Perceived Costs And Benefits Of IFRS Adoption In Japan, Essay.

Discuss The Perceived Costs And Benefits Of Ifrs Adoption In Japan.

The adoption and implementation of International Financial Reporting Standards (IFRS) remains to be a controversial topic of discussion. The corporate perceptions of the likely costs and benefits that will result from the adoption and implementation of IFRS varies according to the size of the company in question. Thought, most companies recognise a moderate degree of benefits to come of the adoption of IFRS, the substantial benefits have been perceived to only be applicable to the larger companies.Additionally,the cost of adopting and implementing IFRS have been identified to have more bearing on the smaller companies and less of a burden on the larger companies therefore these perceptions adds fuel to the controversies of IFRS adoption. Ultimately, sacrifices must be made in order to gain the benefits that will come with the adoption of the IFRS however the rationality of such actions remains elusive.

recent controversies coupled with the adoption and implementation of IFRS is highlighted through a survey that was conducted in Japan. The survey portrayed the corporate perceptions of the likely costs and benefits that would arise as a result of the adoption and implementation of IFRS through surveyed data of senior financial executives from 292 Japan listed companies (Ozu et al. 2018).

The survey was a questionnaire focusing on two main questions, 1) What is perceived to be the most significant costs and concerns of implementing IFRS and 2) What are the perceived benefits of adopting IFRS, a 1-7 point likert was used to rate the significance(Ozu et al. 2018). The survey was posted out to 3581 Japanese listed companies returning 292 useable responses, of these 292 companies that completed the survey, they were classified according to size. Companies with a market capin excess of 1 trillion yen were classified as mega large (8 companies), 100 million - 1 trillion yen as large (60 companies), 10 million to 100 million yen as medium (106 companies) and less than 10 million yen as small (118 companies).The survey returned results that conveyed various areas of concerns by Japanese listed companies with the adoption and implementation of IFRS as well identifying a moderate degree of benefits which will be discussed in further detail below.

As seen in the survey conducted on Japanese companies, the three main perceived benefits of the adoption of IFRS in Japan is increased comparability with international companies, improved information to shareholders and ability to raise capital (Australian Accounting Review, 2018). However, these benefits are not apparent to all companies - The larger Japanese companies tend to realise the positive outcomes of the implementation of IFRS, whereas the smaller companies tend to view IFRS adoption in a negative light. IFRS promotes the comparability of financial statements and allows end users also enjoy the advantage of understanding the financial data communicated, whether it comes from one country or a different one (Chron, 2018). Increased comparability of financial statements is highly valuable for the large and internationally listed Japanese companies as shareholders and potential investors will be able to make smart and confident investment decisions. If a company does not abide by IFRS, overseas investors may be sceptical and hesitant to invest. IFRS contribute to economic efficiency by helping investors to identify opportunities and risks across the world, thus improving capital allocation (IFRS, 2018).Therefore, adoption of IFRS allows for a company to be more attractive to international investors and is advantageous especially for companies raising capital from international markets (Australian Accounting Review, 2018). International capital raising is beneficial for companies as it gives them substantial funding to invest in their business activities. More funding can be expensed towards items such as marketing, research and development and machinery to promote business growth and increased market share.

Benefits of the adoption of IFRS in Japan

An example of a Japanese company that currently thrives through the adoption of IFRS is Sony Corp. Sony is listed on the Tokyo Stock Exchange (6758:TYO) as well as the New York Stock Exchange (SNE:NYSE). Through the company’s IFRS adoption, more funding becomes available from international investors. As a result, Sony has grown to be the market leader in technology products such as televisions, cameras and laptops.

Although the initial adoption of IFRS can be costly, timely to completely adhere by and difficult to perceive if there are benefits for locally responsive companies (Australian Accounting Review), long term benefits such as increased comparability and capital raising can still be realised.

