Financial Accounting: In an Economic Context

INTERNATIONAL PERSPECTIVE: THE IMPORTANCE L OF DEBT FINANCING IN OTHER COUNTRIES

The nature of capital markets plays an important role in determining the nature and use of an accounting system. U.S. companies, for example, rely heavily on both debt and equity capital, which, in turn, influences the accounting systems to provide information for both equity and debt investors. Accordingly, the importance of both earning power and solvency in the assessment of a company's financial health has been emphasized throughout the text.

In certain other countries, however, the sources of capital are not as balanced between equity and debt. In Japan and much of Western Europe, for example, the environment is characterized by a few very large banks that satisfy the capital needs of most businesses. The local stock and bond markets, though increasingly becoming more active, are not as heavily relied upon as they are in the United States. The dependence on borrowing in Japan has caused the normal debt/equity ratio for a Japanese company to be well in excess of 75 percent, with most of the debt being in the form of long-term notes from one or more of the large banks.

This situation has had two significant effects on the different accounting systems. First, the accounting disclosure requirements in non-U.S. countries and IFRS are not as comprehensive as those in the United States, partially because the information needs of the major capital providers (i.e., banks) are satisfied in a relatively ...