Japan’s four major auditing firms use different guidelines and standards to calculate banks’ deferred tax assets, tax credits they might get in the future that they count as part of their capital today, according to a Kyodo News survey.

Deferred tax assets came under the spotlight when the government decided to infuse 1.96 trillion yen in taxpayer money into Resona Bank following its capital ratio’s sharp drop below the required 4 percent.

Asahi & Co. has taken a stricter stance on the issue of how much deferred tax assets could be counted as capital, while the remaining three auditing firms — Shin Nihon & Co., Tohmatsu & Co. and ChuoAoyama Audit Corp. — are more generous, according to the Kyodo survey, which was released Sunday.

Specifically, Asahi would not treat such assets as part of capital if a bank had a negative net worth after counting its regular assets and liabilities, the survey found.

However, the three others said that they would count deferred tax assets on the same level as other assets.

The guidelines used for assessing a bank’s earnings outlook, a major factor for calculating deferred tax assets, also differed significantly among the four auditing firms, according to the survey results.

Under domestic rules, deferred tax assets are counted as part of a bank’s tier-1 core capital.

A bank is forbidden from booking loan-loss provisions as expenses deductible from its taxable income when it makes the provisions.

As a relief measure, in 1998 the government began allowing banks to count the sum equal to the provisions as deferred tax assets that can be counted into the core capital until tax authorities recognize the expense as deductible from taxable income.

Japanese banking regulators have since limited the amount of deferred tax assets to a minimum of five years of taxes paid by a bank when it made the provisions, or five years of projected pretax profit.

Since the government released the so-called revival plan for the banking sector last Oct. 30, the accounting industry has worked out stricter guidelines to calculate deferred tax assets.

The new guidelines issued by the head of the Japanese Institute of Certified Public Accountants in February call for an auditing firm to consider lowering the upper limit from five years if financial conditions at a bank deteriorate.

ChuoAoyama said the auditing firm has toughened standards for counting deferred tax assets in line with the new guidelines, while the three others said they have not adopted any different standards.

Akio Okuyama, president of JICPA, acknowledged that the four auditing firms have different standards when they count the ratio of deferred tax assets to be included into capital.

JICPA will have officials at the four firms meet around fall, or before the end of the April-September first half of fiscal 2003, to make sure the same standards will be used in auditing firms’ fiscal 2003 interim financial reports, Okuyama said.

The government decided to infuse 1.96 trillion yen in public money into Resona Bank after the bank’s auditor, Shin Nihon, concluded that the bank’s capital-adequacy ratio had plunged to 2.07 percent, far below the 4 percent required for domestically operating banks.

Asahi had been Resona’s coauditor with Shin Nihon but pulled out of the process because it reportedly took a stricter stance on the bank’s audits, especially on the treatment of deferred tax assets.

Deferred tax assets accounted for more than 50 percent of the combined core “tier-1” capital at major Japanese banks as of the end of March.

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