In 2005, the International Accounting Standards Board (IASB) and the Accounting Standards Board of Japan (ASBJ) announced their agreement to launch a joint project to reduce differences between International Financial Reporting Standards (IFRSs) and Japanese Generally Accepted Accounting Principles (GAAP). According to Deloitte, the convergence project covers the identification and assessment of differences in existing standards on the basis of the boards' respective conceptual frameworks or basic philosophies with the aim of reducing those differences where economic substance or market environments such as legal systems are equivalent. Per Deloitte's IAS Plus website, the ASBJ released its Project Plan Concerning the Development of Japanese Accounting Standards in October 2006 with the objective to clarify the status of its initiatives toward convergence with IFRSs. The ASBJ's plan, developed, in part, in response to the June 2005 Report to the European Commission from the Committee of European Securities Regulators (CESR), outlined the work planned to be achieved through the end of 2007 and the anticipated convergence status as of the beginning of 2008 for each of the 26 differences identified by the CESR. The initiative to accelerate convergence between Japanese GAAP and IFRSs, known as the 'Tokyo Agreement' was signed by the ASBJ and the IASB in August 2007. The Tokyo Agreement, according to a presentation made in April 2008 by the Chairman of the ASBJ, requires that Japan complete the short term convergence projects by 2008 by eliminating the major differences or provide compatible accounting standards for the items which the CESR advised remedies on. The long-term objective is to eliminate all major differences by June 2011.

General Overview

The Committee of European Securities Regulators (CESR), in 2005, completed a review on the equivalence of Japanese, American and Canadian Generally Accepted Accounting Principles (GAAP) with International Financial Reporting Standards (IFRSs). The CESR was approached to technically advise the European Commission on possible implementation measures of the Transparency and Prospectus Directives concerning equivalence of financial reporting standards in the above-mentioned countries. In its June 2005 report to the European Commission, the CESR advised the Commission to declare the three countries' GAAP equivalent to IFRSs, subject to remedies for a limited list of differences that the CESR considers significant.

The International Accounting Standards Board (IASB) and the Accounting Standards Board of Japan (ASBJ) announced in January 2005 their agreement to launch a joint project to diminish differences between IFRSs and Japanese GAAP. Per an IASB 2004 press release, both boards agree the implementation of this project will help further promote international convergence to high quality accounting standards. Deloitte's IAS Plus website notes that in October 2006, the ASBJ released its Project Plan Concerning the Development of Japanese Accounting Standards to clarify the status of its initiatives toward convergence with IFRSs. The plan has been developed, in part, in response to the CESR report, which identified 26 issues for which 'remedies' should be required if the European Commission decides to continue to allow Japanese companies to trade on European securities markets using financial statements prepared in adherence with Japanese accounting standards. The ASBJ's plan outlined the work planned to be achieved through the end of 2007 and the anticipated convergence status as of the beginning of 2008 for each of the 26 matters identified by the CESR. Signed by the ASBJ and the IASB in August 2007, the Tokyo Agreement, according to a presentation made by the Chairman of the ASBJ, Nishikawa, in April 2008, requires that Japan completes the short term convergence projects by 2008 by eliminating the major differences or provide compatible accounting standards for the items which the CESR advised remedies on in July 2005; and promote convergence in major areas of Japanese GAAP and IFRSs. The IASB and the ASBJ established a target date of June 30, 2011 to resolve other differences between IFRSs and Japanese GAAP which have been flagged but are not part of the short-term projects. The IASB and the ASBJ will also continue working closely to ensure the application of new standards that will become effective after June 30, 2011. To this effect, according to the Japanese Institute of Certified Public Accountants' (JICPA) website, in December 2007 the new project plan was issued which indicates the schedule for all three categories of projects (short-term, medium-term and medium and long-term).

According to the JICPA website, Business Accounting Principles issued by the Business Accounting Council of the Financial Services Agency (FSA), accounting standards issued by the ASBJ, and practical guidelines issued by the JICPA constitute the Japanese GAAP. Per the JICPA's 2004 self-assessment, the FSA has oversight responsibilities over the accounting profession in Japan and as such has the final authority to endorse issued standards. The JICPA's website indicates that in 2001, the Financial Accounting Standards Foundation (FASF) was established through the collective efforts of ten leading private-sector entities including the JICPA. The ASBJ was established as a result of the support of the FASF as an independent and private-sector entity to develop accounting standards in Japan. The JICPA not only provides funding to the FASF, but also takes part in setting accounting standards by sending board members to the FASF and the ASBJ. The IFAC's website indicates that the JICPA is a member of the organization.

