International Financial Accounting Standard (IFRS) is a set of accounting standard issue by International Accounting Standard Board (IASB) in year 2003 (MatthiasKirchner 2007). According to Choi and Meek (2008), IASB was previously known as IASC (International Accounting Standard Committee) which formed in year 1973 and restructured to IASB in year 2001. Their main objective is to develop a single set of high quality, understandable and enforceable accounting standards, to assist users of the statement in capital markets to make suitable economic decision based on the situation they face (IASB 2009). The process of setting accounting standard had started long time ago, early they aim to create a standards which can be used by developing and for those nations which don't have ability to form their accounting standard. However, due to the globalized of business world nowadays, people start realize that having a same accounting standards can benefit them in several areas, raising fund internationally, auditing, and also comparable (AICPA 2009).
However, IFRS is moving toward the requirement of capital market. According to Tatum (2009), capital market refers to a market where organization can raise fund to finance their business operation. Capital market provide products and services that related with finances and investment, business organization able to trading securities with lenders and investors in the market. Generally capital market can be distinguished into debt financing and equity financing (U.S. Chamber of Commerce 2009). Debt financing can be explained as borrowing money from an entity but return in a period of time with interest charge. The main difference between debt finance with equity finance is lenders do not hold any ownership or right of control for the business. Nevertheless, equity finance refers to raise fund by exchanging share of business with money. Investors do hold the ownership and right of the company depend on the amount of share holding. Company will pay shareholder specific amount of dividend based on the performance of business (U.S. Chamber of Commerce 2009).
Code Law and Common Law
Both of these financing methods are suitable under different economic situations and background. Choi and Meek (2009) mentioned that accounting standard in the world can be classified by legal system of each countries. According to Ma (1997), there are two types of major legal system in the world, code law legal system and common law legal system.
Most of the Europe countries are under code law legal system, other than that Asia countries for example China, Japan, Korea, and Taiwan are also applying code law legal system in their country (Ma 1997). Ma (1997) concluded that in code law countries, rules and laws are set by legal scholars based on the concept of justice and morality. All legal issues will be referring to the framework which formed earlier. According to Choi and Meek (2009), debt financing is more favorable in code law countries. This is because the accounting standard in code law countries is incorporated into national law with high prescriptive and procedural. Furthermore bank and government are the main lender in capital market of the country, therefore creditor protection is a major concern of setting accounting standard. Accounting standard in code law countries tend to be low disclosure and combine between financial and tax accounting.
By contrast, base on the studies of Choi and meek (2009), common law develops on a case-by-case basis, every cases will be refer back to past cases and experience on similar situation. Therefore, common law is much more flexible than code law. Countries under British Commonwealth and US are applying common law. Accounting standard in common law countries is aim for transparency and full disclosure, and also less connection between accounting standard and national law. Setting of accounting standard seems to be a private professional sector activities, therefore stock market become a major financing method in common law countries. Professional sector will form accounting standard base on the public interest, strong investor protection and shareholder right are key factors of setting the standard.
User of Financial Statement in Capital Market
Alexander and Britton (2004) stated that user of financial statement under debt finance can be classified into short-term, mid-term and long-term lender. Short-term and mid-term lender will be concern about the cash return of the business in short period, hence the trend cash flow is their major concern. Net realizable value of asset holding also can show the ability of company to pay back short-term loan. Longer-term lender will focus on the further cash flow position in future. Longer-term lender will also estimate the future cash position of the business based on the information of statement to safeguard of their debt, which is quite similar with equity user.
For equity financing, main user group under this method is actually shareholder (Alexander and Britton 2004). The way of shareholder gain income from their investment is under two ways, dividend income and capital gain. Dividend income is consider as interest pay by company depend on shareholding, capital income refer to the income when shareholder sell their share above the cost price. Obviously these two incomes will be depending on the performance of the business, consequently shareholders or investors will concern about future profit and growth of the business section for example profit or sales rather than cash flow statement. Although information provide in financial statement is almost all on pass result, however investors and shareholders can do their estimation based on past result.