31 August 2011
Ms. Françoise Flores
Chairman of European Financial Reporting Advisory Group
35 Square de Meeûs
1000 Brussels
Belgium
Dear Françoise
Comments on EFRAG DP “Considering the Effect of Accounting Standards”
The Accounting Standards Board of Japan (ASBJ) is pleased to respond to the Discussion
Paper (DP) “Considering the Effects of Accounting Standards” of the European Financial
Reporting Advisory Group (EFRAG).
Although it has not been customary for us to respond to consultative documents from thoseorganisations other than the IASB/FASB or the IFRS Foundation, we decided to share ourviews since this issue is particularly important for the IFRS Foundation and IASB to consider
when designing future standard setting schemes. We hope that our comments would be
conducive to advancing things forward. Accordingly, we are copying this submission to theleadership of respective bodies of the IFRS Foundation.
We strongly believe that the maintenance of independence is critical for accounting standards
setters to deliver high quality outputs, whereas fulfilling the accountability is equallyimportant. In this respect, we believe that ‘effect analysis’ is an essential element for astandard setter to fulfil its accountability. Therefore, we are pleased to see that the IASB
published a comprehensive effect analysis document regarding IFRS 11, Joint Arrangements
and disclosure for joint arrangements included in IFRS 12, Disclosure of Interests in Other
Entities in July 2011, and believe that it constitutes a good starting point for undertaking theinitiative.
Yet although ‘effects analysis’ is defined as a part of the IASB’s standard setting process in
its Due Process Handbook1, the process is yet to be further substantiated in it. Clarification ofterminologies and steps to take as set out in the DP will help address an expectation gap
among stakeholders regarding what is meant by effects analysis. Therefore, while there areseveral instances where further considerations would be warranted (for example, we are notconvinced that it is realistic or appropriate to ‘consider’ macro-economic factors. See our
response to Q8), we generally support the proposed steps presented in the paper.
In addition, taking into account the accelerated trend towards the global convergence ofaccounting standards, we believe that it is not efficient for each national standard setter toreplicate the steps that the IASB takes. Rather, we believe that the process would be more
effective and efficient, if the IASB takes the leadership of the initiative, and national standard
setters or regional groups partner with the IASB in proceeding with the steps. Such apartnership will be particularly helpful, when liaising with stakeholders on a national level
1

IASB Due Process Handbook, paragraph 109-110.

(including regulators, user groups, and industry groups). We are pleased to provide the IASB
with relevant assistance when undertaking the initiative.
Please see the Appendix for our comments to specific questions in the DP. If you have any
questions, please feel free to contact us.
Yours faithfully,

Ikuo Nishikawa
Chairman, ASBJ
CC: Mr. Aki Fujinuma, Vice-Chair of the IFRS Foundation Trustees
Mr. Robert Glauber, Vice-Chair of the IFRS Foundation Trustees
Mr. Hans Hoogervorst, Chairman of the IASB
Mr. Masamichi Kono, Acting Chairman of the IFRS Foundation Monitoring Board

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Appendix
Section 2: The process of ‘effects analysis’
Q1) Do you agree that ‘effect analysis’ should be defined, for the purposes of accounting
standard setting, as a systematic process for considering the effects of accounting standards as
those standards are developed and implemented (paragraph 2.2)?
If you disagree with the proposed definition, or would like it to be amended, please provide
an alternative definition, and please explain why you favour that alternative definition.
We wonder if it would be possible to define ‘effects analysis’ more appropriately than adictionary does. Rather, a focus should be given more on what is meant by ‘effects analysis
on developments of or revisions to financial reporting standards.’
In addition, we share the following observations on the proposed definition of ‘effects
analysis’ (i.e., ‘a systematic process for considering the effects of accounting standards as
those standards are developed and implemented’):Effects analysis can be performed either in a systematic or ad-hoc manner, depending
upon the surroundings;‘Consider’ may be ambiguous; thus clarification should be sought;‘Effects’ would be difficult to measure, and it may be very difficult, if not impossible, tocapture actual effects before standards are implemented; and‘Effect’ arises not only from the development of standards, but from the revisions to them.
Accordingly, we suggest that ‘effects analysis on developments of or revisions to financial
reporting standards’ should be defined as follows (proposed additions are underlined, andproposed deletions are struck-out):‘a systematic process to identify and evaluate for considering the anticipated or actual effects
from the development of or revisions to financial reporting of accounting standards as thosestandards are developed and implemented’

Q2) Do you agree that effects analysis should be integrated (or further embedded) into thestandard setting due process (paragraph 2.7)? If not, why not? Please explain the reasons foryour answer.
Yes, we agree that effects analysis should be integrated into the standard setting due process.
As stated earlier, we believe that the IASB and national standard setters can effectively share
the responsibility in the global standard setting environment.

