IFRS-JGAAP comparison. English version 1.0

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1 - comparison English version 1.0

2 Contents Contents... 2 Introduction... 3 Presentation of Financial Statements, Assets Held for Sale and Discontinued Operations... 4 Consolidation, Equity Method & Joint Ventures... 7 Business Combinations Inventory Intangible Assets and Research and Development Costs Fixed Assets Investment Property Impairment of Assets Leases Financial Instruments Foreign Currency Income Tax Revenue Recognition, Construction Contracts Share-Based Payments Employee Benefits, excluding Share-Based Payments. 49 Appendix-The Development of

3 Introduction Today, in a move towards improving the comparability of financial statements and to reducing the costs of raising capital in international markets, countries are converging their national accounting standards with International Financial Reporting Standards ( ) or are adopting itself. In Japan too, The Accounting Standards Board of Japan ( ASBJ ) and the International Accounting Standards Board ( IASB ) concluded the Tokyo Agreement in August 2007 and agreed to the acceleration of convergence. Specifically, it is planned that the significant differences between Japanese generally accepted accounting principles ( ) and will be eliminated by the end of 2008 and that the remaining differences will be eliminated by 30 June Through the convergence project consistent with that agreement, the differences between and have been eliminated to a considerable extent. However, a number of differences remain between and because convergence based on the Tokyo Agreement is ongoing and as revisions continue to be made and new standards issued in. In this booklet, we outline the differences between the two sets of standards by accounting topic. It is not possible to describe comprehensively every difference which could arise in accounting for all transactions, and we have focused as much as possible on those differences which are considered to be most common. We have taken care in preparing this booklet. However as the information is summarised, this booklet is intended to be used as general guidance only and is not intended to be used as detailed advice or in place of professional judgment. Ernst & Young ShinNihon LLC, Ernst & Young Global and any member firm thereof, will not be responsible should any damages or losses arise as a result of the use of this booklet. The information contained herein is based on accounting standards effective as at 1 January

4 Presentation of Financial Statements, Assets Held for Sale and Discontinued Operations Significant Differences Accounting periods required to be presented (Regulation for Terminology, Forms and Preparation of Consolidated Financial Statements: Presentation) The prior period and the current period consolidated financial statements must be presented comparatively. (IAS1.38) Comparative information, as a minimum for one previous period, shall be disclosed for all amounts reported in the financial statements. Components of financial statements (Regulation for Terminology, Forms and Preparation of Consolidated Financial Statements: Presentation) The following statements must be prepared: Consolidated Balance Sheet Consolidated Profit and Loss Statement Consolidated Statement of Changes in Shareholders Equity Consolidated Cash Flow Statements Accounting Policies and Other Explanatory Information Consolidated Supplementary Information (IAS1.10) The following statements must be prepared: Statement of Financial Position Statement of Comprehensive Income Statement of Changes in Equity Statement of Cash Flow Accounting Policies and Other Explanatory Information Titles other than those listed above may be used for these statements. Presentation of extraordinary gains and losses (Regulation for Terminology, Forms and Preparation of Financial Statements 95-2,3) Items related to extraordinary gains and losses are presented by category in accordance with the nature of the items. (IAS1.87) Extraordinary items shall not be presented in the statement of comprehensive income (profit and loss statement) or in the notes. 4

5 Changes in accounting policies Changes in accounting estimates Corrections of errors (Regulation for Terminology, Forms and Preparation of Consolidated Financial Statements 14) The amounts of prior periods are not restated, the effect of the change of accounting policy is disclosed in the notes only. This disclosure is of the impact of the change on the period in which the change takes place and is the amount that would have been recorded had the previous accounting policy been used in the current period. (Regulation for Terminology, Forms and Preparation of Consolidated Financial Statements 15) The effect of the change is adjusted in the profit and loss of the year in which the change in accounting estimate is made only. <Changes in method of depreciation> A change in the method of depreciation is considered to be a change of accounting policy and therefore, the above required disclosures are given. (Corporate Accounting Principles 2.12) There is no specific rule regarding the corrections of material errors, however corrections of errors to the prior periods financial statements are recorded as extraordinary items (adjustments in relation to prior period) in the profit and loss statement of the period in which they are found. (IAS8.22) Changes in accounting policies are applied retrospectively by adjusting the opening balance of each component of equity for the earliest period presented as if the new policy had always been applied. (IAS8.35,36) Changes in accounting estimates are not adjustments to prior periods or corrections of errors. They shall be adjusted in the current period and future periods, as appropriate, only. <Changes in method of depreciation> Under, a change in the method of depreciation is considered to be a change of accounting estimate. (IAS8.42) Except for when it is impracticable to determine the period-specific effect or the cumulative effect, a material error shall be corrected retrospectively by: restating the comparative amounts in the prior period in which the error occurred; or if the error occurred before the earliest period presented, restating the opening balances of assets, liabilities and equity for the earliest period presented. 5

