Journal of Modern Accounting and Auditing, ISSN 1548-6583
March 2013, Vol. 9, No. 3, 335-347

D

DAVID

PUBLISHING

Roadmap to Future Mandatory Application of International
Financial Reporting Standards (IFRS) in Japan From the
Perspectives of Financial Statement Preparers∗
Hu DanNagoya University, Nagoya, Japan

Yao JunRitsumeikan University, Kyoto, Japan

This paper seeks to contribute to the discussion on the future mandatory application of International Financial
Reporting Standards (IFRS) using data from a questionnaire-based survey administered to financial statement
preparers, that is, management in Japan. The important findings of this paper are as follows. The majority ofJapanese companies consider that the domestic markets are more important than overseas markets; the mostimportant differences between IFRS and Japanese standards are goodwill, comprehensive income, and therecognition of revenue; it is expected that IFRS would be applied only in consolidated financial statements or inboth consolidated and parent companies’ separate financial statements; and the lack of legislation making it
mandatory is the main reason why IFRS has not been adopted by Japanese companies. Overall, this paper foundthat Japanese management is prudent and passive regarding IFRS adoption, leaving room for further discussions on
the future mandatory application of IFRS in Japan.
Keywords: International Financial Reporting Standards (IFRS), Japanese Generally Accepted Accounting
Principles (GAAP), convergence

Introduction
The current research attempts to investigate issues concerning the adoption of International AccountingStandards (IAS) or International Financial Reporting Standards (IFRS) from the perspectives of financial
statement preparers.
The “Interim Report: Application of International Financial Reporting Standards (IFRS) in Japan” (the“Interim IFRS Roadmap”) was published on June 30 (described in Section 3), which was based on the exposure
draft published on February 4, 2009. After investing efforts for 10 years on producing high-quality accounting
standards that reflect the Japanese way of conducting business and the exploration of ways to converge with
global financial reporting standards, Japan has apparently taken a critical step forward towards adopting IFRS.
∗

Acknowledgements: Hu and Yao would like to thank Chitoshi Koga (Doshisha University), Norio Igarashi (Yokohama National
University), and Hajime Yasui (director of Aarata Institute, PwC Japan) for assisting in the data collection of this study. Hu thanks
the funding support from Japan Society for the Promotion of Science (JSPS) KAKENHI Grant Number 24730385, JSPS Strategic
Young Researcher Overseas Visits Program Number J2302, and Nitto Promotion of Science Foundation.
Hu Dan, Ph.D., associate professor, Graduate School of Economics, Nagoya University. Email: kotan@soec.nagoya-u.ac.jp.
Yao Jun, Ph.D., assistant professor, College of Business Administration, Ristumeikan University.

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ROADMAP TO FUTURE MANDATORY APPLICATION OF IFRSThe main points of the report concern the voluntary adoption of IFRS in consolidated financial statements,
starting with the fiscal year ending on March 31, 2010, for “companies with global financial/operating
activities” and the possibility of mandatory application of IFRS in Japan.
As we know, the approach to achieving a single set of global accounting standards is two-pronged:
adoption and convergence. Japan and the US have been regarded as examples of convergence countries.
However, the Interim IFRS Roadmap indicates a future approach where IFRS can be used and Japan would
adopt IFRS in some manner in the future. Therefore, the issuance of the initial IFRS draft roadmap would
signify far-reaching regulatory changes that would require some important issues be considered and dealt with.
For example, before the final decision on mandatory adoption is made, questions such as whether to adopt
IFRS in both consolidated financial statements and non-consolidated financial statements or in consolidated
financial statements alone, what kinds of companies should be required to prepare financial statements incompliance with IFRS, what are the incentives for and obstacles preventing companies from implementing
IFRS, and other related questions should be answered on the basis of a comprehensive investigation. Since
these issues are very pertinent for financial statement preparers, it is relevant to explore their understanding of
IFRS and their opinions regarding the adoption of IFRS and the preparations for its application.
The authors conducted a survey investigating leading Japanese companies’ views on the IFRS application
before the publication of the initial IFRS roadmap, when Japan was deliberating over convergence and adoption.
The authors aimed to provide evidence for or against the adoption of IFRS from the perspective of financial
statement prepares. However, the result of the survey is also relevant at this time because it refers to the issues
proposed in the Interim IFRS Roadmap. The result of the survey is expected to provide implications for setting
future standards regarding the mandatory application of IFRS and to provide evidence for establishing, training,and supporting the program with regard to the application of IFRS in Japanese companies.
Section 2 first introduces the context for Japan’s move towards IFRS adoption to indicate the importanceof strategic structuring of an accounting system based on a comprehensive understanding of the situation ofJapanese companies and their accounting contexts. Section 3 specifies the significance of the Interim IFRS
Roadmap and important issues concerning adoption that is to be considered. Section 4 considers the mostimportant influential factors that affect the accounting practices of Japanese companies, the features ofJapanese accounting, and the differences between IFRS and Japanese Generally Accepted Accounting
Principles (GAAP) that have a direct bearing on the problems concerning the application of IFRS in Japanesecompanies. Section 5, based on the analysis in Sections 3 and 4, investigates Japanese managers’ opinions on
issues concerning IFRS application and the perceived proper way of application. Finally, Section 6 identifies
some problems facing companies and provides concluding remarks.

