Abstract
Over the last few years there has been an increasing acceptance of the International Financial Reporting Standards (IFRS) in developing countries. However, limited research has been undertaken in understanding the pathway of the transition towards the use of IFRS in these countries. This study examines the dynamics of accounting standard development in Indonesia with emphasis on the process of convergence between the country’s national accounting standards and IFRS. Using teleology process theory as a theoretical lens, this study finds that different sets of objectives have initiated and directed the changes in Indonesian accounting standards since their early development to the current convergenceprogrammes. In the period of transition to IFRS, there have been gradual changes in the Indonesian accounting standards, which reflect a steady movement towards the final goal of full convergence with IFRS. Furthermore, based on Indonesia’s experience, this study also highlights several issues and challenges in the gradual implementation of IFRS, which include the perceived complexity of the standards, issues in professional judgement, the availability of relevant training and education programmes, and the remaining differences between national accounting standards and IFRS. Overall, the insights provided by this study may assist other national and regional accounting standard bodies in determining and evaluating the pathway of IFRS convergence programmes in their region.
Keywords: Accounting standards; IFRS; Accounting convergence; Process theory;
Developing countries; Indonesia
Introduction
The convergence of global accounting standards initiated by the International Accounting Standards Board (IASB) has gained widespread support from numerous national accounting bodies as well as international organisations. The number of countries which have adopted the International Financial Accounting Standards (IFRS) has grown steadily in the last decade, with many others stating an intended commitment to adopt IFRS (Carmona and Trombetta, 2008; Deloitte Touche Tohmatsu, 2012). Countries in the European Union and Australia are the fore runners of IFRS adoption, having implemented IFRS standards since 2005. The global acceptance of IFRS has further shown a significant progress when the U.S. Securities and Exchange Commission (SEC) permitted foreign companies listed on the New York Stock Exchange to use IFRS in submitting their financial statements without making reconciliations with U.S. GAAP. As of June 2012, there are more than 120 countries that have adopted IFRS (Deloitte Touche Tohmatsu, 2012), which implies that the goal of a single accounting language in the world is gradually materialising. Although the first countries to adopt IFRS were mainly developed countries characterised by advanced capital markets and large number of multinational corporations, presently IFRS are also being implemented by developing countries with emerging capital markets. Indonesia, the largest economy in Southeast Asia (Basri and Hill, 2011), is one of the emerging economies currently undertaking the convergence process of its national accounting standardstowards IFRS. In 2008 the Indonesian Institute of Accountants, which is the national accounting profession body that oversees accounting standard setting, formalised its commitment towards the full convergence of IFRS in Indonesia (Deloitte Touche Tohmatsu, 2009). Since then, the Indonesian Financial Accounting Standards Board has started the gradual adoption of IFRS, with an intention to have Indonesian accounting standards fully converged with IFRS by 2012. Unlike the ‘big-bang’ adoption approach in the European Union member countries and Australia, IFRS adoption in Indonesia follows a gradual process, in which selected IFRS standards are adopted each year and published as Indonesian equivalents of IFRS. This approach has been selected by the standard setters due to the importance of evaluating the impact of each newly adopted IFRS standard on the Indonesia’s accounting practice, as well as to give regulators time to make adjustments with regard to specific regulations.
The move towards the use of IFRS in Indonesia has marked a major shift in the development of accounting standards in the country. Previously, Indonesian accounting standards were developed based on an adaptation of IAS (such as IAS 7 Cash Flow Statements) and influences of the U.S. GAAP (e.g. SFAS 52 Foreign Currency Translation), and were also self-developed by the Indonesian accounting standard setters to cater for the Indonesian specific business environment (e.g. PSAK 37 Accounting for Toll Road) (Diga and Yunus, 1997, p.294; Deloitte Touche Tohmatsu, 2007). Nowadays, IFRS and their interpretations are the major influences of standard-setting in Indonesia. The decision to converge Indonesian accounting standards with IFRS has gained support from various stakeholders, including government agencies, public accounting firms, and industries. Even the Indonesian vicepresident, speaking at the 5th IFRS Regional Policy Forum in 2011, has promoted the importance of IFRS for the future advancement of Indonesian businesses and economic expansion. A number of prominent Indonesian national bodies such as the central bank and the capital market authority have also pledged their support for the convergence process. Forces of globalisation and political factors may be the prominent reasons behind Indonesia’s decision to adopt IFRS, as those factors have been identified in a number of studies as the main drivers for global acceptance of IFRS (e.g. Ball, 2006; Chua and Taylor, 2008). With the steady growth of the Indonesian stock exchange in recent years and greater investment opportunity for foreign investors (IDX, 2013), the implementation of internationally recognised accounting standards seems necessary in order to increase the confidence of international investors in the Indonesian capital market sector and business environment. This is particularly important as Indonesia has been striving to strengthen its financial system in the last few years because the country was severely affected by the East Asian financial crisisin the late 1990s. Furthermore, the Indonesian Institute of Accountants’ position as a member of the International Federation of Accountants (IFAC) and the fact that Indonesia is a member of G20 have given Indonesia no choice but to follow the international trend of accounting convergence.
