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

Transcription

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

28 Subsequent measurement Unit of depreciation (components approach) Review of residual values, useful lives and depreciation methods Changes of depreciation method Assets are carried at cost less any accumulated depreciation and any accumulated impairment losses (the revaluation model is not permitted). There are no specific rules. (Audit and assurance committee report No. 81 2) Depreciation shall be determined on a rational basis, and as such depreciation must be carried out each period in a planned and systematic way. (Guidance on change in accounting and correction of errors 11, 18, 19, 20) The depreciation method of fixed assets is regarded as an accounting policy. Since a change of depreciation method is difficult to distinguish from a change in accounting estimate, it is treated the same way as a change in the accounting estimate. However the nature of change, a valid reason for the change and the current effect from the change should be stated in the notes. Where it is difficult to reasonably estimate the future effect of the change, this fact should also be stated. (IAS16.29, 31) Either the cost model or the revaluation model must be selected as an accounting policy and that policy must be applied to an entire class of assets. When the revaluation method is used, revaluations shall be made regularly to ensure that the carrying amount does not differ materially from the fair value at the end of the 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. 28

29 Investment Property Significant differences Property used for more than one purpose Properties under development Ancillary services associated with a property (Accounting Standard for Disclosures about Fair Value of Investment and Rental Property 7 and related Implementation Guidance and Practical Solution 7, 17) A property is normally expected to be separated into rental property portions and other portions using cost accounting and other reasonable methods. When the proportion of the property used for rental purposes is high, the property can be split for presentation purposes between rental property and others. When the proportion of the property used for rental purposes is low, the property as a whole can be booked as "fixed assets except rental properties" and is outside of the scope of rental property disclosures. (Accounting Standard for 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 for continued use as rental property in the future. (Accounting Standard for Disclosures about Fair Value of Investment and Rental Property 28) When it is difficult to judge the significance of any ancillary services offered to tenants, the classification of the property may be judged on the basis of form alone. Investment property which is rented out is subject to the required disclosures of a rental property. However, property which is rented as part of a business operation is outside the scope of rental property disclosures (e.g. hotels etc). (IAS40.10) If the relevant portions of a property with more than one use could be sold separately or leased out separately under a finance lease, an entity accounts for the portions separately. If the portions could not be sold separately, the property is classified as an investment property only if an insignificant portion is held for the entity s own use. If the portions could not be sold separately, the property is classified as other than investment property if the portion held for the entity s own use is other than insignificant. (IAS40.8(e)) Property which is being constructed or developed to earn rentals (i.e. for future use as investment property) is accounted for as investment property. (IAS40.11, 12, 14) When the ancillary 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. 29

30 Measurement on initial recognition The cost model is the only method allowed (there are no specific rules for fair value accounting as fair values are disclosure items only). (IAS40.30) The cost or the fair value model may be selected. Fair value measurement There are no specific rules. (IAS40.33, 35, 53, 53A, 53B, 54) If the fair value model is chosen, all investment properties must be fair valued, except in specific situations where fair value cannot be reliably determined. Changes in fair values are recorded in the profit and loss in the period in which they arise. The same principles apply to investment property under construction however there is a rebuttable presumption to support application of this in practice. Determination of fair value (Guidance on Accounting Standard for Disclosures about Fair Value of Investment and Rental Property 11) The market value of rental properties at year end is usually measured by observable market prices, but if market prices are not observable, calculated prices using reasonable assumptions are used. These calculated prices for rental properties are calculated using the method described in the Real Estate Appraisal Standards (Ministry of Land, Infrastructure, Transport and Tourism) or a similar method. (IAS40. 32, 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 a valuation by an independent valuer with a certain level of experience is used. 30

31 Impairment of assets Significant differences Indicators of impairment long lived assets Impairment review process Reversal of impairment losses (Guidance for the application of the standard on the impairment of fixed assets 11-17) More precise, numerical indicators are used in than in (for example an indicator would be: if the market value falls below 50% of book value). (Accounting Standard for the impairment of fixed assets 2 2,3) 2 step approach: 1. Complete a recoverability test (the carrying value of the asset is compared to the undiscounted cash flows to be generated through the use of the asset and on its final disposal). 2. As a result, if the carrying value is higher than the undiscounted cash flows, the carrying value is considered to be not recoverable. An impairment loss is then recognised for the difference between the carrying value and the amount of the discounted cash flows. (Accounting Standard for the impairment of fixed assets 3 2) Reversals of impairment losses are prohibited for all fixed assets. (IAS36.12) As the indicators of impairment 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. Further, one of the examples of an indicator of impairment given is if the carrying value of net assets is more than an entity's market capitalisation. (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) fair value less costs to dispose and (ii) value in use (the present value of future cash flows derived from using the asset, including its residual value). (IAS36.110,117, 124) Reversals relating to goodwill are prohibited however, for other assets, at the end of each period an assessment must be made as to whether there is any indication that a previously recognised 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 or depreciation) had an impairment not been recognised previously. 31

32 Allocation of goodwill (Accounting Standard for the impairment of fixed assets 2 8) When determining the recognition of an impairment loss, goodwill shall be allocated across the asset groups of the business to which the goodwill relates, generally at a higher level. If the carrying amount of goodwill can be allocated to individual asset groups of the related business, based on reasonable criteria, then the recognition of an impairment loss can be determined after the goodwill has been allocated to each asset group. (IAS36.80,84) Goodwill shall be allocated to each of the acquirer's cash generating units, or groups of cash-generating units. Each unit or group of units to which the goodwill is allocated shall: Represent the lowest level within the entity at which the goodwill is monitored for internal management purposes, and Not be larger than an operating segment as defined by paragraph 5 of 8 Operating Segments before aggregation. If the initial allocation of goodwill cannot be completed before the end of the annual period in which the business combination is effected, that initial allocation shall be completed before the end of the first annual period after the acquisition date. 32

33 Leases Significant differences Definition of a finance lease (Accounting Standard for Lease Transactions 5, Implementation Guidance on Accounting Standard for Lease Transactions 9) Finance leases are defined to be non-cancellable and requiring full payout, which means meeting the following conditions: the present value of the total lease payments over the term of the non-cancellable 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. (IAS17.4,8,10) 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. 33

34 Lessee accounting for finance leases convenient method (kanben hou) Lessor accounting for finance leases insignificant transactions (Implementation Guidance on Accounting Standard for Lease Transactions 22,34,35,37,45,46) Lease assets and lease liabilities are measured as follows: <If the lessor s purchase price is clear> Transfer of ownership: lessor s purchase price No transfer of ownership: the lower of the lessor s purchase price and the present value of the minimum lease payments (including the residual value of the asset) <If the lessor s purchase price is unclear> The lower of the present value of lease payments (including the value of any rights to purchase the asset at a discount) and the lessee s estimated cash purchase price. If any of the conditions below are met, the convenient method may be used, which allows accounting for the lease as an operating lease: leases for depreciable assets, which are insignificant; where the cost of the lease is expensed when the assets are acquired and the total lease payments are 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 business s operations that they are not significant (excluding those leases which transfer 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. (IAS17.20) At the commencement date of the lease term, the lease 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, each determined at the inception of the lease. There is no convenient method as in the Japanese standards. (IAS17.39) The recognition of finance income shall be based on a pattern reflecting a constant periodic rate of return on the lessor s net investment in the finance lease. There is no convenient method as in the Japanese standards. 34

35 Depreciation of finance leases Operating lease-incentives (Accounting Standard for Lease Transactions 39) It is possible to select a different depreciation policy for a leased asset than for an entity s own fixed assets, depending on the circumstances. There are no specific rules. (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. (SIC15) In principle, incentives shall be recognised by lessors and lessees as part of the net consideration for the use of the leased asset over the lease term, on a straight-line basis. If there is another systematic basis of allocation which is more appropriate than the straight line method, then it should be used. 35

36 Financial Instruments Significant differences Initial Measurement Inclusion of transaction costs in acquisition cost Subsequent measurement (Practical Guidance on Accounting Standard for Financial Instruments 102) does not make the same assumptions as regarding non-listed derivatives. This allows an entity to measure a non-listed derivative at a valuation amount, so long as a reasonable price estimate can be calculated or observed. (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 the acquisition cost. However, costs that arise regularly and which are not clearly related to the cost of the acquisition may be excluded. (Accounting Standard for Financial Instruments 14, 15-18) Receivables shall be separately recognised from securities. In principle, only securities shall be classified into the financial instrument categories. (IAS 39.AG76A) No gain or loss is recognised on the initial recognition of a non-marketable financial asset or financial liability. (IAS39.43) For financial assets and liabilities not at fair value through profit or loss, transaction costs that are directly attributable are included in the acquisition cost. Transaction costs are not included in the acquisition cost of financial assets and liabilities at fair value through profit or loss. (IAS ,55) All of the entity's financial instruments shall be classified into one of 5 categories. (these are described further below) 36

