JGAAP-IFRS comparison. English version 3.0 [equivalent of Japanese version 4.0]

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1 - comparison English version 3.0 [equivalent of Japanese version 4.0]

2 Contents Contents... 2 Introduction... 3 Presentation of Financial Statements, Accounting Policies, Changes in Accounting Estimates and Errors, Assets Held for Sale and Discontinued Operations... 4 Consolidation... 7 Equity Method Joint Ventures/Arrangements Business Combinations Inventory Intangible Assets and Research and Development Costs Fixed Assets Investment Property Impairment of assets Leases Financial Instruments Foreign Currency Income Tax Provisions and Contingencies Construction Contracts Revenue Recognition Share-Based Payments Employee Benefits, excluding Share-Based Payments Appendix 1 - The Adoption of in Japan Appendix 2 - Related Resources

3 Introduction Today, in a move towards improving the comparability of financial statements and to reducing the costs of raising capital in international markets and so on, countries around the world 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 outlined that the significant differences between Japanese generally accepted accounting principles ( ) and would be eliminated by the end of 2008 and that the remaining differences would be eliminated by 30 June Through the convergence project consistent with that agreement, the differences between and are eliminated considerably. Furthermore, in February 2009 the Financial Services Agency of Japan issued a proposed road map for adopting, and serious consideration of adoption of in Japan commenced. There are still a number of differences 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 in current practice. 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. Please refer to the original texts for the detailed guidance. Also, we recommend that you consult with specialists about particular transactions. 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 30 June

4 Presentation of Financial Statements, Accounting Policies, Changes in Accounting Estimates and Errors, 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, 39) Comparative information, at 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 ( 1)must be prepared: Consolidated Balance Sheet Statement of Consolidated Comprehensive Income (a single statement approach) or an Income Statement and a Statement of Other Comprehensive Income (a two statement approach) ( 2) Consolidated Statement of Changes in Shareholders Equity Consolidated Cash Flow Statements Consolidated Supplementary Information 1 Even if an entity applies an accounting policy retrospectively, makes a retrospective restatement of items in its financial statements or reclassifies items in its financial statements, it does not need to prepare an opening balance sheet for the earliest period presented. 2 Both a single statement approach and a separate (two) statement approach are permitted. (IAS1.10) The following statements must be prepared 1,2 : Statement of Financial Position Statement of Comprehensive Income (a single statement approach) 4 or an Income Statement and a Statement of Other Comprehensive Income (a two statement approach) 3 Statement of Changes in Equity Statement of Cash Flows Accounting Policies and Other Explanatory Information 1 Titles other than those listed above may be used for these statements. 2 If an entity applies an accounting policy retrospectively, makes a retrospective restatement of items in its financial statements or reclassifies items in its financial statements, it must prepare an opening balance sheet for the earliest period presented in addition to the above. 3 Both a single statement approach and a separate (two) statement approach are permitted. (Revised standard: IAS1.10A(b)) 4 A statement of profit or loss and other comprehensive income (a single statement) 4

5 Presentation of extraordinary gains and losses Other comprehensive income not reclassified to profit or loss Presentation of the total of profit/loss and comprehensive income attributable to minority interests for the reporting period ( comprehensive income) Departure from a requirement of a standard to give a fairer presentation Non-current assets classified as held for sale (and disposal groups) (Regulation for Terminology, Forms and Preparation of Financial Statements 62,63) Items related to extraordinary gains and losses are presented by category in accordance with their nature. In principle, it is not expected that there will be items of comprehensive income that, as in, will not be reclassified to profit and loss subsequently. (Regulation for Terminology, Forms and Preparation of Consolidated Financial Statements ) Profit (or loss) attributable to minority interests is presented in the consolidated profit and loss statement. The amount of comprehensive income attributable to owners of the parent and to minority interests will be disclosed as allocations in the consolidated financial statements. No such rule exists. There are no specific rules. 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, disposal earlier than initially planned, changes in purpose of use etc. are given. 5 (IAS1.87) No profit or loss items are allowed to be presented as extraordinary items in the statement of comprehensive income, the income statement (when presented) or in the notes. ( IAS 1.95,96) Certain items are recognised in other comprehensive income and are not reclassified to profit or loss in subsequent periods. (Revised standard IAS 1.82A) Within other comprehensive income items which will not be reclassified subsequently to profit or loss; and items which will be reclassified subsequently to profit or loss when specific conditions are met shall be separately presented. (IAS1.83) (revised standard IAS 1.81B) Profit (or loss) and total comprehensive income for the period attributable to non-controlling interests shall be presented. (IAS1.19) 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, it is necessary to depart from that requirement (the true and fair override ). (5.6,15) 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.

