Endless subsidy frauds

The Japanese government and local governments offer various kinds of subsidies to large enterprises, small and medium-sized businesses, and individuals, which most of us might know little about.

However, during the COVID-19 pandemic, special cash payments were provided to every resident in Japan and a new subsidy program for sustaining businesses was established, which made headlines. Many people might have become interested in subsidies in a broad sense.

Subsidies are contributed to achieve policy objectives for the improvement of our lives or the promotion of a better society.

Usage of subsidies are specified, such as a subsidy for the promotion of some business or a subsidy for the research of something, however, regrettably, not a few subsidies are used inappropriately.

Let me break up the problem into two smaller problems. One of these is a procedural issue which results in subsidy frauds. An alleged fraud of COVID-19-related subsidies for sustaining businesses has become a sensational headline, although 1.2 billion yen out of the total amount of the subsidies of 5.5 trillion yen had already been revealed to be illegally received before this case.

Another problem is the abuse of subsidies which are processed and paid properly. For example, if a cultural facility construction with a subsidy which is paid properly results in poor utilization, the intended purpose of the subsidy such as cultural promotion cannot be achieved. (In Japan, it is called hakomono gyosei, which means a public policy only focusing on the construction of public buildings.)

A common matter in those two problems is only focusing on receiving subsidies. Subsidies are funded by tax revenues. In other words, they are “for all people,” which means, in a broad sense, they should undertake their essential role to be utilized for all people, thus for the public interest. Nevertheless, in most cases, people do not pay much attention to such an essential role after receiving subsidies.

For the first problem, the reporting function of accounting can contribute; however, ultimately, it must be judged under the law. The latter one is my area of research. Currently, various post-construction evaluations on the utilization of public buildings are adopted. However, accounting can contribute more to changing the mindset in order to pay attention to their essential role, I think.

Why people pay little attention to the essential role? It seems that people think of a subsidy as revenue from the government and tend to think their goals are to receive the money and to complete all the accounts. The essential role of subsidies is to serve the public interest and it is the duty of receivers to fulfill that role. However, most people seem to pay little attention to that point. For example, if the role of a subsidy is accomplished when a building construction is finished, it is not a public interest but only a private interest for construction companies.

Subsidies are deferred income under International Financial Reporting Standards (IFRS)

It seems that people think of subsidies as revenue partly because of their accounting process.

Generally, companies record subsidies as revenue in accounting processes. Most of you might think this is reasonable. I will explore this in detail. When an organization receives a subsidy of 100 million yen to acquire a certain facility or equipment, the subsidy of 100 million yen is recorded as revenue in its accounting process. Then, as a general treatment, the same amount of 100 million yen is recorded as a loss on tax purpose reduction entry. In other words, in order to eliminate the revenue of the subsidy on financial statements, the same amount of cost is recorded. The meaning and effect of this process is not important here, however, I think this process makes people think of subsidies as revenue and pay less attention to their essential role.

On the other hand, for example, incorporated administrative agencies, including national universities and the Japan Mint, record such subsidies as liabilities. What does this mean?

Suppose an incorporated administrative agency constructs a facility to serve the public interest for ten years with a subsidy of 100 million yen, the agency records the 100 million yen as liabilities. After the construction, the agency continues to serve the public interest and but a kind of advanced gains 10 million yen per year as an income for ten years to refund the liabilities.

In other words, a subsidy is not a revenue but a kind of advance received in return for its essential role, serving the public interest, which means that it is liabilities. Then, to reduce the liabilities, serving public interest is unavoidable. As a result, paying attention to the subsequent utilization is also unavoidable. Building construction cannot be the goal.

Of course, many aspects, including purposes of foundation and social roles, are different between incorporated administrative agencies and companies. However, under IFRS, deferred income method in which subsidies are recorded in liabilities section has become common for companies. The underlying thought of this method is that subsidies have their own purposes to be offered and companies which receive subsidies have a duty to accomplish those purposes, which is a requirement for recording subsidies as revenue.

This way of thinking leads to facilitating companies’ social responsibilities and SDGs. In Japan, it seems appropriate to the times to discuss the method such as recording subsidies as liabilities.

We should pay more attention to the utilization of subsidies

Let’s think about this issue another way. Think about a subscription which offers services to customers. A company provides subscription services and receives annual or monthly fees in advance. Are these fees revenue?

If the company cannot provide services it has promised to users, users may cancel the services or in some cases, demand a refund of the fees.

This means that fees received in advance become revenue after the company provides services it has promised to users during the period it has promised. Subsidies can be thought of in the same way as subscriptions.

Of course, subscriptions have specific contracts with users. There are various types of subsidies. Therefore, whether each subsidy can be considered as a contract between the government or a local government and a company should be discussed more with legal experts.

At least in U.S. accounting, some subsidies are processed as a kind of conditional liabilities. In this case, a subsidy has strings (requirements to be accomplished) attached and is deemed as liabilities until the requirements are accomplished.

From the perspective of the public, subsidies are funded by taxes we paid. It is obvious that subsidies should be utilized for the improvement of our lives or the promotion of a better society.

If subsidies are illegally received or improperly used, we should raise a question about that.

Compared to Europe and the U.S., Japanese people rarely raise such a question. One of the reasons for that might be the withholding tax system under which taxes are automatically collected at source for company employees.

Many people do not know the amount of taxes they pay. We should pay more attention to how taxes are used.

If a subscription you checked and paid for by yourself does not offer services you expected, all of you would get angry. Subsidies can be considered similar to subscriptions.

Receivers should consider that receiving money is not a goal but a start and take responsibility to fulfill the role of subsidies. We, taxpayers, should also have more interest in the way taxes are used.

(I have tried to explain the above without using technical terms where possible, which makes some rough description.)

* The information contained herein is current as of July 2022.
* The contents of articles on Meiji.net are based on the personal ideas and opinions of the author and do not indicate the official opinion of Meiji University.
* I work to achieve SDGs related to the educational and research themes that I am currently engaged in.

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