30 November 2011

Mr. Hans Hoogervorst
ChairmanInternational Accounting Standards Board
30 Cannon StreetLondon EC4M 6XH
United Kingdom
Dear Mr. Hoogervorst:
re: Comments on Request for Views on“Agenda Consultation 2011”
The Corporate Accounting Committee (CAC) of the Securities Analysts Association ofJapan (SAAJ) is pleased to comment on Request for Views on “Agenda Consultation
2011” put out by the International Accounting Standards Board. The SAAJ is a
not-for-profit organization providing investment education and examination programs forsecurities analysts. Its certified members number 24,000. The CAC is a standing committeeof the SAAJ composed of 14 members, most of whom are users including equity and credit
analysts, and portfolio managers, while a few others are academicians and publicaccountants. The CAC writes comment letters to global standard setters, including theInternational Accounting Standards Board (IASB) and Accounting Standards Board ofJapan (ASBJ), and exchanges opinions with organizations including the ASBJ and theFinancial Services Agency. Following are our views on the questions raised in “Agenda
Consultation 2011”.

Question 1:
What do you think should be the IASB’s strategic priorities, and how should itbalance them over the next three years?
When the IASB was established in 2001, few expected that 10 years later IFRS would
have been adopted by more than 100 countries. The CAC applauds the hard work of theIFRS Foundation and the IASB which brought about such wide acceptance of IFRS.
The rapid acceptance of IFRS, however, has caused some problems. First, as the IASB
has had to concentrate on the standards selected in the MoU and also the financial
instrument standards for which the G20 requested speedy amendments, the IASB has been1unable to put enough resources into development of the conceptual framework project.
Second, the same resource constraint prevented the IASB from conducting sufficient
review of the implementation and application of the standards it developed. Third, underthese circumstances, big influential projects including revenue recognition and leases arestill to be introduced. The above considerations make the CAC believe that the coming few
years should be a period in which to concentrate on the smooth implementation andapplication of the recently developed standards rather than to develop new ones.
From this perspective, the CAC thinks the following should be the priority areas for theIASB during the next few years: first, the conceptual framework, second, post
implementation review, and third, limiting the development of new standards to just someurgently needed ones. A stable platform needed by many constituents would thus beprovided by this prioritization.
Question 1(a):Do you agree with the two categories we identified and the five strategic areas within
them? If you disagree, how do you think the IASB should develop its agenda, and why?
The CAC agrees with the two categories but disagrees with one of the five strategicareas. The CAC believes that the resources IASB would be able to devote to “researchingstrategic issues for financial reporting” would be minimal given the three-year time span
for agenda consultation and also the circumstances described in our response to Question 1above. The CAC understands the importance of research activities for a standard setter ingeneral, but the area of research should be limited to issues directly related to current
standard developments. For the next three years, the CAC thus proposes excluding“researching strategic issues for financial reporting” from the five strategic areas.
Question 1(b):How would you balance the two categories and five strategic areas? If you haveidentified other areas for the IASB’s agenda, please include these in your answer.
Amongst the four remaining strategic areas, the CAC thinks “conceptual framework”
and “post implementation reviews” are most important.
Conceptual framework
In the conceptual framework, both a clear definition of income in Phase B of theproject, “Definition of elements, recognition and derecognition”, and clarification of asset
and liability measurement standards in Phase C, “Measurement”, are essential.
(a) Net income and recycling
Under the existing IASB conceptual framework, revenue and expenses are defined2