6 Depreciation of non-current assets (or disposal groups) classified as held for sale There are no specific rules. However, impaired assets must be depreciated from the book value from which the amount of impairment loss is already deducted (Standard for the Impairment of Fixed Assets 3.1). (5.25) Non-current assets (or disposal groups) classified as held for sale are not depreciated. Presentation of non-current assets classified as held for sale There are no specific rules. ( 5.38) Non-current assets and liabilities classified as held for sale (or disposal groups), and any cumulative income or expense recognised in other comprehensive income or loss relating to a non-current asset (or disposal group) classified as held for sale, shall be separately presented within assets, liabilities and equity in the statement of financial position and within the statement of comprehensive income, respectively. The major classes of items within assets and liabilities described above, except for certain items, shall be disclosed in the statement of financial position or notes ( 5.38,39) Presentation of discontinued operations There are no specific rules. (5.30,33) The following total amounts must be separated as a single item 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 of the assets (or disposal group). An analysis of post tax profit and loss except for certain items shall be disclosed in the statement of comprehensive income ( or income statement ) or notes. 6

7 Consolidation Significant differences Scope of consolidation (Accounting Standard for Consolidated Financial Statements 6, 7, 13) The scope of consolidation is based on the concept of control. A parent company controls another company when it has control over the body which makes the financial, operating and business decisions (the decision making body) of that other company. There are no specific rules about the effect of potential voting power or whether the decision maker is a principal or an agent when judging the existence of control. On the other hand, similar to de facto control in 10, even if less than half of the voting rights are held, there are rules that require an entity to make the judgment as to whether control exists by also including the voting rights held by closely related parties or parties with the same intention after considering the structure of the Boards of Directors, the financial position, and the existence of any contracts which control policy making ability etc. of such parties. (IAS27.4,12,13,14) 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 an 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. (New standard 10.7) The scope of consolidation is based on the concept of control. An investor controls an investee if and only if the investor has all the following: (a) power over the investee; (b) exposure, or rights, to variable returns from its involvement with the investee; and (c) the ability to use its power over the investee to affect the amount of the investor s returns. (New standard 10.B, B47) When assessing control, an investor considers its potential voting rights as well as potential voting rights held by other parties, to determine whether it has power. (New standard 10.B41, B42) It is possible, that an investor with less than a majority of the voting rights has rights that are sufficient to give it power, the so-called de facto control. (New standard 10.18, B58) When an investor with decision-making rights (a decision maker) assesses whether it controls an investee, it shall determine whether it is a principal or an agent. 7

8 Scope of consolidation (exception) Special purpose entities (SPEs) and structured entities (SE) Uniform accounting policies of consolidated subsidiaries (Accounting Standard for Consolidated Financial Statements 14) 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 of subsidiaries and affiliated companies) (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. (Accounting Standard for Consolidated Financial Statements 17) (Practical Interim Solution on Unification of Accounting Policies Applied to Foreign Subsidiaries for Consolidated Financial Statements) Accounting policies and procedures for like transactions in similar circumstances applied by the parent and the subsidiary, in principle, shall be unified. However, if the financial statements of the foreign subsidiary are prepared in accordance with or USGAAP, as an interim measure, these can be used after adjustment of five specific items. (IAS27.4, 12) All entities, which are in substance controlled must be consolidated, there are no exceptions similar to the exceptions. (New standard 10 Appendix A, ) In accordance with 10, all subsidiaries must be consolidated. There are no exemptions as in. (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. (New standard 10) As set out in 10.7, structured entities (SEs) that an investor controls must also be consolidated. (IAS27.24, 25) (New standard 10.19, B87) Consolidated financial statements shall be prepared using uniform accounting policies for like transactions and other events in similar circumstances. If a member of the group uses accounting policies other than those adopted in the consolidated financial statements for like transactions and events in similar circumstances, appropriate adjustments are made to its financial statements in preparing the consolidated statements. 8

