Japanese companies should be barred from recording income from the sale of cross-shareholdings, said Tatsumi Yamada, a member of the International Accounting Standards Board.

The IASB proposed accounting changes last month that may reduce Japanese companies incentives to hold each other's shares. Meant to bolster ties, cross-shareholding often leads to the sale of those shares to bolster income statements before the financial year ends, only to be bought back at a later date.

"Companies shouldn't be able to reflect profits and losses on the sale of cross-shareholdings if the purpose of the holdings is to cement a strategic relationship," Yamada said in Tokyo on Aug. 25.

Japan's publicly listed banks had about ¥16 trillion in such holdings at the end of June, according to Nomura Securities Co. The country currently doesn't apply the international financial reporting standards set by the IASB, which aims to simplify the classification of securities to make understanding financial statements easier for investors.

Under the proposed changes, companies would have two choices in accounting for cross-shareholdings. The first option would require them to classify the shares at fair (estimated market) value and record any losses or profits on the income statement.

Alternatively, they could treat the shares as held for strategic purposes. Under this category, any gains or losses would be "other comprehensive income" and excluded from the income statement, according to the proposal. Once companies choose this classification, they would have to stick to the accounting method.

"Banks may be reluctant to use this option because they won't be able to realize gains by selling those stocks," said Shinichi Ina, a Tokyo-based analyst at Credit Suisse Group AG. On the other hand, "excluding any losses from the income statement may help stabilize their business performance."

Yamada said the option of treating shares as separate income is a concession to Japan's tradition of cross-shareholding. If that choice wasn't available and any profit or loss were to appear on the income statement, "Japan's economy probably wouldn't be able to endure it," he said.

In Japan, cross-shareholdings are now classified as "available for sale," letting companies record profits from share sales on their income statement and only account for losses when the share price declines by 50 percent or more.

"This is an opportunity to think about the Japanese practice of cross-shareholdings," said Yamada, who is one of the 15 members at the London-based IASB.

A panel advising the Financial Services Agency in June recommended allowing companies to voluntarily apply the standards in the current fiscal year.