Financial Accounting: In an Economic Context

INTERNATIONAL PERSPECTIVE: JAPANESE BUSINESS AND INVENTORY ACCOUNTING

We have commented several times in this text that knowledge of the business environment and practices in individual countries is important for understanding the financial statements used in those countries. The situation in Japan with respect to inventories provides an interesting example. Japan has a long history of what might loosely be described in the United States as “corporate groups.” Typically, such groups are made up of a number of different entities, many of which perform different functions and hold equity interest in the others. The board of directors of each company is normally composed of representatives from each of the member entities. Mitsubishi, Sanwa, Nippon Steel, Hitachi, Nissan, and Toyota are all organized in such interlocking networks.

This group orientation, which is not evident in the United States, offers a number of significant advantages, most of which relate to planning and coordination among the group members. In most cases, for example, the presidents of the group companies hold meetings periodically to promote coordination and mutual understanding and to eliminate overlap in the activities conducted by the membership. These groups are then better able to share business risks, and when a company within a group faces difficulties, other group members pursue various means to assist it.

In many situations, such as in the Japanese auto and electronics industries, the group network ...