1. Introduction
  2. The “Accounting Standard for Disclosure of Accounting Estimates” has become mandatory for fiscal years ending on or after March 31, 2021.

    This accounting standard mentioned does not apply to the actual process of accounting, it is to provide a standard for the notes provided to financial statements. IFRS-compliant companies have already been providing detailed notes on accounting estimates in accordance with IAS 1 “Presentation of Financial Statements”. This new Accounting Standard for Disclosure of Account Estimates will serve as the standard to be used in Japan financial statements.

    Let us look back on notes and disclosures regarding the financial results for the fiscal year ended March 31, 2021, considering the treatment of the effects of COVID-19 in making accounting estimates and the review of the financial statements by the Financial Services Agency.

  3. What is an “accounting estimate”?
  4. accounting_estimate

    For starters, an accounting estimate refers to calculating a reasonable amount based on information available at the time of preparation of financial statements when there is uncertainty about the amount of assets and liabilities, income, and expenses, etc.

    “Uncertainty” here means that there are multiple outcomes, and “calculating a reasonable amount” means that the entity (management) prepares an estimate from among multiple outcomes. In other words, the company (management) chooses among multiple potential results.

    Simply put, it is the act of calculating the amount of money based on certain assumptions made at the discretion of the company (management) for figures that cannot be determined on the date the financial statements are prepared.

    The figures published in the financial statements are only the assumed values, and methodology behind the values are not exactly conveyed to those reading the financial statements. As a result, we do not know what kind of events affected the estimate, what other values were possible, or what the rationale was behind selecting the values presented in the statements. It is also difficult to predict what impact this uncertainty may have on the following year and beyond.

    For these reasons, when an “accounting estimate” is made, companies are now required to disclose the method in preparing their estimates.

  5. Accounting Estimate Standards: Outline
  6. Now that we have discussed the definition of what an accounting estimate is, let us see the outline of ASBJ Statement No. 31 “Accounting Standard for Disclosures about Accounting Estimates” (hereinafter referred to as “Accounting Standard for Accounting Estimates”).

    The purpose of this new accounting standard as follows:

    1. Of the amounts recorded in the financial statements for the current fiscal year that are based on accounting estimates, include
    2. The details of the accounting estimates for items that are at risk of having a material impact on the financial statement for the following fiscal year, and
    3. The Company shall disclose information that can contribute to further user’s understanding of the financial statement.

    In ①, the only amounts that are required to be shown in the statements are those that “are related to items recorded” for the current fiscal year. Disclosing other items not recorded in the year is voluntary.

    For example, if an impairment loss is estimated and it is not necessary to record it, noting this item in the financial statements is optional.

    Another key point is that ② the scope of material impact on financial statements is limited to the following fiscal year. This is because the longer the deadline for disclosure, the broader the range of items required to be disclosed and the less specific the disclosures to be made about specific assets or liabilities, so the period is deliberately limited.

    As for ③ the information subject to disclosure in the notes, the following items are listed as examples that should be disclosed information that will provide readers with more information as they read the financial statement:

    • Amounts recorded in the current year’s financial statements
    • Other information that contributes to financial statement readers’ understanding of the nature of accounting estimates
    • Method of calculating the amounts recorded in the current year’s financial statements
    • Key assumptions used to calculate the amounts recorded in the current year’s financial statements
    • Effect on the financial statements for the following fiscal year

    The items above are only examples, and there is no need to disclose everything based on our examples above. In fact, companies that comply with IFRS companies disclose accounting estimates in various formats.

    However, as far as the financial results for the fiscal year ending March 31, 2021, are concerned, many of the companies that have adopted the Japanese GAAP have disclosed the items above. While disclosing in accordance with the standards has the advantage of ensuring a certain content standard, there is still a concern that it may not adequately represent the different situations of companies because the objective is to meet the format.

  7. On the Effect of COVID-19
  8. The impact of the COVID-19 is very troubling when making accounting estimates. It is extremely difficult to judge the impact of the COVID-19 because there is no specific time where the pandemic will be resolved, and this affects many companies.

    However, the Accounting Standards Board of Japan (ASBJ) takes the position that “best estimates” can always be made even in such highly uncertain situations. Even if there is a discrepancy between the best estimate and the subsequent result, it does not constitute an accounting error unless it is clearly unreasonable.

    For example, a case in which no estimate was made because of uncertainty even though the impact of the COVID-19 is significant may fall under the category of clearly unreasonable.

    The Financial Services Agency (FSA) has published the following disclosure arrangement.


    Due to the application of the notes to accounting estimates, companies are now required to provide full disclosure on the impact of COVID-19. However, it is difficult to provide specific information, and many companies stated that the economy will gradually recover as vaccination progresses, and that the impact on FY 2022 will be minimal.

  9. Description of accounting estimates in MD&A
  10. The disclosure of accounting estimates is not limited to notes in the accounting status. It is also required in “Management’s Discussion and Analysis of Financial Condition, Operating Results, and Cash Flows” (hereinafter referred to as “MD&A”).

    Prior to ASBJ Statement No. 31, the Cabinet Office Ordinance on Partial Amendments to the Cabinet Office Ordinance on Disclosure of Corporate Information, etc., which came into effect in January 1991, has enhanced the disclosure of accounting estimates.

    As a result, in the MD&A, companies are required to provide information on significant accounting estimates and assumptions used in creating these estimates, the nature of the uncertainty of the estimates and assumptions, and the impact of changes in the estimates and assumptions on operating results.

  11. In the light of the FSA’s review of prefectural reports
  12. Every year, the Financial Services Agency (FSA) conducts an annual review of securities reports with the aim of ensuring the appropriateness of the contents of the reports. In the results of the review of annual reports for FY 2020, it was reported that there were examples of disclosures regarding accounting estimates that could be improved.

    Based on actual cases, the following examples that need improvement are listed.


    For example, in the MD&A, the company says, “For details, please refer to the notes to the financial statements”, but there is no mention of the contents required by law in the financial statements. We believe that there are many companies that disclose in this manner, but it may be necessary to consider enhancing the means of disclosure in the future.

  13. Conclusion
  14. In this issue, we went through the points required by laws and regulations regarding the disclosure of accounting estimates for the fiscal year ending March 31, 2021.

    In recent years, required specific disclosures are no longer limited to accounting estimates but also “business risks” in MD&A.

    In addition to formal descriptions to meet the requirements of laws and standards, it will be increasingly necessary to prepare disclosures with the objective of providing information needed by financial statement users in mind.