Accounting Standards Board of Japan 1 Japan’s Progress Toward Convergence Ikuo Nishikawa, vice-chairman Accounting Standards Board of Japan

2 Basic position of the ASBJ on international convergence Current situation surrounding the ASBJ Joint convergence project with the IASB Representative meeting with the FASB 1. Introduction

Accounting Standards Board of Japan 3 2. Basic position of the ASBJ on international convergence ‘‘ Medium-term operating policy of the ASBJ’’ in July 2004  The ASBJ agrees with the objective of international convergence to achieve high-quality accounting standards, since it is beneficial to respective capital markets around the world  The convergence should be attained through the process of assessment and selection by market participants from international accounting standards which are mutually accepted in major capital markets.  In order to promote international convergence into high-quality accounting standards, the ASBJ will establish closer relationship with other accounting standard setters around the world.

Accounting Standards Board of Japan 4 3. International Situation (1) Technical advice on equivalence of the third country GAAP (Japan, U.S. and Canada) was issued by CESR in July  Three countries GAAP are, taken as a whole, equivalent to IFRSs.  Remedies required (Japan:26, US:19, Canada:14) Draft proposal for postponement of the equivalence decision between IFRS and US GAAP, Japanese GAAP and Canadian GAAP for two years issued by European Commission in April The ASBJ released “Statement on Japan’s progress toward convergence between Japanese GAAP and IFRSs” on January 31, 2006.

Accounting Standards Board of Japan 5 3. International Situation (2) Discussion on “roadmap” between EU and SEC in April 2005  The IASB and the FASB released the new convergence plan in February Progress of other countries  Canada ： Canadian standards (for public companies) will be converged to IFRS by  China ： Started the convergence project with the IASB

Accounting Standards Board of Japan 6 4. Capital Markets in Japan Further globalization  Total value of Japanese stock markets: US 5trillion (comparable with those in the U.S. and European markets)  Overseas investors’ share of equity trading ： 33.7%  Overseas investors’ share of ownership ： 23.7% （ 2004 Survey of Tokyo Stock Exchange ）

Accounting Standards Board of Japan 7 5. Development of Japanese GAAP(1) Accounting standards developed by the ASBJ in 2005 will contribute to the convergence. (e.g.)  Share-based payments  Presentation of net assets in the balance sheet  Statement of changes in net assets

Accounting Standards Board of Japan 8 5. Development of Japanese GAAP(2) The following major accounting standards are also effective or to be effective this year.  Impairment of Fixed Assets(effective for FY beginning after April 1,2005)  Business Combination(effective for FY beginning after April 1,2006)

Accounting Standards Board of Japan 9 6. Importance of Convergence Dramatically Increased Joint convergence project with the IASB Convergence needs to be accelerated, in consideration of changes in surrounding environments.

Accounting Standards Board of Japan Joint Project with the IASB (1) Progress to date  Convergence meeting has been held semiannually in Tokyo and London since March  6 issues are selected for the first phase.  Exchange of views on the basic concepts of accounting standards has been made continuously.

Accounting Standards Board of Japan 11 Issues discussed in the first phase  Valuation method of inventories （ IAS2 ）  Segment reporting （ IAS14 ）  Related party disclosure （ IAS24 ）  Uniformity of accounting policies on overseas subsidiaries （ IAS27 ）  Investment property （ IAS40 ）  Cost of issuing new shares （ IAS32 ） * *Added at the second meeting （ Recognized as an expense or as a deduction from owners’ equity ） 7. Joint Project with the IASB (2)

Accounting Standards Board of Japan 12 (1-1) Additional topics for the first phase Asset retirement obligation(ARO)  ARO: Dismantling and removing cost assumed at the retirement or the decontaminating cost required by existing laws or contracts  Under IFRS and U.S. GAAP, estimated cost is capitalized as a part of the cost of the PP&E while ARO is recognized as a liability.  Deliberate recognition of ARO under Japanese GAAP 7. Joint Project with the IASB (3)

Accounting Standards Board of Japan Joint Project with the IASB (4) (1-2) Additional topics for the first phase Construction contract  Under IFRS and U.S. GAAP, the percentage of completion method is required.  Deliberate Japanese GAAP under which both the completed-contract method and the percentage of completion method are allowed  Deliberate the case when outcome of a construction contract cannot be estimated reliably