Background: Accounting Development Towards Adoption
Since 1997, the Japanese government had decided on the basic policy regarding the Japanese Financial
Big Bang in an attempt to sweep away the lack of transparency that was said to characterize the Tokyo market
and to improve its globalization by constantly focusing on global standards instead of domestic logic. In thefollowing decade, Japan extensively reformed its accounting system and commercial code to achieveinternational standards, well known as the “Accounting Big Bang.” Although with these reforms, Japanese
accounting became quite similar to the IAS/IFRS, some differences in specific accounting standards continue toexist.

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337

However, since there was no clear strategy for structuring the accounting system, the regulator’s opinion
regarding IAS/IFRS adoption kept changing. In 2002 and 2003, the Japanese Financial Services Agency,
Ministry of Justice, and Nippon Keidanren1 expressed negative opinions regarding the adoption of IAS/IFRS.
In contrast, there appeared an international trend of convergence with IAS/IFRS during the same period andthis trend spread. On October 29, 2002, the International Accounting Standards Board (IASB) and the US
Financial Accounting Standards Board (FASB) jointly issued a memorandum of understanding which
formalized their commitments to the convergence of the US and IAS. Moreover, during the following year, thatis, 2005, which might be seen as the beginning of a new era for financial reporting, IAS and IFRS were adopted
in European Union (EU) countries. In keeping with this trend, in March 2005, a joint project on theconvergence of Japanese GAAP and IFRS was established in Japan to analyze and discuss the equivalence ofJapanese GAAP and IFRS (Koga & Rimmel, 2007). Nippon Keidanren changed its opinion in favor of
convergence with IAS in 2006, three years after it expressed a negative opinion regarding adoption. However,there was still no real progress. In 2007, with the publication of the US Securities and Exchange Commission’s(2007a; 2007b) concept release on allowing US issuers to prepare financial statements in accordance with IFRS
(the concept release) and its proposal, acceptance from foreign private issuers of financial statements preparedin accordance with IFRS without reconciliation to US GAAP, Japan found itself falling behind in the global
trend. Therefore, generally speaking, after the Big Bang, Japan seemed to lag behind its European and US
counterparts in converging with IAS/IFRS. The changing opinion of the regulator was apparently owing to theexternal influences of international trends and the lack of a strategy based on the comprehensive understandingof the state of Japanese companies and their accounting environments.

The Publication of the Interim IFRS Roadmap
A major step towards Japan’s adoption of IFRS is the publication of the “Interim IFRS Roadmap” whichindicates that the attitude of the Financial Services Agency (FSA) towards the adoption of IFRS is positive. The
Business Accounting Council (BAC), a key advisory body to the commissioner of the FSA, approved theroadmap for the adoption of IFRSs in Japan. Sir David Tweedie, chairman of the IASB, said the following on
the announcement of the adoption of IFRSs in Japan (IASB, 2009):
This is a landmark decision, both for Japan and for IFRSs. For Japan, it signals the eventual adoption of IFRSs. For
the IASB, adoption of IFRSs by the world’s second largest national economy underscores the truly global nature of IFRSs
and the acceptance of these standards by all major economies.