37 Held-to-Maturity (HTM) investments (Practical Guidance on Accounting Standard for Financial Instruments 274, Q&A Q22) Only securities with no excessive credit risk can be reclassified as HTM investments. (Practical Guidance on Accounting Standard for Financial Instruments 86) A structured bond cannot satisfy the criteria for classification as an HTM investment, because of the risk exposure of the principal even if the embedded derivative is separated. (Practical Guidance on Accounting Standard for Financial Instruments 83) If an entity changes its purpose for holding securities, it cannot classify any financial assets as HTM for 2 years (the 2 years includes the period when the purpose of possession is changed). (Practical Guidance on Accounting Standard for Financial Instruments 82) An entity cannot reclassify securities as HTM investments even after the lapse of the penalty period above. (Accounting Standard for Financial Instruments 20, Practical Guidance on Accounting Standard for Financial Instruments 91) For HTM investments with a market value, the amount of any impairment loss is measured as the difference between the asset's carrying amount and its fair value. (IAS (b)) When measuring HTM financial instruments at amortised cost, the effective interest rate is determined based on estimated future cash flows reflecting any discount due to incurred credit losses. (IAS 39.11) For a compound financial instrument, where the host financial instrument and the embedded derivatives are separated, the host instrument itself can be accounted for as HTM investments. (IAS 39.9) An entity shall not classify any financial assets as HTM if the entity has, during the current financial year or during the two preceding financial years, sold or reclassified more than an insignificant amount of held-to-maturity investments before maturity (more than insignificant in relation to the total amount of held-to-maturity investments), other than sales or reclassifications meeting certain conditions. (IAS 39.54) After the lapse of a"penalty period" as a result of the above, available for sale financial instruments can be reclassified to HTM investments. (IAS 39.63) The amount of any impairment loss on HTM investments is measured as the difference between the asset's carrying amount and the present value of estimated future cash flows. 37

38 Loans and receivables Low or noninterest bearing loans or receivables Scope of fair value measurement There is no separate category for loans and receivables as part of the classification of securities. (Accounting Standard for Financial Instruments 14) Receivables are subsequently measured after initial recognition by deducting any applicable allowance for bad debts from the receivables. There are no specific rules. In practice, normally these are recognised at the loan value (amortised cost). (Practical Guidance on Accounting Standard for Financial Instruments 63 provisory clause) Securities that do not have a quoted market price in an active market are measured making the assumption that there is no fair value. (Practical Guidance on Accounting Standard for Financial Instruments 104) Where a mature market has not yet developed for a particular type of derivative (for example weather derivatives etc.), the fair value is quite difficult to measure. In this case, such derivatives are measured at acquisition cost and recorded on the balance sheet. (IAS 39.46(a)) The amortised cost method, based on an effective interest method, shall be applied to all loans and receivables except for those that are short term. (9.B5.1.1, B5.1.2 / IAS39.AG64, AG65) Loans with no interest or with a lower than market interest rate are originally measured at fair value, which may be based on a discounted cash flow calculation using the prevailing market interest rate of a similar instrument, and then measured after recognition using the effective interest rate method. If the fair value of the financial asset or financial liability at initial recognition differs from the transaction price, the entity shall account for that difference according to its nature. (IAS 39.AG80, AG81) Investments in equity instruments and derivatives linked to them that do not have a quoted market price in an active market can be measured at cost if their fair value cannot be measured reliably. However such cases are presumed to be rare. 38

39 Loan commitments A regular way purchase or sale of financial assets Derecognition of financial assets (Practical Guidance on Accounting Standard for Financial Instruments 139) A financial institution that acts as a lender should provide disclosures in the notes to the accounts for its bank overdraft contracts (or similar) and lending commitments. These disclosures should cover the fact that such items exist, the credit line amount or the loan commitment, after deducting the amount already loaned. (Practical Guidance on Accounting Standard for Financial Instruments 22,26) For contracts to buy and sell securities, if the period between trade date and settlement date is normal in accordance with the market rules or practices, the buyer recognises the marketable securities and the seller derecognises the marketable securities on the trade date. However, for each category of investment (based on the purpose of possession), it is permitted for the buyer to recognise only the market movement between the trade date and settlement date, and for the seller only to recognise the gain or loss on sale at the trade date. Loans receivable and loans payable are recognised when the loan is made, and are derecognised when repayment is made. (Accounting Standard for Financial Instruments12) Financial assets are derecognised based on the "financial component" approach. (9.2.1, / IAS39.4, 47) Certain loan commitments are recognised as financial liabilities at fair value when the commitment is made. ( /IAS39.38) Regular way purchases or sales of financial assets shall be recognised and derecognised, as applicable, using trade date accounting or settlement date accounting. ( /IAS39.20) Financial assets are derecognised based on a risk and rewards approach. If an entity has neither transferred nor retained substantially all the risks and rewards of ownership, then it must determine whether it has retained control. If control has been retained, then the entity continues to recognise the asset to the extent of its continuing involvement. 39

40 Obtaining a new asset or liability as a result of transferring a financial asset Accounting for loan participations Accounting for debt assumptions (in-substance defeasance) Exchange of financial liabilities and alteration of conditions (Practical Guidance on Accounting Standard for Financial Instruments 37,38,39) Any new asset or liability arising when a financial asset is derecognised is recorded at market value at the date of transfer. If the market value of the remaining interest or any new asset (derivative) arising on the derecognition of another financial asset cannot be reasonably measured, the remaining interest or new asset should be measured at zero and any gain or loss on the transfer should be calculated as if the market value is zero. (Accounting Standard for Financial Instruments 42, Practical Guidance on Accounting Standard for Financial Instruments 41) Derecognition of a receivable is allowed only when certain conditions are met, such as when almost all the risks and economic rewards of that receivable are transferred. (Accounting Standard for Financial Instruments 42, Practical Guidance on Accounting Standard for Financial Instruments 46) The related bonds may be derecognised only when the likelihood of a retrospective claim to the issuer is extremely low. There are no specific rules. ( /IAS39.25) If as a result of transfer, a financial asset is derecognised in its entirety but the transfer results in the entity obtaining a new financial asset or assuming a new financial liability, or a servicing liability, the entity shall recognise the new financial asset, financial liability or servicing liability at fair value. (IAS39.16,19,21) There are no specific rules, so the derecognition of loan participations is assessed based on the general requirements for derecognition. (9.B3.3.3/IAS39.AG59) Payment to a third party, including a trust does not, by itself, relieve the debtor of its primary obligation to the creditor, in the absence of legal release, and does not meet the criteria for derecognition. ( B3.3.6/IAS39.40,AG62) An exchange between an existing borrower and lender of debt instruments with substantially different terms, or a substantial modification of the terms of an existing financial liability (or a part of it), shall be accounted for as an extinguishment of the original financial liability and the recognition of a new financial liability. 40

41 Other financial liabilities Classification of financial assets (Accounting Standard for Financial Instruments 26) In principle, financial instruments are recognised on the balance sheet at the amount of the debt. If an entity issues a bond at a price that is lower or higher than its denomination, then an entity can use amortised cost. In this case, in addition to an effective interest method, a straight line method is allowed. (Accounting Standard for Financial Instruments 15-18) Marketable securities are classified as follows: securities held for trading; debt securities held to maturity; shares in subsidiaries and associates; and other marketable securities. ( , IAS 39.47) After initial recognition, an entity shall measure all financial liabilities at amortised cost using the effective interest method except for financial liabilities at fair value through profit or loss. (IAS39.2(a),9,45) Financial assets are classified into four 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. (New standard ,5.2.1) Financial assets are divided into debt instruments and equity instruments. Debt instruments (bonds, loans receivable etc.) Debt instruments are measured at amortised cost only if the business model test and the characteristics of the financial asset test are met and the fair value option is not applied. (hereinafter referred to as FVTPL) Equity instruments On acquisition an equity instrument, which is not held for trading, can be designated as measured at fair value through other comprehensive income. In all other cases, equity instruments are measured at fair value through profit and loss. 41

