2009-28

Roadmap to Future Mandatory Application of IFRS in Japan:

from the Perspective of Financial Statements Preparers

Yao Jun Chitoshi Koga

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Roadmap to Future Mandatory Application of IFRS in Japan:

from the Perspective of Financial Statements Preparers

Yao Jun (Kobe University) Chitoshi Koga (Kobe University)

*contact mail address: yao77cn@hotmail.com

Abstract

After ten years’ efforts on producing high-quality accounting standards which can represent

Japanese style of business activities and on exploring its own way to converge with global financial

reporting standards, Japan makes a major step forward towards adopting International Financial

Reporting Standards (IFRS) by publish the Interim IFRS Roadmap. This shows a stance for

acceptance of adoption. However, there are still quite a lot issues to be taken into consideration

before the last determination of mandatory application of IFRS is made. The current research

explores these issues from the perspective of financial statements preparers—in this paper,

accounting managers or CFOs in leading Japanese companies which are most possible to be subject

to mandatory application. The background of Japan’ stepping towards adoption is introduced, the

feature of Japanese accounting that might influence the adoption by Japanese companies are

analyzed. Based on the this analysis, a survey was made investigating their opinions on IFRS

implementation, as well as the source of finance of and actual application in these companies at the

present time. The results of the survey acquired in the current paper are expected to have

implications for regulation making and IFRS adoption training programming.

*We are thankful to Hajime Yasui, the director of Aarata Institute of PWC Japan for helping us make the survey. We would also like to thank Professor Norio Igarashi, Yokohama National University for his kind comments for this paper. .

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１．Introduction

The current research tries to investigate issues concerning the adoption of international

accounting standards (refers to IAS or IFRS) from the perspective of financial statements preparers.

When we were preparing this paper, the “Interim Report: Application of International Financial

Reporting Standards (IFRS) in Japan” (the “Interim IFRS Roadmap”) was published which is based

on the exposure draft published on February 4, 2009. It seems that after ten years’ efforts on

producing high-quality accounting standards which can represent Japanese style of business

activities and on exploring its own way to converge with global financial reporting standards, Japan

makes a critical step forward towards adopting International Financial Reporting Standards (IFRS).

The main points of the report concern the acceptance of voluntary adoption of IFRS in consolidated

financial statements from fiscal years ending 31 March 2010 for “companies with global financial /

operating activities” and the considerations for the possibility of mandatory application of IFRS in

Japan.

As we know, there are two-pronged approaches to achieving a single set of global accounting

standards: adoption and convergence. Japan, as well as U.S. has been regarded as examples of

convergence countries. However, The Interim IFRS Roadmap indicates a future approach

foreseeing the possibility that IFRS can be used and that Japan should adopt IFRS in some way in

the future. Therefore, the issuance of the Initial IFRS Draft Roadmap would signify great regulatory

change and proposes some important issues that should be considered and dealt with. For example,

before the final decision on mandatory adoption is made, questions such as whether to adopt IFRS in

both consolidated financial statements and non-consolidated financial statements or only adopt IFRS

in consolidated financial statements, what kind of companies should be required to prepare financial

statements in compliance with IFRS, the incentive and obstacles of companies to implement IFRS

and other related questions should be answered based on comprehensive investigation. Since these

issues are closely related to preparers of financial statements, it is relevant to explore their

understanding of IFRS and opinion towards the adoption of IFRS and preparation for the

application.

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We made the survey investigating leading Japanese companies’ view on IFRS application

before the publication of the Initial IFRS Roadmap when Japan still stood on the crossroad of

convergence and adoption. We aimed to provide evidence for adoption or against adoption from

the standpoint of preparers of financial statements. However, this result of our survey is also quite

relevant right now because it provides reference for the issues proposed in the Interim IFRS

Roadmap. The result of the survey is expected to provide implications for future standards setting

concerning mandatory application of IFRS and provide evidence for the establishing training and

supporting program for the application of IFRS in Japanese companies.

