Valuation Issues in Japan

By: William Hughes

Tanizawa Sogo Appraisal Co. Ltd. Japan

This is a high-level summary of issues likely to be relevant to companies and international groups with operations in or considering transactions in Japan. The following overview was prepared by VRG member firm Tanizawa Sōgō Appraisal Co., Ltd.

Financial Reporting

Financial reporting in Japan is mostly based on Japanese Generally Accepted Accounting Principles (JGAAP) and International Financial Reporting Standards (IFRS).

When are Valuations for Financial Reporting Required in Japan?

Business Combinations / Asset Acquisitions. Under accounting standards for business combinations or asset acquisitions, acquired tangible assets (real and personal property) and intangible assets are required to be re-set to fair value in a purchase price allocation (PPA) report.

Pre-Acquisition Analysis. A pre-acquisition analysis assists potential acquirers in understanding potential accounting impacts of an acquisition.

Asset Impairment. After an acquisition, companies are required to test assets for impairment on an annual or more frequent basis in accordance with IFRS. Under JGAAP, companies are required to test assets for impairment when there is an indication that assets may be impaired.

Mergers and Acquisitions

When considering mergers, acquisitions, and divestitures, management teams may require sound valuation analysis and advice. Independent business valuation and stock valuation may be performed as a starting point for price negotiation in a business acquisition. In addition to business valuation, valuations of real and personal property and intangible assets may be performed prior to mergers and acquisitions.

Business Reorganizations

Business reorganizations and restructurings may require valuation professionals to determine proper valuation of a business and its segments in a planned or enforced business restructuring and/or rationalization.

Taxation

Under the Income Tax Law, the Corporation Tax Law, and the inheritance tax law, fair value measurements are determined mainly through the National Tax Agency Basic Instructions on Evaluation of Assets. Tax-related valuations include business valuations, stock valuations, tangible asset valuations, and intangible asset valuations.

Real Estate Investment

Real estate investment utilizing securitization has been increasing in recent years in Japan. Real estate securitization converts real estate into securities such as stock and corporate bonds. In real estate securitization, it is necessary to provide due diligence for investors to make investment decisions and to understand the profit value derived via cash flow analysis.

Fairness Opinions

A fairness opinion is a letter stating whether the consideration offered in a transaction, either by insiders or third parties, is fair to the non-affiliated shareholders of the company from a financial perspective. Boards of directors will typically obtain a fairness opinion as part of discharging their fiduciary duties.

To learn more about how VRG and Tanizawa Sōgō Appraisal Co., Ltd. can work with your company, we welcome you to visit us online or contact Hitoshi Kawafuji at tk-khonbu@tanikan.co.jp.

For more information about VRG’s full scope of international valuation and value-related services, contact Bill Hughes.

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