but net income is not. This is the root cause of repeated arbitrary decisions made by theIASB in regard to other comprehensive income (OCI) and its recycling. Defining revenue
and expenses without the definition of income means implicit formulization of “revenue –expenses = income”, which treats income only as residual. However, the formula is just anidentity which does not suggest any causal relationship between the variables. Therefore,
the right side of the equation (income) can define the left side (revenue and expenses).
Mutual definition between the right and left sides of the formula yields a robust conceptual
framework.
Some use the “asset – liability = equity” formula and regard the change in equity thus
defined (excluding capital transactions) as income. The CAC thinks income thus defined(comprehensive income) is also useful for investment decision making. The conceptual
framework should clearly define both of the two income concepts.
The CAC has consistently opined that all OCI items should be recycled1 for thefollowing reasons. First, while accumulated other comprehensive income (AOCI) numbers
fluctuate every year because of changes in the markets, realized value is fixed. Once
realized, the fixed number has informational hardness which makes recognition in net
income worthwhile. Second, by recycling all AOCI items, total cash flow, net income, andcomprehensive income for the life of a corporation will be exactly the same. This meansthat the balance sheet, income statement, and cash flow statement are connected by threebridges. The connection enhances the cohesiveness of financial statements. Third, when aclean surplus relationship is established between net income and changes in sum of capitaland retained earnings, net income can be used as an input to the residual income model.2
Fourth, when some items in AOCI are not recycled, retained earnings may include realized
and unrealized gains. The CAC thinks retained earnings should be composed of only
realized gains that belong to stockholders. Fifth, the definition of net income by therealization concept mentioned above has a clear advantage of showing two different
incomes on the income statement; namely, comprehensive income that includes valuation
gains/losses and net income that includes solely realized gains and losses. Finally, fullA few CAC members think OCI occasioned by the cross holding of shares should not berecycled because it could be used to manipulate net income. Others think that the recyclingof cross holding shares has information value when recycling is clearly shown on financialstatements.
2 Three types of stock price valuation models are commonly used: the dividend discountmodel, the cash flow discount model, and the residual income model. The dividend discountmodel is difficult to apply to companies that do not pay dividends, and the cash flow
discount model is difficult to apply to growing companies whose cash flows are negative.
The residual income model is free from these restrictions but the model assumes a clean
surplus relationship.
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recycling will resolve one of the major differences between IFRS and US GAAP andJapanese GAAP and prevent mutation of the traditionally important meaning of netincome.
The debate about net income and recycling is caused by modern accounting standards
which are seeking an optimal solution between pure acquisition cost accounting based onrevenue and expense views, and pure fair value accounting based on asset and liability
views. The CAC thinks Japanese GAAP is a model which synthesizes the two views byshowing fully recycled net income and comprehensive income and dividing the capital(called net assets) into stockholders’ equity and ‘other’ (AOCI, stock options and minority
interests).3 Clean surplus relationships exist between net income and stockholders’ equity
and between comprehensive income and net assets.
A thorough conceptual consideration of net income and recycling which relates to thebasis of modern accounting standards is essential for making IFRS a robust set ofaccounting standards. However, some speculate that if the issue is considered in Phase B of
the project, it would take at least 10 years for completion. Therefore, the CAC proposes
expediting the project by limiting the scope to net income and recycling.
(b) Measurement
With regard to asset and liability measurement, the CAC has opined that incorporationof management intent will make information in financial statements rich and meaningful. It
has also opined that the financial liabilities of non-financial companies are typically used
to acquire assets needed for business and it is therefore opposed to the fair value
measurement of these liabilities. Some stakeholders in Japan still believe that the IASB’s
ultimate goal is to measure all assets and liabilities at fair value. In order to eradicate thesebiased views, clear measurement standards should be established in Phase C of the project.
Post implementation reviews
The IASB’s policy is to conduct post implementation review two years after standards
become effective. The CAC proposes expanding the scope of post implementation review
to include standards developed more than two years previous and also guidance developed
For a description of the basic philosophy behind Japanese GAAP, see the following,particularly Chapter 3: The Accounting Standards of Japan, The Discussion Paper“Conceptual Framework of Financial Accounting”, 2006.
https://www.asb.or.jp/asb/asb_e/asbj/begriff/ConceptualFramework200612.pdf
The following article is useful as an analysis of Japanese accounting standards from
historical, political, and economic perspectives: Tsunogaya. N., H. Okada, and C. Patel,“The Case for Economic and Accounting Dualism: Towards Reconciling the Japanese
Accounting System with the Global Trend of Fair Value Accounting”, Accounting,Economics, and Law, Vol 1, Issue 2, 2011. Available fromhttp://www.bepress.com/ael/vol1/iss2/5
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by IFRIC. Post implementation reviews are scorecards for the standard setter. By
expanding the scope of scorecards, the ISAB can more precisely evaluate its performance
during the past 10 years and this evaluation will be precious input for the future
development of standards. Post implementation review in regard to capitalization ofdevelopment costs and recapturing impairment of fixed assets, which are major differences
between IFRS and US GAAP and Japanese GAAP, will provide valuable input for theconvergence of the three standards.
Question 2:
What do you see as the most pressing financial reporting needs for standard-setting
action from the IASB?
As stated in our response to Question 1, the CAC thinks the most pressing needs focuson i) the conceptual framework project to clarify the concept of income, and ii)
post-implementation review, including of standards developed in the past. In fact, the CAC
thinks the need for these two projects is higher than for the four ongoing projects andproposes prioritizing them.
Question 2(a):Considering the various constraints, to which projects should the IASB give priority,
and why? Where possible, please explain whether you think that a comprehensive
project is needed or whether a narrow, targeted improvement would suffice?
Amongst the four projects the IASB is working on now, the CAC thinks financial
instruments has the highest priority. It might be difficult to build a consensus among
stakeholders when turbulence in financial markets is continuing and there still remains ahuge gap between IFRS and US GAAP. However, once this difficult task is achieved, theIASB can allocate substantial resources to other projects.
Among the five activities and projects the IASB is already committed to or is required
to do so, the CAC’s priority is on the conceptual framework and post implementation
review as mentioned above. On the other hand, the CAC thinks ‘undertaking three-yearly
review of the IFRS for SMEs’ has relatively low priority. The CAC understands that SMEs
were developed to offer a stable IFRS platform for small to medium-sized entities, and, if
so, regular review is not so pressing. As shown in CAC’s response to Question 1(a), it
proposes excluding ‘researching strategic issues for financial reporting’ from the five
strategic areas. By the same token, the CAC thinks ‘investing in research in preparation for
future standard-setting needs’ should be limited to the minimum.