According to the JICPA's website, Japan has three laws that govern financial accounting and reporting: the Commercial Code, the Corporate Income Tax Law, and the Securities and Exchange Law (SEL) which was replaced by the Financial Instruments and Exchange Act (FIEA) in June 2006. The FIEA, according to the Deloitte IAS PLUS website, covers a wider scope of the existing SEL in order to include financial instruments that have the natures of an investment. The new law, among other things, introduces a quarterly reporting system from fiscal years beginning on or after April 1, 2008. The law will also require from the management of listed companies to submit along with its annual report, a letter certifying the accuracy of its annual report. The financial statements prepared as prescribed by the Commercial Code and the Securities and Exchange Law are, in general, compatible with each other. Further, a new corporate law was, according to Deloitte IAS Plus website, enacted in May 2006 which provided additional regulations to accounting requirements which are compatible with accounting standards published by the ASBJ.

The Commercial Code, according to the JICPA's 2004 self-assessment, covers listed and private entities. Listed companies, pursuant to the SEL (now FIEA), are required to submit two types of financial statements: one that conforms to the Commercial Code requirements and the other in accordance with the SEL. Furthermore, under the SEL it is mandatory for listed companies to adhere to regulations on additional disclosure requirements like the preparation of consolidated financial statements, including cash flow statements. The enacting body for listed companies is the Financial Services Agency (FSA). Banks, according to the 2004 JICPA self-assessment, adhere to the same accounting and auditing standards that public companies apply but have to provide more additional disclosures. To this effect, the FSA can supervise the accounting and auditing of banks. The difference in requirements from other industries for non-banks is not significant. In addition, there is no difference between auditing and accounting standards for insurance companies and those of other industries; however certain additional disclosure requirements and practices are required. The FSA can also monitor insurance accounting and auditing in this respect.

The Principles

IFRS 1: First-time Adoption of International Financial Reporting Standards (effective 2006)

NC

According to a 2005 comparison of IFRSs and Japanese GAAP provided by CESR, "Individual Japanese GAAP standards specify treatment for first-time adoption of those standards. There is no Japanese GAAP standard providing exceptions to the specified basis of application when a new basis of accounting is applied for the first time" (pp 44-45). In its 2006 self-assessment, the JICPA states that there is no need for this standard under Japanese GAAP, since this standard only addresses the first time application of IFRS.

IFRS 2: Share-based Payment (effective 2005)

ID

According to a 2005 CESR report, the differences between the 2005 practices of share-based payments in Japan were considered significantly different from IFRS 2 for the purpose of equivalence. In July 2006 national Accounting Standard No. 8 was issued which deals with expense recognition and explanatory notes. (CESR 2005, p. 45; ASBJ 2006 Chart) However, there is no publicly available information as to compliance of the issued standard with IFRS 2.

Per a 2006 JICPA self-assessment, an Exposure Draft was issued in 2004 and it was, as of 2006, still under deliberation.

IFRS 3: Business Combinations (effective 2004)

ID

According to Nishikawa's 2008 presentation, a Discussion Paper was issued in December 2007 and an Exposure Draft during the second quarter of 2008.

IFRS 4: Insurance Contracts (effective 2006)

NC

The difference between IFRSs and Japanese GAAP regarding this standard is considered to be significant, according to a 2005 comparison of IFRSs and Japanese GAAP provided by the CESR.

IFRS 5: Non-current Assets Held for Sale and Discontinued Operations (effective 2005)

NC

Per a 2006 comparison of IFRSs and Japanese GAAP provided in the JICPA's 2006 Part II Self-assessment, there are differences between the national standard and IFRS 5.

IFRS 6: Exploration for and Evaluation of Mineral Resources (effective 2006)

II

There is insufficient publicly available information as to Japan's compliance with this principle.

IFRS 7: Financial Instruments: Disclosures (effective 2007)

ID

According to Nishikawa's 2008 presentation, the IASB/FASB was expected to issue a Discussion Paper during the first two quarters of 2008.

