Japanese GAAP vs IFRS vs US GAAP

When you read the financial statements of an overseas subsidiary or counterparty, or compare statements prepared under different standards, you need to know where the standards differ. The differences cover derivative accounting, hedge accounting, balance sheet presentation, and the notes.

Comparing the three standards item by item

Japanese GAAP is the set of corporate accounting standards in Japan. IFRS Accounting Standards (hereafter "IFRS") are developed by the International Accounting Standards Board (IASB), and more than 140 jurisdictions require their use¹. US GAAP is the set of standards set by the US Financial Accounting Standards Board (FASB)². The standards this article names are as follows. For Japanese GAAP, it is Accounting Standards Board of Japan (ASBJ) Statement No. 10, "Accounting Standard for Financial Instruments." For IFRS, it is IFRS 9, "Financial Instruments." For US GAAP, it is ASC 815.

Measurement of derivatives

All three standards put derivatives on the balance sheet and measure them at fair value. Unless hedge accounting is used, the valuation difference goes to profit or loss.

Japanese GAAP regards the value of a derivative transaction as the net of the values of the rights and obligations that make up the contract. If the net is a receivable, it is a financial asset, and if it is a payable, a financial liability. Both are carried at fair value on the balance sheet, and the valuation difference, except for amounts related to hedges, goes to profit or loss for the period³.

IFRS 9 provides that financial liabilities that are derivatives are measured at fair value through profit or loss, and it puts financial assets that are not measured at amortized cost or the like in the same category. Changes in fair value go to profit or loss unless they are part of a hedging relationship⁴.

ASC 815 measures all derivatives at fair value, both at inception and afterward⁵. Changes go to profit or loss unless the derivative is designated as a hedge⁶. The treatment when a derivative is designated as a hedge is compared in the next section, "How hedge accounting works."

Consider a hypothetical example in which Company T enters into an interest rate swap with Bank M with a notional of 1 billion yen. Company T receives a floating rate and pays a fixed rate. The fair value at inception is 0. If rates rise by the closing date, Company T's fair value is 20 million yen, and if rates fall, it is −20 million yen. Ignore tax effects and credit valuation adjustments, and assume no hedge is designated.

The result is the same under all three standards.

Suppose Company T has a floating-rate borrowing, and the swap offsets changes in the interest on that borrowing. Without hedge accounting, if rates rise, the swap's valuation gain of 20 million yen appears in this period, while the increase in interest appears in future periods, so the timing in profit or loss is mismatched. If rates fall, the valuation loss of 20 million yen appears first, and the decrease in interest appears in later periods. Hedge accounting is the method that reduces this mismatch, and the section "How hedge accounting works" compares how each standard handles it.

Separate accounting for embedded derivatives

For the separate accounting of embedded derivatives, IFRS and US GAAP differ in the starting point of the judgment. If the host contract is a financial asset within the scope of IFRS 9, the standard does not separate the embedded derivative and classifies the whole contract as a financial asset. If the host is anything else, the embedded derivative is separated when all three conditions are met⁷. ASC 815-15 judges by three conditions of the same form, whatever kind of host it is⁸.

The three conditions rest on the same idea in every standard. The first is that the economic characteristics and risks of the embedded part are not closely related to those of the host. ASC 815-15 words this as "not clearly and closely related." The second is that a separate instrument with the same terms as the embedded part would meet the definition of a derivative. The third is that the contract as a whole is not measured at fair value with changes going to profit or loss. IFRS and US GAAP are the same in not separating a contract that is already measured at fair value through profit or loss as a whole⁷⁸.

According to a commentary of March 2006, Japanese GAAP, in the practical guidance before its amendment, required separate accounting when all three of the following were met⁹. The risk of the embedded part could extend to the underlying physical asset. The embedded part as a separate contract on the same terms would have the characteristics of a derivative. The valuation difference of the whole compound financial instrument does not go to profit or loss. On separation, the derivative part is measured at fair value, and the valuation gain or loss is recognized in profit or loss⁹.

