Ministry of Justice held a board of committees on July 18 2012 to discuss revision of the companies act based on a first draft submitted by staffs.
According to the minute of this meeting, discussion seemed to cover the topics as below.
1. Foundation of the audit/supervising committee
2. Reinforcement of independency of the outside directors
3. To give a right to determine the appointment and remuneration of independent auditors
4. Multiple shareholders’ derivative action
Proposition on obligatory outside directors has been deleted from the draft due to the strong opposition from economic circles.
Multiple shareholders’ derivative action is a system that renders shareholders of a parent company a right to make a shareholders’ derivative action against directors of its subsidiaries. This reflects the context that shareholders of a parent company was not allowed to make such an action against directors of its subsidiaries before, and since directors from a parent company often become directors of its subsidiaries as well, it has been hard to make an action towards their responsibility.
As you can see in this discussion, audit and supervision over companies will become lawfully more reinforced in the future.
Financial Services Agency issued on July 6 “a cabinet office ordinance draft on partial revision of the regulations about terms, format, and preparation method.” This revision has to be made because terms on accounting standards on pension benefit need changing due to its reforms which was made a while ago. Its revision will be limited to the consolidated financial statements.
There are two major changes.
A term “allowance for pension benefits ” is switched with “liability on pension benefits,” and “prepaid pension expenses” is switched with “asset on pension benefits.”
And the second major change is that “unrecognized actuarial differences” and “unrecognized prior services cost” Their alternatives are “accumulated adjustments on pension benefits” presented in the section of “accumulated other comprehensive income,” while expenses are shown as “adjustment on pension benefits” categorized in “other comprehensive income.”
We would also like to point out that notes are extended.
This draft requires more discussion till the issuance, but unless something comes up it will be applied for the year beginning April 1 2013.
Japanese Institute of Certified Public Accountants (JICPA) issued an announcement “action plan regarding the Standards of Retirement Benfits,” on July 12 2012.
Accounting Standards 26 “Accounting Standards of Retirement Benefits” and Application Guideline 25 “Application Guideline of the Standards of Retirement Benefits” reflected some revisions from the Accounting System Committee 13 “Application Guideline of Accounting Standards of Retirement Benefits (Interim Report)” and “Q&A on Accounting of Retirement Benefits,” both of which JICPA plan to abolish in the future.
However, since the new standards will be effective for the year beginning after April 1 2013, we have to be aware that until then these guideline and Q&A are alive.
Financial Services Agency held a discussion on June 27, 2012 on the reform of the audit standards.
Committees made a comment that they should be consistent with other countries’, especially with US audit standards.
While accounting frauds are increasing these days in Japan, nothing big has recently happened in the U.S. Therefore, we wonder whether rules and regulations in the U.S. are more effective. The differences between both audit standards are the followings:
– It is required to analyze the risk factor in the risk evaluation of the fraud in the U.S. while it is not in Japan.
– Records and vouchers are considered authentic unless they are proved to be contradictory by other audit proof in Japan while this rule has been deleted from the standards in the U.S. because it could diminish the effect of rules and regulations.
They point out that accounting firms may consider to give education about accounting fraud to their accountants and make cooperation with professionals on fraud (Forensic Accountant, Certified Fraud Examiner, etc.).
It is interesting to see what comes next.
Corporate Accounting Board Audit division of Financial Services Agency decided on May 30 2012 to consider the reform of the audit standards, after some incidents of corporate fraud these days.
The followings are the opinions raised in the board meeting.
– There is an audit expectation gap between stakeholders and auditors, in which auditor think that finding fraud is not obligatory for auditors and stakeholders would like auditors to discover the illegal act. This gap should be narrowed by applying broader audit procedures.
– Reviews from FSA and JICPA are so strict that auditors require more time spending for preparing the documents instead of sparing more time for actual auditing.
– Psychological pressure from the clients due to the direct contract of the audit.
It is useful for companies to switch auditors voluntarily in order to raise companies’ reliability while they usually think that switching auditors often is not considered to be good for the reliability. Switching auditors and addition of the audit procedure will impose more burden on companies, and how they are going to deal with this is an important point on this matter. Maybe asking investors for a part of the audit remuneration is one of the options.
In our country we also have a certification such as Certified Fraud Examiners, and will its demand increase in the future? How do they solve the audit expectation gap? We would like to see how the discussion will go in the future.
Japanese Institute of Certified Public Accountants announced “Proposal from professional auditors and accountants about the loss of pension funds” on May 16 2012.
The following are four proposals that they have suggested.
1. Advantage of independent audit of financial statements of the pension funds
Financial reports with opinions of “inspector” of the pension funds are currently submitted to the Ministry of Health, Labour and Welfare. However, it is not the same as the independent audit. Credibility of the financial disclosure will be achieved by the independent audit.