The following section firstly introduces background of Japan moving towards IFRS adoption

to indicate the importance of strategy about the structuring of accounting system based on

comprehensive understanding of situation of Japanese company and accounting context. Then

section 3 specifies the significance of Interim IFRS Roadmap and important issues concerning

adoption that is to be taken into consideration. In section 4, the most important influential factors

that effect accounting practices of Japanese company, the feature of Japanese accounting and

difference between IFRS and Japanese GAAP which direct relate to the problems concerning

application of IFRS in Japanese companies. In section 5, based on the analysis in section 3and 4,

we investigate Japanese managers’ opinions on issues concerning IFRS application and the

perceived proper way of application. Finally, some problems facing companies will be identified

and concluding remarks are provided. .

2. Background --Accounting development towards adoption

Since 1997, Japanese government made the decision on the basic policy of Japanese Financial

Big Bang, trying to sweep away the lack of transparency that has been said to characterize the Tokyo

market and to improve the globalization by a constant devotion to global standards instead of a focus

on domestic logic. In the following ten years, Japan has conducted extensive reforms in its

accounting system and commercial code towards the International standards, which is well known as

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“Accounting Big Bang”. By these reforms, Japanese accounting becomes quite similar to the IAS /

IFRS. Notwithstanding, there are still some difference left in specific accounting standards.

However, since there was a lack of a clear strategy about the structuring of the accounting

system, the regulator’s opinion towards IAS/IFRS adoption kept changing. In 2002 and 2003,

Japanese Financial Services Agency, the Ministry of Justice and Nippon Keidanren1 expressed

negative opinion towards the adoption of IAS. In contrast, there appeared a international trend of

convergence with IFRS during that time and this trend spread since then. On 29 October 2002, the

International Accounting Standards Board and the US Financial Accounting Standards Board jointly

issued a memorandum of understanding formalizing their commitment to the convergence of US and

international accounting standards. Moreover, in the following year 2005 which might be seen as

the beginning of a new era for financial reporting, International Accounting Standards (IAS)/

International Financial Reporting Standards(IFRS) were required to be applied in EU countries.

Then in this trend, in Japan on March 2005, a joint project on the convergence of Japanese GAAP

and IFRS was established to analyze and discuss the equivalent of Japanese GAAP and IFRS (Koga

and Rimmel 2006). Nippon Keidanren changed its opinion in favor of convergence with IAS in

2006, 3 years after they expressed negative opinion towards adoption. But there was still no real

progress. In 2007, the publication of SEC’s Concept Release on Allowing U.S Issuers to Prepare

Financial Statements in Accordance with International Financial Reporting Standards (the Concept

Release) and its proposal, Acceptance from Foreign Private Issuers of Financial Statements

prepared in accordance with International Financial Reporting Standards without Reconciliation to

US GAAP, made Japan find itself dropping out in the global trend. Therefore, generally speaking,

after the Big Bang, Japan seems lagged behind compared with its European and US counterparts in

converging with IAS / IFRS. The changing opinion of the regulators seems to caused by external

1 Nippon Keidanren (Japan Business Federation) is a comprehensive economic organization born in May 2002 by amalgamation of Keidanren (Japan Federation of Economic Organizations) and Nikkeiren (Japan Federation of Employers' Associations). Its membership of 1,662 is comprised of 1,343 companies, 130 industrial associations, and 47 regional economic organizations (as of June 22, 2007).

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influences of international trend and the lack of strategy based on comprehensive understanding of

the state of Japanese company, its accounting environment .

