The issue of International Financial Reporting Standard (IFRS) convergence has become the popular topic in the financial and business world for the past years.The tense and the preparation has become higher and tighter as the Indonesian Generally Accepted Accounting Procedure (PSAK) regulating accounting standards and requirements for the financial statements shall be fully converged to IFRS on 1st January 2012. This issue was actually covered in our Minimagz 3rd Edition Year 2010 and it is always worth discussing.
Indonesian IFRS convergence Roadmap
As presented in the figure, there are many changes which should be made by company due to accounting standard compliance. During 2008-2010, there were sixteen revised PSAK effectively applied since 1 January 2011 and 1 st January 2012, respectively.
In a short run, a long list of more accounting standards will be changed and revised. According to the IAI (the Indonesian Institute of Accountants), IFRS internally continues updating its accounting standards until the end of year 2012. The process of PSAK convergence therefore will go along with any updates of IFRS.
In business world, common accounting standards are needed by users of financial statements for high-quality, transparency, and comparable information. Without such standards, it is difficult to compare financial information prepared by entities located in different parts of the world. Furthermore, common standards which are accepted by all countries enable to facilitate investment and other economic decisions across borders, increase market efficiency, and reduce the cost of raising capital. These reasons have been attributable to the decisions of most countries to adapt IFRS to their general accepted accounting standard, including Indonesia.
From the taxation perspective, IFRS based accounting standards contain many different treatments compared to those under the taxation regulations. This is related to the condition where IFRS based accounting standards use the principle-based approach while tax regulations use the rule-based approach. The principle based accounting standards place greater emphasis on interpretation and application of principles, with a particular focus on the spirit of the principle being applied. The standards necessitate the assessment of the substance of the transactions and an evaluation of whether the accounting presentation reflects the economic reality. Therefore, professional judgment in arriving at accounting conclusions is intensely needed. The standards also more set out fair value as a measurement basis pacing emphasis on obtaining reliable measurements. In addition, the new standards require more extensive disclosures. In taxation, in the other side, which is under the rule-based approach, refers to the provisions of the regulations, though certain tax matters in grey area still require professional interpretation.
Main Changes in the Standards
PSAK 1 – Presentation of Financial Statements
This standard has been revised in 2009. In relation to the revised standard, the changes include certain terminologies, format and structure, additional disclosures, and also additional items in the complete set of financial statements. In particular, the format and structure are changed significantly. In the Income Statement, there is Other Comprehensive Income (OCI) section as the significant different between the former standard and the revised standard.
Changes in terminologies as elements of the Financial Statements are highly recommended to be adjusted according to IFRS. For example, Balance Sheet is changed into Financial Position Report; Income Loss Statement is changed into Comprehensive Income Loss Statements, etc. Many suggest that these new terminologies are mentioned in the Laws and the regulations, including in taxation area.
Particularly regarding Other Comprehensive Income (OCI), up to now the Director General of Taxes has not issued regulations concerning this matter. Nevertheless, if based on the realization principle applied in taxation, the element of OCI will not be recognized in the calculation of year end Corporate Income.
PSAK 4 – Consolidated Financial Statements
PSAK 4 should be applied in preparing the consolidated financial statements of groups of companies controlled by a parent entity. The revised standard is quite different from the former standard. The structure of the consolidation report has been changed according to the new PSAK 1 and there is a regulation about separate financial statements.
In taxation, consolidated financial statements are not recognized. For compliance purposes, an entity should prepare its financial statements separately from its company group.
PSAK 13—Investment Property
Under PSAK 13, a property can be classified as investment property if it is not used in operating activities of a company but it generates income in the form of rental income or gain on property, or both. The initial purpose of owning property can be changed in line with the business condition, which further affects to the depreciation expense since investment properties cannot be depreciated. In addition, it is possible that tax may not recognize such property which leads to fiscal adjustment.
PSAK 15. Accounting for Investment in Associates
This PSAK has been revised and there are some changes in the new standard. In the new standard, profits and losses resulting from ‘upstream’ and ‘downstream’ transactions between an investor (including its consolidated subsidiaries) and an associate are recognized in the investor’s financial statements only to the extent of unrelated investors’ interests in the associate.
