The purpose of this paper is to examine the effects of a principles-based accounting standard with guidance (principles-with-guidance approach), stringency (conservativeness) of numerical thresholds, and incentives (high or low debt-equity ratio environment) on the judgments of Japanese auditors in a lease accounting setting.
To reflect Japanese auditors’ judgmental features, this study adopts a quasi-experiment that uses both manipulation for different environments (i.e. stable or critical financial condition) and perceptions about the importance of “principles” and “guidance” in different types of lease accounting standards (i.e. substantially all, approximately 90 and 88 percent).
“Principle” (substantially all) has a positive effect, while “guidance” (approximately 90 percent) has a negative effect on encouraging Japanese auditors to capitalize lease transactions. “More stringent guidance” (approximately 88 percent) has a positive effect only when clients are in critical financial conditions. Other findings indicate that judgments of Japanese auditors are strongly influenced by their colleagues’ perceived judgments.
This is the first quasi-experiment to examine Japanese auditors’ professional judgments using a lease accounting setting. To find out whether Japanese auditors interpret and apply International Financial Reporting Standards (IFRS) in the similar manner as their counterparts in other countries will be important when Japanese policymakers make their final decision regarding the adoption of IFRS. The discussion and findings also contribute to the International Accounting Standards Board (IASB) with regard to enhancing global convergence of financial reporting.
The authors would like to appreciate the helpful comments and suggestions of the editor, anonymous reviewers, Professors Keiko Kitamura and Seong-Pyo Cho, the participants of the 2013 Annual Meeting of Japan Accounting Association and the 2014 Annual Meeting of American Accounting Association, and Japanese CPAs who participated in the survey. This study was supported by the Grand-in-Aid for Scientific Research, KAKENHI (C) 26380606 and (A) 24243053.
Tsunogaya, N., Sugahara, S. and Chand, P. (2016), "Judgments of auditors on “principles” versus “guidance” in lease accounting standard: Evidence from Japan", Asian Review of Accounting, Vol. 24 No. 3, pp. 362-386. https://doi.org/10.1108/ARA-09-2014-0101Download as .RIS
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