Melco Management Accounting Research
Discussion Paper Series
No.MDP2018-006

Impacts of Voluntary IFRS Adoption on Japanese Pharmaceutical
Companies: An Analysis by Financial Comparison

December 2018

Yuta Hoshino
Graduate School of Economics, Nagoya City University

1 Yamanohata, Mizuho-cho, Mizuho-ku, Nagoya 476-8501, Japane-mail: hoshino@econ.nagoya-u.ac.jp

The Melco Foundation
Nagoya, Japan
Discussion Paper Series of the Melco Management Accounting Research, in order to promote
the study of management accounting, has published this unfinished paper onto the Web. Pleaseobtain the permission of the author when citing this paper.

Impacts of Voluntary IFRS Adoption on Japanese Pharmaceutical
Companies: An Analysis by Financial Comparison

Yuta Hoshino
Graduate School of Economics, Nagoya City University
1 Yamanohata, Mizuho-cho, Mizuho-ku, Nagoya 476-8501, Japane-mail: hoshino@econ.nagoya-u.ac.jp

Abstract
This study examines the impact of the voluntary adoption of International Financial
Reporting Standards (IFRS) on pharmaceutical companies that are active in adopting
IFRS. Japanese companies have decided to voluntarily adopt IFRS to prepare foradvancing globalization, conduct global financial reporting, improve the comparabilityof financial information with other companies, easily explain information to foreign
investors, increase financing options, and improve business management. The increase inpharmaceutical companies’ voluntary IFRS adoption has been influenced by the
expansion of overseas developments as well as mergers and acquisitions (M&A). This
paper empirically analyzes a sample of main financial data to determine how IFRS
adoption affects the performance of 13 Japanese pharmaceutical companies.

Keywords: IFRS, Voluntary Adoption, R&D, M&A, Indicator Analysis
JEL Classification: M41

1

1. Introduction
Companies worldwide are increasingly adopting International AccountingStandards (IAS) to respond to global economic activities. Specifically, International
Financial Reporting Standards (IFRS) have currently been introduced in over 130
countries, which includes voluntary adoption. European Union (EU) member countries
have already enforced the adoption of IFRS, while the United States’ Securities andExchange Commission has developed a road map for mandatory adoption. When Japan
joins this movement, the IFRS will have been introduced in countries that account for
95% of the total market capitalization worldwide, and its influence will be substantial.
Although the relevant agencies in Japan are examining IFRS, the timing of its
adoption has still not been disclosed, and this uncertainty is unlikely to be eliminated in
the near future. However, industry awareness around IFRS adoption is steadily increasing,with nearly 200 companies having already adopted or deciding to adopt IFRS. 1 The
contents of financial reports prepared under the IFRS guidelines are highly useful for
management teams with an interest in future results rather than past performance, as thesereports are material to evaluating company performance.2
Thus, the influence of IFRS adoption on Japanese companies’ performance
evaluation systems will significantly increase in the future. Companies even benefit, as it
is easier to manage a unified method, rather than following different methods of recording
assets and expenses for each country. Naturally, companies will adopt IFRS to unify
accounting between their headquarters and overseas subsidiaries. Further, a management
accounting system based on IFRS will also be useful in financial reporting to external
stakeholders.3
In this article, I would like to focus on Japanese pharmaceutical companies that are
actively adopting IFRS, and discuss the results of their voluntary adoption. The increasein the number of pharmaceutical companies that have applied IFRS has also been
influenced by expanding overseas development and mergers and acquisitions (M&A).
Circumstances also exist that are unique to the pharmaceutical industry, such as theInternational Council for Harmonisation (ICH 4 ), which prepares drug regulatory
1

Please refer to the article on “International Accounting Standard Adoption, Over 200 Companies" in the Nihon Keizai
Shimbun dated July 16, 2018. This information includes the upcoming change schedule, and reports 204 companies asof the end of June 2018, or 20% more than one year ago. This is also 7.1% of companies listed on the Tokyo Stock
Exchange (TSE) (see Parts 1, Parts 2, and Mothers’ (“market of the high-growth and emerging stocks”) total of 2,870
companies as of the end of June). As many large enterprises have adopted these standards, this corresponds to almost
one-third of the total market capitalization.
2
Please refer to Hoshino (2017, p.79).
3
It is necessary to unify the accounting system so investors can gain the same perspective on accounting informationthat has been provided to management.
4Founded in 1990, the International Council for Harmonization of Technical Requirements for Pharmaceuticals for2

guidelines from scientific and technological perspectives; this council will continue to be
relevant, even if the industry actively adopts IFRS. In terms of aiming for international
harmonization, in short, IFRS is also oriented toward ICH.
This paper discusses how the voluntary adoption of IFRS affects performancemeasurements in Japanese pharmaceutical companies. The remainder of this paper isorganized as follows. Section 2 describes IFRS trends and their impact on companies.
Section 3 discusses our verification task and hypothesis. Section 4 reports on researchand development (R&D) investments and M&A incentives. Section 5 presents ouranalyses, and section 6 concludes.

