Japan to maintain goodwill accounting rule, remaining global outlier

The current Japanese GAAP mandates that goodwill, the premium paid over the fair value of net assets in an acquisition, be expensed over a period of years. This practice has been identified as a significant barrier, particularly for profit-conscious listed companies, as it can substantially reduce reported profits in the years following an acquisition, even when the acquisition is strategically aimed at growth.

However, discussions are progressing toward a potential shift. A proposal to introduce a choice system, allowing companies to opt out of periodic goodwill amortization and instead recognize impairment losses only when the value of goodwill diminishes, is gaining momentum. This approach aligns more closely with International Financial Reporting Standards (IFRS).

The Regulatory Reform Promotion Council and other bodies are aiming to finalize these rule changes within the fiscal year 2026. Initial considerations suggest that the new rules might be introduced first for companies listed on the Prime Market, with a gradual expansion to other companies planned thereafter. The shift is intended to promote more dynamic M&A activity, especially for startups, by removing the perceived accounting disadvantage.