Internationalization of Accounting Standards for Consolidatio


Internationalization of Accounting Standards for Consolidation
Japan: A Case Study


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, 1995).
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