3. The publication of Interim IFRS Roadmap

What represent Japan’s major step towards adoption is the publication of the “Interim IFRS

Roadmap” which represents positive attitudes of the Financial Service Agency towards the adoption

of IFRS. The Business Accounting Council (BAC), a key advisory body to the Commissioner of the

Financial Services Agency (FSA), approved the roadmap for the adoption of International Financial

Reporting Standards (IFRSs) in Japan. Sir David Tweedie, Chairman of the IASB commented on

announcement:

this is a landmark decision, both for Japan and for IFRSs. For Japan, it signals the eventual

adoption of IFRSs. For the IASB, adoption of IFRSs by the world’s second largest national economy

underscores the truly global nature of IFRSs and the acceptance of these standards by all major

economies.

In the Interim IFRS Roadmap, continuing convergence is emphasized. At the same time, the

directions for Japanese GAAP are indicated, covering topics on issues concerning the application of

IFRS in Japan and the required approach. These issues include optimal application and

considerations for the mandatory application of IFRS in Japan, for example, scope and methods for

mandatory application, treatment on non-consolidated financial statement and etc.

One of the arguments for adoption of IFRS is that adopting IFRS can improve the

comparability of accounting information and improve the transparency. The mission of IASB is to

develop a single set of high-quality, global accounting standards that are accepted worldwide.

Though IFRS provide possibility to improve the comparability, it should be noted that comparability

should not be confused with uniformity as comparability means that like things should look alike

and different things should look different(Barth 2008). It is obvious that there are major

international differences existing in accounting practices and the possible causes of differences

might not be completely deleted even if we adopt the international accounting standards(Alexander,

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and Nobes 2009). Therefore, IFRS, if to be adopted in Japan, must faithfully reflect the economic

reality of businesses and trade practices in Japan, as well as the global financial and capital market.

So the continuing convergence is still emphasized in the Interim IFRS Roadmap.

On the other hand, though the interim IFRS Roadmap show a stance of acceptance of IFRS, there

still left a lot of problems to be tackled including the above issues indicated in the report because of

existing differences between IFRS and Japanese GAAP and the cause of the difference which may

not be deleted entirely. As we know, accounting standards can be regarded as fully functional only

if financial reports are appropriately prepared. Therefore, when the way of adoption, especially

mandatory application is to be determined, the feature of Japanese accounting, the situation of

Japanese companies, the difference between IFRS and Japanese GAAP, and other related issues

should be understand, just as it is made clear in the Interim IFRS Roadmap:

……Japan must be prepared to take on the issue of mandatory application of IFRS from a broad

range of perspectives, defining the path to be taken in the case of making the use of IFRS by a

certain range of Japanese companies mandatory, while attending to the various aforementioned

conditions in Japan and abroad……

4. The feature of Japanese accounting

In this section, we will analysis the major environmental factors that influence companies’

accounting practices – to be specific, factors that directly influence the incentive to implement IFRS,

the feature of Japanese accounting, and the major difference between IFRS and Japanese GAAP so

that we can acquire an understanding of relevant issues which should be considered in making the

final decision on whether and how IFRS should be required to be complied with.

First, a large list of possible causes of international differences can be found in the writings of

previous researchers (e.g. Choi and Meek, 2005, Nobes C and R Parker, 2008). For example, the

most frequently referred factors that might influence the accounting development are cultures, legal

environment, providers of finance, taxation, profession of accounting profession and other external

influences such as economic, political events and international influences. Though international

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influence seems to be the most influential factor which spurred the adoption of IFRS in a world wide

scope, in both countries with a strong equity market and weak equity market, however accounting

standards are not set to follow the fashion.

Among all the above factors that affect accounting development, financing system, to be

specific, the providers of finance, apart from international influences has been regarded as the main

explanatory variable for the most important international differences in financial reporting. In

countries, where capital provided by banks or family company is very important, the banks or family

company may nominate directors and thus be able to obtain restricted information and to affect

decisions. In this case, the need for published information is much smaller because of this access to

private information. In other countries where the major source of corporate finance has been the

share capital and loan capital provided by large numbers of private investors, especially foreign

investors, there is relatively strong requires for unbiased information about the success of a business

and its state of affairs. It is reasonable to assume that companies with different capital structures

might have different opinion on IFRS.