How hedge accounting works

The standards divide hedge accounting differently. IFRS 9 and ASC 815 divide hedging relationships into three types. They are fair value hedges, cash flow hedges, and hedges of a net investment in a foreign operation (net investment hedges in ASC 815)¹⁰¹¹. Japanese GAAP divides them by method of treatment. The principle is deferral hedge accounting, which defers the gain, loss, or valuation difference on the hedging instrument until the gain or loss on the hedged item is recognized. Japanese GAAP also permits a method that recognizes the gain or loss on the hedged item in the same period¹². The details are covered in the Deferral Hedge Accounting under Japanese GAAP page.

Under Japanese GAAP, for hedges of available-for-sale securities, either deferral hedge accounting or fair value hedge accounting could be chosen. The hedged items of fair value hedge accounting were read as limited to available-for-sale securities¹³. This was the rule in Accounting System Committee Report No. 14, "Practical Guidance on Accounting for Financial Instruments" (our translation), as last amended in July 2019. The report was abolished as of July 1, 2024, and moved to the transfer guidance of the Accounting Standards Board of Japan¹⁴. In the rest of this page, statements about the Japanese GAAP practical guidance describe the version before its abolition.

The most visible difference in requirements is in hedge effectiveness. The Japanese GAAP guideline was that a high correlation exists if the ratio of the changes in the hedging instrument and the hedged item is roughly within 80% to 125%¹⁵. IFRS 9 has no "highly effective" requirement. It requires an economic relationship between the hedging instrument and the hedged item, that credit risk does not dominate the value changes, and that the hedge ratio reflects the quantities actually used. ASC 815 requires the hedging instrument to be highly effective in offsetting changes in the hedged item¹⁶.

In the example from the measurement section, suppose Company T designates the swap as a hedge of the changes in interest on the floating-rate borrowing and meets the requirements. Because the swap offsets changes in future interest, it is a cash flow hedge. The valuation difference does not go to profit or loss for the period but is placed in net assets (for the ineffective part under IFRS, see the next paragraph). Under Japanese GAAP it is placed in deferred hedge gains or losses¹⁷. Under IFRS it is placed in other comprehensive income (an item within net assets) through the cash flow hedge reserve. Under US GAAP it is placed in other comprehensive income¹⁸¹⁹. Under all three standards, the amount placed there returns to profit or loss in the periods when the hedged item affects profit or loss. Under Japanese GAAP, for interest-bearing assets and liabilities, it returns as an adjustment of interest²⁰.

When a hedge is not fully effective, IFRS 9 recognizes the ineffective part in profit or loss¹⁸. For a highly effective cash flow hedge, ASC 815 places in other comprehensive income the whole change in the fair value of the hedging instrument that was included in the assessment of effectiveness¹⁹. When a derivative is designated as the instrument of a hedge of a net investment in a foreign operation, ASC 815 puts it in other comprehensive income to the extent it is effective⁶. Under Japanese GAAP, the hedge could be judged effective as a whole if it also met the requirements. In that case, the part of the hedging instrument's gain or loss that turned out to be ineffective could also be deferred. If the ineffective part could be separated reasonably, a policy of recognizing it in profit or loss for the period was also available²¹.

Definition and hierarchy of fair value, and disclosure

IFRS and US GAAP have the same definition of fair value and the same requirements for measurement and disclosure. The IASB summarized in May 2011 that IFRS 13 had aligned the two²². The idea of dividing the inputs used in valuation into three levels is also common to IFRS 13 and ASC 820²³. Japan's fair value measurement standard adopts basically all the provisions of IFRS 13. It sets out separate treatments in individual items in consideration of Japanese practice, such as limiting the scope to financial instruments and the like²⁴.

The Regulation on Terminology, Forms, and Preparation Methods of Financial Statements also divides the inputs used in measuring fair value into observable and unobservable ones, and into three levels²⁵.

In disclosure, a difference remains in Level 3 sensitivity. IFRS 13 requires, for fair values classified in Level 3, a disclosure of how the unobservable inputs would change and how fair value would move if other reasonably possible assumptions were used. The Japanese implementation guidance does not require this item. What it does require is an explanation of the effect on fair value of changing the unobservable inputs²⁶. At the time of the IASB's May 2011 summary, US GAAP did not require a disclosure of quantitative sensitivity analysis²⁷.