6 Departure from a requirement in order to give fair presentation Non-current assets classified as held for sale (and disposal groups) Depreciation of non-current assets classified as held for sale Presentation of discontinued operations First time adoption No such rule exists. There is no specific rule. However, under the Standard for the Impairment of Fixed Assets, note 2, as examples of indicators of impairment, disposal of a business operation and restructurings, changes in purpose of use etc. are given. There is no specific rule. There is no specific rule. There is no clear required treatment. However, where companies which have not previously prepared financial statements prepare these for the first time, with respect to the opening consolidated balance sheet, there are many cases in which the notes state that there are no comparatives to the financial statements in the first year of presentation. 6 (IAS1.19,20) There are cases, in the extremely rare circumstances in which compliance with a requirement in an would be so misleading that it would conflict with or be contrary to the Framework for the Preparation and Presentation of Financial Statements, where it is necessary to depart from that requirement (the fair presentation override ). (5.6,15,16) If the carrying value of assets will be recovered principally through a sale transaction rather than through continuing use, the asset (or disposal group) shall be classified as held for sale and shall be measured at the lower of carrying amount and fair value less costs to sell. (5.25) Non-current assets (or disposal groups) classified as held for sale are not depreciated. (5.30,33,38) The following amounts must be separated from the amounts arising from continuing operations in the statement of comprehensive income (profit and loss statement): the post-tax profit or loss of discontinued operations; the post-tax gain or loss recognised on the measurement to fair value less costs to sell or on disposal. (1) In principle, all effective accounting standards must be applied in the first financial statements. By way of exception however, there are certain retrospective applications of standards which may be exempted and there are others which are prohibited.

7 Consolidation, Equity Method & Joint Ventures Significant differences Scope of consolidation (Regulation for Terminology, Forms and Preparation of Consolidated Financial Statements 5) The scope of consolidation is based on the concept of control. Control exists when one company has control over the decision making body of another company. (IAS27.12,13,14) The scope of consolidation is based on the concept of control. Control exists when the parent entity is able to govern the financial and operating policies of another entity so as to obtain benefits from that entity s activities. When assessing whether an entity has control over another entity, potentially exercisable or convertible instruments with voting rights are considered. Scope of consolidation (exception) Special purpose entities (SPEs) (Regulation for Terminology, Forms and Preparation of Consolidated Financial Statements 5) The following entities are excluded from the scope of consolidation: subsidiaries where control is temporary; subsidiaries which, if consolidated, would give rise to the risk of substantially misleading the judgment of interested parties (Treatment of the revision of the scope of consolidation) (Treatment in practice regarding the control and the influence standards in relation to investment vehicles) Certain SPEs which meet certain conditions are presumed not to meet the definition of subsidiaries. The scope of consolidation of investment vehicles is in principle judged based on the existence of control over operations. All entities, which are in substance controlled must be consolidated, there are no exceptions similar to the exception. However, investments which are classified as held for sale in accordance with 5 are accounted for in accordance with 5. (SIC12.8) SPEs shall be consolidated when the substance of the relationship between an entity and the SPE indicates that the SPE is controlled by the entity. 7

8 Presentation of profit or loss attributable to minority interests Changes in parent s ownership interest which do not result in loss of control Loss of control of a subsidiary Equity methodscope (Regulation for Terminology, Forms and Preparation of Consolidated Financial Statements 65) Profit (or loss) attributable to minority interests is presented as a deduction from net profit for the period after tax. Consolidated Financial Statements 5) The difference between the additional investment and the additional ownership interest is goodwill. The difference between the decrease in the investment and the decrease in the ownership interest is reflected in the profit or loss on disposal of an interest in a subsidiary. (Practical Guidance on Accounting Standards for Capital Consolidation Procedures in Preparing Consolidated Financial Statements 45,46) When the remaining investment represents an investment in an associate, the investment is valued using the equity method. When the remaining investment is not an associate, it is valued based on its carrying value in the separate financial statements of the parent. Consolidated Financial Statements 4,8) Non-consolidated subsidiaries and investments in associates are, in principle, accounted for using the equity method. (IAS1.83) Profit or loss and total comprehensive income for the period attributable to non-controlling interests (minority interests) and to the parent company are disclosed as allocations for the period in the statement of comprehensive income. (Currently effective standard) There is no clear rule. (Revised standard) (IAS27.30) Effective for accounting periods commencing on or after 1 July 2009, these are treated for as equity transactions. (Currently effective standard) (IAS27.32) The parent company recognises any remaining interest at cost in accordance with IAS39 on the date that the entity is no longer a subsidiary. (Revised standard) (IAS27.34) The parent company recognises any remaining interest at its fair value at the date that control is lost. (IAS28.1,3,4,13) In principle, all investments in associates are accounted for using the equity method. (In there are no non-consolidated subsidiary rules) 8