2. IFRS Trends and their Impact on Companies
Once Japan’s Financial Services Agency (FSA) indicates a firm policy in relation
to IFRS, its adoption will include companies listed in 2015 or 2016. Currently, the UnitedStates too mandates that domestic companies listed on its stock exchanges adopt US
standards. Thus, among developed countries, only Japan and the United States have been
cautious about adopting IFRS.
The widespread effects of IFRS adoption have led to changes not only in the
preparation of annual reports, but also the reviews of financial measures as a basis forevaluation and the business process as a means of business management. The changes infinancial measures after IFRS adoption have had a substantial effect on corporate
performance.
Companies in Japan, which is close to adopting IFRS, must clarify the indicatorsthat should support various management processes and construct a performance
evaluation system to motivate management’s organizational behavior. Moreover, if
companies can present new “statements of financial performance” along with nonfinancial information, this will be useful for investors.5
What will change with adopting IFRS? First, the changes in the recording method
will considerably impact corporate performance. Some researchers note that companies’
financial performance may change due to the international convergence of accounting
standards, which may greatly affect both dividend and investment behaviors.6 Although
Human Use, or “ICH,” was reorganized in October 2015 with the incorporation of Switzerland to respond to theglobalization of drug development, regulation, and distribution. This ICH aims for a global harmonization of technicalrequirements to reduce animal experiments without compromising safety and effectiveness, and to effectively utilize
limited resources. Further information on the ICH is available from the Pharmaceuticals and Medical Devices Agency’s
home page: https://www.pmda.go.jp/int-activities/int-harmony/ich/0014.html. For further details, see Kishi (2014).
5
For the strategic meaning of Japanese companies’ non-financial indicators, see Hoshino (2013, pp.129-131).
6
Kagaya’s (2012, pp. 42-43 and 46-52) thesis proves that it negatively influenced Japanese firms’ investment
behaviors when the IFRS adoption focused on changes in sustainable cash flow at the profit attribute, and especially in

3

IFRS adoption requires reform in the enterprise’s business process, it is possible to create
a global common evaluation index; consequently, this is advantageous, as it becomes easy
to evaluate company performance in terms of such common indicators during M&As.
Adoption of IFRS also contributes to sophisticated business management, such as
strengthening the governance of group companies, including subsidiaries and otheraffiliated companies, and securing flexible group reorganizations. Therefore, companies
adopting IFRS are likely to be targets for overseas investors.
The financial reporting under IFRS will be useful in predicting future cash inflows
through the publication of financial statements that measure individual assets andliabilities; this information in such reports is more useful to investors than the one
obtained under current Japanese standards, which provide financial reporting as a resultof the past “profit and loss center.” Naturally, the content of financial reports prepared
under IFRS is highly useful for management, as a measure to evaluate performance.
Therefore, IFRS adoption is important in disclosures to external stakeholders as well asinternal management.7
The current trend of accounting internationalization worldwide has certainly
evolved by converging the accounting standards of each country with the International
Accounting Standards toward a direction that promotes and encourages IFRS adoption.
In the section of “purpose of the constitution” in the IFRS foundation, it was newly
specified in March 2010, that IFRS was also adopted through convergence (see Hoshino(2017,78)).
These circumstances have led to an increase in the number of Japanese companies
that have voluntarily adopted IFRS; this includes nearly 200 organizations that haveadopted or decided to adopt IFRS. As previously mentioned, standardizing theiraccounting methods makes these companies easier to manage and compare with otherfirms in the same industry; thus, it is more convenient for companies to expand in overseas
markets and participate in M&As.8

3. Verification Task and Derivation of Hypotheses
3.1 The Verification Tasks Accompanying IFRS Adoption

the future, with substantial changes in profit.
7
See Hoshino (2017, p.79).
8
A survey conducted by the Financial Services Agency (2015, p.27) revealed that Japanese companies decided tovoluntarily adopt IFRS for the following reasons, in descending order of importance: (1) contribution to business
management, (2) the improvement of comparability, (3) the ease of explanation for overseas investors, (4) the proper
reflection of business results, and (5) facilitating the procurement of funds, among others.