IAS 1: Presentation of Financial Statements (effective 2007)

ID

According to Nishikawa's 2008 presentation, the IASB/FASB was expected to issue the Discussion Paper during the first two quarters of 2008. Per a 2006 comparison of IFRSs and Japanese GAAP provided in the JICPA's 2006 Part II Self-assessment, a difference between the national standard and IAS 1 is that under Japanese GAAP deferred tax assets and liabilities can be classified as either current or non-current whereas under IFRSs they are only classified as non-current.

IAS 2: Inventories (effective 2005)

ID

According to a 2005 comparison of IFRSs and Japanese GAAP provided by the CESR, the difference between IAS 2 and its equivalent Japanese GAAP are significant. Per Nishikawa's 2008 presentation the Exposure Draft was issued in March 2008 and the proposed effective date is April 2010.

IAS 7: Cash Flow Statements (effective 1994)

NC

According to a 2005 comparison of IFRSs and Japanese GAAP provided by the CESR, there are differences between IAS 7 and Japanese GAAP, however, they are not significant.

IAS 8: Accounting Policies, Changes in Accounting Estimates and Errors (effective 2005)

ID

Per Nishikawa's 2008 presentation, the standard was issued in March 2008 and the effective date is April 2010.

IAS 10: Events after the Reporting Period (effective 2005)

II

There is insufficient publicly available information as to Japan's compliance with this principle; however, according to the Ministry of Economy, Trade and Industry, accounting treatment of events after the balance sheet date under Japanese GAAP differs from IFRS as dividends are not treated as subsequent events.

IAS 11: Construction Contracts (effective 1995)

ID

A 2005 comparison of IFRSs and Japanese GAAP provided by the CESR deem the differences between IAS 11 and Japanese GAAP to be significant. This area was identified as one of the items advised by CESR for EU's equivalence assessment purposes. According to Nishikawa's 2008 presentation, the new standard was issued in December 2007 with the effective date of April 2009.

IAS 12: Income Taxes (effective 2001)

NC

According to a 2005 comparison of IFRSs and Japanese GAAP provided by the CESR, there were differences between IAS 12 and Japanese GAAP in this area, although they were not considered significant.

IAS 14: Segment Reporting (effective 1998)

ID

Per a 2006 comparison of IFRSs and Japanese GAAP provided in the JICPA's 2006 Part II Self-assessment, there are differences between IAS 14 and Japanese GAAP. Per Nishikawa's 2008 presentation, the standard was issued in March 2008 and the effective date is April 2010.

IAS 16: Property, Plant and Equipment (effective 2005)

NC

According to a 2006 comparison of IFRSs and Japanese GAAP provided in the JICPA's 2006 Part II Self-assessment, there are differences between IAS 16 and Japanese GAAP.

IAS 17: Leases (effective 2005)

ID

According to a 2006 comparison of IFRSs and Japanese GAAP provided in the JICPA's 2006 Part II Self-assessment, there are differences between IAS 17 and Japanese GAAP. Per the ASBJ 2006 Project Plan, two Exposure Drafts were released with regard to this standard and the project was to be finalized by January 2008.

IAS 18: Revenue (effective 1995)

ID

Per Nishikawa's 2008 presentation, as of December 2007, a Discussion Paper is expected to be issued during the fourth quarter of 2008.

IAS 19: Employee Benefits (effective 2006)

NC

According to a 2006 comparison of IFRSs and Japanese GAAP provided in the JICPA's 2006 Part II Self-assessment, there are differences between IAS 19 and Japanese GAAP.

IAS 20: Accounting for Government Grants and Disclosure of Government Assistance (effective 1984)

NC

According to a 2006 comparison of IFRSs and Japanese GAAP provided in the JICPA's 2006 Part II Self-assessment, there are differences between IAS 20 and Japanese GAAP.

IAS 21: The Effects of Changes in Foreign Exchange Rates (effective 2005)

NC

According to a 2006 comparison of IFRSs and Japanese GAAP provided in the JICPA's 2006 Part II Self-assessment, there are differences between IAS 21 and Japanese GAAP.

IAS 23: Borrowing Costs (effective 1995)

NC

According to a 2005 comparison of IFRSs and Japanese GAAP provided by the CESR, differences between IAS 23 and Japanese GAAP are not considered to be significant.

