The national government has a substantial
influence on accounting in Japan. Accounting legislation is based on three laws:
the organization Law, the Securities as well as Exchange Law, and the Company Income Tax
Law. These 3 laws are linked as well as interact with each other. A leading Japoneses
scholar refers to the situation like a “triangular legal system.”The Company Law is administered by the Ministry of Justice (MOJ). Developed from
German commercial law, the original code was enacted in 1890 but not implemented until
1899.
Creditor and shareholder protection is its fundamental principle, with an unequivocal
reliance on historical cost measurements. Disclosures on creditworthiness and also the
availability of earnings for results distribution are of main importance. All companies
integrated under the Company Law have to meet its accounting provisions.Publicly owned companies must meet the further requirements of the Securities and
Exchange Law (SEL), administered by the Financial Services Agency (FSA). The SEL is
modeled after the U.S. Securities Acts and had been imposed on Japan through the United States
during the U.Utes. occupation following World War II. The primary objective of the SEL is to
supply information for investment decision-making. Even though SEL requires the
same basic financial statements because the Company Law, the lingo, form, and content
associated with financial statements are more precisely defined underneath the SEL; certain financial statement
merchandise is reclassified for presentation, and additional fine detail is provided. Net income
and shareholders’ equity are, however, the same under the Company Law and the SEL.
Until recently, a special advisory body to the FSA was responsible for developing
accounting standards under the SEL. Called the Business Accounting Deliberation
Council (BADC), and now the Business Accounting Council (BAC), it was arguably
the major source of generally accepted accounting principles in Japan. However, a
major change in accounting standard setting occurred in 2001 with the establishment
of the Accounting Standards Board of Japan (ASBJ) and its related oversight foundation,
the Financial Accounting Standards Foundation (FASF). The ASBJ now has sole
responsibility for developing accounting standards and implementation guidance in
Japan. It has 15 members, four of whom are full-time. It also has a full-time technical
staff to support its activities. The FASF is responsible for funding and naming its
members. Funding comes from companies and also the accounting profession, not the
government. As an independent private-sector organization, the actual ASBJ is stronger and
much more transparent than the BAC, as well as subject to fewer political as well as special-interest
pressures. The ASBJ works with the IASB in developing IFRS as well as in 2005
launched a joint task with the IASB to reduce differences in between Japanese
accounting standards and IFRS. The actual so-called Tokyo Agreement between the ASBJ
as well as IASB, announced in 2008, focuses on 2011 as the date with regard to full convergence between the 2 sets of standards. The BAC still advises the FSA on accounting matters. As
discussed later, the BAC is responsible for establishing auditing standards. Japanese
accounting standards cannot be at variance with commercial law (or tax law, as
discussed next). Thus, the triangulation of accounting standards, company law, and
tax law is still a feature of Japanese financial reporting.
Finally, the influence of the tax code is important. As in France, Germany, and
elsewhere, expenses can be claimed for tax purposes only if they are fully booked.
Taxable income is based on the amount calculated under the Company Law.
Under the Company Law, the financial statements as well as supporting schedules of little
and medium-sized companies are susceptible to audit only by legal auditors. Both statutory
and impartial auditors must audit large companies. Independent auditors must audit
financial statements associated with publicly held companies according to the Securities and
Trade Law. Statutory auditors do not need any kind of particular professional qualification as well as
are employed by the company on a full-time foundation. Statutory audits focus mainly around the
managerial actions of the company directors and whether they perform their own duties in compliance
along with legal statutes. Independent audits include examining the financial statements and
information, and must be performed by certified public accountants (CPAs).The Japanese Institute of Certified Public Accountants (JICPA) is the professional
organization of CPAs in Japan. All CPAs must belong to the JICPA. In addition to
providing guidance on the conduct of audits, the JICPA publishes implementation
guidelines on accounting matters, and provides input to the ASBJ within developing
accounting standards. Generally recognized auditing standards are promulgated by the
Blood alcohol content rather than the JICPA. The Certified Public Accountant as well as Auditing Oversight
Board was set up in 2003. A federal government agency, it is designed to keep track of and
oversee the auditing occupation and improve the quality associated with Japanese audits. It was put
underneath the FSA in 2004.