4

The difference between current Japanese standards and the IFRS is that the former
are based on rules, while the latter are based on principles. Therefore, the general view isthat the IFRS is easier to unify internationally, as the Japanese standards’ rules are
incredibly complicated. Further, the IFRS is subject to accounting at the company’s
discretion; thus, its scope of processes will be broader, but it is important that it caneffectively prevent accounting fraud. Both standards include profit items (ordinary
income is included in the Japanese standards, but not in the IFRS) as well as a method toamortize the goodwill from M&As, a method to process R&D expenses (Japanesestandards treat these entirely as expenses, while the IFRS allows for the creation of someassets), a depreciation method, pension assets (Japanese standards expense insufficient
funds in a certain period, while the IFRS immediately reflects these on the balance sheet),and differences in accounting standards for net sales, among other items.
Adopting IFRS has several merits: (1) it occurs by stock investment andmerchandising across both countries and regions; (2) as the appropriation rules regarding
sales and profit differ, it is not possible to offer material for an international comparison;and (3) the enterprise’s evaluation and reliability increases when it adopts common
measures. However, IFRS adoption also has some disadvantages: (1) companies become
exposed to severe evaluation by global investors; (2) individual judgments occur basedon principle; and (3) time and costs depend on the conversion from the existing to the
new standards9.
Alternatively, researchers must also consider IFRS adoption’s effects on Japanesecompanies, including: (1) the governance of consolidated accounting; (2) improvementof the internal control system, resulting from the disclosure of strengthened information;(3) the substantiality of disclosing intangible assets; and (4) the strengthening ofaccounting literacy.
The features of IFRS include a conversion to three approaches: (1) a principlebased approach, (2) an assets-liabilities approach, and (3) fair-value accounting.
Specifically, if IFRS is introduced, comprehensive income will be the primaryperformance measure, although previously, the achievements of Japanese companies
were indicated by net profits. Therefore, it is necessary to reflect profit from the stock thatreflects the market’s quotation for the enterprise’s property.

9

Kato (2014, pp.1-2) points out that the benefits of IFRS are as follows: (1) improving comparability with overseas
peers, (2) improving an understanding of financial content by overseas investors and business partners, (3) easierfundraising abroad, (4) easier consolidation, and (5) companies are added when they choose the JPX Nikkei INDEX
400, among other benefits. Meanwhile, Hiratsuka, Sou, and Fundrich (2009, p.44) note advantages that emphasize thepolicy aspect: (1) decreases the cost to prepare financial statements, (2) improves transparency in the company group’s
accounting as well as its speed and governance, and (3) improves the accuracy in cost management.

5Additionally, and as previously mentioned, the pharmaceutical industry’s council
allows pharmaceutical regulators, the ICH, and representatives of the pharmaceuticalindustry to collaborate and discuss international guidelines for pharmaceutical products
from a scientific perspective. Thus, cases not found in other industries also relate to thepromotion of IFRS.
3.2 Hypotheses and Previous Research
Based on the above discussion, this paper aims to verify two hypotheses. The first
hypothesis involves confirming the differences that exist between the indicators ofconsolidated financial statements prepared based on IFRS and those prepared using
Japanese standards, which is posited as follows:
Null hypothesis (H0): No difference exists in financial indicators between the IFRS
and Japanese standards.
Alternative hypothesis (H1): Differences exist in financial indicators between the
IFRS and Japanese standards.
The second hypothesis discusses whether differences exist in financial indicators
over time; specifically, before and after adopting IFRS, and before and after adopting
Japanese standards. To verify this, Hypothesis 2 is posited, as follows:
Null hypothesis (H0): No difference exists in financial indicators between the time
before and after adopting IFRS and before and after adopting Japanese standards.
Alternative hypothesis (H1): Differences exist in financial indicators between thetime before and after adopting IFRS and before and after adopting Japanese standards.
In Section 5, I establish Hypotheses 1 and 2 as the alternative hypothesis (H1), whileclassifying the hypotheses to be tested as the null hypothesis (H0). I would like to verify
whether each of these null hypotheses (H0) is rejected relative to such financial indicators
as sales, operating income, and research and development expenses. Subsequently, I
introduce previous research that has examined voluntary IFRS adoption and its impact onfinancial accounting relative to these tasks.
Research examining mandatory or voluntary IFRS adoption’s effects on financial
information is scarce; I will begin with a review of overseas literature.

