Industry

In the real estate industry, major challenges include the increasing number of vacant houses and land due to the declining birthrate, aging population, and overall population decrease, as well as the aging of commercial facilities and office buildings, and the soaring costs of construction materials and labor. On the other hand, urban real estate continues to see price increases due to its convenience and investment potential. Furthermore, the advancement of digitalization, enabling teleworking and online shopping, is changing people's lifestyles and significantly altering the role of real estate.

In this changing environment, the real estate industry faces the urgent challenge of providing highly convenient properties that go beyond just location and accessibility, and offering high-quality properties while minimizing costs amidst rising construction material and labor costs, all in order to ensure a rich living environment. From a broader perspective, it is also expected that the industry will attract resources from both domestic and international sources to support the country's sustainable growth and foster the creation of value and innovation.

• Inventory Valuation
  Due to significant changes in the industry environment and large price fluctuations in some areas, valuing the value of owned real estate is crucial.
• Revenue Recognition
  In the case of complex real estate transactions, such as real estate securitization or sale-and-leaseback arrangements, careful consideration is required when determining the timing of revenue recognition.
• Impairment of Fixed Assets
  When operating multiple business locations, real estate market conditions in each area significantly impact the impairment assessment of tangible fixed assets such as land and buildings at each location.

The food and beverage industry faced a difficult situation due to the business closure requests during the COVID-19 pandemic. However, with the reclassification of COVID-19 to Category 5 under the Infectious Disease Control Law in May 2023, restrictions on movement were eased and then lifted, marking a transition to the post-COVID era. The industry as a whole is on a recovery trend due to the return of foot traffic and the expansion of inbound tourism. However, this recovery is largely due to an increase in average customer spending, and it is estimated that the number of customers has not yet recovered to pre-COVID levels.

Furthermore, many negative factors are seen in terms of costs, such as rising prices due to increased logistics costs, chronic labor shortages, soaring labor costs, and increased costs for implementing reservation, ordering, serving, and payment systems. The environment surrounding the food and beverage industry remains challenging, and the number of bankruptcies has reached a record high. On the other hand, the high number of bankruptcies also means that there are more locations available for new store openings, and it is expected that the increase in new store openings will accelerate in the future.

• Impairment of Fixed Assets
  Due to significant environmental changes and the ebb and flow of business trends, particularly in multi-store operations where some stores may not be sufficiently profitable, careful impairment considerations are required.
• Lease Accounting Standards and Asset Retirement Obligations
  Multi-store operations often rely more on lease agreements than on self-owned real estate, and are therefore expected to be significantly affected by the new lease accounting standards. Furthermore, estimates of restoration costs upon vacating premises are also affected by inflation, necessitating a timely review of the amount of asset retirement obligations recorded.
• Systematization and Strengthening of Internal Controls
  Because many stores handle cash, small-scale fraud tends to be higher than in other industries. Systematization and strengthening of control activities to prevent fraud are necessary.

Accommodation-related spending is recovering, exceeding pre-COVID-19 levels. According to the Japan Tourism Agency's "Travel and Tourism Consumption Trends Survey," domestic travel accommodation spending in 2023 reached 3,911.2 billion yen, 120% of the pre-COVID-19 level in 2019. Adding inbound tourism demand based on the breakdown of total overnight stays in the Japan Tourism Agency's "Accommodation Travel Statistics Survey," the industry is estimated to be worth approximately 5 trillion yen.

In 2020-21, the COVID-19 pandemic caused a near-complete disappearance of inbound demand and a significant contraction of domestic travel demand, creating a difficult situation for this industry with high fixed costs. However, since 2022, it has begun to recover, driven by factors such as the easing of restrictions on movement and entry. In 2024, the industry continued to perform well, following the increase in inbound demand in 2023. Despite rising costs due to soaring utility and linen expenses, accommodation prices are trending upward due to expanding demand.

Source: Japan Tourism Agency, "Travel and Tourism Trends Survey," 2023 Annual Summary Table (Final Report)

• Revenue Recognition (Checkout Basis)
  For long-term stays, accommodation fees are generally received at check-in. Therefore, if revenue for the entire period is recorded at the time of cash receipt, adjustments for unpaid accommodation fees must be made at the end of the period.
• Revenue Recognition (Points)
  When awarding accommodation points to customer members, care must be taken when measuring revenue recognition.
• Lease Accounting
  If the company does not own the land or property of the hotel and operates it based on a lease agreement, consideration must be taken in light of lease accounting standards and accounting standards for asset retirement obligations.
• Impairment of Fixed Assets
  When applying impairment accounting, each hotel location is usually the grouping unit, so the consideration becomes complex and audit risk increases when operating multiple locations.
• Commissions Paid to Travel Agencies
  With the increase in accommodation bookings via online travel agencies (OTAs), the amount of commissions paid is on the rise. Since OTA invoices are calculated based on actual bookings and stays, there may be delays in sending invoices, and care must be taken regarding the period attribution of expenses.

