Accounting System in Japan

Cultural Influence on Accounting

First and foremost, to understand the principles of Japanese accounting one should know its background and culture in which it exists. Basically, accounting in Japan reflects not only national culture, but external influence (Germany, U.S.) as well. The way Japanese do business represents its collectivistic culture. Take, for instance, Keiretsu, a form of conglomerates having a control over a top hundred firms in Japan through cross-corporate ownership. Actually, around 70% of shares of listed Japanese companies are in cross-ownership of corporate shareholders. What is more, the company’s earnings are considered as a sum that may be distributed between shareholders, but not as a measure of corporate achievements.

Accounting Focus and Main Providers of Finance

Financial reporting system in Japan is influenced by the means of financing and is highly oriented on providers of capital. The main sources of finance for companies are bank credits and cross-corporate ownership. Moreover, banks usually have control over the lion's share of companies’ equity capital and, therefore, the access to their financial statements. Thus, companies are not forced by their main financial providers to disclose information publicly and the level of disclosure information of Japanese companies is relatively low.

Accounting profession

The beginning of an accountant profession as it is now in Japan started in 1948 with the foundation of Japanese Institute of Certified Public Accountants (JICPA). As it was previously stated, the cultural value of collectivism makes all the members of accounting profession bear a title of Certified Public Accountant, therefore emphasising his belonging to this special professional group. The profession of a Public Accountant has a rather low status within Japanese society; the number of CPAs on high managerial positions is minor. It’s remarkable, that Japan has only about 15,000 CPAs with population 127.2 million (0,1 accountants per 1000 inhabitants), compared to about 250,000 in the United States with population 307.2 million (0,8 accountants per 1000 inhabitants). To become an accountant one must pass some examinations where the pass level is relatively low and take a two-year internship.

Legal System And Accounting Regulation

Japanese accounting and financial reporting are subject to three main laws: the Commercial Code, the Securities and Exchange Law (SEL), and the Corporate Income Tax Law. These three main laws are interrelated and form a so-called Triangular Legal System.

The Commercial Code was developed by the Ministry of Justice in Japan and has its roots in German Commercial Code. Basically, all Japanese joint stock corporations (kabushiki kaisha) have to prepare an annual report each year that includes the following:

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