Environmental accounting of small and medium-sized entities following the 2011 Tohoku-Pacific Ocean earthquake.

Author:Tsuji, Mineo


The Japanese people listened to the following message from His Majesty the Emperor on March 16, 2011:

I am deeply saddened by the devastating situation in the areas hit by the Tohoku-Pacific Ocean Earthquake, an unprecedented 9.0 magnitude earthquake, which struck Japan on March 11. The number of casualties claimed by the quake and the ensuing tsunami continues to rise by the day, and we do not yet know how many people have lost their lives. I am praying that the safety of as many people as possible will be confirmed. My other grave concern now is the serious and unpredictable condition of the affected nuclear power plant. I earnestly hope that through the all-out efforts of all those concerned, further deterioration of the situation will be averted. According to the Nihon Keizai Shimbun (2011), in Miyagi prefecture, earth and sand containing arsenic shifted into residential areas from a disused mine. In addition, the newspaper reporters found when visiting Miyagi prefecture in April that more than a few transformers containing polychlorinated biphenyl (PCB), which had been in use at refrigerated warehouses, had been washed away. At the time, the newspaper's reporters were unable to take pictures because of the unrecovered corpses of victims.

Before Statement No. 18: Accounting Standard for Asset Retirement Obligations (ASBJ, 2008), Japan had not permitted accounting for an asset retirement obligation except as a reserve for the decommissioning costs of nuclear power units of an electric power company (e.g., Tokyo Electric Power Company, 1989, p. 35; ASBJ, 2008a, par. 22). Accordingly, small and medium-sized entities (SMEs) would currently not need to act in accordance with this statement. A sustainable society will ask an entity to protect the environment, so it has to account and report in such a way, regardless of whether it is a large company or an SME. Our previous study (Tsuji & Fujibayashi, 2011) finds that the voluntary recognition of the fair value of a liability for an asset retirement obligation is necessary for maintaining a sustainable society. When considering the users of the financial reporting of smaller entities, it is significant that the Corporation Tax Law (Act No. 34 of 1965) does not permit this accounting provision.

Under current laws, a transformer containing PCB that is not in use and is designated for exchange is usually stored in a designated area/room until disposal. We cannot define this as an asset retirement obligation. In practice then, an entity may account for provisions. However, in Japan, the Accounting Standards Board of Japan (ASBJ) developed the standards for asset retirement obligations, and the accounting standards for provisions have not yet converged (ASBJ, 2009). Moreover, at the international level, the International Accounting Standards Board (IASB) has not yet completed its project on improving IAS37: Provisions, Contingent Liabilities, and Contingent Assets, in spite of two recent exposure drafts (2005; 2010a).

At the national level, Japan has a set of domestic tax rules. SMEs have applied these to preparing their financial statements in practice. The experience of the recent earthquake suggests that SMEs in Japan should be treated in accordance with these financial accounting standards.


On April 22, 2011, in order to know how our customers were doing, we visited Miyagi prefecture, which was one of the prefectures in the Tohoku district that suffered direct damage from the earthquake. We were able to ask four presidents and representative directors of food industry SMEs about the influence of the earthquake at that time. Their common response was that although they wanted to give priority to the maintenance of employment, the impairments to the property of the companies were so serious that they believed they should obtain a loan from a financial institution in order to resume their business.

Soon after the earthquake, however, it seemed impossible for a financial institution to make a loan to such a damaged entity without a foundation for a new guarantee system. We anonymously contacted the loan officers for five regional banks in the Tohoku district, who explained some of the reasons they gave for refusing new loans in the area. These included a decline in an entity's collateral value because of the earthquake, the lack of continuity and the interruption of cash inflow, and its worsened economic substance if it had already taken out a loan under the Act concerning Temporary Measures to Facilitate Financing for SMEs, etc. (Act No. 96 of 2009).

Subsequently, the Japanese government and its agencies began to implement countermeasures against the effects of the earthquake. At the national level, for example, the Small and Medium Enterprise Agency established the Urgent Guarantee against the East Japan Earthquake in May (SMEA, 2011). The guarantee provided assurance for 14,182 claims totaling 352,200 million yen, more than ninety percent of which were for indirect damages by the earthquake (Credit Guarantee Corporation of Tokyo, 2011).

The guarantee provided assurance for 14,182 claims totaling 352,000 million yen, more than ninety percent of which were for indirect damages caused by the earthquake. At the local government level, the Miyagi Prefecture Credit Guarantee Corporation began to guarantee against the earthquake. As at the end of July 2011, it had guaranteed 3,864 claims totaling 65,900 million yen. Nevertheless, considering that the amount of damage caused by the earthquake in Miyagi prefecture alone would amount to more than seven trillion yen (Nippon Television Network Corporation, 2011), some financial institutions could not maintain a loan without adequate security in spite of the guarantee system.

By contrast, after the earthquake, the number of funds that attempted to support business realignment of SMEs, such as Music Securities, Inc. and Public Interest Incorporated Association Civic Force, appears to have increased. To determine whether they would invest in an SME, these funds applied due diligence in analyzing the financial reports useful for investment decision making rather than the SME's tax accounts.


Some nuclear power stations in the Tohoku area were badly damaged by the earthquake, and this resulted in an electrical power shortage. As a result, the Ministry of Economy, Trade, and Industry announced 'the Imposition of Electric Power Limitation on Article 27 of Electric Utilities Industry Law (Act No. 170 of 1964)' on June 1, 2011.

This 'imposition' obliged customers demanding more than five hundred kilowatts of electric power to conclude a supply-and-demand contract with a specific electric provider, such as the Tokyo Electric Power Company, Inc. or the Tohoku Electric Power Company, to decrease electricity usage by 15 percent from the previous year. Any company violating this limit was to pay a fine of...

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