Information and communication technologies, and the communication infrastructure that supports them, are indispensable to daily life and have become so deeply ingrained that they can be considered essential infrastructure for society, just like electricity, water, gas, roads, and public transportation.

In recent years, the information and communication industry has seen continuous market growth and significant transformation due to the development of new technologies (AI, IoT, DX, etc.) and the acceleration of mobile communication systems (5G). These technologies are being utilized in a wide range of industries and sectors, and with the acceleration of digitalization due to the COVID-19 pandemic, new business models are emerging one after another, such as the fusion of the real and digital worlds. Coupled with the IT introduction subsidy system, it is expected that technological innovation will continue to advance in the future.

On the other hand, with the increasing complexity of systems due to the advancement of IT use in corporate activities, and especially with the diversification of work styles due to the spread of telework since the COVID-19 pandemic, cybersecurity incidents are also continuously increasing.

• Revenue Recognition
  Transactions based on new technologies and services require careful consideration of revenue recognition.
• Software Accounting
  The classification of research and development expenses and software, and the valuation of software, have a significant impact on performance and require careful consideration.
• Goodwill Valuation
  When a company acquisition is carried out as part of a business strategy, careful consideration of goodwill valuation is necessary.
• Cost Accounting System
  As a basis for compiling profitability management by service and software production costs, evaluating the development and operation of internal controls related to cost accounting is important.
• Unusual Transactions
  Due to the characteristics of the industry, which often deals with intangible services, attention must be paid to the presence or absence of circular transactions conducted by multiple vendors in collusion.
• Responding to IT Controls
  Given the diversification of IT used in society and the continuing trend of expanding cybersecurity risks, it is necessary to evaluate IT controls in a more technical area.

In the manufacturing sector, operating profits fell sharply during the COVID-19 pandemic in fiscal year 2020, but recovered from fiscal year 2021 onwards, exceeding pre-pandemic levels. However, the recent surge in raw material and energy prices has had a significant impact, and companies are exploring ways to pass on these price increases.

Furthermore, while companies continue to invest domestically, they are also focusing on overseas investments, with overseas sales accounting for over 50% of major companies' total sales. The maturation of the domestic market and the remarkable growth of emerging countries are driving active overseas expansion.

On the other hand, while Japan is recognized as a technologically advanced country, its ability to generate profits will become crucial going forward. With challenges such as carbon neutrality by 2050 and a declining workforce due to factors like a low birth rate, there is a strong demand for a shift to environmentally friendly manufacturing technologies and efficient manufacturing through digital transformation (DX). Manufacturing has been a pillar of Japan's economy, generating the second-largest share of GDP after the service sector, and is expected to continue driving Japan's growth through technological innovation.

Source: Ministry of Economy, Trade and Industry, Manufacturing White Paper 2024, "Current Situation and Challenges Surrounding the Manufacturing Industry, and Future Policy Directions"

• Impairment of Fixed Assets
  If you have made significant capital investments not only domestically but also at overseas locations, it is necessary to carefully consider the identification, grouping, recognition, and measurement of fixed assets for each location.
• Inventory Valuation
  Due to the rapid changes in product trends and the significant price fluctuations caused by price changes, it is necessary to carefully value your inventory.
• Revenue Recognition
  If you sell a variety of products, it is necessary to carefully consider and consistently apply the revenue recognition method for each product.
• Evaluation of Investments and Loans to Affiliated Companies
  If you have subsidiaries overseas or make investments and loans to companies with overseas locations, it is necessary to obtain and evaluate the financial statements of the local subsidiaries in a timely manner.

The construction industry faces challenges such as the normalization of long working hours and declining productivity due to a serious labor shortage. From this perspective, the Construction Industry Act was amended in June 2019 to promote work-style reforms, including correcting long working hours and improving on-site working conditions, as well as improving productivity at construction sites, including the effective utilization of human resources and the efficiency of construction work execution. Furthermore, in response to rising construction material costs, the Ministry of Land, Infrastructure, Transport and Tourism is taking measures such as requesting the implementation of price adjustment clauses (a system that allows for a change in the contract price if wages, price levels, etc., fluctuate after the conclusion of a construction contract and the rate of change exceeds a certain level) and contract modifications.

In recent years, construction investment has been on the rise, and with disaster prevention investments and various large-scale construction projects on the horizon, construction investment is expected to increase further. In addition to improvements in working conditions and on-site productivity, further improvements through the use of AI technology and digital transformation (DX) are expected to support construction investment.

