To the International Accounting Standards Board

Keidanren is supportive of the IASB's 2015 Agenda Consultation initiative and appreciates the Board's tireless efforts to attend to the needs of a wide range of market participants for Standards setting.

We submitted a comment letter to the IASB's 2011 Agenda Consultation as well, with the result that some of our proposals have been reflected in Standards development, including the proposed revision of the Conceptual Framework. While appreciating that fact, we still consider that the content of the Standards being developed does not necessarily meet the needs and wants of market participants. What the IASB needs to do before anything else is an exhaustive review of its responses to the 2011 Agenda Consultation, looking into the concrete achievements and failures. Based on the review findings, the Board should then shape policies for future Standards development, fully taking into account market participants' expectations for improvements expressed in their comments on the 2015 Agenda Consultation.

Especially, we request that the IASB's Standards development going forward address the following two issues:

• As for the revision of the Conceptual Framework, we value the IASB's efforts as the revision was strongly called for by market participants during the 2011 Agenda Consultation. We cannot help being disappointed, though, at the exposure draft because it fails to make the definition of profit or loss, despite the concept being deemed most important by the market participants, and removes references to probability from the asset and liability recognition criteria. As the revised Conceptual Framework will have a far-reaching impact on the IASB's Standards development, resources need to be predominantly assigned to the Conceptual Framework project, in which all issues must be discussed exhaustively until market participants are convinced.

• As for changes to goodwill accounting, the compelling need of market participants was confirmed through the post-implementation review of IFRS 3 and a joint research conducted by the European Financial Reporting Advisory Group (EFRAG), the Organismo Italiano di Contabilità (OIC), and the Accounting Standards Board of Japan (ASBJ). Nevertheless, rather than initiating a Standard-setting process, the IASB added this issue to its research program. The revision of accounting for goodwill is a matter of high importance and urgency. We strongly request that the project be escalated to the Standards-level program to move ahead with Standard development.

Question 1: The Balance of the IASB's Projects

After the completion of the 2011 Agenda Consultation, the IASB has continued, as before, to develop and publish Standards that have significant impacts on market participants, most notably those on revenue recognition, leases, and financial instruments. As a result, financial statement preparers have been extremely busy endeavoring to better understand and preparing for the application of new Standards, on top of their daily duties and accounting work. As most of the projects stipulated in the memorandum of understanding between the IASB and the US Financial Accounting Standards Board (FASB) are close to their completion, we believe that the IASB should, from now on, carry out truly necessary Standard-setting activities only.

Therefore, although the IASB is running a large number of research projects that are referred to in (a) of the question, those projects should be narrowed down to ones addressing urgent matters that are strongly needed by market participants. Similarly, the use of a Standards-level project, referred to in (b), should be limited to a matter of high necessity, with a period of calm set. The resources to be saved through these measures have to be assigned to the Conceptual Framework project, the Disclosure Initiative, and maintenance and implementation projects, referred to in (c), (d), and (e), respectively. Resources must be allocated efficiently so that the IASB can dedicate itself to developing truly necessary Standards as speedily as possible. For our other specific requests, see our responses to Questions 2&3, 4, and 5 below.

Questions 2&3: Comments on Research Projects

We strongly request that the Goodwill and Impairment project be escalated to the Standards-level program, as the compelling need of market participants that justifies Standard development has been confirmed and in-depth research has been undertaken.

On the other hand, we believe the Primary Financial Statements project, the Provisions, Contingent Liabilities and Contingent Assets project, and other items should be removed from the research program because they deal with the matters to which numerous market participants previously objected.