Japan seems to be a unique case. It has a fairly important equity market, although not as

important as that in the US or the UK. Furthermore, many Japanese companies own shares in each

other, and so the total number of listed companies and market value is exaggerated when making an

international comparison. Thus, to understand the major finance resource of Japanese company and

their perception on the importance of domestic and foreign equity market is a way to decide whether

there is a need for mandatory adoption.

Second, Japan accounting has both German and US features. The Japanese accounting system

consists largely of a commercial code borrowed from Germany in the late nineteenth century,

overlaid with US-style securities laws imposed in the late 1940s. Japan accounting standards are

characterized as rule-based which are similar to U.S. GAAP, while contrast to IFRS which are

characterized as principle-based. In converging an accounting standard to the IAS, there are two

approaches: the“Principle based approach” and the “ Rule based approach”. Under the former, the

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accounting standards are set based on general principles and the professional judgment of the

financial statements makers while under the latter the accounting standards are set based on more

detailed and clear rules. Continuing convergence with IFRS should solve the confliction between

rule-base and principle-based accounting standards. On the other hand, complete adoption of IFRS

might mean a change from rule-based to principle-based accounting standards which are assumed to

have great impact on financial statement preparers.

Third, the major difference in accounting standards between IFRS and Japanese GAAP are

concerning recognition of revenue, R&D, financial instrument, lease accounting and etc. These

differences are rooted in basic accounting idea in the two set of accounting standards. The basic

ideas of IFRS are principle-based, statement of financial position-focused, and fair value accounting,

while Japan accounting are rule-based, attach great importance to income statements. While the

resulting concrete differences in standards have different importance to Japanese companies, it is

relevant to understand the relative importance of all the difference in accounting standards.

5. Investigation on manager’s opinion on IFRS adoption

With the above consideration in mind, we made a survey trying to acquire some knowledge on

the necessity of adoption and possible problems concerning adoption from the view of financial

statement preparers – in this paper, we refer to CFO and accounting managers of Japanese

companies. In a postal questionnaire, we asked questions investigating their understanding of and

attitude towards IFRS adoption and present situation of IFRS application in Japanese companies.

5.1 structure of investigation questionnaire

Since provider of finance is one of the most important factors that influence the accounting

practice, it is helpful to know the capital structure and major finance sources of investigated

companies. It is also relevant to understand how the accounting managers are prepared for

adoption, for example to explore how important they think of the difference in accounting standards

between domestic accounting standards and IFRS, how they prefer IFRS to be adopted, present

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adoption of IFRS in their company, the difficulties or other considerations that concerning the

application of IFRS. Furthermore, as Japanese accounting are rule-based while IFRS are principle

based, if IFRS is to be adopted, this contradiction should be relieved. It is also important to

understand the accounting manager’s opinion on principle-based and rule-based accounting because

the character of accounting standards directly affects manager’s judgment and their accounting

practice. Therefore, our questionnaire was made up of four parts:

(1) Major finance sources and users of financial statements

(2) attitude towards and opinion on the adoption of IFRS

(3) the present situation of IFRS application

(4) The convergence approach of accounting standards

5.2 Sample selection and collection of responses

The sample selection and collection of responses of each investigation are summarized as

follows. The investigation selected 500 companies within which 67 are Japanese companies

according to the sales rank of Fortune Global 500 of 2007. The questionnaires were sent to the

CFO or senior managers of these companies. 115 useful responses were received (the response rate

23%) within which 57 are Japanese companies (response rate is 89%). In the current paper, we only

analyze the data of Japanese companies. The companies which are permitted to optimally apply

and are possible to be required to apply IFRS to their financial statements in the Interim IFRS

Roadmap are those which have global financial or business activities. The investigated companies

are possible to fall into the scope of optimal application and future mandatory application of IFRS.