Q3) Do you agree that the standard setter should be responsible for performing effects
analysis, and that the performance of effects analysis by any other body is not a sufficient or
satisfactory substitute (paragraph 2.11)? If not, why not? Please explain the reasons for youranswer.
Yes, we generally agree that the standard setters should be responsible for performing effects
analysis, since they should have the best knowledge about the proposed standards; thus, theyshould be best positioned to identify areas that are likely to be affected.

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However, the process might become more objective if the third party committee plays a roleof conducting effects analysis. Such a committee may consist of senior individuals who haveprofound knowledge and experience in financial markets (such as macro-economists, retired
regulators, and academia). While accounting standard setters have profound expertise inaccounting, effects analysis might require much broader expertise.

Q4) Do you agree that effects should be considered throughout the life-cycle of a project tointroduce a new accounting standard or amendment, but that publication of a document
setting out the key elements of the effects analysis should be specifically required, as aminimum, at the following points in time in that life-cycle (paragraph 2.15)?:
A. When an agenda proposal on the project is considered by the standard setter;
B. When a discussion paper is issued for public consultation (this effects analysis is an update to‘A’, to reflect the latest information available;
C. When an exposure draft is issued for public consultation (this effects analysis is an update to ‘B’,
to reflect the latest information available);
D. When a final standard or amendment is issued (this effects analysis is an update to ‘C’, to reflect
the latest information available); andE. For new accounting standards and major amendments, a ‘post-implementation review’ isrequired, which is an analysis of ‘actual effects’ that should be performed and published when the
pronouncement has been applied for at least 2 years, together with the publication of an
associated document setting out the key elements of the review; a post-implementation review is
not required for minor amendments.

If you do not agree, why is this? Please explain the reasons for your answer.
Yes, we agree with the proposal. However, we suggest that the proposal be further clarified
by stipulating that there is no need to mention effects in each and every agenda paper forboard meetings, such that effects analysis may not hinder too much of the staff work before
undertaking theoretical considerations. As stated in the cover letter, we are pleased to see the
IASB’s recent publication of effect analysis; however, we think that it would be more useful
if such analysis is provided at respective standard-development stages (rather than at ex-postof standard publication only).

Q5) Do you agree that effects analysis should be undertaken for all new accounting standards
or amendments, but that the depth of the analysis work should be proportionate to the scale ofthe effects (in terms of their ‘likelihood of occurring and magnitude of the consequences’ ifthey do occur), the sensitivity of the proposals and the time available (paragraph 2.19)? If not,why not? Please explain the reasons for your answer.
Yes, we generally agree with the proposal. As effects are inherently difficult to measure (thus,
identifying immaterial projects is difficult), it is reasonable to presume that all new or revised
standards should be scrutinised; while, the depth of the exercise should differ depending upon
the nature of the projects.
For the purpose of determining the depth of the exercise, a judgmental framework should not
be made too definitive or structured so as to ensure the practicality of the exercise. Rather,
we suggest that standard setters should determine the extent of work to be performed, taking
into account the relevant qualitative factors.

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We believe that the ‘likelihood of occurrence’ and ‘magnitude of consequences’ are goodqualitative indicators in evaluating the scale of the effects, but other factors should not bedismissed. For example, even if the development of or revision to a particular standard has asmaller magnitude of consequences, it may have a significant effect, when considered inaggregate with other regulatory or standard-setting developments. Therefore, other elements
such as the impact on other standards or regulatory requirements should be factored into when
determining the necessary level of analysis.

