Editor's letter

Comment

Following the issuance of a new derivatives accounting rule, FAS 155, in the US in February to replace the previous FAS 133 – a move that aims to simplify accounting for hybrid financial contracts – Japan’s accounting body in April issued revised rules for inflation-linked government bonds and synthetic collateralised debt obligations (CDOs). Under the new rules, such products could qualify for exemption from ‘bifurcation’ requirements – under which embedded derivatives are accounted for separately from the host contract – and instead be treated as single instruments in the accounting books.

It is even possible for synthetic CDOs to be exempt from mark-to-market requirements and classified as hold-to-maturity instruments – the same treatment as for cash bonds. There are signs that this accounting change is driving new demand for synthetic CDOs from Japanese investors, with a few private deals being done in recent weeks as a direct result of the change – see our cover story.

These are the latest steps in long-standing reforms of Japanese accounting standards since the late 1990s. At the time, weak accounting practices led to widespread corporate defaults, a surge in bad loans and financial scandals that shocked the markets. The market is still feeling the repercussions today, as seen in the recent suspension of Chuo Aoyama PwC – the local affiliate of accounting firm PricewaterhouseCoopers – for two months by the Financial Services Agency after three of the company’s auditors allegedly certified false accounts of a client.

Auditors in Japan are known to maintain very close relations with clients, to such an extent that it hinders their ability to disclose financial window-dressing by the client company’s management. The event also highlights the need to address risk management and corporate governance issues at accounting firms.

This month, we publish the results of our annual derivatives end-user survey, the most competitive since its launch in 2000. Global investment banks have traditionally topped the poll, and this year is no exception. However, some domestic regional banks scored impressively, with some ranking ahead of the multinationals in certain categories. Many thanks to all those who participated.