D-POPS GROUP is a community of enterprises that combine “real business, technology, and group synergy” in their operations, aiming to realize a Venture Ecosystem that remains essential to society even 100 years from now. To ensure the growth of this ecosystem, we are driving five fundamental strategies: organic growth of existing businesses, establishment of new businesses and companies, M&A, CVC (corporate venture capital), and “Strategic Capital and Business Alliances”.
This article will address the accounting topic of goodwill, which is closely related to M&A, especially given recent discussion about how to account for goodwill in Japan. Specifically, we will discuss the possibility of non-amortization of goodwill.
Regarding goodwill, a request entitled “Introduction of Non-Amortization of Goodwill and Change in Classification of Goodwill Amortization Expense” (page in Japanese only) was submitted to the Accounting Standards Board of Japan (ASBJ), the body responsible for setting Japanese accounting standards, on May 30, 2025. This request was jointly submitted by the Japan Association of Corporate Executives and 13 startup-related organizations, and was voluntarily backed by 35 startup companies, and 138 corporate executives. The Council for Regulatory Reform, an advisory body to the Japanese Prime Minister, has also publicly stated that it will monitor this issue and closely watch the deliberation process at the ASBJ to ensure that the concerns of startup stakeholders are fully considered and appropriate discussions take place. This development was also reported by the Nikkei newspaper under the headline, 13 private-sector organizations and others propose review of goodwill amortization to accounting standards body.
1. Summary of the Request to the ASBJ
The key points of the request submitted are as follows:
① To introduce non-amortization of goodwill as an option
They proposed the adoption of an optional system that permits non-amortization of goodwill alongside the current amortization method. (They requested that at the latest, a measure be implemented by the end of FY2027, the final year of the “5-Year Startup Development Plan”.)
② To change the classification of goodwill amortization expenses
They also proposed a reclassification of the goodwill amortization expense, currently recognized as an operating expense (selling, general, and administrative expenses), to non-operating expenses or extraordinary losses.
(Part of their request included their hopes for a measure to be enacted in FY2026.)
2. Definition and Treatment of Goodwill in Current Japanese Accounting Standards
Under current Japanese accounting standards, the portion of an M&A’s financial amount which exceeds the net assets of the acquired company is recorded as goodwill (an intangible asset) and is systematically amortized over a period within its estimated useful life, not exceeding 20 years. For example, if a target company with ¥300 million in net assets is acquired for ¥1 billion, ¥700 million is recorded as goodwill. If the recovery period is estimated to be 7 years, this ¥700 million in goodwill would be expensed (amortized) by ¥100 million annually on a straight-line basis over the 7 years.
In contrast, IFRS (International Financial Reporting Standards) and GAAP (the United States’ Generally Accepted Accounting Principles) do not require systematic amortization of goodwill. Instead, they adopt an impairment-only approach, where goodwill is tested and written down only when its value is impaired. This is the “non-amortization of goodwill” approach mentioned in the above request. Impairment is the process of expensing an asset when its profitability declines and the recovery of the investment amount is no longer expected, writing down the asset to its reliably recoverable amount. In the earlier example, if the ¥700 million intangible asset was recorded but the acquired company continually reported losses with no prospect of recovery, the value would be considered impaired (i.e., the investment is unrecoverable), and the entire ¥700 million would be expensed at once.
Japan’s accounting standards have consistently aimed for convergence with IFRS to improve the transparency and comparability of corporate financial reporting. However, the accounting treatment of goodwill remains a point of difference. As a result, many public companies that are actively pursuing M&A have transitioned to IFRS due to this specific discrepancy. While adopting IFRS incurs additional costs, such as introducing accounting consulting and increased audit fees, some listed companies have determined the benefits outweigh these costs.
3. Background of the Submitted Request
The Japanese government formulated the “5-Year Startup Development Plan” in 2022. In this plan, M&A is highlighted not only as an exit strategy for startups but also as a crucial measure for promoting open innovation with existing large corporations (M&A for Startup Growth).
The recently submitted request is rooted in the idea that the amortization of goodwill under Japanese accounting standards obstructs the promotion of M&A for startup growth. Specifically, when goodwill is amortized, it is recorded as an operating expense (selling, general, and administrative expenses), which reduces operating profit by the amount of the amortization charge. This added pressure on operating profit is cited as a hindrance or reason for companies to abandon M&A considerations.
For startups, the net asset value often represents a small fraction of the enterprise value (M&A price), resulting in relatively large goodwill amounts. Furthermore, for many growing companies in Japan, most of the core competencies that are their greatest source of enterprise value are human capital (employee knowledge, skills, and experience) and intellectual capital (patents, trademarks, and corporate know-how). This trend is even stronger among startups, and it’s only expected to accelerate with the rapid increase in AI-focused startups.
While human and intellectual capital are extremely important sources of corporate value, Japan’s current accounting standards make it almost impossible to properly capitalize on these “internally generated” intangible assets. The reasons cited include the difficulty of objectively measuring their value and the uncertainty of their contribution to future revenue.
Consequently, there is a growing number of cases where a company with highly valuable human and intellectual capital is given a favorable enterprise value (M&A price) but has a small net asset value from an accounting perspective. This means that M&A deals targeting these companies are extremely likely to generate large amounts of goodwill, and in turn, the acquiring company will almost certainly face pressure on its operating profit due to the amortization of this goodwill.