In the Interim IFRS Roadmap, continuing convergence has been emphasized. At the same time, thedirections for Japanese GAAP are indicated, including topics on issues concerning the application of IFRS in
Japan and the required approach. These issues include the optional application and considerations for the
mandatory application of IFRS in Japan, for example, scope and methods for mandatory application, treatmentof non-consolidated financial statements, etc..
One of the arguments for the adoption of IFRS is that adopting IFRS can improve the comparability ofaccounting information and transparency. The mission of IASB is to develop a single set of high-quality global
1

Nippon Keidanren (Japan Business Federation) is an umbrella economic organization born in May 2002 through theamalgamation of Keidanren (Japan Federation of Economic Organizations) and Nikkeiren (Japan Federation of Employers’
Associations). Its membership comprises 1,285 companies, 127 industrial associations, and 47 regional economic organizations(as of March 29, 2012).

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accounting standards that are accepted worldwide. Though IFRS enables improved comparability, it should be
noted that comparability should not be confused with uniformity, because comparability means that similar
things should look alike and different things should look different (Barth, 2008). It is obvious that majorinternational differences exist in accounting practices and the possible causes of differences may not becompletely eliminated even if adopting the IAS (Alexander & Nobes, 2009). Therefore, IFRS, if to be adopted
in Japan, must faithfully reflect the economic reality of businesses and trade practices in Japan, as well as in the
global financial and capital market. Hence, the continuing convergence is still emphasized in the Interim IFRS
Roadmap.
On the other hand, though the Interim IFRS Roadmap indicates acceptance of IFRS, several problems stillneed to be tackled, including the above issues indicated in the report because of the existing differences
between IFRS and Japanese GAAP and the cause of the differences which may not be eliminated entirely. As
we know, accounting standards can be regarded as fully functional only if financial reports are appropriately
prepared. Therefore, when the manner of adoption, especially mandatory application, is to be determined, thefeatures of Japanese accounting, situation of Japanese companies, difference between IFRS and Japanese
GAAP, and other related issues should be understood, just as the Interim IFRS Roadmap makes clear:… Japan must be prepared to take on the issue of mandatory application of IFRS from a broad range of perspectives,
defining the path to be taken in the case of making the use of IFRS by a certain range of Japanese companies mandatory,
while attending to the various aforementioned conditions in Japan and abroad… (Business Accounting Council, 2009,
p. 16)The Features of Japanese Accounting
In this section, the authors will analyze the major environmental factors that influence companies’
accounting practices, particularly, the factors that directly influence the incentive to implement IFRS, featuresof Japanese accounting, and the major differences between IFRS and Japanese GAAP, in order to acquire anunderstanding of the relevant issues that must be considered in making the final decision on whether and how
IFRS should be complied with.
First, a large list of possible causes of international differences can be found in the writings of previous
researchers (e.g., Choi & Meek, 2005; Nobes & Parker, 2008). For example, the most frequently referredfactors that may influence accounting development are cultures, legal environment, providers of finance,
taxation, professionalization of the accounting profession, and other external influences such as the economy,
political events, and international influences. Although international influence seems to be the most significant
factor spurring the adoption of IFRS worldwide, the countries with a strong equity market and those with weakequity market accounting standards do not seem to follow the prevailing trend.
Among all the above factors affecting accounting development, the main variable apart from international
influences that explain the most important international differences in financial reporting is the financing
system, or particularly, the providers of finance. In countries where the capitals provided by banks or family
companies are very important, the banks or family companies may nominate directors and thus be able toobtain restricted information and affect decisions. In this case, the need for published information is muchlesser because of this access to private information. In other countries where the major sources of corporate
finance have been the share capital and loan capital provided by large numbers of private investors, especiallyforeign investors, there is a relatively strong requirement for unbiased information regarding the success of a