Our comments on specific research projects are as follows:

Projects that should proceed due to high importance and urgency

1. Goodwill and Impairment

If entities are allowed to account for goodwill using the amortization and impairment approach instead of the current impairment-only approach, they will be able to match the outcome of investment with the cost and to measure business performance more accurately. We believe this will increase the usefulness of financial information to investors and entities alike. With respect to this matter, the IASB received requests for changes to goodwill accounting during the post-implementation review of IFRS 3, and the EFRAG-OIC-ASBJ joint research recommended the reintroduction of goodwill amortization. Through these initiatives, sufficient feedback has been obtained from market participants to verify their need for Standard revisions. The FASB, having started examining this matter ahead of the IASB, currently waits for the IASB discussion to progress. As all of these demonstrate the importance and urgency of the Goodwill and Impairment project, it should be undertaken jointly with the FASB as a Standards-level project.

2. Principles of Disclosure

Excessive disclosure requirements under IFRS deter more Japanese companies from adopting IFRS. To pave the way for substantive reductions in disclosure requirements, the IASB needs to establish high-level disclosure principles like the ones proposed below, and to start working on amendments to the disclosure provisions of the current Standards in compliance with the principles. Additionally, we urge the Board to consider in the Principles of Disclosure project the best way to present the gains and losses that indicate the sustained growth of the entity, the most notable example of which is operating income, a performance indicator essential to corporate management. On the other hand, EBITDA and other non-GAAP measures are the kind of information that is supposed to be voluntarily disclosed by the entity in a dialogue with investors, and should be removed from the scope of this project.

The disclosure principles we propose are as follows:

• The information to be disclosed should be determined by considering whether the costs incurred by preparers are justified by the benefits obtained by users.
• The necessity and usefulness of disclosure requirements should be considered through appropriate due process.
• Consideration should be given to the specific analysis the disclosed information will be used for, and the way it will be used, as well as to the analytical inconvenience that would arise in the absence of the disclosure requirement.

3. Foreign Currency Translation (functional currency)

The method of determining the functional currency has caused grave concern in related industries, in which companies have been extremely unwilling to adopt IFRS. When an entity's functional currency is different from the currency of its country of domicile, the problem arises that the entity's financial reporting does not reflect its internal management. Also, if the taxation and corporate laws of that country do not permit accounting in the functional currency, the entity has to prepare ledgers in multiple currencies, bearing a substantial cost burden. The possibility of this problem occurring increases as IFRS spreads around the world and is adopted by non-US and non-EU countries whose currency is neither the US dollar nor the euro. In view of that, in-depth research needs to be undertaken into the current state. We therefore request that, in the Foreign Currency Translation project, the IASB conduct research focusing on the method of determining the functional currency.

4. Research and Development Expenditure (capitalization of development expenditure)

Development expenditure satisfying the set criteria is recognized as an intangible asset under the current IFRS rules. These six criteria for asset recognition, however, lack objectivity and may not ensure comparability among entities. Another problem is that entities may recognize development expenditure as an asset even if it is not necessarily probable for the asset to provide future economic benefits. Given these problems, development expenditure should be expensed as incurred, as provided for by Japanese and US GAAPs. We thus request that the IASB conduct this research project by narrowing its scope to a review of the six criteria for recognizing development expenditure as assets. Additionally, we would like to clarify that it is in no way our intention to spark a general debate on the fair value measurement of intangible assets as a whole, and that we consider starting such a debate to be completely illogical.

Projects that should be removed due to lack of importance and urgency

1. Primary Financial Statements

This project is an extension of the Performance Reporting project that faced fierce opposition from numerous market participants in the past. As such, the Primary Financial Statements project is highly unlikely to be successfully completed but very likely to cause confusion among market participants, if restarted. Accordingly, it should be removed from the research program. We propose that items relating to the concept of gains and losses be examined in the Conceptual Framework project, and the definition of operating income be considered under the Disclosure Initiative.

2. Provisions, Contingent Liabilities and Contingent Assets

With respect to liabilities, the IASB previously proposed that the existing probability criterion be abolished and expected value be calculated using estimated losses and the probability of them occurring, but gave up the proposal due to strong objections from market participants. Nonetheless, the Board once again proposes the abolishment of the probability criterion as part of the revision to the Conceptual Framework, while in parallel examining the matter under this research project. This is a total disregard for the opinions of the majority of market participants, and we are bitterly disappointed at the way the IASB handled deliberations on this matter. We believe that the proposed abolition of the probability criterion itself is highly unreasonable, and the Provisions, Contingent Liabilities and Contingent Assets project should be removed from the research program.

