The Indonesian Financial Accounting Standards - Essay Example

Thought Activity My country – Indonesia has not adopted IFRS but instead has been following a process of gradual convergence to IFRS. In fact, Hans Hoogervorst (2013) points out that Indonesia’s approach to the adoption process is to maintain its national Accounting Standard – the Indonesian Financial Accounting Standards (IFAS). Since 2012 we have adopted those IFRS which were effective January 2009. However, there are no plans to at this time to adopt IFRS fully and some of the standards that were effective in 2009 have since been revised and would therefore increase the gap between our revised standard (for the process of convergence) and the revised IFRSs. The reason for opting for gradual convergence instead of adoption is that the local accounting body may want to become involved in the standard setting process. If IFRS is adopted fully then we will just have to accept what a few people have decided for us. I think we should be involved in decisions that affect us, and other countries have taken a similar approach. In fact, Ramanna and Sletten (2009) indicates that there is evidence to suggests that the more powerful countries like the US are not willing to surrender their authority to set accounting standards to an international body. However, Ramanna and Sletten (2009) found that counties are more likely to adopt IFRS when trade partners or countries within the geographical area in which they operate adopt IFRSs. This is one of the reasons for the importance of the transition to IFRS. Hoogervorst (2013) indicates that 75% of the countries in the G20 group of which Indonesia is apart use IFRS. I found out that the reactions in relation to the adoption of IFRS are mixed. There are ongoing changes to IFRS and so the gap between Indonesian Standards will widen as new changes are set for this year. In expressing their views to the Vice President of Indonesia some people indicated that at least a level of convergence with IFRS will help to reduce the level of corruption that prevents change from taking place in the country (Shying 2012). Additionally, at an IFRS Regional Policy Forum which was held in Bali in 2011, participants from 21 countries including Indonesia reaffirmed their commitment to ultimate adoption and to achieve accounting standards of the highest quality (CFO Innovation 2011). One of the concerns expressed at the forum in Bali was the requirement of investors for financial statements prepared in accordance with IFRS. This is particularly crucial for companies that need foreign investors. In fact, Hoogervorst (2013) in a speech indicated that full adoption would assist Indonesia sustain economic development. Hoogervorst further stated that IFRS is close to becoming the global language of financial reporting. Approximately ten years ago only a few countries were using IFRSs. Now over 100 countries have it as a requirement or permit the use of it. The move to accept IFRS has been made for many reasons including the fact that the creation of a common economic market requires a common financial reporting language. With globalisation the world is now one village and so use of the same financial reporting standards make sense for comparative purposes. I agree with Istiningrum (2011) point that the benefits that companies can derive from transition to IFRS outweigh all costs that are incurred during the conversion process. Giri (2008 cited in Istiningrum 2011) makes a compelling case for adoption with an example of a case where translation of Daimler Benz net profit reported of DM 602 million based on a German Accounting Standards changed to a net loss of DM1,839 million when it was translated to US Accounting Standards. With Indonesia adopting this standard more opportunities are provided for investment in Indonesian companies. However, some stakeholders still see a problem since IFRS takes a principle based approach and so Standards can be applied differently by companies (Elena et al 2009). The adoption of IFRS would therefore provide Indonesian companies with increased access to international capital and this along with globalisation will allow businesses to expand globally (Stovall 2010). Therefore, adopting IFRS makes it easier for them to fulfil the requirements of capital markets across the world (Elena et al 2009). Wahyuni (2011) carried out a research and the findings indicate that the perceptions of convergence of Indonesian Accounting Standards with IFRS are positive with 78% of respondents. Concerns about convergence mainly came from accountants with between 1 to 5 years in practice Tutorial engagement Activity 2 (Similar to thought activity) The need arose during the discussion to distinguish between convergence towards or adoption of IFRS. The reasons provided by group members in relation to adoption/convergence were similar in a number of ways. For example, the issue of foreign investment and the need to be able to compare financial statements with ease. The additional disclosures that IFRS requires would also help to improve transparency although some people felt that too much disclosure may provide competitors with too much information. It was agreed that the use of different accounting standards leads to the creation of difficulties for investors and creditors who may want to compare the financial statements of companies located in different countries. When one standard is used across the board there is no need to convert due to differences. The need for countries to be involved in the process was also one of the points discussed. It was clear that members of the group read widely and so the discussion was very informative. The reasons for and against adoption were worth noting. Activity Three Part 1 The notion of embracing “one set of accounting standards that will rule them all” is hard for some. Some countries do not agree with that at all. They want to be involved in the process and do not want it left up to others to decide for them. In fact, Zori (2012) indicates that this is the very reason why some countries choose the route of convergence and not adoption. However, there are some advantages and disadvantages in adopting IFRS. The advantages include: Increased comparability of financial statements Reduction in risk of international investments Ability of companies to attract international investors Improvements in financial