European GAAP, Japanese GAAP

In most European countries, public entities are subject to IFRS and must prepare their accounts accordingly. While local GAAP is aligned to IFRS, it is here and in taxation that key differences emerge.

The European Union’s alignment to the International Financial Reporting Standard (IFRS) for accounting purposes makes financial reporting in Europe quite streamlined for companies. Private entities need to follow the local GAAP (Generally Accepted Accounting Principles), but in most European countries it is aligned to IFRS.

Differences do exist however, and one source of difference is the fact that IFRS as adopted by the EU is sometimes behind the actual IFRS standards. This is because the EU goes through an endorsement process, and this can result in a gap of approximately six months between the implementation of a new standard, and implementation in practice.

With regard to private entities and local GAAP, it is in the few European countries where this is not aligned to IFRS, in which differences occur. For example, in Italy, goodwill should be amortised, revaluation is not allowed, there are specific capitalisation rules and useful lives and only operating leases are recognised.

Efforts to align

There are various initiatives in Europe that look to align tax regulation. The EU is making moves to harmonise VAT legislation, making the rules more similar across member countries. And the common tax base is a recent initiative that would see companies with activities in various EU countries cumulate their expenses and revenues for a consolidated calculation of the profits. These would then be split among countries depending on the level of activity. While there are these initiatives intended to make tax more consistent, there is at the end of the day, a distinct national, local, flavour.

Financial reporting checklist

When it comes to financial reporting in different jurisdictions, there are several aspects you need to consider.

• The format of the financial report country-to-country and specific requirements, which can vary in complexity.
• Differences in terms of the accounting treatment. Usually the difference areas are in, for example, foreign exchange rates, fixed assets and how depreciation is calculated, inventory valuation.

Japanese GAAP

Japanese Accounting Standards (‘Japanese GAAP’) are developed by the Accounting Standards Board of Japan (ASBJ), which was established in 2001. Under an agreement between the ASBJ and the International Accounting Standards Board (IASB) entered into in August 2007, known as the Tokyo Agreement, the ASBJ had been working towards converging the requirements of Japanese Accounting Standards with International Financial Reporting Standards (IFRSs). The achievements under the agreement were jointly announced in June 2011 by the ASBJ and the IASB.

Voluntary adoption of IFRSs by public companies

Since 2010, eligible listed companies in Japan have been permitted to use IFRSs as designated by the Financial Services Agency of Japan (FSA) in their consolidated financial statements, in lieu of Japanese GAAP. As the FSA has designated all IFRSs as issued by the IASB before the effective date without an exception, the designated IFRSs are identical IFRSs as issued by the IASB.

Based on the most recent ordinances that govern eligibility requirements, Japanese listed companies or those applying for a listing to use designated IFRSs in their consolidated financial statements on a voluntary basis must establish internal processes to ensure appropriate reporting under designated IFRSs, with officers or employees who have sufficient knowledge of the subject being in place. There are filing requirements for eligible entities to disclose the fact designated IFRS have been used, and the basis of eligibility.

IFRSs are not permitted to be used in statutory separate financial statements in Japan.

Possible mandatory adoption of IFRSs in Japan

While Japan has considered the possible mandatory adoption of IFRS by public companies for some time, a decision to that effect is yet to be made. Currently, Japan is promoting greater use of IFRSs on a basis of voluntary adoption as explained above.

On 20 June 2013, the Japanese Business Accounting Council (BAC) released its final report titled “The Present Policy on the Application of International Financial Reporting Standards (IFRS)”. The report recommended a number of measures to contribute to greater, but not mandatory, use of IFRSs in Japan. Among others, the key recommendations in the final BAC report were:

• Increase the number of companies that can adopt designated IFRSs on a voluntary basis by eliminating certain eligibility requirements (already implemented in October 2013).
• The introduction of endorsement process and ‘endorsed IFRSs’ in Japan, which may include limited amendments to IFRSs based on specific criteria. The ‘endorsed IFRS’ would be promulgated by the Accounting Standards Board of Japan (ASBJ) and to be approved by the FSA. The ‘endorsed IFRS’ would be available for voluntary adoption by Japanese companies.
• Simplification of disclosure requirements in separate financial statements under Japanese GAAP