42 Concept of fair value Financial liabilities held for the purpose of trading and the fair value option (Practical Guidance on Accounting Standard for Financial Instruments 49) If a financial instrument is listed on more than one market, then an entity determines the price in the most active market. Except for some unlisted derivatives, the 'mid price' is generally used as the quoted market price. There are no specific rules. (Accounting Standard for Financial instrument 15) Securities held for trading are not included in financial liabilities. (IAS 39.AG71) An entity determines the price at which a transaction would occur at the end of the reporting period in that instrument in the most advantageous active market to which the entity has immediate access. (IAS 39,AG70) For assets held the current bid price is used, and for assets to be acquired (short positions) the current asking price is normally used. In May 2011, 13 was published. 13 does not preclude the use of mid-market pricing or other pricing conventions that are used by market participants as a practical expedient for fair value measurements within a bid-ask spread. (IAS 39.9) Only if certain conditions are met, can financial liabilities be designated as at fair value through the profit or loss the fair value option. Financial instruments held for the purpose of trading and financial instruments for which the fair value option has been elected, are classified and measured at fair value with valuation differences recognised in net profit (FVTPL). 42

43 Fair value option There are no specific rules. (IAS39.9,11A-13) If certain criteria are met, financial assets and liabilities, which are not held for trading purposes, can be measured at fair value (the fair value option). Such financial assets and liabilities must then be fair valued every period, and a valuation gain or loss recognised. ( ) An entity may, at initial recognition, irrevocably designate a financial asset as measured at fair value through profit or loss if doing so eliminates or significantly reduces a measurement or recognition inconsistency (sometimes referred to as an accounting mismatch ) that would otherwise arise from measuring assets or liabilities or recognising the gains and losses on them on different bases. ( ) An entity may, at initial recognition, irrevocably designate a financial liability as measured at fair value through profit or loss under certain conditions. However, the change in the fair value of the financial liability that is attributable to the change in an entity s own credit risk shall be accounted for as other comprehensive income, unless doing so creates or enlarges a measurement or recognition inconsistency (sometimes referred to as an accounting mismatch ). This OCI is prohibited from being reclassified to profit or loss. 43

44 Classification change of financial instruments Available-for-sale financial assets (Practical Guidance on Accounting Standard for Financial Instruments 80) The classification of securities (by the purpose of possession) cannot be changed without a rational reason. For example, a change of operating policy or a similar specific circumstance would allow an entity to change its purpose of possession of a security. Only securities can be accounted for as other marketable securities. (Accounting Standard for Financial Instruments 18) Other marketable securities are presented when no other categories are appropriate. (Accounting Standard for Financial Instruments 18 (2)) With regard to other marketable securities, unrecognised gains are presented within equity, while unrecognised losses are presented as a current loss. (Accounting Standard for Financial Instruments Note 7) The average market price over a one month period can be used as the fair value measurement base at the end of the reporting period for other marketable securities. (IAS 39.50) An entity shall not reclassify any financial instrument as held at fair value through profit or loss after initial recognition just because it changes its operating policy. A financial asset may be reclassified out of that fair value through profit or loss category only in rare circumstances. Even the recent financial crisis allows only certain reclassifications. ( ) When, and only when, an entity changes its business model for managing financial assets it shall reclassify all affected financial assets (debt instruments). Equity instruments held and financial liabilities cannot be reclassified. (IAS 39.9) As long as they are not held as FVTPL, any financial assets can be accounted for as available for sale. Receivables can be accounted for as available for sale financial assets. The method of separate presentation given under Accounting Standard for Financial Instruments 18(2) is not allowed. (IAS 39.46) A fair value at the end of reporting period must always be used without any exceptions. 44

45 Valuation of available-for-sale financial assets Gains and losses related to FVTOCI/other marketable securities (equities) Foreign exchange gains and losses on foreign currency denominated available-for-sale financial assets and other marketable securities (Accounting Standard for Financial Instruments 18, 20-21) The carrying values of securities are determined using market values, and the valuation 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 the market value exceeds acquisition cost, are recognised as a part of net assets. Valuation losses, where the market value is below acquisition cost, are recognised as a loss in the current period. When fair value is decreases dramatically, and there is no possibility of a recovery or the decrease is significant, an impairment loss should be recognised and the difference between the carrying value and fair value shall be reclassified to profit or loss. Reversal of impairment losses is prohibited. (Practical Guidance on Accounting Standard for Financial Instruments 16) For foreign currency denominated other marketable securities, any foreign currency translation differences arising on the cost or amortised amount are treated in the same way as valuation differences. However, for foreign currency denominated bonds, foreign currency differences arising from changes in the foreign currency denominated market value can be treated as valuation differences, and any other differences can be treated as foreign exchange gains or losses. (IAS39.55(b),AG83) For available-for-sale financial assets, fair value adjustments (after considering deferred tax) are taken to other comprehensive income until derecognition. This excludes, however, interest charges arising from the effective interest method, impairment losses and foreign exchange differences For non-monetary securities (such as equity instruments) foreign exchange differences are recognised in other comprehensive income. (New standard 9.4.2, 5.7.5) The classification available-for-sale financial assets is abolished. If the entity makes the election at initial recognition to measure equity instruments at fair value through other comprehensive income, only dividend income is recorded in profit and loss. All other changes are recorded in equity and are not subsequently reclassified to profit or loss. (IAS39.AG83,IAS21.28) If the available for-sale financial assets are foreign currency denominated monetary items (i.e. bonds), any foreign exchange gains and losses are recognised in profit or loss. (new standard 9. B5.7.2-B5.7.4 / IAS 21.28) Foreign exchange gains and losses on monetary assets and monetary liabilities are to be recognised in profit or loss. Exchange differences arising on an equity instrument classified as FVOCI and denominated in a foreign currency are recognised through OCI. 45

46 Amortisation and the effective interest rate method Investments in unlisted equities (shares with no market value) Separation of bad debts allowances and impairment (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 for convenience, providing it is applied consistently. An effective interest rate method takes into account the interest amount only. (Accounting Standard for Financial Instruments19, Practical Guidance on Accounting Standard for Financial Instruments 63) For shares which are not traded or for which there is no market value based on that trading, if market value is extremely difficult to measure, then measurement at cost is allowed. (Accounting Standard for Financial Instruments 20-21, 27-28) Impairment of financial instruments is considered separately by the following categories: bad debts on receivables; and impairments of securities. (Accounting Standard for Financial Instruments 27, Practical Guidance on Accounting Standard for Financial Instruments 106) Based on the financial condition of the creditor and its operating results etc., impairments are considered by each of the following categories: general receivables; receivables with risk of default; and bankrupt, delinquent, and doubtful receivables. (IAS39.9,46,47) Normally, the effective interest rate (EIR) method is applied. (IAS 39.9) EIR includes all fees and points paid or received between parties to the contract that are an integral part of the effective interest rate, transaction costs, as well as all other premiums or discounts and incurred losses. It does not consider future credit losses. (IAS39.AG80,AG81) Except in cases where appropriate models are not available, investments in unlisted equity instruments are measured at fair value. (New standard ,B5.5-B5.8) The above exemption is abolished and all investments in equity instruments must be measured at fair value. However, in limited circumstances, cost may be an appropriate estimate of fair value. There is guidance in the standard as to when that would not be appropriate. (IAS , 66,67-70) Impairment is considered for each of the following categories: impairment of financial assets carried at amortised cost; impairment of financial assets carried at cost; and impairment of available-for-sale assets. 46

47 Bad debt allowances and impairment (equities) (Accounting Standard for Financial Instruments 20-21) For securities, where the fair value decreases dramatically (unless there is a possibility of recovery), the carrying value of those financial assets is reduced to fair value (market value), and the related loss is recognised in profit or loss. For shares whose market value is extremely difficult to measure, if the value in substance decreases dramatically, the carrying amount shall be reduced to the in substance value and the loss shall be accounted for through profit or loss. (Practical guidance on Accounting Standard for Financial Instruments 93) It is assumed that the market value of a security is extremely difficult to measure. (IAS , 66,67-70) Impairment of financial instruments is considered using the model appropriate for each of the following categories: impairment of financial assets carried at amortised cost; impairment of financial assets carried at cost; and impairment of available-for-sale assets. Where there is objective evidence of impairment, regardless of recoverability, an impairment loss is recognised. Securities are assumed to have market value. (IAS39.63,66) For financial instruments accounted for at amortised cost, where there is objective evidence of impairment, regardless of recoverability, the carrying value of those financial assets is reduced to the estimated present value of future cash flows, and the related loss is recognised in profit or loss. For equity instruments, both a significant decrease in fair value and a long term decrease in fair value can be objective evidence of impairment. 47

48 Impairment of loans and receivables ( Accounting Standard for Financial Instruments 27, 28) Bad debt allowances are estimated differently 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 irrecoverable balance remaining after reducing it by the amount expected to be collected from collateral and similar items. 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 irrecoverable 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, regardless of recoverability, the carrying value of financial assets is reduced to the estimated present value of future cash flows 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. ( ,5.4.1, B5.12-B5.15) The separate classification of loans and receivables is abolished, but for those items which are measured at amortised cost, the assessment of impairment is carried out in accordance with IAS39. 48

