13 April 2009
Sir David Tweedie
International Accounting Standards Board
30 Cannon StreetLondon EC4M 6XH
United Kingdom
Dear Sir David:

re: Comments on “Financial Statement Presentation”
The Corporate Accounting Committee (CAC) of the Securities Analysts Association ofJapan (SAAJ) is pleased to comment on the International Accounting Standards Board(IASB or the Board)’s discussion paper “Preliminary Views on Financial StatementPresentation”. SAAJ is a not-for-profit organization providing investment education andexamination programs for securities analysts. Its certified members exceed 23,000. The
CAC is a standing committee of SAAJ composed of 13 members, most of whom are users
including equity and credit analysts, and portfolio managers, while a few are
academicians and certified public accountants.

General Comments
The discussion paper is the product of joint work between the Board and the US
Financial Accounting Standards Board (FASB). Needless to say, we greatly appreciate
the efforts of the two boards in producing such an ambitious and intellectuallystimulating discussion paper which could result in revolutionary changes to financialstatements. Under the circumstances where both Japan and the US have announcedplans to adopt IFRS, we are most pleased to have had the opportunity to consider
financial statement presentation from a completely new perspective. We think it rightthat the boards decided to keep net income, comprehensive income, and recycling in thepaper. Indeed, the vast majority of our over 23,000 members demand disclosure of bothnet income and comprehensive income, and we understand the decision of the boards toproperly reflect such views of financial statement users.
The discussion paper also enables breakeven point analysis by disclosing line items incost of goods sold and selling, general & administrative expenses in a statement ofcomprehensive income. Japanese financial reporting requires disclosure of bothconsolidated and non-consolidated statements, but breakeven analysis is only possible

on a non-consolidated basis because a breakdown of cost of goods sold is not available ina consolidated income statement. Making breakeven point analysis possible on aconsolidated basis represents substantial progress and we thus highly evaluate thediscussion paper in this context.
Securities analysts process financial data in various formats. This is because
important items and ratios differ according to which industry a company is in, acompany’s specific situation, and ever changing themes in the market. From thisstandpoint, a one-size-fit-all financial statement that dispenses with analyst processing
completely cannot, by definition, exist. Hence, financial statements should be simple
with a flexible structure and enough line items to enable processing. The examples
shown in the discussion paper have many more line items than those currently
available which will be applauded by financial statement users.
Believing that the “Financial Statement Presentation” and “Revenue Recognition”
discussion papers are very important and will define the foundation of IFRS going
forward, SAAJ commissioned Professor Eiko Tsujiyama of Waseda University to write
an explanatory booklet, which has been distributed to all members. Further, SAAJ held
seminars for members in Tokyo and Osaka inviting Professor Tsujiyama as a lecturer
and asked participants for their overall impression of the proposals contained in thediscussion papers. Questions and responses regarding the “Financial StatementPresentation” were as follows:
Question: Compared to current Japanese financial statements, do you think the proposed new
financial statements are improved so as to facilitate company analysis and performance comparisons?
Answer: Improved

20%

Cannot judge

61%

Not improved13%

No answer

6%

Number of respondents=151

Unfortunately, the discussion paper was not warmly welcomed by our members. The
main reason, we assume, is that it contains so many radical changes that it is difficult
for the average financial statement user to determine how analysis could be conductedwithin the proposed new format.
We have heard from preparers of financial statements that they are very muchagainst the many propositions in the discussion paper as they would require
fundamental changes to the current financial reporting system which would mean asubstantial increase in costs. Although the discussion paper offers some important
benefits as mentioned earlier, considering the rather strong opposition of the preparers,
we regret to say that we could not identify enough positive reasons to support the2discussion paper as a whole. Below, you will find our comments on major issues.
Question numbers in parentheses after headings are the same as numbers shown on
pages 7-12 of the discussion paper.