9 Non-cotermino us reporting periods Presentation of profit or loss attributable to non-controlling interests (minority interests) (Accounting Standard for Consolidated Financial Statements Note 4) When the difference between the end of the reporting period of the subsidiary and that of the parent is less than three months, the financial statements of the subsidiary can be used as they are for consolidation purposes. In that case, adjustments shall be made for the effects of significant intragroup transactions. (Accounting Standard for Consolidated Financial Statements 39) In the Consolidated Profit and Loss (two statement approach) and the Consolidated Profit and Loss and Comprehensive Income (single statement approach), after deducting or adding income tax to profit before incomes taxes and similar, the profit before minority interests is presented, then minority interests are deducted or added to present the profit and loss for the period. In the two statement approach, Consolidated comprehensive Income, and in the single statement approach, Consolidated Profit and Loss and Comprehensive Income, as part of presenting comprehensive income, both amounts attributed to the owners of the parent and amounts attributed to minority interests are shown. (IAS27.22, 23, 41(c)) (New standard 10.B92, B93) The financial statements of the parent and its subsidiaries used in the preparation of the consolidated financial statements shall be prepared as of the same date. When the end of the reporting period of the parent is different from that of a subsidiary, the subsidiary prepares, for consolidation purposes, additional financial statements as of the same date as the financial statements of the parent unless it is impracticable to do so (after making every reasonable effort). In the case that it is impracticable to align the reporting period ends,, adjustments shall be made for the effects of significant transactions or events that occur between that date and the date of the parent s financial statements (the gap period is limited to no more than three months). (IAS1.82, 83) (Revised IAS1.81B) Profit or loss and total comprehensive income for the period are presented including non-controlling interests (minority interests), and amounts attributable to non-controlling interests and to the parent company are disclosed as allocations in the financial statements. 9

10 Allocation of losses of a subsidiary to non-controlling interests Loss of control of a subsidiary (Accounting Standard for Consolidated Financial Statements 27) If the proportionate losses of subsidiaries relating to the minority interests share exceed the amount that the minority interests are obliged to bear, any such excess amount is charged to the parent company. (Accounting Standard for Consolidated Financial Statements 29 ) (Accounting Standard for Business Separations 38, 48(1)1) (Application Guidance on Accounting Standards for Business Combinations and Business Separations 275, 276, 288(2)) As the result of a disposal etc, when the remaining investment represents an investment in an associate, the investment is accounted for using the equity method. When the remaining investment does not meet the definition of an associate, it is valued based on its carrying value in the separate financial statements of the parent. (IAS27.28) (New standard 10, B94) Even when non-controlling interests result in a deficit balance, total comprehensive income is attributed to both non-controlling interests and the parent company. (IAS27.34) (New standard 10.25, B97-99) The parent company recognises any remaining interest at fair value at the date that control is lost. 10

11 Change in a parent s ownership interest in a subsidiary that does not result in a loss of control Separate financial statements (Accounting Standard for Consolidated Financial Statements 28-30) (Accounting Standard for Business Separations 48, 38,17-19, 39) For purchases of an additional share in a subsidiary, any difference between the value of the interest acquired and the amount invested is recognised as goodwill (or negative goodwill). For disposals, any difference between the reduction in the interest sold and the reduction in the investment amount is recorded as a profit or loss on disposal of the shares in the subsidiary. For increases or decreases in interests in a subsidiary as a result of stock issues etc. or business combinations and such like, the difference between the increase in the interest and increase in the investment are treated as goodwill (or negative goodwill) and the difference between the decrease in the interest and the decrease in the investment are treated as differences arising on change in interest (i.e. within equity). (Accounting Standard for Financial Instruments 17 ) In the separate financial statements, investments in subsidiaries and associates are accounted for at historical cost. (IAS ) (New standard 10.23) Changes in a parent s ownership interest in a subsidiary that do not result in a loss of control are accounted for as equity transactions. (IAS 27.38) (Revised IAS27.10) Investments in associates and interests in joint ventures must be accounted for by either: cost, or in accordance with 9/ IAS39 However, when investments accounted for at cost are classified as held for sale in accordance with 5, such investments are accounted for in accordance with 5. 11

