Discuss how the Application of its Principles could have Benefitted the Users of Kanebo’s Financial Statements: Accounting Assignment, MU, Singapore

Assignment Brief:

IFRS 10 Consolidated Financial Statements is a relatively new standard of control. It was issued on 12 May 2011 which replaced IAS 27 Consolidated and Separate Financial Statements and SIC-12 Consolidation – Special Purpose Entities.

Assume IFRS 10 was in force, discuss how the application of its principles could have benefitted the users of Kanebo’s financial statements. Support your discussion with examples from the case, other literature reviews, and/or publications. Kindly refer to the attachment for the case study. Thank you!

Kanebo Ltd. (A)

In April 2005, Kanebo Ltd., a large but financially strapped Japanese cosmetics manufacturer, revealed that it had committed a series of fraudulent accounting practices. At the time, Kanebo was being restructured with the support of the government-backed Industrial Revitalization Corporation of Japan (IRCJ). After failing to properly consolidate its subsidiaries into its consolidated financial statements, Kanebo was forced to restate its earnings from 2000 to 2004, which revealed that the company’s earnings between these years had been overstated by 200 billion yen, one of the largest misstatements for a Japanese company. Following the scandal, Kanebo was delisted from the Tokyo Stock Exchange (TSE) in June 2005 and sold its cosmetics business to its cosmetics rival, Kao, in December 2005. Kanebo’s remaining businesses were later acquired by an investment fund.

Kanebo’s accounting scandal profoundly affected the Japanese auditing profession, accounting standards, and securities regulation practices. During the course of investigating Kanebo’s finances, the company’s audit firm, ChuoAoyama Audit Corporation, the Japanese arm of international accounting major PricewaterhouseCoopers (PwC), was implicated in concealing the accounting fraud.1 In May 2006, Japan’s Financial Services Agency (FSA), the Japanese securities regulator, made the unprecedented decision to suspend ChuoAoyama’s audit operations for two months. It was the first time such a penalty had been imposed on a major audit firm. Kanebo’s former president and vice president, Takashi Hoaski and Takashi Miyahara were each given a three-year suspended sentence by the courts. In August 2006, three ChuoAoyama accountants also received three-year suspended sentences for falsifying accounting statements in a conspiracy with Kanebo executives.2

The Kanebo scandal came as Japan was trying to conform itself to international accounting practices. In 2005, the Accounting Standard Board of Japan (ASBJ) and the International Accounting Standards Board (IASB) began discussions on the convergence of Japanese Generally Accepted Accounting Principles (J-GAAP) and the International Financial Reporting Standards (IFRS). In August 2007, the ASBJ and IASB announced a plan, known as the Tokyo Agreement, to eliminate 26 major discrepancies between J-GAAP and IFRS by the end of 2008 and to remove any remaining

Assignment Questions

1. What were the root causes of Kanebo’s fraudulent accounting?

2. Assess Japan’s decision to adopt the International Financial Reporting Standards during 2015/16. Should there be any exceptions to implementing the full set of IFRS?

3. Compare J-GAAP’s present consolidation standards and those of IAS 27. Which ones seem more appropriate for Japan?

4. Imagine you are a recently hired financial analyst covering publically traded Japanese companies. Is there anything from the analysis of the Kanebo case that you might find relevant to your assignment?