The accounting standards that were created by the IASB are collectively called the IFRS, and consist of
the IAS of the IASC (established in 1973, and the predecessor of the IASB until 2001), and the narrowly-
defined IFRS, established by the IASB.
3 The European Union: the greater European economic region.
4 Triangular System: The Securities Exchange Law (whose objective is to protect investors) requires the
use of “business accounting standards that are recognized to be generally fair and appropriate” (Japan
GAAP: Generally Accepted Accounting Principles in Japan) as the basis for disclosure of securities reports,
etc. The Commercial Code (whose objective is to adjust interest among creditors and shareholders)
stipulates that “fair accounting practices should be taken into consideration” in the preparation of
accounting records. In reality, records are prepared in accordance with the Japan GAAP. Under the
Corporate Income Tax Law (whose objectives are fair taxation and tax revenue collection), taxable income
Corporate Income Tax Law play complementary roles. As corporate activities have
grown increasingly international, and international commonality is sought in business
accounting, the challenge that faces the internationalization of business accounting is the
question of how to integrate accounting standards that are deeply rooted in individual
countries. Japan is no exception.
Such organizations as the Ministry of Economy, Trade and Industry, the Financial
Services Agency, the Japan Federation of Economic Organizations, and the Accounting
Standards Board of Japan (ASBJ) are working to tackle the challenges of the present
situation. The Study Group on Internationalization of Business Accounting supports the
basic position of these organizations, but also believes that a more aggressive approach
and better coordination of efforts among all parties are required.
Since December 2003, the Study Group has been honored by the participation of
domestic business leaders, scholars, and market experts, as well as leaders of the
European and American business communities in Japan5. In addition, we invited
Japanese members of the ASBJ and the IASB as observers. We conducted a broad-based
examination of issues revolving around the internationalization of Japanese business
accounting amidst the current trend toward international convergence. This included a
questionnaire-based survey6 of Japanese corporations and investors, and exchanges of
opinions with foreign governments—such as the EC—and overseas standards bodies,
such as the IASB (for a total of six meetings).
Of particular concern is an EU directive that, beginning in 2007, requires corporations
based outside the EU, and having their stocks listed on European exchanges, to use
“either the IFRS or another set of standards deemed equivalent” in their financial
statements related to ongoing disclosure or new listings of their securities in the EU
In response to this critical issue, the Study Group listened to the opinions primarily of
investors and other market participants in the industrial sector7, as well as of scholars, to
is computed, based on the financial statements prepared in accordance with the Japan GAAP and finalized
pursuant to the Commercial Code. Thus, the Securities Exchange Law, Commercial Code, and Corporate
Income Tax Law are closely intertwined in the practical regulation of business accounting.
5 The opinions of Mr. Casey Sadgman, Policy Director of the European Business Community in Japan, Mr.
Jean-Francois Minier, Tokyo Branch Manager of Dressner Kleinwort Wasserstein, and Mr. Robert F.
Grondine, Chairman of the American Chamber of Commerce in Japan were sought.
6 The survey was taken of all stock exchange-listed and OTC corporations (excluding securities firms,
banks and insurance companies) that are included in the Kaisha Shiki Ho
(Quarterly Report of
), totaling 3,488 corporations (with a response rate of 17.1%), and sell-side analysts and
institutional investors, and buy-side analysts, totaling 199 corporations (with a response rate of 25.1%).
Any reference to the “questionnaire-based survey” in the remainder of this report refers to this survey.
7 Opinions about this report were heard by the Corporate Finance Committee (see Reference), which is a
committee of the Ministry of Economy, Trade and Industry. The CFOs of Japan’s major corporations sit
on the committee.
consider the concept of mutual acceptance. At the same time, the group verified efforts
that were initiated in 1998 to rapidly internationalize Japan’s accounting standards, and
the resultant equivalency of Japanese standards with the IFRS, by conducting technical
comparisons of individual standard items. Furthermore, we elaborated on the equivalency
of Japan’s accounting standards and the IFRS, based on the concept of mutual acceptance
and through the verification of accounting standards.
In addition, we analyzed the opinions of the above-mentioned participants to form a
unified position on the international convergence of business accounting. We described
the efforts made toward internationalization and the challenges that await us.