12 Loss of control of a subsidiary Change in a parent s ownership interest in a subsidiary that does not result in a loss of control (Accounting Standard for Consolidated Financial Statements 29 ) (Accounting Standard for Business Separations 38, 48(1)1) (Application Guidance on Accounting Standards for Business Combinations and Business Separations 275, 276, 288(2)) As the result of a disposal etc, when the remaining investment represents an investment in an associate, the investment is accounted for using the equity method. When the remaining investment does not meet the definition of an associate, it is valued based on its carrying value in the separate financial statements of the parent. (Accounting Standard for Consolidated Financial Statements 28-30) (Accounting Standard for Business Separations 48, 38,17-19, 39) For purchases of an additional share in a subsidiary, any difference between the value of the interest acquired and the amount invested is recognised as goodwill (or negative goodwill). For disposals, any difference between the reduction in the interest sold and the reduction in the investment amount is recorded as a profit or loss on disposal of the shares in the subsidiary. For increases or decreases in interests in a subsidiary as a result of stock issues etc. or business combinations and such like, the difference between the increase in the interest and increase in the investment are treated as goodwill (or negative goodwill) and the difference between the decrease in the interest and the decrease in the investment are treated as differences arising on change in interest (i.e. within equity). (IAS27.34) (New standard 10.25, B97-99) The parent company recognises any remaining interest at fair value at the date that control is lost. (IAS ) (New standard 10.23) Changes in a parent s ownership interest in a subsidiary that do not result in a loss of control are accounted for as equity transactions. 12

13 Separate financial statements (Accounting Standard for Financial Instruments 17 ) In the separate financial statements, investments in subsidiaries and associates are accounted for at historical cost. (IAS 27.38) (Revised IAS27.10) Investments in associates and interests in joint ventures must be accounted for by either: cost, or in accordance with 9/ IAS39 However, when investments accounted for at cost are classified as held for sale in accordance with 5, such investments are accounted for in accordance with 5. Separate financial statements (Accounting Standard for Financial Instruments 17 ) In the separate financial statements, investments in subsidiaries and associates are accounted for at historical cost. (IAS 27.38) (Revised IAS27.10) Investments in associates and interests in joint ventures must be accounted for by either: cost, or in accordance with 9/ IAS39 However, when investments accounted for at cost are classified as held for sale in accordance with 5, such investments are accounted for in accordance with 5. 13

14 Equity Method Significant differences Equity methodscope Equity methodscope (exception) Uniform accounting policies of associates (Accounting Standards for Investments, Using the Equity Method 6) Non-consolidated subsidiaries and investments in associates are, in principle, accounted for using the equity method. (Application Guideline on determining the scope of consolidation for subsidiaries and associates 25, 26) 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 (Accounting Standards for Investments, Using the Equity Method 9) (Practical Interim Solution on Unification of Accounting Policies Applied to Foreign Affiliates for Consolidated Financial Statements) Accounting policies and procedures for like transactions in similar circumstances used by the investor and the associate (including its subsidiaries), in principle, shall be unified. Also, the Practical Interim Solution on Unification of Accounting Policies Applied to Foreign Affiliates for Consolidated Financial Statements (IAS28.1,13) (Revised standard IAS28.16) In principle, all investments in associates are accounted for using the equity method. (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. (Revised standard IAS28.20) An entity shall apply 5 to an investment, or a portion of an investment, in an associate that meets the criteria to be classified as held for sale. Any retained portion of an investment in an associate that has not been classified as held for sale shall be accounted for using the equity method until disposal of the portion that is classified as held for sale takes place. (IAS 28.26, 27) (Revised IAS28.35,36) The investor s financial statements shall be prepared using uniform accounting policies for like transactions and events in similar circumstances. If an associate uses accounting policies other than those of the investor for like transactions and events in similar circumstances, adjustments shall be made to conform the associate s accounting policies to those of the investor when the associate s financial statements are used by the investor in applying the equity method. 14

