Japan as an accounting jurisdiction is characterized by the dominance of the state (Haller and Raffournier, 2003). The accounting rules have been set out in the past fifty years as statute law with an implicit objective that accounting should contribute to the growth of the national economy (Haller and Raffournier, 2003). Until recently, the accounting profession had played a minor role in shaping accounting practices, and he accounting profession and auditing practice was created by law after World War II as a discipline needed to reactivate the securities market in Japan (Haller and Raffournier, 2003).
Going back in time would show that industrialization of Japan began in 1868 after the Meiji Restoration (Nobes and Parker, 2004). In 1890 and 1899, the first Commercial Code was established based on a Franco-German model and oriented towards creditors and tax collection (Nobes and Parker, 2004). A deeper look at Japan's accounting and financial reporting reflects a mixture of a number of domestic and international influences (Choi et al., 1992), with the first half of the twentieth century having the accounting thinking drawing influences from France and Germany (Lawrence, 1996), and the second half from the United States, that emphasizes on shareholder information (US) (Choi et al., 1999).
Because Japanese accounting system bents more to tax influences, it is classified as the uniform accounting approach (Choi et al., 1992). In addition, following the Hofstede and Gray's framework would put Japan under the conservatism or masculinity cultural classification (Choi et al., 1992). However, it is widely known that Japan's accounting system differs significantly from other national systems; therefore this paper is to discuss the factors for the differences and to consider whether the Japanese system will have any influence on international accounting in the future.
Legal System and Standard Setting
In terms of legal and institutional basis of accounting, the national government has the most significant influence on accounting in Japan (Arai and Shiratori, 1991 cited from Nobes and Parker, 2004). There are three main sources of regulation, all imposed by the government and administered by two separate ministries (Lawrence, 1996).
The Ministry of Justice (MoJ) is responsible for the Commercial Code; the Ministry of Finance (MoF) is responsible fro the Securities and Exchange Law, the tax law and regulations and the Business Accounting Deliberation Council, which is the body that publishes financial accounting standards (Lawrence, 1996). The legal framework is better illustrated below.
Adopted from Lawrence (1996)
The Commercial Code was enacted in 1899 and it deals with limited liability companies (Kabushiki Kaisha), such as incorporation procedures, issuance of shares, and duties and responsibilities of directors and statutory auditors (Haller and Raffournier, 2003). The code sets the legal framework of accounting in Japan and is in the centre of the triangular legal system, and given its generality, coupled with an implicit and persistent belief in Japan that accounting should eventually contribute to the development of the national economy as a whole (Haller and Raffournier, 2003).
The Japanese accounting profession is divided into two groups that provide services to third parties. One is the licensed tax practitioner (Zeirishi) and the other is the certified public accountant (Konin Kaikeishi) (Haller and Raffournier, 2003). Tax practitioners are individuals who have passed the required examinations or obtained through some other way (i.e. working as a tax agent of the Japanese Tax Administration for a certain number of years), and who are registered with the appropriate regional Certified Public Tax Accountants Associations (Haller and Raffournier, 2003).
They principally provide tax compliance and consulting services, which also includes bookkeeping and preparation of accounts (Haller and Raffournier, 2003). The certified public accountant is a registered member of the Japanese Institute of Certified Public Accountants (JICPA) (Nobes and Parker, 2004). In order to be a certified public accountant, one must pass three levels of examination (Nobes and Parker, 2004). University and college graduates are exempted from the preliminary CPA examination.
The intermediate examination includes economics, bookkeeping, financial accounting, cost accounting, the Commercial Code, business administration and auditing theory (Nobes and Parker, 2004). Those that pass are referred to as junior CPAs' and they must undergo three years of apprenticeship before sitting the final test of technical competence, and submit a thesis and the passing rate is known to be low (Nobes and Parker, 2004).
