Convergence of Japanese
GAAP with IFRS
Selected Topics
from the 2006 Tax Reform Act
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OKAMOTO & COMPANY
International Accounting Office
/ Hanato Tax Accountant Office
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Convergence of Japanese GAAP with IFRS |
Recently, the number of Global Fortune 500 companies reporting their financial statements on IFRS (International Financial Reporting Standards) have increased to 200, surpassing those being reported on US GAAP (176)1. The impact of IFRS is growing each year. Many countries, including the US, are making serious efforts to converge with IFRS (and the IFRS is attempting to converge with US GAAP when appropriate).
Since 1997, Japan has also made efforts to move towards (or converge with) IFRS. This started with reforms to consolidation policies, income taxes, employee benefits and financial instruments. The accounting policy on impairment of fixed assets has started and is now being required for companies with fiscal years ending March 2006.
Accounting for business combinations and share-based payments will take into effect from April 2006. Business combinations will be classified as either " acquisition (purchase method) " or "uniting of interests (pooling of interests)." Good will arising from the purchase method will not be re-evaluated each year but will be amortized on a straight-line basis not to exceed 20 years. Unfortunately, there appears to be much political pressure to eliminate the pooling of interests method in Japan2.
Going Forward
The ASBJ (Accounting Standards Board of Japan) is leading a project to examine the following international accounting standards with its relation to J-GAAP by March 2007. Topics include:
| IAS2 | Measurement of inventories – J-GAAP allows the cost method of accounting as an alternative to the lower of cost or market |
| IAS24 | Related party disclosures – J-GAAP does not require disclosure of the entity's parent and it's ultimate controlling entity, nor does it require companies to disclose control relationships if there have been no transactions between the related parties. |
Other topics such as segment information (IAS14), unification of policies within the group (IAS27), investment properties (IAS40) will also be examined.
| 1. | Source: IOSCO Chairman Keynote Address on February 16, 2006 |
| 2. | Paul Gallagher (Deloitte & Touche LLP partner) and Hayato Wada (Deloitte Touche Tohmatsu) presentation on "Japanese GAAP's road to IFRS convergence" on April 25, 2006 |