Japanese uncertainty in a shift to IFRS: waiting on the SEC, Japan throttles back in a move toward IFRS with an abundance of caution and a bit of uncertainty.

• Author: Burkholder, Steve
• Position: Financial Reporting - International Financial Reporting Standards - Securities and Exchange Commission

Robert Herz, former chairman of the Financial Accounting Standards Board FASB), recently described Japan's approach to adopting International Financial Reporting Standards (IFRS) with a little algebra.

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In an interview last November with Bloomberg BNA, Herz called that strategy by Japan on IFRS "N plus one." In his formula, "N" is the position of the U.S. Securities and Exchange Commission (SEC) with regard to incorporation in this country of international accounting standards. According to Herz's math, Japan and its key financial regulator, the Financial Services Agency (FSA), are essentially waiting on the SEC.

So, too, are many who watch the development of global standards for accounting in the United States. Through much of 2011, the SEC had signaled that it would make a decision on IFRS incorporation before the end of that year.

Japanese securities regulators had said they aimed to decide the question of mandatory application of IFRS by listed companies in Japan "around 2012," according to FSA documents. The International Accounting Standards Board (IASB) issues the rules intended for global use from its offices in London.

Since that time, both the SEC and Japan's Financial Services Agency have throttled back decidedly in their movement toward potential adoption of IFRS. For the last two years, extreme care and caution--along with consensus-building--seem to be the operative watchwords in Japan with regard to the future of IFRS there.

In Japan, the IFRS Option

There is one significant difference between the Japanese and U.S. situations with regard to use of the IASB-written standards: since March 2010, Japan has approved voluntary application of IFRS by its listed domestic companies.

The SEC does not permit such an option. Comments by commission officials since 2011--together with FASB Chairman Leslie Seidman's recent critical observations on a voluntary IFRS course--suggest the agency is wary of moving in that direction.

Today, less than a dozen companies out of the approximately 3,600 exchange-listed Japanese public enterprises apply the international standards. About 20 more have committed to use what are known as "designated IFRS" by March 2015, according to public notices of a number of Japanese firms. Meanwhile, many large Japanese multinationals file financial statements using U.S. generally accepted accounting principles.

Both 2011 and 2012 passed without a verdict by the SEC on IFRS incorporation as the agency's staff continued careful study of the suitability of the global rules. The U.S. presidential election had cast doubt on a vote on IFRS incorporation. Also, the commission was busy at the time with myriad...