Japanese M&A accounting and IFRS convergence

A Buddha viewed past a screen covered with cursive Japanese script

This article includes a summary of the most recent changes to Japanese accounting standards relating to enterprise combinations which were proposed in 2008 as part of Japan’s IFRS convergence process and which came into force at for transactions from 1 April 2010 onwards (although earlier adoption was possible from 1 April 2009). Japanese accounting standards relating to business combinations including mergers and acquisitions, corporate splits and other corporate reorganisation transactions are also listed below. Please also refer to this article giving an overview of Japanese purchase accounting and alternative accounting treatments in Japanese enterprise combination accounting.

History, overview of Japanese accounting standards relating to business combinations

Prior to the issue of the first set of Japanese accounting standards covering business combinations in 2003 the Japanese accounting treatment of mergers, acquisitions and similar transactions tended to be inconsistent with no clear guidelines applicable. At that time reference was made to the former corporate law which, on a merger or other allowed business combination transaction, was interpreted as allowing certain assets to be revalued to market price on a voluntary basis while others may be treated at being accounted for at their original book value.

In 2003 the Enterprise Accounting Council (kigyou kaikei shingi kai/企業会計審議会) published its first paper addressing Japanese accounting for business combinations: “Opinion Paper Concering the Establishment of Accounting Standards for Business Combinations” (kigyou ketsugou ni kakaru kaikei kijun no settei ni kansuru ikensho/企業結合に係る会計基準の設定に関する意見書) and following discussion in the Accounting Standards Board of Japan (kigyou kaikei kijun iinnkai/企業会計基準委員会) formed the basis of two standards issued in 2007 and subsequently revised, being (links in Japanese):

These standards are key Japanese accounting standards applicable to enterprise combinations. They underwent limited revision in 2006 and 2007 but were revised materially in 2008, principally as part of Japan’s first steps to converge with international accounting standards. Important changes his reform were the prohibition of merger/pooling of interest accounting (mochi bun pooringu hou/持分プーリング法) and to require immediate recognition of negative goodwill in the profit and loss account rather than amortisation over its useful life (less than 20 years).

These and other changes are summarised in the table found in this link which can also be found in the table below.

Item Pre 1 April 2010 1 April 2010 onwards
Ending of pooling of interests accounting Differentiate between cases where pooling of interests or purchase accounting could apply and where required use pooling of interests Determine the purchased business and apply purchase accounting. In line with international standards, merger/pooling of interests accounting no longer applies.
Intangible assets Consideration for acquisition of differentiable intangible assets can be allocated to such assets If intangible assets can be differentiated, then they should be accounted for as such (i.e. from voluntary allocation of purchase price to intangibles to compulsory accounting recognition)
Method of determining the acquired business Determine whether purchase or pooling of interests treatment applies; no need to identify the acquired business when pooling if interest accounting applied. In cases where it is difficult to determine the acquired business under standard consolidation/control principles refer to the guidlines to the business combination accounting standards
Method of determining the value of the acquired business in transactions where consideration for business combination includes an exchange of shares In principle the price of the shares exchanged for a logical period prior to the date of announcement of agreement to the transaction. However the use of the share price based on the value on the date of exchange is also possible. Calculation is based on the value of the shares on the day of the business combination
Accounting treatment for negative goodwill Amortise over an appropriate period of 20 years or less from time of acquisition Treat as income for the financial year end in which the negative goodwill arose (including treatment of any existing remaining amount as an adjustment on change of accounting policy)
Measurement of minority interest Allows choice out of valuation of minority interest based on part of minority interest held or minority’s share of whole value of business Only allows valuation of minority interest based on share of whole of value of business
Accounting treatment of step acquisitions Where another business is acquired in separate steps then the acquisition value is measured based on the accumulated investment cost Acquisition value is based on market value at the day of combination of the businesses concerned (note that this is relevant for consolidated accounting; in single entity accounting the accumulated investment cost approach is still applied)
Conversion of foreign currency denominated goodwill Where a foreign subsidiary is purchased giving rise to foreign currency denominated goodwill, conversion to JPY is based on FX rate at time goodwill arises Similar to other acquired assets of the target company, FX conversion of goodwill is made at the FX rate at the period end settlement date concerned.
Capitalised research and development costs Where part of consideration for acquisition is allocated to research and development costs, then the amount concerned is treated as expenses at the time of allocation As for other intangible assets, if an amount can be recognised as an intangible asset then recognise as such

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