Operating profit is a crucial indicator of a company’s core earning power and significantly influences corporate value. However, theoretically, the increase or decrease in operating profit due to the amortization or non-amortization of goodwill does not directly affect enterprise value. This is because, in theory, enterprise value is assessed by the future cash flows a company generates, and goodwill amortization is the recording of an operating expense that does not involve a cash outflow, meaning it doesn’t affect the cash flow generated by actual business activities.
The fact that the pressure on operating profit from goodwill amortization still acts as an obstacle or a reason to abandon M&A suggests that operating profit, as a key measure of core earnings, holds significant sway in practical corporate valuation, often transcending theoretical considerations.
This is further suggested by the fact that IFRS is now considering clarifying the definition of “operating profit” and making its presentation mandatory, indicating its importance to investors in practice. Moreover, most IFRS-adopting companies in Japan already show operating profit or a similar item on their income statements.
4. What is Goodwill According to D-POPS GROUP, which Aims to Realize a Venture Ecosystem?
D-POPS GROUP fully understands the merits and drawbacks of both amortization and non-amortization of goodwill in fulfilling its obligation to explain its financial and management status to stakeholders. We support the non-amortization of goodwill, or at least making it an option to do so. As one of our strategies for realizing and growing the Venture Ecosystem, we have actively pursued M&A. However, we feel that the pressure on operating profit caused by goodwill amortization obstructs the accurate explanation of our true management status, including the corporate growth we have achieved.
When goodwill is amortized, the goodwill balance decreases each fiscal year, but the accumulation of net assets is limited due to the pressure on operating profit. Conversely, when goodwill is not amortized, the goodwill balance remains high (unless impairment occurs), resulting in a large total asset balance. Since operating profit is not pressured, the accumulation of net assets accelerates.
In simple terms, the essence of assets on the balance sheet is “what a company currently possesses that forms the basis of its future earning power”. The net asset value, excluding shareholder contributions, represents the “accumulation of profits a company has earned”.
When D-POPS GROUP invites companies into our Venture Ecosystem through M&A, we are confident that they will generate future earnings (i.e., cash flows) that exceed the investment amount, leading to investment recovery. This confidence stems from group synergy created by the conglomerate premium—one of our core strategies—and our goal is for these cash flows to increase year-on-year through business growth within the symbiotic relationships within our Venture Ecosystem.
Therefore, even if the goodwill amount is large, we believe it appropriately reflects the future earning power gained through the M&A investment. Furthermore, the recovery of that investment leading to the accumulation of net assets accurately reflects the accumulation of earned profits. Thus, we believe this treatment is appropriate for explaining the financial status to our stakeholders.
Finally, while D-POPS GROUP sometimes focuses on excellent business models during M&A, we often place a greater emphasis on the capabilities and know-how of leaders who steadily execute superior management strategies. This is connected to the fact that D-POPS GROUP’s Venture Ecosystem emphasizes self-reliance and aims to be a community of independent business owners.
Our ecosystem provides a “conglomerate premium” business environment for managers seeking further self-growth through group synergy. We fundamentally hope these leaders will continue paving the way for their companies’ management and growth even after joining the group.
Companies built by such leaders typically have established highly valuable human and intellectual capital through strategic investments aimed at future revenue expansion and competitive advantage (such as research and development, personnel training, and marketing) by the time they join D-POPS GROUP.
As noted earlier, the essence of an asset is “what a company currently possesses that forms the basis of its future earning power”. Expenses for research and development to create groundbreaking technology or training costs to develop excellent personnel should contribute to future revenue growth. Yet, as mentioned, it is not generally feasible to capitalize on these internally generated intangible assets. In our modern knowledge-intensive society, where intangible assets account for a major part of corporate value, this creates a challenge where a company’s financial statements may not adequately reflect its true value or the reality of its investments.
In this kind of context, we believe that amortizing the goodwill of companies that join our group through M&A is basically like double-expensing. This is because most of that goodwill is essentially equal to the expenses that those group companies previously invested in their own human and intellectual capital—expenses for “future corporate growth investments” that were not able to be calculated as assets. They are only now capitalized as an asset in the form of goodwill through the M&A. This raises the issue that an investment previously treated as an expense is at risk of being expensed again through the amortization of goodwill.
In other words, D-POPS GROUP believes the majority of goodwill is equivalent to human and intellectual capital, and is thus a critical asset that forms the core of our conglomerate premium, driving our mission of realizing a Venture Ecosystem. We aim for this to accelerate group synergy, generating more cash flow within our Ecosystem, which is then reinvested for the Ecosystem’s future growth. This virtuous cycle accelerates innovation and contributes to the future of Japan.
After the revision of the Tokyo Stock Exchange’s Growth Market, M&A has become increasingly vital as a major pillar of growth strategy and a key exit strategy. We will closely monitor the upcoming deliberations by the ASBJ regarding the accounting treatment of goodwill, which is deeply linked to M&A.
We hope you enjoyed this article and look forward to working with you sometime in future.
D-POPS GROUP Advisor
Yoshihiro Yoneya
