IFRS introduction and fair value reliability/auditability

Nobuhito Ochi

Visiting research fellow at the Chuo University Institute of Business Research,
Majors in financial regulations, accounting and auditing

1. Introduction

A special feature of the IFRS (International Financial Reporting Standards) is its asset and liability approach along with its many fair value measurements. Even in Japanese financial reports, in recent years there has been a rise in estimates and fair value information that have been influenced by IFRS, and the issues surrounding the reliability of information and auditability that comes from the uncertainty of those measures have been put under the microscope. On the other hand, in the financial crisis that followed the Lehman Shock (September, 2008) which originated from the subprime problem, the problems of fair value assessment through undeveloped models that have largely surfaced in America and Europe, are still fresh in our memory.

This spring, I released IFRS Fair Value Information Measures and Auditing, the results of my accounting research involving the reliability of fair value assessments, starting from the lessons of crises cultivated during my work (Bank of Japan etc.). After that, in autumn conventions etc., I received traditional academic awards such as the Japan Accounting Association Ota/Kurosawa Prize and the Institute of Internal Auditors Aoki Prize, and also being a visiting research fellow at the Institute of Business Research as a Chuo graduate (fair value accounting development and limits team). That is why I, while being a businessman, have the honor of contributing to this column.

Below, an outline of problem areas involving fair value assessment accounting methods and auditing are covered through my publication in the first section. However, as many readers may not be researchers, the style may be a little stiff, so in the middle section, I deviate a little from the main theme and give details on being a working researcher, while adding my connections to Chuo University, and also introduce clumsy trials and errors that occur at adult graduate schools etc. I hope this becomes a reference of some kind for both students and working adults as an example surrounding the connections between learning and practical business.

Nobuhito Ochi, IFRS Kosei Kachi Joho No Sokutei To Kansa – Mitsumori・Yosoku・Risuku Joho Kakudai e No Taiou [ IFRS Fair Value Information Measures and Auditing – Dealing with Estimate,Forecast and Risk Information Expansion] (Kunimoto Shobo, March 2012)


2.IFRS fair value information and auditing

In July of this year, the Financial Services Agency stated that it is necessary to continue investigations involving fair values, even in addressing interim issues related to the handling of IFRS. In the face of these current issue, my aforementioned work, based on lessons learnt from the financial crisis, comprehensively covers those measurement/disclosure and auditing/assurance issues surrounding expanding fair value information and explanatory note supplementary information under IFRS. It is made up of 12 chapters over three volumes (including the introduction and conclusion), with Part I introducing Lessons From the Global Financial Crisis (chapters 1 & 2) and providing awareness of the issues. Based on that, Part II is Reliability of Fair Value Measures and Auditability in Financial Products (chapters 3-6) and considers the issues related to minimum reliability standards of fair value measures, and in Part III Expansion of Estimates, Predictions and Risk Information Expansion and the Response of Auditors (chapters 7-10) the involvement over auditors in subjective estimates including legal liability issues, explanatory notes and non-financial information is covered.

This book especially focuses on practicing and clarifying the following three points.
The first point is examining the divergence of temporary targets and observed facts and analyzing those causes by having a distinct awareness of, and practicing normative accounting research methods. That is to say, on top of setting a temporary target as “sufficiently providing measured value reliability and auditability so accounting standards can become an advance notional check imposed on estimated values that are capable of deviating from true values,” this book points out the divergence of observed facts and temporary targets, as well as setting forth reform measures, and in terms of the expansion of fair value information and explanatory note supplementary information under IFRS, it systematically covers those measurement/disclosure and auditing/assurance issues.

The second is the researched points that came from technical and institutional constraints of standards for drawing up application ranges for fair values. In the core classifications of US-GAAP, regarding the range of level 3 fair values (quantified model estimated prices based on unobservable information), practical perspectives (measured value solidity and auditability) are taken in, areas that produce measurement uncertainty by measurement technique diversity are recognized as “level 4″, and consistent statements are developed while illustrating specific financial products. In such areas, not only are there tendencies lacking intent, as well as demonstrating on many fronts a remarkable expansion in arbitrarily excessive (inadequate) value margins, in those statements, it has become clear that there is a limit to fair value measures in financial products.

The third point is how to conduct the disclosure, auditing and assurance of explanatory notes and non-financial information, which was seamlessly researched with the roles and responsibilities demanded of accountants, and the problem of the user “expectation gap” (the difference between expectations of the public and the actual work of accountants) as a common frame of reference. There, while engaging in comparative research involving systems of the Basel II disclosure controls (international capital adequacy ratio controls related to banks etc.) that are not usually discussed accounting circles, points of issue involving the disclosure, auditing and assurance of risk information were analyzed, and a course of action for the system framework was tentatively produced.

3. Details of the activities of a working researcher

From here on, I want you to be a little more relaxed when reading. As mentioned earlier, because I am concurrently working as a visiting research fellow at Chuo University’s Institute of Business Research, I often make my way to Hachioji Campus, and the other day I had the opportunity to meet Professor Tadahiko Fukuhara (now Chancellor and President), who guided me in my faculty seminar when I was a graduate school student (President Shuzo Toda era), for the first time in a long time. What originally set me out on my current research activities began with me taking an interest in a newspaper advertisement on the guidance seminar taken by Professor Fukuhara at the newly established adult graduate school, and heading out to Surugadai. There I was introduced to Professor Shuya Nomura (now a professor at the Graduate School of Law), who was a teaching advisor while also working at the Financial Services Agency, and as a working adult in the first batch of students of the Nomura seminar, I had the opportunity to be taught on a wide range of topics related to bank commissioners in volatile financial systems.

