Accounting for deferred tax in Japanese Banks and the consequences for their international operations

Abstract

In recent years, financial reporting has changed in Japan towards the requirements of internationally recognized accounting standards. At the same time, banks suffered significant bad debts on their loans and it became difficult to maintain capital adequacy ratios at the level required for international operations. In this context, using as case studies the five major banking groups in Japan from 2002 to 2004, we address four related research questions concerned with the importance of deferred tax for the maintenance of regulatory capital. The responses of the government, regulatory agencies and auditors to problems with deferred tax accounting are also considered. We find that, without deferred tax assets, the five major banking groups would not have been allowed to operate internationally. We also suggest implications, and conclude that the solutions to these problems lie not just with the accounting profession but also with the government and regulatory agencies, as part of wider financial, rather than accounting, reform.

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