Accounting Standards Board of Japan 14 (1-3) Additional topics for the first phase Disclosures of FV of financial instruments  Under IFRS and U.S. GAAP, FV of all financial instruments is disclosed in the footnote.  Deliberate rationale to expand FV disclosure to all financial instruments (ex. loans, non-current receivables and loan-payables) in the footnote under Japanese GAAP 7. Joint Project with the IASB (5)

Accounting Standards Board of Japan 15 (2) Assessment of the first phase Steady progress in deliberation towards convergence Improved mutual understanding Need for action in light of changing conditions domestically and internationally 7. Joint Project with the IASB (6)

Accounting Standards Board of Japan 16 (3-1) Current Plan From “phased approach” to “whole picture approach”  Entire picture of convergence process  Classify “short-term project” and “longer-term project”  Review regularly differences and progress of deliberation (“on-going” process) 7. Joint Project with the IASB (7)

Accounting Standards Board of Japan 17 (3-2) Current Plan Short-term items (including 9 items)  Eliminate or find a way to eliminate major differences by 2008 Longer-term items  Differences primarily due to conceptual frameworks or legal restrictions, and items being discussed between the IASB and the FASB 7. Joint Project with the IASB (8)

Accounting Standards Board of Japan 18 Short-term items  Issues discussed in the first phase 1.Inventories(valuation method) 2.Segment reporting 3.Related party disclosures 4.Uniformity of accounting policies in overseas subsidiaries 5.Investment properties 6.Cost of issuing new shares 7. Joint Project with the IASB (9)

Accounting Standards Board of Japan 19 7.Joint Project with the IASB (10) Short-term items(cont.)  Additional topics for the first phase 7.Construction contracts 8.Asset retirement obligation 9.Disclosure of financial instruments at fair value (footnote)  Other 10.Leases

Accounting Standards Board of Japan 20 Longer-term items  Items which are currently discussed or will be discussed between the IASB and the FASB.The ASBJ will make comments on these items to the IASB and the FASB on a timely basis from the early stages. 7. Joint Project with the IASB (11)

Accounting Standards Board of Japan Joint Project with the IASB (12) Longer-term items (cont.) 1.Revenue recognition 2.Performance reporting 3.Intangibles (including R&D expenses) 4.Scope of consolidation (including SPE) 5.Fixed assets (impairment, revaluation) 6.Provisions 7.Fair value measurements 8.Fair value option

Accounting Standards Board of Japan Joint Project with the IASB (13) Longer-term items (cont.) 9.Financial instruments 10.Liabilities and equity 11.Government grants 12.Insurance contracts 13.Retirement benefits 14.Uniformity of accounting policies in associated companies 15.Inventories (LIFO) 16.Income taxes

Accounting Standards Board of Japan 23 Longer-term items (cont.)  Items on which IFRSs and U.S. GAAP have converged, but which differ from Japanese GAAP 1.Retrospective restatement 2.Business combinations (pooling-of-interest method, goodwill, etc) 7. Joint Project with the IASB (14)

Accounting Standards Board of Japan Joint Project with the IASB (15) Longer-term items (cont.)  Standards for which assessment of the market should be taken into consideration because of their resent developments 1.Share-based payments

Accounting Standards Board of Japan 25 (4) Efforts by the ASBJ Short-term items  Consensus-building among market constituents Longer-term items (a) Performance reporting (b) Revenue recognition (c) Scope of consolidation(including SPE) (d) Intangibles (e) Retrospective restatement Conceptual Framework  Authorization of conceptual framework 7. Joint Project with the IASB (16)

Accounting Standards Board of Japan Joint Project with the IASB (17) (5) Next meeting It will be held in September 2006 in London. Short-term and major long-term issues will be discussed.

Accounting Standards Board of Japan 27 An initial meeting was held in May 2006 in Tokyo.  Representatives of the FASB including Chairman, Robert Herz, will come to Japan. Major long-term issues was discussed.  Conceptual framework  Performance reporting  Business combination 8. Initiate Representative Meeting with the FASB