9 Equity methodscope (exception) Discontinuance of equity method Joint ventures (Regulation for Terminology, Forms and Preparation of Consolidated Financial Statements 10) The following investments are excluded from the application of the equity method: associates where control is temporary; associates, which, if the equity method were to be applied, would give rise to the risk of substantially misleading the judgment of interested parties (Practical Guidance on Accounting Standards for Investments, Using the Equity Method 19) When an entity ceases to be an associate as the result of sale or another event, any remaining investment in shares is valued at the carrying value of the investment in the separate financial statements of the investor. (Treatment of the revision of the scope of consolidation 2.2) As it is not considered to be appropriate to proportionately consolidate certain assets or liabilities etc. of joint ventures when such assets have substance, they should be fully consolidated by one of the JV partners. Such investments may be accounted for using the equity method by other related entities rather than by proportionate consolidation. (IAS28.13,14) All entities over which an entity has significant influence are accounted for using the equity method. However, investments which are classified as held for sale in accordance with 5 are accounted for in accordance with 5. (Currently effective standard) (IAS28.19) The investment is accounted for in accordance with IAS39 as a financial asset and the book value of the investment at the time it ceases to be an associate, is its cost on initial recognition. (Revised standard) (IAS28.19) For periods commencing on or after 1 July 2009, it is accounted for in accordance with IAS39 as a financial asset and the fair value of the investment at the date it ceases to be an associate is its fair value on initial recognition. (IAS31.30,38) Of joint ventures, jointly controlled operations are accounted for by either of the following methods: proportionate consolidation; or equity method. 9

10 Separate financial statements: subsidiaries, associates and jointly controlled operations Financial Instruments 4 2.(3) 17) Investments in subsidiaries and associates are recorded at cost in the balance sheet of the separate (non-consolidated) financial statements. (IAS27.38) In the separate financial statements of the investing entity, investments in subsidiaries, associates and jointly controlled operations are accounted for either: at cost; or in accordance with IAS39. However, when investments are classified as held for sale in accordance with 5, they are accounted for in accordance with 5. 10

11 Business Combinations Significant differences Definition of a business combination Business Combinations current standard 2.1) A business combination is when an entity (company or similar entity) or a business operation, which forms an entity, combines with another entity or business operation, which forms an entity, to become one reporting unit. (3 - Currently effective standard - Appendix A) A business combination is the bringing together of separate entities or businesses into one reporting entity. (3R - Revised standard - Appendix A) The revised standard is effective for accounting periods commencing on or after 1 July A business combination is a transaction or other event in which an acquirer obtains control of one or more businesses. Accounting for business combinations Timing of the measurement of consideration (shares) Expenses directly related to the business combination (Current standard 3,2,3) The purchase method and, in limited circumstances, the pooling of interests method are allowed. (Guidance on the application of Business Combination Accounting 38) Within 5 days preceding the agreement or the announcement of the major terms of the acquisition. Date of the acquisition is also permitted provided no material difference between stock prices on the announcement date and the acquisition date would arise. (Current standard 3,2,(2),4) Included in the cost of the business combination (as a result a part of goodwill). (3.4, 3R.4) The acquisition method (the purchase method in 3)is the only method allowed. (3.25, 3R8) The acquisition date is the date on which the acquirer effectively obtains control of the acquiree. (Currently effective standard) (3.29) Included in the cost of the business combination (as a result a part of goodwill). (Revised standard) (3R.53) Expensed as a cost when the services are received. 11

12 Recognition of contingent liabilities Accounting for intangible assets Rights reacquired through a business combination (for example, trademarks previously sold by the acquirer) (Guidance on the application of Business Combination Accounting 62) If certain conditions are met, these can be recognised in a specified account relating to the business combination. (Business Combinations Accounting Standard 3,2,(3)) Intangible assets which were not previously recognised by the acquiree may be recognised separately from goodwill. There is no specific guidance. (Currently effective standard) (3.37,47) Contingent liabilities including potential liabilities are recognised regardless of likelihood of occurrence when fair value can be measured reliably. (Revised standard) (3R.22) Contingent liabilities which are obligations arising from past events are recognised regardless of likelihood of occurrence when fair value can be measured reliably. (Currently effective standard) (3.37) Intangible assets must be recognised separately when they meet the definition in IAS38 and to the extent that fair value can be measured reliably. (Revised standard) (3R.13, IAS38.33) Intangible assets must be recognised separately when they meet the definition in IAS38 and in a business combination, reliable measurement criteria is always considered to be satisfied. (Currently effective standard) (3) There is no specific guidance. (Revised standard) (3R.29) Where the rights meet the criteria for recognition, they are recognised as intangible assets separately from goodwill based on the remaining contractual term. 12