15 may be applied to foreign associates as an interim measure. If it is extremely difficult to obtain information for unification of accounting policies, this is considered to be a rational reason for not using uniform accounting policies as outlined in the Audit Guidance on the Practical Interim Solution on Unification of Accounting Policies Applied to Foreign Subsidiaries for Consolidated Financial Statements. Non-cotermino us reporting periods (Accounting Standards for Investments, Using the Equity Method 10) The most recent available financial statements of the associate are used by the investor in applying the equity method. When the end of the reporting period of the investor is different from that of the associate, necessary adjustments are made or notes given for the effects of significant transactions or events. (IAS ) (Revised IAS28.33, 34) The most recent available financial statements of the associate are used by the investor in applying the equity method. When the end of the reporting period of the investor is different from that of the associate, the associate prepares, for the use of the investor, financial statements as of the same date as the financial statements of the investor unless it is impracticable to do so. When it is impractical to align the period ends, adjustments shall be made for the effects of significant transactions or events that occur between that date and the date of the investor s financial statements (limited to a gap of no more than three months). 15

16 Impairment of associates (and joint ventures accounted for using the equity method) Discontinuance of equity method (Practical Guidance on Accounting Standards for Investments Using the Equity Method 9) (Practical Guidance on Consolidation Procedures 32) Where an investor recognises an impairment loss in respect of an associate in its separate financial statements, and the resulting book value after the recognition of the impairment loss is below the book value in the consolidated financial statements, any goodwill is immediately depreciated to the extent of that difference. (Accounting Standards for Investments, Using the Equity Method 15) (Accounting Standard for Business Separations 41(2), 48(1)1) (Application Guidance on Accounting Standards for Business Combinations and Business Separations 278(2), 290(2)) When an entity ceases to be an associate as the result of a 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. When an entity ceases to be an associate or jointly controlled operation as the result of a business combination, the shares of the acquirer or acquiree are valued at the carrying value in the separate financial statements of the investor (in principle at the market value of the shares of the combined entity after the business combination). (IAS ) (Revised IAS ) Goodwill forms part of the carrying amount of an investment in an associate and is not separately recognised. Therefore it is not tested for impairment separately. Instead, the entire carrying amount of the investment is tested for impairment as a single asset, whenever application of the requirements in IAS 39 indicates that the investment may be impaired. The impairment test itself shall be carried out in accordance with IAS 36. Any reversal of that impairment loss is recognised to the extent that the recoverable amount of the investment subsequently increases. (IAS28.19) (Revised standard IAS 28.22) When equity accounting is discontinued, the investment is accounted for as a financial asset in accordance with 9 and the fair value of the investment at the date it ceases to be an associate is its fair value on initial recognition. 16

17 Joint Ventures/Arrangements Significant differences Joint ventures/ arrangements Separate financial statements: jointly controlled entities (Accounting Standard for Business Combinations 39 (2)) Jointly controlled entities are accounted for using the equity method. (Accounting Standard for Business Combinations 301) Investments in jointly controlled entities are presented in the separate financial statements in the appropriate classification such as affiliates etc. (Accounting Standard for Financial Instruments 17) Investments in subsidiaries and associates are recorded at cost in the balance sheet of the separate (non-consolidated) financial statements. (IAS31.30,38) Within joint ventures, jointly controlled entities are accounted for by either of the following methods: proportionate consolidation; or equity method. (New standard 11.20, 24) Of joint arrangements, for a joint operation an investor accounts for his own assets, liabilities, and revenue and expenses as well as/ or his share of the jointly controlled assets, liabilities, and revenue and expenses of the joint operation. For joint ventures, the equity method is applied. (IAS27.38) (Revised standard IAS 27.10) In the separate financial statements of the investing entity, investments in subsidiaries, associates and jointly controlled entities are accounted for either: at cost; or in accordance with 9/IAS39. However, when investments are classified as held for sale in accordance with 5, they are accounted for in accordance with 5. 17

