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Keiko Kitamura

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Accounting Today Is Changing Business Behavior

Keiko Kitamura
Professor, Faculty of Commerce, Chuo University
Area of Specialization: Financial Accounting

Accounting Is the Language of Business

Accounting is often referred to as "the language of business." In other words, accounting is a mirror to reflect the real picture of an entity and through the financial statements preparedby using accounting, stakeholders such as managers and investors can grasp the performance of a business and know about the position of the assets and liabilities at the end of the reporting period. Without accounting, stakeholders could not know the actual condition of a business, managers could not perform business management and investors would be unable to make decisions on whether to contribute or collect their funds.

If accounting is to act as a true mirror to the position of an entity, they need to convey the whole picture precisely as it is, and accountants have gone to a great deal of trouble to increase the accuracy of this mirror in recent years. The global standards for accounting are created by the International Accounting Standards Board-an organization assembled from representatives of associations of certified public accountants from around the world-and released as International Financial Reporting Standards, hereafter abbreviated to IFRS. While still some projects in progress, efforts have finally started to bear fruit and take shape for completion over the last year or two, and in Japan, it is anticipated that IFRS will be adopted to giant corporations financing operations abroad from 2015 or 2016. However, IFRS is based on a sharply different view from accounting standards adopted in Japan up to now, which is why IFRS is being received like the arrival of the black ships of Commodore Perry.

The Impact of IFRS on Japan's Accounting Standards

IFRS has been adopted by more than 100 nations. Some countries have adoptedIFRS as their own set of domestic standards without alteration, and inside the European Union, where IFRS has already been adopted, it is applied to the consolidated financial statements reported by major companies which are active internationally. Meanwhile, companies operating domestically inside Japan and the United States, both still have not finished to adopt IFRS yet, are intent on applyingi their own accounting standards to separate financial statements and plan to adopt IFRS only to their consolidated financial statements. Following the decision to introduce IFRS, our country's accounting standards have undergone extensive changes in order to eradicate deviations from IFRS. The so-called process of convergence has been followed, with the result that Japan's accounting standards now show no substantial differences to IFRS. However, the accounting standards prior to convergence had differed sharply from IFRS.

The biggest difference is the approach to income. Up to now, in what is known as the revenue-expense view, accounting standards in Japan have attached importance to the net income equivalent to the difference between income and expense as flow over a period, with net income used as a performance indicator. On the other hand, in IFRS, comprehensive income equivalent to the difference between equity's opening balance and its ending balance as stock, is the underlying basis for concept of income.(This is what we call the asset-liability view.) How does this difference influence accounting? To put it an extreme way without fear of misunderstanding, in the revenue-expense view, expenses and revenue of the next period, which were not recognized as expenses and revenue in the current period but were accrued during that time, are realized in the balance sheet. For example, expenses considered to have an effect in the next period without corresponding to the sales of the current period yet accrued in that period are realized in the balance sheet as deferred assets. These are not recognized as assets under the asset-liability view and must be realized as expenses in the current period. Moreover, since the asset-liability view limits liabilities to contractual obligations, provisions , hitherto realized under the revenue-expense view, is no longer possible. Conversely, there are cases where some obligations not realized up to now must be reported as provisions. Furthermore, perhaps the most significant impact of the asset-liability view has been on the measurement of assets and liabilities, which has become somewhat problematic with the assertion of fair value measurement.

Accounting Controls Business Behavior

In response to such sharp changes in accounting standards, companies are starting to make decisions in consideration of the applicable accounting standards. Accounting is no longer merely the language of business but rather it controls business behavior. Cross-shareholdings held in our country require fair value measurement and with suspicions raised over gains and losses resulted from changes in fair value, companies have started to unwind (sell-off) mutually held shares. Lease transactions, where accounting standards required the realizationof leased assets in the past, have decreased and there has been a shift toward transactions using purchase by installments. Even the popular points programs used for merchandise sales is apt to change from this revised concept of provisions. Our accounting, which for a long time were considered a mirror to reflect the position of a business, have assumed such enormous power that they can even change business behavior.

Keiko Kitamura
Professor, Faculty of Commerce, Chuo University
Area of FinancialAccounting
Born in Nara Prefecture in 1945, Keiko Kitamura graduated from the Faculty of Commerce Department of Accounting at Chuo University in 1968, and went on to complete her doctorate from the university's Graduate School of Commerce in 1973. After working as assistant to the Faculty of Commerce in 1970, she has been a professor there since 1981. She specializes in accounting, especially financial accounting and researching into the disclosure of accounting information helpful for investors to make decisions. Her paper Changes in Accounting Environments and Subjects concerning Financial Reporting (featured in the January 1993 issue of Kaikei -Moriyama Shoten) received an award from the Japanese Accounting Association. In 2000, she co-authored and edited Cash Flow Accounting for Financial Reporting (Chuokeizai-sha) with Aishi Imafuku.