49 Impairment reversals 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 must 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 where fair value cannot be reliably measured, for derivative assets linked to such equity instruments, and for equity instruments classified as available-for-sale, impairment losses shall not be reversed. (New standard , B5.12-B5.15) For equity instruments there will be no further issue concerning impairment (or reversal thereof) as fair value measurement will be used. For debt instruments measured at amortised cost, there is no change to IAS39 regarding the reversal of impairment. For investments classified at FVTOCI, only dividend income is accounted for in profit or loss, and cumulative other comprehensive income shall not be reclassified to profit or loss subsequently. Therefore, impairment and impairment loss issues do not arise. (IAS 39.65) For financial assets carried at amortised cost, 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. 49

50 Valuation of financial liabilities Classification of financial liabilities and equity instruments Convertible bonds accounting by the issuer Financial liability issue costs (Accounting Standard for Financial Instruments 26) Balance sheet amounts are based on the amount of the liability at maturity. However, the amortised cost method should be used where the proceeds and the amount of the liability due on maturity differ. There is no comprehensive standard dealing with the classification of debt and equity, however normally classification is based on legal form. (Accounting Standard for Financial Instruments 36, Implementation Guidance on Corporate Accounting Standards No. 18) Either of two methods may be used: record the bond as a single amount without separation, or separate the bond and the share rights portion. (Interim Treatment relating to the Accounting for Deferred Tax Assets 3 (2)) Principle: account for issue costs as non-operating expenses However, such costs can be accounted for as deferred assets and may be amortised throughout the bond redemption period using the interest method, or using a straight-line method provided that method is applied consistently. (IAS39.47) With the exception of those financial liabilities valued at fair value through profit or loss, an entity shall measure all financial liabilities at amortised cost using the effective interest method. (IAS32.11,16A-16D,15,18) IAS32 deals comprehensively with the classification of equity and liabilities. Classification is determined based on the substance of the contract and definitions of financial liability (asset) and equity. (IAS32.15,28) After evaluating the terms of the contract, the financial instrument is classified as debt or equity according to the substance of the contract. (IAS32.35, IAS39.9) Bond issue costs are recognised by including them in the effective rate of interest, and as such they are amortised as interest. 50

51 Costs related to equity transactions Transaction costs related to compound financial instruments (Accounting Standard Treasury Shares and Reversals of Legal Reserves 14) (Tentative Treatment relating to the Accounting for Deferred Tax Assets 3 (1)) Costs related to the acquisition, disposal, or extinguishment of treasury stock are accounted for as non-operating expenses. Costs related to share exchanges as part of financial activities to enlarge the business (including share exchanges as part of a reorganisation) should be accounted as deferred assets, and amortised using the straight-line method within three years from the day of the exchange. There are no standards regarding the allocation of transaction costs to a liability component and an equity component. (IAS32.35,37) Transaction costs of equity transactions shall be accounted for as a deduction from equity, net of any related income tax benefit. (IAS32.38) Transaction costs that relate to the issue of compound financial instruments are allocated to the liability and equity components of the instrument in proportion to the allocation of proceeds. 51

52 Derivativesdefinition (Practical Guidance on Accounting Standard for Financial Instruments 6) A derivative is a financial instrument with the following characteristics: The value of the rights or obligations respond to changes in an underlying variable and the contract has 1) an underlying variable and 2) either a fixed nominal amount or determinable settlement amount, or both a fixed nominal amount and a determinable settlement amount. There is no initial net investment or no significant net investment compared to that which would be required for other similar types of contracts that would have a similar response to changes in market conditions. Net settlement (payment of the difference) of the contract is required or accepted; net settlement can be easily carried out separately to the contract, or even if physical settlement occurs, in substance it leaves the counterparty in no different position than if net settlement had occurred. ( 9. Appendix A/IAS39.9) A derivative is a financial instrument or other contract with all three of the following characteristics: a) its value changes in response to changes in an underlying variable (i.e. specified interest rate, financial instrument price, commodity price, foreign exchange rate, index of prices or rates, credit rating or credit index, or another variable), provided, in the case of a non-financial variable, that the variable is not specific to a party to the contract; b) it requires no initial net investment or an initial net investment that is smaller than would be required for other types of contracts that would be expected to have a similar response to changes in market factors; and c) it is settled at a future date. 52

53 Embedded derivatives Hedge accounting (Accounting Standards for Other Compound Instruments) It is necessary to separate embedded derivatives if all of the following conditions are met: it is possible that the underlying asset or liability could be affected by the risks arising from the embedded derivative; a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative; and the impact of changes in fair value are not reflected in profit and loss. However, where embedded derivatives are separated for management purposes and certain conditions are met, they may be separated. (Accounting Standard for Financial Instruments 32) As a general rule, profits, losses or valuation differences related to the hedging instrument are deferred as a part of net assets (equity). However, where other marketable securities are the hedged item, fair value hedges are permitted, where the market fluctuations of the hedged item are recorded in profit or loss. (IAS39.11) An embedded derivative shall be separated from the host contract if all of the below are met: the economic characteristics and risks of the embedded derivative are not closely related to those of the host contract; a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative; and the hybrid (combined) instrument is not measured at fair value with changes in fair value recognised in profit or loss. ( ) An embedded derivative with a host contract that is a financial asset shall not be separated. The derivative is to be included with the host contract and shall be measured at amortised cost or fair value through profit and loss depending on the characteristics of the cash flows of the entire contract. Note: for contracts with non-financial asset hosts, the separation criteria of IAS39 continue to apply. (IAS39.86,89,95) There are three types of hedge accounting as follows: Fair value hedges: changes in fair value arising from exposures relating to the hedged item and changes in the fair value of the hedging item are both recognised in the profit and loss. Cash flow hedges: the effective portion of the changes in fair value of the hedging instrument is recognised in other comprehensive income. Hedges of a net investment in a foreign operation. 53

54 Ineffective portions of hedges Accounting for forecast transactions Using the foreign currency contract rate (furiate shori) Interest rate swap special method (Implementation Guidance on Financial Instruments 172) The ineffective portion of the gain or loss can be deferred where the hedging instrument as a whole is judged to be effective and the requirements for hedge accounting are fulfilled. Where the ineffective portion of the hedge can be separately identified in a rational manner, it may be recognised in profit or loss in the current year. (Implementation Guidance on Financial Instruments 170,338) Deferred profits or losses from cash flow hedges relating to forecast transactions are recognised as an adjustment to the book value of the asset acquired, and are reflected in profit and loss when the cost of the related asset affects profit or loss. However, if the asset acquired is an interest accruing financial asset like a loan, the profits or losses arising on the hedge may be treated as a deferred hedge with profits or losses recorded in net assets (equity). (Accounting Standard for Financial Instruments 43) When the requirements of hedge accounting are met, foreign currency denominated receivables and payables may be translated using the rate in the forward currency contract. (Accounting Standard for Financial Instruments 107) Where certain conditions are met, an interest swap contract is not recognised at market value, but rather the swap interest is directly adjusted to increase or decrease the interest on the relevant financial assets or liabilities. (IAS39.95(b)) The ineffective portion of the gain or loss on the hedging instrument shall be recognised in profit or loss (this is particularly notable for cash flow hedges). (IAS39.97,98) When an asset or liability is subsequently acquired and the gain or loss on the cash flow hedge of the forecast transaction has been recognised in OCI: for non-monetary items, that gain or loss is reclassified to profit or loss as the non-monetary item affects profit and loss, or is reclassified to adjust the carrying amount of the non-monetary item; for monetary items, that gain or loss is reclassified to profit or loss as the monetary item affects profit and loss. There are no such rules, and this method is not allowed. There are no such rules, and this method is not allowed. 54

55 Documentation requirements Assessment of hedge effectiveness (Accounting Standard for Financial Instruments 31) (Practical Guidance on Accounting Standard for Financial Instruments 144,145) Hedge documentation may be abbreviated if certain conditions are met. (Implementation Guidance on Financial Instruments 143(2),146,156,158) If the main provisions of the hedging instrument and the hedged item are the same and changes in market rates or cash flows are expected to perfectly offset, the hedge effectiveness assessment may be abbreviated. If an initial test shows that the hedge is highly effective and even if a subsequent test shows it to be ineffective, if the range of fluctuations is small and are expected to be temporary, hedge accounting may be continued. For hedges which fix cash flows, if the cumulative change in the cash flows of the hedging instrument and the hedged item are highly correlated, they are accepted as effective. (IAS39.88(a) and others) Hedge documentation shall not be abbreviated. (IAS39.88(e),F.4.2,F.4.7,F.5.5 and others) The assessment of hedge effectiveness cannot be cut short as in. Expected hedge effectiveness may be assessed on a cumulative basis if the hedge is so designated, and that condition is incorporated into the appropriate hedging documentation. Therefore, even if a hedge is not expected to be highly effective in a particular period, hedge accounting is not precluded if effectiveness is expected to remain sufficiently high over the life of the hedging relationship. Further, in the ongoing assessment of the effectiveness of a cash flow hedge, it is necessary to compare the changes in the fair value of the cash flows of the hedging instrument with the changes in the discounted expected cash flows arising from the hedged item. 55