Although the adoption of IFRS poses potential benefits for Japanese corporations, it also raises significant costs including both general and accounting difficulties in which many preparers believe to outweigh the benefits (Ozu et al. 2018). According to the findings of the survey which investigated the general areas of difficulty regarding the implementation of IFRS in Japan, over 50% of the respondents perceived six areas to be of the highest level of difficulty, including uncertainty regarding interpretations of standards, staff training, IT systems, technical knowledge, complexity of standards and differences between J-GAAP and IFRS (Ozu et al. 2018). Due to differences in social, organisation and cultural characteristics between Japan and Western countries, Japan may interpret IFRS differently in comparison to other countries (Tsunogaya). In particular, concerns were raised about the application of IFRS’s principle based approach (Tsunogaya). The interpretation of IFRS could be improved with consistent and quality training of staff. The issue lies with the cost of training, as the cost of IFRS training is expected to be higher in Japan compared to other countries (Tsunogaya). In spite of the significant amount of the time and money that would be devoted to training of staff, it is extremely necessary and may provide multiple benefits for Japanese corporations over the long term. Technology is also another area that would be impacted through the adoption of IFRS. IT systems may require significant change, dependent on multiple factors, such as size and complexity of the business which would also consume significant resources (Deloitte). Another difficulty regarding the adoption of IFRS in Japan is the difference between Japanese GAAP and IFRS, as many perceive J-GAAP to be superior to IFRS (Tsunogaya). For instance, the treatment of intangible assets requires both scheduled amortisation and impairment procedures whereas IFRS only relies on impairment procedures (Tsunogaya). However, international investors are unable to understand J-GAAP, which impacts its comparability with international companies.

Costs of the adoption of IFRS in Japan

The costs of implementing IFRS appear to be significant, which creates doubt as to whether the potential benefits will be realised. Most difficulties that have been presented are likely to be addressed with thorough training and education of staff. Although the costs appear to be significant, Japanese corporations should not attempt to cut down on these costs by taking shortcuts as it may create greater difficulties in the long term.

Conclusion

The overall discussion in the report is undertaken for critical examination of the benefits and costs that Japanese firms have to face by the adoption of IFRS standards proposed by IASB. The report has concluded that Japanese firms should adopt the IFRS standards for achieving the global competitiveness. This is because the implementation of IFRS standards within the financial reporting process of Japanese firms will improve their comparability with global competitors. This will help in gaining attraction of the foreign investors and improving the business performance by capital inflows. Thus, the major benefit that Japanese firms can realise from the adoption of IFRS standards is gaining larger access to international finance. Also, it will facilitate greater interaction and communication with the international investors and seeking new options for accessing funds to promote the business expansion and growth. However, the benefits can be largely outweighed by the costs incurred by the Japanese firms in adoption of IFRS standards.  The firms need to invest larger amount of time and money in complying with the IFRS standards as they have to adopt changes in their overall financial reporting process. Therefore, the Japanese firms need to gain an analysis of of both the benefits and costs of IFRS adoption before considering the final decision of implementation. However, IFRS adoption is essential for Japanese companies to maintain their competitiveness at a global level as IASB is mandating all countries to comply with the international accounting standards.

The major limitation of the present report is that it has involved only developing an insight into the research issue from the collection of secondary data. The report has only involved the collection and extraction of qualitative data for examining the various aspects of the research topic. The research lacks any quantitative base to provide a specific answer for the research problem. The quantitative data refers to the primary data that is collected mainly for the research purpose and is not available from nay other external source. The primary data can be collected with the use of questionnaire or interview survey method aimed at analysing the costs and benefits that selected Japanese firms are facing in complying with IFRS standards. This would help in providing a practical base to the research study and thus improving its credibility in the eyes of the readers.

At present, the research has only provided a qualitative base to the problem presented to be examined and evaluated. Th most significant limitation of the present research report in this context is that it has lacked in providing a new insight into the research issue. It has only identified ad discussed the major themes in relation to the research issue that has already been discussed by other researchers. As such, it has limited the applicability and reliability of the findings of the research to be used for other research purpose held in this context in the future direction. The collection of both qualitative and quantitative data both is essential to improve its authenticity and credibility. The quantitative data will help in providing a new insight into the research issue being examined while qualitative data seeks to examine the accuracy of the new insight developed.

References

Ozu C, Nakamura M, Nagata K, Gray S, 2018, “Transitioning to IFRS in Japan: Corporate Perceptions of Costs and Benefits”, Australian Accounting Review No. 84 Vol. 2018 Issue 1 2018, 2018

Chron, K, McIntosh, Three Advantages to an End User of Using IFRS Accounting With Financial Statements, 2018. [ONLINE] Available at: https://smallbusiness.chron.com/three-advantages-end-user-using-ifrs-accounting-financial-statements-10018.html. [Accessed: 28 May 2018]

IFRS, Why Global Accounting Standards, 2018. [ONLINE] Available at: https://www.ifrs.org/use-around-the-world/why-global-accounting-standards/. [Accessed: 28 May 2018]