Offsetting of financial assets and financial liabilities

Offsetting is the question of whether a financial asset and a financial liability are shown gross or net on the balance sheet. One of the big differences between IFRS and US GAAP is the treatment of cases where offsetting is allowed on conditions. A master netting arrangement is a contract with a single counterparty under which, on default or termination, all the covered contracts are settled net as one amount. As of a commentary in March 2012, IFRS did not allow offsetting on the existence of this arrangement alone, and US GAAP did²⁸. The legal mechanism of the arrangement is covered in Close-Out Netting.

Under IAS 32, an entity can offset recognized amounts only if it currently has a legally enforceable right. It must also intend either to settle on a net basis or to realize the asset and settle the liability simultaneously. The right must not depend on a future event, and it must be legally enforceable in the normal course of business, in the event of default, and in the event of insolvency or bankruptcy²⁹. The right under a master netting arrangement becomes usable only after an event such as default, so the arrangement alone does not meet this requirement.

US GAAP offsets when all four conditions are met. The two parties owe each other determinable amounts, the reporting party has the right to set off, the reporting party intends to set off, and the right of setoff is legally enforceable. However, derivatives have an exception. US GAAP permits a choice to net the amounts under a master netting arrangement if the other three conditions are met, without considering the intent to set off. The scope includes the fair value of derivatives and the rights to reclaim and the obligations to return cash collateral arising from derivatives³⁰.

Under Japanese GAAP, in the practical guidance before its abolition, gross presentation on the balance sheet is the principle. Monetary claims and obligations with the same counterparty can be shown offset when setoff is legally valid, the company has the ability to set off, and it intends to settle by setoff. Derivatives have an exception. If there is a master netting arrangement whose legal validity is recognized, assets and liabilities from fair value measurement of transactions with the same counterparty may be offset to the extent of the arrangement³¹.

Figure description

The figure sorts, by two opening checks, whether the assets and liabilities of derivatives can be shown net on the balance sheet under each of the three standards. A derivative that is not under a master netting arrangement is shown gross in principle, and it can be shown net if the offsetting conditions of each standard are met. A derivative under such an arrangement is sorted by whether the standard is IFRS or not. IFRS does not allow offsetting on the arrangement alone, and the outcome depends on whether the offsetting conditions of IAS 32 are met separately. Japanese GAAP and US GAAP can show the amounts net if they meet their respective conditions. The existence of the arrangement alone does not settle the outcome, and the content of the conditions is in the paragraph right after this figure.

The "conditions" in Figure 1 are, for Japanese GAAP, a legally valid master netting arrangement and offsetting within the scope the arrangement covers. For US GAAP, they are the remaining three conditions of the derivatives exception, without considering the intent to set off. Under Japanese GAAP and US GAAP, whether to offset is chosen as an accounting policy and applied consistently. The next example follows this figure and looks at how the same two swaps appear under each standard.

Consider a hypothetical example in which Company T has Swap A and Swap B with Bank M under a single master netting arrangement, and has posted no collateral. For Company T, A's fair value is 80 million yen and B's is −50 million yen.

In every presentation, the total fair value of the two swaps is 30 million yen, and only the gross amounts on the balance sheet change. If the fair values of A and B were reversed, IFRS would show an asset of 50 million yen and a liability of 80 million yen, and US GAAP and Japanese GAAP would show a liability of 30 million yen. If the company does not offset under US GAAP or Japanese GAAP, the gross amounts are the same as under IFRS. This example assumes that the other condition under which IFRS allows offsetting (an intention to settle net, and a mechanism for it) is not met.

In December 2011, the FASB and the IASB left the offsetting requirements on the balance sheet unchanged and introduced a common disclosure. It covers the gross amounts of assets and liabilities before offsetting, the amounts offset, the net amounts presented on the balance sheet, and the amounts not offset that are subject to an enforceable master netting arrangement³².

Which standard is used in which situation

For consolidated financial statements under Japan's Financial Instruments and Exchange Act, the Consolidated Financial Statements Regulation as of October 2026 sets the terminology, forms, and preparation methods, and matters the regulation does not cover follow the corporate accounting standards generally accepted as fair and appropriate³³. These standards include the corporate accounting standards that the Business Accounting Council has published³³.

