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Finance

More Japan companies opt for IFRS to lure foreign funds

But the accounting method could result in huge losses if an acquisition goes bad

An advertisement for sushi chain Sushiro outside one of its restaurants in Kawaguchi, Saitama Prefecture.   © Reuters

TOKYO -- International Financial Reporting Standards are gaining popularity with newly listed Japanese companies hoping to attract foreign cash, but risks lurk in the global standard's accounting method for acquisitions. 

Take conveyor belt sushi chain Sushiro Global Holdings, which listed this year and used IFRS right out of the gate. Sushiro's stock dipped as low as 3,245 yen in June, compared with its debut price of 3,600 yen, but has since recovered to around 3,500 yen on hopes for overseas expansion.

The Osaka Prefecture-based restaurant operator already has eight stores in South Korea with plans to move into Europe and the U.S. Shares were also sold overseas in the global initial public offering. Use of IFRS allows investors to compare earnings against other global companies, making it easier to raise funds from foreign investors and giving a boost to investor relations, Sushiro's accounting department explained.

Permira, a U.K. investment fund that owns roughly 30% of Sushiro's shares and has been a major stockholder since 2012. The focus moving forward will be on whether Sushiro can attract other foreign buyers.

Since 2013 

IFRS became available for listed companies and businesses preparing IPOs in 2013. Restaurant chain Skylark got the trend going in Japan when it relisted in 2014. Three companies using the global accounting standard have already listed this year, including Sushiro. Service-sector researcher MS & Consulting plans to list in October.

There were 83 IPOs in Japan last year, including companies employing Japanese accounting standards, and the number is expected to rise this year. Although IFRS-compliant companies are still in the minority, their presence is even growing on startup markets, which are typically home to businesses more reliant on domestic demand.

"Awareness [of IFRS] is increasing and more companies are aiming to procure funds over the medium to long term," said Taiji Suzuki of Deloitte Touche Tohmatsu. 

Many Japanese companies have praised the convenience afforded by the global accounting standard. Groups with overseas subsidiaries, for example, stand to benefit.

MS & Consulting conducts customer satisfaction surveys on behalf of restaurant and retail clients. The company has subsidiaries in Thailand and Taiwan and was able to "reduce translation costs since common accounting standards are used," according to the head of its accounting department. This is a major benefit for the many companies that have been planning to expand abroad before listing.

Risks of IFRS

However, there is a certain risk with the global standard when it comes to accounting practices for acquisitions. In IFRS accounting, there is no need to regularly amortize goodwill and other intangible assets. Solasia Pharma, which listed on the Mothers market for startups in March, develops pharmaceuticals using drug candidate compounds purchased from others. Roughly 40% of its total assets are considered intangible.

A company adopting IFRS may appear larger than a similar one using a different accounting standard, when in reality their financial health and profitability are the same. Use of IFRS tends not to reduce profits, unlike Japanese standards that require fixed costs to be booked every year, but massive losses can suddenly arise if the acquired company's earnings go south.

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