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AYB311 Accounting Theory Debate

Normative vs Positive Accounting Theory

Monica Trojanowski

on 1 September 2013

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Transcript of AYB311 Accounting Theory Debate

Should Japanese Financial Service Agency (FSA) adopt IFRS standards?

Supporting the
assumption that high quality accounting standards, such as the IFRS are always able to best serve the information needs of all users and should be adopted in Japan.
What is IFRS?
International Financial Reporting Standards (IFRS) are a set of accounting standards developed by the International Accounting Standards Board (IASB) that is becoming the
global standard
for the preparation of financial statements.

Designed as a common global language for business affairs so that company accounts are understandable and comparable across international boundaries (IFRS, 2013).
governance in Japan

Insider- dominated corporate governance system in which companies are owned and controlled by a small number of major shareholders

where minority shareholders may not be able to obtain information on the company's operations as there is little transparency
Topic 3 Introduction to Accounting Theory
Monica Trojanowski (A)

The government has stepped up efforts to harmonise Japanese standards with international standards.

Greater global consistency and transparency.

Growing presence of foreign investors and helps international competitiveness of the Japanese market.

Increase capital into the market to help expand business activities by tapping into international funding.

Japan Tobacco, the world's third-largest cigarette maker, using the newly adopted International Financial Reporting Standards.

The move is to better account for the more than half of its revenue that comes from its overseas operations in more than 120 countries (Wall Street Journal, 2013).

The move would also improve the company's disclosure methods to fit investors' perspectives and aims to diversify the group’s sources of financing via international markets (Japan Tobacco, 2013).

The tobacco company could become a trailblazer for other Japanese companies in new accounting methods.
What are the advantages of converting to IFRS?
The use of one common global reporting language.

Present financial statements on the same basis as its foreign competitors.

It will allow for comparability over all financial markets, regardless of the country of origin.

Investors will have better information for decision making.

Companies will have more flexibility for applying accounting principles.

Companies may also benefit by using IFRS if they wish to raise capital abroad (IFRS, 2013).

There is the potential for reduced financial reporting complexity.

All levels of management, including the audit committee, will have to be more involved in financial reporting and aware of transactions (AICPA online video, 14/08/13).

In the end, companies should be more efficient and have the advantage of cost-savings (AICPA online video, 14/08/13).
Japan's proactive approach
be achieving an objective of “creating a single high-quality global standard” by adopting the IFRS.

That objective coincides with the normative assumption that high quality accounting standards are always able to best serve the information needs of all users.

To achieve this objective, the
IFRS is an example of normative theory
which prescribes standards that should happen to create a single high-quality global standard.
Japan and IFRS
Objective and theory
Accounting for Goodwill
Ambiguity in the treatment of goodwill as the Commerical Code in Japan did not provide any clear explanations as to how goodwill should be measured and no established rules for accounting of mergers. Consensus made as an interpretation of the Commercial Code.

The impairment approach is supported by the following reasons (FASB, 2013):
the useful life of goodwill and the pattern in which it diminishes are both difficult to predict, yet its amortisation depends on such predictions.
Not all goodwill declines in value and that goodwill that does decline in value rarely does so on a straight line basis.
straight line amortisation of goodwill over an arbitrary period does not reflect economic reality and this does not provide useful information.

Characteristics of Goodwill in Japan has become clearer in the new rules with resulting companies undertaking business combinations have encountered enhanced transparency and quality of financial reporting for
all users
(Shinji Nakamura, 2013).

IFRS provides high quality accounting standards and
be adopted in Japan.

The adoption of the IFRS, based on the normative assumption and objective that
be in place, is the best option for the FSA to create the single high-quality global standard for all users in which they are pursuing.
Table 1: Accounting for goodwill
Which is better?
(1) Positive theories describe, explain and predict activities - Student B.

(2) Normative theories provide recommendations about what should happen.
Goodwill accounting is till this day indeed an interesting example
of how differences between countries’ accounting standards can lead to an ‘uneven playing field' (Zeff and Dharan, p.325 1997).

Goodwill classified as identifiable intangible assets in a business combination accounted for under the Japanese GAAP are required to be reclassified as goodwill under IFRS 3 because they do not meet the definition of an intangible asset under IAS 38.
Classifications of accounting theories
Corporate Structure

Co-existence of two classes of shareholders:
majority owners are banks and industrial partners
minority shareholders are considered investors

Primary users of financial statements are governments, banks and creditors
‘360’ Panorama photo of Tokyo from Tokyo Tower, courtesy of Jeffrey Martin

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Zeff, S. A. and Dhalan, B. G. 1997. Financial Accounting: Issues and Controversies, 5th ed. New York: McGraw-Hill.
Morris-Suzuki, T. 1989. A History of Japanese Economic Thought. London: Routledge
Ready Ratios financial statements analysis software. 2013. Business Accounting Council of Japan looks for ways to promote the use of IFRs in Japan. Accessed August 13, 2013. url: http://www.readyratios.com/news/ifrs/2394.html
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