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Accounting Standards

The process of setting accounting standards, previously driven by the Ministry of Finance, and the Financial Services Agency after the reorganization of government ministries and agencies, has been gradually changing.

The Financial Accounting Standards Foundation ("FASF") was established in 2001, and the Accounting Standards Board of Japan ("ASBJ") was organized under the auspices of the FASF as an independent, private-sector entity to develop accounting standards in Japan. Since its inception, the ASBJ has issued many accounting standards, guidance and other documents that address practical issues. In addition, in January 2005, it announced the launch of a joint project with the International Accounting Standards Board ("IASB") aimed at achieving convergence between Japanese GAAP and International Financial Reporting Standards ("IFRSs").

In October 2006, the ASBJ has decided to formulate and release "ASBJ Project Plan" focusing on accounting standards development projects, related to convergence, in an attempt to indicate the status of initiatives of the ASBJ to various constituencies in Japan and abroad.

In this report, based on the proposal concerning a time-framed approach in light of the European Union ("EU") equivalence assessment, titled "Towards the International Convergence of Accounting Standards" issued by the Planning and Coordination Committee of the Business Accounting Council of Japan (BAC) in July 2006, primary emphasis was placed on mapping out the work planned to be achieved through the end of 2007, and also on clarifying the prospects of convergence status as of the beginning of 2008 concerning the initiatives to be undertaken with respect to the 26 issues for which the remedies were advised by the Committee of European Securities Regulators ("CESR") *1

In August 2007, the ASBJ and the IASB jointly announced an agreement (known as the Tokyo Agreement) to accelerate convergence between Japanese GAAP and IFRSs, a process that was started in March 2005. As part of the agreement, the two boards were going to seek to eliminate by 2008 major differences between Japanese GAAP and IFRSs (as defined by the July 2005 CESR assessment of equivalence), with the remaining differences being removed on or before 30 June 2011. Whilst the target date of 2011 did not apply to any major new IFRSs being developed, that would become effective after 2011, both boards were going to work closely to ensure the acceptance of the international approach in Japan when new standards become effective.

The new project plan was issued in December 2007, in accordance with the content of the Tokyo Agreement. It classified the project items into three categories (short-term, medium-term and medium and long-term) and indicated the schedule for each item. Items exhibited in "2. Items relating to the remaining differences (medium-term)" and "3. Items relating to MOU between IASB and FASB" were only the items that had already been launched or clearly planned.

As for the EU equivalence assessment, in March 2008, CESR announced that Japanese GAAP was considered to be equivalent to IFRSs if the progress of convergence was to be made as scheduled in Tokyo Agreement. Thereafter, in December 2008, European Commission (EC) also reached the conclusion that Japanese GAAP was found to be equivalent to IFRSs adopted by the EU. Consequently, those decisions made it possible for Japanese companies to continue to be listed in European capital markets after 2009, by using the financial statements based on Japanese GAAP.

While the convergence between Japanese GAAP and IFRSs progressed, in June 2009, the BAC published the "Opinion on the Application of International Financial Reporting Standards (IFRS) in Japan (Interim Report)." The Interim Report proposed that the optional application of IFRSs should be allowed for consolidated financial statements of certain listed companies from the fiscal year ending in March 2010.

Following the Interim Report, in December 2009, the Financial Services Agency (FSA) published a set of revised Cabinet Office Ordinances, including "Regulation for Terminology, Forms and Preparation of Consolidated Financial Statements" and "Cabinet Office Ordinance on Disclosure of Corporate Information," etc. This provided an official operational framework for the voluntary application of IFRSs, starting from the fiscal years ended on or after March 31, 2010 as the first step towards the possible application of IFRSs in Japan.

In June 2011, the IASB and the ASBJ jointly announced their achievements under the Tokyo agreement and their plans for closer co-operation. The announcement referred to the progress made by the IASB and ASBJ in both short-term and other convergence projects. Both boards also expressed their intention to continue a close relationship to seek further convergence between IFRSs and Japanese GAAP.

In July 2012, the BAC published the interim discussion paper summarizing the discussions by its members of the possible application of IFRSs. The BAC intends to continue its further deliberations over the best approach for the possible application of IFRSs in Japan.

  • *1 From January 1, 2011 CESR activities were continued by the European Securities and Markets Authority (ESMA).

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