Revision of the Quarterly Disclosure System: The Case of Japan

Abstract

In a report released by the Financial Services Council Disclosure Working Group in June 2022 , the Financial Services Agency (FSA) of Japan announced a policy to abolish the statutory quarterly securities reports and consolidate them into the financial statements of the stock exchanges. Regarding the quarterly disclosure system in Japan, the introduction of quarterly financial statements based on the stock exchange rules has progressed since 2000, then the business community requested that legislation that aimed at unifying accounting and auditing standards be considered. For this reason, the statutory quarterly securities reports based on the Financial Instruments and Exchange Act (FIEA) were introduced in 2006 (enforced in April 2008). When we compare the two systems, we can see that the financial statements of the stock exchanges are quicker, the disclosure content is simplified, and the description format is also easier for investors to understand.

The revision of the quarterly disclosure system was considered a highlight measure by Prime Minister Fumio Kishida when he took office in October 2021. One of the issues in this revision was the "relationship between quarterly disclosure and short-termism". Regarding the impact of quarterly disclosures, many empirical studies have already been conducted in Japan and overseas, and various conflicting ideas have been presented, such as it leading to short-term management, and not being related to short-term management. The FSA report says that "As far as the empirical research so far is concerned, the relationship between quarterly disclosure and short-termism is not always clear" and the report does not consider its influence leading to "short-term management" as the reason for the revision of the quarterly reports.

Another issue is the "consolidation of quarterly reports and financial statements." The timing of disclosures is close and there are many overlaps, which has led to calls for revisions from companies that want to reduce the administrative burden. Regarding this point, the FSA report states that it is possible to reduce costs and improve the efficiency of disclosure by consolidating the two by devising enforcement and that consolidating it into quarterly financial statements could be an appropriate measure. The background for this is that (1) currently, the quarterly financial statements have been more widely used by investors, and (2) consolidating information into quarterly securities reports that are disclosed later may reduce the usefulness and timeliness of the information. Specifically, the following policies have been set out to abolish the statutory quarterly securities report (1st and 3rd quarters) for listed companies and consolidate them into quarterly financial statements based on the rules of stock exchanges.

The author supports this as it is well-balanced, and because the primary aim of this quarterly disclosure revision is to eliminate the duplication of disclosures and improve efficiency by consolidating the financial statements instead of the securities reports . However, the following issues must be considered when consolidating quarterly disclosure reports. (1) Regarding the disclosure reports in the "second quarter", is it necessary to consolidate them into the financial statements or leave the "securities report"? (2) Whether the quarterly financial statements need to be reviewed by a certified accountant. (3) Ensuring means of enforcement against false statements in quarterly financial statements. (4) Disclosure of contents of the consolidated quarterly financial statements.

Based on these issues, in my opinion, it would be appropriate to consolidate into the financial statements in the second quarter as well and require the disclosure of an "extraordinary report" (the same content as the financial statements) with a review by a certified accountant after the financial statements are published in each quarter. Under the current quarterly disclosure system, financial statements are not reviewed by certified accountants, while quarterly securities reports are reviewed. However, if a review is required under the new unified financial statements regime, it will be time-consuming, and the promptness of the financial statements will be impaired. In contrast, if the review is abolished, questions will arise about ensuring the accuracy of the disclosure content. In this regard, I don’t think that the new unified financial statements need to be reviewed in their present form, and instead, an extraordinary report with the same content as the financial statements (corrected if necessary) must be submitted due to the publication of quarterly financial results. If we decide to add a review at the extraordinary report stage, we can resolve the abovementioned dilemma. Furthermore, since the extraordinary report is a disclosure document based on the FIEA, it is possible to ensure legal enforcement measures for false statements.

Regarding the disclosure in the "second quarter", before the introduction of the statutory quarterly disclosure system, listed companies in the Japanese market were obliged to submit a "semi-annual securities report". This time, while abolishing the securities reports for the first and third quarters, there is also an idea of reviving the conventional semi-annual securities report (corresponding to the semi-annual version of the annual securities report). However, according to the abovementioned opinion, the disclosure in the second quarter can also be unified with the financial statements. If a securities report is to be left to the second quarter, it should be in accordance with the current "second quarter securities report" which is subject to review, and not an interim audit. It is important to understand that the way disclosure is done in the second quarter may impose a heavier burden on disclosure practices than the current system and go against the policy objective of improving disclosure efficiency.

Furthermore, regarding “non-financial information," the FSA report has stated that it will add a new entry column in the securities report regarding matters related to corporate sustainability such as climate change risk and human capital. Based on these assumptions, I think that in the future, (1) qualitative non-financial information should be enriched in the annual securities report in principle, and (2) the disclosure content of the quarterly financial statements should focus on the financial situation (quantitative information) as before, (3) we should seek a more flexible disclosure method by timely disclosure. Whether this quarterly disclosure revision works well depends on how well we can address specific issues.

Keywords: Quarterly Disclosure System, Securities Report, Financial Statements, Securities Law (Financial Instruments and Exchange Act), Stock Exchange Rules