On March 14, Toshiba Corp. announced it will delay, for the second time, the release of its financial earnings for the third-quarter period until April 11, saying it needs more time for an audit of its accounting problems at U.S. nuclear unit Westinghouse, which filed for bankruptcy protection last week.

Toshiba stocks have halved in the past three months, and the company, one of the top three electronics manufacturers in Japan, risks being delisted from the Tokyo Stock Exchange.

An earnings report is a crucial tool to assess the financial health of a company, closely watched by investors, clients, business partners, analysts and other stakeholders.

But what are the rules on financial reporting and what happens if they are broken? The Japan Times looks into the issue.

Which companies need to disclose financial statements and when?

The Financial Instruments and Exchange Law requires all stock-listed companies to report their financial statements to the Financial Services Agency within three months of their business year ending.

The law also requires that listed companies release a summary of their financial results every quarter (three months), no later than 45 days after the end of each quarter.

Nonlisted companies are not required to publicize their financial statements except in certain situations, such as if they have 1,000 or more stakeholders. But they are required to report their financial statements to the tax authorities and shareholders.

Why do business years tend to vary between companies?

Corporate entities can decide when their own annual financial period starts and ends. But many adopt the April-March fiscal year.

According to a National Tax Agency survey released in February, 19.3 percent of about 2.6 million corporate entities ended their business year at the end of March 2016, followed by 10.9 percent in September, 10.1 percent in December and 9.7 percent in June.

Ending the financial period in March works conveniently for many companies in Japan, particularly contractors and other firms that are involved in public works projects, said Naoto Kimura, a certified public accountant for Tokyo-based audit company Avantia GP.

“As the government’s fiscal year runs from April to March … many changes in the system take effect in accordance with this schedule,” he said. “Ending the financial period in March helps companies respond to the changes quickly.”

But Kimura said in recent years more companies in Japan have adopted the January-December calendar year for their business year to align with the accounting standards of their subsidiaries overseas, including in China, where the accounting period is the same as the calendar year.

In one example, cosmetics giant Shiseido Corp., which is headquartered in Tokyo but has subsidiaries in China, Singapore, the United States and France, has used the January-December financial period since 2015 to make it easier to consolidate the earnings of its group companies.

What information must companies disclose?

Two major financial statements are the balance sheet and the profit-and-loss statement, which are often referred to as company report cards.

The balance sheet reveals the financial standing of a company by showing its assets, liabilities and shareholders’ equities — or how much it owns and owes — as of its settlement day.

Reading a balance sheet helps to gauge how healthy a company’s finances are. If a balance sheet is in the red, it indicates the company is financially at risk.

Meanwhile, the profit and loss statement (P&L), or income statement, reveals its revenue, as well as costs and expenses incurred, for the business year.

The bottom of the P&L shows the company’s net income, or revenue after costs are subtracted, an important measure of how profitable a company is over the period.

Posting a net loss, however, doesn’t immediately mean a company is financially in danger, said Takeshi Adachi, a Tokyo-based certified public accountant.

Adachi said many shareholders tend to place weight on ordinary profit, which includes profits from a firm’s core business as well as gains from stocks, real estate and interest, because it is often seen as an indicator of a company’s true earning capacity.

“Even if a company temporarily recorded a net loss due to extraordinary reasons, such as corporate restructuring, many tend to view this positively if the company has the prospect of springing back in the black in the next financial period,” he said.

Listed companies are also required to publicize cash-flow statements, which allow investors to understand where money is coming from and how it is being spent.

The corporate law also requires all companies to create a statement on shareholder equity, which details how a company’s equity on the balance sheet has changed over the financial period.

What happens if disclosure is delayed?

The Financial Instruments and Exchange Law states the deadline of the earnings release can be extended upon approval by the FSA, the financial watchdog, if there is a “compelling reason.”

According to FSA, a “compelling reason” includes if there was a significant wrongful entry in the company’s past financial statements and it needs more time to recalculate it.

But it is unusual for a company to miss the disclosure deadline since it can damage investor confidence and it risks being delisted.

Japan Exchange Group Inc., which operates the Tokyo and Osaka stock exchanges, says a company will be delisted if it cannot provide a financial statement within a month after the deadline, or eight days after an extended deadline.

Who uses financial statements?

The major stakeholders in a firm are investors — who want to analyze the risk and reward of their investment — and financial institutions, including banks, which want to assess a company’s ability to pay down a loan.

The financial statement is also useful for businesspeople to know the financial standing of clients and to determine whether it is safe to do business with them. Managers also pursue business strategies based on financial statements.

The government also uses the financial statement to impose taxes.

“Disclosing their financial statements is the most important process for companies to fulfill their accountability requirements,” Kimura of Avantia GP said.

What happens when a company falsifies its financial statements?

Cooking the books is a criminal offense subject to a possible prison term and fine.

One notable example is Olympus Corp., which was first reported by Japanese financial magazine Facta in 2011. A whistleblower — former Chief Executive Officer Michael Woodford — later came forward to detail the wrongdoing. Woodford was sacked after he urged senior board members to explain their attempt to cover up investment losses.

The misdeeds led to the arrests of top executives, including Chairman Tsuyoshi Kikukawa, who was handed a suspended three-year prison term in 2013 for falsifying financial statements by overstating the company’s net assets by ¥41.6 billion to ¥117.8 billion.

The Tokyo District Court also ordered Olympus to pay ¥700 million in fines, and the company was separately fined about ¥192 million by the Financial Services Agency.

More recently, the Toshiba accounting scandal, which first emerged in 2015, revealed the company was conducting “inappropriate” practices that helped it to overstate earnings by ¥152 billion over seven years from 2008.

The scandal led to the ouster of key executives, including President Hisao Tanaka and predecessors Atsutoshi Nishida and Norio Sasaki, but to date none of the three has been charged.

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