• Estimation of Total Construction Costs
  In the construction industry, revenue recognition is generally measured based on the percentage of actual construction costs incurred relative to the estimated total construction costs. Therefore, evaluating whether the estimate of total construction costs is reasonable is crucial.
• Estimation of Construction Progress (Period Attribution of Construction Costs)
  Construction progress is generally estimated based on the percentage of actual construction costs incurred relative to the estimated total construction costs. Errors in the period attribution of actual construction costs can lead to errors in the estimation of construction progress, making the period attribution of construction costs a crucial point.
• Appropriate Cost Aggregation for Each Project (Cost Allocation)
  When costs from one project are transferred to another, the revenue from the transferred project may be overrecognized, potentially allowing the original project to avoid recording a provision for construction losses. Careful consideration is necessary to ensure that such cost allocations are not occurring.
• Construction Loss Provision
  For construction projects where the estimated total construction cost exceeds the contract amount, it is necessary to examine whether future anticipated construction losses are comprehensively recognized and recorded as a construction loss provision.
• Application of Cost Recovery Standard
  When it is not possible to reasonably estimate the progress of the construction but it is expected that the incurred costs will be recovered, it is necessary to examine whether the cost recovery standard is being appropriately applied.

Land Logistics
While the volume of cargo is increasing due to the globalization of supply chains and the rise of online transactions, the Japanese domestic logistics market is also being negatively impacted by factors such as labor shortages, restrictions on working hours, rising fuel costs, and the contraction of domestic industries, as highlighted by the "2024 Logistics Problem." Therefore, the logistics industry is predicted to experience a mix of growth and stagnation. The total market size for 15 logistics sectors in fiscal year 2022 was 24.3 trillion yen, with projections of 23.4 trillion yen for fiscal year 2023, and 24.2 trillion yen and 24.8 trillion yen for fiscal years 2024 and 2025, respectively, according to some research results*.

Logistics services are becoming more sophisticated and complex, and with shippers demanding a review of their logistics systems and cost reductions, customer needs for 3PL (Third-Party Logistics/comprehensive, proposal-based logistics outsourcing) are increasing. This demands the ability to plan and propose logistics rationalization for shippers. Logistics companies are striving to expand added value by strengthening their 3PL (Third-Party Logistics) businesses and optimizing supply chain management (SCM) through the construction of information platforms connecting manufacturers, distributors, and retailers. Many major players offer a wide variety of logistics services.

*Source: Yano Research Institute Ltd., "Survey on the 15 Logistics Industry Markets (2024)" (Published July 22, 2024)
Note: The market size was calculated based on the sales revenue of businesses including freight charges, storage fees, handling fees, and related service fees, for 15 industries: consolidated freight transport, domestic express delivery, international express delivery, 3PL (Third-Party Logistics) (including delivery agency services), shipping (overseas and domestic), general port transport, air freight transport, forwarding, rail freight transport, rail freight transport, light freight transport (including motorcycle delivery), general warehousing, refrigerated warehousing (including frozen warehousing), moving services, and other businesses. Because the market size was calculated by aggregating the markets of the 15 industries, there is some overlap in the market size. Maritime Logistics
The port transportation business, while experiencing a temporary decrease in cargo handling volume due to the impact of COVID-19, has shown a recovery trend in recent years. While not yet back to pre-COVID levels, the industry as a whole remains relatively stable. Port transportation involves various processes such as port cargo handling, barge transportation, and raft transportation, and general port transportation companies utilize numerous subcontractors. Therefore, managing whether a subcontractor/transaction is subject to the Subcontracting Act is a complex task.

Furthermore, the role of port transportation companies differs between import and export transactions; in the case of export transactions, they also function as maritime freight forwarders.

In the warehousing industry, few companies operate solely as warehousing businesses; most combine warehousing with other logistics services. Warehousing is required to meet diverse needs, including highly efficient delivery, handling small quantities of diverse goods, and customer service. Therefore, efforts are being made to improve profitability by enhancing warehousing functions through automation and the introduction of machinery, thereby reducing manpower.

