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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 Financial Reporting in Japan
Accounting in JapanDeveloped 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 Business Advisory Deliberations Council PRIVATE SECTOR IASC JICPA OTHERS KEY: Direct control Influence Japan- Accounting Regulation
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
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.