Besides these corporate accounting standards (what this site calls Japanese GAAP), the regulation provides three other routes. The first is designated international accounting standards (the part of IFRS that the Commissioner of the Financial Services Agency designates). A joint-stock company can prepare under them if it describes special initiatives to ensure the appropriateness of its consolidated financial statements in its securities report or the like and has in place a system for preparing under designated international accounting standards³⁴. The second is Japan's Modified International Standards, which are standards made by a specified body modifying the international accounting standards, as designated by the Commissioner of the Financial Services Agency³⁵. The third is US-style consolidated financial statements. A company registered with the US Securities and Exchange Commission can use them when the Commissioner of the Financial Services Agency approves filing consolidated financial statements prepared in the format required in connection with the issuance of American depositary receipts and the like³⁶.

Voluntary adoption of IFRS began with the consolidated fiscal years ending on or after March 31, 2010. Initially, the policy was to apply IFRS to consolidated financial statements only. For US GAAP, a deadline of the end of March 2016 for its use was set in 2009 and abolished in 2011. Japan's Modified International Standards were introduced in 2013, so that four standards stood side by side: Japanese GAAP, IFRS, US GAAP, and the Modified International Standards³⁷.

As of August 31, 2022, 267 companies had applied or planned to apply IFRS. Among them, the listed companies' market capitalization was 45.6% of the market capitalization of all listed companies at the end of August 2022 (about 339.0 trillion yen)³⁸.

The standards usable for non-consolidated financial statements and for the financial documents under the Companies Act are not covered on this page.

Notes

1. IFRS Foundation, "Who we are" (checked in October 2026). The IASB develops IFRS Accounting Standards, and more than 140 jurisdictions require their use. ↩

2. IASB, "IFRS 13 Fair Value Measurement Project Summary and Feedback Statement" (May 2011), p.2. It names the FASB as the US standard setter. ↩

3. Business Accounting Council, "金融商品に係る会計基準の設定に関する意見書" (Opinion on the Establishment of Accounting Standards for Financial Instruments, in Japanese; our translation) (January 22, 1999), "一 金融資産及び金融負債の範囲等" (scope of financial assets and financial liabilities; the net of the values of rights and obligations) and "四 金融資産及び金融負債の貸借対照表価額等" (balance sheet amounts of financial assets and financial liabilities), "デリバティブ取引により生じる正味の債権及び債務" (net receivables and payables arising from derivative transactions; fair value and the treatment of the valuation difference). The content of the opinion. ↩

4. AASB 9 (the same content as IFRS 9; "COMPARISON WITH IFRS 9" at the start says that an entity that complies with AASB 9 also complies with IFRS 9), paragraphs 4.2.1(a), 4.1.4, 5.7.1, and 6.2.1. Below, paragraph numbers of IFRS 9 come from this document. ↩

5. Deloitte & Touche LLP, "Deloitte's Roadmap: Derivatives," 7.2 "Balance Sheet," which cites ASC 815-10-25-1, 30-1, and 35-1 (all derivatives are recognized as assets or liabilities and measured at fair value both initially and subsequently). A quotation of the standard within an audit firm's commentary. ↩

6. FASB ASU 2017-12, which contains ASC 815-20-35-1, items (a) (derivatives not designated as hedges), (c) (cash flow hedges), and (d) (hedges of a net investment in a foreign operation). Items (a) and (c) are on PDF p.98, and item (d) is on PDF p.99. ↩ ↩²

7. IFRS 9, paragraph 4.3.2 (an embedded derivative is not separated when the host is a financial asset within the scope of the standard) and paragraph 4.3.3(a) to (c) (the three conditions otherwise). ↩ ↩²

8. Deloitte's Roadmap: Derivatives, 4.3 "Bifurcation Criteria," which cites ASC 815-15-25-1 (the three conditions, and that there is no required order of consideration). A quotation of the standard within an audit firm's commentary. ↩ ↩²

