Decision Made to Maintain 'Goodwill' Amortization! A Thorough Explanation of the Impact on Japanese Companies, Stock Prices, and M&A

"Why do Japanese companies amortize 'goodwill' every year?"
As M&A (mergers and acquisitions) becomes an essential tool for corporate growth, Japan's accounting system is receiving significant attention. The Financial Accounting Standards Foundation (FASF) has decided to maintain the policy of regular amortization of 'goodwill'.
This means continuing a unique Japanese rule that differs from the 'non-amortization' approach adopted by International Financial Reporting Standards (IFRS) and U.S. accounting standards.
While it may seem like a technical accounting matter at first glance, this decision is a crucial topic that significantly impacts corporate profits, stock prices, investor evaluations, and even the M&A strategies of Japanese companies. In this article, we will explain the key points in an easy-to-understand manner.

1. What has been decided?

Decision made to maintain 'goodwill' amortization: Key points summarized
・Japanese accounting standards will maintain the policy of 'regular amortization of goodwill'.
・A choice between amortization and non-amortization will not be introduced.
・The unique Japanese system, which differs from IFRS and U.S. standards, will be continued.

2. What is 'goodwill'?

When acquiring a company, it is the difference when:
Acquisition Price > Net Assets of the target companyFor example:
・Net Assets: 10 billion yen
・Acquisition Price: 15 billion yen
→
5 billion yen is 'goodwill'It represents
intangible valuesuch as brand power, technology, human resources, and customer base.

3. Differences between Japanese standards and IFRS

Japanese Standards | IFRS/U.S. Standards
Regular amortization | Generally no amortization
Profits decrease every year | Profits do not decrease every year
Impairment risk is small | Potential for huge losses during impairment

4. Why Japan chose to maintain amortization

① Desire to avoid the risk of massive impairment

While non-amortization makes profits look larger, if a business fails, it could lead to an impairment of hundreds of billions of yen at once.
There is concern that corporate performance could become highly volatile.

② Goodwill is relatively small for Japanese companies

The ratio of goodwill to shareholder equity is:
・Japan: approx. 1%
・Europe/U.S.: 20–30%
・In the U.S., 16% of companies have a ratio exceeding 100%
It was determined that Japanese companies are not as dependent on M&A as overseas companies, so the benefits of changing the system are small.

③ System change costs

Approximately 3,600 companies use Japanese standards.
Changing the system would incur significant costs, including:
・System modifications
・Changes to accounting processes
・Internal training

5. Disadvantages

It is disadvantageous for companies that are active in M&A.
Annual amortization expenses make profits appear lower.
As a result:
・ROE
・EPS
・Operating profit
tend to look lower.

6. Arguments from the business community

The Japan Association of Corporate Executives and others argue that regular amortization is an obstacle to M&A.
The idea is that because profits appear lower than those of overseas companies, corporate value is not evaluated correctly.

7. Impact on investors

Pros
・High profit stability
・Sudden massive deficits are less likely to occur
・Accounting becomes more conservative
Cons
・Difficult to compare with overseas companies
・Profits of Japanese companies appear lower
・Possibility that valuations may tend to be undervalued

8. Response from the Financial Accounting Standards Foundation (FASF)

Instead of making it completely non-amortizable, they are considering the disclosure of profit before goodwill amortization.
Through this, they hope to make it easier to compare:
・Japanese companies
・Companies adopting IFRS
.

9. Possibility of an increase in companies adopting IFRS

If companies that actively engage in M&A transition to IFRS, they can
・avoid amortizing goodwill
, so there is a possibility that the number of companies adopting IFRS will continue to increase in the future.

Key points for investors to watch

・Japanese standards prioritize "profit stability"
・IFRS tends to emphasize "profit growth"
・For companies actively engaging in M&A, there is a possibility of increased IFRS adoption in the future.
When looking at financial results, checking not only "profit after goodwill amortization" but also "profit before amortization" will make it easier to compare the true earning power of companies.

This decision is not just about accounting rules.
Japan has chosen a path that prioritizes "financial stability" and "future risk management" over "making profits look larger." On the other hand, challenges remain regarding the ease of comparison with overseas companies and the impact on companies that actively engage in M&A.
By looking not only at "net income" in future financial results, but also at "profit before goodwill amortization" and the accounting standards adopted by companies, investors will be able to more accurately evaluate a company's true strength. Understanding the differences in accounting standards should become a major weapon in future investment decisions.

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