To カ ジ ノ シ ー ク レ ッ トFRS Foundation

Keidanren welcomes the opportunity to submit comments on カ ジ ノ シ ー ク レ ッ トFRS Foundation's Trustees' カ ジ ノ シ ー ク レ ッ トnd Effectiveness: Issues for the Review.

In Japan, as IFRS voluntary adoption becomes widespread, more than 100 companies have already announced adopting IFRS. The aggregate market capitalization of these companies is nearly one-fourth that of all companies listed on the nation's stock exchanges. To encourage more Japanese companies to adopt IFRS, it is essential to improve and raise the quality of Standards. From that standpoint, we would like to emphasize the following two points in particular:

Firstly, カ ジ ノ シ ー ク レ ッ トASB should not broaden the scope of its work any further. The Board should dedicate itself to developing high-quality Standards for private-sector companies, rather than engaging in the development of Standards for the public and not-for-profit sectors (see our response to Q1 below). As for integrated reporting, カ ジ ノ シ ー ク レ ッ トASB's involvement should be limited to maintaining the forms of cooperation with カ ジ ノ シ ー ク レ ッ トnternational Integrated Reporting Council (IIRC) that are ongoing (see our response to Q2 below).

Secondly, we strongly oppose reducing the number of IASB members allocated for the Asia/Oceania region (see our response to Q11 below). In Japan an increasing number of companies are adopting IFRS, and many other Asian nations are in the process of adopting IFRS as well. Against that backdrop, it is becoming more necessary than ever to listen to the views of stakeholders in the Asia/Oceania region including Japan, in the pursuit of the global adoption of IFRS. Hence, we object to reducing the number of IASB members allocated for the Asia/Oceania region, and request that an increase, rather than a decrease, in the number of those members be considered.

Below are our responses to the specific questions.

Primary Strategic Goal 1: Development of a Single Set of Standards

< Response

We strongly oppose カ ジ ノ シ ー ク レ ッ トASB engaging in the development of Standards for the public and not-for-profit sectors. カ ジ ノ シ ー ク レ ッ トASB should dedicate itself to developing high-quality global Standards for private-sector companies.

Reasons

• As accounting standards for the public sector are developed by カ ジ ノ シ ー ク レ ッ トnternational Public Sector Accounting Standards Board, there is no need for カ ジ ノ シ ー ク レ ッ トASB to develop Standards for that sector.
• Financial reporting requirements for the private not-for-profit sector in each country are subject to the various laws and regulations of the jurisdiction, making it difficult to develop internationally consistent standards for the sector. Furthermore, in the event of カ ジ ノ シ ー ク レ ッ トASB engaging in the development of Standards for the sector, a significant amount of additional funds would be needed. However, カ ジ ノ シ ー ク レ ッ トnfeasibility of raising such funds is evident, considering the funding status of カ ジ ノ シ ー ク レ ッ トFRS Foundation.

< Response

We strongly oppose カ ジ ノ シ ー ク レ ッ トASB expanding the scope of its work into a nonfinancial area. Such expansion is totally unnecessary, and カ ジ ノ シ ー ク レ ッ トASB should limit its involvement in integrated reporting to maintaining the existing forms of cooperation with カ ジ ノ シ ー ク レ ッ トIRC.

Reasons

• Integrated reporting remains, and should continue to remain, voluntary disclosure by companies. Practices of integrated reporting vary from one company to another and how this reporting relates to financial one is unclear. Given those features, カ ジ ノ シ ー ク レ ッ トASB's active involvement in integrated reporting would run counter to カ ジ ノ シ ー ク レ ッ トntention of IASB's financial supporters.

We do not comment on these questions.

Primary Strategic Goal 2: Global Adoption of IFRS (not covered by this review)

Primary Strategic Goal 3: Consistency of Application and Implementation

< Response

We consider that, overall, カ ジ ノ シ ー ク レ ッ トASB is operating through appropriate due process but has three issues that need to be addressed as listed below. Incidentally, we do not agree with the statement in paragraph 64 that "carve-outs and inconsistent application of the Standards . . . damage the brand." As accounting standards are public goods, they are not in harmony with the notion of brand. Before worrying about brand damage, カ ジ ノ シ ー ク レ ッ トASB should ponder why there have been carve-outs from IFRS by national standard-setters, and ensure that its effort to raise the quality of IFRS is not hampered by excessive attention to maintaining the brand. The three issues that need to be addressed are as follows:

• Whereas post-implementation reviews are an important step, it takes too much time to resolve matters after they were identified. When sufficient information has been obtained in the post-implementation review, there is no need to conduct research anew. To develop Standards more efficiently, we call for a more flexible approach, such as publishing an exposure draft without releasing a discussion paper.
• At カ ジ ノ シ ー ク レ ッ トFRS Interpretations Committee, the time frame between the submission of proposals from countries and the final decision by IFRS Interpretations Committee is excessively long. We request that its due process be improved to shorten this time frame.
• On カ ジ ノ シ ー ク レ ッ トASB website, it is not easy to search educational materials that help preparers and others to interpret IFRS on such matters as depreciation and fair value measurement of private equities. We request the creation of a portal where anyone can easily find those materials at a glance.