56 Foreign Currency Significant differences Determination of functional currency Foreign currency transactions Classification of foreign operations Functional currency is not clearly defined. (Accounting Standard for Foreign Currency Transactions Note 1) A foreign currency transaction is defined as a transaction for which the trading price or other transaction price is denominated in a foreign currency (that is, a transaction denominated in a currency other than Japanese yen). (Accounting Standard for Foreign Currency Transactions 2,3) Foreign operations are classified as foreign branches or as foreign subsidiaries and similar. (IAS ,21) Management must determine the functional currency by considering the primary economic environment in which the entity operates. A foreign currency transaction shall be recorded, on initial recognition in the functional currency, by translating the foreign currency amount at the spot exchange rate between the functional currency and the foreign currency at the date of the transaction. (IAS21.8,20) A transaction that is denominated or requires settlement in a currency other than the functional currency (IAS21.8) A foreign operation is an entity that is a subsidiary, associate, joint venture or branch of a reporting entity, the activities of which are based or conducted in a country or currency other than those of the reporting entity. A foreign operation is not further classified as a foreign branch or as a foreign subsidiary as in. 56

57 Translation of foreign operations (Accounting Standard for Foreign currency transactions 2,3) Branches The foreign currency transactions of foreign branches are accounted for in the same way as the transactions of the head office, in principle, with the following exceptions: Income and expenses can be translated at average rates for the period. Under certain conditions, the closing rate at the date of the balance sheet can be used to translate all balance sheet items. In this case, income and expenses can also be translated at the same rate. The exchange differences arising from the use of a translation method other than that used by head office are recognised as exchange gains or losses in the income statement. Subsidiaries Assets and liabilities in foreign subsidiaries and similar entities are translated into yen at the exchange rates at the date of the balance sheet. Equity related items acquired by the parent are translated at the exchange rate at the time of the acquisition and subsequently acquired items are translated at the date of each transaction. Revenue and expenses are translated at average rates in the period in principle, however the closing rate at the date of the balance sheet can also be used. Transactions with the parent are translated using the parent s exchange rate, any differences which arise are recognised as exchange gains or losses in the income statement. Exchange differences are recognised as a separate component of equity. (IAS21.39,40,44) The results and financial position of foreign operations shall be translated into the presentation currency of the reporting entity (after their recognition in functional currency) using the following method, provided that the functional currency is not the currency of a hyperinflationary economy. Assets and liabilities for each balance sheet presented shall be translated at the closing rate at the date of that balance sheet. Income and expenses for each statement of comprehensive income (income statement) shall be translated at the exchange rates at the dates of the transactions. Average rates for the period are often used if the exchange rates do not fluctuate significantly. All resulting exchange differences arising from the above translations shall be recognised as a separate component of equity. 57

58 Disposal or partial disposal of a foreign operation (Accounting Standard for Foreign Currency Transactions and related Implementation Guidance and Practical Solution 42) When the parent's proportion of ownership interest decreases as a result of a change in equity, the related decreased portion of foreign currency translation adjustments shall be recognised as a profit or loss on sale of investments in the consolidated Income Statement. (IAS21. 48A) On the disposal of an entity s entire interest in a foreign operation, the cumulative amount of the exchange differences relating to that foreign operation shall be reclassified from equity to profit or loss (as a reclassification adjustment) only if one of the following conditions is met: The loss of control of a subsidiary The loss of significant influence over an associate The loss of joint control over a jointly controlled entity (IAS C) On the partial disposal of a subsidiary that includes a foreign operation, the entity shall re-attribute the proportionate share of the cumulative amount of the exchange differences recognised in other comprehensive income to the non-controlling interests in that foreign operation (when control continues). In any other partial disposal of a foreign operation the entity shall reclassify to profit or loss only the proportionate share of the cumulative amount of the exchange differences recognised in other comprehensive income. Net investment in a foreign operation There are no specific rules relating to the exchange differences arising from a net investment in a foreign operation. Accordingly, foreign exchange differences arising on such monetary items are recognised in profit or loss in the separate and consolidated financial statements of the reporting entity. (IAS21.32) Exchange differences arising on a monetary item that forms part of a reporting entity s net investment in a foreign operation are recognised in profit or loss in the separate financial statements of the reporting entity. However, in the consolidated financial statements, such exchange differences are recognised initially in other comprehensive income and are reclassified to profit or loss on disposal of the net investment. 58

59 Forward foreign exchange contracts Financial reporting in hyperinflationary economies (Accounting Standard for Foreign currency transactions Notes 6 and 7) Foreign currency receivables and payables may be translated on the basis of rates in the related forward contract (furiate shori), as a temporarily allowed treatment. There is no standard relating to financial reporting in hyperinflationary economies. (IAS39) When hedge accounting is applied, the method described on the left is not permitted. (IAS21.42) The results and financial position of an entity whose functional currency is the currency of a hyperinflationary economy shall be translated into a different presentation currency using the following procedures: All amounts (i.e. assets, liabilities, equity items, revenue and expenses, including comparatives) shall be translated at the closing rate at the date of the most recent balance sheet. 59

60 Income Tax Significant differences Tax effect on goodwill (Practical Guidance on Accounting Standard for Tax effect accounting for consolidated financial statements 27) Deferred tax assets or deferred tax liabilities are not recognised in relation to goodwill. (IAS12.15) A deferred tax liability arising from the initial recognition of goodwill shall not be recognised. (IAS12.21B) However, in some countries the amortisation of goodwill is allowed for tax purposes. A deferred tax liability, for taxable temporary differences which arise after the initial recognition of goodwill as a result of the amortisation of goodwill for tax purposes, is recognised. (IAS12.32A) If the carrying amount of goodwill arising in a business combination is less than its tax base, a deferred tax asset shall be recognised as part of the accounting for that business combination, to the extent that it is probable that taxable profit will be available against which the deductible temporary difference could be utilised. 60

61 Assessment of the recoverability of deferred tax assets Tax effect of the elimination of unrealised profit (Practical Guidance on Accounting Standard for Tax effect accounting for separate financial statements 21, Audit committee report No66,3) The recoverability of deferred tax assets relating to deductable temporary differences, and any necessary valuation allowance, should be thoroughly and prudently determined considering the following items: sufficiency of taxable income based on earning power; existence of tax planning; sufficiency of taxable temporary differences When judging recoverability, detailed guidance, which includes numerical criteria (within five years, or within a year etc.), for each category of entity are stipulated. (Practical Guidance on Accounting Standard for Tax effect accounting for consolidated financial statements 16) The criteria in Practical Guidance on Accounting Standard for tax effect accounting for separate financial statements 21" are not applied when considering the recoverability of deferred tax assets arising from the elimination of unrealised profits on consolidation. Such deferred tax assets are considered to be recoverable. (Practical Guidance on Accounting Standard for Tax effect accounting for consolidated financial statements 13,14) The carrying amount of this type of deferred tax asset is measured by multiplying the unrealised profit by the effective tax rate, which is calculated using the seller s rate on its taxable income for the year. (IAS12.24,27-31) A deferred tax asset shall be recognised for all deductible temporary differences to the extent that it is probable that taxable profit will be available against which the deductible temporary difference can be utilised. A two step approach under which a valuation allowance is recognised is not adopted, rather a deferred tax asset is recognised directly for the amount of recoverable deferred tax after considering the following items: sufficiency of taxable income based on earning ability; existence of tax planning; sufficiency of taxable temporary differences Certain guidance is provided for judging the recoverability of deferred tax assets (however, the categories of the assets or numerical criteria are not stipulated as in ). When considering the recoverability of deferred tax assets arising from the elimination of unrealised profits on consolidation, a determination is made based on the general principles above (there is no exceptional rule as in ). (IAS12.47) There is no exception as in (above). Therefore, in principle, deferred tax assets and liabilities shall be measured at the rate which is expected to apply to company which holds the asset (the purchaser). 61