Section 3: The concept of ‘effects’
Q6) Do you agree that ‘effect’ should be defined, for the purposes of accounting standard
setting, as consequences that flow, or are likely to flow, from an accounting standard,referenced against the objective of serving the public interest by contributing positively todelivering improved financial reporting (paragraph 3.2)?
If you disagree with the proposed definition, or would like it to be amended, please provide
an alternative definition and please explain why you favour that alternative definition.
As stated in our response to Q1), we believe that ‘effects analysis’ should be defined in thecontext of developments of or revisions to financial reporting standards. In the same vein, we
believe that ‘effect’ should also be defined in the context of developments of or revisions tofinancial reporting standards.
In addition, it may be possible that effects analysis is performed with reference to theobjective of serving the public interest by contributing positively to delivering improved
financial reporting, but we do not believe that analysis should be performed with such anarrower scope. Effects may be perceived differently among stakeholders, and standard
setters will be asked to be sufficiently responsive when they receive inputs from stakeholders.
Therefore, we suggest that ‘effects on developments of or revisions to financial reporting
standards’ be defined as follows (proposed additions are underlined, and proposed deletions
are struck-out):‘consequences that flow, or are likely to flow, from developments or revisions to financial
reporting an accounting standards, referenced against the objective of serving the public
interest by contributing positively to delivering improved financial reporting’Q7) Do you agree that the term ‘effects’, rather than term ‘costs and benefits’ should be used
to refer to consequences of standards, in order to distinguish effects analysis from a CBA, on
the grounds that it would not be appropriate to require a CBA to be applied to standard setting(paragraph 3.7)? If not, why not? Please explain the reasons for your answer.
Yes, we agree with the use of the term ‘effect’ rather than ‘costs and benefits,’ since the term
‘cost and benefits’ predicates quantitative measurements of benefits and drawbacks. It is not
usually possible or desirable to measure effects quantitatively, in the context of financial
reporting standard setting.

Q8) Do you agree that the scope of the ‘effect’ to be considered, for the purposes ofPage 5 of 10

performing effects analysis, should include all effects, both ‘micro-economic effects’ and‘macro-economic effects’ (paragraph 3.12)?
If you disagree, please provide an alternative way of specifying what the scope of ‘effects’ tobe considered to be, and please explain why you favour that alternative.
Yes, we generally agree that the scope should include all effects, both ‘micro-economic’ and‘macro-economic effects.’ However, some question if macro-economic effects should ever be
neutral, given that the effects are measured in reference to the objectives of financial reporting.
Moreover, we believe that the proposal should clarify that it is possible to identify whether
significant macro-economic effects are likely to exist, but it would be significantly difficult toconsider effects as proposed.
For instance, it might be predictable whether a proposed standard may give rise to someeffects (whether they are positive, negative or encompass even pro-cyclical effects) on macro
economy, but usually it is impracticable to consider or evaluate how the scale of the effects
would be.

Q9) Do you agree that a standard setter can only be expected to respond to an effect which isoutside of its remit (or for which an accounting standard is not the most effective means ofaddressing the particular effect) by communicating with the relevant regulator or government
body to notify them of the relevant issue and to obtain confirmation from them that they will
respond appropriately to it (paragraph 3.17)? If not, why not? Please explain the reasons foryour answer.
Yes, we generally agree with the proposal. However, we believe that it is highly unlikely tobe able to obtain confirmation from a relevant regulator or government body that they will
respond appropriately to the effect, while it is possible for standard setters to notify them of
the relevant issues. We recommend that the proposal acknowledge this regard explicitly.

Q10) Do you agree that ‘effects’ should be defined by reference to an objective, and that theobjective should be that of serving the public interest by contributing positively to delivering
improved financial reporting’, where ‘serving to the public interest’ means ‘taking into
account the interests of investors, other participants in the world’s capital markets and otherusers of financial information’ (paragraph 3.19)?
If you disagree because you consider that ‘effects’ should not be defined by reference to an
objective, please explain the reasons for your answer.
If you disagree because you consider that ‘effects’ should be defined by reference to an
objective other than that specified above, please provide an alternative objective and please
explain why you favour that alternative objective.
No, we disagree with the proposal to define effects referenced to an objective that is to serve
the public interest by contributing positively to delivering improved financial reporting.
We believe that effects analysis involves communication with a wide range of stakeholders,and standard setters will not be able to control what should be communicated. In practice,

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stakeholders may communicate what they perceive as ‘effects’ with standard setters, and theywould simply be requested to take a note of it.
While standard setters may try to ask specific questions or collate inputs in accordance withthe proposed objective, it is unlikely that we can control everything. Therefore, we suggestthat ‘effects’ should be defined without reference to particular objectives.
If the proposal (i.e., to define effects by reference to an objective) remains intact, werecommend that the term ‘public interest’ be articulated in greater detail. As a notion of
public interest may be understood differently among stakeholders, we are concerned that thedefinition could confuse stakeholders without clear articulation.

