Japan

Despite the growing internationalization of Japanese accounting standards, the influence of

taxation, creditor interests, and a conservative culture have ensured that measures of earnings are
relatively understated compared to the United States. After making further adjustments for cross-
holdings and differences in capitalization, it was suggested that the average of Japanese Price-
Earnings ratio becomes 12.51 and not 34.3. as reported by Morgan Stanley Capital International
Perspective. However, it should be noted that differences in financial ratios such as corporate
liquidity and gearing(leverage) are not just the result of accounting differences but also differences
in financial systems and norms of countries. In Japan, for example, higher levels of gearing and
short-terms payables are considered normal relative to the United States because of longer-term
relationships with bankers and suppliers. Similarly, a longer-term view tends to be taken of
profitability, with much more emphasis placed on achieving growth in sales and market share.

Factors influencing measurement differences

The reasons for measurement differences can be found in the environmental and cultural factors
influencing accounting principles in these countries.
a) In United States and the United Kingdom, the stock market is dominant influence, with the
information needs of investors encouraging a more optimistic view of earnings and hence
higher share prices. At the same time, accounting principles are relatively flexible, the
accounting profession is relatively independent of government, and tax rules have only a
limited influence on accounting practice. Underlying cultural values tend to both motivate
and reinforce a less conservative approach to measurement taken overall.
b) In continental Europe and Japan, on the other hand, taxation and sources of finance are
relatively major influences compared to the stock market. These countries, have tradition
of commercial codes and accounting plans. Moreover, it is common for the tax authorities
to allow for tax purpose only those items charged in the accounts and to tax earning as
reported in the accounts. This tends to lead to a more conservative application of
accounting principles in order to report lower earning for tax purpose.
In addition, the significance of creditors and loan finance relative to equity provides a further
conservative influence in that lower earnings will tend to better meet the interests of creditors and
lender vis--vis shareholders. Black and White (2003) find that balance sheet information is more
value relevant than income statement information in Germany and Japan. In contrast, they find
that income statement information is more informative in the United States. The legal requirements
relating to accounting are also usually more detailed, with the result that professional influences is
relatively low and is limited mainly to the audit function. Finally, underlying cultural values tend
to both motivate and reinforce a more conservative approach to measurement.
Global accounting convergence
Although a number of organizations around the world, including the United Nations and EU, have
been concerned with harmonizing international differences in accounting and reporting, the most
important body in recent years has been the International Accounting Standards Board (IASB),
formerly the International Accounting Standards Committee (IASC) established in 1973, which
sets International Financial Re3porting Standards (IFRSs).
The main reason for developing international standards has been to achieve a degree of
comparability that will help investors make their decisions while reducing the costs of MNEs in
preparing multiple sets of accounts and reports. It is also fair to say that the IASB sees itself as
playing a major role in coordinating and harmonizing the activities of many agencies involved in
setting accounting and reporting standards. IASB standards are also intended to provide a useful
model for developing countries wishing to establish accounting standards for the first time.
In early days, international standards were developed allowing substantial flexibility to a
accommodate different national interests, but since the late 1980s, there has been growing pressure
to develop more uniform standards to facilitate cross-border capital raisings and stock exchange
listings. International Organization of Securities Commissions (IOSCO) was completed in 1998.
As of May 2000, IOSCO recommended acceptance of international standards subject to
supplemental treatments where necessary. The IASB is hoping that IOSCOs endorsement will
lead to a greater recognition of International Financial Reporting Standards and the promotion of
global convergence. A growing number of companies are also electing to follow international
standards, though compliance is not always a comprehensive in practice. Most recently, effective
2005, the EU countries have decided to adopt approved international standards for financial reports
by all listed companies.