From the tax perspective, investment in a subsidiary or in a parent company is recognized at the historical value. Any record of increase or decrease in the investment value shall not be recognized by tax, since it only applies the realization principle. In other words, tax only allows recognition of actual gain or loss on investment value at the time of its sale.
PSAK 16. Fixed Asset
Related to Fixed Asset in PSAK 16, for the measurement after initial recognition, an entity may choose either the cost model in or the revaluation model as its accounting policy and should apply the policy to an entire class of property, plant and equipment. However, the residual value and the useful life of an asset should be reviewed at least at each financial year-end and, if expectations differ from previous estimates, the change(s) shall be accounted for as a change in an accounting estimate in accordance with PSAK 25 Accounting Policies, Changes in Accounting Estimates and Errors.
In taxation, the cost model is the only allowable method for measurement after initial recognition of an asset. Nevertheless, an asset revaluation may still be conducted under the approval of the Director General of Taxes.
After revaluation, the value of asset for depreciation per fiscal purpose is the acquisition cost by not deducting the residual value of the depreciated asset. It means that the total asset value per fiscal shall be depreciated.
PSAK 24. Employee and Pension Benefits
Employee benefits are regulated in PSAK 24 – Employee Benefits. In the new standard, there are alternative methods of actuarial unrealized gains/losses recognition, the standard permits alternative systematic methods of faster recognition, whereby it should be applied to both gains and losses and the basis is applied consistently from period to period. Such permitted methods include immediate recognition of all actuarial gains and losses in profit or loss. In addition, the standard permits an entity to recognize all actuarial gains and losses in the period in which they occur in other comprehensive income.
For taxation which applies the realization principle, recognition of gain or loss shall not be made until its realization. The similar treatment is also applied to actuarial gain or loss on employee benefit based Thus, fiscal adjustment to unrealized gain or loss on employee benefit whenever a company applies immediate recognition under PSAK 24.
PSAK 30 – Leases & ISAK 8 – Arrangement containing Lease
Under PSAK 30, the definition of lease is wider in scope as it does not require a legal standing status. An entity may enter into an arrangement, comprising a transaction or a series of related transactions, that does not take the legal form of a lease but conveys a right to use an asset (e.g. an item of property, plant or equipment) in return for a payment or series of payments. ISAK 8 (IFRIC 4) provides guidance for determining whether such arrangements are, or contain, leases that should be accounted for in accordance with IAS 17.
Determining whether an arrangement is, or contains, a lease shall be based on the substance of the arrangement and requires an assessment of whether:
(a) fulfillment of the arrangement is dependent on the use of a specific asset or assets (the asset); and
(b) the arrangement conveys a right to use the asset.
In taxation, criteria of leasing arrangement or transaction are determined in the Finance Minister Decree (KMK) No. 1169/KMK.01/1991.
Moreover, there are some other topics which should be considered by entities regarding the changing standards for instance, the financial instruments, intangible assets, combination business and many others. However, all those changes is added up by more extensive disclosures which are required in the new standards.
Key Challenges
Toward the IFRS convergence, Indonesian companies should consider the key challenges, which among others are: changing in accounting policy, financial reporting and taxation impact. Further, companies will also need to review their tax planning strategies to determine whether they are in alignment with any changes created by the IFRS convergence.
When companies begin to assess the potential implications of adopting each new accounting standard, the related tax-reporting and compliance implication should be identified. Each change of financial statements as a result of IFRS convergence will most likely cause certain impacts on the Indonesian taxation. Also, corporate information systems that support the tax planning, accounting and compliance processes continue to run effectively and efficiently with the new IFRS-based information.
Upon the IFRS convergence, the Directorate General of Taxes (DGT) as the Indonesian Tax Authority owns a series of choices to conduct, namely full adoption, partial adoption or no adoption. When the full adoption is chosen, an amendment to the Tax Laws is a must. In doing so, DGT shall absolutely ascertain that tax provisions remain rule based and sufficiently defined to prevent from any misinterpretation which causes different tax treatments. Ideally, DGT seeks possibilities of synchronization between the tax regulation and accounting standards. In a wider scope, coordination with other relevant government institutions are highly required to build conformity among related regulations issued.
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