Q11) Do you agree with the following clarifications of the term ‘effects’?
a)Effects can be ‘positive’, ‘negative’ or ‘neutral’, as determined by whether they support, frustrateor have no impact on the achievement of the objective of serving the public interest bycontributing positively to delivering improved financial reporting (paragraph 3.23);b)

Effects analysis will usually involve assessing the ‘marginal effects’ of an accounting standard oramendment, relative to the status quo that existed before its introduction, so the term ‘effects’should, in general, be interpreted to refer to ‘marginal effects’ (paragraph 3.24);c)

The term ‘effects’ can be used to refer to both ‘one-off effects’ and ‘ongoing effects’ (paragraph3.26); andd)The term ‘effects’ can be used to refer to both ‘anticipated effects’ and ‘actual effects’, dependingon what stage the effects analysis is at - before, during or after implementation of the new
accounting standard or amendment (paragraph 3.28).

If you do not agree with any of the above clarifications of the term ‘effects’, which one(s) do
you disagree with and why? Please explain the reasons for your answer.
We generally agree with the proposal. However, in relation to the categorisation of effects asstated in a), we believe that effects can be clarified in five categories: ‘very positive,’‘positive,’ ‘neutral,’ ‘negative,’ and ‘very negative.’ Three levels of categorisation may seemtoo simple, which would not be adequate in achieving the objective of benchmarking exercise.

Q12) Do you agree with the following further considerations concerning effects:a)Effects analysis should involve considering effects in terms of both their ‘incidence’ (who isaffected) and their ‘nature’ (how they are affected), and that the standard setter should betransparent about whether and why they consider that the effects on one group should receive
greater weight, less weight or equal weight to the effects on any other group (paragraph 3.30);
andb)

Effects analysis should involve prioritising effects, possibly by ‘ranking’ them in terms of their‘likelihood’ of occurring and the magnitude of the ‘consequences’ if they do occur (paragraph3.32).

If you do not agree with any of the above further considerations concerning effects, which

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one(s) do you disagree with and why? Please explain the reasons for your answer.
We agree with the proposal set out in paragraph a), but ‘ranking’ effects as suggested inparagraph b) may be over-engineered. As the extent of effects is largely subject to judgment,and ‘likelihood’ and ‘magnitude’ can only work as factors for consideration, we propose notto proceed with ‘ranking’.

Section 4: The key principles underpinning effects analysis
Q13) Do you agree that there should be a set of key principles underpinning effects analysis(paragraph 4.2)? If not, why not? Please explain the reasons for your answer.
We think that ‘principle’ is not an appropriate term relative to the substances suggested: rather,
they should be labelled as ‘key steps.’ Please refer to our response to Q14) for details.

Q14) Do you agree that the set of key principles underpinning effects analysis should be as
follows (paragraph 4.2)?:
Principle 1: Explain intended outcomes (refer to paragraph 4.2);
Principle 2: Encourage input on anticipated effects (refer to paragraph 4.2);
Principle 3: Gather evidence (refer to paragraph 4.2); andPrinciple 4: Consider effects throughout the due process (refer to paragraph 4.2).

If you disagree with the proposed set of key principles, or would like the principles to beamended, please provide an alternative set of key principles and please explain why you
favour that alternative set.
We suggest setting out ‘a set of key steps’ rather than ‘a set of principles.’ A set of key steps
that the IASB should take may be characterised as follows:
Step-1: To formulate the entire plan of effects analysis.
Step-2: To explain intended outcomes when agendas are set.
Step-3: To encourage input on anticipated effects when due process documents are issued,by providing specific questions to stakeholders with assistance from national standard
setters.
Step-4: To document summary of inputs from stakeholders by collating evidence that has
been received either directly or through national standard setters.
Step-5: To publicise the document and submit it to the IFRS Foundation Trustees or its
Due Process Oversight Committee for their review.
Step-6: To seek to measure actual effects during the process of post-implementation
reviews.

Section 5: The practicalities of performing effects analysis
Q15) Do you agree that the process that a standard setter should apply for validating theintended outcomes of a proposed accounting standard or amendments should include steps ‘a’to ‘d’ of paragraph 5.2?
If you disagree with the proposed steps, or would like the steps to be amended, please provide
alternative steps and please explain why you favour those alternative steps.

