Location: The Japanese archipelago lies off the northeast coast of Asia and consists of four principal islands (Hokkaido, Honshu, Shikoku, and Kyushu) and a number of smaller islands.

Population: In 1996, Japan population consisted of 125.86 million people. The population density is very high, with approximately 10% of the population centered around the nation's capital—Tokyo.

Languages: The language spoken is Japanese, while there are some local dialects. The English language is taught in schools as a second language because it is widely used in business circles.

Currency: Yen (¥)

Brief history: In the mid-sixteenth century, Japan was closed to foreign trade until 1853, except with the Netherlands and Portugal. The domestic economy developed during this period. Since 1868, Japan started its Western civilization and modernization. Today, Japan is a combination of its own origins and the influence of both Asia and Western culture.

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Japan is an economic giant of the West Pacific Rim. Its economy can be characterized as high-savings and high investing. In 1996, Japan 's GDP is $4,598 billion, compared to $7.636 billion of the United States. The GDP per capita exceeds that of the United States.

Comparative economic indicators, 1996

Japan has very limited natural resources; therefore, the country relies heavily on imports of raw materials. As located at a major fishing area in the world, Japan has become a major fishing nation. However, with short supply of agricultural land, Japan is also heavily dependent on imported basic foodstuffs.

Steel and non-ferrous metallurgy, heavy electrical equipment, construction and mining equipment, motor vehicles and parts, electronic and telecommunication equipment and components, machine tools and automated production systems, locomotives and railroad rolling stock, shipbuilding, chemicals, textiles, food processing.

The number of households has increased, however, the size of household are getting small. The population is aging rapidly. The population of aged 65 and above had increased from 7.1% to 15.1% during the period of 1970 to 1996, which would take 100 years in most European countries. It is projected that the number of people over 65 will nearly double to 32.7 million by 2020, which will be 25% of total population.

Population by age (1996)

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Several important laws affecting business are:

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The accounting system in Japan was introduced mainly from the United States and Germany. During the era of modernization, western bookkeeping was introduced into Japan through the importation of books from Britain, France, Germany, Russia, and the United States. In addition, accounting experts from western countries were invited to Japan to train Japanese accountants and western accounting textbooks were translated to Japanese. Along with the coming of big business, improved accounting systems were developed.

The Commercial Code, based on the German Code, became law in 1890. It was later amended and emphasized on the provision of information to creditors rather than shareholders.

After the World War II, a major change occurred in the orientation of corporation financial reporting by the introduction of the Securities Exchange Law (SEL) and several revisions in the Commercial Code. In addition, the Japanese Institute of Certified Public Accountants (JICAP), the Investigation Committee on Business Accounting Systems (later became the BADC), and the Tax Bureau and National Tax Administration Agency were formed. This new regulatory system was based on that prevailing in the U.S. and with a purpose to protect investors.

In general, the Japanese accounting can be characterized as statutory control, uniformity, conservatism, and secrecy, which resulting from the influences of its culture, government, legislation, and accounting profession.

To be a CPA in Japan, a person must pass three stages of examination. The CPA exam is administrated by the MOF and conducted by the CPA examination Board. For those who have completed two years of study at university or college, the first stage examination can be waived. The second stage examination is the most difficult part. A person passes the second stage examination would receive the title of a Junior CPA. After passing the third stage examination, a person would then receive a title of a CPA. In order to use the title CPA, registration with the JICPA is required.

Japanese accounting standards are developed under the influences of both governmental and private organizations. The major organizations are as follows:

The only professional body of CPAs in Japan is the JICPA. It was established in 1949 and was recognized by the CPA Law in 1966. A CPA is licensed under provisions of the CPA Law and has to register with JICPA to engage in public accounting practices. The members of the JICPA composed of CPAs, foreign CPAs, and audit corporations. They become members upon registration. An audit corporation is a legal entity consisting of CPAs and is established under the CPA Law, while its formation is under the control of the Ministry of Finance. Junior CPAs may also voluntarily become associate members of the JICPA.

The JICPA is a founding member of the International Accounting Standards Committee (IASC). Although the JICPA has agreed to try to harmonize its rules and regulations with international accounting standards, it is seldom to see international accounting standards mentioned in a company's Japanese reports, but occasionally this may occur in their English version accounts.

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Japanese GAAP consists of the following sources:

1. Basic financial statements

 Under the Commercial Code: A joint-stock corporation is required to prepare the following financial statements and data as of each fiscal year-end: balance sheet, profit and loss account (income statement), business report, proposal for appropriation of retained earnings, and supporting schedules. The form and content of the accounts are prescribed by the Ministry of Justice.

 Under the Securities Exchange Law: In addition to the financial statements prepared in accordance with the Commercial Code, corporations that are publicly listed are required by the SEL to prepare financial statements to be included in the securities reports. The form and content of the statements are prescribed by the Ministry of Finance Ordinance.

Some major companies also prepare an English version of annual report for international readers. This report uses U.S. terminology and often compiles with U.S. GAAP.

2. Business combinations

It can not be clearly distinguished between purchase and pooling-of-interests methods in Japan. Mergers are usually effected by an exchange of shares between an acquired company and an acquiring company and are generally accounted for in accordance with the Commercial Law and Corporation Tax Law in a manner similar to the purchase method of the United States. Goodwill is recognized at the time of merger as an intangible fixed asset. Purchased goodwill must be valued at acquisition cost and amortized using the straight-line method within 5 years.

3. Consolidated financial reports

Majority-owned subsidiaries are consolidated, and investment in affiliated companies is accounted for in the consolidated financial statements using the equity method. It is important to notice that the consolidated accounts only have to be prepared by listed companies reporting under the SEL and consolidated financial statements are issued as supplementary to the financial statements of the parent company.

