Summary of Findings

The adoption of the PSAK (Indonesian GAAP) that is converged with IFRS in Indonesia is an example of accounting standardization in the developing country with different institutional frameworks and enforcement rules. This allows investigating issues relating to the IFRS adoption process and the implementation of IFRS-based PSAK by Indonesian non-financial companies listed on the Indonesian Stock Exchange (IDX) or (Bursa Efek Indonesia, BEI). By using hypothesis deduction approach, this study develops the hypothesis and empirically examines them to explain the relationship between the implementation of IFRS-based PSAK and accounting quality in the country.

Assuming that IFRS is a high quality of accounting standards, implementing of the standard will improve the quality of accounting information in Indonesia. Based on this proposition, the present study proposes a research problem as follows: What are the consequences of implementing IFRS-based PSAK on accounting quality in Indonesia?

Then, three specific research questions to deal with research problem is submitted as follows:

RQ1. How does the IAI eliminate national differences in accounting standards?

RQ2. To what extent are non-financial companies listed on the Indonesian Stock Exchange (IDX) discloses information in their financial reporting after implementing IFRS-based PSAK?

RQ3. Are the levels of companies’ compliance with IFRS disclosures value relevant to firm value?

The primary objective of the study is to evaluate comprehensively the impact of International Financial Reporting Standards (hereafter IFRS) implementation on the quality of accounting information by non-financial companies listed on the Indonesian Stock Exchange (IDX) or (Bursa Efek Indonesia, BEI). In doing so, three studies that are dealt with each research question were designed.

148 6.1.1 Findings of the First Study

The first study is to deal with RQ1. This is a descriptive study aims to investigate the setting stage of IFRS adoption in Indonesia. The study focuses on three issues, namely, motivation for convergence, how to make national standards comparable to IFRS, and the remaining differences between PSAK and IFRS after they are converged. To address the issues, the 2012 PSAK, the 2009 IFRS and archival documents that are relevant with the issues were examined by using content analysis.

The findings are decision to adopt international accounting standards in Indonesia can be categorized into 2 phases, 1994–2000 and 2004–now. Decision to adopt international accounting standards (IAS) on the first phase is driven by several factors such as complexity of current standards (U.S. GAAP) (at that time Indonesia adopts U.S. GAAP). At the same time, IAS has been developed consistently and less complex. The second phase, decision to adopt IFRS takes place because of some international pressures, such as compliance to IFAC SMO, commitment to G20 forum, and World Bank assessment.

In adopting IFRS, Indonesia has implemented a gradual approach, that is, IFRS standards are adopted in several phases with minor modifications. The reasons are first, to provide some time to Indonesian companies to become familiar with the new standards and second to align the newly-adopted IFRS standards with Indonesian business environment and regulatory framework. This approach has an impact on the degree of formal (de jure) convergence, that is, not adopted, consistent in with IFRS in all significant respects, not yet adopted amendments being made in the referred IFRS, and adoption with exception.

6.1.2 Findings of the Second Study

The second study discusses issues relating to transparency. This exploratory study aims to (a) measure the degree of listed-non-financial companies’ compliance with IFRS-based PSAK disclosure, and (b) identify the explanatory factors for non-compliance. To address the issue, a self-constructed disclosure index that is containing the applicable and relevant IAS/IFRS for Indonesian financial reporting environment and study period be constructed to measure the extent of companies’

compliance with IFRS in 2012. Six hypotheses dealing with the degree of companies’ compliance with IFRS disclosures, which are suitable to answer research questions (RQ2) of the present study,

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were developed (see Table 1.4). Then, by using regression analysis, the study examines factors that cause for non-compliance.

The findings show that the levels of companies’ compliance with IFRS-based PSAK are low. It seems that the low compliance score for the Indonesian context is consistent with the evidence that law enforcement mechanisms in the country are not fully effective and are accompanied by weak corporate governance (Setyadi, et al. 2009). In addition, the finding is consistent with the argument of the World Bank (2005), which recognized Indonesia as a civil law country with poor law enforcement and no clear bankruptcy law. It also reflects the regulator's lenient approach concerning compliance with IFRS-based PSAK during the initial period of the standards' implementation.

Further, regression analysis to investigate the factors that influence compliance levels illustrates that companies were more compliant with IFRS-based PSAK disclosure requirements in 2012 when they had the following characteristics: they were large, employed Big Four auditors, and were in the manufacturing industry. For Indonesia, the findings should be correlated with capital needs theory, which posits that a primary motivation for companies to increase disclosure is the need to raise capital. In order to attract more financing from investors, large companies enhance mandatory disclosure. Moreover, because the implementation of IFRS-based PSAK is complex, and there is a shortage of qualified professionals who are familiar with the new standards, most companies hire Big Four auditors. Such auditors are more likely to have IFRS competency and experience.

6.1.3 Findings of the Third Study

The third study discusses issues relating to value relevance. This exploratory research aims to investigate whether accounting information and companies’ compliance with IFRS-based PSAK value relevant to firm value. To address the issue, an empirical evaluation is conducted to test the association among accounting information and companies’ compliance with IFRS-based PSAK and firm value by employing Ohlson (1995) models that are extended. A hypothesis dealing with those relationships, which is suitable to answer research questions (RQ3) of the present study, was developed.

The findings for both the price and returns models show a significant association between the IFRS-based PSAK compliance level and the value relevance of earnings and book value to IDX

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investors. These results suggest that compliance represents additional information that investors incorporate into their valuation models. These results also provide empirical evidence to support the theoretical expectation of the association between IFRS-based PSAK compliance and the value relevance of accounting information to market participants. The evidence that moving towards stricter IFRS compliance is likely to improve the value relevance of financial statement information clearly highlights the effectiveness of greater IFRS compliance and the associated benefits for the quality and value relevance of financial statements information to market participants.