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Chapter 12

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. DIET. PUBLIC SECTOR. M.O. JUSTICE. M.O. FINANCE. TAX DIV. BADC.

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Chapter 12

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  1. Chapter 12 Financial Reporting in Japan

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

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

  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 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

  12. 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

  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.

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