13 Initial recognition of goodwill and measurement of non-controlling interest (minority interests) Amortisation of goodwill Negative goodwill (Current standard 2,8) Goodwill is the amount by which the acquisition cost of the entity or the business acquired exceeds the net amount which is allocated to the assets acquired or the liabilities assumed (the so-called purchased goodwill approach ). (Consolidated Financial Statements Standard 4,2,1) One of two methods may be selected: 1) the assets and liabilities of subsidiaries are measured at their fair values on acquisition date and minority interest s are recorded as the minority interest share of the fair value of net assets at acquisition date (the so-called full market value method ). 2) the parent s share of the assets and liabilities of the subsidiary are measured at fair value on the date of each acquisition, and minority interest s are recorded at their share of the amount recorded in the balance sheet of the subsidiary (without fair value adjustment) (the so-called partial valuation method ). (Consolidated Financial Statements Standard 4,3,2) In principle, goodwill must be amortised within 20 years using the straight line method or any other rationale method. When amount is insignificant, it is possible to expense goodwill in the period in which it arises. (Current standard 3,2,(5)) Negative goodwill is amortised systematically over the period to which it relates within 20 years. When amount is insignificant, it is possible to recognise it as a gain in the period in which it arises. (Currently effective standard) (3.51) Minority interests are measured as the proportionate share of the fair value of the acquiree s net assets, and goodwill is recognised only in respect of the acquirer s share (the so-called purchased goodwill approach ). (Revised standard) (3R.19,32) One of two methods may be selected: 1) the fair value of the entire entity acquired is measured including the non-controlling interest s share, and goodwill is recognised including that relating to the non-controlling interest s share (the so-called full goodwill approach ); or 2) non-controlling interests (NCI) are measured as the NCI s share of the fair value of the net assets of the acquiree, and goodwill is recognised only in respect of the acquirer s share (the so-called purchased goodwill approach ). (3.55, 3R.54,B63) Goodwill is not amortised but is subject to an impairment review in each reporting period. Reversals of previous impairments of goodwill are prohibited. (3.56, 3R.34) After reassessing the identified assets, liabilities, contingent liabilities and the acquisition cost, negative goodwill is recognised as a gain in profit or loss. 13

14 Identifying the acquirer (for example, when combination is effected by exchanging equity interests) (Current standard 3,2,(1)) The acquirer is determined after clarification of conditions of payment of the consideration, relative voting rights, and effective control. (Currently effective standard) (3.20) The following are considered in the determination of the acquirer: which entity has a significantly greater fair value; where cash etc. and shares are exchanged in the business combination, which entity contributed the cash etc.; and which entity has the right to select management of the combined entity. (Revised standard) (3R.7,B15) The following are considered in the determination of the acquirer: the relative voting rights in the combined entity after the combination; the largest minority voting interest held in the combined entity, where there is no other party with a significant voting interest; the composition of the governing body of the combined entity; the composition of the senior management of combined entity; the terms of the exchange of equity interests (existence of a premium paid by one of the parties). 14

15 Business combinations achieved in stages (Current standard 3,2,(2)2) Purchase consideration at each transaction is simply totaled (no remeasurement) and compared to acquisition date fair value of net assets to calculate goodwill. Minority interests are measured as outlined above in Initial recognition of goodwill and measurement of non-controlling interest (minority interests). (Currently effective standard) (3.58,59) At each transaction date, the assets and liabilities acquired are measured at fair value at that date to calculate goodwill. At acquisition date, any gain or loss which arises on the previously held share of net assets from each transaction date to acquisition date is treated as a revaluation and, in principal, is recognised initially in a separate component of equity as such. (Revised standard) (3R.18,42, Appendix B) The previously held equity interest is remeasured at acquisition date fair value and the resulting gain or loss recorded in profit and loss, and the remeasured interest is considered in the measurement of goodwill at acquisition date. Non-controlling interests are measured as outlined above in Initial recognition of goodwill and measurement of non-controlling interest (minority interests). 15