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We believe that it would be premature to formulate practical details as set out in this section,
since an application to practice should be considered once a big picture is agreed.
Nevertheless, we suggest that the steps to take be aligned with the approach detailed in our
response to Q14. Also, given the framework suggested in the DP, we share our comments to
Q15-17 as follows.
We agree that the list of steps set out in paragraph 5.2 is a good starting point to consider theprocess for ‘validating the intended outcomes of a proposed accounting standard oramendment.’ However, we have the following observations.
Subparagraph b) states that the standard setter should confirm that the net benefit ofdoing nothing is outweighed by the net benefit of issuing a new accounting standard oramendment. We consider that this is highly unrealistic, since accounting standard setters
are not able to predict how the new accounting standard or amendment would be until thestandards are finally approved. Since even changes in detailed wordings may
significantly alter effects, standard setters cannot confirm the net benefit of issuing new
standard or amendment.
Subparagraph d) denotes that preparers, users, and other constituents can validate or
propose the assumptions that the standard setters made. However, we believe that only
standard setters are responsible for effects analysis. Therefore, the term ‘validate’ should
be deleted to convey the intended message.

Q16) Do you agree that the process that a standard setter should apply for identifying andassessing the effects of a proposed accounting standard or amendment should include steps‘a’ to ‘f’ of paragraph 5.3?
If you disagree with the proposed steps, or would like the steps to be amended, please provide
alternative steps and please explain why you favour those alternative steps.
We generally feel comfortable with the proposal, but share the following observations:
We generally agree with the subsection b), but effects should be categorised into fivescales (Please see our response to Q11.)
We do not believe ‘ranking’ the effects is necessary or relevant (Please see our response
to Q12.)

Q17) Do you agree that the process that a standard setter should apply for identifying options
for the proposed accounting standard or amendment (options for achieving the intended
outcomes of the proposed accounting standard or amendment), and for choosing the preferred
option, should include steps ‘a’ to ‘f’ of paragraph 5.4?
If you disagree with the proposed steps, or would like the steps to be amended, please provide
alternative steps and please explain why you favour those alternative steps.
No, we do not believe that the process should include providing several options. We areafraid that providing and prioritising options may result in narrowing the scope ofdeliberations by the IASB, since stakeholders may think that there is no benefit of further
deliberation if there is an objective prioritisation.

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Additionally, providing options may be seen as giving too much emphasis on effects analysis.
We believe that effects analysis is one of the critical elements in the standard setting dueprocess, but it is not a determinant factor of the entire process.
Therefore, we disagree that standard setters should identify options and choose preferred
options as suggested in paragraph 5.4.

Q18) Do you agree that the IASB should, to some degree, delegate to national standard settersand similar institutions some of the activities involved in gathering evidence of the effects ofaccounting standards, particularly consultation with constituents, and that these bodies shouldplay a more active part in the due process to ensure that IFRSs contribute positively todelivering improved financial reporting (paragraph 5.5)?
We generally agree with the gist of the proposal, but we consider that an improvement can bemade with regard to how it is phrased. We believe that effects analysis should be performed
as a process of international and national standard settings; however, we believe that the
IASB should lead the initiatives, taking into account that standard setting processes are
increasingly integrated globally and that most of the financial reporting standards are, in
substance, agreed at the international level rather than at the domestic one.
Accordingly, we recommend that the proposal be clarified by stating that the IASB should
lead the initiative by ‘partnering with’ national standard setters and regional groups (such as
the AOSSG or EFRAG), rather than the IASB ‘delegate’ some of the activities to national
standard setters.

Section 6: Next steps
Q19) Do you agree that the next steps in developing and, subject to the results of public
consultation, implementing the proposals put forward in this paper should include steps ‘a’and ‘b’ of paragraph 6.2?
If you disagree with the proposed next steps, or would like there to be additional next steps,
please provide alternative and/ or additional steps and please explain why you consider thatthose alternative and/ or additional next steps are appropriate.
Although we highly appreciate the initiatives by the UK Accounting Standards Board and
EFRAG to formulate the proposal, we believe that the IFRS Foundation Trustees should takea lead in considering the next steps. As stated earlier, we consider that effects analysis shouldbe implemented, led by the IASB in collaboration with national standard setters or regionalgroups. Thus, we believe that the structure should ultimately be considered by the IFRSFoundation.
Further, we think that ‘field testing’ in paragraph 6.2 a) should be read ‘pilot testing,’ toclarify that the initiative is used as a part of initial assessment in determining whether the
proposed framework is operational.

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