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International Financial Reporting Standard (IFRS) is a set of accounting standards issued by International Accounting Standard Board (IASB) (Choi and Meek, 2008). Based on Kirchner (2007), IASB replaced International Accounting Standard Committee (IASC) in year 2001 and developed IFRS in year 2003 based on International Accounting Standard (IAS). According to Growthorpe and Robins (2002) there are 3 reasons which cause IASB issued IFRS. IASB wish to develop a high quality, transparent and comparable information in the financial statement of global accounting standard, to help users of the statement to make economic decision in capital market. They also want to promote the use and rigorous application of this standard. One of the objectives of IASB is to combine national accounting standard to a high quality solutions.
Capital Market is a market which for organization to raise fund to finance their operation and long term investment. It includes stock market, commodities exchange and the bond market. It has the physical or virtual facility for debt and equity securities can be traded (Tatum, 2009). Debt financing refer to borrow money from others entity and repay after a period of time. The amount repay normally will include interest. The lender does not gain any ownership or control for the business (U.S. Chamber of Commerce, 2009). According to Choi and Meek (2008), debt financing is popular in code law countries especially Europe countries. This is because code law countries, laws are tie under a set of requirement and procedures. Therefore, accounting standard in these countries is linked to the national laws, and highly prescriptive and procedural. Setting of accounting standard is considering activities of public sector such as government or bank. Hence, financial reporting in these countries is mainly focus on creditor protection, low disclosure and also combine financial and tax accounting. Based on the studied of Alexander and Britton (2004), user of financial statement under debt financing including long, medium or short term lender of money. A short-term lender will emphasize on the amount of cash for the business in short period. Furthermore, they will also interested in net realizable value(NRV) of all assets holding by the organization. Long-term lender will required the information in firm longer term future cash position.
Equity finance work under exchange of money for share issues by companies. Nevertheless, shareholders hold part of the ownerships and right of control for the business. Company paid shareholders with dividend based on the performance of business (U.S. Chamber of Commerce, 2009). Based on Choi and Meek (2008), common law develops frequently on case by case basis. Although, they statute law for those countries but the law is less in detail therefore more flexible. Accounting standard in common law countries is prepared by private sector of professional organization. It tends to be more focused on economic substance. Due to the basic of common law, financial statement is more transparency and full disclosure, therefore equity finance is more favorable in common law countries. Common law legal system provides more protection for right of shareholder and investor compared with code law. This cause a result that capital market in common law countries are more developed than code law countries. Alexander and Britton (2004) concluded that majority users under equity finance are shareholders and investors they normally consider decision of investing in the business therefore their main concern about two things. One of the concerns is income, which refer to the money return in the way of dividend. Another concern is capital gain, profit return by selling share above purchase price. The key factor affect income and capital gain is future profit however financial statement did not provide future information but therefore investor are required a detail disclosure on performance for they own estimations. In other word, IFRS is more suitable in common law countries due to the background of national legal system.
According to Bhattacharyya (2009), IFRS uses fair value accounting for the basic measurement of financial assets and financial liabilities. Furthermore, equity instruments, assets and liabilities are measure under fair value. But loan and debt instruments hold by entity are measure at amortized cost and not fair value. The IASB defines Fair Value as "The amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm's-length transaction" (Edge, 2004).
Based on Rappeport (2008), academics and accountants are agreed that accounting under common law system is better because it is more flexible; develop in case-by-case basis, set by experts. This is also a key factor for the world achieves a single set of global accounting standards. IFRS is born under common law, but today many code law countries are adopting it, although their countries had own creating and enforcing accounting rules. Consequently, IFRS under common law legal system will obtain most benefits. Organization which based on common law will provide update information and become more efficient due to the threat of lawsuits from shareholders or regulators. By contract, code law accounting systems are less market-oriented and rely more on private information. Levies penalties for violations are highlighted by the government's accounting code. I had chosen a code law and a common law for examples to show the relevance between IFRS and different economies situations.
EU code law countries including Greece must use IFRS for consolidated accounts for periods starting on 1 January 2005. Based on the studies of Spathsis (2007), firms in Greece are always try to reduce taxes, therefore tax has strong influences on other sections in financing statement. This will have an outcome a financial accounting information always unable to show the real economic event when organization try to minimise their taxes. They will prefer accelerated depreciation and rapid asset write-offs, result in accounting income misleading of economic performance of the business. IFRS separated financial accounting and tax accounting, firms in Greece will than use tax accounting rules to minimise tax pay to Greece government and financial reporting rules to meet the information needs of investors. According to Ballas (1994), Greek accounting was originally based on Greek General Accounting Plan (GGAP), it confirm financial reporting and tax regulations. Besides that, protection on creditors, conservatism, balance sheet and income statement are the areas focus by GGAP. Based on Guenther and Young (2000), financial accounting information may differ with business economic activities because firms try to minimise their tax in countries where conformity between financial accounting and tax accounting rules. The Greek Accounting System (GAS) is stakeholder-oriented and tax driven (Ballas, 1994). This is totally different with IFRS which are shareholder- oriental and independent of tax reporting. Other than that, GAS promote "prudent" approach on assets valuation and liabilities recognition while IFRS encourages "true and fair" presentation on balance sheet to assist investor in decision making. In addition, GAS allow managers to value assets at lowest amount to minimise taxes but IFRS do not allow.