5.3 Results and analysis

The respondent percentages reported in this paper are based upon the total number of responses

to the questions. The design of the questionnaire allowed multiple answers for some questions.

Consequently, the combined responses for some questions may exceed 100 percent.

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(1) Major finance sources and users of financial statements

The first question asked the managers’ views on the importance of domestic and overseas stock

markets to their companies, as well as the importance of the stock market and bond market. 5 point

Likert scale was used for measurement ranging from 1= not important at all, 3=not so important. 5=

very important).

As is shown in Figure 1, domestic market was regarded by the largest category, 65% respondents,

as being very important to their business activities. 42% respondent indicated that domestic bond

market was very important. 23% respondent rated the overseas stock market as either important or

very important. Though the majority of respondents rated the overseas markets not as of the same

importance as the domestic markets, in general, they do regarded overseas market as important.

Figure 1 Importance of markets to Japanese business operations (2008)

Table 1 Importance of Markets

2008

average

Domestic stock market 4.508772 (n=57)

Domestic bond market 4.175439 (n=57)

Overseas stock market 3.614035 (n=56)

Overseas bond market 3.54386 (n=56)

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Compared with domestic market, the perceived less importance of overseas markets may

suggest that Japanese companies are relatively lack of attention to overseas users of financial

statements that may lead to the lack of incentive to adopt international accounting standards. To

confirm this, the second question in the questionnaire use 5point Likert scale as previously described,

to sought how CFOs or senior managers view on the importance of financial statements to various

users.

Figure2 Perceived Importance of Financial Statements to Users (2008)

Table2 Comparison of Perceived Importance of Financial Statements to Users

2008 average

Domestic institutional investors – stock market 4.631579(n=57)

Domestic institutional investors – bond market 4.157895 (n=56)

Domestic individual investors – stock market 4.263158 (n=57)

Domestic individual investors – bond market 3.839286(n=56)

Overseas institutional investors – stock market 4.385965(n=57)

Overseas institutional investors – bond market 3.982143 (n=56)

Overseas individual investors – stock market 3.614035 (n=57)

Overseas individual investors – bond market 3.321429 (n=56)

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Table 2 shows that the respondents as a whole think financial statements are important to most of

the users. Generally, the respondents expressed an assessment that financial statements are more

important to domestic investors than overseas investors. Even for overseas investors, financial

statements are important. 42% respondents think that financial statements are very important to

individual investors in stock market, while 70% think that the financial statements are very

important to institutional investors. But for investors in the overseas stock market, 60%

respondents think financial statements are important to institutional investors while only 26% regard

them to be very important to individual investors.

We had made a similar survey in 1997, by comparing the result, we find that the managers’

perception that financial statements are most important to domestic institutional investors compared

to other users kept unchanged during the past decade .

We also investigate the foreign ownership of each company. Almost 10% respondents stated

that their overseas investment are 0 percent while 48% respondents, the largest group, stated that the

foreign ownership is within “1～10％”, 12% respondents choose “11%~20%”, 20% respondents

choose “21%~40%”, while 10% respondents said their foreign ownership is “over 40%”.

(2) Attitude towards and opinion on the adoption of IFRS

The fourth question asked the respondent ways by which they prefer IFRS to adopted. There are

show three options. The three options are (1) only adopt IFRS or US GAAP, (2) use both IFRS (for

overseas use) and Japanese GAAP (for domestic use), (3) use international accounting standards as

supplementation to Japanese GAAP. 41% respondents preferred to adopt only IFRS as the basic

financial statements standards. 29% respondents preferred to use IFRS as supplementation to

Japanese GAAP. Those who selected to use both IFRS and Japanese GAAP only occupies 11%,

that may be resulted from the high cost of using double standards and the complication of practices.

Then, the survey asked the respondents’ understanding of the difference of IFRS and Japanese

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accounting standards.

