Shortcomings of Japanese Consolidated Financial Statements

Japan began using consolidated financial statements at least 50 years later than many other industrialized countries. Responding to external pressure, the Japanese reluctantly adopted the accounting practices applicable to consolidated reporting employed in the US and made a determined effort to adapt them to their own business environment. The results have not been entirely satisfactory. US generally accepted accounting principles for preparing consolidated financial statements recognize groups based on the legal relationships arising from the majority ownership of voting shares. Japanese corporate groups tend to develop from substantive relationships of a nonlegal nature. Consequently, US users of Japanese consolidated statements assume that they are analyzing the financial position and results of operations of a group of companies operating as an economic entity. Actually, they may be analyzing something quite irrelevant because the statements do not represent the substance of the actual business relationships. This obviously impairs the ability of readers to make appropriate judgments from these statements.