On August 8, 2007, the Accounting Standards Board of Japan (ASBJ, henceforth) and the International Accounting Standards Board (IASB, henceforth) jointly announced an agreement known as the Tokyo Agreement (ASBJ and IASB, 2007) to accelerate convergence between Japanese generally accepted accounting principles (GAAP, henceforth) and International Financial Reporting Standards (IFRSs, henceforth), a process that was started in March 2005. As part of the agreement, the two boards would seek to eliminate, by 2008, major differences between Japanese GAAP and IFRSs as defined by the July 2005 the Committee or European Securities Regulators assessment of equivalence, with the remaining differences being removed on or before 30 June 2011 (ASBJ, 2007b).
After the Tokyo Agreement, Japanese GAAP, in fact, seems to be acceleratedly converged into IFRSs as shown in Table 1. Before the Tokyo Agreement, the Business Accounting Deliberation Council (BADC, henceforth), former accounting standards setter in Japan, issued the Opinion Relating to the Setting of the Accounting Standards for Research and Development Costs in 1998 and the Opinion Relating to the Setting of the Accounting Standards for Business Combinations in 2003.
The 1998's Accounting Standards for Research and Development Costs required research and development (R&D, henceforth) costs to be expensed (III.para.1), while the Financial Accounting Standards for Business Enterprises revised in 1982 permitted a company to defer both research and development expenditure (Note 15). The 2003's Accounting Standards for Business Combinations allowed some business combinations to be accounted for using the pooling of interests method (III.3) and required goodwill arising on a business combination, whether it was positive or negative, to be capitalized and then amortized on a systematic basis over its useful life (III.2(4)(5)).
Some large Japanese enterprises were afraid of a negative impact on practice resulted from the ASBJ's Practical Issues Task Force (PITF, henceforth) No. 18: Practical Solution on Unification of Accounting Policies Applied to Foreign Subsidiaries for Consolidated Financial Statements, which was issued in 2006 (Takahara, 2006). While it required a parent company and its subsidiaries be unified in principle, it permitted tentative treatment. That is, financial statements prepared by foreign subsidiaries in accordance with IFRSs or the generally accepted accounting principles in the United States (U.S. GAAP, henceforth) might tentatively be used for the consolidation process. However, the six items should be adjusted in the consolidation process so that net income can be accurately accounted for, unless they were not material.
Among these six items, Japanese GAAP related to both amortization of goodwill and capitalization of intangible assets arising from development phases, which differed from those of the IFRSs and the U.S. GAAP, were regarded as disadvantage in competition with Western corporations, which were active in support of mergers and acquisitions (M&A, henceforth), and had an adverse effect on a Japanese entity which costed large amount of money in R&D in such industries as pharmaceutical (Takahara, 2006).
After the Tokyo Agreement, the ASBJ narrowed most of these gaps except amortization of positive goodwill, which is today seems as one of the items related to the remaining differences between existing Japanese GAAP and IFRSs in the latest ASBJ Project Plan Table (ASBJ, 2009).
The Cabinet Order No.73 (Article 1) on December 11, 2009, amended some old rules of the Ministerial Regulation concerning Terminology, Forms and Method of Preparation of Consolidated Financial Statements. As a result, some Japanese companies could be permitted to adopt IFRs instead of Japanese GAAP (FSAJ, 2009).
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