Professor, Keio University Faculty of Business and Commerce
Eiko Arata
Financial Accounting
Appointed a Professor of the Keio University Faculty of Business and Commerce in 2019, after serving as a full-time lecturer , associate professor, and professor in the Musashi University Faculty of Economics. Holds a master's degree in economics. Author of numerous publications including Financial Statement Analysis and Security Valuation (co-translator, Yuhikaku, 2018), "Reasonability of Accounting Rules as Social Norms: Based on the Example of Depreciation" in Financial Accounting Theory and Institutions (chapter 11, 2018), "The Consequences of Standardization of Social Norms: Thinking About Financial Reporting Systems with Shyam Sunder (2016),"Kigyou kaikei (68(9), 2017), and "The Impact on HOUJIN-KIGYOU-TOKEI by Revision of Lease Accounting Standards" (coauthor, Keizaigaku Ronshu, 78 (3), The University of Tokyo, 2012).
Grasping the structure of accounting standards
Professor, Keio University Faculty of Business and Commerce Eiko Arata
A business enterprise converts its daily economic activities into accounting information on financial statements such as the balance sheet and income statement, using a tool, i.e. double-entry bookkeeping and rules, i.e. accounting standards, and discloses this information to its stakeholders. Stakeholders use this information to make decisions on matters such as whether or not to invest in the company or how much taxes to asses on it, and the results then impact the company's economic activities as feedback. This series of processes makes up the financial reporting system. My research interest is in the structure and roles of accounting standards, as sets of functions through which map transactions to accounting information.
Issues concerning lease accounting
In particular, I have conducted research on lease accounting. Lease transactions (generally speaking, without considering their accounting definition) are ones in which a lessee is promised the ability to use a specific asset for a certain period of time in exchange for payment to the lessor. Users of accounting information want a lessees to recognize its payment obligations as liabilities, since it was unable to cancel the lease during its term. At the same time, lease assets need to be characterized by concepts other than ownership in recognizing on balance sheet, because the lessor retains ownership of the assets. Repeated debate has taken place for more than 70 years since the 1940s regarding what kind of lease transactions should be recognized on the lessee’s balance sheet and the logic behind such recognition. Accounting standards for leases have changed considerably from my time in graduate school to now.
Consistency in accounting
Normally, any rules should have a consistency within a whole (sound) system. Since the meaning of consistency can vary depending on the dimensions considered, readers are encouraged to refer to Saito (2012) and other works for more detailed descriptions. Here we will consider merely a consistency with the logic behind the accounting treatment of a transaction and that behind the accounting treatment of similar transactions or with what users have come to accept as appropriate accounting treatment over the years. Maintenance of such consistency makes changing accounting standards somewhat predictable. Inconsistency could have a major impact on the economic system through loss of trust in accounting standards. I am interested in how this consistency has been maintained in lease accounting despite it has changed over 70 years.
But the academic trend has shifted from an interest in accounting principles themselves to empirical research on the accounting information generated given those accounting principles and the implications for accounting systems from study of correlations with stock prices and other data. In such a situation, it is not easy to find an approach appropriate for answering my questions, but I have found clues to a solution in the disciplines of law and economics and cooperative game theory.