6

First, Horton, Serafeim, and Serafeim (2013) examine the impact of mandatory
IFRS adoption on firms’ information environment. 10 They discover that after thismandatory IFRS adoption, consensus forecast errors decrease for these firms relative toother firms’ forecast errors. Additionally, the authors note that the larger the difference
between the IFRS earnings and each country’s GAAP earnings, the larger the
improvement in forecast accuracy; this increases our confidence that IFRS adoption
improves the information environment.
Meanwhile, Byard, Li, and Yu (2010) examine the effect of the European Union’s
mandatory adoption of IFRS on financial analysts’ information environment. Specifically,
they analyze the impact of the European Union’s 2005 mandatory IFRS adoption on
financial analysts’ information environment as measured by forecast errors, forecast
dispersion, and analyst following. The authors indicate that such information includes acontrol sample of firms that had already voluntarily adopted IFRS at least two years
before the mandatory adoption date.
Li and Yang (2015) examine the effect of mandatory adoption of IFRS on voluntary
disclosure and propose and validate three channels by which IFRS adoption changes firms’
disclosure and incentives in response to increased capital market demand. These channels
include improved earnings quality, increased shareholder demands, and increased analyst
demand. Further, they contribute to literature examining the IFRS adoption’s effect on
business forecasts, which was previously unexplored.
Finally, Ozawa’s (2015) Japanese research paper describes the status of voluntary
IFRS adoption in Japan, and explains factors that have led public companies to adopt
these international standards. He clarifies the reasons for Japanese public companies tovoluntarily adopt IFRS by analyzing the primary differences between Japanese standards
and the IFRS. His process demonstrates one main advantage gained from voluntarily
adopting IFRS, in that Japanese companies can raise funds earlier in overseas financial
markets. Another advantage of voluntary IFRS adoption is that it can unify not only
external indexes for public announcements, but also internal indexes for business
management. It is also one reason for an increase in the number of companies using thesame indexes as foreign companies for comparison.11

4. R&D Investments and M&A Incentives
The Japanese standard, on the one hand, indicates that expenses are recorded at the10

Horton, Serafeim, and Serafeim (2013) published a 2010 Working Paper (11-029) in the Harvard Business School
before submitting this paper.
11
Five questions have been raised by Prof. Nakamura, who was in charge of a discussion on Ozawa’s (2015) paper.

7

time R&D occurs if it is unknown whether such R&D will succeed. On the other hand,
the IFRS interprets R&D activities that likely to be commercialized as (intangible)
assets,12 and those that are regularly amortized appropriately represent the company’s
actual situation. If development expenses are recorded as assets, profits will temporarily
increase. Naturally, tax is imposed on this profit, and thus, it is necessary to makeadjustments to comply with tax laws in the case of single account settlements.
Particularly in industries such as pharmaceuticals, the R&D investment’s successwill influence future growth potential. Thus far, Japanese standards have fully recorded
R&D expenses as expenses, but IFRS enables companies to record part of their R&D
investment as an intangible asset. The IFRS also allows for capitalization if R&D has
reasonable grounds to do so; R&D investments recorded in assets are amortized over acertain period of time after product sales, and are treated as expenses on the income
statement. Many cases can be handled as expenses, such as with self-development underJapanese standards, which is difficult to evaluate as an asset. However, as R&D expenses
can be recorded as assets after adopting IFRS compared with the Japanese standard offull cost, a profit-boosting effect occurs, which acts as an incentive to promote product
R&D.
Regarding M&As, when the purchase price (or acquisition cost) paid by theacquiring company (acquirer) exceeds the net asset value of the acquired company(acquiree), the excess portion is treated as “goodwill.” Here, goodwill involves treating
those measures that cannot reasonably be calculated, such as brand value or human ability,
as a premium (excess profitability). As such, goodwill is an “invisible” asset 13 thatindicates the value of a corporate brand and its future profitability. Goodwill is amortized
for up to 20 years in Japan, while in IFRS it is customary not to write this off because ofdifferences in profit. Consequently, the goodwill arising from M&As can be recorded as
an intangible asset on the balance sheet, and the superficial net profit increases throughthe absence of amortization expenses. This occurs because the “goodwill” intangible asset
becomes a source of cash flow, and the profit increases unless it deteriorates. As a matterof course, the acquiring company should check the acquired company’s value each time,decrease this value if profits do not exceed expectations, and conduct impairments.
The next section will extract key financial data from the consolidated financial
12

According to the IFRS (IAS38.57), development expenditures can be recorded as intangible assets only if all six ofthe following requirements can be proven: (1) the technical feasibility of completing the intangible asset, (2) the
intention to complete and use or sell the asset, (3) the ability to use or sell the asset, (4) the existence of a market for
the intangible asset to generate economic benefits, (5) the availability of resources to complete its development, and(6) the ability to reliably measure the attributable expenditure.
13
See Hoshino (1992, pp. 181-225). Corporate success involves how to effectively create a source of competitiveness.
This is significantly influenced by the accumulation of purported “invisible” assets, such as ingenious technologicalknowledge, excellent research and development capabilities, or competent human resources.