9. Daiwa Institute of Research, "物価連動国債、区分処理は不要に(確定版)" (Inflation-Linked JGBs Need No Separate Accounting (Final Version), in Japanese; our translation) (March 31, 2006), p.1 (definition of separate accounting) and p.2 (the three conditions in the practical guidance before its amendment). Commentary from a private research institute. ↩ ↩²

10. IFRS 9, paragraph 6.5.2 (the three types). ↩

11. The introductory paragraph of Appendix A of Deloitte's Roadmap: Hedge Accounting (fair value hedges, cash flow hedges, and hedges of a net investment in a foreign operation each have their own requirements). ↩

12. Business Accounting Council, "金融商品に係る会計基準の設定に関する意見書" (Opinion on the Establishment of Accounting Standards for Financial Instruments, in Japanese; our translation), "六 ヘッジ会計" (hedge accounting), "ヘッジ会計の方法" (methods of hedge accounting; (1) the principal method is deferral hedge accounting, and (2) a method that recognizes the gain or loss on the hedged item is permitted). ↩

13. Accounting System Committee Report No. 14, paragraph 160 (PDF p.47; when an available-for-sale security is the hedged item, either deferral hedge accounting or fair value hedge accounting can be chosen) and paragraph 185 (the hedged items of fair value hedge accounting are interpreted to be available-for-sale securities only). ↩

14. Japanese Institute of Certified Public Accountants, "移管に伴う会計制度委員会が公表した実務指針等の廃止について" (On the abolition of the practical guidance and other documents that the Accounting System Committee published, following the transfer, in Japanese; our translation) (posted July 1, 2024). The reports including Accounting System Committee Report No. 14 were abolished as of July 1, 2024. Transfer guidance was published as of the same date. ↩

15. Accounting System Committee Report No. 14, paragraph 156 (PDF p.46; a high correlation is recognized if the ratio of the changes is roughly within 80% to 125%). ↩

16. The row "'Highly effective' threshold to qualify for hedge accounting" of the table in Appendix A of Deloitte's Roadmap: Hedge Accounting. The three requirements of IFRS 9 are in paragraph 6.4.1(c), which the same row cites. ↩

17. Japanese Institute of Certified Public Accountants, Accounting System Committee Report No. 14, "金融商品会計に関する実務指針" (Practical Guidance on Accounting for Financial Instruments, in Japanese; our translation) (last amended July 4, 2019; the paragraph numbers cited on this page are those of the version before its abolition), paragraph 174 (PDF p.51; deferred hedge gains or losses are recorded in the net assets section, net of the amount of deferred tax assets or deferred tax liabilities). ↩

18. IFRS 9, paragraph 6.5.11(a) to (c) (the cash flow hedge reserve, the effective portion recognized in other comprehensive income, and the ineffective portion recognized in profit or loss). ↩ ↩²

19. The row "Measurement and recognition of hedge ineffectiveness — cash flow hedges" of the table in Appendix A, "Comparison of U.S. GAAP and IFRS Accounting Standards," of Deloitte's Roadmap: Hedge Accounting. A description of ASC 815 after ASU 2017-12. ↩ ↩²

20. Accounting System Committee Report No. 14, paragraph 176 (PDF p.52); IFRS 9, paragraph 6.5.11(d)(ii); ASC 815-20-35-1(c) in FASB ASU 2017-12 (PDF p.98). ↩

21. Accounting System Committee Report No. 14 (version before its abolition), paragraph 172 (PDF p.51; if the hedge can be judged effective as a whole and meets the requirements, the part that turned out to be ineffective may also be deferred; if the ineffective part can be separated reasonably, a policy of recognizing it in profit or loss for the period is also available). ↩

22. IASB, "IFRS 13 Fair Value Measurement Project Summary and Feedback Statement" (May 2011), p.2 (At a glance) and p.9. The same definition of fair value and the same requirements for measurement and disclosure. ↩

23. The same IASB document, p.6 (Fair value hierarchy). For US GAAP, ASC 820-10-35-40, which Section 8.2 of Deloitte's Roadmap: Fair Value Measurements and Disclosures cites, and that section's examples. ↩