Figure 3 Importance of IFRS versus Japanese GAAP Difference by Areas

Table 4 Importance of Differences in Accounting Standards between Japanese GAAP and IFRS

Accounting standard 2008

(average) Accounting standard

2008 (average)

Goodwill 4.636364 Allowance 3.545455 Comprehensive income 4.327273 Fixed tangible assets 3.509091 The recognition of revenue 4.018182 Consolidated/SPC 3.490909 Business combination 3.981481 Investment property 3.363636 R&D 3.857143 Foreign currency 3.127273 Financial instrument 3.636364 Lease 2.872727 Impairment * Employee payment*

*additional indication by respondents

The results show that differences between Japanese GAAP and IFRS which are thought to the

most important are standards for goodwill, comprehensive income, recognition of revenue. The

different in accounting standards for business combination and R&D are also regarded as important.

In addition to those listed in the questionnaire, some respondents indicate that significant differences

existing in accounting for standards for impairment and payment to employee are also important.

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We also asked respondents to state their opinions on the change concerning the application of

international accounting standards 5 years from now. Most of the respondents expected that IFRS

would be increasingly used only in consolidated financial statements or in both consolidated and

parent company’s separated financial statements. The minority of the respondents considered that

IFRS would be adopted only in the parent company’s account or and as well as supplementary

disclosure. If the expectation of these respondents is correct, they will need to plan for the switch

to IFRS.

Table 4 Expectation of Future Application of IFRS 2008

average Application only in Consolidated financial statements 1.5818

(n=55) Application only in parent company’s separate financial statements 2.3208

(n=53) Application in both consolidated and parent separate financial statements 1.8545

(n=55) Application only in supplementary disclosure 2.4717

(n=53)

The survey then asked whether the respondents agree with the statement that it would be difficult

to change from Japanese GAAP to IFRS. As is illustrated in the following figure, 55% respondents

think that it would be difficult to change from Japanese GAAP to IFRS.

Figure4 Views on whether changing from Japanese GAAP to IFRS will be difficult (2008)

strongly agree

agree

slightly agree

disagree

strongly disagree

(3) The present situation of IFRS application

Only 2 out of 57 usable respondents reported that they are currently adopting IFRS when asked.

There are other 2 Japanese companies answered that they are going to adopt IFRS though they are

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not using at the moment. However, the vast majority(93.0%) of the respondents noted that IFRS are

not being adopted and they are not sure whether they will adopt it or not in the future.

We asked respondents who indicated that they are not yet adopting IFRS to explore the main

reason why IFRS were not being adopted. The reasons suggested by respondents are as follows:

(1) the cost is too high (10.5% respondents)、(2)there is inadequate staff training system(24.5%

respondents)、(3)the international accounting standards are inconsistent with Japanese accounting

standards (38.5%respondents)、(4)there is little benefit from the adoption of International accounting

standards (22.8%respondents)、(5)it was not legally required to adopt IFRS (52.6% respondents)、

(6)others (14.0%respondents）。Multiple choices are allowed. And respondents could cite other

reasons. It became clear that the lack of legal requirement is the main reason for the uncertainty in

the future adaptation of IFRS.

We then use the 5 point Likert scale to measure the respondents’ perceived importance

concerning the benefit of adopting IFRS. The expected benefits are: (1) improve the trust and

understanding of securities investors, （2）improve the trust and understanding of bond investors, (3)

make it easier to issue securities in international markets, (4)reduce the cost of raising bond capital,

(5)improve the international image of the company、(6) reduce the barriers to list in overseas stock

market,(7) to reduce the cost of making financial statements. The majority of the respondents

perceived that the most important benefits of IFRS adoption were to make it easier to issue securities

in international markets(61%), “ improve the trust and understanding securities investors”(58%),

“reduce the barriers to list in overseas stock market”(51%). It is obvious that the greatest benefit of

IFRS adoption is related to international market, international status and international fund-raising.

