Aug. 28 (Bloomberg) -- Japanese companies should be barred from recording income from the sale of cross-shareholdings, said Tatsumi Yamada, a member of the International Accounting Standards Board.

The IASB proposed accounting changes last month that may reduce Japanese companies incentives to hold each other’s shares. Meant to bolster ties, cross-shareholding often leads to the sale of those shares to improve income statements before the financial year ends, only to be bought back at a later date.

“Companies shouldn’t be able to reflect profits and losses on the sale of cross-shareholdings if the purpose of the holdings is to cement a strategic relationship,” Yamada, 56, said in an interview in Tokyo on Aug. 25.

Japan’s publicly listed banks held about 16 trillion yen ($170 billion) of such holdings at the end of June, according to Nomura Securities Co. The country currently doesn’t apply the international financial reporting standards set by the IASB, which aims to simplify the classification of securities to make understanding financial statements easier for investors.

Under the proposed changes, companies would have two choices for accounting for cross-shareholdings. The first option would require them to classify the shares at fair value and record any losses or profits on the income statement.

Alternatively, they could treat the shares as held for strategic purposes. Under this category, any gains or losses would be “other comprehensive income” and excluded from the income statement, according to the proposal. Once companies choose this classification, they would have to stick to the accounting method.

‘May Be Reluctant’

“Banks may be reluctant to use this option because they won’t be able to realize gains by selling those stocks,” said Shinichi Ina, a Tokyo-based analyst at Credit Suisse Group AG. On the other hand, “excluding any losses from the income statement may help stabilize their business performance.”

Yamada said the option of treating shares as separate income is a concession to Japan’s tradition of cross- shareholding. If that choice wasn’t available and any profit or loss were to appear on the income statement, “Japan’s economy probably wouldn’t be able to endure it,” he said.

In Japan, cross-shareholdings are now classified as “available for sale,” letting companies record profits from share sales on their income statement and only account for losses when the share price declines by 50 percent or more.

“This is an opportunity to think about the Japanese practice of cross-shareholdings,” said Yamada, who is one of the 15 members at the London-based IASB.

Voluntary Application

A panel advising Japan’s Financial Services Agency in June recommended allowing companies to voluntarily apply the standards in the current fiscal year, which ends March 2010. The panel said the government should decide whether to make the rules mandatory by around 2012.

The IASB’s proposal also requires companies to present dividends from cross-shareholdings as other comprehensive income, meaning companies won’t be able to count them as part of their net profit.

That “would have a considerable impact on the management of life insurers,” which rely on recording dividends on cross- shareholdings as profits, Yoshio Sato, president of the Life Insurance Association of Japan, said in July.

Katsunori Nagayasu, chairman of the Japanese Bankers Association, also voiced concern about the proposals for accounting for cross-shareholdings.

“There are still many aspects we need to study,” he said last month.

The IASB has acknowledged resistance to the idea of excluding dividends from income statements and the board may consider reviewing the draft after hearing more comments from Japan, Yamada said.

Bonds will also be reclassified under the IASB’s proposal, either at fair value or amortized cost.

The IASB is asking for public comment on the proposed rule changes until Sept. 14. The new rules are expected to be set by the end of the year.

To contact the reporter on this story: Keiko Ujikane in Tokyo at kujikane@bloomberg.net

Last Updated: August 27, 2009 21:02 EDT