3. Dynamic Risk Management

The IASB received mixed views in response to the discussion paper on this matter. Having failed to reach a conclusion, the Board is preparing for the issuance of a second discussion paper. While the second discussion paper is expected to be limited in scope, focusing on disclosure, it is inconceivable that there are many market participants who want such a Standard to be developed. Rather, developing a Standard on macro hedge accounting as an extension of the current general hedge accounting model would make more sense in terms of development costs, and meet the wishes of Japanese market participants as well. Therefore, the Dynamic Risk Management project should be removed from the research program.

4. Discount Rates

Although we have noticed some differences among Standards as to the treatment of discount rates, these differences are not so substantial as to cause us to be aware of specific problems. From the perspective of using resources effectively, this project should be removed from the research program.

5. High Inflation

We agree with removing this project from the research program, as its priority is low due to the limited number of applicable countries.

Other projects

1. Equity Method

Regarding the equity method, some argue that there is no need to change the current accounting treatment while others insist on starting with a review of this concept as part of a long-term endeavor. The IASB intends to proceed with this project by dividing it into a short-term project and a longer-term one. We disagree, at least, with this approach. Although the Board considers simplifying the accounting for investment differential and the elimination of unrealized gains and losses in the short-term project, we think the conclusions will depend on how the significance of the equity method is viewed. If the Equity Method project is continued, the Board should start with establishing the fundamental principles of the equity method as part of a long-term endeavor, and defer the release of a discussion paper that is prematurely scheduled for 2016.

Question 4: Comments on Major Ongoing Projects

In the Standards-level program, the Revenue Recognition and Financial Instruments projects resulted in the publication of new Standards that will come into effect in 2018, and the Leases project is scheduled to issue a new Standard that will be effective from 2019. In view of these, financial statement preparers are simply unable to cope with any more new influential Standards to be developed and issued. The number of Standards-level projects must therefore be kept to an absolute minimum in the future. Our comments on the major ongoing projects are as follows:

• It is very unfortunate and disappointing that the IASB and the FASB have failed to achieve convergence in the leases standards concerning lessee accounting and other major items, in the financial instruments standards pertaining to multiple important matters including impairment, and in guidance on the revenue recognition standards. These failures of convergence will undoubtedly lead to increased burdens for preparers. The IASB should remind itself once more that convergence with US GAAP, another internationally recognized set of standards, is a matter of critical importance to the development of a single set of high-quality international accounting standards. Once again, we strongly request that, when developing IFRS, every effort be made not to create any inconsistencies with US GAAP.

• The Insurance Contracts project plans to issue a final Standard in 2016. Prior to finalizing the Standard, however, the project needs to go through the process of ensuring that the views of market participants are fully taken into account, for example by carrying out a field test to assess whether the proposed Standard is practicable and properly reflects the economic substance of insurers. Then, during a period between the publication of the final Standard and its mandatory application date, the challenges faced by market participants and their solutions should be discussed at the meeting of the Accounting Standards Advisory Forum etc. Furthermore, considering its significant impact on the insurance industry, we strongly request that a sufficient preparatory period be provided before the mandatory application date of the final Standard.

• Although we value the fact that the IASB has undertaken the revision of the Conceptual Framework in response to the feedback during the 2011 Agenda Consultation, the Board has failed to properly define the concept of profit or loss, despite it being deemed most important by stakeholders all over the world. This makes another revision unavoidable. We are also gravely concerned about the removal of references to probability from the asset and liability recognition criteria, and strongly request the removal be reconsidered. As the revised Conceptual Framework will have a far-reaching impact on the IASB's Standards development, resources need to be predominantly assigned to the Conceptual Framework project to resolve the important pending issues, including the necessity of issuing a reexposure draft.