16 Inventory Significant Differences Definition of inventories (treatment of office supplies and similar) Measurement of Inventories 3) Inventories are assets for sale which are held to achieve the entity s operating objectives, and also include office supplies and similar which, although not held for sale, are consumed in the short term in the entity s sales or general administrative activities. (IAS2.6) Inventories are assets: held for sale in the ordinary course of business; in the process of production; or materials or supplies to be consumed in the production process or in the rendering of services. Cost methods Inclusion of borrowing costs in cost (Current standard) (Corporate Accounting Principles note 21) (Methods for determining balance sheets values) Specific identification method, FIFO, LIFO, average cost method, retail method (Revised standard) Measurement of Inventories 6-2, 34-4) For periods commencing after 1 April 2010, the LIFO method is prohibited. In certain situations, the latest purchase price method is allowed. (Guidance on auditing interest costs in relation to property development operations II) Interest costs, which meet certain criteria, may be included in cost in respect of property development operations. (IAS ) (Cost method) Specific identification method, FIFO, weighted average (Cost measurement techniques) The actual cost method is the principle, however the standard cost method and retail cost method are also given as examples in the standard. The standard cost method and retail cost method are acceptable for convenience when their results approximate cost. (IAS23.7-8) For those inventories which meet the conditions in IAS23, in principle, borrowing costs must be included in cost. 16

17 Reversals of write-downs Measurement of Inventories 14, 17) It is possible to select a policy of reversal of previous write downs or a policy of non-reversal. However, in extraordinary circumstances even if a policy of reversal is selected, reversal is not allowed. (IAS2.33) Where the circumstances that previously caused inventories to be written down no longer exist, or when there is clear evidence of an increase in net realisable value caused by changed economic circumstances, the amount of the previous write-down is reversed (i.e. limited to the amount of the original write-down). 17

18 Intangible Assets and Research and Development Costs Significant differences Acounting standard There is no one comprehensive accounting standard which deals with intangible fixed assets. (IAS38) The basis of recognition and measurement of intangible assets differs depending on whether they are purchased individually or acquired through a business combination, or whether they are internally generated. Definition Initial recognition and measurement (recognition rules) (Regulation for Terminology, Forms and Preparation of Financial Statements 28) There is no separate definition for intangible assets, however the following are given as examples: goodwill patents land lease rights (including surface rights) trademarks utility model rights design rights mining rights fishing rights(including common of piscary) software leased intangible assets There is no clear guidance in respect of the recognition of intangible assets. (IAS38.13,17,8) The definition of an intangible asset includes all the following: an asset controlled by the entity as a result of past events; an asset from which future economic benefits are expected to be received; and an identifiable non-monetary asset without physical substance. (IAS38.18,21) Intangible assets shall only be recognised if they meet the definition of an intangible and if, and only if: it is probable that the expected future economic benefits from the asset will flow to the entity; and the cost of the asset can be measured reliably. 18

19 Internally generated intangible assets: research and development In-process research and development acquired in a business combination Measurement after recognition research and development costs 3 and Note 3) Expenditure on research and development shall be recognised as an expense when incurred. Software development costs which are related to research and development are also recognised as an expense when incurred. business combinations 3,2,(3)) When part of the acquisition cost is allocated to research and development costs (including software), the relevant cost is expensed at the time of allocation. Measured at cost less accumulated amortisation and impairment losses (the revaluation method is not permitted). (IAS ) Expenditure on research shall be recognised as an expense when incurred. Development costs are recognised as intangible assets but only if the technical feasibility, the intention to use or sell the asset, and other conditions can all be demonstrated (if the conditions cannot be demonstrated, the costs must be expensed). There is no separate guidance relating to the development of computer software. (IAS38.34,42,43) An acquirer recognises as an asset separately from goodwill in-process research and development costs of the acquiree when the definition of an intangible asset is met. The definition of an intangible asset is met when: it meets the definition of an asset; and it is separately identifable. (IAS38.72,75) An entity chooses either the cost model or the revaluation model for subsequent measurement. The revalued amount of an intangible asset is its fair value at the date of revaluation less any subsequent accumulated amortisation and any subsequent accumulated impairment losses. To apply the revaluation model, fair values can only be determined by reference to an active market. 19

20 Amortisation (useful lives) In practice, intangible assets are generally amortised on a straight line basis in accordance with the tax regulations (however, there is a specific rule for the amortisation of software in the standard relating to research and development costs 4,5). (IAS38.88,89) The useful life of an intangible asset is determined as finite or indefinite. An intangible asset shall be regarded as having an indefinite life when, based on an analysis of all of the relevant factors, there is no foreseeable limit to the period over which the asset is expected to generate net cash flows for the entity. An asset with a finite useful life is amortised over its useful life An asset with an indefinite useful life is not amortised but is subject to an impairment test each period. 20