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339

business and its state of affairs. It is reasonable to assume that companies with different capital structures may
have different opinions on IFRS.
Japan seems to be a unique case. It has a fairly important equity market, although not as important as thatin the US or the UK. Furthermore, many Japanese companies own shares in each other, and therefore, the total
number of listed companies and market value is exaggerated when making an international comparison. Thus,
an understanding of the major finance resource of Japanese companies and their perceptions of the importanceof domestic and foreign equity markets is beneficial when deciding if there is a need for mandatory adoption.
Second, Japanese accounting has both German and American features. The Japanese accounting systemlargely consists of a commercial code borrowed from Germany during the late 19th century, overlaid with
US-style securities laws imposed during the late 1940s. Japanese accounting standards are characterized as
rule-based, which are similar to US GAAP, in contrast to IFRS which is characterized as principle-based. In
converging an accounting standard with IFRS, there are two approaches: the “principle-based approach” andthe “rule-based approach”. Under the former, the accounting standards are established on the bases of generalprinciples and the professional judgments of the financial statements makers, whereas, under the latter, theaccounting standards are established on the basis of more detailed and clear rules. Continuing convergence withIFRS should resolve the conflict between rule-based and principle-based accounting standards. On the other
hand, complete adoption of IFRS may mean a change from rule-based to principle-based accounting standards
that are assumed to have a great impact on financial statement preparers.
Third, the major difference in accounting standards between IFRS and Japanese GAAP concerns therecognition of revenue, research and development (R&D), financial instruments, lease accounting, etc.. These
differences are rooted in the basic accounting ideas of the two sets of accounting standards. The basic ideas of
IFRS are principle-based, financial position-focused statement, and fair value accounting, whereas those ofJapanese accounting are rule-based and attach great importance to income statements. Although the resulting
concrete differences in standards hold different levels of importance for Japanese companies, there is value inunderstanding the relative importance of each of the differences in accounting standards.

Investigation of Managers’ Opinions on IFRS Adoption
With the above considerations in mind, the authors conducted a survey to determine the necessity of
adoption and the possible problems concerning adoption from the perspectives of financial statement preparers.
In this paper, the authors referred to the chief financial officers (CFOs) and accounting managers of Japanesecompanies and asked questions to investigate their understanding of and opinions towards IFRS adoption andthe present situation of IFRS application in Japanese companies using a postal questionnaire.
Structure of Investigation Questionnaire
Since the provider of finance is one of the most important factors influencing the accounting practice, it is
helpful to know the capital structure and major finance sources of investigated companies. It is also relevant tounderstand how the accounting managers are prepared for adoption, for example, to explore how importantthey consider the difference between domestic accounting standards and IFRS to be, how would they prefer
IFRS to be adopted, the present adoption of IFRS in their companies, and the difficulties or otherconsiderations relating to the application of IFRS. Furthermore, if IFRS is to be adopted, the contradiction
between rule-based Japanese accounting and principle-based IFRS should be resolved. It is also important to340

ROADMAP TO FUTURE MANDATORY APPLICATION OF IFRS

understand the accounting managers’ opinions on principle-based and rule-based accounting, because thecharacter of accounting standards directly affects managers’ judgments and their accounting practices.
Therefore, the questionnaire comprised four parts:(1) Major finance sources and users of financial statements;(2) Attitudes towards and opinions on the adoption of IFRS;(3) The present situation of IFRS application;(4) The convergence approach of accounting standards.
Sample Selection and Collection of Responses
The sample selection and collection of responses of each investigation are summarized as follows. The
investigation selected 500 companies of which 67 are Japanese companies having the rank of a Fortune Global
500 in 2007. The questionnaires were sent to the CFOs or senior managers of these companies in 2008. One
hundred and fifteen useful responses were received (the response rate was 23%), of which 57 are Japanesecompanies (response rate 89%). In the current paper, the authors analyze only the data of Japanese companies.
The companies that are permitted to apply IFRS voluntarily and those that may be required to apply IFRS to theirfinancial statements in the Interim IFRS Roadmap are those that conduct global financial or business activities.
The investigated companies fall within the category of optional application or future mandatory application of
IFRS.
Results and Analysis
The respondent percentages reported in this paper are based upon the total number of responses to thequestions. The design of the questionnaire permits multiple answers for some questions. Consequently, thecombined responses for some questions may exceed 100%.
Major finance sources and users of financial statements. The first question asked the managers’ views
concerning the importance of domestic and overseas stock markets to their companies and the importance ofthe stock market and bond market. A 5-point Likert scale was used for measurement where “1” = Not importantat all, “3” = Not so important, and “5” = Very important.
domestic stock market
0.7

domestic bond market

overseas stock market

overseas bond market

rate of response (%)

0.6
0.5
0.4
0.3
0.2
0.1
0
1

2
3
4
Figure 1. The managers’ views on the importance of markets in Japan.

