The convergence period (2007-present)

         As the development of Indonesian accounting standards since 1994 has followed the progress of the international accounting standard setting, the international convergence of IFRS inevitably affects the DSAK’s strategy in formulating Indonesian accounting standards. Since the publication of the 2007 codified Indonesian accounting standards pronouncement, the IAIhas stated its support to the IASB convergence programme. However, it was not until 23 December 2008 did the IAI announce its formal statement that Indonesian accounting standards would fully converge with IFRS with the expected completion date by 1 January 2012 (Deloitte Touche Tohmatsu, 2009). This marked the beginning of a period of transition to IFRS, a process that still continues until presently. In this convergence period, an ultimate goal to achieve full convergence between Indonesian national standards and IFRS has directed the sequence of events in the Indonesian accounting standard setting agenda. Accordingly, the Indonesian accounting standards have moved significantly closer to IFRS compared to the previous period.

             The globalisation of the Indonesian economy provides strong impetus for Indonesia to move towards IFRS. In the capital market sector, for example, foreign investors maintain significant presence in the market, owning more than 60 per cent of the shares traded in the Indonesian Stock Exchange as of December 2013. Based on Indonesian capital market regulations, foreign investors are permitted to hold up until 100 per cent of shares of companies listed on the stock exchange, with an exception only for ownership of commercial banks which is limited to 99 per cent of the total shares. The importance of foreign capital in the Indonesian economy is also shown by the substantial increase in foreign direct investment (FDI) inflow to the country over the last few years, where Indonesia was listed in the toptwenty countries that attract the largest FDI in 2012 (UNCATD, 2013). From the perspective of a developing country that requires foreign investments to support the growth of its national economy, the use of internationally acceptable accounting standards is essential in convincing foreign investors and international business community of the quality of financial reporting practices in Indonesia.

            Another strong incentive for the convergence of Indonesian accounting standards with IFRS comes from political pressure imposed by supranational institutions. The IAI is a full member of the International Federation of Accountants, which means it should conform to IFAC’s statements of membership obligations with regard to incorporating IFRS into national accounting standards. Furthermore, the position of Indonesia as a member of G20 also facilitates the full convergence of IFRS in the country. As the adoption of IFRS has been a commitment of member countries of G20 then Indonesia has an obligation to ensure the convergence of its national standards with IFRS. The IAI (2012b, pp. 9, 11) also indicates that the current Indonesian IFRS convergence programme is a response to agreement between G20 members.

           The IAI’s decision to move towards full convergence of IFRS has gained immense support from various national institutions in Indonesia. The Capital Market and Financial Institutions Supervisory Agency (Bapepam-LK), for example, responded to the Indonesian IFRS convergence programmes by revising certain financial reporting requirements in capital market regulations to make them consistent with the Indonesian equivalent of IFRS. Similarly, the Bank of Indonesia (the central bank) has also incorporated the IFRS-equivalent standards relevant to the banking industry into the revision of the Indonesian Accounting Guidelines for Banks. More recently, the newly-established Financial Service Authority has also pledged its support for the full convergence of IFRS in the country, while it also emphasises the readiness of the financial industry as a prerequisite in implementing the standards (IAI, 2013). The convergence with IFRS has gained strong momentum since it brings a new expectation concerning the quality of financial reporting practices in Indonesia. Given that IFRS are perceived to be of high quality as they represent world’s best practices and a number of countries have shown positive experiences after adopting IFRS (see Barth et al., 2008; Chua et al. 2012), it is expected that the implementation of IFRS in Indonesia will bring about improvement in the quality of corporate financial reporting, which in turn will increase the confidence of business participants and improve Indonesian economy.

           While the use of IFRS gains widespread support in Indonesia, the decision to converge the Indonesian accounting standards and the IFRS had initially prompted concern over accounting for non-listed companies, given the fact that the majority of companies in Indonesia have been small and medium in size.As the IFRS standards are mainly developed for big and publicly listed companies, it was feared that IFRS convergence would lead to accounting standards overload in small and medium-sized entities (SMEs) sector. This consideration has led the DSAK to initiate the development of a separate set of accounting standards for small and medium-sized entities. The standards, entitled the Financial Accounting Standards for Non-publicly Accountable Entities (SAK-ETAP), were eventually published in July 2009, set to be effective as of 1 January 2011. SAK-ETAP are developed based on IFRS for SMEs although the two set of standards are not identical as the DSAK made some modifications to make SAK-ETAP applicable to the Indonesian context.

           As stated in the scope section of SAK-ETAP, these accounting standards can be used by entities that do not hold public accountability. There are two criteria for a company to be considered as a non-publicly accountable entity: not listed or in the process to be listed in stock exchanges; and not holding assets in a fiduciary capacity (IAI, 2009b, p.1). SAK-ETAP prescribe less reporting requirements compared to the full Indonesian equivalent of IFRS, and hence the standards will save SMEs and non-listed companies from the complexity of the Indonesian IFRS-equivalent accounting standards that are more capital market oriented. With the publication of SAK-ETAP, the present period of the accounting standard development has been characterised by an implementation of a multi-accounting standards system.The Indonesian IFRS-equivalent accounting standards are directed towards public listed companies and large financial institutions, while SAK-ETAP are targeted at non-listed companies and non-financial institutions.