Financial Reporting in Japan
Business accounting in Japan mentions seven qualitative characteristics such as truthfulness of reporting, understandability, consistency of application and conservatism in general terms (Haller and Raffournier, 2003). The income statement is generally governed by the accrual basis of accounting, the realization principle and the matching of revenue with expenses (Haller and Raffournier, 2003).
Financial reporting under the Securities and Exchange Law requires an annual securities report (Yukashoken Hokokusyo) from all publicly held Japanese companies. The report is filed with the MoF, and submitted to all stock exchanges the securities are listed and available to the public (Haller and Raffournier, 2003). In addition, the Commercial Code also requires a statutory report from all companies (Choi et al., 1999).
The statutory report will consist of:
Proposal for appropriation of retained earnings
In addition to the statutory report, all companies with shares more than ¥500 million or when liabilities are ¥20000 million or more will be required to have their business report, including those items in the descriptive sections which relate to the accounting records audited by independent accountants (Haller and Raffournier, 2003). To give a better view of how Japanese accounting standards may differ from the International Accounting Standards (IAS) and International Financial Reporting Standards (IFRSs), please refer to the appendix.
Factors That Contribute the Difference Between the Japanese Accounting System and Other Countries' Accounting System Looking at the brief outline of the Japanese accounting system, it can be drawn that the main factors that contribute the difference between the Japanese accounting system and other countries stems from the mix cultural influence from the Franco-German model in the early stages and the United States after the World War II (Nobes and Parker, 2004), which effectively made the accounting system difficult to classify whether it was more of a tax based accounting system or otherwise.
In addition, the Japanese accounting standard setting bodies are controlled solely by the Diet, unlike many other countries that have a separate accounting entity that is not bounded by the government like the United States' Financial Accounting Standrads Board (FASB), Malaysia's Malaysian Accounting Standards Board (MASB) or the United Kingdom's Accounting Standards Board (ASB) (Haller and Raffournier, 2003). Due to the bounded relationship the standard setting process would favor the government's objective more (Lawrence, 1996).
In addition, much changes to fit the international arena has been contributed by the existence of a nationalistic culture that has prevented changes, therefore further causing the differences between other nations' accounting system (Lawrence, 1996).
Influences the Japanese system will have on international accounting in the future Moving on from the factors causing the differences between the Japanese accounting system and other nations, Japanese system may not have much influence on international accounting. This is because, to date the Japanese government has already made much reform to bring them closer to the International Financial Reporting Standards (IFRS) and The BADC has launched a major project to do just that (Haller and Raffournier, 2003).
Many new standards have been issued and the older ones have been revised, and by 2002 only few differences could be identified from the IAS (Haller and Raffournier, 2003). Further efforts have been made by the Diet, which is still in progress to transfer the standards-setting responsibility from the government to the private sector and to function independently under a foundation which is financed primarily by contributions from listed and over-the-counter companies, to create a more transparent standard-setting process, independent and responsive to the changing environment in financial reporting (Haller and Raffournier, 2003).
Therefore, it can be concluded that the Japanese accounting system will not have much influence on international accounting in the future but, more of the harmonization of international accounting will influence the Japanese accounting system promoting more changes to the system with the advent of IFRSs.
Lawrence, S. 1996, International Accounting, 1st ed., London, International Thomson Business Press.
Nobes, C. and Parker, R. 2004, Comparative International Accounting, 8th ed., New Jersey, FT Prentice Hall.
Frederick, D. S. C. and Mueller, G. G., 1992, International Accounting, 2nd ed., New Jersey, Prentice Hall.
Frederick, D. S. C., Frost, C. A. and Meek, G. K., 1999, International Accounting 3rd ed., New Jersey, Prentice Hall.
Haller, A. and Raffournier, B., 2003, International Accounting, 2nd ed., London, International Thomson Business Press.
Japanese Institute of Certified Public Accountants, 2006, ?History of Accounting and Auditing System in Japan', online, date accessed 18th February 2006. Available from: http://www.jicpa.or.jp/n_eng/e-history.html/