Primary Strategic Goal 4: IFRS Foundation as an Organization

< Response

We support カ ジ ノ シ ー ク レ ッ トFRS Foundation's three-tier structure. Under this structure, the Foundation and カ ジ ノ シ ー ク レ ッ トASB should conduct personnel administration, organizational management, and Standards development independently of any involvement from particular political parties or stakeholders in specific jurisdictions.

At the same time, ongoing monitoring is needed to ensure that this three-tier structure is functioning properly. We would like to stress the following points:

• We understand that カ ジ ノ シ ー ク レ ッ トFRS Foundation does not involve itself in the content of the Standards being developed, but request that it thoroughly examine (1) whether the way カ ジ ノ シ ー ク レ ッ トASB develops Standards is in line with カ ジ ノ シ ー ク レ ッ トFRS Foundation's strategic goals, and (2) whether カ ジ ノ シ ー ク レ ッ トASB develops Standards in an efficient manner and maintains an appropriate due process.
  1. (1) カ ジ ノ シ ー ク レ ッ トFRS Foundation is in a position to strategically encourage individual countries' adoption of and convergence with IFRS. As such, カ ジ ノ シ ー ク レ ッ トFRS Foundation is required to diligently promote convergence with US GAAP. However, such convergence has not been fully achieved in the core standards, namely standards on leases, revenue recognition, and financial instruments; and the convergence of カ ジ ノ シ ー ク レ ッ トnsurance contract standards has no longer been pursued as a joint IASB-FASB project. カ ジ ノ シ ー ク レ ッ トFRS Foundation may need to carefully analyze and assess IASB's Standards development activities like these.
  2. (2) カ ジ ノ シ ー ク レ ッ トFRS Foundation has to pay due attention to the efficiency of カ ジ ノ シ ー ク レ ッ トASB's Standards development activities as well. We believe that カ ジ ノ シ ー ク レ ッ トASB should not be allowed to propose relaunching a project that was abandoned due to objections from market participants, unless the environment has changed. Nevertheless, the abandoned Financial Statement Presentation project, for example, has been revived as part of a research program under the Primary Financial Statements project. To be accountable to the financial supporters, カ ジ ノ シ ー ク レ ッ トFRS Foundation needs to pay thorough attention to the efficiency of カ ジ ノ シ ー ク レ ッ トASB's Standards development activities and to the appropriateness of its due process.

< Response

We agree with the proposal to increase the number of "at large" Trustee appointments from two to five. We consider it right to increase the number of at large Trustee appointments in order to achieve a more appropriate geographical distribution in tandem with the global spread of IFRS.

In addition, the number of Trustees appointed from the Asia/Oceania region should be increased, in view of the region's growing influence on the global economy and existence of many nations that are in the process of adopting IFRS. カ ジ ノ シ ー ク レ ッ トncrease will not only enable カ ジ ノ シ ー ク レ ッ トFRS Foundation to reflect a more appropriate geographical balance in its operations, but also contribute to its strategy of pursuing the global adoption of IFRS.

< Response

We support the current approach of requiring an appropriate balance of professional backgrounds among カ ジ ノ シ ー ク レ ッ トFRS Foundation Trustees without specifying a quota for each of those backgrounds, as mentioned in paragraph 82.

We also support reviewing Section 7 of カ ジ ノ シ ー ク レ ッ トFRS Foundation Constitution as proposed in paragraph 82. While Section 7 sets out that "two of the Trustees shall be senior partners of prominent international accounting firms," we are not comfortable with カ ジ ノ シ ー ク レ ッ トdea that a quota for persons with a particular background is specified.

< Response

We agree, in general, with the proposal to (1) shift the focus of カ ジ ノ シ ー ク レ ッ トFRS Foundation's reviews from its organization and structure to strategy, and (2) change the frequency of the reviews from every three years to every five years.

Nonetheless, not reviewing the organization and structure at all may cause some inconvenience. We thus propose to stipulate that a review may be conducted as needed, for example, due to a change in the environment. Incidentally, we object to changing the frequency of カ ジ ノ シ ー ク レ ッ トASB's Agenda Consultation in line with that of カ ジ ノ シ ー ク レ ッ トFRS Foundation's reviews, from every three years to every five years.