8

statements of 13 Japanese pharmaceutical companies as corresponding samples, clarify
their characteristics, and empirically analyze their relevance.

5. Analyses of Pharmaceutical Companies
5.1 Reasons and Background of IFRS adoption among Pharmaceutical Companies
One of the major reasons why trading companies and pharmaceuticalmanufacturers were early adopters of IFRS is that the industry involves active M&As.
Specifically, the patents of many pharmaceutical companies expired around 2010, whenthe validity period (20-25 years) of patents acquired by large pharmaceutical companies
in the latter half of the 1990s came to an end. Concerns exist that such patent expirations
will significantly affect pharmaceutical manufacturers’ revenues, a problem that occurredin 2010 regarding medicines with expired patents. Therefore, there are many examples ofsuccessful, large acquisitions that sought overseas markets for survival;14 in 2016, it wasreported that Japanese medical companies with medicine-related operations participatedin 116 M&As, with the overall transaction value reaching a record high of 160 billion
yen.15
As IFRS adoption is not currently mandatory in Japan, companies that choose IFRS
note this as “voluntary” adoption. As of November 2015, eight of the 27 pharmaceuticalcompanies in Japan have voluntarily adopted IFRS and published financial reports.16 As
these eight companies (including those intending to adopt) are all top-sellingcompanies—with net sales of 58%, operating profits of 55%, net income of 51%, R&D
expenses amounting to 64% 17 —their business results substantially influence all 27
companies.
Therefore, the ratio of companies in the pharmaceutical industry that have adopted
IFRS or that plan to adopt it, is extremely high compared to other industries, withnegligible differences in performance.
14

Specifically, the expiration of a patent for a large-sized pharmaceutical company that sells 100 billion yen brings a“cliff of corporate performance,” called a “patent cliff.” For example, Takeda Pharmaceutical conducted two overseas
M&As during the patent expiration rush. Among them, Millennium is a US venture acquired for approximately 900
billion yen in 2008, and is said to be helping management’s struggle by creating multiple medicines as its main businessforce. See the article on "Crossroad Medical Industry" in Weekly Toyo Economy (2015, p.74-76).
15
See the article on "The number of medical M&A transactions has reached a record high" in the Nihon Keizai
Shimbun dated December 18, 2016.
16
At that time, five companies—including Chugai Pharmaceutical, Takeda Pharmaceutical, Astellas Pharmaceutical,
Ono Pharmaceutical, and Daiichi Sankyo—were companies that had already adopted IFRS; three companies—
including Eisai, Santen Pharmaceutical, and Mitsubishi Tanabe Pharma—had planned to adopt IFRS, for a total of eight
pharmaceuticalcompanies
with
IFRS
adoption.
Please
refer
to
the
JPX
home
page.
https://www.jpx.co.jp/listing/others/ifrs/index.html.
17
See Murakami (2015, p.2).

9

Subsequently, the number of voluntarily adopting companies has increased; as ofJune 2018, 161 Japanese companies have adopted IFRS and 32 companies have decided
to adopt it, forming a total of 193 companies. Among these, the 13 major pharmaceuticalcompanies that have already applied IFRS are Chugai Pharmaceutical, Takeda
Pharmaceutical, Astellas Pharmaceutical, Ono Pharmaceutical, and Daiichi Sankyo in thefiscal year (FY) 2013; Eisai and Santen Pharmaceutical in FY 2014; Mitsubishi Tanabe
Pharma and Otsuka Holdings in FY 2016; and Kyowa Hakko Kirin, Japan Sumitomo
Pharmaceutical, Nichi-Iko Pharmaceutical, and Sawai Pharmaceutical in FY 2017. The
TSE Mothers that have decided to voluntarily apply IFRS will be added to this group, andfour companies will be included: the Sosei Group, GNI Group, Kubota Pharmaceutical
Holdings, and Solasia Pharma. Further, semi-major pharmaceutical companies, such as
Terumo and Shionogi, are also considering adopting the IFRS in the near future.18
Therefore, the increase in pharmaceutical companies’ IFRS adoption is motivatedby overseas expansion, such as developing new markets and utilizing M&A to sellbusinesses’ out-of-patent drugs. Additionally, many companies are developing global
strategies, and it is possible to expand the likelihood of exploitation not only overseas,
but also in overseas capital markets. This is another important reason why the sameaccounting standards for comparisons with overseas companies will become
indispensable in expanding opportunities to raise capital overseas. In fact, this tendency
is stronger when considering the high ratio of foreign shareholders among pharmaceuticalcompanies.

