This article was first published in the July 2012 International edition of Accounting and Business magazine.
As one of the members of the Group of 20 Leaders – the G20 – Indonesia is working towards adopting International Financial Reporting Standards (IFRS). The decision to converge with IFRS was announced by the Indonesian Institute of Accountants (IAI) in 2008, with the aim of eliminating the differences with local generally accepted accounting principles.
Although IFRS has been the major reference for accounting standards’ development since 1994, Indonesia had adopted some US standards and developed its own based on the country’s unique business environment. The new G20 movement brings more confidence to the convergence initiatives led by the Indonesian Financial Accounting Standards Board (IFASB) which is funded by the IAI.
On 1 January 2012, Indonesia adopted almost all IFRS except IFRS 1, First Time Adoption, and IAS 41, Agriculture; together with Malaysia and India, Indonesia is still waiting for further revisions on IAS 41 before making a decision on adoption. Some standards were adopted with minor modifications such as IFRIC 15, Agreements for the Construction of Real Estate, and IAS 27, Consolidated and Separate Financial Statements.
As with other developing countries on similar journeys to adopting IFRS, Indonesia faces challenges such as the difficulties in applying fair value measurements, educating accountants and – most prevalent of all – overcoming multiple interpretations.
A question of interpretation
Since the inception of the International Accounting Standards Board (IASB) in 2001, IFRS have always been intended to be simple and principle-based. However, this has also created a vulnerability to multiple interpretations, depending on the level of knowledge and experiences of standard users. One such example in Indonesia is land accounting.
Before 2012, Indonesia used a method in which the land’s initial cost was considered as property plant and equipment (PPE) and not subject to amortisation. While companies in Indonesia, by legal regulation, cannot have a freehold land title, the right to use the land bestowed from the government can be extended and renewed indefinitely. The renewal or extension cost is also insignificant. The holder of the land right is protected by law, thus the government cannot revoke the land right without the holder’s approval – for example, for public interest – and should that rare occasion happen, a proper consideration will be provided to the land (right) holder.
As Indonesia adopts IFRS, this method of land accounting is provoking different interpretations. Some accountancy firms interpret accounting for land right as falling under IAS 16, Property Plant and Equipment, with no depreciation as this is, in substance, a purchase transaction. Other firms, however, are quite adamant about accounting for the land as a lease, with a variation of treating it as a finance lease and operating lease and subject to amortisation. Some minority voices have suggested that the land right may also be accounted for as an intangible asset, thus it can be categorised as an indefinite intangible asset subject to an annual impairment test instead of systematic amortisation.
Observing multiple interpretations can be a significant part of the company’s assets and, in 2011, the IFASB issued an interpretation after consultation with the national land authority. It decided that land (right) should be accounted for using IAS 16 and should not be amortised unless there is an indication that the land right cannot be extended. The IFASB presented the issue at a meeting of the IASB’s Emerging Economies Group held in India last year and then submitted the paper to the IFRS Interpretations Committee (IFRIC). IFRIC decided not to put the issue on its agenda because it was specific to Indonesia and thus too narrow to undertake the due process associated with an interpretation or an annual improvement.
Another variation of practice in Indonesia is the accounting for telecommunication towers. Under Indonesian regulation, the communication provider companies need to rent the tower from another company. The rental company – the owner of the towers – can rent one tower to more than one communication provider who then put their transmitting devices on the towers. There are two variations on how to treat these towers in Indonesia. The tower should be treated as PPE in accordance with IAS 16 or it should be treated as investment property under IAS 40, Investment Property.
These different interpretations of IFRS created a vicious debate. The main issue is whether the towers satisfy the definition of a ‘property’ in IAS 40. Both companies have their own merits and believe that they have plausible arguments. Both IAS 40 and IAS 16 do not have a clear definition of ‘property’ which then leaves the door open for multiple interpretations.
The decision to account for a telecommunication tower either under IAS 16 or IAS 40 will most certainly affect the entities’ profit-and-loss figures, especially if the comparison made is between the entities opting to use the revaluation model (PPE) and those who use the fair value model (investment property). This has a significant impact on the comparability among entities in the telecommunication tower rental industry and, more importantly, multiple (and presumably inaccurate) depictions of transactions that in substance are the same and have similar economic consequences.
The accounting for land and communication towers are just two examples out of many. These examples have caused debate on a national scale because the size of disputable assets is significant; there are many other disputes among practitioners, between companies and their auditors, and between companies and their IFRS consultants. It is not easy for a developing country in their first year of IFRS convergence to fully understand and apply principle-based accounting.
To educate accountants spread out all over the archipelago, Indonesia needs reliable, good-quality and affordable IFRS training. On several occasions, such as the IFRS Regional Policy Forum in Kuala Lumpur in April, many other countries as well as the IFRS Foundation, described a similar urgent need.
The IFRS Foundation has obtained support from other international organisations to fund training for small and medium-sized enterprises (SMEs). This initiative has provided opportunities for developing countries to learn IFRS for SMEs inexpensively. Similar opportunities should also be pursued by the IFRS Foundation by approaching the International Organization of Securities Commissions, the World Bank and other international organisations to provide free training in developing countries such as Indonesia.
As more developing countries with different characteristics in law, tax and business culture converge with IFRS, we believe that IFRIC’s role will be significantly increased in the near future. Currently we believe that there is an under representation of members from developing countries. Such members may offer unique perspectives to the committee’s discussions.
To eliminate the implementation challenges, we urgently call for a more formal relationship between the IASB and the national standard setters of IFRS-adopting countries.
As more countries, especially in Asia, have decided to adopt, or converge with, IFRS, the implementation challenges will only become more daunting than before. Asia is more fragmented than Europe, with a different level of maturity in its accounting profession and capital markets, as well as different socio-economic characteristics, legal framework and business culture. The IASB and IFRIC need to be more responsive in dealing with different interpretations of IFRS, otherwise one global accounting standard will abide as a divine goal, incongruous with multiple accounting practices that remain diverged and inconsistent.
Rosita Uli Sinaga is the chairperson of the Indonesian Financial Accounting Standards Board (IFASB), a partner at Deloitte and an accounting lecturer at the University of Indonesia. Ersa Tri Wahyuni is technical adviser at IFASB and an accounting lecturer at Padjadjaran University Indonesia