Only 9% respondents think “reduce the cost of making financial statements” as important or very

important factors.

It is interesting that the perceived benefits over years changes. To be specific, respondents in

2008 investigation think more negatively about the IFRS adoption and they perceived less benefit

than those did in 1997. For example, in 1997, Japanese managers regarded “improve the trust and

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understanding of stock investors” as very important benefit while in 2008 they did not attached great

importance to it. One of the reasons for it may be that the managers have fully realized the

achievement of accounting convergence towards IFRS through the Accounting Big Bang after 1997.

Table 5 Perceived benefit of IFRS adoption

2008 average

Improve the trust and understanding of stock investors 3.754386 (n=57)

Improve the trust and understanding of bond investors 3.684211 (n=57)

Make it easier to issue securities in international markets 3.929825 (n=57)

Reduce the cost of raising bond capital 3.245614 (n=57)

Improve the international image of the company 3.473684 (n=57)

Reduce the barriers to list in overseas markets 3.789474 (n=57)

Reduce the cost of making financial statements 2.263158 (n=57)

Then the questionnaire asked the accounting managers to state their perception on the relationship

of cost and benefit. The respondents showed some kind of skeptical about the benefit of IFRS

adoption. Indeed, 63% respondents thought that cost would exceed benefit, while 15% indicate that

cost would almost equal benefit, only 1.8% expected that benefit would exceed cost should the IFRS

be adopted.

Figure 5 Cost-benefit analysis of IFRS adoption (2008)

benefits greatly exceedcosts

benefits slightly exceedcosts

benefits equal costs

costs lightly exceed benefits

costs greatly exceedbenefits

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(4) The convergence approach of accounting standards

Furthermore, as for the approach – by principle-based approach or rule-based approach— to

adopt international accounting standards, 60% respondents regarded principle-based approach as

more appropriated. The main reason was described as the accounting under principle standards

reflects the substance of economy and it is easier to implement IFRS in practice because detailed

rules which might impediment usage of IFRS in Japanese context. In contrast, only 25% think

rule-based approach is better with the main argument being that the accounting method is clearly

prescribed so that it is easier for compliance in practice and the comparability of accounting

information will be improved.

4 Conclusion

The present research investigated issues concerning the application of IFRS in Japan from the

perspective of managers of Japanese companies—the preparers of financial statements.

In the first 3 sections of the paper, we have indicated that provider of finance, difference in the

basic idea and concrete standards between the IFRS and Japanese GAAP might influence the

financial statements preparer’ application of IFRS. These aspects should be taken into

consideration when the scope and approach of mandatory application of IFRS are to be decided.

By investigating the major finance of leading Japanese companies, the manager’s opinions on

adoption, and present adoption by Japanese companies and reasons for no adoption, we get to know:

(1) Over half of these largest companies have rather low foreign ownership (less than 10%). It is

obvious that the greatest benefit of IFRS adoption is related to international market,

international status and international fund-raising. Thus the Japanese companies expressed an

assessment that financial statements are more important to domestic investors than overseas

investors. Though the majority of respondents rated the overseas markets as being not so

important relative to the domestic markets, in general, they still regard overseas financing

market as important.

(2) The major differences in accounting standards concern recognition of revenue, R&D, lease and

financial instrument, while the differences thought to the most important by Japanese

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companies are standards for goodwill, comprehensive income, the recognition of revenue.

The different in accounting standards for business combination and R&D are also regarded as

important.

(3) Most of the respondents expected that IFRS would be increasingly used only in consolidated

financial statements or in both consolidated and parent company’s separated financial

statements.

(4) The main reasons why Japanese companies have not adopted IFRS include that there is not

legal requirement that IFRS be adopted, there are inconsistence exist between IFRS and

Japanese GAAP and inadequate training system. The reason why Japanese companies show

negative attitude towards IFRS adoption may be that the Japanese managers expect that the

application of IFRS would be difficult. Furthermore, with the convergence of Japanese

standards with IFRS, Japanese companies in 2008 are more confident to prepare their financial

statement under the domestic standards than before. Even without adopting IFRS, they

assume that they can get the trust and understanding of investors. And Japanese managers

expected that the cost would exceed the benefit for IFRS adoption.

