Japan

Member Organizations

Member Organization Associate

  Japanese Institute of Certified Public Accountants

Legal and Regulatory Environment

• Overview of Statutory Framework for Accounting and Auditing

  In Japan, general financial reporting requirements, such as the frequency, form, and content of financial statements, are outlined in the Companies Act 2005 (which replaces portions of the Commercial Code 1993) and in the Financial Instruments and Exchange Act (FIEA) 2007. The Companies Act regulates the preparation of financial statements of all companies (i.e. stock, general partnership, limited partnership, and limited liability) whereas the FIEA is specific to listed companies and unlisted publicly accountable companies.

  In 2001, the Accounting Standards Board of Japan (ASBJ) was formed under the auspices of the Financial Accounting Standards Foundation. The ASBJ is responsible for the development and deliberation of private sector accounting standards in Japan. All standards set by the ASBJ are subject to the endorsement of the Financial Services Agency (FSA).

  The IASB and the ASBJ have been working together to achieve convergence of IFRS and Japanese Generally Accepted Accounting Principles (Japanese GAAP) since 2005. Voluntary adoption of IFRS for consolidated financial statements by companies that meet certain criteria has been permitted since March 2010. On 30 June 2015, Japan inaugurated a new set of accounting standards known as Japan’s Modified International Standards, bringing to four the number different accounting frameworks that listed companies in Japan may use. The four frameworks are:

  IFRS: virtually all listed companies and unlisted companies preparing consolidated financial statements for listing purposes are permitted to use IFRS as designated by the Commissioner of the FSA.

  Japanese GAAP as issued by the ASBJ: historically, most listed companies have used Japanese GAAP.

  Japan’s Modified International Standards (JMIS): accounting standards comprising IFRS and the ASBJ modification. JMIS was developed based on IFRS with deletions and modifications determined by the ASBJ. Concurrent with issuance of JMIS on 30 June 2015, the ASBJ published modifications relating to amortization of goodwill and recycling of other comprehensive income. However, there are no adopters of JMIS as of this report.

  US GAAP: with the permission of the Commissioner of the FSA

  The Japanese government policy has continuously encouraged stakeholders to promote the voluntary adoption of IFRS since 2014. As of August 2018, 193 companies (over 30% of the Tokyo Stock Exchange market capitalization) have adopted or plan to adopt IFRS. The 193 companies include 178 companies that have already adopted or are in the process of adopting IFRS, 15 companies that have announced plans to adopt IFRS.

  Companies that are subject to statutory audits in Japan are identified in the FIEA and the Companies Act. The FIEA determines a scope of statutory audit for investor protection purposes, including all listed companies and other certain companies with shareholders over the specified threshold. In addition, the Companies Act outlines that companies that meet the following criteria must also undergo audits: (i) companies with capital stock of 500 million yen or more, or total liabilities of 20 billion yen or more as of the latest fiscal year end; (ii) companies that adopt a “Company with Nominating Committee, etc.” or a “Company with Audit and Supervisory Committee” corporate governance system; and (iii) companies which appoint external auditors on a voluntary basis. Statutory audits are also required for other specific types of entities in accordance with relevant laws or regulations, for example, incorporated private educational institutions that have received subsidies from the government, certain non-listed large financial institutions, incorporated administrative agencies, local governments, agricultural corporation, social welfare entities, and medical corporations.

  All audits must be carried out in accordance with the Japanese GAAS (auditing standards generally accepted in Japan). Japanese GAAS consists of the standards issued by the Business Accounting Council (BAC)—an entity that operates under the supervision of the Financial Services Agency—and Auditing Standard Committee Statements (ASCSs) and Quality Control Standards Committee Statement (QCSCS) issued by the Japanese Institute of Certified Public Accountants (JICPA). ASCSs and QCSCS are developed by JICPA at the request of the BAC to develop detailed requirements to implement the auditing standards issued by the BAC. JICPA’s ASCSs and QCSCS are comparable to ISA and ISQC 1 issued by IAASB. According to JICPA, ASCSs and QCSCS are converged with the 2012 ISA as issued by the IAASB.