reporting transparency The disadvantages related to the limited involvement in the standard setting process by individual countries and the initial cost involved. Part 2 In relation the joint ventures between FASB and IASB harmonisation relates to reducing differences in accounting principles and rules around the world. It is the first term that was used in reference to the similar rules and practices in accounting. In fact, Wyslocka (2011) indicates that harmonisation started from as early as 1904. Standardisation relates to the process leading to one set of standards for all. The process of harmonisation leads to standardisation. Therefore, instead of each country having their own standards they will use one set of standards. This would result in a standard way of preparing financial statements and dealing with certain transactions. Condorsement is the newest accounting buzzword which relates to a continuation of convergence projects by the US followed by through gradual endorsement by FASB in the areas where differences still exits. Since the existence of US GAAP would remain with FASB still retaining authority the situation is described as ‘condorsement’ – a combination of both terms. The term was developed by Paul Beswick an accountant at the Securities and Exchange Commission (Accountingweb 2013). All three terms relate to convergence. They all relate to a process through which the FRSs are endorsed by the different countries that have their own standard setting bodies. However, the difference relates to the timeframe in which the terms have been widely used. Harmonisation was the first term used to represent convergence and condorsement the latest. Part 3 The standardisation of accounting standards on a global basis does not equate with standardisation in accounting practice. FRS is principles-based and therefore relies on professional judgement. The fact is not everyone has good judgement and so decisions may be made which cannot be justified. Post-Thought Activity The starting of cracks in IASB’s efforts to standardise accounting practice globally can be seen in its inability to get develop an acceptable accounting standard for Insurance contracts. This has been going on for sometime now. In fact, Accountingweb (2013) indicates that concerns were made known by various stakeholders in 2003. It was pointed out that the aspect relating to measurement which is critical to accounting was to be left for another phase. In fact, there is still a problem ten (10) years later. Consensus on the contents of Standards is still uncertain. In fact, IASB and FASB appear to be having difficulties agreeing on insurance contract accounting. Additionally, the Standards are principle-based and allows for differing practices. This indicates that the benefits that have been touted about may not be realised. Furthermore, it has been stated that fair value accounting is responsible for the financial crisis which occurred in 2008 that led to The Great Recession which some countries in Europe have not yet recovered from. Countries have differing political systems and are very sceptical towards anything western or European and so the adoption of IFRSs seems doubtful. Countries like China are also becoming powerful and are not going to stand by watching others like the US and UK making the rules for them and so it is a sensitive situation where no one is willing to let go. It is very clear that there will be no wholesale adoption by the US. They will agree where it suits their economic and political situation. In essence they will determine when an Accounting Standards is in keeping with their goals. In fact Deegan (2006) indicates that there are cultural, political and other explanations of the reasons for countries adopting some accounting practices over others. Therefore, all the benefits provided are not all convincing to all countries involved. The globalisation of accounting standards will have a positive impact on accounting professionals including myself since I would be able to work in any jurisdiction without having to learn a new set of standards. It will also make the skills of accountants more transferable than it is at this time as only one set of internationally accepted standards would be required. This is definitely much better than keeping abreast of more than one standard which would definitely place a strain on accountants. References Accountingweb. (2011). Condorsement and the future role of FASB. [Online] Available at http://www.accountingweb.com/topic/accounting-auditing/condorsement-and-future-role-fasb CFO World. (2011). ‘Condorsement’: An IFRS Buzzword to Get Used To. [Online] Available at http://www.cfoworld.com/accounting-standardsifrs/28054/condorsement-ifrs-buzzword-get-used Deegan, C. (2006). Financial Accounting Theory. Australia: McGraw Hill Elena, H., Catalina, M., Stefana, C and Niculina, A. (2009). Some Issues about The Transition from US Generally Accepted Accounting Principles (GAAP) to International Financial Reporting Standards (IFRS), Annales Universitatis Apulensis Series Oeconomica, 11, p. 275 - 289. Hoogervorst, H. (2013). IAI-AFA International Seminar: “IFRS and Indonesian Accounting Standards 2013 and Beyond.” [Online] Available at http://www.ifrs.org/The-organisation/Members-of-the-IASB/IASB-speeches/Documents/2013/Hans-Hoogervorst-Indonesia-Speech-March-2013.pdf Istiningrum, A.A.(2011). The Importance of Moving to International Financial Reporting Standards for Indonesian Companies. Journal Pendidikan Akuntansi Indonesia, IX(1), p. Ramanna, K and Sletten, E. (2009). Why do countries adopt International Financial Reporting Standards? Working Paper 0-102. [Online] Available at http://www.hbs.edu/faculty/Publication%20Files/09-102.pdf Shying, M. (2012). Pathway to IFRS: Indonesia Success and challenges on the way to convergence. [Online] Available at http://www.itbdigital.com/opinion/2012/03/25/pathway-to-ifrs-indonesia/ Stovall, D.C. (2010). Transition to IFRS: What Can We Learn? The Business Review, 1, p. 120 - 126. Wahyuni, E.T. (2011). The Accountant Perceptions of The IFRS Convergence Plan In Indonesia. [Online] Available at http://ejournal.umm.ac.id/index.php/jrak/article/viewFile/510/533_umm_scientific_journal.pdf Wyslocka, E. (2008). Harmonization and Standardization of the Accounting and Its Functions. [Online] Available at http://www.oeconomica.uab.ro/upload/lucrari/1020081/15.pdf Read More