The first phase of the Indonesian IFRS convergence programmes has been completed at the end of 2011, marked by the publication of a set of new IFRS-equivalent accounting standards. All companies listed on the Indonesian Stock Exchange have been required to implement these new standards by 1 January 2012. This achievement has been celebrated as a significant milestone in the Indonesian accounting standard history as it reflects the beginning of the application of IFRS in Indonesia. Although the year 2012 was initially slated as the deadline for full IFRS convergence in Indonesia, it is important to note that the new set of Indonesian accounting standards has yet to completely represent all the current IFRS standards. This is due the gradual and selective approach to IFRS adoption, and subsequent revisions in IFRS that have not been addressed by the Indonesian accounting standard setters. The transition to IFRS in Indonesia has progressed not without any challenges. One of the biggest obstacles in implementing IFRS has been the readiness of Indonesian listed companies to implement the IFRS standards. This has been evident by a postponement of the effective dates of several new Indonesian equivalents of IFRS standards in the early phase of IFRS convergence in the country. The Indonesian equivalent to IAS 39 concerning financial instruments is one of those standards, in which the standard setting body allowed a one-year delay in its implementation due to the lack of readiness of certain industries. The need to exercise judgement and interpretation in the implementation of IFRS is also perceived as a major challenge in the convergence process as the Indonesian context reflects a different business environment from where IFRS are developed. Additionally, as the move towards IFRS has made substantial changes in the structure of Indonesian accounting standards, the availability of IFRS training and education programmes in Indonesia has become an issue in both the accounting profession and education. Despite all the progress and obstacles in IFRS convergence in Indonesia in recent years, there have been limited studies focusing on the development of Indonesian accounting standards during the IFRS transition period.
A previous study by Perera and Baydoun (2007) examines the accounting ecology in Indonesia and highlights the prospects for the adoption of IFRS in the country. Whilst Perera and Baydoun’s study is important in providing a description of the Indonesian accounting environment and the structural issues that may prevent the country from adopting IFRS, it only focuses on the particular period leading up to the IFRS convergence programmes. The present study seeks to contribute by further examining the dynamics in the Indonesian accounting standard setting process in the period of transition to
IFRS. In doing so, this study concentrates on the gradual changes in the Indonesian accounting standards from their early development to the current IFRS transition and the challenges and obstacles that have emerged in the different stages of IFRS convergence in the country. To capture the phenomena of the Indonesian IFRS convergence programmes, this study employs process theory as a theoretical lens. Process theory provides a comprehensive framework for explaining the reasons as to why an entity undergoes changes and how those changes are embraced by the entity (Van de Ven and Poole, 1995). Process theory has been developed in the management literature based on a synthesis of theories originating from both social and natural sciences (Van de Ven, 1992; Van de Ven and Poole, 1995), and has been used extensively in the study of organisational change (see Cunha and Cunha, 2003). Adopting process theory to examine IFRS convergence enables this study to identify the forces advocating for the change and development of accounting standards in Indonesia, and to follow the sequence of events in the Indonesian accounting standard history that have led to the recent adoption of IFRS. Furthermore, using process theory to frame the analysis also enables this study to highlight the issues that may determine the success of the current IFRS convergence programmes in Indonesia.
Examining the dynamics of the IFRS convergence process in a developing economy is important for a number of reasons. First, prior studies have shown that accounting standards experience structural changes over time (Baylin et al., 1996), hence the current trend towards adoption of IFRS represents a significant change in accounting standard setting orientation of developing countries. Second, it has been suggested that the relevance and importance of IFRS in developing nations is significantly influenced by the adoption process of these standards (Mir and Rahman, 2005). Finally, whilst there has been a growing concern over the relevance and suitability of IFRS in developing countries, very little attention has been given to the process of convergence in these countries in the literature (Peng and \ van der Laan Smith, 2010). Furthermore, with IFRS having gained international recognition, the real issue is not the relevance of IFRS to a particular country, but rather the “pathway of change” to which IFRS is adopted (Tyrrall et al., 2007). Indonesia provides an interesting setting as to how IFRS is adopted in an emerging economy because the country has a unique history in the development of national accounting structures, shows a fast expansion in the financial system, and takes a careful approach to IFRS adoption. Unlike its neighbouring countries such as Malaysia and Singapore, which share British colonisation history, Indonesia was colonised by the Dutch; thus, early Indonesian accounting practices were largely influenced by the Dutch accounting system (Liang, 1997, p.361; Diga and Yunus, 1997, p.284). When the accounting system later changed to the Anglo-American model, the influence of Dutch accounting still remained apparent. This was a condition that Perera and Baydoun (2007) refer to as “split personality” in Indonesian accounting practices. The Indonesian financing system, which is characterised by the dominance of bank credit as a source of financing, were also considered as not suitable for the implementation of IFRS since these international standards were mainly developed to cater for countries with “equity-outsider financing system” (see Perera and Baydoun, 2007).
However, the rapid development of Indonesian capital market in recent years has indicated a progressive trend towards portfolio investments in which reliable financial reporting practices is substantially required. \ As a consequence, high quality accounting standards that ensure transparency and comparability of \ financial information (Levitt, 1998) has been a prerequisite. This eventually provides a better environment \ for the application of IFRS in Indonesia. Furthermore, the gradual approach towards the full adoption of IFRS has meant that the Indonesian accounting regulators work carefully in order to ensure IFRS are implemented properly in the local context, an issue that might not be of utmost importance in developed countries. The remainder of this paper proceeds as follows. Section 2 provides a description of the theoretical lens used in this study. Section 3 presents an overview of the Indonesian economy, followed by details of the Indonesian accounting environment in section 4. Section 5 presents a discussion of the \ accounting standard development in Indonesia. Section 6 describes the progress of convergence of Indonesian accounting standards and IFRS. Section 7 outlines the challenges and issues in IFRS convergence in Indonesia. The last section concludes the paper.
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