The Necessity of Flow and Internal Aspects in Japan

2345 In accounting, there are two functions to maintain the order of our society. One is the function to provide decision useful information for investors. This is called as operational accounting. The other function is to reconcile interests among stakeholders. This function is called as equity stewardship accounting. There are three main laws regulating accounting systems in Japan: The Corporation Law former name: Commercial Code, The Financial Products Exchange Law former name: Stock and Exchange Law, and The Corporation Tax Law. These laws have their own purpose of preparing financial statements financial reporting. The main purpose of Financial Products Exchange Law is to provide decision useful information to investors. Financial statements prepared by this law have been affected by international accounting standards. The main purpose of Corporation Law is to reconcile the interests between stakeholders and to protect creditor through the calculation of distributable amount of surplus. The main purpose of corporation tax law is to maintain the equity of taxation through the calculation of fair income. But each law regulates accounting practice 2346 respectively in order to achieve own purpose. In other words, each law does not have prescriptions to cover overall accounting practice. In Japan, Both distributable amount of surplus and taxable income are based on the net income. We consider the reason for this fact in terms of flow or stock and internal or external aspects of accounting systems. Traditionally Japanese companies have held shares with each other. As Figure 7 shows that the percentage of shareholding of companies is almost the same as percentage of the individual investors. Through cross-holdings, Japanese companies build up ―business groups‖, so called ―Keiretsu‖ such as Sumitomo and Mitsubishi Koga, 2007, 220. Figure 7 Transition of share holding ratio by investor 2347 Source http:www.tse.or.jpmarketdataexaminationdistributeh19distribute_h19a.pdf in Japanese, Latest access date: 06132009. As Figure 7 shows, the percentage of shareholding of banks are above 30 and it indicates that banks are the largest shareholder in Japan. Through lending and boil out loan, banks act as big creditors as well as shareholders of the borrowing company. It is often called as ―main bank system‖. In this situation, main interested parties surrounding a company are main bank andor companies that make alliance in the business group. Especially main bank is able to get necessary information from the interested company 2348 directly in order to monitor business affairs. This situation has led to internal oriented accounting in Japan. Under the Corporation Law, in order to calculate distributable amount of surplus under the Corporation Law, it is necessary to distinguish realized and unrealized income. As long as shareholder‘s liability is limited, a company‘s asset is the only ―mortgage‖ for creditors. If a company distributed unrealized income, company could not maintain a mortgage for creditor and reconciliation of interests could not function. And historical cost is suitable basis of distributable amount of surplus calculation, because unrealized income is not recognized in this measurement system. Under the Corporation Law, the Regulation Concerning Calculation of Company prescribes ―net income that constitutes main resource of distributable amount as difference of revenue and ex penses‖ § 94. Taxable income adjusts the income calculated under the Corporation Law. According to article 22 in the law prescribes that ―revenue and expense are recognized on the basis of J-GAAP except as otherwise provided ‖. 2349 Above two income calculations make Japanese accounting practice flow oriented. The basic features are historical cost, matching costs with revenues and the revenue and expense view. On the other hand, accounting standards reforms have started after ―Financial Big Bang‖ at 1996. The purpose of Financial Big Bang is to realize free, fair and global financial market. Accounting standards reforms which respond to international accounting standards have been deemed as an important part of Accounting Big Bang. Japanese government considered that in order to pull market price, it was necessary to disclose accounting information which is equivalent to the international accounting standards for foreign investors. In fact as Figure 7 shows the percentages of shareholding of foreign investor is increasing year by year. This means external feature of accounting has emerged apparently. IASB and many other conceptual frameworks assume that investors need information about future cash flow and income based on asset and liability view. 2350 This aspect relates to the Financial Products Exchange Law. The purpose of this law is to provide decision useful information to investors but this law does not have its own prescriptions relating to accounting measurement. This law entrusts accounting standards setting body to establish accounting standards. To achieve this purpose, Japanese accounting standards setting bodies BADC and ASBJ have been preparing accounting standards so that it may not be contradictory to the international accounting standard. For example, the variance of revaluation for available-for-sale security, differed hedge gain or loss and foreign currency translation difference are recognized in the balance sheet. These items are recognized as other comprehensive income or recognized in net assets part of the balance sheet directly. This is the feature of stock oriented. However, according to empirical studies, investors have preferred net income to comprehensive income. The Discussion Memorandum on Conceptual Framework issued by the ASBJ equates net income flow-oriented with comprehensive income stock- oriented. It states ―Net income has been widely 2351 used for investors over the long period, and experiential proof which supports the usefulness of net income has been confirmed so far. Theref ore we decided to give the independent status to net income as before.‖ ASBJ Conceptual Framework 2006b, chap.3, par.21 This means that although the operational accounting is important primarily, accounting standards setting bodies cannot make slight of equity accounting. Actually global movement of convergence has big effect on Japanese accounting standards and now we can see stock and external oriented prescriptions in the Corporation Law. But traditional flow and internal oriented accounting has still effect to maintain social order through the reconciliation of the interests between stakeholders and protection of creditor in Japan.

9. Concluding Remarks

Accounting has both aspects of historical correlativity and practical correlativity. There is no doubt that traditional accounting concepts have played an important role in the sense of these correlativities. 2352 Recently a growing number of journalists, standard setters, professionals and academics in the world have been claiming that historical cost ac counting should be transferred into fair value accounting in order to accomplish the global convergence of accounting standards. According to this paper, this means the movement from internal management or entity discipline toward external proprietary or market discipline, and from flow revenue and expense view toward stock asset and liability view. When we emphasize stock and external view and the movement toward fair value accounting, the balance sheet might recognize the variance of revaluation for every account and the performance report might recognize the changes in net assets as a part of comprehensive income to provide decision useful information to investors. At the same time, however, as mentioned, a consensus about the importance of flow and internal exists in the context of practical correlativity in Japan. In order to deal with a worldwide stock market plunge and financial crisis which stemmed from the nonperforming subprime mortgage, the Emergency