This interim report summarizes the basic philosophy regarding the internationalization of
business accounting in Japan.
1. Effecting Mutual Acceptance
(1) Perspectives on Mutual Acceptance
With the growth of global corporate activities, international commonality is being sought
in global standards for business accounting. The IFRS, in particular, is taking a leadership
role in this movement. However, business accounting has developed over a number of
years in individual countries, based on the market realities that are unique to each capital
market, including regulatory systems. In Japan, business accounting evolved as it
fulfilled certain roles in meeting the requirements of the Securities Exchange Law,
Commercial Code and Corporate Income Tax Law. In contrast, business accounting has
evolved over history in such countries as the United States mainly for the protection of
investors. As these examples show, each country has its own unique situation.
In order to act in ways that would not hinder the fund raising and other global activities
of corporations, while recognizing the individuality of the accounting standards of
individual countries, “mutual acceptance” should be sought; countries would mutually
recognize one another’s accounting standards only if they were “equivalent.” The
evaluation of equivalency should be made by fully incorporating the opinions of market
participants, and especially those of investors and corporations. In short, as long as
individual standard items that are indispensable to investors and others are clearly
stipulated in an explainable format8, and the standards are comparable in terms of their
usefulness and comparability, these standards should be deemed to be equivalent.
In other words, there are rational reasons behind individual national standards, and
differences between national accounting standards should not become obstacles for
investors in making international comparisons, as long as the impact of such differences
is clearly disclosed. Rather, many investors have expressed their preference for the use
of standards that match the realities of the country in which the main business operation
of the corporation is conducted, as such usage permits a more appropriate presentation of
the realities of the corporation.
“Mutual acceptance” should be adopted so that these equivalent accounting standards are
(2) Mutual Acceptance with the EU
The urgent task today is mutual acceptance with the EU. At present, financial statements
that are prepared in compliance with Japan’s accounting standards are accepted in EU
markets. However, the EC announced in 2002 that it will require all companies whose
securities are listed in the EU to adopt the IFRS, starting in January 2005. In addition, an
EU directive requires corporations based outside of the EU that have their securities
listed in the European markets to use “the IFRS or other standards that are deemed to be
8 Transparency in setting accounting standards and the way arguments are handled in the process of
standard-setting are expected to be highly significant.
9 Mutual recognition is positioned as an interim stage in the process of international convergence of
business accounting, which is the ultimate goal. Efforts toward international convergence are thus needed.
For further details, see 3. International Convergence : Efforts and Obstacles
equivalent to the IFRS” in their financial statements for continuing disclosure in the EU
market or new listings of their securities in the EU market. This requirement is expected
to be enforced for Japanese and other non-EU corporations starting in 200710.
Currently, at least 250 Japanese security issuers (business corporations, etc.) have their
stocks and bonds listed in the EU. The majority have used the method of disclosing
financial statements that were prepared in compliance with Japanese accounting
standards. Should it be judged that Japan’s accounting standards are not equivalent to the
IFRS and that disclosures made in compliance with Japanese accounting standards are
not accepted by the EU, we have serious concerns about the potential direct impact on
fund raising by these Japanese securities issuers in the EU.
Faced with this situation, the Japanese government and the industrial sector of Japan are
exchanging views with the EC. However, the EC is still in the process of deliberation.
Below we describe the efforts that have been made to rapidly internationalize Japan’s
accounting standards since 1998, and the results of such efforts, as well as providing
technical verification that the current Japanese accounting standards stipulate individual
standard items that are needed by investors in an explainable format and that they are
equivalent in terms of usability and comparability.
Furthermore, we earnestly hope that Japan’s accounting standards will promptly be
accepted to be equivalent to the IFRS, for the sake of not only European market growth
but also the sustenance and strengthening of the economic relationship between the EU
and Japan, which centers on increased investment by Japanese corporations in the EU.