There is nothing specified under the Commercial Code requiring companies in Japan to issue consolidated financial statements.

4. Segmental reporting

Segment reporting is still a fairly new idea in Japanese financial reporting. Disclosure requirements were introduced in 1990 under the SEL. It requires sales and profits by industry and by location disclosed.

5. Provisions and reserves

Designated provisions, such as provision for bad debts, are allowable against tax and available to all companies. All provisions allowed in one accounting period must be reserved in the following period, except for the provision for retirement allowance. In addition to provisions there are a number of reserves that are tax-deductible provided they are recorded in the books of account.

6. Inventories

Inventories are valued at either cost or the lower of cost or market. The following cost flow assumptions can be used in accounting for inventories: individual cost, FIFO, LIFO, weighted-average cost, moving-average cost, and latest purchase price. Market value is usually the repurchased price, which differs from market value interpreted in the United States. In the U.S., market value is the current replacement cost that should not exceed net realizable value and must not less than net realizable value reduced by normal profit margin.

7. Fixed assets

Fixed assets are generally recorded at historical cost. Although different methods are allowed for depreciation charges, it is common to use the declining-balance method and apply useful lives that are specified by the income tax law. Accumulated depreciation is deducted from the cost of each class of asset or it may be shown as aggregated amount and deducted from the total of depreciable assets.

8. Intangible assets

Intangible assets are recorded at historical cost. Except for property rights, the cost of intangible assets is amortized using a straight-line method over their useful life or over the number of years prescribed by the tax regulation. In the balance sheet, intangible assets must be presented at their unamortized amount.

9. Investments

Securities acquired are recorded at cost. Marketable securities are carried at either cost or the lower of cost or market. Investment securities are carried at acquisition cost.

10. Long-term debt

Bonds are recorded at face value. Bond discounts are recorded as deferred charge in the balance sheet and amortized over the life of the debt. Bond issue costs are recorded as deferred assets and amortized within three years or the redemption period, whichever is shorter.

11. Pensions

It is common for Japanese companies to provide for employee retirement and severance benefits. In the past, many plans were generally not funded, but now there is a tendency to partially fund such plans. Most companies provided a reserve for retirement on a tax basis, which limits the deduction of employee retirement and severance benefit liabilities to a maximum of 40 percent of the voluntary retirement and severance liability as of the balance sheet date.

12. Contingencies

The accounting for loss contingencies is the same as that in the United States. Contingent loss must be accrued and reported in the financial statements, or be disclosed in the notes.

13. Capital

When a company issues shares, with or without par value, at least 50 percent of the proceeds must be recorded as capital stock. The excess over par is recorded in the paid in surplus included in the capital reserve account. Stock dividend was abolished in 1991. The acquisition of treasury stock is prohibited except for retiring the shares and a business merger. Treasury stock is shown as an asset on the balance sheet. This is different from the practice in the United States. However, treasury stock is shown as a deduction from stockholders' equity on consolidated balance sheet prepared in accordance with SEL.

14. Legal reserves

Under the Commercial Code, it is required that an amount equal to at least 10 percent of the sum of cash dividends and officers' bonuses paid be set aside as a legal reserve. This amount is transferred from retained earnings to the reserve each accounting period until the total amount is equal to 25 percent of the capital stock amount.

15. Retained earnings

It is common in Japan to appropriate a certain amount of retained earnings for special purposes.

16. Income taxes

Income taxes shown on the income statement are the taxes levied on taxable income for the period. Income taxes shown on the balance sheet are amount currently payable. Interperiod income tax allocation is not acceptable. Deferred taxes are usually not recognized.

17. Earnings per share (EPS)

EPS is calculated as net income for the year divided by the weighted-average number of common shares outstanding during the year. No diluted EPS information is required.

18. Prior period adjustments

1. Foreign currency translation

A new accounting standard for foreign currency translation was issued by BADC in 1995. The new accounting standards were effective for fiscal years beginning on or after April 1, 1996. Short-term monetary items should be translated at current rates, while long-term monetary items should be translated at historical rates. A material unrealized translation loss on long-term monetary items should be recognized in income in the period that the loss occurs.

For foreign branch financial statements, the temporal method is applied.

For translation of the foreign subsidiary financial statements, the modified temporal method had been used before; however, the amended Statement requires the current rate method to be used.

2. Interim reporting

A new accounting standard, "Opinion on Accounting Standards for Interim Consolidated and Parent-Only Financial Statements", was issued by BADC in March 13, 1998. It recommends that interim reporting should be based on "discrete view" rather than "integral view."

3. Cash flow statement

A new accounting standard for cash flow statement was issued by BADC in March 13, 1998. It is the first time for Japan to have cash flow statements as one of the financial statements because it will replace funds flow statements, which disclose fund information and are regarded only as information outside of financial statements. The new standard recommends that an entity should disclose cash flow statements as part of an integral set of financial statements. The standard will be effective for fiscal years beginning on or after April 1, 1999.

4. Research and development

Japanese auditing standards are provided for under the "Auditing Standard, Audit Procedural Rules and Audit Reporting Rules" set forth by the BADC of the Ministry of Finance. The JICPA also has its Auditing Committee, which provides auditing guidance to its members. Basically, the auditing standards are similar to those applied in the United States, but there are certain differences, especially in reporting standards.

Audits under statutory requirements:

1. publicly listed on the stock exchange,
2. with its stock registered with the Japan Securities Dealers' Association,
3. with public offer of securities for at least ¥500 million, and
4. with number of shareholders of at least 500.

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Comparison of the consolidated financial statements (Fiscal year 1997) of Toyota Motor Corporation (Japan) with those of Ford Motor Company (U.S.) shows some differences and similarities. They are summarized as follows:

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