Role and Format of Financial Statements and Line Items Shown (Question1)
The discussion paper proposes financial statements with a completely new format
and content, but we do not think this will be particularly useful to investors in making
decisions. The paper seems to propose the new format in order to secure statement
cohesiveness––achieved by having horizontal bars and using the same category and line
items throughout the three statements. This is an ambitious attempt, but, whilecohesiveness seems to be accomplished, we do not think the new statements aresuperior to existing ones, where cohesiveness is realized as a whole because threeapparently different statements each play their own unique and mutuallycomplementary roles. We think the traditional balance sheet is superior to the proposed
statement of financial position in understanding the financial position of a company at aglance. The proposed statement shows assets and liabilities of a company on a net basis
according to operating, investing, and financing categories. However, a major functionof a balance sheet is to show gross assets and liabilities employed by a company for its
business as a whole. A net amount presentation is not suitable to fulfill this role. Thebalance sheet is extensively used for financial safety and robustness analysis. Numbers
used in such analysis are not easily obtained from the proposed format. If the proposed
financial position statement were to be actually adopted, we think many analysts wouldreproduce the traditional balance sheet themselves.
On the other hand, the discussion paper makes a major step forward indisaggregating information. Analysts want information on variable and fixed costs andthe discussion paper discloses expenses both by nature and function. We welcome thisas it substantially enhances investment decision usefulness.

Problems Distinguishing Between Business
Management Approach (Questions 2, 7)

andFinancing,and

The discussion paper distinguishes between business and financing, and the former
category is further divided into operating and investing. Therefore, operating plant &equipment investments will be included in the operating category. In traditional
financial analysis, operating income and operating cash flow are compared, and plant &equipment investments and financing cash flow to finance the investments are collated.

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In the proposed statements, it is difficult to conduct such analysis.
The above mentioned categorization, according to the discussion paper, will be madeby the management approach. While the management approach has an advantage inunderstanding the business philosophy of the manager, it has a disadvantage in making
intercompany comparison difficult, because each manager has his/her own businessphilosophy. This point is particularly relevant in distinguishing between ‘operating’ and‘investing’. Japanese companies have a tradition of mutually holding each others’ shares.
Whether these investments would be considered operating as a strategic investment orinvesting as a non-core business solely depends on the manager’s decision. There mightalso be a risk that decisions could be arbitrarily changed from time to time. If themanagement approach is adopted, very detailed guidelines would be needed in regard to
the operating and investing distinction, albeit this is against principle-based standard
setting.

Single Comprehensive Income Statement (Question14)
As mentioned under General Comments above, we highly evaluate the discussion
paper in presenting both comprehensive income and net income with recycling. Net
income is one representative performance indicator of a company’s operations. If
comprehensive income is considered to add risk exposure information to net income,then prominently disclosing both numbers will enhance decision usefulness. In an
opinion survey we conducted in the fall of 2005, 54% of the respondents supported
seeing both numbers as below.
Survey result:（１）Comprehensive Income and Net Income（International issue）
Under current Japanese standards, the bottom line of the income statement is net income.
International standard setters are considering replacing net income with comprehensive income.
What is your opinion of the proposed change?
＊

Comprehensive income: Based on current Japanese standards, comprehensive income is net
income plus/minus changes in ‘valuation differences in other securities’ and ‘foreign currencytranslation adjustments’. These items which are currently directly injected into capital arein aggregate called ‘other comprehensive income’. Comprehensive income is exactly thesame as changes in equity except capital transactions like dividend payments or the newissue of stock. On the other hand, stock markets and currency exchange rates could makecomprehensive income more volatile than net income.
(%)

A

Agree. Comprehensive income should be the bottom line and net income should be5.04

abolished.
B

Agree, but both comprehensive income and net income should be shown

53.7(comprehensive income as the bottom line and net income as a sub-total).
CDisagree. The bottom line of the income statement should continue to be net

32.9

income (comprehensive income should be disclosed in the stockholders' equity
statement or as a note).
DDisagree. Comprehensive income is not really necessary and the bottom line of the3.8

income statement should be net income.
EDon't know.

4.2

F

Other.

0.4(SAAJ Survey, Oct. 2005, 974 respondents, 8.3% response rate. Full survey results
available upon request.)

The CAC’s opinion was divided as to whether to have a single statement or two
separate statements. Some supported a single statement as it more clearly showsdifferences in net income and comprehensive income, while others argued that as thereal bottom line is net income, two statements should be used, making thecomprehensive income statement a supplementary statement to the net income
statement. However, as all CAC members agreed having both net income andcomprehensive income, the one or two statement argument is not an essential issue.