21 Fixed Assets Significant differences Measurement of cost of asset acquired by exchange (Guidance on auditing advanced depreciation by reduction of book value of assets) In exchanges of assets of a similar nature or for a similar purposes, the asset received is measured at the book value of the asset given up. In exchanges of dissimilar assets, in principle, either the asset received or the asset given up is measured at their fair market values. (IAS16.24) Assets acquired in exchange for another asset (or in a combination of exchange for monetary and non-monetary assets) are measured at fair value unless: a) the exchange transaction lacks commercial substance; or b) the fair value of neither the asset received nor the asset given up is reliably measurable. If the acquired item is not measured at fair value, its cost is measured at the carrying amount of the asset given up. Capitalisation of borrowing costs Dismantling, disposal and restoration costs etc. Subsequent expenditure There is no related rule. However, interest paid that meets the conditions in the specific rules for interest on capital borrowings required for construction and for property development can be included in the acquisition cost of the asset. (Current standard) There is no specific rule. (Revised standard) Asset Retirement Obligations 4) For periods commencing after 1 April 2010, the recording of liabilities relating to the disposal of assets is required. The liability is measured at present value. There is no specific rule. Normally, expenditure which extends the useful life of an asset or which improves its operating capacity is capitalised, and expenditure which maintains an asset s current level of operation is treated as maintenance costs. 21 (IAS23.4,7,8) Borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset shall be included in the acquisition cost of the asset. (IAS16.16(c),18, IAS37.19,45,47) The initial estimate of the costs of dismantling and removing the item and restoring the site are part of the cost of an asset, the corresponding liability is accounted for under IAS37. The amount of the liability is measured at present value. The discount rate used must reflect the market rate and the risks specific to that liability. (IAS16.7,12,13) Subsequent costs are capitalised if it is probable that they will give rise to future economic benefits to the entity and they can be measured reliably. In all other cases they are expensed as incurred.

22 Government grants related to assets Subsequent measurement Unit of depreciation (components approach) Revision of residual values, useful lives and depreciation methods Changes of depreciation method (Corporate Accounting Principles Note 24) Government subsidies, construction related proceeds from users etc can be deducted from cost of the related assets. (Guidance on auditing advanced depreciation by reduction of book value of assets) When the company records advanced depreciation as an appropriation of profit in a transfer to reserves, this accounting method can be considered to be appropriate by the auditors. Carried at cost less any accumulated depreciation and any accumulated impairment losses (Revaluation model is not permitted). There is no specific rule. (Audit and assurance committee report No. 81 2) In accordance with the rule that depreciation is determined on a rationale basis, depreciation must be carried out each period in a planned and systematic way. (Regulation for Terminology, Forms and Preparation of Financial Statements 8.2) Changes in the method of depreciation are changes in accounting policy and when a change is made, they are treated as such. (IAS20.24) Government grants related to assets are presented either as deferred income or are deducted from the book value of the related asset. (IAS16.29,31) Either the cost model or the revaluation model must be selected as accounting policy and that policy must be applied to an entire class of assets. Revaluations shall be made regularly to ensure that the carrying amount does not differ materially from the fair value at the end of each reporting period. (IAS16.43) Each part of an item of property, plant and equipment with a cost that is significant in relation to the total cost of the item shall be depreciated separately. (IAS16.56,61) The residual values, useful lives and depreciation methods shall be reviewed at least each financial year-end. (IAS16.61) Changes in the method of depreciation are treated as changes in accounting estimates. 22

23 Investment Property Significant differences Definition of investment property (rental property) Disclosures about Fair Value of Investment and Rental Property 4,(2)) Investment properties are properties, other than those classified as inventory, which are held for rental income or capital gains purposes (excluding properties under finance lease held by the lessor). (IAS40.5) Investment property is property held to earn rentals or for capital appreciation. Properties under development Disclosures about Fair Value of Investment and Rental Property 6) Rental property (investment property) includes property under development which is intended to be used as rental property in the future and property under redevelopment which is intended to continue to be used as rental property. (IAS40.7,9) Property which is being constructed or developed does not meet the definition of investment property and is accounted for as a fixed asset. When the construction or development is complete, it is accounted for as investment property. Ancillary services associated with a property Measurement on initial recognition Disclosures about Fair Value of Investment and Rental Property 28) When the services offered are immaterial to the overall arrangement, the property is treated as an investment property. When the services are material, the property is treated not as an investment property but as an owner-occupied property. Under this judgment is allowed on the basis of form rather than substance. The cost model is the only method applicable(there is no specific standard as fair values are disclosure items only). (IAS40.11,12) When the services are insignificant to the arrangement as a whole, the related property is treated as an investment property. When the services are significant, the property is treated as an owner-occupied property. When the above determination is difficult, disclosure must be made of the criteria used in making the judgment. (IAS40.30) The cost or the fair value method may be selected. 23