62 Recognition of current and deferred tax Classification of deferred tax assets (liabilities) in the statement of financial position (balance sheet) Presentation in the statement of comprehensive income (income statement) (Accounting Standard for Presentation of Comprehensive Income and amendment to a related Accounting Standard 8) There are no specific rules with regard to the presentation of current tax and deferred tax, but they are generally considered to be included in profit or loss for the period (except for as below). However, tax effects on items recorded in other comprehensive income (i.e. unrealised gains or losses on securities, gains or losses on hedges and foreign currency translation adjustments) are not included in profit or loss for the period but are also included in other comprehensive income. (Accounting Standard for tax effect accounting 3,1) Deferred tax assets and liabilities are classified into current or non-current items as appropriate. (Accounting Standard for Tax effect accounting 3 3) The amounts that shall be paid as corporate tax for the period along with deferred tax expenses (or deferred tax income) are presented on the face of the income statement separately. (IAS12.58,61A) Current and deferred tax shall be recognised as income or expense and included in profit or loss for the period, except for: tax arising from a transaction or event recorded either in other comprehensive income or directly in equity; tax arising from a business combination. Current tax and deferred tax that relates to items that are recognised outside of the profit or loss, in the same or a different period, shall be accounted for as follows: If related to transactions in other comprehensive income, then the tax shall be recognised in other comprehensive income. If related to transactions that are recognised directly in equity, then the tax shall be recognised directly in equity. (IAS1.56) When an entity presents current and non-current assets as separate classifications on the face of its balance sheet, it shall not classify deferred tax assets (liabilities) as current assets (liabilities). Deferred tax assets (liabilities) are classified as non-current assets (liabilities). (IAS12.6,77,77A,80) The current tax expense (current tax income) and deferred tax expense (deferred tax income) relating to net income and loss from ordinary activities shall be presented as a tax expense (tax income) in the statement of comprehensive income. The major components of that tax expense (tax income) shall be disclosed separately in the notes. 62

63 Offsetting deferred tax assets and liabilities (Accounting Standard for Tax effect accounting 3 2) Deferred tax assets (liabilities) classified as current assets (liabilities) and non-current assets (liabilities) are offset within each of these categories. (Practical Guidance on Accounting Standard for Tax effect accounting for consolidated financial statements 42) Deferred tax assets and deferred tax liabilities shall be offset if they relate to the income taxes of the same taxable entity. (IAS ) In rare circumstances and not limited to the same taxable entity, if certain conditions are met (for example, the entity has a legally enforceable right), deferred tax assets and deferred tax liabilities of different taxable entities are offset. *In, deferred tax assets (liabilities) are classified as current assets (liabilities) and non-current assets (liabilities), and are offset within those current/non-current categories. However, in, all deferred tax assets (liabilities) are classified as non-current assets (liabilities) and therefore there is no restriction of offset for current or non-current classifications as in. 63

64 Provisions and Contingencies Significant differences Criteria for recognition of a provision (Corporate Accounting Principles Explanatory Notes18) A provision shall be recognised when all of the conditions below are met: it relates to a specific future cost or loss; it arises from a past event; it has a high probability of occurrence; and the amount can be estimated reasonably. (IAS37.14) A provision shall be recognised when all of the following conditions are met: an entity has a present obligation (legal or constructive) as a result of a past event; it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation; and a reliable estimate can be made of the amount of the obligation. Constructive obligations Present obligation of provisions Major inspections or repair costs There are no specific rules. Even if it is not a present obligation, a provision shall be recognised when it satisfies the above conditions. (Corporate Accounting Principles Explanatory Notes 18) Special repair provisions are given as an example of non-current liabilities. The amount of the provision which relates to the current period is recognised as a current period profit or loss. (IAS37.10) Liabilities include both legal and constructive obligations. A constructive obligation is an obligation that derives from an entity s actions where: (a) by an established pattern of past practice, published policies or a sufficiently specific current statement, the entity has indicated to other parties that it will accept certain responsibilities; and (b) as a result, the entity has created a valid expectation on the part of those other parties that it will discharge those responsibilities. (IAS 37.14(a)) It is not acceptable to recognise provisions unless they represent present obligations. (IAS16.14) Future costs of major inspections of items of PPE, which have not yet been carried out, are not permitted to be recognised as provisions. When the recognition criteria are fulfilled, such costs are recognised in the carrying amount of the item of PPE and are included in the depreciation charge. 64

65 Discounting the provision Environmental clean-up and decommissioni ng costs Onerous contracts Restructuring costs There are no specific rules. (Accounting Standard for Asset Retirement Obligations 6) An asset retirement obligation is calculated based on its discounted value. The discount rate used is the risk free pre-tax interest rate which reflects the time value of money. (Accounting Standard for Asset Retirement Obligations 4) Recognition of asset retirement obligations is required for legal or equivalent obligations. There are no specific rules. There are no specific rules. These are provided for based on the general requirements for provisions. (IAS ) Where the effect of the time value of money is material, the amount of a provision shall be the present value of the expenditures expected to be required to settle the obligation. The discount rate (or rates) shall be a pre-tax rate (or rates) that reflect(s) current market assessments of the time value of money and the risks specific to the liability. The discount rate(s) shall not reflect risks for which the future cash flow estimates have been adjusted. (IAS ) The general principles of IAS37 are applied to provisions for environmental clean-up and decommissioning costs etc. In other words, if a legal obligation or a constructive obligation exists, a provision shall be recognised. (IAS37.10,66-69) An onerous contract is a contract in which the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received under it. If an entity has a contract that is onerous, the present obligation under the contract shall be recognised and measured as a provision. (IAS ) A provision for a constructive obligation to restructure is recognised under the general recognition criteria of IAS37 when an entity: a) has a detailed formal plan for the restructuring and b) has raised a valid expectation in those affected that it will carry out the restructuring by starting to implement that plan or by announcing its main features to those affected by it. 65

66 Contingent assets: definition and disclosure Measurement of a provision within a range of expected outcomes There are no specific rules. (Corporate Accounting Principles Explanatory Notes 18) Only a rational basis is accepted for the estimation of a provision, and so there is no requirement to give an explanation of the details of the measurement method. (Accounting Standard for Asset Retirement Obligations 6) An asset retirement obligation is calculated by discounting future cash flows, using either the most likely outcome or the expected value method. (IAS37.10,89) A contingent asset is a possible asset that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity. Where an inflow of economic benefits is probable, an entity shall disclose a brief description of the nature of the contingent assets at the end of the reporting period, and, where practicable, an estimate of their financial effect should be disclosed. (IAS37.39,40) Where the provision being measured involves a large population of items, the best estimate is the expected value (if all possible outcomes in the range have the same probability of occurrence, the mid-point can be used). Where a single obligation is being measured, the individual most likely outcome may be the best estimate of the liability. 66

67 Construction Contracts Significant differences When the outcome of a construction contract cannot be measured reliably Resolution of the uncertainty of the outcome (Accounting Standard for Construction Contracts 9) The contract completion method is applied. (Implementation Guidance on Accounting Standard for Construction Contracts 3,14) Changing from the use of the percentage of completion method should not be made only because of certainty derived from subsequent events. However, this does not apply to subsequent determinations which should have been made at the commencement of the contract. (IAS11.32) A method based on the recoverability of construction costs is applied (that is, revenue shall be recognised only to the extent of contract costs incurred for which recovery is probable). (IAS11.35) From the point when the uncertainties over the outcome of the construction work are resolved, the stage of completion method is applied. 67

68 Revenue Recognition Significant differences Basic concept (Corporate Accounting Principles 2 3B) Revenue related to the sale of goods or rendering of services should be recognised in accordance with the realisation principle. Identification of the transaction Aside from the "Practical Guidance for Software Transactions and the Standard on Accounting for Construction Contracts", there are no general rules regarding the identification of transactions, or whether those transactions require separation or combination. (IAS18.7) Revenue is defined as the gross inflow of economic benefits during the period arising in the course of the ordinary activities of an entity when those inflows result in increases in equity, other than increases relating to contributions from equity participants. The standard specifies requirements for recognising revenue from the sale of goods, the rendering of services, and from interest, royalties and dividends. In addition, practical examples of applying the general principles of IAS 18 are given in the Appendix. (IAS18.13) It is necessary to apply the revenue recognition criteria to the separately identifiable components of a single transaction in order to reflect the substance of that transaction. On the other hand, more than one transition should be treated as a single transaction when the commercial effect cannot be understood otherwise. Presentation of revenue Contracts with deferred payment terms (e.g. instalment sales contracts) Aside from the "Practical Guidance for Software Transactions", there are no general rules regarding the presentation of revenue. (Corporate Accounting Principles Note 6) Even if the difference between the fair value and the nominal amount of consideration is, in substance, interest income, the interest element does not have to be accounted for separately. In addition to the normal sales method, accepted methods of accounting for such sales are the due date method and the cash basis. (IAS18.8, Appendix21) Amounts collected as an agent on behalf of a principal, which do not bring economic benefits to the entity, do not result in increases in equity and therefore only commission income is recognised. (IAS18.11,IE8) Revenue is measured at the fair value of the consideration received. For transactions with a financial element, like instalment sales contracts, consideration is determined using an imputed rate of interest and the interest element is separately recognised. The due date method and recognition on a cash basis are not allowed. 68