• Revenue Recognition
  Due to the increasing trend towards building comprehensive logistics systems both inside and outside warehouses, such as 3PL (Third-Party Logistics) businesses, and providing a combination of various services including transportation, storage, handling, and customs services, complex contract forms are becoming more common. Therefore, the importance of considering contract combinations and performance obligations is increasing.
• Lease Accounting
  Companies leasing vehicles or warehouses will be required to comply with the new lease accounting standards scheduled to be implemented from the fiscal year ending March 2028. In particular, for off-balance-sheet lease transactions, the right-of-use assets and lease liabilities will be brought on-balance-sheet, requiring careful consideration of the impact on the balance sheet.
• Asset Retirement Obligations
  If a company leases a warehouse and has an obligation to restore it to its original condition, it is necessary to reasonably estimate and record the amount of the asset retirement obligation. It is also necessary to consider the impact of recent inflation on the amount of asset retirement obligations recorded.
• Impairment of Fixed Assets
  In cases where companies own or lease expensive vehicles such as large trucks or large warehouses, the amount of tangible fixed assets (buildings, vehicles, land, leased assets, etc.) can be substantial. Therefore, careful impairment considerations must be conducted for each asset group, such as logistics and warehousing bases.
• Warehouse Equipment Upgrades
  When upgrading warehouse equipment, it is necessary to carefully examine the breakdown of the upgrade work to determine whether it falls under capital expenditures or revenue expenditures.

Among non-profit organisations, which lack the concepts of shareholders (investors) and profit distribution, this section focuses on school corporations and social welfare corporations, in which our audit firm conducts a significant amount of audit and advisory work.

School Corporations:
Each school corporation is grappling with the challenges posed by the declining birthrate and other factors, while simultaneously undertaking various management efforts such as developing distinctive educational activities and improving operational efficiency through cost reductions. Furthermore, with the revised Private School Law coming into effect in 2025, there is a growing need to promote effective governance reforms that can meet societal demands.

Social Welfare Corporations:
To address the increasing complexity and diversification of welfare needs and changes in local communities, there is a demand for providing comprehensive and integrated welfare services. Additionally, under the Social Welfare Law (revised in 2016), there is a need to strengthen governance within management organisations and improve the transparency of business operations, necessitating efforts to secure personnel to handle service and management tasks.

• Laws and Accounting Standards
  Non-profit organisations are not subject to the same laws and accounting standards as corporations, such as the Companies Act and the Financial Instruments and Exchange Act. Instead, they are subject to laws and accounting standards appropriate to their type of organisation. Therefore, it is crucial to properly understand the accounting procedures and financial statements required for each type of organisation.
• Grants and Subsidies (Insurance) from Public Institutions
  Non-profit organisations, particularly the school corporations and social welfare corporations discussed here, rely on income from public institutions such as subsidies from local governments and caregiving fees from insurance companies (for the operation of elderly care facilities and various care services) to support their operations. Understanding these mechanisms and carefully considering accounting procedures is essential.
• Other Services (Advisory Services)
  Non-profit organisations are required to strengthen governance, especially the establishment and implementation (establishment) of appropriate internal controls, but they often face difficulties in allocating significant personnel to management tasks. Under these circumstances, we receive many requests from non-profit organisations for advisory services aimed at supporting the establishment and implementation of internal controls.

While the advertising and PR industry in Japan experienced a temporary decline in 2020 due to the impact of the COVID-19 pandemic, the market size has been increasing year by year.

In 2024 (January to December 2024), total advertising expenditure in Japan reached 7,673 billion yen, marking a new record high for the third consecutive year. In recent years, the increase in internet advertising, driven by the growing demand for video advertising on social media and connected TVs, has been particularly significant. In 2024, internet advertising expenditure reached 3,651.7 billion yen, accounting for almost half of the market size. Furthermore, advertising expenditure on traditional media such as television, radio, and magazines also increased year-on-year in 2024.

Meanwhile, sales in the PR industry also increased from 111.1 billion yen in fiscal year 2020 to 147.9 billion yen in fiscal year 2022, representing an increase of over 30%. In addition to the steady performance of traditional core businesses such as planning and managing PR events and media relations, video production and promotion services have expanded significantly in recent years.

The advertising and public relations industry in Japan is expected to continue expanding, primarily driven by the internet and social media.

Source: Dentsu Inc., "Total Advertising Expenditures in Japan, 2024"; Japan Public Relations Association, "2023 PR Industry Survey"

• Revenue Recognition (Fulfillment of Performance Obligations)
  Given the diverse types of contracts, such as advertising placement and production, it is necessary to carefully identify performance obligations for each contract and consider whether to recognize revenue at a point in time or over a period of time. Especially when recognizing revenue over a period, accurate budgeting for each transaction is a crucial point.
• Revenue Recognition (Principal/Agent)
  It is necessary to carefully determine whether each transaction is an agent transaction or a principal transaction, and whether to recognize revenue on a net basis or gross basis.
• Goodwill Valuation
  When a company acquisition is carried out as part of a business strategy, it is necessary to carefully consider the valuation of goodwill.
• Establishment of Individual Costing System
  Because profitability differs for each contract, it is necessary to establish an individual costing system and perform work-in-progress valuation using the individual method (including book value reduction due to decreased profitability).