• While we appreciate the efforts made by the Disclosure Initiative, it is unclear how effective the initiative as a whole will be in reducing excessive disclosure requirements, owing to its structure whereby individual projects are run on an ad hoc basis. We urge the IASB to first establish high-level disclosure principles like the ones proposed in our response to Questions 2&3 above, and then to start working on amendments to the disclosure provisions of the current Standards to substantively reduce disclosure requirements. Additionally, we emphasize that the amendments to IAS 7 proposed this year go against the underlying principles of the Disclosure Initiative; whereas the initiative aims for more efficient disclosures, the amendments are designed to expand some disclosure requirements under IAS 7 and thereby increase unnecessary disclosures whose benefits do not justify the costs.

Question 5: Maintenance and Implementation Projects

With the adoption of IFRS expanding around the world including in Japan, the IASB needs to focus more than ever on the maintenance and implementation projects.

In particular, as each country faces its own challenges in applying IFRS, the IASB is called on to provide sufficient support to and work closely with national accounting standard-setters. In the case of Japan, where first-time IFRS adopters are likely to continue increasing, we would like the IASB to provide comprehensive implementation support to those first-time adopters.

We are appreciative of lively deliberations at the IFRS Interpretations Committee, but cannot help feeling that the committee takes too long (such as one year) to solve an issue after it has been raised by a country. We ask for the committee to deliberate much more speedily by selecting high-priority issues.

Question 6: Levels of Change and of Detail of Standards

Over the 15 years since its establishment, the IASB has developed many Standards, at the core of which has been the convergence projects with the FASB, the undertakings that are about to be completed. During the same period, IFRS has been adopted in many jurisdictions including Japan. In light of these changes, we suggest that from now on the IASB refrain from developing Standards that are not urgently needed, in order to slow down the development pace and allow Standards to be firmly established. The Board should instead channel its resources into the maintenance and implementation of IFRS.

The level of detail of Standards seems to vary from one to the next, examples of which are the ones on financial instruments and revenue recognition that are considerably more voluminous than the other Standards. Although the appropriate volume depends on individual Standards, we consider it essential to assess whether the volume of a new Standard is appropriate from the practical standpoint in its post-implementation review and at other opportunities.

Question 7: Other Comments

Paragraph 16 of 2015 Agenda Consultation states that the IASB may add a project to its Standard-setting program without first conducting a research project if it has obtained "sufficient evidence" to justify the addition from a post-implementation review and other work. The reality however is that, in the case of goodwill accounting, the IASB obtained sufficient evidence of the need for Standard development through the post-implementation review of IFRS 3 and the EFRAG-OIC-ASBJ joint research, but decided to deal with the issue at a research project again. We are utterly dissatisfied with this decision, unable to understand why the findings of the post-implementation review and the joint research were not deemed sufficient evidence. The Board should clearly define what constitutes "sufficient evidence".

Question 8: Frequency of Agenda Consultations (proposed change from every three years to every five years)

We disagree with the proposed change of the frequency of Agenda Consultations from every three years to every five years, for the reasons listed below. The IASB should conduct an Agenda Consultation every three years in a timely manner, listening to the expectations of market participants for improvements and other matters and providing detailed feedback to them.

• With the growing number of jurisdictions and companies adopting IFRS, Agenda Consultations taking place every five years would not be able to effectively address the changing circumstances.

• Even under the current three-year cycle, there was in fact a four-year interval between the 2011 Agenda Consultation and the 2015 Agenda Consultation. If a five-year cycle were to be introduced, an interval between Agenda Consultations would become longer than five years. It should be stipulated that the IASB must carry out an Agenda Consultation every three years in principle, but may slightly delay the start in some cases.

• If the frequency of Agenda Consultations were to be reduced to every five years, in more cases a Standard-setting process would be started without first conducting an Agenda Consultation with the involvement of market participants.

Sincerely,

Sub-Committee on Corporate Accounting
KEIDANREN