[ Nippon Keidanren ] [ Policy ]

Nippon Keidanren Supports to Accelerate the Convergence of Accounting Standards and to Seek Mutual Recognition of Standards in Japan, the United States, and Europe

June 20, 2006
Nippon Keidanren

Nippon Keidanren fully supports the acceleration of convergence of accounting standards among the IFRS, U.S. GAAP, and Japanese GAAP. We think that the immediate task is to realize mutual recognition in the process of the work to eliminate reconciliation requirements among these standards. To achieve this objective, we propose that the Financial Services Agency, the Accounting Standards Board of Japan (ASBJ) and other related parties work together as one to strongly urge the European Commission (EC) and Securities and Exchange Commission (SEC) to agree on a framework to realize mutual recognition among authorities of Japan, the U.S., and the EU.

1. Concern about Isolation of Japanese Accounting Standards

With today's rapid advancement of globalization, the flow of people, goods, and funds is becoming ever more robust. Due to the instant traverse of funds in capital markets, companies and investors can now select the market with the best conditions and raise and invest funds at places they wish. Accordingly, international comparability of accounting standards is becoming of increased importance as part of business infrastructure.

From this perspective, Nippon Keidanren has consistently supported the convergence of accounting standards. Our stance is shown in the proposal entitled, "Seeking International Collaboration on Accounting Standards," which was issued in 2003. Japan has already developed a high quality accounting standards equivalent to the International Financial Reporting Standards (IFRS), as witnessed by the fact that the Committee of European Securities Regulators (CESR) deemed Japanese GAAP to be equivalent to IFRS.
The infrastructure of Japan's capital markets is also steadily being improved with a view to securing market credibility and transparency in financial information. As part of these efforts, every listed company in Japan will report on its internal control relating to financial statements and start quarterly reporting from fiscal 2008.

At the same time, another major step has been made in the area of the convergence of accounting standards. U.S. and European authorities and standard setters reached an agreement in February this year on the convergence of accounting standards and the elimination of the need for reconciliation requirements with the prospect of achieving mutual recognition of accounting standards in 2009. In concert, the European Commission submitted to the European Parliament a bill to defer the decision on equivalence of Japanese, U.S., and Canadian accounting standards until fiscal 2009. If the convergence of the IFRS and U.S. GAAP advances in the future, and Japanese standards are left from the move, it might send the world the wrong message that the Japanese standards are significantly different from IFRS and U.S. GAAP in nature. Nippon Keidanren is concerned that this situation might lead to the isolation of Japanese GAAP, and that it will hinder the activities of Japanese companies that are engaged in international business, thereby impairing the credibility of the Japanese market and Japanese companies.

2. Accelerating the Convergence of Accounting Standards and Seeking the Mutual Recognition of Standards

Japan should vitalize the nation's capital market and strengthen corporate dynamism while nurturing and developing globally-competitive and high-quality industry that creates products and services with high added value. The key tasks Japan has to tackle now, is to accelerate convergence and to realize the mutual recognition of standards among Japan, the United States, and Europe by 2009.

In achieving this task, Nippon Keidanren is determined to firmly support the acceleration of the convergence of accounting standards towards the elimination of reconciliation requirements. Along with this effort, we propose that the Financial Services Agency, the ASBJ, and other related parties in Japan work together as one to immediately urge the U.S. and European authorities to reach an agreement on a framework for the mutual recognition of accounting standards among the financial authorities of Japan, the United States, and Europe.

3. Concerns on the On-going Discussions at the IASB

The IASB needs to listen to the practical needs of market participants, including the preparers and users of financial statements as well as auditors and market supervisory bodies, in their work of developing accounting standards.
The discussions on such topics as performance reporting and accounting for financial instruments that are currently under way at the IASB are based too much on the asset and liability approach and are advancing in a direction that could lead to full fair value accounting. Nippon Keidanren is concerned that these discussions could hinder corporate strategy based on long-term perspective and instead encourage shortsighted business management. Nippon Keidanren actively participates in IASB's discussions and issues statements from the perspective that long-term perspective corporate management, under the going concern assumption, profits investors as a result. We expect the IASB to fully take our view into account and develop not "revolutional" accounting standards, but practical standards, based on actual economic activity that does not impose too much burden on companies.

In addition, Nippon Keidanren calls upon the Trustees of the International Accounting Standards Committee Foundation (IASCF) to play a greater role than they have in the past, in monitoring and supervising the IASB, to strengthen governance, and to guide the IASB to develop international accounting standards that are suited to the actual reality of corporate activities.

4. Issues to be Resolved - Challenges in Japan-

(1) Strengthening Communication Channels among Standard Setters

Nippon Keidanren actively supports the work of the International Accounting Standards Board (IASB), the U.S. Financial Accounting Standards Board (FASB), and the ASBJ —the world's main standard setters—and proposes that the three organizations enhance their mutual understanding by exchanging views periodically and developing accounting standards that are easier to use.

(2) Strengthening of the Role of the ASBJ in Developing Accounting Standards

Nippon Keidanren recognizes the importance of the role of the ASBJ, which is responsible for developing Japan's accounting standards, and will continue to support its activities. To play a central role with other world's standard setters in developing global, high-quality accounting standards, the ASBJ must further strengthen its current resource. Nippon Keidanren seeks the understanding and cooperation of related parties to help the ASBJ achieve this goal.

(3) Adjustment with the Corporation Tax System

To smoothly promote the convergence of accounting standards in the limited time available, the issue of taxable income bases for corporation tax must be resolved individually through close cooperation with the related authorities. Those decisions should be made with an eye to enhancing the competitiveness and dynamism of Japanese companies, so that they could compete in the global marketplace on an equal footing.

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