5

As shown in Figure 1, the domestic market was regarded by the largest category, 65% of respondents, as
being very important to their business activities. Some 42% of respondents indicated that the domestic bond

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market was very important. Overall, 23% of respondents rated the overseas stock market as either important orvery important. Though the majority of respondents rated the overseas markets as not being of the same
importance as the domestic markets, in general, they regarded the overseas market as important (see Figure 1
and Table 1).
Table 1The Managers’ Views on the Importance of Markets in Japan
MarketDomestic stock market
Domestic bond market
Overseas stock market
Overseas bond market

The average point
4.501
4.175
3.614
3.544

Sample company
n = 57n = 57n = 56n = 56Note. A 5-point Likert scale was used: “1” = Not important at all, “3” = Not so important, and “5” = Very important.

The perception that domestic markets are more important than overseas markets may suggest that Japanesecompanies give little attention to overseas users of financial statements, which may lead to a lack of incentive
to adopt IFRS. To confirm this, the second question in the questionnaire used a 5-point Likert scale aspreviously described to determine how CFOs or senior managers view the importance of financial statements tovarious users (see Figure 2 and Table 2).
Domestic institutional investors – stock market
Domestic individual investors – stock market
Overseas institutional investors – stock market
Overseas individual investors – stock market

Domestic institutional investors – bond market
Domestic individual investors – bond market
Overseas institutional investors – bond market
Overseas individual investors – bond market

0.8
0.7

Rate of response (%)

0.6
0.5
0.4
0.3
0.2
0.1
0
1

2

3

4

5

Figure 2. The managers’ views on the importance of financial statements to various users in Japan.

Table 2 shows that the entire set of respondents think that financial statements are important to most users(the average point > 3). Generally, the respondents assessed financial statements as being more important todomestic investors than to overseas investors. However, financial statements are important even for overseas
investors. Overall, as can be seen in Figure 2, 42% of the respondents think that financial statements are very
important to individual investors in the stock market, whereas 70% think that the financial statements are very
important to institutional investors. However, concerning investors in the overseas stock market, 60% of
respondents think that financial statements are important to institutional investors, whereas only 26% regard
them as very important to individual investors.

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ROADMAP TO FUTURE MANDATORY APPLICATION OF IFRSTable 2Comparison of the Managers’ Views on the Importance of Financial Statements to Various Users in Japan
Investor and market
Domestic institutional investors⎯stock market
Domestic institutional investors⎯bond market
Domestic individual investors⎯stock market
Domestic individual investors⎯bond market
Overseas institutional investors⎯stock market
Overseas institutional investors⎯bond market
Overseas individual investors⎯stock market
Overseas individual investors⎯bond market

The average point
4.632
4.158
4.263
3.839
4.386
3.982
3.614
3.321

Sample company
n = 57n = 56n = 57n = 56n = 57n = 56n = 57n = 56Note. A 5-point Likert scale was used: “1” = Not important at all, “3” = Not so important, and “5” = Very important.

The authors did a similar survey in 1997, and by comparing the results, they found that the managers’
perceptions that financial statements were most important to domestic institutional investors compared withother users remained unchanged over the past decade (Hu, 2012).
The authors also investigated the foreign ownership of each company. Approximately, 10% of the
respondents stated that their overseas investment is 0%; 48% of respondents, the largest group, stated that
foreign ownership is within “1%-10%”; 12% of respondents chose “11%-20%”; 20% of respondents chose“21%-40%”; and 10% of respondents said that their foreign ownership is “over 40%”.
Attitudes Towards and Opinions on the Adoption of IFRSThe fourth question asked the respondents about their preferences with regard to how IFRS is adopted.
There were three options: (1) only adopt IFRS or US GAAP; (2) use both IFRS (for overseas use) and Japanese
GAAP (for domestic use); and (3) use international accounting standards as supplementation to Japanese
GAAP. Forty one percent of respondents preferred to adopt only IFRS as the basic financial statements
standards. Another 29% of the respondents preferred to use IFRS as a supplementation to Japanese GAAP.
Only 11% selected the use of both IFRS and Japanese GAAP, which might because of the high costs of using
double standards and the complication of usage.
Then, the survey asked the respondents for their understanding of the difference between IFRS andJapanese accounting standards.
Table 3The Managers’ Views on the Importance of Differences Between Japanese GAAP and IFRS
Accounting standard
Goodwill
Comprehensive income
The recognition of revenue

The average point
4.636
4.327
4.018

Accounting standard
The average point
Allowance
3.545
Fixed tangible assets
3.509
Consolidated/South Pacific
3.491
Commission (SPC)
Business combination
3.981
Investment property
3.364
R&D
3.857
Foreign currency
3.127
Financial instrument
3.636
Lease
2.873
Employee payment*
Impairment*
Notes. (1) A 5-point Likert scale was used: “1” = Not important at all, “3” = Not so important, and “5” = Very important; (2) *:Additional indication by respondents.

