BAC report recommends greater use of IFRS in Japan

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21 Jun 2013

Japan’s Business Accounting Council (BAC) met on 19 June 2013 to finalise its deliberations about the use of International Financial Reporting Standards (IFRSs) in Japan. Subsequent to the meeting, on 20 June, the BAC issued its final report, based on a series of BAC discussions. The report recommends a number of measures, and may result in four possible sets of accounting standards that could be used by Japanese public companies, including greater, but not mandatory, use of IFRSs or IFRS-based standards.

The nine-page report contains the following three key policy recommendations, to promote further use of IFRSs in Japan:

  1. Ease eligibility to use IFRSs voluntarily
    The BAC has concluded that two of three existing eligibility criteria to use IFRSs should be eliminated. The current requirements 1) that an entity shall be a public company and 2) that an entity is conducting financing or business activities internationally, would be deleted. The remaining criteria is that an entity has established a system to ensure appropriateness of consolidated financial statements in accordance with IFRSs. This initiative will make it possible for entities 1) that are going public and 2) that have no larger foreign subsidiaries to use IFRSs and thus will contribute to significant increase in the population of entities that are permitted to use IFRSs in Japan.
  2. Introduction of 'endorsed IFRSs'
    In addition to maintaining the voluntary use of IFRSs as issued by the IASB in Japan, a new process of endorsement that may result in amendments to IFRSs is recommended to be introduced. The endorsement process would be conducted by the Accounting Standards Board of Japan (ASBJ), the local accounting standard setter, on individual standard of IFRSs, followed by approval by the FSA, separately from the existing designation process. In endorsing an individual standard, for the public interest and investor protection, three criteria would be considered: 1) basic thinking toward accounting standards, 2) practical burden (costs of preparation outweighing benefits), and 3) coordination with related institutions (application is difficult or too costly in light of industry regulation). The report states that any amendments to IFRSs should be limited to items that can be reasonably explained to international constituents, and that such endorsed standards would not be mandated for use. The BAC report expresses its expectation that the ASBJ act swiftly on endorsement, based on above key features of the new process.
  3. Simplification of disclosure requirements in a separate financial statement under Japanese GAAP
    The BAC concluded that certain disclosures currently required in separate financial statements under the Japanese Financial Instruments and Exchange Act be simplified by means such as substituting them by similar ones under the Companies Act, except for entities that do not disclose consolidated financial statements or those in regulated industries for which other industry regulators are to be consulted. The report also noted that the enhanced or supplemental disclosure needs to be considered in responding to concerns over a decreasing level of disclosure in a separate financial statements.

In addition to above three key initiatives, the report also touched on the following in connection with the use of IFRSs:

  1. Composition of a new stock price index
    It is expected that stock exchanges would consider the use of IFRSs in selecting public companies that comprise a new stock price index to be developed.
  2. Mandatory use of IFRSs
    The report notes that it is not the appropriate time to decide on mandatory use of IFRSs in Japan. Discussions shall continue among constituents, based on future review of the results of the initiatives in the report (including the increase in IFRS users in Japan) and in light of the international environment such as developments in the United States and standards development by the IASB.

The issuance of the report is understood as the concluding event to this round of policy debates around use of IFRSs in Japan at the BAC level. It is expected that relevant parties such as FSA and ASBJ will act upon this report and will propose changes to regulations etc. in due course.

After these measures are taken as set out in the report, Japanese public companies may be able to use one out of four sets of accounting standards in their consolidated financial statements (subject to certain eligibility requirements):

  1. IFRS as issued by the IASB
  2. endorsed IFRSs
  3. Japanese GAAP, or
  4. US GAAP.


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