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Developments of Accounting Standards and XBRL Ikuo Nishikawa Vice Chairman

Developments of Accounting Standards and XBRL Ikuo Nishikawa Vice Chairman Accounting Standards Board of Japan November 7, 2005. １ . Introduction. Our organization Recent developments of Accounting Standards in Japan Joint project for convergence between ASBJ and IASB

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Developments of Accounting Standards and XBRL Ikuo Nishikawa Vice Chairman

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  1. Developments of Accounting Standards and XBRL Ikuo Nishikawa Vice Chairman Accounting Standards Board of Japan November 7, 2005

  2. １. Introduction • Our organization • Recent developments of Accounting Standards in Japan • Joint project for convergence between ASBJ and IASB • Expectation for XBRL

  3. １-１. Our organization -ASBJ and FASF 《FASF》

  4. １-２. ASBJ • BAC and Accounting Big Bang • Philosophy as a private sector • 13 board members, including 2 full-time members • 26 technical staff (second largest) • FASF’s activity

  5. １-３. Process of discussions • Meetings are open to public. • Approval by FSA • Due process - exposure draft and discussion paper • Approved for issuance on the Board when 60% or more favor • Standards and other final documents ：25 Outstanding ED and Discussion paper : 19

  6. ２-１. Recent Developments of Accounting Standards • Business combinations and Business Divestiture • Share-based Payment • Presentation of Net Assets on the Balance Sheet • Statement of Changes in Equity • Quarterly Financial Reporting ※except themes on joint project between the ASBJ and the IASB

  7. ２‐２. Business combination (1/2) Summary of Accounting Treatment under the Purchase Method (1) Measurement of acquisition cost Acquisition costs※ 　　＋Direct expenses incurred for acquisition ※Public entity：Fair value of shares issued upon acquisition (2) Allocation of acquisition cost Scope：Identifiable assets and liabilities Amount：Fair value as of acquisition date 　　 　①Market price 　　　 ②Amount reasonably calculated Differences （Goodwill（or Negative goodwill）） To be amortized over the period expected utility to the acquirer but less than 20 years

  8. ２‐２. Business combination (2/2) • Distinction between acquisition and combining of interests Acquirer is identified simultaneously Consideration criterion （voting common stock） Ｎｏ Applying the purchase method Yes Voting rights ratio criterion （within a range from 55％～45％） Ｎｏ Yes Criteria other than voting rights ratio （4 criteria including occupying majority of board members） Ｎｏ Yes Combining of interests （Applying the pooling of interests method）

  9. ２‐３. Business Divestiture Relationship between accounting for business combination and accounting for business divestiture Accounting for owners (whether transfer gains or losses are recognized or not) Owners of entity combined Owners of combining entity consideration Entity divesting business (entity combined) Company A Transferred business Business a Transferred business Business a Entity accepting business (combining entity) Company B Business Accounting for business divestiture Continuity or liquidation of investment Whether transfer gains or losses are recognized or not Accounting for business combination Acquisition or combining of interests Whether goodwill is recognized or not

  10. ２‐４. Share-based Payment (1/2) • Scope • Share-based compensation arrangements with employees or directors • Share-based payment transactions with those other than employees or directors when goods or services are received • Arrangements in which a company’s own equity instruments are used as consideration

  11. ２‐４. Share-based Payment (2/2) • Recognition and Measurement • Recognition - Compensation cost should be recognized over the period for services rendered - Credit entries are recorded in “net assets” - When exercised : reclassified into owner’s equity • Measurement - Fair value at the time of grant - Not reviewed afterwards

  12. ２‐５. Presentation of Net Assets on the Balance Sheet • Background • Trigger : Controversy over the credit entry of Stock option • Harmonization with international accounting standards • Overview • Net Assets consists of • Owners’ equity： attributable to shareholders of the parent company • Other components:OCI, Warrants issued, Minority interest

  13. ２‐６. Presentation of Net Assets on the Balance Sheet Net assets Ⅰ Owners’ equity 1 Common stock××× 2 Capital surplus××× 3 Retained earnings××× 4 Treasury stock △ ××× Total owners’ equity××× Ⅱ Accumulated other comprehensive income 1 Net unrealized gains or losses on available-for-sale securities ××× 2 Deferred gains or losses on hedging instruments ××× 3 Foreign currency translation adjustments ××× Total accumulated other comprehensive income ××× Ⅲ Warrants issued××× Ⅳ Minority interest××× Total net assets ×××