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ROADMAP TO FUTURE MANDATORY APPLICATION OF IFRSThe results show that the differences between Japanese GAAP and IFRS, which are thought to be the mostimportant, are the standards for goodwill, comprehensive income, and recognition of revenue (see Table 3).
The differences in accounting standards for business combinations and R&D are also regarded as important. In
addition to those listed in the questionnaire, some respondents indicate that significant differences inaccounting standards for impairment and payment to employees are also important (see Table 3).
The authors also asked respondents to state their opinions on the change concerning the application of
IFRS five years from now. As can be seen in Table 4, most of the respondents expected that IFRS would be
increasingly used only in consolidated financial statements or in both consolidated and the parent company’s
separated financial statements. A minority of the respondents expected that IFRS would be adopted only in theparent company’s account or in a supplementary disclosure as well. If the expectation of these respondents iscorrect, they will need to plan for the switch to IFRS.
Table 4The Managers’ Views on the Expectation of Future Application of IFRSExpectation of future application of IFRSApplication only in consolidated financial statements
Application only in parent company’s separate financial statements
Application in both consolidated and parent company’s separate financial statements
Application only in supplementary disclosure

The average point
1.582
2.321
1.855
2.472

Sample company
n = 55n = 53n = 55n = 53Note. A 5-point Likert scale was used: “1” = Not important at all, “3” = Not so important, and “5” = Very important.

The survey then asked whether the respondents agreed with the statement that it would be difficult tochange from Japanese GAAP to IFRS. As can be seen in Table 5, 55% of respondents thought that it would be
difficult to change from Japanese GAAP to IFRS.
Table 5The Managers’ Views on Whether Changing From Japanese GAAP to IFRS Would Be Difficult
The managers’ view
Strongly agree
The percentage of responded companies 7.14%

Agree21.43%

Slightly agree
26.79%Disagree35.71%

Strongly disagree
8.93%

The Present Situation of IFRS Application
Only two out of 57 respondents from the usable sample reported that they were adopting IFRS when asked.
Another two Japanese companies answered that they were going to adopt IFRS though they were not using it atthat moment2. However, the vast majority (93.0%) of the respondents noted that IFRS was not being adopted
and they were not sure whether they would adopt it in the future.
The respondents who indicated that they were not yet adopting IFRS were questioned to explore the main
reasons why IFRS was not being adopted. The reasons suggested by these respondents are as follows: (1) The
cost is too high (10.5% of the respondents); (2) The staff training system is inadequate (24.5% of the
respondents); (3) The international accounting standards are inconsistent with Japanese accounting standards(38.5% of the respondents); (4) There is little benefit from the adoption of international accounting standards(22.8% of the respondents); (5) Adopting IFRS is not a legal requirement (52.6% of the respondents); and (6)2Note that even though the Japanese government (FSA) decided to adopt IFRS voluntarily from 2010, there was only one
company which did adopt IFRS in 2010 (Hu, 2011).