Analysis of accounting standards based on law and economics
general to use of economic methods to analyze laws. What interested me about this discipline was not empirical research to evaluate the effects of laws quantitatively but research that explains the functions and structures of laws using economic theory. In such studies, researchers in sociology of law and philosophy of law employ economics to study the roles of laws as a kind of social norms and the relationship between social order and laws. Since in a broad sense accounting standards can be considered a form of legal norms, it seemed to me that knowledge from the results of research on law and economics could be applied to find methods of verifying changing structures of accounting standards and the consistency referred to above. Now I am a member of the Japan Law and Economics Association and engage in periodic research meetings with colleagues who specialize in law and economics. I am advancing research through such activities. The paper "Analysis of the Recognition of Leases by Property Rights Approach" published in 2022 (Kigyou Kaikei, October issue) was accepted to one of the few peer-revised journals in the field of financial accounting, and I reported on the subject " Structure of Accounting Standards and Its Transformation: Analysis of accounting standards based on law and economics" as a panelist in a conference of the Japan Accounting Association. I believe that my research is gaining acceptance in the academic community, although the methods are not major. Currently, I am studying the subject together with legal and economics scholars and practitioners in the Research Group on Ownership and Trusts in the Digital Age: Study Based on Economic and Comparative Law Analysis (chair; Professor Takashi Shimizu of the University of Tokyo), with a grant from the Trust Mirai Forum. I am thrilled to see the background of how accounting has considered the meaning of assets across jurisdictions, and my own related studies, may contribute to solutions to new issues in today's world.
Axiomatic analysis of accounting standards
Axiomatic analysis through cooperative game theory has provided an opportunity to advance research on consistency in accounting standards. Cooperative game theory is a theory used in analysis of the kinds of coalitions and distribution of payoff that take place under the assumption that players can be bound by consensus. Since in many cases this assumption that players can be bound by consensus is guaranteed by the law or accounting standards, it seemed to me that this theory in fact could be applied more broadly. In a cooperative game, distribution of specific payoff secured through cooperation is called a solution, and it is possible through listing (axiomatization, characterization) of the properties that would satisfy each soliton to verify consistency among problem-solving methods.
Aumann and Maschler (1985) used cooperative game theory to solve a mystery concerning distribution of an inheritance, which is illustrated by puzzling numerical example in the Jewish Talmud. Captivated by such research on solving mysteries in norms, together with Professor Takuhei Shimogawa (mathematical logic), a former colleague at Musashi University, and Professor Takehiro Inohara (decision theory) of the Tokyo Institute of Technology I developed a model to explain depreciation, with the aim of conducting similar research on the subject of accounting standards (Arata et al., 2022). Since transferring to Keio University, I have learned from Professor Toru Hokari of the Faculty of Economics, a specialist in cooperative game theory, how to view cooperative games systemically from an axiomatic approach, and we are jointly advancing further research on the subject. We expect to make the logic behind generally accepted accounting principles (GAAP) clear by using cooperative games to model the procedures prescribed by accounting standards and identifying their axioms.
In this way, research that I first began just because it seemed interesting has evolved into an ongoing tool for verifying consistency in accounting standards, an issue that had interested me since my student years.
A worldview broadened through research on accounting standards
My research covers the field of accounting standards, which at first glance appears quite narrow. It does not concern flashy themes that are current today in accounting research such as AI, the Sustainable Development Goals, and integrated reporting. But I am blessed to have encouraged the approaches of law and economics and cooperative game theory, which I find highly interesting, and to be surrounded by so many specialists who are willing to discuss these topics with me. I enjoy this worldview that has broadened from the accounting standards that make up the core of the financial accounting system. In addition, through repeated in-depth discussions with researchers from other fields I am able to recognize anew the essence of accounting and remind myself that my own identity as a researcher is found in accounting.
References
Arata, E. (2022) "Analysis of the Recognition of Leases by Property Rights Approach." Accounting, 74 (10) pp. 97–108. (In Japanese)
Saito, S. (2012) " Consistency and usefulness of accounting standards: theoretical, empirical, and normative studies on social norms" in Takashi Obinata, ed., Basics of Accounting Standards Research, Chapter 1. Chuokeizai-Sha. (In Japanese)
Arata, E., Shimogawa, T and Inohara, T. (2022). A Game Theory-based Verification of Social Norms: An Example from Accounting Rules. Keio-IES Discussion Paper No. 2022-007.
Aumann, R. J. and Maschler, M. (1985). Game Theoretic Analysis of a Bankruptcy Problem from the Talmud. Journal of Economic Theory, 36 (2), 195–213.