24. PwC Arata LLC, "日本基準トピックス 第378号" (Japanese GAAP Topics No. 378, in Japanese; our translation) (July 4, 2019), p.2, "概要" (overview). The fair value measurement standard adopts basically all the provisions of IFRS 13, the reason for using 時価, and the limit of scope to financial instruments and the like. Commentary from an audit firm. ↩

25. Regulation on Terminology, Forms, and Preparation Methods of Financial Statements (Financial Statements Regulation), Article 8, paragraphs 65 to 68 (inputs used in measuring fair value, observable inputs, unobservable inputs, and levels). ↩

26. PwC Arata LLC, "日本基準トピックス 第378号" (Japanese GAAP Topics No. 378, in Japanese; our translation), p.3, "開示" (disclosure). The item the Japanese implementation guidance requires (item (7), an explanation of how much fair value changes when the unobservable inputs are moved), and the item IFRS 13 requires but the implementation guidance does not (item (9), the effect of other reasonable assumptions on a Level 3 fair value). ↩

27. IASB, "IFRS 13 Fair Value Measurement Project Summary and Feedback Statement," p.9. An example of a remaining difference: quantitative sensitivity analysis for Level 3 financial instruments (as of May 2011). ↩

28. Yasuyoshi Kawanishi (FASB International Fellow), "金融資産と金融負債の相殺表示に関する会計基準" (Accounting Standards on Offsetting of Financial Assets and Financial Liabilities, in Japanese; our translation) (Japanese Institute of Certified Public Accountants, 会計・監査ジャーナル (Accounting & Auditing Journal; our translation) No. 680, March 2012), p.1 (printed p.87). It presents the personal views of an FASB staff member. ↩

29. The same article, p.3 (printed p.89). A clarification of the requirements of paragraph 42 of IAS 32: the right does not depend on a future event, it is enforceable in the normal course of business, in the event of default, and in the event of insolvency or bankruptcy, and there is an intention to settle net, together with the conditions under which gross settlement is effectively the same as net. ↩

30. Deloitte's Roadmap: Derivatives, 7.2.1 "Balance Sheet Offsetting" (7.2.1.1 "Conditions for Offsetting Derivatives"), which cites ASC 210-20-45-1 and ASC 815-10-45-5. ↩

31. Accounting System Committee Report No. 14 (last amended July 4, 2019; the version before its abolition), paragraph 140, "相殺表示" (offsetting presentation; PDF p.42. The principle of gross presentation, the three requirements for offsetting, and the exception for assets and liabilities with the same counterparty arising from fair value measurement of derivative transactions when there is a master netting arrangement). ↩

32. The same article, pp.1 to 2 (printed pp.87 to 88). The content the two boards published on December 16, 2011. The start of application of the disclosure requirements is on p.3 (printed p.89). ↩

33. Regulation on Terminology, Forms and Preparation Methods of Consolidated Financial Statements (Consolidated Financial Statements Regulation; the title of the official English translation in the Japanese Law Translation Database), Article 1, paragraphs 1 and 2. Source in Japanese (e-Gov). ↩ ↩²

34. Consolidated Financial Statements Regulation, Article 1-2, item 1 (requirements for a company specified as applying designated international accounting standards) and Article 312 (designated international accounting standards may be followed). The version checked on e-Gov in October 2026. ↩

35. Consolidated Financial Statements Regulation, Article 314 (special provisions on Japan's Modified International Standards). ↩

36. Consolidated Financial Statements Regulation, Article 316 (US-style consolidated financial statements; the term "US-style consolidated financial statements" is our translation). ↩

37. Financial Services Agency, "会計基準を巡る変遷と最近の状況" (Changes and Recent Developments in Accounting Standards, in Japanese; our translation) (September 29, 2022), p.2 (the 2009 interim report, the abolition in 2011 of the deadline for using US GAAP, and the introduction of Japan's Modified International Standards in 2013) and the note on p.3 (voluntary adoption of IFRS began with the consolidated fiscal years ending on or after March 31, 2010). ↩

38. The same material, p.3 (267 companies voluntarily applying IFRS, including those planning to, as of August 31, 2022; the note says the market capitalization of listed companies voluntarily applying or planning to apply IFRS was about 339.0 trillion yen at the end of August 2022, 45.6% of the market capitalization of all listed companies). ↩