Question

Given that Japanese GAAP is different from US GAAP, what would be some of the steps US Companies need to take to reconcile their financial statements to Japanese GAAP (or vice versa) should a company decide to issue their statements in the other country?

Answer 1

Significant differences between Japanese GAAP and U.S. GAAP are summarized below. These differences are not necessarily the only differences and other differences may exist:-

1).Consolidated Subsidiaries:-

Japanese GAAP = The consolidated financial statements include all enterprises that are controlled by the parent, irrespective of the percentage of the voting shares owned. Control is defined as the power to govern the decision making body of an enterprise.

U.S. GAAP = Consolidated Subsidiaries Statement of Financial Accounting Standards (“SFAS”) No. 94 requires a parent company to consolidate all of its majority-owned subsidiaries with more than 50% of outstanding voting shares, subject to certain exceptions related to temporary control or the parent company’s inability to exercise control over the subsidiary.

2). Equity Method of Accounting:--

Japanese GAAP = Affiliates are enterprises over which SMFG has material influence with respect to their financial and operating policies. Investments in nonconsolidated subsidiaries or affiliates are accounted for by the equity method in the consolidated financial statements.

U.S. GAAP = Investments representing ownership of 20% to 50% of the outstanding voting shares are accounted for by the equity method. In addition, investments representing ownership of less than 20% are accounted for by the equity method if the investor has the ability to exercise significant influence over the entity in which it invests.

3). Business Combinations:-

Japanese GAAP = Accounting treatment that is similar to the poolingof-interest method is normally used for business combinations in accordance with the Commercial Code of Japan. Under the accounting treatment, the balance sheet items of the acquired company are combined with those of the acquiring company at their carrying amount or fair value. The Accounting Standards Board of Japan published “Opinion Concerning Establishment of Accounting Standard for Business Combination” in October 2003. According to the opinion, from the fiscal year starting April 1, 2006, new accounting standard is required to be applied. Under the new accounting standard, purchase method is the basic method. Pooling of interests method is applied only to exceptionally limited circumstances when strict criteria are met

U.S. GAAP = SFAS No. 141, Accounting for Business Combinations, prescribes the purchase method for all business combinations. The purchase method requires the valuation of the acquired assets and liabilities based on fair market values at the time of combination. The difference between the fair market values of the net assets and the consideration given represents goodwill.

4). Accounting for Sales of Loans with Recourse:-

Japanese GAAP = Certain loan participations which meet specified criteria are allowed to be accounted for as sales, even though the loans are not legally isolated from the transferor.

U.S. GAAP = Under U.S. GAAP, pursuant to SFAS No. 140, financial assets are generally recorded as sold and removed from the balance sheet only when the following conditions have been met: legal title has passed; the financial assets are beyond the reach of the transferor’s creditors, even in bankruptcy or receivership; the purchaser obtains the asset free of conditions that constrain it from taking advantage of the right to pledge or sell the asset; and the transferor does not maintain effective control over the assets as defined. Sales that are not free of such constraints are recorded as a financing. A transfer of assets qualifying as a sale under U.S. GAAP but in connection with which the seller has assumed a limited recourse obligation would result in the recording of a liability for the estimated recourse.

5). Accrued Interest on Non-Performing Loans:-

Japanese GAAP = Accrued Interest on Non-Performing Loans Consolidated subsidiaries places into the non-accrual status loans which management assesses as “Bankrupt,” “Effectively Bankrupt” or “Potentially Bankrupt.” Accrued interest related to such loans is written-off.

U.S. GAAP = Loans are placed on non-accrual status when they are deemed uncollectible based on management’s assessment. Accrued interest related to such loans is reversed against interest income. Income is generally recognized on such loans using either a cost-recovery method, cash-basis method or some combination of those methods.

6). Goodwill:-

Japanese GAAP = Goodwill that is the excess of investment cost over the parent’s share of the underlying equity in net assets of the subsidiary at the date of acquisition and that is created in consolidation procedures shall be amortized within 20 years. According to the “Opinion Concerning Establishment of Accounting Standard for Business Combination” issued in October 2003, goodwill is strictly amortized within 20 years using a systematic method, with impairment test in addition.

U.S. GAAP = Under SFAS No. 142, goodwill is not amortized but tested at least annually for impairment.