Japanese accounting and financial reporting reflect a mixture of domestic as well as international
influences. Two individual government agencies have responsibility with regard to accounting
regulations, and there is the additional influence of Japanese company income tax law. In the
very first half of the 20th century, accounting considering reflected German influences; within the
second half, U.S. suggestions were pervasive. More recently, the results of the International
Accounting Standards Panel have been felt, and in Mid 2001 a profound change happened with
the establishment of the private-sector accounting standard setting organization.
To understand Japanese accounting, one must understand Japanese culture, business
practices, and history.
Japan is a traditional society with strong cultural and religious
roots. The group consciousness and interdependence within personal and corporate
associations in Japan contrast using the independent, arm’s-length relationships among
people and groups in Traditional western nations. Japanese companies maintain equity interests in
one another, and often jointly own additional firms. These interlocking opportunities yield
giant industrial conglomerates-notably the actual keiretsu. Banks are often a part of these types of
industrial groups. The prevalent use of bank credit as well as debt capital to finance big
enterprises is unusually excellent from a Western perspective, as well as corporate managers
must mainly answer to banks and other banking institutions rather than shareholders.Central government also exerts tight control on many activities in Japan, which means
a strong bureaucratic control over business affairs, including accounting. Knowledge of
corporate activities is primarily limited to the corporation and other insiders, such as
the banks and the government.
This keiretsu business model is being transformed as the Japanese undertake structural
reforms to counteract the economic stagnation that occurred in the 1990s. The
financial crisis that followed the actual bursting of Japan’s “bubble economy” also motivated a
review of Japanese financial reporting requirements. It became clear that lots of accounting
practices hid how terribly Japanese companies were doing.
For example:
- Loose consolidation standards allowed Japanese companies to bury loss-making operations in affiliates. Investors could not see whether a company’s entire operations were really profitable.
- Pension and severance obligations were only accrued to 40 percent of the amount owed because that was the limit of their tax deductibility. This practice led to substantial underfunding of pension obligations.
- Securities holdings were valued at cost, not market prices. Designed to reinforce the cohesion of the keiretsu, these cross-holdings are vast. Companies held on to the ones with losses, but sold those with gains to prop up sagging profits.
An accounting “Big Bang” was announced within the late 1990s to make the economical
health of Japanese businesses more transparent and to provide Japan more in line with
worldwide standards. These accounting reforms tend to be described later.