69 Sales Incentives Sales of goods Rendering of services Rendering of services: where the outcome cannot be reliably measured (Regulation for Terminology, Forms and Preparation of Financial Statements 93) A cash discount on sales is expensed as non-operating expenses. A sales incentive is either deducted from sales or recorded as selling and administrative expenses for practical purposes. (Corporate Accounting Principles 2,3B,Note 6) There is no specific definition of realisation nor are there standard requirements for revenue recognition. In general, realisation refers to economic transactions conducted with third parties, in other words when the goods or services are converted to a form of monetary asset. The realisation principle is applied as guidance for the recognition of sales. However, in practice, a delivery basis and a shipping basis for revenue recognition are also applied, and so the timing of recognition depends on established commercial practice. There are no specific rules. There are no specific rules. (IAS 18.9,10) The amount of revenue is measured at the fair value of the consideration received or receivable taking into account the amount of any trade discounts and volume rebates allowed by the entity. (IAS18.14) Revenue from the sale of goods shall be recognised only if: the entity has transferred to the buyer the significant risks and rewards of ownership of the goods; the buyer of the goods controls those goods; the amount of revenue can be measured reliably; it is probable that there will be an inflow of economic benefits to the entity; and the costs incurred can be measured reliably. (IAS18.20) When the following conditions are met: the amount of revenue and costs can be measured reliably, it is probable that the economic benefits associated with the transaction will flow to the entity the stage of completion of the transaction can be measured reliably, Then the revenue associated with the transaction shall be recognised by reference to the stage of completion of the transaction. (IAS18.26) Revenue shall be recognised only to the extent of the expenses recognised that are recoverable. 69

70 Dividends received Separate identification of transactions (customer loyalty programmes) (Accounting Standard for Financial Instruments and related Implementation Guidance and Practical Solution 94) In terms of marketable securities, dividends are recognised based on the expected declared amount per share on the ex-dividend date, for each class of security. For non-marketable securities, dividends are recognised on the date when the declaration of dividends is approved by a shareholder's meeting or another authorised board meeting. However, dividends are allowed to be recognised on the date received provided that the recording entity uses the same accounting method consistently for all securities. There are no clear rules. In practice it seems that in many cases the full amount of revenue is recorded at the time of sale and a provision for the expected cost of fulfilling the customer loyalty obligation is recorded. (IAS (c) ) Dividends shall be recognised when the shareholder's right to receive payment is established. (IFRIC13.3, 5-7) When customer loyalty credits are awarded at time a sale is made, the fair value of consideration is divided with reference to the relative fair values of the goods sold and the credits awarded. The portion of revenue for the goods sold is recognised at the time of the sale and the portion of revenue in respect of the credits awarded is recognised when the points are utilised. 70

71 Share-Based Payments Significant differences In scope transactions and effective date (Accounting Standard for Share-based Payment 17) The guidance in this standard is to be applied to stock options, options such as rights relating to the company s stock and payments made through stock transfers from the date of the implementation of the Companies Act (1 May 2006). (2.53,54,58) For equity settled share-based payments, 2 shall be applied to grants of shares, share options or other equity instruments that were granted after 7 November 2002 and had not yet vested as at the effective date of 2. The entity is encouraged, but not required, to apply 2 to other grants of equity instruments if the entity has disclosed publicly the fair value of those equity instruments, determined at the measurement date. Classes of share-based payment transactions Equity-settled share based payments measurement date (Accounting Standard for Share-based Payment 28) Applies to stock options and situations where consideration for goods or services is given through equity-settled share-based payments. (Accounting Standard for Share-based Payment 6,14,15) Transactions with employees: Stock options granted as consideration for goods or services: grant date Transactions with parties other than employees: Stock options granted as consideration for goods or services: contract date Stock delivered as consideration for goods or services: contract date (2.2) 2 is applied to equity-settled and cash-settled share-based payment transactions, and transactions which provide a choice of cash or equity settlement. ( ) Transactions with employees: grant date Transactions with parties other than employees: date goods are obtained or services rendered 71

72 Equity settled share based payments measurement method If the fair value of the equity instruments granted cannot be estimated reliably Equity instruments with reload feature (Accounting Standard for Share-based Payment 6,14,15) Transactions with employees: Stock options at grant date: measure using a widely accepted measurement technique that gives a reasonable estimated value. Transactions with parties other than employees: calculate using whichever of the two methods below gives the most reliable valuation: fair value of the stock option (or stock) used as consideration; fair value of the goods or services received. (whichever gives the most reliable valuation is judged based on The Application Guidance 23) (Accounting Standard for Share-based Payment 13) There are no specific rules. However, for unlisted companies, it is possible to account for stock options based on the estimated intrinsic value per option, as a substitute for fair value. In this case, the intrinsic value per option at the grant date is estimated, and is not revised later. There are no specific rules. ( ) Transactions with employees: measure at the fair value of the equity instruments granted Transactions with parties other than employees: measure at the fair value of the goods or services received. Only where the fair value of the goods or services received cannot be estimated reliably, measure at the fair value of the equity instruments granted. (2.24) In rare cases, if the fair value of the equity instruments cannot be estimated reliably at the measurement date, the equity instruments are measured at their intrinsic value. This is measured initially at the date the entity obtains the goods or the counterparty renders service, and subsequently at each reporting date and at the date of final settlement, with any change in intrinsic value recognised in profit or loss. The goods or services received are recognised based on the number of equity instruments that ultimately vest or (where applicable) are exercised. (2.22) For options with a reload feature, the reload feature shall not be taken into account when estimating the fair value of options granted at the measurement date. Instead, a reload option shall be accounted for as a new option grant, if and when a reload option is subsequently granted. 72

73 Treatment after vesting date Cancellation or settlement of grant Lapse due to non exercise of options (Accounting Standard for Share-based Payment 8) If an option is exercised and new stock is issued, the portion of the amount recorded as share warrants that relates to the exercise of the option is transferred to paid-in capital. There are no specific rules. (Accounting Standard for Share-based Payment 9) When options lapse because they are not exercised, the portion of the amount recorded as share warrants (or options) that relates to those options is transferred as a gain in the profit and loss account. (2.23) The entity shall make no subsequent adjustment to total equity after vesting date. However, this requirement does not preclude the entity from recognising a transfer within equity, i.e. a transfer from one component of equity to another. (2.28) Account for the cancellation or settlement as an acceleration of vesting; Any payment made on the cancellation or settlement of the grant shall be accounted for as the repurchase of an equity interest. However, to the extent that the payment exceeds the fair value of the equity instruments (measured at the repurchase date), the recording entity shall recognise an expense for that excess. (2.23) No adjustment is made to the existing equity balance. However, an entity is not precluded from recognising a transfer within equity. 73

74 Employee Benefits, excluding Share-Based Payments Significant differences Defined Benefit Pension Plans Benefit Obligations (Accounting Standard for Retirement Benefits 2, 2 Practical Guidance on Accounting for Retirement Benefits 2) In principle, the value of accrued benefit obligations is calculated using the straight line method. Other methods such as a payroll basis, a percentage of salary method and a points basis may be used by way of exception. (IAS19.64,67) (Revised standard IAS 19.67,70) In principle, the Projected Unit Credit Method (accrued benefit valuation method) shall be used. However, the straight-line method is required if employee service in later years leads to a materially higher level of benefit than in earlier years. Defined Benefit Pension Plans Plan Assets (Accounting Standard for Retirement Benefits Note 1) When pension plan assets exceed retirement benefit obligations, the difference is recognised as a prepaid pension expense. (IAS19.58) Where there is a surplus of pension plan assets over obligations, an asset is recognised up to the limit of the total of: a) any unrecognised net actuarial losses and past service costs; and b) the present value of any economic benefits available as refunds from the plan or reductions in future contributions to the plan (the asset ceiling). (Revised standard IAS19.64) When an entity has a surplus in a defined benefit plan, it shall measure the net defined benefit asset at the lower of the surplus in the defined benefit plan and the asset ceiling 74