18 Business Combinations Significant differences Definition of a business combination Accounting for business combinations Acquisition-relat ed costs (expenses directly related to the business combination which form part of the purchase cost) Contingent consideration and subsequent adjustments to goodwill (Accounting Standard for Business Combinations 5) 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. (Accounting Standard for Business Combinations 17) The purchase method is applied for business combinations other than jointly controlled entities and transactions with entities under common control. (Accounting Standard for Business Combinations 26) Included in the cost of the business combination (as a result form part of goodwill). (Accounting Standard for Business Combinations 27) The acquirer recognises the consideration and adjusts goodwill after delivery or exchange is fixed and market value is reasonably determinable. Adjustment is not limited to a tentative reporting period (such as one year). (3R Appendix A) A business combination is a transaction or other event in which an acquirer obtains control of one or more businesses. (3.4) The acquisition method is applied, the pooling method is not permitted. (3.2) 3 does not apply to the formation joint ventures or the combination of entities or businesses under common control. (3.53) Expensed when the services are received, with the exception of debt or equity issue costs which are offset against the carrying amount of such debt or equity on initial recognition. (3.39, 58 BC349) The acquirer shall recognise the acquisition-date fair value of contingent consideration as part of the consideration transferred in exchange for the acquiree, regardless of the probability of economic benefit arising (it is considered that fair value can be reliably measured). Aside from changes as a result of additional information that the acquirer obtains after the acquisition date about facts and circumstances that existed at the acquisition date within the measurement period, no change is made to consideration or to goodwill. 18

19 Recognition of contingent liabilities Intangible assets acquired in a business combination Rights reacquired through a business combination (for example, trademarks previously sold by the acquirer) Initial recognition of goodwill and measurement of non-controlling interests (minority interests) (Accounting Standard for Business Combinations 30) Contingent liabilities are recognised when they are expenses or losses for certain conditions estimated to occur after acquisition, and the likelihood of occurrence is reflected in the measurement of consideration. (Accounting Standard for Business Combinations 28, 29) (Application Guideline for Business Combinations 59, 370) Intangible assets must be recognised outside of goodwill when they can be separately identified and can be measured rationally. There is no specific guidance. (Accounting Standard for Business Combinations 31) 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 ). (Accounting Standard for Consolidated Financial Statements 20) All assets and liabilities of a subsidiary are measured at their fair values on acquisition date (the so-called full market value method ). *There is no option, as in, to measure the entire minority interests at fair value. (3.232) Contingent liabilities, which are present obligations arising from past events, are recognised regardless of the probability likelihood of occurrence an outflow of economic resources arising when fair value can be measured reliably. (3.B31, IAS38.33) Identifiable intangible assets must be recognised separately from goodwill. In business combinations, the reliable measurement criterion is always considered to be satisfied. (3.29) Where the rights meet the criteria for recognition as intangible assets, they are recognised as such separately from goodwill based on the remaining contractual term. (3.19,32) One of the following methods may be selected on an acquisition by acquisition basis: 1) the fair value of the entire entity acquired is measured including the non-controlling interests share, and goodwill is recognised including that relating to the non-controlling interests 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 ). 19

20 Treatment of goodwill (Accounting Standard for Business Combinations 32) (Accounting Standard for Consolidated Financial Statements 24) In principle, goodwill must be amortised within 20 years using the straight line method or any other rational method. However, when the amount is insignificant, it is possible to expense goodwill in the period in which it arises. (Accounting Standard for the impairment of fixed assets 2.8) When there is an indicator that goodwill is impaired, the need to recognise an impairment loss must be considered. (3.B63, IAS36.90) Goodwill is not amortised but is subject to an impairment review each reporting period. Reversals of previous impairments of goodwill are prohibited. 20

21 Inventory Significant Differences Cost of inventories Cost methods Allocation of fixed production overheads (normal capacity) (Regulation for Terminology, Forms and Preparation of Financial Statements 90, and related guideline 90) Purchase discounts are treated as non-operating income. (Accounting Standard for Measurement of Inventories 6-2, 34-4) The following methods are permitted for determining balance sheets values; the specific identification method, FIFO, the average cost method and the retail cost method. In certain situations, the latest purchase price method is allowed. (Cost Accounting Standard 4(1)2, 47(1)3) The allocation of fixed production overheads is based on the scheduled capacity or normal capacity of production facilities etc. Relatively large cost variances, arising due to differences between actual prices and expected prices, are allocated to cost of sales and to inventories at the end of period. (IAS2.11) Trade discounts, rebates and other similar items are deducted in determining the costs of purchase. (IAS ) The following methods of assigning the costs of inventories are permitted; the specific identification method, FIFO, and the weighted average method. The following guidance on cost measurement techniques is given in the standard. In principle, the actual cost method should be used, however the standard cost method and the retail cost methods are also given as examples of cost measurement techniques in IAS2. The standard cost method and retail cost method may be used for convenience if the results approximate cost. (IAS2.13) The allocation of fixed production overheads is based on the normal capacity of production facilities. The allocation of fixed production overheads is not increased in periods of low production, but such unallocated overheads (unfavourable variances) are recognised as an expense in the period in which they are incurred (i.e. they are not included in period end inventory). On the other hand, in periods of abnormally high production, the amount of fixed overhead allocated to each unit of production is decreased (i.e. favourable variances are allocated to period end inventory). 21