Direct Cash Flow Statement and Reconciliation Statement (Questions 19,23)
We are against the mandatory use of a direct method cash flow statement. Direct
method cash flow statements have a great advantage for users because they enable thegrasping of cash sales––such statements could be a powerful tool in analyzing
companies that have special difficulties in day-to-day cash management. As a matter offact, banks and credit agencies request such companies submit a statement of cash
receipts and disbursements, which is close to a direct method cash flow statement, on amonthly, weekly, and sometimes even daily basis. However, an annual or quarterly cash
flow statement would not be so useful in predicting bankruptcies even if they werebased on the direct method. Further, analysts typically cover listed companies with ahealthy financial base. In analyzing the performance and cash flow of these companies,a typical first step is to check operating income and/or EBITDA based on operating
income. The first role of the cash flow statement is to confirm how operating income andEBITDA are backed by cash. In this regard, it is important to reconfirm the effects of anincrease/decrease in working capital through balance sheet, income, and cash flow

5statements. The second role of cash flow statements is to show how plant & equipment
investments have been financed. In this regard, it is essential to be able to reconfirm therelationship between an increase/decrease in debt & equity and plant & equipment
investments. In short, a cash flow statement is a bridge between the income statement
which shows current income under accrual accounting, and the balance sheet whichshows an asset/liability snapshot at the closing date. The keyword for the bridge is cash.
If we define the role of the cash flow statement in this way, it is clear that the indirect
method cash flow statement better fulfills the role. Also, assuming use of the cash flow
statement above, the first line of an indirect method cash flow statement should beoperating income rather than net income so that operating cash flow is clearly shown,
followed by non-operating cash flow, and investing and financing cash flows.
We hear that some US and European analysts have serious problems with the current
cash flow statement. We assume the source of this discontent lies in the relatively
scarce number of line items in US and European companies’ financial statements, whichmakes it rather difficult to reconcile an increase/decrease in working capital and debt.
In other words, the real issue lies not in how the cash flow statement is made, on a
direct or indirect basis, but in the number of line items disclosed. If the number of line
items shown in examples in the discussion paper is actually incorporated in futurestatements, then discontent will disappear no matter how the cash flow statement isprepared.
We understand that the discussion paper requires a reconciliation statement as anote because it is difficult for the direct method cash flow statement to show therelationship between income statement and balance sheet. We think a well-designed
indirect method cash flow statement with a sufficient number of line items wouldnegate the need for a reconciliation statement. The reconciliation statement should bemade mandatory for only those companies which use a direct method cash flowstatement.

Field Test
During deliberations at the CAC, what kind of analysis could be conducted if the newfinancial statements proposed in the discussion paper were actually adopted wasdiscussed. In this regard, we are very interested in the findings of our colleagues whowill participate in the field test. We expect detailed results of the test will be disclosed.

Concluding Remarks
We strongly support the discussion paper with regard to (1) parallel disclosure of6

comprehensive income and net income with recycling, (2) disclosure of details of cost of
goods sold, and selling, general & administrative expenses that enable breakeven point
analysis, (3) parallel disclosure by function and nature of costs and expenses, and (4)more line items throughout the three statements. On the other hand, since current
analytical methods are already well established and there is deep concern amongst
preparers regarding direct method cash flow statements and reconciliation statements,
we do not think the current format of traditional financial statements should bechanged substantially. Adding an expense statement by nature as a note to the current
three statements would enormously increase decision usefulness.
In Japan, ministerial regulations specify what line items should be disclosed in eachand all cases, making Japanese statements informative and easy to compare. IFRS are
principle-based standards which emphasize the management approach. We are afraidthat under principle-based standards and the management approach, companies might
arbitrarily limit the number of line items disclosed. Detailed guidelines to secure
meaningful disclosure are highly desired.
Some readers might feel it rather absurd that we have exhibited some empathy for
preparers in this comment letter, but preparers’ costs are ultimately born by us
investors. For some of the proposals in the discussion paper, we simply could not
identify enough benefits that would outweigh the anticipated increase in costs.
Should you have questions or need further clarification, please contact Mr. Sei-Ichi
Kaneko, Executive Vice President, SAAJ (s-kaneko@saa.or.jp).
Sincerely yours,

Keiko Kitamura
Chair
Corporate Accounting Committee

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