  14. ２‐７. Statement of Changes in Equity • Background • Newly required by the New Company Act • Convergence with international accounting standards

  15. ２‐８. Quarterly Financial Reporting • Background • The quarterly financial reporting system will be introduced to Japanese listed companies by Securities and Exchange Law

  16. ３-１. Basic position of ASBJ on international convergence • The ASBJ agrees with the objective of international convergence to high-quality accounting standards, since it is beneficial to respective capital markets around the world. • In order to promote international convergence to high-quality accounting standards, the ASBJ will establish closer relationships with other accounting standard setters around the world. • The ASBJ believes that the international convergence to high-quality accounting standards should be attained through the process of assessment and selection by market participants.

  17. ３-２. Launch of the project • Sir David Tweedie, chairman of the IASB, proposed the joint project for convergence. (July 2004) • The ASBJ replied that it agreed with the proposal to launch the joint project. (September 2004) • Sir David Tweedie visited Japan. The ASBJ and the IASB started talks about the joint project. (October 2004) • The ASBJand the IASB agreed to the key elements on proceeding the joint project. (January 2005)

  18. ３-３. Key elements for joint project(1/2) － Key elements agreed • Utilize their respective conceptual frameworks or basic philosophies to choose the better accounting standards. • Address the differences in their respective conceptual frameworks later in the project as a separate subproject, at a time agreed by the boards. • Consider their respective due process requirements in arriving at agreement. • The ASBJ will undertake a study to get an overall picture of major differences between the respective standards and will identify topics to be discussed. • Adopt a phased approach to the comparative reviews of differences in individual standards.

  19. ３-３. Key elements for joint project(2/2) － Key elements agreed (continued) • The scope of the first phase is the standards in place as of 31 March 2004, with the following exceptions; • Standards under review or intended to be reviewed in the joint projects between the IASB and the FASB. • Standards that are divergent owing to differences in the respective conceptual frameworks or basic philosophies. • Standards recently developed. • Standards whose requirements are subject to legal restrictions or those currently considered inapplicable in Japan.

  20. ３-４. Initial meeting • The ASBJ and the IASB held initial meeting on March 9 and 10, 2005 in Tokyo. 　　　（Contents） • Basic philosophies underlying Japanese accounting standards (based on our discussion paper “Conceptual Framework of Financial Accounting”) • Comparison between Japanese accounting standards and IFRSs • Topics to be addressed in the first phase of the project

  21. ３-５. First phase agenda • Topics addressed in the first phase of the project （1） Measurement of inventories（IAS2） （2） Segment reporting（IAS14） （3） Related party disclosures （IAS24） （4） Unification of accounting policies applied to foreign subsidiaries（IAS27） （5） Investment property（IAS40） 　　＊Each topic will be deliberated within a year or two. 　　＊There may be additional topics in the first phase.

  22. ３-６. Second meeting • Second meeting was held in London on September 23. • Agenda • Details of progress concerning the five topics in the first phase • Additional topics in the first phase and other • Conceptual frameworks (Recognition and measurement) • Hedge accounting, Asset removal obligation

  23. ３-７. Our thought • Our ultimate goal is international convergence to a set of high-quality accounting standards. • Attention should be paid to the de facto rules prevailing in capital markets. • Accord with the constituents of global markets should be more strengthened.

  24. ４-１. Objectives of Accounting Standards and XBRL • Accounting Standards　⇒ Decision-making usefulness of financial reporting (overall) • XBRL　 ⇒ Enhancing the usefulness of financial reporting (user of XBRL)

  25. ４-２. Contribution of XBRL • Easy retrieval of necessary information • Enhanced comparability of financial analysis • Enhanced affirmation of consistency among data • Availability of comparative reports

  26. ４-３. Different Approach • Accounting Standards　⇒　 Conceptual and theoretical approach • XBRL　⇒ Series of interpretation

  27. ４-４. Developments of XBRL Taxonomy • No change for the approach of developing Accounting Standards • Accounting Standards Setters do not interfere with developments of taxonomy of XBRL • Wait for developments of taxonomy to reach the comfortable level

  28. ４-５. Expectation • Single Standards in the world is the ultimate goal • XBRL may function as a bridge • Future role of FASF?

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