Financial Reporting in Japan Chapter 12 Financial Reporting in Japan

Accounting in Japan Developed Countries. Historically operated a single entry system English influence on practice, and German influence on statutory law.

Japan- Accounting Regulation PUBLIC SECTOR PRIVATE SECTOR KEY: Direct control Influence DIET OTHERS IASC JICPA BADC TAX DIV. M.O. FINANCE JUSTICE Business Advisory Deliberations Council

Sources of Regulation - JAPAN “Triangular System” Commercial code, ministry of justice All cos, creditor protection Statutory audit (focus on fraud)

Sources of Regulation - JAPAN Securities & exchange law, M.O.F. Listed cos, investor orientated Independent audit M.O.F. Ordinances B.A.D.C. Standards Corporate tax law

Regulation in Japan The Government plays a prominent role Diet prescribes acceptable accounting principles. Published Accounts must follow the Japanese Commercial Code

Regulation in Japan Listed company accounts lodged with Securities Division of the Ministry of Finance and follow the Securities and Exchange Law. The Diet provides through the Business Advisory Deliberations Council (BADC), All Japanese corporations file income tax returns with the Taxation Division of the Ministry of Finance.

BADC Accounting Principles General principles - True and Fair View; Orderly Bookkeeping; Distinction between Capital and Earnings; Fair Presentation; Continuity; Conservatism; Consistency Emphasis on profit measurement Strong adherence to historic costs

Accounting Characteristics - JAPAN Contribute to national economy Conformity with tax treatment Little demand for disclosure

Accounting Characteristics - JAPAN Conservatism, income smoothing Multiple accounts: Per commercial code Per SEL English language version V. Slow development of standards

Development of Group Accounts - JAPAN 1965 - Diet request change 1966 - BADC exposure draft 1975 - BADC standard 1976 - Ordinance consolidations, from 1/4/77 may excl subsid’s < 10% group assets & sales

Development of Group Accounts - JAPAN 1981 - Ordinance equity acctg, from 1/4/83 may excl subsid’s < 10% group assets, sales & income equity acctg for assoc’s 1997 - BADC standard may excl subsid’s < 3-5 % subsid defined by control as well as ownership

Important accounting standards set after the mid 1990s Consolidated Financial Statements(1997) Research and Development (1998) Postretirement Employee Benefits (1998) Income Tax (1998) Foreign Currency Translation (1999) Financial Instruments (1999) Impairment of Fixed Assets (2002) Treasury Stock and Compulsory Reserves (2002)

Accounting regulation in the last decade More accounting standards established Changes in accounting standard setting process New auditing standards (2002) Reconciliation of domestic standards with IAS (IFRS) Recognition of accounting as an infrastructure of market-oriented economy Private standard setting organization: ASBJ

Differences in accounting practice

Reasons for differences in profitability and risk ratios between Japanese and US Companies Differences in accounting The role of the Keiretsu Attitudes to and availability of debt Stock ownership

Keiretsus Each keiretsu typically comprises firms in eight or ten different industries. The companies usually hold stock in each other (25% to 30%) The object is not control or influence but operating links Each keiretsu normally includes a bank

Stock Ownership One third of Japanese companies shares is owned by the members of the keiretsu One third is held by banks and other financial institutions outside the keiretsu One third is held by other individuals

Why Are We Considering Japan and America? The Japanese economy has been in recession since the 1990’s. doubts have emerged concerning “Japanese-style management. while the Japanees economy has stagnated, companies in the U.S., and other Anglo-Saxon countries have significantly increased their earnings.

Why Are We Considering Japan and America? a paradigm shift from so-called “Japanese-style management” to “Anglo-Saxon-style management,” a style of management that maximizes shareholder value. in light of Enron and World Com, Japanese management have pointed out that there are significant problems with American-style management.