During periods of economic transition, such as the introduction of new accounting standards, companies’ financial statements do not necessarily reflect their actual financial soundness. Balance sheets, income statements and other financial reports, therefore, should be analyzed from multiple viewpoints.

Recently, two major changes were made to Japanese accounting standards. The first involves the disclosure of retirement-allowance payments, while the second deals with the valuation of financial assets based on market prices. The changes were made to facilitate the establishment of international accounting standards.

In the past, Japanese companies did not have to report total retirement-allowance payments or unrealized losses on assets caused by discrepancy between their book and market values.

In fiscal 2000, Japanese firms listed on domestic stock exchanges were only required to disclose preparatory information for retirement-allowance payments. Beginning in fiscal 2001, they will have to disclose unrealized losses on assets caused by large gaps in their book and market values.

Although the new rules came into effect at the start of fiscal 2001, many companies reported unrealized losses on financial assets as special losses on fiscal 2000 income statements. In the same fiscal year, many firms reported the total of the retirement-allowance payments they made.

According to Shinko Research Institute, companies listed on the Tokyo Stock Exchange’s first section logged 9.55 trillion yen, equivalent to 53.5 percent of their pretax profits, as special losses in fiscal 2000 due to the changes. Those firms recorded 5.755 trillion yen, equivalent to 45.7 percent of their pretax profits, as special losses in fiscal 1999.

If companies that wrote off large amounts of special losses last year due to the accounting-standard changes increase their net profits this year, then coming years could see drastically improved financial statements.

Companies are allowed 15 years to write off their retirement-allowance payments, however many firms try to amortize them within a few years to improve their financial standing.

Of 944 companies surveyed by Shinko Research, 506 wrote off their retirement-allowance payments in one year. Another 190 companies reported that they will amortize their retirement-allowance payments within five years, while 57 firms said they planned to write off such payments within 10 years.

In general, companies that write off their retirement-allowance payments in one year have strong financial resources.

Meanwhile, book price-based valuations of financial assets have long played a major role in the Japanese business world.

Japanese companies often engage in the “mochiai” practice of holding shares from other companies in their corporate group. The practice helps maintain stable share prices and close ties among the firms in the group.

The accounting-standard changes will affect the mochiai practice because many companies will no longer be able to hang on to such shares as they decline in value.

The introduction of market price-based valuation for fixed assets is also being considered by the Financial Services Agency’s Business Accounting Council.

According to analysts, it is necessary to modify national accounting rules with an international framework in mind, even though international standards have yet to be established. The result will be an improvement in the ability to assess the financial soundness of Japanese firms.

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