• Regulation of Accountancy Profession

  There is one professional designation—Certified Public Accountant (CPA)—in Japan which is protected and regulated by the Certified Public Accountants Act 2007 (CPA Act). The law sets the regulatory framework for the profession by stipulating the scope of services to be provided by CPAs, the establishment of the national CPA examination, requirements for CPA qualification, establishment of audit corporations, duties and responsibilities of CPAs, role and organization of the Japanese Institute of Certified Public Accountants (JICPA), roles of the regulatory authorities, and the disciplinary and criminal sanctions applicable to CPAs. The CPA Act grants the Financial Services Agency (FSA) the authority to oversee CPAs along with the JICPA’s and national standard-setting bodies’ activities.

  Individuals seeking the CPA designation must meet the following requirements: (i) pass the CPA examination conducted by the Certified Public Accountants and Auditing Oversight Board (CPAAOB)—an agency that is part of the FSA, (ii) have a minimum of two years’ practical experience, (iii) participate in a three year professional accountancy education program offered by the Japan Foundation for Accounting Education and Learning, and (iv) pass final assessments offered by JICPA.

  The FSA and the CPAAOB oversee distinct aspects of the audit profession. The FSA is responsible for (i) overseeing all of JICPA’s activities; (ii) supporting the standard-setting processes of the Accounting Standards Board of Japan (ASBJ) and the Business Accounting Council (BAC); and (iii) registering audit firms while the CPAAOB has the following three responsibilities: (i) conduct and oversee the quality assurance reviews; (ii) implement the CPA examinations; and (iii) deliberate disciplinary actions against CPAs and audit firms and make necessary recommendations to the FSA.

  Under the oversight of these bodies, the JICPA is authorized to carry out the following regulatory activities: (i) uphold the professional ethics of members by developing the code of ethics for accountancy profession and promoting compliance with the code; (ii) design and implement measures to improve the quality of services provided by members through organizing seminars and research projects; (iii) research on the theories and the practices of auditing, accounting, and other related fields of professional services in order to promote the implementation of auditing and accounting standards, and to establish auditing and accounting systems; (iv) design and implement quality assurance reviews; (v) support members by providing necessary assistance through consulting with the members and providing materials; (vi) conducting investigative and disciplinary proceedings; (vii) design and implement measures for the education and training of CPAs; and (viii) perform administrative works for the registration of members.

  Lastly, JICPA maintains certain independence requirements for CPAs providing services to regulated companies. Specifically, CPAs are not allowed to conduct audits on companies in which the individual was employed within the past year (two years for a government office). Audit corporations are also not allowed to provide audit services to a company within which the corporation has substantial interests, such as investments. Audit firms are restricted from providing extensive consulting services beyond auditing itself. Finally, each individual CPA and engagement partner of audit corporations must rotate for audit engagements of listed companies at least every seven years.

• Audit Oversight Arrangements

  In Japan, the Certified Public Accountants and Auditing Oversight Board (CPAAOB) serves as an independent audit oversight function of the Financial Services Agency (FSA). Both agencies oversee the regulatory activities of the Japanese Institute of Certified Public Accountants (JICPA). The Certified Public Accountants Act as amended in 2007 establishes that the CPAAOB may (i) conduct and oversee the quality assurance reviews; (ii) implement the CPA examinations; and (iii) deliberate disciplinary actions against CPAs and audit firms and make necessary recommendations to the FSA while the FSA is overall responsible for (i) overseeing all of JICPA’s activities; (ii) supporting the auditing standard-setting processes of the Business Accounting Council; and (iii) registering audit firms.

  The CPAAOB is a member of the International Forum of Independent Audit Regulators.

• Professional Accountancy Organizations

  The Japanese Institute of Certified Public Accountants (JICPA)

  JICPA was established under the Certified Public Accountants Act in 1966 and the Act has subsequently be amended to enhance JICPA’s authority as it relates to the accountancy profession. Today it is the sole organization representing the profession in Japan and any individual who wishes to use the designation of and publicly practice as a Certified Public Accountant (CPA) must be a member.