(5) Principle-based accounting is thought to superior to rule-based accounting by managers of

Japanese companies.

The above survey results provide some implications for regulation consideration and training

programming. The following points call attention of regulators. Firstly, though the globalization

of Japanese economy and the filtering global standard (accounting standards, corporate governance)

has made steady progress, Japanese companies still kept prudent and passive in IFRS adoption.

This may be connected with the relative low foreign ownership in leading Japanese companies.

Though the investigated companies are all leading companies in Japan, the fund-raising policies and

proportion of foreign ownership are various. The Initial IFRS Roadmap suggests a phase-in

approach based on criteria such as the gross market value of each company-- a scheme proposed in

the US roadmap, the survey result may suggest for the phase-in approach based on criteria of both

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foreign ownership and gross market value, as the greatest benefit of IFRS adoption is related to

international market, international status and international fund-raising.

Secondly, one of the most important considerations concerning adoption of IFRS is that the cost

of adoption is expected to excess the benefit. The adoption of IFRS does not only influence

accounting practice, it also has an effect on other aspects of business such as the operating process,

management system, strategy making. For example, we have known that there are differences in

two set of accounting standards, one of which concerns standards for revenue recognition. In

Japanese GAAP, sales revenue is recognized at the time of shipment, while IFRS prescribe that sales

revenue can be recognized when risk and benefit of the goods have been transferred to the buyer so

that the revenue may not be recognized at the shipment time. If IFRS is required to be adopted,

Japanese companies which have recognized sales revenue on a shipment basis might have to change

the time of revenue recognition. This might result in changes in the internal control system,

information system, distribution system of the company and the amount yearly sales revenue which

further influence the business plan and strategy. These costs are beyond the direct costs only

related to accounting system. Cost-benefit tradeoff is one of the most important considerations of

preparers of financial statement so that it should also be important issues to be considered in

deciding mandatory application.

Furthermore, the lack of training system has been regarded as an important cause of Japanese

companies’ prudent attitude towards IFRS. The training should not only concentrate on the

detailed accounting standards, but also include content concerning the total influence IFRS adoption

might have on the whole business. Moreover, principle-based accounting standards are regarded by

a majority of companies as reflecting economic substance, thus to be superior. However, it requires

higher judgment capacity of preparers of financial statements. This not only requires a

comprehensive training program but also increases the cost of adoption.

In addition, the investigated companies has indicated several differences in accounting

standards that are important to their companies-- goodwill, comprehensive income, recognition of

revenue, which imply that in making a decision on mandatory application regarding whether to

20

apply IFRS as developed by the IASB or to make partial modifications or exclusions of IFRS, not

only the content of IFRS and the status of the setting of IFRS should be reviewed, but also these

influence on Japanese companies should be carefully investigated.

The current paper is written mainly from the standpoint of preparers of financial statements.

There are other perspectives should be taken into consideration when deciding application scope and

methods, for example the standpoint of accounting information users, auditors and other interested

parties. In addition, research shows some evidence that the adoption of IFRS itself does not lead to

high-quality information. Therefore, adoption will not necessarily lead to increased transparency

and interested parties’ trust of accounting information. Effective enforcement combined with high

quality standards leads to high value relevance information. Strong equity market is connected with

strong investor protection. Overall, international value-relevance of accounting information studies

provide some support for the argument that accounting information is more value-relevant in

countries with strong legal protection of outside investors(Habib 2007). Japan has a unique equity

market and accounting system which is discussed in section 4, therefore adoption of IFRS should

also be supplemented with taking into consideration of enforcement which can be analyzed in future

papers.

[2009.7.13 932]

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