Firms win in early stages of Japan’s IFRS move

As Japan continues its shift over to international financial reporting
standards, it is creating a host of challenges and opportunities for firms and
their clients at the start of the new fiscal year.

Although Japan’s Financial Services Agency decided in December 2009 that full
adoption of IFRS was voluntary, this year, the asset retirement obligations are
compulsory from 1 April, 2010, explained Kana Chiba from the IFRS desk at the
Japanese Institute of Certified Public Accountants (JICPA).

And this could cause a short-term problem in Japan’s recession-buffeted
economy. Leading Japanese business newspaper the Nikkei reported that companies
ranging from power generators to retail chains could be facing a ¥300bn ($3.2bn)
hit to their balance sheets from new requirements on asset retirement
obligations alone.

According to Tomo Sekiguchi from the Accounting Standards Board of Japan
(ASBJ) only “one or two companies” have chosen to voluntarily adopt IFRS fully
this year, a number that is expected to rise to “ten to 20” next year. The full
switchover is expected to be completed by 2013.

“Helping Japanese companies get ready for IFRS is a major part of our work
now, and involves 12-24-month projects,” explained Jonathan Stuart-Smith, a
partner at Deloitte Touche Tohmatsu in Tokyo. “We’ve been working with our
clients on compliance with J-SOX [Japan’s version of Sarbanes-Oxley] and now the
shift is to preparation for IFRS.”

The main challenge for Japanese companies is that “most don’t have the
internal resources to do it and have to rely on consultants such as ourselves;
not that we’re complaining, it’s keeping us busy,” according to Stuart-Smith.

“To give you a live example: I was in a meeting with a company that was
thinking about a US-related M&A deal. Because it involves US shareholders,
they need to file [forms] with the SEC under IFRS. This will take significant
time and resources to achieve and may end up delaying the deal,” said
Stuart-Smith.

“One of the main changes is that the Japanese standards were more rules-based
but IFRS is more principle-based. I think Japanese people prefer rules-based,
culturally speaking, so that’s a challenge,” said Sekiguchi.

Preparations for IFRS are considerable, and the ASBJ is working on issues
including accurate translations, education and training to ready the Japanese
accounting profession and business sector for the shift.

“The JICPA is taking the leading role in education but there are also
universities and accounting firms involved,” said Sekiguchi.

“The companies that also have overseas listings are dealing with it all now,
and then the second wave will be in two to three years time,” added
Stuart-Smith.

Unlisted companies will also have to deal with the shift. As a result the
ASBJ is creating a Council on Accounting of Unlisted Companies, charged with
considering accounting standards for unlisted companies, taking into account
IFRS.

The effect of the Japanese reforms will impact outside Japan of course, most
likely in the US, which has also been grappling with applying.

Richard Fuchs, a senior partner at PricewaterhouseCoopers, however, thought
Japan’s switch would not be overly influential. “The US is taking a very
methodical approach in considering the implications of adoption [of IFRS],” he
explained.

“The overall objective [in determining which standards to follow] is to be in
the best interest to the US.”

Despite Japan and the US being very close markets and Japanese companies
accounting for a large volume of activity in the US, Fuchs believes “Japan’s
move to IFRS will have no specific impact on the US changing over. The US will
continue with its methodical approach in finding out what’s right for America.”

Stuart-Smith added: “One of the positives for the companies is that once
they’ve switched, comparisons with EU firms – and even US ones if they finally
get around to shifting over – should be easier for investors. This should boost
share prices for the strong-performing Japanese companies; if there’s more
transparency then Japanese companies should be more attractive to overseas
investors.”