As major Japanese multinationals continue to expand in the US, one critical but underappreciated issue has come to the fore: a significant lack of Generally Accepted Accounting Principles (GAAP) expertise within their American subsidiaries.
A recent KPMG analysis highlights that, while the number of Japanese firms formally reporting under US GAAP is declining, many US operations remain constrained by the parent company’s adoption of J-GAAP or IFRS, without sufficient investment in local US GAAP capabilities.
Meanwhile, US regulators such as the PCAOB conduct rigorous inspections of non‑US audit firms, reporting persistent deficiencies, including gaps in internal control over financial reporting (ICFR), often linked to limited US GAAP knowledge among local staff.
In a landscape where even small misapplications in areas like lease accounting or revenue recognition can trigger Securities Exchange Commission (SEC) comment letters, restatements and compliance penalties, the knowledge gap is more than a technical flaw – it’s a material risk to Japanese companies’ financial integrity and global credibility.
This challenge is exacerbated by a global talent shortage in accounting professionals with deep expertise in US GAAP, particularly among bilingual staff who can bridge US standards with Japanese business practices.
According to the AICPA, the US is already facing a shrinking pipeline of qualified Certified Public Accountants (CPAs), with the number of candidates sitting for the CPA exam falling nearly 33% between 2016 and 2021.
For Japanese subsidiaries, the problem is compounded because they must recruit talent with not only US accounting expertise but also fluency in Japanese and cultural familiarity with the parent company’s practices.
As a result, many resort to on-the-job learning or rely on external audit firms to fill internal gaps, an approach that can lead to costly miscommunications and a reactive, rather than proactive, compliance posture.
As Japanese parent companies increasingly shift from US GAAP toward IFRS (with over 200 major firms now reporting under IFRS and the number using US GAAP expected to drop below ten), their international subsidiaries, especially those in the US, face growing pressure to adapt.
This growing IFRS adoption removes the previous option of simply “reconciling” JGAAP to US GAAP, forcing US‑based Japanese firms to either maintain real-time IFRS proficiency or hire external consultants to ensure compliance.
Such reliance on external audit and advisory firms for continuous IFRS expertise can exacerbate the communication gap and put control frameworks on the back foot, further reinforcing a reactive, compliance-heavy approach rather than a proactive, in‑house strategy.
To effectively support the growing demand for IFRS compliance, Japanese US subsidiaries are increasingly embedding IFRS requirements directly into their financial operations and enterprise systems. As Japan allows IFRS for consolidated reporting, its firms can no longer consolidate US subsidiaries under GAAP, but rather they must align their systems and processes with IFRS standards from the outset.
One study analyzing ERP adoption in IFRS conversions concluded that companies must modify their IT systems and redesign transaction-level workflows, not just adjust reporting at year-end, to ensure continuous compliance with multiple GAAP regimes.
More specifically, in the insurance sector, IFRS 17 implementations routinely require building new subledger systems that sit between core systems and the general ledger, capturing detailed transaction flows needed for compliant disclosures. These upgrades embed IFRS processes into the core transaction cycle, reducing reliance on periodic manual reconciliations and enabling proactive, controls-driven reporting.
One of the most problematic areas for Japanese subsidiaries operating under US GAAP is lease accounting, particularly following the implementation of ASC 842. This standard requires lessees to recognize nearly all leases on the balance sheet, posing significant operational and data management challenges.
Many Japanese subsidiaries, accustomed to off‑balance‑sheet treatment under J‑GAAP or IFRS 16, have struggled with this shift. For example, a recent study found that even before Japan formally adopted IFRS 16, firms operating under Japanese GAAP proactively reduced operating leases and shifted toward buying assets, highlighting a deep-rooted preference for keeping leases off the balance sheet under J-GAAP.
This proactive behavior wasn’t merely academic: Japanese banks have historically treated disclosed operating leases as significant indicators in credit assessments, suggesting that firms relied on off‑balance leasing to influence lending terms.
The consequences of these structural preferences for off-balance-sheet leases are increasingly concrete. SEC comment letters to companies adopting ASC 842 have called out insufficient disclosures related to lease classification, unplanned lease modifications and inadequate tabular reporting.
