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Cooke, T. E. 1993. The impact of accounting principles on profits: The US versus Japan. Accounting and Business Research 23 (Autumn): 460-476.

Summary by Dan Crick
Master of Accountancy Program
University of South Florida, Summer 2003

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Accounting measurements, rules and regulations govern the presentation and analysis of financial results throughout the world. Cooke took a case study approach to analyze the factors influencing and creating material differences in the presentation of Japanese and United States (U.S.) companies’ financial statements. He concentrated on the differences between U.S. and Japanese generally accepted accounting principles (GAAP). These differences create difficulties in international regulation and financial comparisons. The article “sought to add qualitative and quantitative literature on profit comparisons between U.S. and Japan (Cooke, 475).”

Cooke first introduced the main differences between the two nations’ accounting frameworks and GAAP. In the U.S., the Securities and Exchange Commission (SEC) requires foreign companies listed on U.S. stock exchanges to file a 20-F report that either reconciles or restates profits following U.S. GAAP. This requirement led many Japanese companies to avoid the U.S. capital markets due to the additional costs of financial presentation. In Japan, companies provide two sets of financials: one set following the Commercial Code (CC) to give to creditors and investors and one set following the Securities and Exchange Law (SEL) to provide information to shareholders.

Cooke identified various qualitative differences between U.S. and Japanese GAAP that could potentially create material differences in presentation. Those differences include the treatment of deferred taxes, detachable warrants, consolidations, equity accounting, leases, pensions, marketable securities, stock dividends, inventories, goodwill, depreciation, borrowing costs and research and development expenditures. The case study more clearly identified actual material differences due to the above factors.

In the study, five of the 19 Japanese companies that file a 20-F report and one Japanese company that prepares statements in both U.S. GAAP and Japanese GAAP were analyzed based on the conservatism index or a partial index. The conservatism index (I) divides the difference between US profits and Japanese profits by the absolute value of US profits and subtracts the answer from one: I = 1 – [(Profits US – Profits Japan) ÷ Profits US]. The partial index, used for companies that could not be completely restated in U.S. GAAP, simply replaces the difference in profits with the partial adjustment. These indices provide a quantitative measure of the differences between Japanese and U.S. GAAP. A low percentage indicates a wide spread between Japanese and U.S. profits, consequently, providing support for Japanese conservatism. Cooke found that Japanese companies utilized more conservative accounting procedures, resulting in lower net income than that based in U.S. GAAP. The conservatism index ranged from 48% to 92% in the analyzed companies.

The material differences found in these six companies were chiefly attributable to the lack of deferred taxation in Japan, the lack of lease capitalization in Japan, valuation of marketable securities and installment sales on an accrual basis. These differences are further discussed in the following paragraph. Furthermore, the case study occurred in 1991. Consequently, Japanese or U.S. GAAP may have changed since conclusion of this study.

In the U.S., companies record differences in tax by recording deferred tax assets and liabilities as well as decreasing or increasing deferred tax expense for book purposes. Japanese companies do not record any provisions for taxes but provide financial statements influenced by taxation regulations. Therefore, the material difference identified for deferred taxes may not be as significant as originally thought. In the U.S., companies capitalize and amortize financing leases creating an expense lower than the periodic payments. Japanese companies do not capitalize financing leases creating an expense equal to the periodic payments. Valuation of marketable securities in the U.S. occurs on a portfolio basis. Alternatively, Japanese companies value marketable securities on an individual basis. This creates a difference “during a period of rising stock prices” when U.S. companies would make no adjustment to the value, yet a Japanese company may need to write-down individual securities (Cooke, 474). The differences in valuation of marketable securities also creates a need to provide for a deferred tax liability and deferred tax expense due to the unrealized loss that would be recorded for the write-down. In the U.S., companies rarely recognize sales on an installment basis. Usually, sales are recorded at the transaction date with an appropriate uncollectible account provision. Japanese firms recognize the payments for installment sales as revenue when they are either due or are received. This treatment potentially lowers revenues substantially due to the timing of revenue recognition.

The case study provided a list of other factors that were deemed not to materially affect profits prepared under either country’s GAAP. Also, some factors were discussed but not quantified. Consequently, they were not covered in depth in this summary. Overall, Japanese companies exhibit accounting practices more conservative than those found in the United States. This more conservative approach may influence the mind set of company management by focusing attention on long-term financial health rather than short-term investment returns.


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