  Under the oversight of the Financial Services Agency (FSA) and the Certified Public Accountants and Auditing Oversight Board—an agency that is part of the FSA—the JICPA is authorized to carry out the following regulatory activities: (i) uphold the professional ethics of members by developing the code of ethics for accountancy profession and promoting compliance with the code; (ii) design and implement measures to improve the quality of services provided by members through organizing seminars and research projects; (iii) research on the theories and the practices of auditing, accounting, and other related fields of professional services in order to promote the implementation of auditing and accounting standards, and to establish auditing and accounting systems; (iv) design and implement quality assurance reviews; (v) support members by providing necessary assistance through consulting with the members and providing materials; (vi) conducting investigative and disciplinary proceedings; (vii) design and implement measures for the education and training of CPAs; and (viii) perform administrative works for the registration of members.

  In addition to membership of IFAC, JICPA is a member of CAPA (Confederation of Asian and Pacific Accountants), GAA (Global Accounting Alliance), and AFA (ASEAN Federation of Accountants). JICPA also works closely with ASBJ (Accounting Standards Board of Japan) and the Business Accounting Council in setting standards for the jurisdiction.

• Projects or Other Information

Adoption of International Standards

• Quality Assurance

  The Japanese Institute of Certified Public Accountants (JICPA), Financial Services Agency (FSA), and Certified Public Accountants and Auditing Oversight Board (CPAAOB) work together to design and implement the quality assurance (QA) review system for all statutory audits in Japan. JICPA has conducted quality control reviews since April 1999 to improve and enhance the quality control system of audit firms that perform financial statement audits. The 2003 amendments to the Certified Public Accountants Act legally established the CPAAOB to conduct QA reviews of audit firms along with overseeing the JICPA’s QA review process.

  JICPA has a Quality Control Committee, Quality Control Review Team, and Quality Control Oversight Board. The Quality Control Committee consists of both JICPA members and other experienced non-JICPA individuals. They are responsible for developing quality control review standards and procedures, instructing review teams, approving quality control review reports, and deciding on issuing letters of recommendation. The Quality Control Review Team reviews whether a firm’s audit quality controls has been designed in accordance with the JICPA quality control standards, which are based on ISQC 1 as issued in 2014 by the IAASB, and whether quality control procedures have been adequately implemented. The Quality Control Oversight Board monitors the effectiveness of the overall review system.

  The CPAAOB examines the reports submitted by the JICPA and carries out on-site inspections of the audit firms. If the results of inspections show that the quality control review was not conducted properly, or CPAs/audit firms did not conform to laws, regulations and standards related to quality control of audits, etc., the CPAAOB will recommend that the Commissioner of the FSA take administrative actions and other measures as necessary.

  JICPA reports that its QA review system meets all the revised SMO 1 requirements and notes that it regularly revises the QA review program to ensure it continues addressing all SMO 1 components.

  Current Status: Adopted

• International Education Standards

  The Certified Public Accountants Act outlines the requirements to become a CPA in Japan. These include passing a CPA examination that is administered by the Certified Public Accountants and Auditing Oversight Board, completing a professional accountancy education provided by the Japan Foundation for Accounting Education and Learning, completing practical experience, and passing a final assessment offered by the Japanese Institute of Certified Public Accountants (JICPA).

  JICPA indicates these initial professional development requirements are generally in line with the revised IES requirements, although noting that it shares responsibility of this area among different stakeholders and implementation of the requirements may vary.

  In addition, JICPA also requires members to fulfill continuing professional development (CPD) requirements. Members must fulfill 120 CPD credits in each rolling three-year period and 20 CPD credits in each year. The institute indicates that its CPD is also overall in line with the IES.