24 Fair value measurement Determination of fair value There is no specific rule. (Guidance on Accounting Standard for Disclosures about Fair Value of Investment and Rental Property 11) Market value of rental properties at year-end is usually measured by observable market prices and if the market prices are not observable, reasonably calculated prices are used. Reasonably calculated prices related to rental properties are calculated by the method described in Real Estate Appraisal Standards (Ministry of Land, Infrastructure, Transport and Tourism) or similar method. (IAS40.33,35) If the fair value method is chosen, all investment properties must be fair valued, except in one specific situation. The changes in the fair values are recorded in the profit and loss for the period in which they arise. (IAS40.36) The fair value of an investment property is the price at which the property could be exchanged between knowledgeable, willing parties in an arm s length transaction. It is recommended but not required that the valuation of an independent valuer with a certain level of experience is used. 24

25 Impairment of assets Significant differences Indicators of impairment long lived assets (Guidance for the application of the standard on the impairment of fixed assets 11-17) Certain precise numerical indicators are used (for example: if market value falls below 50% of book value) (IAS36.12) As the indicators are of a broad nature, there is tendency for an indication of impairment to be judged to exist earlier than would be the case under Impairment review process Reversal of impairment losses the impairment of fixed assets 2 2,3) 2 step approach: 1. Recoverability test (the carrying value of the asset is compared to the undiscounted cash flows through the use of the asset and on its final disposal). 2. As a result of this test, if the carrying value is judged not to be recoverable, the amount of the impairment loss is measured. the impairment of fixed assets 3 2) Reversal of impairment losses are prohibited for all fixed assets. (IAS36.59) 1 step approach: When there is an indicator of impairment, an impairment loss is determined as the amount by which the carrying value of an asset exceeds its recoverable amount. Recoverable amount is the higher of (i) the fair value less costs to sell and (ii) the value in use (the present value of future cash flows derived from using the asset, including its residual value). (IAS36.110,111) Reversals relating to goodwill are prohibited however, for other long-lived assets, at the end of each period assessment must be made as to whether there is any indication that the impairment no longer exists. When appropriate, the impairment loss is reversed to the extent that it does not exceed the carrying amount that would have been determined (net of amortisation of depreciation) had no previous impairment been reversed. 25

26 Leases Significant differences Definition of a finance lease Lease Transactions 5, Implementation Guidance on Accounting Standard for Lease Transactions 9) Finance leases are non-cancelable and require full payout, which means meeting the following conditions: the present value of the total lease payments over the term of the non-cancelable lease is 90% or more of the estimated cash purchase price of the asset; or the lease term is approximately 75% or more of the economic useful life of the related asset. (IAS17.4,10) Finance leases are leases which transfer substantially all the risks and rewards of ownership of an asset regardless of whether or not title is transferred. Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than the form of the contract. Lessee accounting for finance leases convenient method (kanben hou) Lessor accounting for finance leases insignificant transactions (Implementation Guidance on Accounting Standard for Lease Transactions 34, 35) If any of the conditions below are met, the convenient method, which allows accounting for the lease as an operating lease may be used: leases of depreciable assets, which are insignificant, the cost of the lease is expensed when the assets are acquired, and the total lease payments is below a set amount; leases with a lease term of less than 1 year; or leases where the total lease payments are less than JPY 3 million and it is clear from the operations that they are not significant (aside from the transfer of ownership). (Implementation Guidance on Accounting Standard for Lease Transactions 59,60) Where a lease does not transfer ownership and is insignificant to the lessor, it is possible to allocate the interest receivable on a straight line basis over the lease term. 26 (IAS17.20) At the commencement of the lease term, the assets and liabilities are recorded at the lower of the fair value of the leased assets and the present value of the minimum lease payments. There is no convenient method as in the Japanese standards. (IAS17.36) Lessors recognise lease assets as receivables at the amount equal to the net investment in the lease. There is no convenient method as in the Japanese standards.

27 Depreciation of finance leases Lease Transactions 39) It is possible to select a different depreciation policy than for owned fixed assets depending on the actual circumstances. (IAS17.27) The leased asset is depreciated by the lessee over the lease term on a basis consistent with the depreciation policy adopted for its own depreciable assets. 27

28 Financial Instruments Significant differences Inclusion of transaction costs in acquisition cost (Practical Guidance on Accounting Standard for Financial Instruments 29,56) The related costs of the acquisition of a financial asset are, in principle, included in its cost. However, costs, which arise regularly and which are not clearly related to the asset, may be excluded. (IAS39.43) For financial assets and liabilities which are not measured at fair value through profit or loss, transaction costs which are directly attributable are included in acquisition cost. Transaction costs are not included for financial assets and liabilities which are measured at fair value through profit or loss. Low or noninterest bearing loans or receivables Derecognition of financial assets There is no specific rule. In practice, normally these are recognised at the loan value (amortised cost). Financial Instruments ) Financial assets are derecognised based on the financial component approach. (IAS39.AG64,AG65) Loans with no interest or with off market interest are measured at fair value, which may be based on a discounted cash flow calculation using the prevailing market interest rate of a similar instrument. Any difference between the loan amount and its fair value is accreted to the statement of comprehensive income (profit or loss) using the effective interest rate method, unless the difference qualifies for asset recognition. (IAS39.20) Financial assets are derecognised based on the risk and rewards approach. If an entity neither transfers nor retains substantially all the risks and rewards of ownership, it must determine whether it has retained control. If control is retained, then the entity continues to recognise the asset to the extent of its continuing involvement. 28

