There are two major types of legal systems used around the world: common law and code law. Code Law countries generally have corporation law which establishes the basic legal parameters governing business enterprises. On the other hand, in countries with a tradition of common law (UK), specific accounting rules are established by the profession or by an independent nongovernmental body representing a variety of constituencies. Thus, the type of legal system in a country tends to determine whether the primary source of accounting rules is the government or a nongovernmental organization.
Code Law: the accounting law tends to be rather general and does not provide much detail regarding specific accounting practices and may provide no guidance at all in certain areas (Germany, France and Japan) Common Law: there is likely to be a non-legislative organization developing accounting standards, much more detailed rules are developed. (FASB in US)
In some countries, published financial statements form the basis for taxation, whereas in other countries, financial statements are adjusted for tax purposes and submitted to the government separately from the reports sent to stockholders. Germany, for instance, the published financial statements serve as the basis for taxable income. Because of the influence of the congruency principal, a German company is likely to report lower income than its U.S Counterpart. In the U.S, in contrast, conformity between the tax statement and financial statements is required only with regard to the use of the LIFO inventory cost flow assumption.
4. Who are the major providers of capital for business enterprises? What influence does the relative importance of equity financing in a country have on financial statement disclosure? The major providers of financing for business enterprises are family members, banks, governments, and shareholders. As companies become more dependent on financing from the general populace through the...
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