22 Inclusion of borrowing costs in cost Measurement of inventories ( Statement of Position 130, Industry Specific Audit Research Group 460) Interest costs, which meet certain criteria, may be included in the cost of inventories in respect of property development businesses. (Accounting Standard for Measurement of Inventories 7, 15, 16) At the period end, if the net sales value is below acquisition cost, then the difference between the two values shall be recognised as a current period expense. Inventories held for trading are carried on the balance sheet at an amount based on market price, and any movements in this price are recognised as current period expenses. Note, the specific guidance for inventories held for trading is similar to the treatment of financial instruments held for trading in the Accounting Standard for Financial Instruments. (IAS23.7-8) For those inventories which meet the conditions in IAS23, in principle, borrowing costs must be included in the cost of inventories. (IAS2.6,9,34) Inventories shall be measured at the lower of cost and net realisable value (NRV). NRV is the estimated selling price less the estimated costs of completion and the estimated costs necessary to make the sale. If a write-down is required, the difference between cost and NRV is recognised as an expense in the period when the write-down occurs. (IAS2.4) Commodity broker-traders, who measure their inventories at fair value less costs to sell, are excluded from only the measurement requirements of IAS2. Reversals of write-downs (Accounting Standard for Measurement of Inventories 14, 17) It is possible to select either a policy allowing the reversal of previous write downs or a policy of non-reversal of such write downs. However, in extraordinary circumstances, even if a policy allowing reversal has been selected, reversals are not allowed. (IAS2.33) When 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. the reversal is limited to the amount of the original write-down). 22

23 Intangible Assets and Research and Development Costs Significant differences Accounting standard Definition Initial recognition and measurement (recognition rules) There is no one comprehensive accounting standard which deals with intangible fixed assets. (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 and similar There is no clear guidance in respect of the recognition of intangible assets. (IAS38) The basis of recognition and measurement of intangible assets differs depending on whether such assets are purchased separately or are acquired through a business combination, or whether they are internally generated. IAS38 covers all these situations. (IAS38.8,13,17) The definition of an intangible asset includes all of the following conditions: 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 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. 23

24 In-process research and development acquired in a business combination Internally generated intangible assets: research and development expenses (Accounting Standard for Business Combinations 28, 29) (Guidance on Application of Accounting Standard for Business Combinations 59, 367) In a business combination, acquisition costs are allocated to such assets, where they are separately identifiable and where individual project costs can be calculated reasonably, at the date of acquisition based on market price on the date of the acquisition. Intangible assets such as transferable legal rights are considered to be identifiable assets. Subsequent expenditure on the above items is treated in the same way as expenditure on internally generated research and development costs (in other words, it is expensed when incurred). (Accounting Standard for research and development costs 3 and Note 3) Expenditure on research and development shall be recognised as an expense when incurred. If there are components of software development costs and production costs that relate to research and development, these are also recognised as an expense when incurred. (IAS38.33,34,42,43) An acquirer recognises the in-process research and development costs of the acquiree as an asset, separately from goodwill, when the definition of an intangible asset is met. The definition of an intangible asset is met when: the item meets the definition of an asset; and the item is separately identifiable. For separately identifiable intangible assets, it is generally considered that their fair values can be reliably measured. Subsequent expenditure on the above items is treated in the same way as expenditure on internally generated intangible assets (below). (IAS ) Expenditure on research shall be recognised as an expense when incurred. Development costs are recognised as intangible assets only if the technical feasibility of the asset, the intention to use or sell the asset and a number of other conditions can all be demonstrated. If these conditions cannot be demonstrated, the related development costs must be expensed. There is no separate guidance relating to the development of computer software. 24