5.2 Indicator Analysis of 13 Pharmaceutical Companies
As mentioned in the previous section, one reason for pharmaceutical companies toaggressively adopt IFRS includes their enthusiasm for pharmaceutical R&D, which again
differs from other industries. As this industry’s success is directly linked to corporate
performance, as an extension, many aspects related to the processing of M&A-generated
goodwill charges cannot be ignored, such as technical cooperation, income from license
fees, and the processing of lump-sum contracts. Therefore, adopting IFRS affects
financial indicators such as net sales (sales revenues), operating profits, intangible assets(specifically, the amortization of goodwill), tangible fixed assets (specifically, differencesin depreciation methods), R&D expenses, and net income.
I would like to analyze a part of this influence by focusing on three indicators
among the aforementioned 13 pharmaceutical companies: net sales, operating profit, and18

See International Pharmaceutical Information Editing (2016, p.19).

10

R&D expenses.
Seven companies have adopted IFRS from FY 2013 to FY 2014: Chugai
Pharmaceutical, Takeda Pharmaceutical, Astellas Pharma, Ono Pharmaceutical, Daiichi
Sankyo, Eisai, and Santen. Among these, the net sales (sales revenues) for that year
collectively increased compared to the previous year, while only Ono and Eisai
experienced a decline. Additionally, the sales growth rate has also roughly increased, withthe exception of the same two companies, whose growth rate declined but with small
downward ranges. Regarding operating profits, four companies have reported an increasein both their amounts and year-on-year rates, and three companies have reported adecrease. This result casts doubt on whether operating profits will increase by adopting
IFRS. Regarding R&D expenses, Santen Pharmaceutical's sales to R&D expenditure ratio
and R&D expenditures have both decreased compared to the previous fiscal year.
Meanwhile, six companies have applied IFRS from FY 2016 to FY 2017:
Mitsubishi Tanabe Pharma, Otsuka Holdings, Kyowa Hakko Kirin, Dainippon Sumitomo
Pharmaceutical, Nichi-Iko Pharmaceutical, and Sawai Pharmaceutical. Among these,four companies later applied voluntary adoption in FY 2017. These four companies’ net
sales (sales revenues) have generally increased compared to the previous year, and allcompanies’ sales growth rates (year-on-year comparison) have increased. Regarding
operating income, Kyowa Hakko Kirin has reported a decrease both in absolute terms andthe growth rate, but other companies have experienced increases in both. This can be
regarded as support for the view that operating profits will increase by adopting IFRS.
Regarding R&D expenditures, Kyowa Hakko Kirin and Nichi-Iko Pharmaceutical havereported a decrease in the value and growth rate of R&D investments compared with theprevious year, but all others have reported an increase.
As previously described, the time of IFRS adoption has been analyzed by dividing
this period into two parts. According to this split, four companies—Chugai
Pharmaceutical, Takeda Pharmaceutical, Dainippon Sumitomo Pharmaceutical, andSawai Pharmaceutical—have reported an increase in terms of net sales, operating profits,
and R&D. Santen Pharmaceutical and Nichi-Iko Pharmaceutical have reported anincrease in their net sales and operating profits, except for R&D. While we cannot use acomparison of these financial indicators to clearly predict the general trends across these13 pharmaceutical companies, it can be said that such tendencies exist in individualcompanies (see Table 1).
Many highly profitable enterprises, excluding Nichi-Iko Pharmaceutical, have aratio of operating profit of sales that well exceeds 10%, and each company has
strengthened its R&D through acquisitions and partnerships with outside parties when thepatents on large medicines expired; this is also indicated in the results from Table 1. In
11

fact, many of these pharmaceutical companies increased their operating income margins
in FY 2017. As demonstrated by Takeda Pharmaceuticals, such companies not only
extend their stronger products overseas, but also have strategies to acquire overseas
venture corporations (startup companies) and connect with major pharmaceuticalcompanies overseas. Consequently, it is presumed that this result has been gradual.