< Response

We disagree with the proposal to reduce the complement of カ ジ ノ シ ー ク レ ッ トASB from 16 members to 13. In particular, we are strongly opposed to reducing the number of members allocated for the Asia/Oceania region, and propose that the current 16 members complement be maintained.

• カ ジ ノ シ ー ク レ ッ トASB was expanded in July 2012 to 16 members, of which two became vacant in July 2014, resulting in the current 14 members. Over that period, カ ジ ノ シ ー ク レ ッ トASB has been operating properly without major problems. There is no reason that justifies the reduction to 13 members.
• As the reasons to propose the reduction, paragraph 90 mentions the establishment of the Accounting Standards Advisory Forum (ASAF) and other changes in circumstances. However, the ASAF was established because カ ジ ノ シ ー ク レ ッ トncreasingly worldwide adoption of IFRS required カ ジ ノ シ ー ク レ ッ トASB to seek the views of a wider range of market participants for developing and applying Standards. It does not make sense to reduce the complement of カ ジ ノ シ ー ク レ ッ トASB when the absolute volume of its work is increasing. The other factors referred to in paragraph 90 are merely the general effects of reducing the complement, and we see no reason that suggests the urgent need for the reduction to 13 members.
• Additionally, we are strongly opposed to reducing the number of IASB members allocated for the Asia/Oceania region, in view of the region's significant impact on the global economy, existence of many nations that are in the process of adopting IFRS, and divergence in corporate transaction practices from one jurisdiction to another. To pursue the global adoption of IFRS, カ ジ ノ シ ー ク レ ッ トASB will have to win over diverse countries in the Asia/Oceania region. To facilitate that, consideration should be given to an increase, rather than a decrease, in the number of members allocated for the Asia/Oceania region.

< Response

We disagree with the proposed amendments to the Constitution.

• If カ ジ ノ シ ー ク レ ッ トntention is to remove the words "recent practical experience" from Section 27, the amended sentence would be too general a background requirement. On the other hand, even the words "recent practical experience" in the existing Constitution may not faithfully express the desired attributes of IASB members. It may be reasonable to define those attributes by using the words "primary practical experience," for example.
• We do not agree with the proposal that obligates カ ジ ノ シ ー ク レ ッ トASB, a private-sector accounting standard setter, to include members with experience at "market and/or financial regulators." We are aware that at present カ ジ ノ シ ー ク レ ッ トASB has some members who have worked for financial regulator, and we would have no objection to welcoming a person who has a financial regulatory background and satisfies other qualifications. However, there is no legitimate reason to mandate カ ジ ノ シ ー ク レ ッ トnclusion of such a person.

We do not comment on this question.

< Response

What is most needed in the area of funding is for カ ジ ノ シ ー ク レ ッ トASB to continue working toward the establishment of a funding model based on national financing regimes, proportional to a country's relative GDP. As IFRS is a kind of public goods, カ ジ ノ シ ー ク レ ッ トASB is not supposed to charge royalties and publication fees pertaining to IFRS, let alone rely on them as an important source of revenue. Charging royalties and publication fees pertaining to IFRS causes countries to back away from IFRS, thereby running counter to the strategic goal of the global adoption of IFRS.

We would like to add that, along with the effort to secure necessary funds, ongoing monitoring is needed to ensure that no unnecessary expenses are incurred (such as by continuing low-priority projects, the most notable example of which being the Primary Financial Statements project).

Other issues

< Response

Whereas this review does not cover the second primary strategic goal of the global adoption of IFRS, we have one request to カ ジ ノ シ ー ク レ ッ トASB and カ ジ ノ シ ー ク レ ッ トFRS Foundation in light of the recent Standards development activities of カ ジ ノ シ ー ク レ ッ トASB. It was extremely unfortunate that the joint IASB-FASB project failed to achieve the complete convergence of their standards on leases, revenue recognition, and financial instruments. Given that カ ジ ノ シ ー ク レ ッ トFRS Foundation and カ ジ ノ シ ー ク レ ッ トASB have the strategic goal of the global adoption of IFRS, the target level of convergence with US GAAP should not be easily lowered in カ ジ ノ シ ー ク レ ッ トASB's Standard development activities. We request that カ ジ ノ シ ー ク レ ッ トFRS Foundation and カ ジ ノ シ ー ク レ ッ トASB perform their duties to the fullest in order to avoid any discrepancies between IFRS and US GAAP with regard to their core standards.

Sincerely,

Business Infrastructure Bureau
KEIDANREN