After completing that master’s degree in March 2000, I moved to Oita as deputy branch general manager, and during that time, I developed an awareness of the issues at Oita University Graduate School of Economics (adult graduate school), and researched the possible contribution of external auditors as bearers of governance who regulate financial organizations. In that process, I received kind one-to-one guidance on accounting and auditing from professors in the accounting field. Furthermore, after returning to Tokyo, in order to advance my merged research of accounting and auditing, and law, I studied under Tsukuba University Professor Masao Yanaga, who was at the center of that research at the time, and began my doctorate course at Tsukuba University Graduate School on the former site of the Tokyo University of Education near Myogadani Station in Bunkyo Ward.

In September 2008, straight after my Tsukuba University dissertation research results were published as Ginko Kantoku To Gaibu Kansa No Renkei [Cooperation Between Bank Commissioners and External Auditors] (Nippon Hyoron Sha), the Lehman Shock occurred. Just as the above work was being published with the strengthening of financial system stability through efficient use of the accounting profession, being completely overturned from its foundations and the sudden development of the situation was a huge shock. But at the same time, it gave me great motivation to research the reliability of fair value assessments and auditability, and I put accounting and auditing in my main field of research with practical finance as a base, and as mentioned earlier, my research activities piled up with this publication. Since I started commuting to the Surugadai institution, by digging deep into actual issues in an interdisciplinary manner while somehow making use of my own experiences of finance and economic surveys and financial organization examinations for more than 10 years, I have been able to continue my research activities. In doing so, the academic improvement “place” in the graduate school and research institute has played a valuable role.

4.My future research activities

Finally, in a more serious tone, I will return to the main theme. In regards to the difference in value relations (correlation between financial information and stock prices) between the previously mentioned level 4 and level 3 fair values, identification through demonstrative research is required. Meanwhile, as well as deepening knowledge involving measurement disposition characteristics related to financial information possessing faithful representation of economic realities or not, in regards to the rationality of reform measures, feasibility, and size of the effects, based on the temporary targets proposed in my book, it is necessary to accumulate combined and continual verifications. Also, the mutual-dependence relations between financial information, including fair values, and non-financial information such as risk information have shown signs of strengthening and expansion while intervening in explanatory notes etc. behind the “principles-based” IFRS, where companies make accounting decisions for themselves in line with the rules. However, with disclosure boundary lines being clarified and auditing and assurance affairs being logically and systematically created along these lines, future problems remain.

Additionally, surrounding the establishment of a sustainable society, in the case of disclosure expansion, requests for environmental and CSR (corporate social responsibility) information disclosure from businesses have been becoming a trend in recent years. Environmental and CSR information, on one side, possesses a risk information aspect, while on the other hand, will not stop at being useful in decision making and function as information that meets the needs of various stakeholders. In regards to this extensive non-financial information, integrated reporting of financial and non-financial information (ESG (environmental, social and governance) information), where dealings have been progressing internationally in recent years, are being placed in the distance, in regards to the special features of those disclosure standards, measurement solidity and auditability, and formation margins for assurance affairs, room for deeper consideration from a uniform and transversal viewpoint remains. There is still plenty of room for improvement, but while steadily accumulating research, I would like to systematically collect results and publish them in the form of a third book.

Nobuhito Ochi
Visiting research fellow at the Chuo University Institute of Business Research, Majors in financial regulations, accounting and auditing, especially in research related to fair value, disclosure of non-financial information, auditing and assurance of financial products etc.


Born in Ehime Prefecture in 1961. Graduated from the Faculty of Law, Chuo University in 1984, and after entering the Bank of Japan in the same year served as bureau assistant, deputy general manager of the Oita branch office, Financial System and Bank Examination Department director, Deposit Insurance Corporation of Japan Treasury Department senior advisor (as well as working as Financial Planning and Coordination Division chief), and Institute for Monetary and Economic Studies director before taking up his current role as senior researcher at the Japan Economic Research Institute.
2000 Completed master’s degree at Chuo University Graduate School of Law
2003 Completed master’s degree at Oita University Graduate School of Economics.
2008 Completed doctorate (law) at Tsukuba University Graduate School of Business Sciences.
2012 Visiting research fellow at Chuo University Institute of Business Research (concurrent position).

Major publications (sole author) include IFRS Kosei Kachi Joho No Sokutei To Kansa [Fair Value Information Measures and Auditing] (Kunimoto Shobo, 2012) (winner of the Japan Accounting Association Ota/Kurosawa Prize and the Institute of Internal Auditors Aoki Prize), and Ginko Kantoku To Gaibu Kansa No Renkei [Cooperation Between Bank Commissioners and External Auditors] (Nippon Hyoron Sha, 2008).
Articles (sole author) include “IFRS Donyu To Kosei Kachi Hyoka e No Taiou [Introduction of IFRS and Dealing With Fair Value Assessments]“, Japanese Association for International Accounting Studies Annual Report (2010) (winner of the JAIAS Association Prize), and “CSR Kihan Keisei Katei Ni Okeru NPO Kino To Kadai [Functions and Issues of NPOs in the CSR Standards Making Process]“, Soft Law Research Vol. 17 (University of Tokyo GCOE, 2011). “ESG Joho no Hokoku Keitai to Kansa・Hosho o Meguru Ichikosatsu – Togo Hokoku Ni Okeru Kaiji to Kansa・Hosho Mondai no Tokushitu [Considerations Surrounding Report Structure and Auditing/assurance of ESG Information – Characteristics of Disclosure and Auditing/assurance Problems in Integration Reports]” will be published in Chuo University’s Project Research Vol. 22 (February 2013).


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