IAS 24: Related Party Disclosures (effective 2005)

ID

According to a 2006 comparison of IFRSs and Japanese GAAP provided in the JICPA's 2006 Part II Self-assessment, there are differences between IAS 24 and Japanese GAAP. The 2006 ASBJ Project Plan indicates that a converged standard was issued during the last quarter of 2006.

IAS 26: Accounting and Reporting by Retirement Benefit Plans (effective 1998)

ID

Per Nishikawa's 2008 presentation, an Exposure Draft was issued in March 2008 and the proposed effective date is end of March 2010.

IAS 27: Consolidated and Separate Financial Statements (effective 2005)

ID

Per Nishikawa's 2008 presentation, a Discussion Paper will be issued during the second half of 2008.

IAS 28: Investments in Associates (effective 2005)

NC

According to a 2005 comparison of IFRSs and Japanese GAAP provided by the CESR, differences between IAS 28 and Japanese GAAP are not considered to be significant.

IAS 29: Financial Reporting in Hyperinflationary Economies (effective 1990)

NC

According to a 2006 comparison of IFRSs and Japanese GAAP provided in the JICPA's 2006 Part II Self-assessment, there is no equivalence in Japanese GAAP to IAS 29; and the Japanese authorities do not currently see the urgent need to add this standard.

IAS 31: Interests in Joint Ventures (effective 2005)

NC

According to the 2005 CESR report, the differences between IAS 31 and the Japanese GAAP were not deemed

IAS 32: Financial Instruments: Disclosure and Presentation (effective 2005)

NC

According to the 2005 CESR report, there were a lot of differences in detail between IAS 32 and Japanese GAAP; Disclosure of fair value information of financial instruments was recognized as one of the items advised for EU's equivalence assessment purposes. Per Nishikawa's 2008 presentation, the guidance on the issue was issued in March 2008 with the effective date of the end of March 2010.

IAS 33: Earnings per Share (effective 2005)

NC

According to the 2005 CESR report, there were a lot of differences in detail between IAS 33 and Japanese GAAP; however, they were not considered to be significant for equivalence assessment purposes.

IAS 34: Interim Financial Reporting (effective 1999)

II

There is insufficient information publicly available as to the compliance of Japanese GAAP with IAS 34. According to the 2005 CESR report, the remedy for this standard was outstanding as further deliberations were required.

IAS 36: Impairment of Assets (effective 2004)

NC

According to the 2005 CESR report, there were significant differences between IAS 36 and Japanese GAAP.

IAS 37: Provisions, Contingent Liabilities and Contingent Assets (effective 1999)

NC

According to the 2005 CESR report, there were differences between IAS 37 and Japanese GAAP. This area was identified by the CESR as one of the items advised for EU's equivalence assessment purposes. In his 2008 presentation, Nishikawa states that the treatment of asset retirement obligations was addressed in the new standard issued in March 2008 with effective date of April 2010.

IAS 38: Intangible Assets (effective 2004)

ID

According to the 2005 CESR report, there were differences between IAS 38 and Japanese GAAP in the treatment of capitalization of development costs. This area was identified by the CESR as one of the items advised for EU's equivalence assessment purposes. Per Nishikawa's 2008 presentation, a Discussion Paper on the subject was issued in December 2007 and an Exposure Draft of the new standard was released during the second quarter of 2008.

IAS 39: Financial Instruments: Recognition and Measurement (effective 2006)

ID

According to a 2006 JICPA's self-assessment, there are differences between IAS 39 and Japanese GAAP.

IAS 40: Investment Property (effective 2005)

ID

According to the 2005 CESR report, fair value of investment properties was not required to be disclosed under Japanese GAAP. This area was identified by the CESR as one of the items advised for EU's equivalence assessment purposes. The 2008 Nishikawa's presentation states that an Exposure Draft of the new standard was issued during the second quarter of 2008.

IAS 41: Agriculture (effective 2003)

NC

According to the 2005 CESR report, there is no specific standard for agriculture under Japanese GAAP. The JICPA in its 2006 self-assessment explains that "very few companies using Japanese accounting standards are engaged in agricultural business, since agriculture is commonly engaged by individual farmers. Therefore, there seem no urgent needs for adding this issue to Japanese standards" (p. Appendix 2 p. 3).