Academic journal article Journal of International Business Research

The Introduction of Accounting Principles for Consolidated Financial Statements in Japan: Focus on Minority Interest and Other Related Accounting Treatments

Academic journal article Journal of International Business Research

The Introduction of Accounting Principles for Consolidated Financial Statements in Japan: Focus on Minority Interest and Other Related Accounting Treatments

Article excerpt

INTRODUCTION

The Accounting Standards Boards of Japan (ASBJ henceforth) has been working on for the convergence of Japanese General Acceptable Accounting Principles (GAAP henceforth) toward the International Financial Reporting Standards (IFRS henceforth). In August 2007, the International Accounting Standards Board (IASB henceforth) and the ASBJ announced the Tokyo Agreement which made clear the deadline for the above convergence by June 30, 2011. As IFRSs are continuing to move toward the economic-unit concept for preparing consolidated financial statements (IFRS No.3, 2008; IAS No.27, 2008), Japanese GAAP is also moving toward the same direction.

IASB amended IAS No.27 Consolidated and Separate Financial Statements to change the term "Minority Interest" to "Non-controlling Interest" (IAS No.27, BC28). This change is because of the fact that the owner of a minority interest in an entity might control that entity as opposed to the owners of a majority interest who might not control that entity.

In Japanese GAAP, the term "Minority Interest" (Shousuu kabunushi mochibun in Japanese) was used, but in December 2009 ASBJ tentatively agreed to consider using "Noncontrolling interest" (Hi shihai mochibun in Japanese). Because the change takes time to take effect and the term "Minority Interest" continues to be used in Japanese GAAP, the same term will be used in this paper.

The Accounting Principles for Consolidated Financial Statements, which was amended in 1997, was also based on the parent-company concept. This is primarily because the information of consolidated financial statement was intended mainly for investors of parent company, and the treatment based on parent-company concept was more suitable in practice (Part 2 Revision of consolidated financial principles I-2).

Based on the parent-company concept, there are two kinds of classification for Minority Interest on the consolidated balance sheet: One is as a liability and the other is as mezzanine (neither liability nor capital). Minority Interest was classified as a liability based on the Accounting Principles for Consolidated Financial Statements in June 1975 until its treatment was amended in 1997 when Minority Interest were excluded from Liabilities but not included among Capital.

The Accounting Principles for Consolidated Financial Statements was amended in 1997 by the Business Accounting Council (BAC, henceforth), which is a standard-setting body in Japan. This amendment now requires presenting Minority Interest as an independent item between Liabilities section and Capital section on the consolidated balance sheet. However, the presentation of Minority Income was not affected as it continues to be deducted for calculating Net Income on the consolidated income statement. This is because Minority Interest does not represent an obligation that the entity must satisfy. Consequently, it did not fulfill the definition of liability but rather an item unique to consolidated financial statements.

The balance sheet classification in Japan was changed by ASBJ Statement No. 5 Accounting Standard for Presentation of Net Assets in the Balance Sheet and ASBJ Guidance No. 8 Guidance on Accounting Standard for Presentation of Net Assets in the Balance Sheet in 2005. By ASBJ Statement No.5, the Capital section of the balance sheet was replaced by the Net Assets section, and Minority Interest was included in the Net Assets section of the consolidated balance sheet. However, it should be noted that the Net Assets section consists of the following sub-sections: Shareholders' Capital, Valuation and Translation Adjustments, Subscription Rights to Shares, and Minority Interest. Although Minority Interest was included in the Net Assets section on the consolidated balance sheet, it was excluded from sub-section Shareholders' Capital.

The presentation of the income or loss attributable to Minority Interest in consolidated subsidiaries was not affected by ASBJ Statement No. …

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