One of the codes of practice that are to be met by companies listed in the New York Stock Exchange is to prepare their financial statements based on the United States Generally Accepted Accounting Principle (US GAAP). Notably, the companies listed in the New York Stock Exchange include foreign and non-foreigners corporations that trade their shares. As it is recommended for all companies to produce financial statements that will give appropriate information to the stakeholders with interest in the company. As there is need information in order for shareholders, invest in locally and internationally owned companies it is critical to regulate the financial reporting standards in order to enhance uniformity in application of Generally Accepted Accounting Principles. The United States Securities and Exchange Commission oversees the companies’ adherence to reporting their financial statements under the US GAAP. For this reason, foreign companies have to oblige to the regulations by reconciling their financial statements into the US GAAP.
Sony Corporation is an international company that manufactures electronic goods and trades its shares in the New York Stock Exchange although it is a Japan based corporation. Sony Corporation is international companies with its subsidiaries based in Japan maintaining their records besides preparing their financial statement in accordance with Japan GAAP. On the contrary, the foreign subsidiaries of Sony Corporation maintain their records and prepare the financial statements with conformity to its domicile country GAAP. In order to come up with uniformity, certain adjustments and reclassifications have to be incorporated with regards to the consolidated financial statements such that they can conform to the US GAAP. This, however, does not include all the details in the financial statements as there are certain disclosures that are omitted from complying with the United States GAAP. The main reason behind the conversion is to ensure uniformity and consistency while giving final reports of the holding company of Sony Corporation. Japanese GAAP applies to most of Sony’s subsidiaries in Japan in a different form as that used by the holding company as it applies the United States GAAP that is totally different in their rules and regulations in maintenance and preparation of financial statements.
Differences in the Japan GAAP and US GAAP in Net Income Measure
The difference in the net income of a financial statement maintained and prepared using the United States GAAP, and Japanese GAAP is brought about by the way the items found in the books of accounts are accounted for respectively. The books of accounts that are prepared at the end of the year give the final report through the cash flow statement, balance sheet beside the profit and loss account. Major difference arises in terms of accounting for the subsidiaries in the consolidated financial statement where according to Japanese GAAP, it is based on the control that the company has over its subsidiaries. On the other hand, the US GAAP recognizes the subsidiaries while preparing the consolidated financial statement depending on the majority voting interest by shareholders. Besides, the convertible bonds value differs when accounted for under the US GAAP and the Japanese GAAP. This is because Japanese GAAP converts changes in market bonds as net unrealized gains or losses under the net assets in the balance sheet whereas the change in market value in the US GAAP is reflected under the income statement.
Accounting treatment of new policies under the Japanese GAAP is charged to the costs as soon as it is incurred unlike US GAAP where the insurance acquisition cost is amortized in order to be evenly distributed. Treatment of the actuarial gains or losses in retirement benefits according to Japanese GAAP amortizes the whole amount without a corridor unlike US GAAP that applies the corridor of amortization based on the value of the retirement benefit. Treatment of goodwill as the Japanese GAAP advocates for strict amortization with impairment whereas the US GAAP advocates for impairment only and not aromatization. Where there is pooling of interest in business combinations the US GAAP uses purchase method while the Japanese GAAP ensures that it is exceptionally used when strict criteria have been met. Another difference arises in the measure of impairment of assets whereby Japanese GAAP takes the higher value between the net selling value and the value in use in order to determine the recoverable amount. On the other hand, US GAAP gives the measure of impairment of assets in terms of the fair value.
Company’s Profitability in Japan GAAP and US GAAP
Company’s profitability differs when US GAAP or the Japanese GAAP is applied when preparing the financial statements. Significantly, the difference extremely comes about due to the different currencies used in different countries. Whereas Sony subsidiaries use Japanese Yens, while maintaining and preparing the financial statements, an increase in the Yen value leads to lower profits as Sony Corporation reports low sales considerably. On the contrary, when compared to the use of US GAAP the translation of the values from Japanese Yen into the United States dollar in order to have uniformity is marked by differences in the exchange rates. As a result, of unfavorable exchange rates, Sony Corporation operations report an increase in the operating loss. In the long run, lower profitability levels led to, lower dividend returns and poor profitability performance of the Sony Corporation in the New York Securities Exchange as it trades its share to investors.
However, the United States Securities and Exchange Commission has overseen that the use of US Generally Accepted Accounting Principles is not favorable they stipulate for the use of the Internationally Financial Reporting standards reinforcement by 2015. As a result, there will be uniformity in the application of accounting standards as most countries just like the Japan GAAP oversee its regulation adherence to the IFRS.