The principal objective of the disclosure requirement of a joint stock corporation (Kabushiki Kaisha) under the Corporation Law is to protect the interests of both creditors and shareholders.
A joint stock corporation is required to hold a general meeting of the shareholders within three months after the end date of each fiscal year to deliberate on certain corporate matters, including the approval of its financial statements. Typically, the notification of a general meeting of the shareholders must be accompanied by a business report and financial documents attested by the corporate statutory auditor or the audit committee, which is an internal organization of a corporation not required to be composed of certified public accountants (CPA). The financial statements are required to be submitted to and approved by the shareholders at the general meeting.
These documents are subsequently mailed to the shareholders in the form of an annual report. In addition, the Corporation Law stipulates that these documents should always be maintained at the head office and at branches of the joint stock corporation for inspection by creditors and shareholders.
The underlying objective of financial documents prepared in accordance with the Corporation Law is to protect creditors’ and shareholders’ interests. Accordingly, disclosures relating to the availability of retained earnings for the distribution of dividends and to the creditworthiness and earning power of the reporting entity are of prime importance.
The financial documents prepared and submitted by a corporation to its annual general meeting of the shareholders are as follows:
- Balance sheet
- Income statement
- Statement of changes in net assets
- Notes to financial statements
In addition, the Corporation Law requires corporations to prepare certain supporting schedules to supplement the financial documents and business report.
Accounting Standards – Japanese GAAP and IFRS
The process of setting accounting standards, previously driven by the Ministry of Finance, and the Financial Services Agency after the reorganization of government ministries and agencies, has been gradually changing.
The Financial Accounting Standards Foundation (FASF) was established in 2001, and the Accounting Standards Board of Japan (ASBJ) was organized under the auspices of the FASF as an independent, private-sector entity to develop accounting standards in Japan. Since its inception, the ASBJ has issued many accounting standards, guidance and other documents that address practical issues. In addition, in January 2005, it announced the launch of a joint project with International Accounting Standards Board (IASB) aimed at achieving convergence between Japanese GAAP and International Financial Reporting Standards (IFRS).
In October 2006, the ASBJ has decided to formulate and release “ASBJ Project Plan” focusing on accounting standards development projects, related to convergence, in an attempt to indicate the status of initiatives of the ASBJ to various constituencies in Japan and abroad.
In this report, based on the proposal concerning a time-framed approach in light of EU equivalence assessment, titled “Towards the International Convergence of Accounting Standards” issued by the Planning and Coordination Committee of the BAC in July 2006, primary emphasis was placed on mapping out the work planned to be achieved through the end of 2007, and also on classifying the prospects of convergence status as of the beginning of 2008 concerning the initiatives to be undertaken with respect to the 26 issues for which the remedies were advised by the Committee of European Securities Regulators (CESR).
In August 8, 2007, the ASBJ and the ISAB jointly announced an agreement (known as the Tokyo agreement) to accelerate convergence between Japanese GAAP and IFRS’s, a process that was started in March 2005. As part of the agreement, the two boards will seek to eliminate by 2008 major differences between Japanese GAAP and IFRS, with the remaining differences being removed on or before June 30, 2011. Whilst the target date of 2011 does not apply to any major new IFRS now being developed, that will become effective after 2011, both boards will work closely to ensure the acceptance of the international approach in Japan when new standards become effective.
The new project plan was issued in December 2007, in accordance with the content of the Tokyo Agreement. It classifies the project items into three categories (short-term, medium-term and long term) and indicates the schedule for each item.
Public companies as well as certain private companies are required to have a financial statement audit under the Financial Instruments and Exchange Act (FIEA) or the Companies Act performed by independent CPAs or an auditing firm.
In accordance with the FIEA, public companies and certain types of private companies (mainly the financial service providers or registered financial institutions defined by the FIEA) are subject to financial statement audit and are required to file an audited quarterly report as well as an audited annual securities report. Public companies are also required to establish the internal control system and file an audited internal control report along with the financial statements.
Under the Companies Act, private companies which have a stated capital of over JPY 500 million or total liabilities of over JPY 20 billion as of previous fiscal year end (i.e. large corporations under the Companies Act) are subject to external audit on the financial statements and the notes to the financial statements.
Companies can also voluntarily select to have a financial statement audit to obtain independent reasonable assurance on the financial statements.