Question

Discuss the implications of the growing move to accept most of the IASB standards. How does this affect Japanese and US companies, which lag behind?

Answer 1

The International Accounting Standards Board (IASB) is an independent, private-sector body that develops and approves International Financial Reporting Standards (IFRSs). The IASB operates under the oversight of the IFRS Foundation. The IASB was formed in 2001 to replace the International Accounting Standards Committee (IASC). A full history of the IASB and the IASC going back to 1973 is available on the IASB website.

Currently, the IASB has 14 members.

The IASB's role

Under the IFRS Foundation Constitution, the IASB has complete responsibility for all technical matters of the IFRS Foundation including:

full discretion in developing and pursuing its technical agenda, subject to certain consultation requirements with the Trustees and the public the preparation and issuing of IFRSs (other than Interpretations) and exposure drafts, following the due process stipulated in the Constitution the approval and issuing of Interpretations developed by the IFRS Interpretations Committee.

Funding         

The IFRS Foundation raises funds for the operation of the IASB.Most contributors are banks and other companies which use or have an interest in promoting international standards. In 2008, American companies gave £2.4 million, more than those of any other country. However, contributions fell in the wake of the financial crisis of 2007–2010, and a shortfall was reported in 2010. Academics such as Oxford professor Karthik Ramanna have criticized this arrangement as facilitating regulatory capture.

Japanese and US companies veiws towards IASB

Japan has accounting standards to spare. Indeed, even as other countries simplify their financial reporting, Japan’s internal debate over standards has led to the proliferation of accounting options. Businesses already use Japanese GAAP (JGAAP) and can also voluntarily plumb for either US standards or what may be called pure International Financial Reporting Standards (IFRS), as issued by the international standard setter. But with debate raging over the use of full IFRS Japanese companies will shortly be presented with yet another set of standards to opt for - a kind of IFRS light, or, as locals have dubbed it, J-IFRS

The big advance towards reform came in 2007 with the signing of the Tokyo agreement in which the Accounting Standards Board of Japan (ASBJ) and the International Accounting Standards Board (IASB) agreed to accelerate the “convergence” between IFRS and JGAAP. Two years later in 2009 Japan’s financial regulator, the Financial Services Agency (FSA), revealed a roadmap toward adoption of IFRS which established 2012 as decision year for coming down for or against, with implementation to start in the financial year 2015/16. In reality Japan was understood to be waiting to see which way the US would move.

And the timetable did not hold. In 2011 finance minister Shozabaru Jimi signalled that 2015 was not the year when things would happen and that five to seven years notice would be needed in any case. Then came the Fukushima earthquake and the timetable for change was undermined again as officials insisted resources had to be focused elsewhere (though some local observers view this as a cynical cover story). A year later the FSA released a paper on IFRS which discussed the standards only in terms of “voluntary” use, a sign that enthusiasm for mandatory adoption had cooled, even if the general direction of travel had not changed.

June this year saw significant developments. In a surprise move the FSA revealed plans to encourage more companies to use IFRS on a “voluntary” basis by relaxing the rules over who could use them, further undermining the idea of a “mandatory” move to the standards. But the big announcement was that it would introduce a fourth set of standards, J-IFRS (IFRS with modifications), which could also be used on a voluntary basis.

Objection

Debate continues to rage over the future of accounting in Japan. On one side are those who seek to embrace IFRS because it enables the country to more easily function in the global economy and, on the other, those who believe it doesn’t fit the country’s “business climate”.

Debate continues to rage over the future of accounting in Japan

Tangled up with those concerns are a number of secondary issues. IFRS is said to be too expensive to implement, especially for smaller companies, and it would add to the volume of disclosures required (something Australian companies have bitterly complained about). Mostly though the complaints are about control.

It is claimed that key bits of pure IFRS would significantly change Japanese accounting practice, even that it has the potential to change business practice. Those causing most offence are the IASB’s approach to the amortisation of goodwill, whether development costs are recognised as assets, the valuation of shares in non-listed companies at fair value and a tricky debate over the current practice in Japan of allowing gains and losses made on Other Comprehensive Income (OCI) to be “recycled” to the income statement.Some argue that halting the recycling would encourage companies to liquidate equity investments and that the amortisation could transform the approach to mergers and acquisitions.