25 Subsequent measurement (Corporate Accounting Principles 3,4(1)B, 5) The acquisition cost of the intangible asset must be allocated to the profit and loss each fiscal year over its useful life, using a depreciation method. The unamortised balance shall be disclosed (revaluation is not allowed). (IAS38.72,75) Either the cost model or the revaluation model must be selected as an accounting policy for the subsequent measurement of intangible assets. 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. Amortisation (useful lives) Advertising costs 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).) There are no specific rules for advertising costs. (IAS38.88,89,102,104,108) The useful life of an intangible asset is determined as finite or indefinite. An asset with a finite useful life is amortised over its useful life. The amortisation period and the amortisation method for an intangible asset with a finite useful life, along with its residual value, shall be reviewed at least at each financial year-end. An intangible asset shall be regarded as having an indefinite useful 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 an indefinite useful life is not amortised but is subject to an impairment test each period. (IAS38.67,69,69A,70) Advertising costs shall be recognised as an expense when incurred. An asset can only be recognised for prepaid advertising costs if payment is made before advertising goods and materials can be used or before advertising services are received. 25

26 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 dissimilar assets, in principle, either the asset given up or the asset received is measured at fair market value. This fair value becomes the acquisition cost of the received asset. In exchanges of assets of a similar nature or for similar purposes, the asset received is measured at the book value of the asset given up. (IAS16.24) Assets acquired in exchange for another asset are measured at fair value unless: a) the exchange transaction lacks commercial substance; or the fair value of neither the asset received nor the asset given up is reliably measurable. b) 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. (Statement of Position 3 Depreciation if Fixed assets 1,4,2) (Self-constructed property) When an entity constructs its own property, it calculates the manufacturing cost based on the Cost Accounting Standard, and acquisition cost is based on that manufacturing cost. Interest on borrowings required for construction and for the period before operation may be included in acquisition cost. (Accounting Standard for Asset Retirement Obligations 3, 6, 7, 11, 14) (Guidance on Application of Asset Retirement Obligations 9) Asset retirement obligations are added to the carrying amount of the related fixed assets. A legal obligation (or similar) is recorded as an asset retirement obligation based on relevant laws relating to the retirement of fixed assets or contractual requirements. The discount rate is determined at the time the liability is recorded and is not subsequently changed (note that where there is an increase in the (IAS23.5) A qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its intended use or sale. (IAS23.8) Borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset shall be included in the acquisition cost of the asset. Other borrowing costs shall be expensed when incurred. (IAS16.16(c), 18, IAS37.10, 14, 19, 45, 47, IFRIC1.3, 8) The costs of dismantling and removing an item and restoring the site of that asset, etc. which meet the recognition criteria for provisions, are included in the acquisition cost of an item of fixed assets in accordance with IAS37. A provision in IAS 37 includes both legal and constructive obligations. When a fixed asset is measured using the cost model and the discount rate is subsequently changed, any related provision shall be re-estimated and 26

27 Subsequent costs Government grants related to assets estimated future cash flows, the discount rate is changed at that time, but where there is a decrease in the estimated cash flows, the discount rate is not changed i.e. the original rate is used). The periodic adjustment to the obligation (the unwinding of the discount) is classified in the profit and loss account in the same way as the depreciation of the fixed asset to which the asset retirement obligation relates. Where a rental deposit (shikikin) is recorded as an asset, the amount that is not expected to be refunded may be reasonably estimated using a short-cut method, and that portion is allocated to the current period and charged to the profit and loss account. There are no specific rules. 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. (Corporate Accounting Principles Note 24) Government subsidies and construction cost sharing proceeds can be deducted from the cost of the related assets. (Guidance on auditing advanced depreciation by reduction of book value of assets) When a company records advanced depreciation as an appropriation of profit through a transfer to a reserve, this accounting method can also be considered to be appropriate by auditors. the acquisition cost shall be adjusted for the change. The expense related to the periodic unwinding of the discount shall be recognised as a finance cost during the period in which the unwinding occurs. The exceptional treatment of rental deposits in is not permitted under. (IAS16.7, 12, 13) Subsequent costs are capitalised if it is probable that they will give rise to future economic benefits for the entity and if they can be measured reliably. In all other cases they are expensed as incurred. (IAS20.24) Government grants related to assets are presented either as deferred income or are deducted from the book value of the related asset. 27

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