(3) The Evolution of Japanese Accounting Standards
Japan’s business accounting system fitted the management realities of Japanese
corporations well and did not give rise to any inconvenience in the past. However, the
following issues began to be raised about Japanese business accounting in the second half
of the 1990s because of concerns about the soundness and reliability of financial
statements in light of international discussions:
(i) Consolidated Information
The need for consolidated information increased as corporations began to gravitate
toward consolidated corporate management while investors wanted to be able to
accurately determine the risks borne and returns earned by groups of corporations. On
the other hand, the scope of consolidation was externally set with the result that some
subsidiaries were excluded from the scope of consolidation in spite of the presence of
control, generating skepticism about the usefulness of information about groups of
(ii) Information concerning Corporate Income Tax, etc.
10 The “transparency directive” that pertains to continued disclosure is scheduled to be implemented at the
end of 2006. The “prospectus directive” that relates to the listing of securities on stock exchanges is
expected to take effect in January 2007 based on the directive’s enforcement regulations.
It has been pointed out that corporate income tax system revisions widened the
differences between the financial statement profits before corporate income tax and other
deductions and the taxable income. In addition, the timing of corporate income tax
payments, etc. does not match the timing of net profits for the current year before
deductions for corporate income tax, etc. These are examples of problems related to the
calculation and presentation of correct profitability and financial conditions.
(iii) Information Concerning Corporate Pensions
Use of outside organizations to manage corporate pension plans has become increasingly
prevalent. At the same time, a drop in the yields from investment of accumulated assets
and unrealized losses on such assets have given rise to concerns as to the ability of the
plans to secure assets that are large enough to meet the future pension payments. It has
been pointed out that the reliability of financial statements is impaired in these ways,
since actual conditions were not disclosed in spite of the widening shortfall in allowance
for retirement benefit payments.
(iv) Accounting Standards for Financial Instruments
Today, a large number of corporations carry unrealized losses in the wake of the
imploding of the so-called economic bubble. To achieve better transparency of business
accounting in the face of globalization in the securities and financial markets, disclosure
of market value information in footnotes alone is not sufficient. It is now necessary to
establish account treatment standards for evaluating financial instruments at market
values, as well as for evaluating newly developed financial instruments and trading
techniques by weighing their values and risks, and reflect them properly on the balance
(v) Book Values of Fixed Assets
In Japan, treatment standards concerning impairment of fixed assets have not been clear.
In light of the current situation in which the value of real estate and other fixed assets, as
well as profitability, has fallen substantially, there is some concern that the current
treatment may be allowing “unrealized losses” to be carried forward to future periods
while leaving the book values of those assets at an overvalued level. Moreover, some
believe that this situation has caused impairment of financial statement reliability, and
there is concern about the arbitrary devaluation of fixed assets, due to the absence of solid
treatment standards concerning impairment losses.
In response to these concerns, action was initiated in Japan in 1998 to achieve
international harmonization and improve accounting standards at a rapid pace by taking
into consideration the IFRS and U.S. accounting standards. These changes (termed the
“Accounting Big Bang”) were as follows:
(i) Review of the Scope of Consolidation
Starting with the year ended March 2000, all subsidiaries began to be included in
consolidation as a general rule. This revision of the scope of consolidation led to a new
way to determine a subsidiary, based on whether or not the parent company (parent)
“controls” the decision-making body, such as the board of directors, of the subsidiary.
An entity is now deemed to be a subsidiary when 1) the parent holds the majority of the
voting rights in substance, or 2) when the parent holds a high percentage of the voting
rights and certain facts are recognized that attest to the control of a decision-making body
when the parent holds less than 50% of the voting rights.
(ii) Deferred Tax Assets and Liabilities (Tax Effect Accounting)
Starting with the year ended March 2000, tax amounts pertaining to temporary
differences (differences between what is recognized for accounting purpose and what is
recognized by the tax law), and those pertaining to loss operating carryforwards for tax
purposes are recorded as deferred tax assets and liabilities, with the exception of amounts
that are not expected to be recovered.
(iii) Accounting for Retirement Benefits
Retirement benefit accounting was introduced, starting with the year ended March 2001.
Liabilities for retirement benefits (i.e., liabilities that are computed by discounting the
amount that is part of the estimated retirement benefit payments and recognized to have
been incurred before the end of the accounting period, using a certain discount rate over
the remaining service lives of employees), adjusted for unrecognized past service cost
and unrecognized actuarial gains and losses, less the pension asset balance, must be
recognized as liabilities for retirement benefit obligations.