5Question 2(b):Adding new projects to the IASB’s agenda will require the balancing of agenda
priorities with the resources available.
Which of the projects previously added to the IASB’s agenda but deferred (see tablepage 14) would you remove from the agenda in order to make room for new projects,
and why? Which of the projects previously added to the IASB’s agenda but deferred do
you think should be reactivated, and why?
Please link your answer to your answer to question 2(a).
Amongst the 10 projects added to the agenda but deferred, the CAC thinks ‘othercomprehensive income’ has the highest priority. In the answer to Question 1(b), the CAC
proposes expediting the project by limiting the scope to net income and recycling. The‘other comprehensive income’ project is closely correlated with net income and recycling.
Hence, the project should be considered in the context of the conceptual framework.
Further, presentation of recycled gains/losses should be considered in the context of‘financial statement presentation’.
Among the 16 newly proposed projects, the CAC thinks ‘intangible assets’ has thehighest priority. The project’s scope includes whether goodwill should be depreciated ornot and whether capitalization of development expenses should be permitted or not.
Agenda Consultation 2011 mentions “There are many who consider the current standard,
IAS 38 Intangible Assets, as out of date and not appropriately reflecting economic
conditions or results” (page 24). The CAC recommends performing a post implementation
review of IAS 38 and reviewing guidance appropriateness to judge the capitalization ofdevelopment expenses. The CAC proposes including ‘intangible assets’ on the agenda anddeliberating development cost and depreciation (or not) of goodwill.
The CAC also thinks that ‘discount rate’ should be included on the agenda. The
discount rate used to obtain present value is very important in corporate analysis andvaluation. Only a small change in the rate results in a huge difference in valuation.
Although IFRS depend heavily on the use of discounted present value in measuring assets
and liabilities, there are differences in the definition of the discount rate among current
standards. This makes corporate analysis difficult and represents a lack of consistency inIFRS. Further, the recent significant surge in some or rather many European countries’
government bonds yields offers a new challenge of how to define the risk free rate. Agenda
Consultation 2011 writes “A future project could aim to provide more consistent guidanceon how to determine discount rates” (page 21). The CAC thinks this project should befront-loaded as an urgent issue.

6If you have any questions or need further elaboration, please do not hesitate to contact
Sei-Ichi Kaneko, Executive Vice President, SAAJ (s-kaneko@saa.or.jp).
Sincerely yours,Keiko Kitamura
Chair
Corporate Accounting Committee

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