Table 1. Key Indicator Comparison of 13 Pharmaceutical Companies
Net Sales

Indicators

IFRS Base(unit: million yen)

Operating Profit

R&D Expenses

Year-

Japanese

Year-

IFRS

Year-

JapaneseYear-

to-YearStandards

to-YearBase

to-YearStandards

to-Year

IFRS Base

Year-

JapaneseYear-

to-YearStandards

to-YearCompanies

Chugai423,652

8.3

391,200

4.7

78,7383.1

76,40022.4

74,28034.8

55,100▲1.4

Takeda1,691,685

8.6

1,557,267

3.2

139,274

13.7

122,505▲53.8

341,560

6.3

321,323

14.0

Astellas

1,139,909

16.1

981,899

1.29

116,806▲3.9

121,593▲7.5

191,460

20.3

159,094

▲16.2

Ono

142.806▲2.0

145,779

7.8

29,935▲21.1

37,904

7.7

44,7680.9

44,383

3.2

DaiichiSankyo1,118,241

12.4

994,659▲0.3

111,552

13.0

98,743

1.8

191,212

3.7

184,393

0.7

Eisai

548,465▲8.5

599,490

4.5

28,338▲57.3

66,398▲5.8

131,9079.6

120,377▲3.8

Santen161,83110.6

146,260

22.8

35,37418.4

29,87821.1

17,477▲12.6

19,99019.6

Mitsubishi
Tanabe423,977▲0.4

431,701

4.0

94,08315.0

36,92941.4

64,7830.3

64,613▲7.2

Otsuka HD

1,195,547▲16.2

1,445,227▲8.1

101,145▲32.1

151,837▲10.1

168,818▲16.7

201,010

26.2

Kyowa
Hakko
Kirin
Japan
Sumitomo

353,380

1.6

343,019▲5.8

29,116▲8.0

31,638▲27.7

49,155▲7.1

53,792

4.4

466,83814.3

411,6382.1

88,17367.1

52,75942.986,9286.8

81,373▲1.5

Nichi-Iko

164,717

8.2

163,372

13.8

10,301

20.4

8,554

▲33.7

4,467

▲38.5

7,263

49.0

Sawai

168,068

26.9

132,428

7.2

22,209

7.6

20,633▲11.0

14,53342.4

10,20727.3

Note 1: A year-to-year comparison of the net sales and operating profit reveals the growth rate, and the R&D expenses
year-on-year indicates the change rate. See Note 3 for the official company names.
Note 2: The IFRS net sales represent sales revenue, although Otsuka HD notes net sales.
Note 3: The IFRS base is the result of each company applying IFRS, while the Japanese standards indicate the previous
year’s results. Specifically, Chugai Pharmaceutical, Takeda Pharmaceutical, Astellas Pharmaceutical, Ono
Pharmaceutical, and Daiichi Sankyo in FY 2013; Eisai and Santen Pharmaceutical in FY 2014; and Mitsubishi
Tanabe Pharma and Otsuka Holdings (HD) in FY 2016 are based on IFRS. Each company had used Japanesestandards in the previous year. Further, Kyowa Hakko Kirin, Dainippon Sumitomo Pharmaceutical, Nichi-Iko
Pharmaceutical, and Sawai Pharmaceutical are based on IFRS for FY 2017, and had used Japanese standards for
FY 2016.
Source: Numerical figures from FY 2013 to FY 2017 in this table are calculated by supplementing the Nikkei Value
Search and International Medicine Information Edition (2016; 2017; 2018) based on each company’s securities
reports.

12

Table 2. Correlation Coefficient with Adoption Criterion—t-Test of Corresponding Samples
Adoption Criterion

N

IFRS base

13

Japanese standards

13

IFRS year-to-year

13

Japanese standards year-to-year

13

IFRS base13

OperatingJapanese standards

13

ProfitIFRS year-to-year

13

Japanese standards year-to-year

13

IFRS base

13

R&D

Japanese standards

13

expenses

IFRS year-to-year

13

Japanese standards year-to-year

13

Net Sales

Correlation Coefficientt-valueP-value

0.97640.27980.3922-0.49221.26220.12690.80870.2956

0.38630.3206

0.2776

0.39750.98751.04910.1574-0.49220.41540.3529Note 1: As a result of the t-test, the net sales for the IFRS base versus Japanese standards indicate: the degree of freedom= 12, t-value = 0.2798, and P-value = 0.3922; not significant. Regarding the operating profit for the IFRS baseversus Japanese standards: degree of freedom = 12, t-value = 0.2956, and P-value = 0.3863; not significant.
Regarding the R&D expenditures for the IFRS base versus Japanese standards: degree of freedom = 12, t-value =1.0491, P-value = 0.1574; not significant.
Note 2: The P-value indicates the upper probability.