75 Defined Benefit Pension Plans - Discount rate Defined Benefit Pension Plans Expected Return Rate Defined Benefit Pension Plans Past Service Cost (Accounting Standard for Retirement Benefits partial revision (3) 2, Notes to the same standard 6) There is no hierarchy with which to consider the discount rate. The discount rate is determined based on the interest rates of highly stable long term bonds. This is the interest rate at period end available on long term government, governmental institution and high quality corporate bonds. (Accounting Standard for Retirement Benefits 3. 2(3)) The expected return on plan assets is calculated per individual pension plan asset at the beginning of the period using a reasonable expected return rate. (Accounting Standard for Retirement Benefits 3,2) In principle, past service costs are recognised as expenses, and are amortised over a fixed period (within the period of the remaining average service lives). The amortisation periods for past service costs and for actuarial gains and losses may be determined separately. For actuarial gains and losses, amortisation may commence from the period following the period in which they arose, however this is not allowed for past service costs. (Accounting Standard for Retirement Benefits Note 11) Past service costs relating to retired employees can be distinguished from other past service costs and can be expensed in full when they arise. (IAS19.78) (Revised standard IAS 19.83) The following procedure is followed. The rate used to discount post-employment benefit obligations (both funded and unfunded) shall be determined by reference to market yields at the end of the reporting period on high quality corporate bonds in a currency and with a maturity consistent to the benefit obligations. In countries where there is no deep market in such bonds, the market yields (at the end of the reporting period) on government bonds shall be used. (Revised standard IAS ) The net interest on the net defined benefit liability (asset) shall be determined by multiplying the net defined benefit liability (asset) by the discount rate stated above. (IAS19.96) In cases where benefits have already vested, an entity shall recognise the related past service cost immediately. In cases where vesting is not immediate, an entity shall recognise the related past service cost as an expense on a straight-line basis over the average period until the benefits become vested. (Revised standard IAS ) An entity shall recognise past service cost as an expense at the earlier of the following dates: a) when the plan amendment or curtailment occurs; and b) when the entity recognises related restructuring costs termination benefits. 75

76 Defined Benefit Pension Plans Actuarial Gains and Losses Defined Benefit Pension Plans Expense (Accounting Standard for Retirement Benefits 3, 2) (Accounting Standard for Retirement Benefits Note 9) In principle, actuarial gains and losses are recognised as expenses and amortised over a fixed period (within the period of the remaining average service lives). As per the above, the amortisation periods for past service costs and for actuarial gains and losses may be determined separately. For actuarial gains and losses, amortisation may commence from the period following the period in which they arose. (Accounting Standard for Retirement Benefit 3,1) Current service cost and interest cost are expensed as the components of defined benefit cost and if the pension plan is funded, the current expected return on the plan assets shall be deducted. (IAS19.92,93A,93B,93D) It is possible to chose any of the follow accounting policies: The corridor method: actuarial differences within a certain corridor are not recognised. However an entity may recognise these differences in profit and loss faster than over the expected average remaining working lives of the employees, provided that it consistently uses a systematic method. An entity which selects an accounting policy to recognise the actuarial differences in the period in which they occur, may recognise the differences outside the profit and loss account, in other comprehensive income. (Revised standard IAS 19.8, 57,63) An entity shall recognise the net defined benefit liability (asset) in the statement of financial position. Remeasurements of the net defined liability (asset) are to be recognised in other comprehensive income, including actuarial gains and losses. (Actuarial gains and losses must not be recognised as profit or loss in subsequent years) (Revised standard IAS ) An entity shall recognise the components of defined benefit cost, except to the extent that another requires or permits their inclusion in the cost of an asset, as follows: a) service cost in profit or loss; b) net interest on the net defined benefit liability (asset) in profit or loss; and c) remeasurements of the net defined benefit liability (asset) in other comprehensive income 76

77 Minimum funding requirement Defined benefit pensionconvenient method Retirement benefits other than pensions Paid vacation accrual There are no specific rules. (Implementation Guidance on Financial Instruments 34) Small sized entities are permitted to account for retirement benefit obligations using the convenient method or the short-cut method. There are no specific rules. There are no specific rules. (IFRIC ) In some cases, to protect employees, a minimum level of funding is required by the plan or the law. Such funding requirements are called minimum funding requirements. If the minimum funding requirement is larger than the actual plan assets, the deficiency should be recognised as an additional liability. There is no short-cut method. (IAS19.1,3,6) (Revised standard IAS19,2,4,7) With the exception of those benefits covered by 2 (Share Based Payment), all employee retirement benefits other than pensions are also within the scope of IAS19. Note: the post-employment benefits of directors are also included. (IAS ) Provisions for accumulating compensated absences must be recognised. 77

78 Appendix 1 - The Adoption of in Japan Since 2001, there has been a tremendous increase in the adoption of around the world. The precise way in which this has happened has varied among jurisdictions. This appendix summarises how Japan is approaching the adoption of. In 2007, an agreement between the Accounting Standards Board of Japan (ASBJ), and the IASB, known as The Tokyo Agreement, was announced. The Tokyo Agreement advanced the gradual convergence of Japanese GAAP and, which had been taking place for a number of years. Following the initial convergence projects under this agreement, in 2008 the European Commission accepted Japanese GAAP in its markets as part of its process to accept certain GAAP as equivalent to for listing non-eu companies in a European regulated market (as defined by the European Commission). Further convergence of Japanese GAAP has continued as new standards are issued or expected to be issued. Since adoption of is being considered for consolidated financial statements only, this convergence process is expected to continue as Japanese GAAP is used by Japanese companies in their standalone financial statements. In June 2009, the Business Advisory Council (BAC) a key advisory body to the Financial Services Agency approved a roadmap for the adoption of in Japan and the relevant related matters have subsequently been incorporated into the regulation for consolidated financial statements. The key points of this roadmap are: Option of voluntary adoption of from fiscal years ended after 31 March 2010 for companies with global financial or operating activities; and Decision on the mandatory adoption of to be made in In June 2011, the BAC announced that if mandatory application of were to be decided, a period of five to seven years would be given for preparing for adoption. This is a longer period than proposed in the June 2009 roadmap. A number of Japanese companies have already taken, or are planning to take, the option to apply voluntarily. 78

79 Appendix 2 - Related Resources Please use our knowledge fully. Ernst & Young Shinnihon LLC website We offer a variety of online resources that provide more detail about as well as things to consider as you research the potential impact of on your company. Ernst & Young Online Ernst & Young s information site for clients, that gathers the latest news from around the world, provides web-based learning, model financial statements a variety of other knowledge. A variety of Japanese language tools and publications: Outlook and Supplements to Outlook- These include a variety of publications focused on specific standards and industries. (English versions in GAAIT) Jouhou sensor our magazine combining accounting and tax information. In this magazine the section jitsumu kouza includes articles by EYSN s professionals on the interpretation of for specific topics and in a practical way. International GAAP This comprehensive book from Ernst & Young is updated annually and provides practical guidance for understanding and interpreting on a globally consistent basis. Web-based learning includes a number of web-based modules that address the basic accounting concepts and knowledge of. Global Accounting & Auditing Information Tool (GAAIT) English only. Subscription fee based. A multinational GAAP research tool that allows continuous access to important International GAAP information: Example option International GAAP online- includes Ernst & Young s International GAAP book, illustrative financial statements and disclosure checklists, all of the official IASB standards, exposure drafts and discussion papers, and full sets of reporting entities annual reports and accounts. International GAAP - Japanese language Japanese language version of the above. A Complete Comparison: Japanese GAAP and - Japanese language only Detailed explanation by topic with many examples of the differences between the fundamental concepts of Japanese accounting standards and, the resulting differences in accounting treatments, and related practical points. This book also includes differences in presentation and disclosure rules. Please send enquiries about our services to: Ernst & Young ShinNihon LLC Hibiya Kokusai Bldg Uchisaiwaicho, Chiyoda-ku Tokyo, Japan Tel: ( Department) 79

80 Ernst & Young ShinNihon LLC About Ernst & Young Ernst & Young is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 152,000 people are united by our shared values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve their potential. Ernst & Young refers to the global organization of member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit About Ernst & Young ShinNihon LLC Ernst & Young ShinNihon LLC is a member firm of Ernst & Young. We are the leading audit firm in Japan, with the largest number of people, and with offices throughout the country. We are committed to providing the highest quality audit and assurance services, and to offering a range of other financial advisory services. Together with the Ernst & Young global network, we strive to ensure trust in our capital markets and improve their functioning to achieve the potential of the global economy and our wider communities, which surround Japan.For more information, please visit Ernst & Young ShinNihon LLC All Rights Reserved. This publication and the materials referred to therein contain edited information in summary form and are, therefore, intended for general reference purposes only. They should not be used for specific purposes, or as a substitute for detailed research or the exercise of professional judgment. Neither Ernst & Young ShinNihon LLC nor any other member of the global Ernst & Young organization can take responsibility for the accuracy, completeness, applicability for purpose or any other aspect of the contents and nor shall they bear any responsibility whatsoever for loss occasioned to any person acting or refraining from action as a result of any material in this publication or the materials referred to therein.