Corporate & Securities Law

By Jim Hamilton

A key advisory group to the Japanese Financial Services Agency has recommended the eventual mandatory use of IFRS for the consolidated financial statements of listed international companies. The Business Accounting Council set forth a roadmap that would allow optional use of IFRS by companies with fiscal years beginning April 1, 2009. The roadmap requires the approval of the FSA, which is expected soon.

In principle, the text of IFRS for optional use should be IFRS as promulgated by the IASB. But the Council added that, in order for IFRS to function well at each stage of the financial reporting process, it is important to ensure that IFRS appropriately reflects business practices in Japan.

The mandatory adoption of IFRS in Japan is also conditioned on the continuing due process and governance reforms now being undertaken by the IASB?s oversight body, such as accountability to regulators and market participants, and securing a stable source of funds. In this regard, the advisory group praised the recent formation of a Monitoring Board as a critical starting point for enhanced governance. The IASB?s Monitoring Board includes the European Commission, the SEC, and the Japanese Financial Services Agency. The primary purpose of the Monitoring Board is to facilitate formal interaction between securities regulators and the IASB?s governing body.

Similarly, it is essential for IFRS adoption that the function of the Accounting Standards Board of Japan be enhanced to secure a broad-based and stable source of funding. In addition, a wide range of stakeholders, such as preparers, investors and auditors, must effectively participate in the standard setting process from an early stage, if necessary, in collaboration with foreign stakeholders.

Companies choosing the option to use IFRS should also be required to disclose Japanese GAAP financial information corresponding to the current and previous year, in the first year of IFRS application. On an on-going basis, however, considering the costs and benefits of parallel disclosure, it would be appropriate to consider a simpler and more effective measure, including qualitative and quantitative disclosure comparing significant differences between IFRS and Japanese GAAP.

There is also an issue involving XBRL. The number of IFRS data items in the taxonomy is far smaller than that of the Japanese GAAP taxonomy, noted the group and the IFRS taxonomies are not compatible with the Japanese language or the Japanese electronic reporting system, EDINET. Therefore, the IFRS taxonomies must be further developed by global efforts so that the XBRL reporting on EDINET under IFRS may be possible by the time the use of IFRS becomes mandatory,

The goal is to make a decision in 2012 on mandatory use starting in 2016. However, the timing may be moved back or forward depending on the progress made in tackling the issues mentioned, as well as the experience gained from the application of IFRS during the optional period.

Full post as published by Jim Hamilton's World of Securities Regulation on June 14, 2009 (boomark / email).