Based on the above discussion, t-tests were conducted using the samples to verify
whether differences exist between the IFRS and Japanese standards relative to thefinancial indicators in each company’s consolidated financial statements (see Table 2).
The results indicate that net sales, operating profit, and R&D expenses were notsignificant at the 5% level. Additionally, a t-test was conducted using the same sample todetermine whether a difference exists between the IFRS year-to-year and Japanesestandards year-to-year, but the difference of mean value of two groups withcorrespondence was not statistically significant, and thus, we have not rejected the null
hypothesis. Alternatively, an observation of the coefficient test, net sales, operating profit,
and R&D expenditure reveals extremely high correlations between the IFRS base andJapanese standards. However, this does not verify Hypothesis 1: “Differences exist in
financial indicators between the IFRS and Japanese standards.”
Various reasons may explain why no significant difference exists. First, there were
only a few target companies, and this small sample may have influenced the robustnessof verification as well as any errors. Further, even if IFRS was adopted, the impact is only
noted for one year, and it can be posited that no change has occurred thus far tosignificantly impact business performance. Thus, it seems that no motivation exists for13

companies to adopt IFRS to improve their performance. For example, it is observed thaton the one hand, net sales will substantially decrease, as the IFRS require payment
commissions to be deducted from sales. However, the data indicates that if the Japanesestandards change to IFRS, actual net sales figures will not decrease as much. On the other
hand, if the technical revenue associated with licensing newly developed pharmaceuticalproducts is recorded, this will become a factor in increasing operating income. Clearly,
the discussion thus far indicates that adopting IFRS is important for Japanese companies
to advance their global strategies, and a strategic accounting takes the initiative for both
M&A and investment opportunities.
Table 1 presents such numerical figures as net sales and operating profit, which do
not substantially differ from before and after IFRS adoption. However, it seems that net
sales have been influenced not through the total amount of transactions, but by indicatingproduct sales amounts and the fees received as service consideration. The IFRS addresses
the transient gains and losses arising from non-operating income and expenses, and treats
extraordinary gains and losses as operating income and expenses. The operating profit is
the gross profit minus operating expenses, and the IFRS significantly influences operating
profit as determined by the magnitude of this transient change in revenues and expenses.
Conversely, the decrease in R&D expenses due to IFRS adoption occurs because the IFRS
permits a part of R&D expenses to be recorded as intangible assets. If the development is
successful, the investment amount recorded in the asset will be amortized after productsales, and is expensed on the income statement. However, it should be noted that if suchdevelopment fails, it will need to be impaired, which will impact operating expenses andsignificantly reduce operating profit.

6. Summary and Conclusion
This paper analyzes the reasons pharmaceutical companies adopt IFRS andcompares key financial indicators to reveal the standards’ impact on these companies.
Switching from Japanese standards to IFRS will certainly alter these companies’
settlement figures, as the amortization of goodwill and the methods to record development
costs differ. However, regardless of whether apparent profits temporarily increase or
decrease, it is noteworthy that the enterprise’s actual situation does not substantiallychange.
On the one hand, Japanese companies have decided to voluntarily adopt IFRS for
the following reasons: to provide financial reporting based on common international
indicators, improve their financial information’s comparability with other companies,
prepare financial information such that it is easy for foreign investors to understand,14

increase financing options, and allow for the easier evaluation of management, among
other reasons.19 On the other hand, IFRS items differ from Japanese standards, such as
net sales, goodwill, the impairment of intangible assets, the depreciation of fixed assets,
R&D, and comprehensive income as it impacts net income.
By adopting IFRS, the rules to evaluate corporate performance may change
significantly. For example, product sales can shift from shipping standards to arrival
standards, and depreciation can be applied to certain options, but assets’ future economic
benefits must be predicted, which involves many constraints. Meanwhile, using common
standards worldwide offers advantages that make it easier to grasp and compare
companies’ financial situations, and it will be easier for businesses to establish overseas
financing, M&As, and strategic planning.
This analysis has revealed that a strategic accounting needs to take the initiative forJapanese companies to adopt IFRS. Thus, it is necessary to carefully examine IFRS tounderstand what influence is exerted on the accounting practice by its introduction, notonly with respect to strategic goals and performance measurement measures,20 but also
for other management accounting techniques, such as capital investment and budgeting,or R&D investments and international taxation. Consequently, further studies on IFRS
should be conducted in the future.
Acknowledgements
I appreciate the helpful comments of the session participants at the 12th New
Zealand Management Accounting Conference. This work was supported by Grant-in-Aid
for Scientific Research (C) of JSPS KAKENHI Grant Number 16K04016.

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