  Current Status: Adopted

• International Standards on Auditing

  Japanese GAAS (auditing standards generally accepted in Japan) consist of the standards issued by the Business Accounting Council (BAC)—an entity operating under the auspices of the Financial Services Agency—and the standards issued by the Japanese Institute of Certified Public Accountants (JICPA). BAC’s standards consist of the Auditing Standards, Standard to address Risks of Fraud in an Audit (applicable to the publicly traded companies only), and the Standard on Quality Control for Audits. The BAC’s standards are supplemented by Auditing Standard Committee Statements (ASCSs) and Quality Control Standards Committee Statement (QCSCS) issued by JICPA. The standards issued by the BAC and the ASCSs and QCSC issued by JICPA, taken together, comprise Japanese GAAS. All audits must adhere to the Japanese GAAS. Companies that are subject to statutory audits in Japan are identified in the Financial Instruments and Exchange Act and the Companies Act. Statutory audits are also required for other specific types of entities in accordance with relevant laws or regulations.

  According to JICPA, Japanese GAAS are converged with the 2012 ISA as issued by the IAASB. On July 5 2018, the BAC issued “Opinion on the Revision of Auditing Standards” and revised BAC’s auditing standards to improve transparency in the auditor’s report which includes implementation of Key Audit Matters. JICPA plans to issue the exposure draft of new ASCS 701 and revision of ASCSs related to auditor reporting in October 2018. It will cover new auditor reporting standards except for ISA 720 (Revised) issued by IAASB in 2015. JICPA has already translated ISA 701 and some supporting materials relevant to the new auditor’s reporting standards into Japanese.

  Additionally, JICPA is working to revise relevant ASCSs in light of revision of ISA 610 (in 2012 and 2013) and revision of ISA to address disclosure in the audit of financial statements (in 2015) issued by IAASB. The exposure draft is planned to be issued in the Q1 2019.

  For other IAASB pronouncements, JICPA issued Auditing and Assurance Practice Committee Statement (AAPCS) 2400 in 2016, and AAPCS 3000 together with Framework for Assurance Engagements in 2017. They are all based on ISRE 2400 (Revised), ISAE 3000 (Revised) and the amended International Framework for Assurance Engagements issued by IAASB with some additional requirements and application materials. Additionally, JICPA issued Professional Engagement Practice Statement 4400 in 2016 with a minor revision in 2018, which were modernized ISRS 4400.

  Current Status: Partially Adopted

• Code of Ethics for Professional Accountants

  Ethical requirements in Japan are defined in the Certified Public Accountants Act in addition to the Code of Ethics issued by the Japanese Institute of Certified Public Accountants (JICPA).

  JICPA has an Ethics Committee that issues the JICPA Code of Ethics which is reported to be in conformity with that of the latest IESBA Code of Ethics. JICPA Ethics Committee works for adoption as soon as possible after the amended IESBA Code releases.

  JICPA states that due to national legislation and the JICPA’s own Code of Ethics some ethical requirements are more stringent than what is in the IESBA Code of Ethics.

  Current Status: Adopted

• International Public Sector Accounting Standards

  The Ministry of Finance of Japan is responsible for the development of public sector accounting standards for the central government while the Ministry of Internal Affairs and Communication (MIC) is responsible for accounting standards for local governments.

  In January 2015, the MIC released a public sector accounting manual for municipalities, in order to promote the use of a single set of accounting standards for reporting financial information by local governments. Local governments were strongly encouraged to align their reporting systems with the new standards by 2017. Beginning in 2018, the MIC is planning to assist local governments on the application of the standards and the ICT system.

  The national public sector accounting standards require financial statements to be prepared on an accrual basis.

  Current Status: Not Adopted

• Investigation and Discipline

  The Certified Public Accountants Act grants legal authority to the Japanese Institute of Certified Public Accountants (JICPA) to conduct investigative and disciplinary proceedings (I&D).

