Is IFRS conditionally or unconditionally more conservative than local GAAP? Evidence from Japan

The purpose of this study is to investigate whether there is any difference in accounting conservatism between firms that voluntarily adopted or plan to adopt the International Financial Reporting Standards (IFRS) and those that continue to use the Japanese Generally Accepted Accounting Principles (J-GAAP). The “principle of conservatism,” which is listed as the sixth general principle of J-GAAP, stipulates that firms should make prudent accounting choices and estimates when future events would have negative effects on their financial conditions. In other words, firms should conduct account treatment based on careful judgment in preparation for foreseen future risks.

In Japan, the voluntary adoption of the IFRS has been approved since 2010, and the number of firms adopting IFRS began to increase since 2013. In the International Accounting Standards (IAS) mandated by the International Accounting Standards Board (IASB), which was the organization that established the IFRS, neutrality is one of the characteristics of financial information and financial reporting (OB2, QC12, 14). In addition, the IASB does not include prudence, a similar concept of conservatism, in the characteristics of financial information and financial reporting. This is because this inclusion can lead to biased financial information and thus violate neutrality.

Unlike in Europe, where IFRS adoption is mandatory, in Japan, firms that voluntarily adopt IFRS and those that apply J-GAAP coexist. Thus, it is necessary to consider the differences in accounting standards and treatment when comparing firms’ financial condition and business performance. As mentioned earlier, conservatism is one of the concepts that constitute the main point of difference between the IFRS and J-GAAP. Nonetheless, to the best of our knowledge, almost no studies provide a comparative analysis of the IFRS and J-GAAP with respect to conservatism. Furthermore, while many studies discussing conservatism related to IFRS adoption in other countries solely focus on conditional conservatism, only few studies analyze unconditional conservatism.

Therefore, in this research, we examine whether there is a difference in the degree of conditional and unconditional conservatism between firms that adopted or plan to adopt IFRS and those that use J-GAAP. Although some differences in accounting standards and accounting treatments related to conservatism exist between J-GAAP and IFRS, whether IFRS is less conservative is a priori unclear. However, our estimated proxies of conditional conservatism are larger for J-GAAP users than for IFRS adopters, while those of unconditional conservatism are not significantly different between the two parties.