1. Financial Reporting in Japan
Chapter 12
Financial Reporting in Japan

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

3. 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

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

5. 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

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

7. 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.

8. 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

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

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

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

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

13. 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)

14. 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

15. Differences in accounting practice

16. 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

17. 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

18. 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

19. 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.

20. 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.