Development of Accounting Standards in Indonesia

          The authority to set accounting standards in Indonesia in the present day is mainly held by the Indonesian Financial Accounting Standards Board (DSAK), an accounting standard setting body within the IAI. Members of the DSAK come from various sectors within the Indonesian accounting environment, including the public accounting profession, the capital market authority, the central bank, accounting academics, and industries. In conducting its duties, the DSAK is advised by the Indonesian Financial Accounting Standards Advisory Council (DKSAK), a consultative body that is also under the IAI. Although the IAI does not have a legal status as a standard-setting body (Kusuma, 2005, p.356), the regulatory framework in Indonesia requires companies to prepare financial statements based on accounting standards set by the accounting professional organisation which is approved by the government.

          In setting accounting standards, the DSAK follows a due-process which includes several steps as follows (Kusuma, 2005, p.357).

1)  Identification of potential topics for new accounting standards

2)  Discussion on identified accounting issues with DKSAK

3)  Preparation of a discussion paper after research and critical evaluation on the issue

4)  Preparation of exposure draft to be discussed with DKSAK

5)  Publication and distribution of exposure drafts

6)  Public hearings

7)  Preparation of the final statement of financial accounting standards

8)  Endorsement of accounting standards by DSAK.

          The history of accounting standard development in Indonesia has evolved over four decades, which can be addressed over three defined periods. The first period, which runs from 1973 to 1990, covers the early formulation of accounting standards that has led to the publication of the first codified modern accounting standards in the country. The second period, between1990-2007, is the period in which Indonesia strived to maintain the credibility and relevance of its accounting standards by aligning with international best practices while at the same time taking into consideration the local needs. The final period, from 2007-present, covers the period of transition to IFRS, in which the country’s standard setters have embarked on a gradual IFRS convergence programme over several phases.

The early stage of Indonesian accounting standard development (1973-1990)

          The early development of modern accounting standards in Indonesia  can be traced  back to 1973, when the IAI appointed a special committee for the establishment of a set of Indonesian accounting standards. At that time, accounting standard development was part of a government’s programme aimed at reactivating the Indonesian capital market from its hiatus. The Money and Capital Markets Preparation Team, an advisory body under the Governor of the Indonesian central bank, supervised all the capital market preparation programmes and coordinated with the IAI in formulating accounting standards. The standard setting process led to the publication of the Indonesian Accounting Principles (PAI) by the IAI in 1973. This pronouncement was the first codified Indonesian accounting standards that were developed largely based on U.S. GAAP (ADB, 2003; Kusuma, 2005). Following this publication, the IAI then established a permanent standard setting body within the organisation structure called the Indonesian Accounting Principles Committee (KPAI) in 1974. The KPAI continued the work on formulating Indonesian accounting standards by revising the newly issued PAI-1973. After a significant revision on PAI-1973 has been completed, the IAI published the second edition of PAI in 1984. This was a response to the government’s intention to accelerate the Indonesian capital market reform in the mid-1980s. However, the newly-revised accounting principles were still considered inadequate as the standards still provided a leeway for companies in preparing their financial statements (Rosser, 1999).

            The accounting standard formulation from the 1970s to the late 1980s may be seen as the foundation stage in the Indonesian accounting standard development, as the period saw a major shift in the accounting standard model and the standard formulation mechanism. In this period, a goal to produce a set of accounting standards as part of the capital market revitalisation programme was the main generating power for the progression of accounting standard setting. This objective had drastically moved the accounting standard orientation from the Dutch colonisation system to the US accounting system. The importance of the capital market reactivation programme in fostering the progress of standard development was evident by the close association between the transition stage of capital market advancement and the accounting standard setting process. When the capital market programme slowed down between the  mid-1970s and early 1980s due to lack of government incentive, the accounting standard setting  agenda also decelerated (Rosser, 1999). Amidst this low incentive, however, the first stage of accounting standard development programme had achieved its objective through the publication and revision of the PAI. A subsequent boom in the capital market sector in the late 1980s had once again speeded  up the standard setting agenda and caused the standard setters to reformulate their objectives. As a result, change and development of accounting standards continued in the ensuing periods.