  JICPA has established an Audit Practice and Review Committee to conduct reviews of submitted information and complaints; an Investigative Committee to investigate further details and decide whether to recommend sanctions; and a Disciplinary Committee to examine the evidence and judge on sanctions. Individuals can then appeal to the institute’s Appeals Committee if not satisfied with the decision of the Disciplinary Committee. The JICPA has also established an Audit Practice Monitoring Board in order to ensure the objectivity and transparency of JICPA's monitoring activities concerning audit practices. The Board reviews the activities of JICPA’s committees involved in I&D procedures and makes recommendations as to whether cases should be published. JICPA reports that its I&D system aligns with the SMO 6 requirements.

  The Financial Services Agency is authorized to take enforcement actions based on the results of investigations and/or the recommendations by JICPA as necessary.

  Current Status: Adopted

• International Financial Reporting Standards

  In 2001, the Accounting Standards Board of Japan (ASBJ) was formed under the auspices of the Financial Accounting Standards Foundation. The ASBJ is responsible for the development and deliberation of private sector accounting standards in Japan. All standards set by the ASBJ are subject to the endorsement of the Financial Services Agency (FSA).

  The IASB and the ASBJ have been working together to achieve convergence of IFRS and Japanese Generally Accepted Accounting Principles (Japanese GAAP) since 2005. Voluntary adoption of IFRS for consolidated financial statements by companies that meet certain criteria has been permitted since March 2010. On 30 June 2015, Japan inaugurated a new set of accounting standards known as Japan’s Modified International Standards, bringing to four the number different accounting frameworks that listed companies in Japan may use. The four frameworks are:

  IFRS: virtually all listed companies and unlisted companies preparing consolidated financial statements for listing purposes are permitted to use IFRS as designated by the Commissioner of the FSA. All voluntary adopters use full IFRS without modification or deletions and any selected types of public interest entities (for instance, financial institutions) are not required to adopt IFRS.

  Japanese GAAP as issued by the ASBJ: historically, most listed companies have used Japanese GAAP.

  Japan’s Modified International Standards (JMIS): accounting standards comprising IFRS and the ASBJ modification. JMIS was developed based on IFRS with deletions and modifications determined by the ASBJ. Concurrent with issuance of JMIS on 30 June 2015, the ASBJ published modifications relating to amortization of goodwill and recycling of other comprehensive income.

  US GAAP: with the permission of the Commissioner of the FSA.

  Current Status: Partially Adopted

• Sources

  Relevant Organizations

  • Accounting Standards Board of Japan (ASBJ)
  • Business Accounting Council (BAC)
  • Certified Public Accountants and Auditing Oversight Board (CPAAOB)
  • Financial Services Agency (FSA)
  • Japan Foundation for Accounting Education and Learning (JFAEL)
  • Japanese Institute of Certified Public Accountants (JICPA)

  Relevant Legislation

  • Certified Public Accountants Act (CPA Act)
  • Commercial Code, as amended in 2008
  • Companies Act, 2005
  • Financial Instruments and Exchange Act

  Relevant Publications

  • Benston, George J., Michael Bromwich, Robert E. Litan, and Alfred Wagenhofer, Corporate Financial Reporting and Regulation in Japan, February 2006.
  • IASPlus, “Accounting Framework in Japan.”
  • IFRS Foundation, “Agreement on initiative to accelerate the convergence of accounting standards,” 8 August 2007.
  • IFRS Foundation, “IFRS Application Around the World, Jurisdictional Profile: Japan,” 12 Jan 2018.
  • JICPA, “Accounting Standards.”
  • JICPA, “Auditing System.”
  • JICPA, “Code of Ethics.”
  • JICPA, “Continuing Professional Education.”
  • JICPA, Corporate Disclosure in Japan: Auditing, 2013.
  • JICPA, Corporate Disclosure in Japan: Overview, 2010.
  • JICPA, “Disciplinary Actions and Sanctions on CPAs.”
  • JICPA, “Quality Control Review System.”
  • JICPA, SMO Action Plan, January 2019.
  • JICPA, The CPA Profession in Japan, 2008.
  • Kawamura, Yoshinori, “Accounting Profession and Professional Accounting Education in Japan,” 26 April 2017.

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