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ROADMAP TO FUTURE MANDATORY APPLICATION OF IFRSOther reasons (14.0% of the respondents). Multiple choices were permitted and respondents could cite otherreasons than those listed. Clearly, the lack of legal requirement for adopting IFRS was found to be the main
reason for the uncertainty regarding the future adoption of IFRS.
The authors then used the 5-point Likert scale to measure the respondents’ perceived importanceconcerning the benefit of adopting IFRS (see Table 6). The expected benefits are that: (1) It will improve thetrust and understanding of securities investors; (2) It will improve the trust and understanding of bond investors;(3) It will make it easier to issue securities in international markets; (4) It will reduce the costs of raising bondcapital; (5) It will improve the international image of the company; (6) It will reduce the barriers to listing inoverseas stock markets; and (7) It will reduce the cost of creating financial statements. The majority of the
respondents perceive that the most important benefits of IFRS adoption are the greater ease of issuing securities
in international markets (61%), the improved trust and understanding of securities investors (58%), and the
reduced barriers to listing in overseas stock markets (51%). It is obvious that the greatest benefit of IFRS
adoption is related to international markets, international status, and international fund-raising. Only 9% of
respondents think that the reduced cost of making financial statements is an important or very important factor.
It is interesting that the perceived benefits have changed over the years (Hu, 2012). To be specific,
respondents in the 2008 investigation thought more negatively about IFRS adoption and they perceived lessbenefits than those did in 1997. For example, in 1997, Japanese managers regarded improving the trust andunderstanding of stock investors as a very important benefit, whereas in 2008 they did not ascribe great
importance to it. One of the reasons for this may be that managers have fully realized the achievement ofaccounting convergence towards IFRS through the Accounting Big Bang after 1997.
Table 6The Managers’ Views on the Perceived Benefits of IFRS Adoption
Perceived benefit of IFRS adoption
Improve the trust and understanding of stock investors
Improve the trust and understanding of bond investors
Make it easier to issue securities in international markets
Reduce the cost of raising bond capital
Improve the international image of the company
Reduce the barriers to list in overseas markets
Reduce the cost of making financial statements

The average point
3.754
3.684
3.930
3.246
3.474
3.790
2.263

Sample company
n = 57n = 57n = 57n = 57n = 57n = 57n = 57Note. A 5-point Likert scale was used: “1” = Not important at all, “3” = Not so important, and “5” = Very important.

Then, the questionnaire asked the accounting managers to state their perceptions of the relationshipbetween cost and benefit. The respondents displayed some skepticism regarding the benefits of IFRS adoption.
Indeed, 64% of the respondents thought that cost would exceed benefit, whereas 15% indicated that cost would
almost equal benefit. Only 1.8% expected that benefit would exceed cost (see Table 7).
Table 7The Managers’ Views on the Cost-Benefit Analysis of IFRS Adoption
Benefits greatly Benefits slightly Benefits equal
exceed costs
exceed costs
costs
The percentage of responded companies 1.82%
20.00%
14.55%The managers’ views

Costs lightly
Costs greatly
exceed benefits exceed benefits
40.00%
23.64%

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The Convergence Approach of Accounting Standards
Furthermore, as for the approach—either principle-based or rule-based approach—to adopting IAS, 60%of respondents regard the principle-based approach as more appropriate. The main reason given is that theaccounting under principle standards reflects the substance of the economy and it is easier to implement IFRS
in practice, because detailed rules may impede the use of IFRS in a Japanese context. In contrast, only 25%
think the rule-based approach is better, with the main argument being that the accounting method is clearlyprescribed so that it is easier to comply with in practice and the comparability of accounting information would
be improved.

Conclusions and Discussion
The present research investigated issues concerning the application of IFRS in Japan from the perspectivesof managers of Japanese companies, that is, the preparers of financial statements.
In the first three sections of the paper, the authors have indicated that the provider of finance and thedifferences in the basic idea and concrete standards between IFRS and Japanese GAAP might influence thefinancial statements preparers’ application of IFRS. These aspects should be considered when the scope andapproach of a mandatory application of IFRS are being decided. By investigating the major finances of leading
Japanese companies, the managers’ opinions on adoption, the present adoption by Japanese companies, andreasons for non-adoption were determined:(1) Over half of the largest companies in the sample have rather low foreign ownership (less than 10%). It
is obvious that the greatest benefit of IFRS adoption is related to international markets, international status, andinternational fund-raising. Thus, the Japanese companies expressed an assessment that financial statements are
more important to domestic investors than to overseas investors. Though the majority of the respondents rated
the overseas markets as being less important than the domestic markets, in general, they still regard overseas
financing markets as important;(2) The major differences in accounting standards concern the recognition of revenue, R&D, leases, andfinancial instruments, whereas the differences thought to be the most important by Japanese companies are
standards for goodwill, comprehensive income, and the recognition of revenue. The differences in accounting
standards for business combinations and R&D are also regarded as important;(3) Most of the respondents expected that IFRS would be increasingly used only in consolidated financial
statements or in both consolidated and parent companies’ separated financial statements;(4) The main reasons why Japanese companies have not adopted IFRS include the lack of a legal
requirement that IFRS be adopted, inconsistencies between IFRS and Japanese GAAP, and inadequate training
systems. The reason why Japanese companies display a negative attitude towards IFRS adoption may be that
the Japanese managers expect that the application of IFRS would be difficult. Furthermore, with theconvergence of Japanese standards with IFRS in 2008, Japanese companies became more confident about
preparing their financial statements under the domestic standards than before. They assume that even without
adopting IFRS, they can gain the trust and understanding of investors. Further, Japanese managers expectedthat the cost of IFRS adoption would exceed the benefit;(5) Principle-based accounting is thought to be superior to rule-based accounting by managers of Japanesecompanies.

