The Company Law requires big companies to prepare consolidated financial statements. In addition, listed companies should prepare consolidated financial statements underneath the Securities and Exchange Law. Individual company accounts would be the basis for the consolidated statements, as well as normally the same accounting concepts are used at both amounts. Subsidiaries are consolidated if a mother or father directly or indirectly regulates their financial and functional policies. Business combinations tend to be accounted for as a purchase. Goodwill is measured on the basis of the actual fair value of the net property acquired and is amortized over 20 years or less and is susceptible to an impairment test. The actual equity method is used for opportunities in affiliated companies once the parent and subsidiaries exert substantial influence over their monetary and operational policies. The equity method is also used to account for joint ventures; proportional consolidation is not allowed. Under the foreign currency translation standard, assets and liabilities of foreign subsidiaries are translated at the current (year-end) exchange rate, revenues and expenses at the average rate, and translation adjustments are in stockholders’ equity.
Inventory must be valued at cost or the lower of cost or net realizable value. FIFO, LIFO, and average are all acceptable cost-flow methods, with average the most popular. Investments in securities tend to be valued at market. Fixed property are valued at cost. The actual declining-balance method is the most common depreciation technique. Fixed assets are also impairments tested.
Research and development costs are expensed when incurred. Finance rents are capitalized and amortized, while the expenses of operating leases tend to be expensed. Deferred taxes are provided for those timing differences using the legal responsibility method. Contingent losses are supplied for when they are probable and may be reasonably estimated.Pension and other employee retirement benefits are fully accrued as employees earn them, and unfunded obligations are shown as a liability. Legal reserves are required: Each year a company must allocate an amount equal to at least 10 percent of cash dividends and bonuses paid to directors and statutory auditors until the legal reserve reaches 25 percent of capital stock.
Many of the accounting practices explained above were implemented consequently of the accounting Big Boom referred to earlier. These modifications include: (1) requiring outlined companies to report an argument of cash flows; (2) stretching the number of subsidiaries that are consolidated according to control rather than ownership proportion; (3) extending the number of affiliate marketers accounted for using the equity technique based on significant influence instead of ownership percentage; (4) pricing investments in securities from market rather than cost; (Five) valuing inventory at the reduce of cost or internet realizable value rather than cost; (Six) full provisioning of deferred income taxes; and (7) full accumulation of pension and other pension obligations. In December '09, the Financial Services Company announced that listed Japoneses companies may voluntarily follow IFRS for fiscal periods beginning on or after 03 31, 2010. This is seen as an step toward full ownership of IFRS, expected around 2015.