OUT OF THE SHADOWS

This article is published in ACCA Magazine : Accounting and Business (AB) International Edition, July 2012. The magazine can be downloaded from www.accaglobal.com/ab

As IFRS Convergence pushes ahead in Indonesia, Rosita Uli Sinaga and Ersa Tri Wahyuni look at the challenges and expectations that are to come

As one of the members of the Group of 20 Leaders - the G20, Indonesia is working toward adopting International Financial Reporting Standards (IFRS). The decision to converge 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 standard development since 1994, Indonesia also adopt some US standard and develop its own standard based on Indonesian unique business environment. The new G20 movement bring more confidence to the convergence initiatives lead by the Indonesian Financial Accounting Standard 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 revision on IAS 41 Agriculture before making decision on adoption. Some standards are adopted with minor modifications such as IFRIC 15 Agreements for the Construction of Real Estate and IAS 27 Consolidated Financial Statements.

As with any other developing countries in similar journey of adopting IFRS, Indonesia faces challenges such as the difficulties in applying fair value measurements, the challenges in educating the accountants over the new standards and –most prevalent of all- overcoming multi interpretations.

Multi Interpretations lead to variation in practices
Since the inception of 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 experience of the standard user. One such examples 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 of 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 revoked 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 adopting IFRS, this land accounting is provoking different interpretation. Some accountancy firms interpret accounting for land right as falling under IAS 16 Property Plant of Equipment, with no depreciation, as this is in substance is a purchase transaction. Other firms, however, are quite adamant about accounting for land as a lease, with a variation of treating it as finance lease and operating lease and subject to amortisation Some minority voices suggested that the land right may also be counted as intangible asset, thus it can be categorised as indefinite intangible asset subject to annual impairment test instead of systematic amortisation.

Observing multi interpretation can be a significant part of the company’s asset, and in 2011, the IFASB issued an interpretation after consultation with the national land authority. It decided that land (right) should be accounted using IAS 16 and should not be amortised unless there is indication the land cannot be extended. IFASB then submit a clarification to IFRIC and ask if such interpretation can be accepted. The IFASB presented the issue at a meeting of the IASB Emerging Economies Group held in India last year and then submitted the paper to the IFRS Interpretation 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 association with an interpretation or an annual improvement.

Another variation of practice in Indonesia is the accounting for communication 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 companies who then put their transmitting devices on to the towers. There are two variations on how to treat these towers In Indonesia, one company account this tower using IAS 16 while other company using IAS 40 Investment Property. 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 they have plausible arguments. Both IAS 40 and IAS 16 does not have a clear definition of “property” which then leaves the door open for multi-interpretation.

The decision to account 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) with 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 multi, (and presumably inaccurate) depictions of transactions that in substance are the same and have similar economic consequences.

The accounting for land and the communication tower are just two examples out of many. These two examples have caused debate on the national scale because the size of disputable assets is significant; there are many other disputes among practitioners, between companies and their auditors, 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.

Future Expectations
To educate accountants spread out all over archipelago, Indonesia needs reliable, good quality and affordable IFRS trainings. On several occasions such as IFRS Regional Policy Forum in Kuala Lumpur in April, many other countries as well as the IFRS Foundation describes a similar urgent need.

IFRS Foundation has obtained support from other international organisation to fund training for small and medium-sized enterprises (SMEs). This initiative has open opportunities for developing countries to learn IFRS for SME inexpensively. Similar opportunities should also be pursued by the IFRS Foundation by approaching International Organization of Securities Commisions, the World Bank and other international organisation to host free trainings in developing countries such as Indonesia

As more developing countries with different characteristic in law regime, tax, and business culture converge with IFRS, we believe the IFRIC’s role will be significantly increased in the near future. Currently we believe that there is 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 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 the capital market, as well as different socio economic, legal framework, and business culture. The IASB and IFRIC need to be more responsive in dealing with different interpretations in the practice, otherwise one global accounting standard will abide as a divine goal, incongruous with global accounting practices which remain diverged and inconsistent.



Rosita Uli Sinaga is the Chairman of IFASB (Indonesian Financial Accounting Standard Board), a Partner of Deloitte and an accounting lecturer at the University of Indonesia. Ersa Tri Wahyuni is technical adviser of IFASB and accounting lecturer at Padjadjaran University Indonesia.