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ROADMAP TO FUTURE MANDATORY APPLICATION OF IFRSThe above survey results provide some implications for regulation consideration and training programs.
The following points require the attention of regulators. First, though the globalization of the Japanese
economy and the filtering of global standards (accounting standards, corporate governance) have steadily
progressed, Japanese companies remained prudent and passive regarding IFRS adoption. This may be partiallyowing to the relatively low foreign ownership in leading Japanese companies. Although the investigatedcompanies are all leading companies in Japan, the fund-raising policies and the proportion of foreign ownershipvary. The initial IFRS roadmap suggests a phase-in approach based on criteria such as the gross market value ofeach company—a scheme proposed in the US roadmap. The survey result suggests that the phase-in approachbased on both foreign ownership and gross market value criteria would be better, as the greatest benefit of IFRS
adoption is related to international markets, international status, and international fund-raising.
Second, one of the most important considerations concerning the adoption of IFRS is that the cost of
adoption is expected to exceed the benefit. The adoption of IFRS not only influences accounting practice but
also has an effect on other aspects of business, such as the operating process, management system, and strategy
making. For example, the authors know that there are differences in the two sets of accounting standards, oneof which concerns standards for revenue recognition. In Japanese GAAP, sales revenue is recognized at thetime of shipment, whereas IFRS prescribes that sales revenue can be recognized when the risk and benefit of
the goods have been transferred to the buyer so that the revenue may not be recognized at the time of shipment.
If IFRS is implemented, Japanese companies that have recognized sales revenue on a shipment basis may haveto change the time of revenue recognition. This may result in changes to the internal control system,
information system, distribution system of the company, and the amount of yearly sales revenue, which may
further influence the business plan and strategy. These costs are beyond the direct costs related only to theaccounting system. Cost-benefit trade-off is one of the most important considerations of preparers of financial
statements. Thus, it should also be an important issue for consideration in deciding on mandatory application.
Furthermore, lack of a training system has been an important reason for Japanese companies’ cautious
attitudes towards IFRS. The training should not only concentrate on the detailed accounting standards but also
include content concerning the total influence that IFRS adoption may have on the entire business. Moreover,principle-based accounting standards are regarded by a majority of the companies as reflecting economic
substance and are thus regarded as superior. However, it requires a higher judgment capacity on the part offinancial statement preparers. This not only requires a comprehensive training program but also increases thecost of adoption.
In addition, the investigated companies have indicated several differences in accounting standards that areimportant to their companies’ goodwill, comprehensive income, and recognition of revenue, which implies thatin making a decision on mandatory application, that is, whether to apply IFRS as developed by the IASB or to
make partial modifications or exclusions of IFRS, not only the content of IFRS but the status of the setting of
IFRS needs to be reviewed but also a careful investigation of the influence on Japanese companies must be
conducted.
The current paper is written mainly from the perspectives of financial statement preparers. There are otherperspectives that should be considered when deciding on the scope and methods of IFRS application, forexample, the perspectives of accounting information users, auditors, and other interested parties. In addition,
research shows some evidences that the adoption of IFRS itself does not lead to high-quality information.
Therefore, adoption will not necessarily lead to increased transparency and the trust of accounting information.

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347

Effective enforcement combined with high-quality standards leads to high value-relevant information. A strong
equity market is connected with strong investor protection. Overall, the international value relevance ofaccounting information studies provides some supports for the argument that accounting information is morevalue relevant in countries having strong legal protection of outside investors (Habib, 2007). Japan has a uniqueequity market and accounting system that is discussed in Section 4. Therefore, adoption of IFRS should befurther supplemented by consideration of enforcement, which can be analyzed in future papers.

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