An advisory panel to the Financial Services Agency has unveiled a set of draft rules for accounting that would oblige businesses to book latent losses on fixed property holdings, starting in fiscal 2005.

If the rules take effect unchanged, they could sharply dent companies’ profitability.

In an attempt to engineer a soft landing, the FSA would allow businesses to take pre-emptive action against the rules by booking these losses on financial statements beginning in fiscal 2003.

Some critics in political and business circles have called for obliging businesses to start booking these losses at an earlier date to alleviate distrust of financial statements.

But panel members have decided to wait until fiscal 2005 to impose the new accounting rules because businesses need time to prepare, said Musashi University Professor Eiko Tsujiyama, chairman of a subcommittee of the FSA panel in charge of fixed property accounting.

The FSA plans to devise more detailed directives on the proposed rules by the summer of 2003, after soliciting and examining opinions from the business and academic communities.

The draft rules say a plunge in real estate prices or a company’s withdrawal from a certain business field should suggest that the time is ripe for a company to book unrealized losses on its fixed property holdings.

The rules call for a company to report as a loss the number obtained by deducting either the price at which the property was sold or the property’s value assessed in view of prospective cash flows from use or development — whichever is higher — from the real estate’s book value.

This is certain to eat into the profitability of industrial sectors with large real estate holdings, such as construction companies, real estate firms and retailers that are swamped with unprofitable outlets, analysts say.

Said an executive at a major construction company: “The proposed accounting rules could force some companies to develop negative net worth and then go belly-up.”

The rules “would have the side effect of heightening the risks involved in holding land,” an executive at a real estate company said.

Others fear that the proposed rules would also diminish the profitability of firms with office buildings and manufacturers with factories.

The rules could exacerbate the decline in real estate values by forcing companies, fearful of continuing to hold loss-ridden land, to unload huge amounts of holdings onto the market.

But some economists say this is exactly how the market needs to be freed up. Once market forces are allowed to determine true value, they reason, Japan’s huge pile of individual savings could flow from bank accounts into the property sector.

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