japan’s progress toward convergence

1Accounting Standards Board of JapanAccounting Standards Board of Japan

Japan’s Progress Toward Convergence

Taiji 　 Ishii, Board member

Accounting Standards Board of Japan


Basic position of the ASBJ on international convergence

Current situation surrounding the ASBJJoint convergence project with the IASBJoint convergence project with the FASB

1. Introduction


2. Basic position of the ASBJ on international convergence

‘‘ Medium-term operating policy of the ASBJ’’ in July 2004The 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

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.


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)

The ASBJ released “Statement on Japan’s progress toward convergence between Japanese GAAP and IFRSs” on January 31, 2006. 　　


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


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 ）


5. Development of Japanese GAAP

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

The following major accounting standards are also effective or to be effective this year. Impairment of Fixed Assets Business Combination 　　　　　


6. Importance of Convergence Dramatically Increased

Joint convergence project with the IASBConvergence needs to be accelerated, in

consideration of changes in surrounding environments.


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.


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 ）



(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


　



(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


(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)


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

estically and internationally



(3-1) Current PlanFrom “phased approach” to “whole picture a

pproach”Entire picture of convergence process Classify “short-term project” and “longer-term projec

t”Review regularly differences and progress of delibera

tion (“on-going” process)



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

Eliminate or find a way to eliminate major differences by 2008

Longer-term projectDifferences primarily due to conceptual frameworks o

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

7. Joint Project with the IASB (8) 　　


Short-term project items

Inventories(valuation method), Segment reporting, Related party disclosures, Uniformity of accounting policies in overseas subsidiaries, Investment properties, Cost of issuing new shares, Construction contracts, Asset retirement obligation, Disclosure of financial instruments at fair value (footnote), Leases



Longer-term project 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.- Revenue recognition, Performance reporting, Intangibles (including R&D expenses), Scope of consolidation (including SPE), Fixed assets (impairment, revaluation), Provisions, Fair value measurements, Fair value option, Financial instruments, Liabilities and equity, Government grants, Insurance contracts, Retirement benefits, Uniformity of accounting policies in associated companies, Inventories (LIFO), Income taxes



Longer-term project 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)

Standards for which assessment of the market should be taken into consideration becouse of their resent developments- share-based payments



(4) Efforts by the ASBJShort-term project items

Consensus-building among market constituentsLonger-term project 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 (12)



(5) Next meeting

It will be held in September 2006 in London.

Short-term and major long-term issues will be discussed.


An initial meeting will be held in May 2006 in Tokyo.Representatives of the FASB including

Chairman, Robert Herz, will come to Japan.

Major long-term issues will be discussed.

8. Initiate Periodical Meeting with the FASB

japan’s progress toward convergence

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