Internationalization of Accounting Standards for Consolidation - Japan: A Case

The purpose of this paper will be to examine problems with internationalization
of accounting standards for consolidations on methods from an international
perspective - specifically, in the US and Japan. This is an especially timely
topic as standardization of financial markets is a prerequisite to international
free trade. Given the trends toward greater globalization, the motivations of
companies for seeking a uniform accounting system are strong. If companies have
to prepare their accounts according to several different sets of rules, in order
to communicate with investors in the various capital markets in which they
operate or for other national purposes, they incur a considerable cost penalty
and feel that money is wasted. This significantly limits global opportunities
for multinational businesses. Thus, it is important to understand what the
differences are between accounting standards, why they exist, and what problems
they pose.

It is worth noting that no one nation has a set of accounting rules which
appears to have such clear merits that they deserve adoption by the whole world.
No one country can claim to have a uniquely correct set of rules. The United
States has the longest history of standard setting. It has the largest standard
setting organization which is characterized by high standards of professionalism.
But, even the rules of the United States exhibit compromises between different
interests of a kind which could have reasonably been decided otherwise.
Furthermore, no unanimity exists among U.S. accountants about the merits of the
precise details of the compromises that have been struck. For example, the
recent discussion memorandum on consolidation outlines three different methods
which are GAAP in the US (Beckman, 1995). No one nation has a clear right, on
the basis of existing achievements, to be regarded as predominant in accounting.
A great deal more work is needed by accountants from different countries before
we can reach the point of having a well founded basis for uniformity.

People who study differences among systems of accounting rules are inclined to
group countries into two categories. On the one hand, there are countries where
business finance is provided more by loans than by equity capital, where
accounting rules are dominated by taxation considerations and where legal
systems customarily incorporate codes with detailed rules for matters such as
accounting. The effect of taxation systems can be particularly pervasive. Often,
the taxation system effectively offers tax breaks for businesses by allowing
generous measurement of expenses and modest measurement of revenues on condition
that these measurements are used for general reporting purposes. Companies have
strong incentives to take advantage of these taxation concessions as real cash
is involved. But the penalty is a jack of full transparency for investors. Major
countries in this category include France, Germany and Japan( AAA, 1995).

The other group of countries is one in which equity sources of finance are more
important, accounting measurements are not dominated by taxation considerations
as tax breaks can be enjoyed independent of the way result are reported to
shareholders, and common law systems prevail. These countries generally have
some private sector system for setting accounting standards, often with a
general statutory framework. The role of equity finance is important because
capital market pressures are then brought to bear most strongly to improve the
quality of information available. The absence of detailed codes leaves
flexibility to respond to pressures. The United States, the United Kingdom,
Australia and the Netherlands are examples of countries in this category (AAA,

US consolidation policy begins with a definition of control. It is based on the
simple legal concept that the majority shareholder controls a company and that
even without a majority, a stockholder can exert significant influence. Thus,
consolidated financial statements reflect the financial position and results of
the firm as well as all subsidiaries upon which the firm may exert this
influence. Furthermore, the entity about which the consolidated financial
statements are prepared is not an entity in legal form. It is an abstraction
created solely for the purpose of these statements and does not have an ongoing
set of books as a normal corporation would (Beams, 1992). The details of
consolidation in the US are based on one of two theories as outlined in the
Discussion Memorandum. The economic unit theory considers the consolidated
group to be one economic entity for financial accounting purposes. Thus, the
full fair market value of the subsidiary\'s net assets at the date of acquisition
as well as the minority interest in those assets are included in the
consolidated financial statements. The parent company theory holds that only
the parent company\'s shareholders\' ownership interest should be reflected.
There are many