For example, in a comment letter to Health Catalyst, Inc, SEC staff demanded “updated disclosures outlined in ASC 842‑20‑50‑4 to include a tabular format” for right‑of‑use (ROU) assets and lease liabilities, prompting a formal amendment to their 2023 Form 10‑K.
Similarly, a 2024 KPMG report highlights that SEC inquiries often target ASC 842’s quantitative and qualitative lease disclosures, especially those concerning discount rates, variable lease costs, and modification accounting, underscoring common missteps during early adoption.
For US-based Japanese subsidiaries, these regulatory pressures can be magnified. Their longstanding practice of keeping leases off-balance-sheet under J-GAAP can lead to gaps in documenting key ASC 842 judgments, like discount rates, lease classification decisions and modification triggers.
Such omissions typically force reliance on external advisors to rectify disclosures post hoc, rather than addressing the root lack of internal lease accounting capability. This reactive posture not only elevates risk of repeated comment letter cycles, but also complicates investor communications, impairs SEC dialogue and can impair consolidation timelines for their Japanese parent companies.
The complexities of maintaining dual US GAAP and J-GAAP reporting have placed a particularly heavy burden on major Japanese financial conglomerates, highlighting structural challenges that likely echo across Japanese subsidiaries in the US.
For example, Mitsubishi UFJ Financial Group (MUFG) and BTMU reported that preparing US GAAP statements required nearly the same effort as their J-GAAP filings, involving significant manual journal entries, complex valuation work and dedicated US GAAP teams, even at the core banking level.
This burden is not unique to banking: the Japanese Financial Services Agency has noted that many corporations maintain parallel accounting systems, one for J‑GAAP and another for IFRS (or US GAAP), resulting in redundant processes and increased costs.
In its 2015 IFRS adoption report, the FSA highlighted that firms commonly develop or modify core accounting and fixed‑asset systems specifically to support dual reporting frameworks, maintaining two sets of accounting data simultaneously.
For US‑based Japanese subsidiaries, the added requirement of recognizing all leases under ASC 842 further amplifies this strain, forcing them to report fully on‑balance‑sheet leases alongside their traditional J‑GAAP methodologies.
This dual‑track reporting demands enhanced internal coordination, tighter system integrations, and sustained US GAAP expertise to avoid errors, inefficiencies, and potential compliance fallout.
Japanese firms transitioning to global GAAP face not just cultural challenges, but also formidable technical hurdles. The FSA’s 2015 IFRS adoption report found that nearly 40% of surveyed companies retrofitted or replaced their main accounting and fixed‑asset systems to support parallel reporting under Japanese GAAP and IFRS, signifying costly infrastructure investments that likely mirror efforts needed for US GAAP as well.
The 2024 IMF Technical Note on Japan’s financial sector highlights a key obstacle: Japan’s legacy accounting systems, built around J‑GAAP’s historic valuation conventions, diverge significantly from those underpinning international and US GAAP standards, particularly regarding asset valuation methodologies.
For instance, under J‑GAAP, non‑listed securities are typically recorded at cost, whereas IFRS (and by extension US GAAP) demand fair‑value recognition, a discrepancy that complicates system design and data capture for companies transitioning to US GAAP-level reporting functionality.
In the end, the difficulties Japanese subsidiaries face with US GAAP are not isolated technical issues, but instead are the product of deeper systemic, cultural and institutional mismatches between Japan’s historical accounting environment and the operational demands of the US regulatory landscape.
From embedded off-balance-sheet preferences under J-GAAP to dual-reporting burdens and legacy IT systems ill-equipped for fair value and lease capitalization requirements, these challenges have created an uphill battle for compliance. Yet the stakes are higher than ever.
As US regulators intensify their scrutiny and Japanese parent companies increasingly adopt IFRS for global reporting, subsidiaries operating in the US must invest in more than just external advisors or ad hoc fixes, but instead they must build internal capacity, overhaul systems and cultivate deep US GAAP fluency within their teams.
For Japanese multinationals hoping to preserve their credibility in US capital markets and avoid costly restatements or enforcement actions, bridging this gap is no longer optional. It’s a strategic imperative.
Sayaka Ohshima holds an MBA and a B.S. in accounting, and works as a US-based accountant specializing in financial reporting and compliance. Her research explores the intersection of economic policy, trade strategy and global capital flows.