(iv) Accounting for Financial Instruments
Starting with the year ended March 2001, a new accounting treatment for financial
instruments was adopted. In this accounting method, marketable securities that are held
for trading are valued at market11, and valuation gains or losses are noted in the income
statement. Bonds that are intended to be held to maturity are valued at their amortized
cost. All other marketable securities are valued at market, and the valuation gains or
losses, which are computed by first reversing the book value to the historical acquisition
cost and measuring the difference between the market value and the historical acquisition
cost in each period, are directly recognized to equity. In Japan, there is a business
tradition of crossholding of stocks. Even the stocks that cannot be sold immediately now
have to be valued at market, and valuation differences calculated in the equity section.
The adoption of this treatment thus places an immense burden on Japanese corporations.
For this reason, this action deserves to be viewed as very ambitious, even in comparison
with the actions of foreign countries.
(v) Accounting for Impairments
When the sum of undiscounted future cash flows falls below the book value of a fixed
asset, an impairment loss is recognized. As a standard for measurement of impairment
losses, the recoverable price (net sales price or value in use, whichever is greater) is
computed, and if it is lower than the book value, the difference is noted as an impairment
loss expense in the income statement. The impairment accounting began to be applied
on a voluntary basis starting with the year ended March 2004, and will be required from
the year ending March 2006.
11 Both the market value as of the balance sheet date and the average market value over a one-month period
prior to the balance sheet date are acceptable.
Furthermore, through revisions of the Commercial Code and the Corporate Income Tax,
including the removal of the ban on holding companies, together with adoption of a
consolidated tax payment system and the elimination of restrictions on treasury stock
purchases and holdings, a legal system has been constructed that can respond to
consolidated business management and flexible equity policies.
The Accounting Big Bang imposed a heavy burden on corporations’ balance sheets in the
process of financial instrument valuation at market and the recognition of projected
pension benefit obligations. Specifically, the aggregate equity of the 400 largest
corporations of Japan decreased in FY 2002 for the first time since the 1980s. On income
statements, special loss in excess of ¥10 trillion12 has been reported for several years in
succession since FY 1999. This special loss was a jump from the few trillion yen figures
that were the norm prior to 199913. This phenomenon is believed to have encouraged
reorganization of corporations, improved the soundness of balance sheets, and ultimately
contributed to the realization of structural reform of the Japanese economy. The result, it
is believed, will be a recovery of the Japanese economy across the board as Japanese
corporations regain their competitiveness and profitability.
Today’s recovery of Japanese corporations came about through this series of reforms. In
other words, Japanese accounting standards have been formulated and contributed to the
Japanese economy, because of the dedication and efforts of market participants, and
especially those of corporations that took on challenges in a harsh environment14. Efforts
continue to be made to develop and improve accounting standards under the leadership of
a private-sector accounting standards-setting body that is equipped with transparency and
(4) Japanese Accounting Standards and IFRS Equivalency
The IASB has been developing a single set of understandable, implementable, high-
quality accounting standards (IFRS) with the objective of assisting the international
convergence of national accounting standards. The IASB is the sole organization that
works toward international convergence of business accounting today. The IASB is an
international private-sector organization that separates itself from governments. Its
members are from various countries; Japan has one member on the board15.
12 Includes losses other than those resulting from changes in accounting treatment.
13 The source of the aggregate equity and special loss figures is a survey by Nomura Securities Co., Ltd.
14 The questionnaire-based survey revealed that 56% of corporations (issuing corporations), 59% of
analysts, and 75% of institutional investors responded that the series of revisions and new additions to the
accounting standards that were made following the Accounting Big Bang brought positive results.
15 The current members of the IASB are from the following countries: U.S.A. (5 members), U.K. (2
members), Japan, Germany, France, Canada, Sweden, Australia, and South Africa (1 member each).
Fourteen members sit on the board.
- 1. Effecting Mutual Acceptance
- (1) Perspectives on Mutual Acceptance
- (2) Mutual Acceptance with the EU
- (3) The Evolution of Japanese Accounting Standards
- (4) Japanese Accounting Standards and IFRS Equivalency
- 2. Resolution of the Legend Issue
- 3. International Convergence: Efforts and Obstacles
- (1) Efforts to Promote International Convergence
- (2) Obstacles to International Convergence