29 Accounting for loan participations Accounting for debt assumption (in-substance defeasance) Classification of financial assets Fair value option Financial Instruments 42) Only when certain conditions are met, such as almost all the risks and economic rewards of a receivable are transferred, derecognition of the related receivable is allowed. Financial Instruments 42) The related bonds may be derecognised only when the likelihood of a retrospective claim to the issuer is extremely low. Financial Instruments 14-18) Marketable securities are classified as follows: securities held for trading; debt securities held to maturity; shares in subsidiaries and associates; and other marketable securities. There is no related rule. (IAS39.16,19,21) Derecognition of part of a financial asset is allowed if, and only if, one of the following conditions is met: the part comprises specifically identified cash flows from the financial asset; the part comprises a fully proportionate share of the cash flows from the financial asset; or the part comprises a fully proportionate share of specified cash flows from the financial asset. (IAS39.AG59) Transfer though a contract alone does not relieve the debtor of its primary obligation in the absence of legal release, and does not meet the criteria for derecognition. (IAS39.2(a),9,45) Financial assets are classified into 4 categories: financial assets at fair value through the profit or loss; held-to-maturity investments; loans and receivables; and available for sale financial assets. In principle, investments in subsidiaries, associates and joint ventures are outside the scope of IAS39. (IAS39.9,11A-13,48A) With the exception of trading assets, where certain requirements are fulfilled, financial assets and liabilities can be measured at fair value (the fair value option). These financial assets and liabilities must then be fair valued every period and the valuation gain or loss recognised. 29

30 Valuation of other marketable securities: available for sale financial assets Effective interest method Investments in unlisted equities (shares with no market value) Financial Instruments 18) Carrying values are determined using market values, and the differences are recognised after considering deferred tax by one of the following methods: the total amount is directly recorded as part of net assets (not through P&L); valuation gains where market value exceeds acquisition cost are recognised as a part of net assets, while valuation losses where market value is below acquisition cost are recognised as a loss in the current period. (Practical Guidance on Accounting Standard for Financial Instruments 70) Amortisation is based on the effective interest rate method in principle, however the straight line method is also allowed as a convenient method providing it is applied consistently (Current Standard 19) Balance sheets value is based on the acquisition cost. (Revised Standard 19) For financial statements for years ending after March , unlisted shares which do not have a market value are regarded as extremely difficult to measure at fair value and are measured at acquisition cost. (IAS39.55(b),AG83) Except for amortisation of interest using the effective interest method, impairments and foreign exchange differences, fair value adjustments after considering deferred tax, are taken to other comprehensive income until derecognition. For non-monetary securities (such as equities) foreign exchange differences are recognised recognised in other comprehensive income. (IAS39.9,46,47) The effective interest method is used to calculate the amortised cost of certain financial assets and of all liabilities, other than those liabilities that are held for trading or for which the fair value option is applied. (IAS39.AG80,AG81) Except in cases where appropriate models are not available, investments in unlisted equity instruments are measured at fair value. 30

31 Impairment (Standard 27, 28) The doubtful debt amount is estimated depending on the category of financial asset as follows: General receivables: Calculated based on the historical rates of doubtful debts and reasonable assumptions. Receivables with risk of default: Depending on the situation of the receivable, either of the following methods are applied consistently: calculation of the doubtful debt amount based on the amounts remaining after reduction of the amount expected to be collected from collateral and similar. estimation of the amount of doubtful debts as the difference between the present value of future cash flows and book value. Bankrupt, delinquent, and doubtful receivables: The estimated doubtful debt amount is the amount remaining after deduction of amounts expected to be collected through realisation of collateral. (IAS39.58,59,63,66,67) Where there is objective evidence of impairment, the carrying value of financial assets is reduced to the estimated present value of future cashflows and the related loss is recognised in profit or loss. For available-for-sale financial assets, the reduction in fair value recognised in other comprehensive income is reclassified to profit or loss when the asset is impaired. Impairment reversal There is no specific rule. Marketable Securities held for trading continue to be measured at market value after impairment, however impairments of debt securities held to maturity and other marketable securities may not be reversed. (IAS39.65,66,69,70) If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised, the previously recognised impairment loss shall be reversed. However, for equity instruments, for which fair value cannot be reliably measured, for derivative assets linked to such equity instruments, and for financial assets classified as available for sale, impairment losses shall not be reversed. 31

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