TOKYO—Frustrated by the impact of currency fluctuations on its earnings, Japan Tobacco is pushing to improve its disclosure methods through the use of new global accounting standards as it increasingly focuses on overseas markets. “We score better than our rivals in terms of the dollar and local currencies…but it looks like a considerable minus in yen terms,” said Chief Financial Officer Hideki Miyazaki in a recent interview with Dow Jones Newswires.
The company, the world’s third-largest cigarette maker after Philip Morris International Inc. and British American Tobacco PLC, plans to use International Financial Reporting Standards, or IFRS, from the fiscal year ending March 2012 to better account for the more than half of its revenue that comes from its overseas operations in more than 120 countries.
The move “would be a good chance for us to improve our disclosure to fit investors’ perspectives,” said Mr. Miyazaki.
The company, also known as JT, is one of a small group of listed Japanese firms that have set specific timetables for reporting earnings under IFRS standards voluntarily. But with Japan set to make a call in 2012 on whether to make IFRS compulsory, the tobacco company could become a trailblazer for other Japanese companies in new accounting methods.
With a shrinking population and stagnant growth at home, Japanese companies are increasingly expanding into emerging markets in Asia and other regions to secure future earnings growth. But with the yen at near-record highs against the dollar, such an increased focus on cross-border business can distort earnings when repatriated into yen.
JT’s overseas tobacco unit JT International uses the U.S. dollar when booking overseas sales, requiring conversion from local currencies into the U.S. unit. The parent company then converts those dollar sales into yen.
“When talking about currency risk, translation makes up a considerable part of that,” Mr. Miyazaki said.
JT’s $15 billion acquisition of Gallaher Group PLC of the U.K. in 2007—the biggest-ever foreign acquisition by a Japanese company—extended its reach in Europe and other regions, including Russia. Since the deal, the ruble and the U.K. pound have weakened about 20% against the dollar, while the yen has strengthened about 30% against the U.S. currency.
JT said that a 1% weakening in the dollar against local currencies (outside Japan) improves its earnings before interest, tax, depreciation and amortization from its overseas tobacco operations by $40 million, with the rouble contributing around 45% to that amount. The next largest contributors would be the British pound, the Taiwanese dollar, the Turkish lira and the euro, the company said.
But once those profits are repatriated into the Japanese currency, the company said that every one-yen fall in the dollar pulls down its Ebitda by 3 billion yen.
To minimize currency risk, JT buys hedging contracts for transactions of goods such as leaf tobacco and packaging materials, and also tries to take out loans denominated in the currencies of countries where it can expect potential future growth.
Even so, JT last year revised downward by 5%, or 16 billion yen, its overseas tobacco business Ebitda for the full fiscal year, reflecting a weaker euro and ruble than originally anticipated against the dollar and a stronger-than-expected yen.
The increased focus on overseas markets among Japanese firms has led to calls for those firms to adopt accounting standards that are in line with firms in other countries. European authorities have complained that international investors might be thrown off when assessing Japanese corporate earnings results due to different methods for calculating the assets of acquisitions.
A recent survey by the Tokyo Stock Exchange showed that 20% of the listed companies polled expressed concern that a lack of IFRS standards in Japan could affect the management of global operations for Japanese companies, while 37% were worried that failure to sign up to the standards could prevent inflows of investment funds into Japan.
But the survey also showed that less than 10 companies are planning to release IFRS-based results by 2012, when Japan is set to determine whether to make IFRS standards mandatory. If the Japanese authorities decide to make the standards mandatory, there will be a preparatory period of at least three years before adoption.
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