2. Audit or Confirmation of audit report of the private placement funds
Some of the private placement funds are subject to statutory audit, and others not. Those who are not subject to the statutory audit should have the independent audit as a voluntary audit. Even though the independent audit is done, directors of the pension funds should confirm the audit report of the private placement funds.
3. Independent audit of the investment management companies
It is desirable that independent audit should be conducted for the investment management companies. Even though the audit is done, directors of the pension funds should confirm the audit report of the companies.
4. Inspection on the asset management of the pension funds and the report for the internal control
Investment management companies should prepare financial statements in accordance with the GIPS, and it should be inspected by the CPAs. In addition, it is effective that directors of the pension funds confirm the assurance report for the internal control of the management process of the investment management companies, which should be issued by CPAs.
※GIPS： Global Investment Performance Standards
These proposals will be effective and preventive measures for the loss of pension funds and will be expected to protect the participants of the pension funds.
Revised standards of retirement benefits, “Accounting Standards of Retirement Benefits” and “Application Guideline of the Standards of Retirement Benefits,” has been issued on May 2012.
Revised standards clarified that unrecognized actuarial gains or losses and unrecognized prior services costs are recognized in net asset (accumulated other comprehensive income) with tax effect adjusted, while they were added to or deducted from the allowance for the retirement benefits before the revision. And the allowance for the retirement benefits will be the difference between retirement benefit obligation and plan assets.
Please note that calculation method of retirement benefit obligation and employee’s services cost and notes to the financial statements have been revised as well.
The revision for the unrecognized items will be effective in the consolidated financial statements for the year ended on or after May 2014, and the revision for the calculation method of retirement benefit obligation and employee’s services costs will be effective for the fiscal year beginning on or after April 1 2014.
The Ministry of Justice announced on April 18 a progress of a discussion on “corporate governance” at a meeting of Subcommittee Legislative Council of the Company Act.
This discussion took place after they had collected till January public comments about “the interim expoure draft on revision of the Company Act”.
In terms of accounting auditors, “remuneration of the accounting auditors” is on the discussion table. (Please refer to previous column of ours about the problem of the current system.)
Public comments collected this time is the followings:
– Decision on the remuneration of the accounting auditors should be under control of directors who are in charge of directing companies.
– There is an apprehension of higher audit fees if company’s auditors have authority to decide the audit fees.
This is an issue because company’s auditors who are not responsible for the company’s performance have authority to make a decision on an action that causes a company’s cost.
On the other hand, committee’s opinion is to make the rule the same as the corporate accounting advisors and auditors, which is to say, to give accounting auditors a right to say their opinions in shareholders’ meetings (Company Act 379, 387).
According to the committee, this could be a solution to the problem. It also says, however, that there is a room for more consideration about to whom or to which function of the company to give a right to propose an agenda to shareholders’ meetings
Independency of the accounting auditors is quite important because it could ruin the effectiveness of the auditing. We would like to keep a close eye on this matter.
Review of the carry-over system of losses had been considered in the 2011 Tax Reform.
For publicly listed company, the followings will be applied
(1) Deadline of the carry-over loss is extended to nine years
(2) Deductible carryover is equivalent to 80% of the amount of income before deduction.
In addition, the dates of application are as follows:
(1) Extension of the carry-over period can be retrospectively applied from the fiscal year ended on or after April 1 2008.
(2) Restriction of the carry-over deduction is effective from the fiscal year beginning on or after April 1 2012
According to this reform, it should be noted that restriction of the deduction of carry-over loss and extension of the carry-over period could make a important impact on the scheduling of tax effect.
March 22, 2012, Japanese Institute of Certified Public Accountants has announced the “Handling on the audit on the accounting treatment relating to the loss of pension assets.”
Accounting treatment for the loss of pension assets, relating to the pension funds of which asset management is delegated to the investment advisory company recently reported in some newspaper as suspected fraud.
It is almost certain that the company, whose operation has been suspended by the Financial Services Agency, has lost the majority of the pension assets. Therefore, the fact of the loss of the pension assets should be taken into account in the financial statements for the fiscal year during which incident occurred.
Specifically, the amount of loss should be reasonably estimated, and the amount should be accounted for “reserve for retirement benefits” and “retirement benefit expenses” as a extraordinary loss.
In addition, the companies that adopts the accounting treatment instructed by the “Note 12 to the accounting standards for the retirement benefits” are required to recognize the amount of the necessary contribution to the pension funds as “retirement benefit expenses” and make an certain explanatory note in the financial statements.
In case that the impact to the contribution to the pension funds expected in the future is material to the certain level, they will have to make a supplementary comment in the financial statements about the summary of the event and the impact to the contribution to the pension funds in the future.
