In Japan, accounting standards are based on a set of criteria for tax documents. Whether a business is private or public, foreign or domestic, and all organizations must submit a balance sheet, a profit and loss statement, and a statement of change in net corporate assets. When considering the tax structure that a business will adhere to, companies can choose between three tax structures: a joint stock company, a limited liability company (LLC) or a limited liability partnership (LLP).
Once the business structure has been decided upon, an accounting firm can be hired to make sure that the chart of accounts is appropriately dealt with. A chart of accounts is essential in maintaining good business standing, as well as in managing tax payments. There are two types of taxes that a company may need to report on in Japan: one is known as the Japanese consumption tax (also known as VAT), and the other is known as the Japanese withholding tax.
To accurately manage the taxes and chart of accounts for a company, accounting is heavily reliant on following guidelines to make sure that standards are kept throughout the business structure. Accounting firms in Japan typically follow one of four accounting methods when managing their client’s portfolio.
The four standards include:
- General Accepted Accounting Principles of Japan- GAAP
- Generally Accepted Accounting Principles, United States- GAAP US
- Japan’s Modified International Standard- JMIS
- International Financial Reporting Standards- IFRS
All four of these standards accounting must be in accordance with Japan’s “Triangular Legal System.” The Triangular Legal System is called as such because three separate offices establish and pass laws and regulations on financial accounting in Japan. These three separate entities are the Commercial Code office, the Securities and Exchanges Law office, and the office of Corporate Income Tax Law.
General Accepted Accounting Principles of Japan- GAAP:
This is the most commonly used standard for accounting in Japan. It requires accountants to follow a set of rules issued by the Business Accounting Council (BAC), the Accounting Standards Board of Japan (ASBJ) and the Japanese Institute of Certified Public Accountants. Accountants in Japan adhere to the business accounting principles, standards, and practical guidelines issued by these authorities.
Generally Accepted Accounting Principles, United States- GAAP US:
The GAAP used in the U.S. is very similar to the standard that Japan adheres to. In the U.S., however, these principles are guided by the U.S. Securities and Exchange Commission.
Japan’s Modified International Standard- JMIS:
This standard demonstrates a movement away from GAAP, towards IFRS- from a rules-based standard to a principles-based standard.
International Financial Reporting Standards- IFRS:
The International Financial Reporting Standards are global standards that have been accepted by numerous countries, although the United States is still resisting. This is most likely because IFRS are largely principle-based, while in the U.S., the use of the rules-based GAAP helps to avoid litigation in a country that is dominated by a litigious-business atmosphere. However, since 2016, companies in Japan have been trying to instill IFRS into their business accounting practices to make international markets more accessible.
With the complexities of accounting under the scrutiny of regulatory agencies that have created a set of rules to be followed, accounting in Japan and the rest of the world has become an efficient way to determine business potential and maintain financial equilibrium. The various reporting standards are guidelines that help us navigate taxation and trade, and though each country has its own set of rules, many countries gradually seem to be leaning towards the International Financial Reporting Standards, including Japan. Ultimately, accounting standards across the board try to represent the scope and breadth of a business in terms that can be understood by both governments and companies themselves, and perhaps someday one universal standard of accounting may come to be accepted by everyone.