the early years adoption of cost or revaluation model for property

2011 Cambridge Business & Economics Conference ISBN : 9780974211428

THE EARLY YEARS ADOPTION OF COST OR REVALUATION MODEL FOR PROPERTY, PLANT AND

EQUIPMENT IN INDONESIA

ADAM ZAKARIA SE. Ak. MSi.

Accounting Lecturer at Accounting Department Faculty of EconomicsState University of Jakarta, Indonesia

Mail address: Faculty of Economics, State University of JakartaBuilding R, Jalan. Rawamangun Muka, Jakarta Timur, Indonesia

Ph.: +62 21 4721227 Fax: +62 21 4706285E-mail address: [email protected], [email protected]

mailto:[email protected]


THE EARLY YEARS ADOPTION OF COST OR REVALUATION MODEL

FOR PROPERTY, PLANT AND EQUIPMENT IN INDONESIA

The Revised Indonesian Accounting Standard for Property, Plant and Equipment

(PSAK 16) which is fully adopted from IAS 16 provides options for companies to

apply cost or revaluation model. It was effectively shall applied for periods

beginning or after January 1, 2008. The objectives of this research are to explore

the use of those methods and its effect to financial performances. Data gathered

for 400 companies listed in Indonesia Stock Exchange from 2008 to 2009. The

result shows that companies prefer using cost method for practicable, not

significantly different and cash flow consideration rather than revaluation model.

Keywords: IFRS, Cost or Revaluation Model, Financial Performance.

June 27-28, 2011Cambridge, UK

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THE EARLY YEARS ADOPTION OF COST OR REVALUATION MODEL FOR

PROPERTY, PLANT AND EQUIPMENT IN INDONESIA

1. Introduction

Despite accounting policy diversity and debates over harmonization of global

accounting standards, the growth of multi-country economic alliances has encouraged their

members to lessen differences for the benefit of regional goals. European Union and ASEAN

are also concern about this matter. Refer to The European Commission decision in 2000 and

Regulation 1606/2002 listed companies required to publish financial statements using IFRS

from January 1, 2005 onwards. Currently, around 150 countries are applying IFRS or

national accounting standards comply with IFRS. The level of IFRS compliance might vary

in every countries but convergence program is still working on. European Union required all

companies listed in European Stock Exchange to apply IFRS for consolidated financial

reporting started in 2005. According to the official information for 2005, there were 8,000

companies prepared their financial statements in the first year of adoption (Hughes, 2007).

Moreover, in November 2008 SEC presented the roadmap indicates that SEC will require all

U.S companies to use IFRS in 2014 (Scanner and Slater, 2008) but final decision would be

made in 2011 regarding moving to IFRS (Milman, 2009).

The roadmap of IFRS compliance in ASEAN countries has been settled. Indonesia

and Malaysia would fully comply that standards in 2012 meanwhile another members might

start differently. Some policy recommendations regarding financial accounting system have

been addressed in pursuing ASEAN harmonization (Saudagaran and Diga, 1998): broad aims

of financial accounting, institutional mechanism for achieving ASEAN harmonization, nature


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of specific measurement and disclosure requirements. In spite of differences in company law

requirements, securities market regulations, accounting standards-setting procedures and

accounting standards content, the similarities among ASEAN countries are concern with the

participation of private sector in accounting standards setting and enforcement (Russel and

Diga, 1996).

The harmonization standards to IFRS is also spread to another ASIAN country such

as Japan, China, Iran, India, Kazakhstan, Pakistan, Bangladesh etc. Debates over standard-

setting process normally occurred during meetings and seminars. IFRS is not only benefit for

its advantages to the country but disadvantages might faced especially if certain IFRS

standards is irrelevant to financial statement users and tend to offer more benefits at the

expenses of other party.

Applying cultural factors for instance a secrecy and lack of transparency (Gray,

1988), given Indonesia’s lower level of individualism, professionalism and large power

distance, its accounting profession likely to rank highly in term of both conservatism and

secrecy. These accounting values would result in a low level of transparency in financial

reports. The growth of Indonesian economy is also expected to strengthen the role of the

accounting profession in setting and implementing financial reporting standards. Structural

issues in society, inadequate regulatory and enforcement mechanism, cronyism as well as

language factors must be considered (Perera and Baydoun, 2007). Research has been done

regarding development of accounting standards and disclosure practice that patterned by

change in cultural norms. The association between national cultural and accounting values in

Indonesia was conducted previously (Sudarwan and Fogarty, 1996).


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The goal of IAS 16 apply for beginning or after January 1, 2005 is to prescribe the

accounting treatment of tangible fixed assets, so the users of financial statement may know

information about the investment that the institution has in its property and equipment as well

as the changes that have occurred in that investment. Accounting information is reflected by

its instruments so that can affect firm’s value. Fair value information is value relevant for the

users of financial statement. Therefore, measuring instruments at fair value can assist

investors for better decision. Indonesian Accounting Standard Board revised Financial

Accounting Standard Statement 16 (PSAK/GAAP) related to Property Plant and Equipment

(PPE) in 2007 and effectively shall apply for annual periods beginning or after January 1,

2008. That standard has fully adopted IAS 16 for cost or revaluation model. That standard

has replaced prior Financial Accounting Standard Statement 16 (PSAK) which only allowed

cost model for reliability consideration during periods before 2008.

This paper discusses the implementation of revised PSAK 16 in the early years of

adoption for all companies listed in Indonesia Stock Exchange. Since this new accounting

standards is totally different with previous one, many aspects would be covered such as : 1)

How far does company start to implement that new standard? 2) What the reasons backed

their decision in choosing that new standard? 3) What is the obstacle in applying that new

standard?

2. Literature Review

2.1. International Financial Reporting Standards (IFRS)

International Federation of Accountant conducted a survey which stated that

convergence to a single set of international accounting standards is a key to economic


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development. Majority of respondents find compliance with IFRS is very important (IFAC,

2007). Other research found that the use of IFRS is expected to improve the comparability of

financial statements, strengthen corporate transparency and enhance the quality of financial

reporting (Daske et al., 2007) while convergence towards IFRS reporting can facilitate cross-

border investment and thus the integration of capital markets (Covrig et al., 2007).

Four primary benefits outlined based on advocates of accounting harmonization

(IASC, 1983; Aitken and Islam, 1984; Purvis et al., 1991; ICMG, 1992): cost saving accruing

to multinational companies, enhanced comprehensiveness and comparability of cross-

national financial reports, widespread dissemination of high quality accounting standards and

practices, and provision of low cost financial accounting standards to countries with limited

resources. Developing national standards that harmonize with IFRS also advantages in the

aspects of costs reduction in preparing financial statements, the elimination or reduction of

set-up costs in developing national accounting standards, the potential of rapid national

improvement in perceived quality and status of financial reports, increase in financial market

efficiency through the provision of more understandable, comparable and reliable financial

statements (Ashraf and Ghani, 2005; Belkaoui, 2004; Chandler, 1992; Choi and Muller,

1984; Murphy, 2000; Nobes and Parker, 2006).

On the other hand, national culture is the largest obstacle hindering the harmonization

of accounting standards. Research has been done in thirty-three national stock exchanges

found that accounting disclosure is significantly affected by cultural dimensions of power

distance, individualism and uncertainty (Riahi-Belkaoui, 1995). Furthermore, national

accounting standards is unsuited or irrelevant to national need that leads to standards

overload (Choi and Muller, 1984), exceed business requirement in complexity (Belkaoui,


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2004) and tend to facilitate large international accounting firms at the expense of local firms

in both developing (Choi and Muller, 1984; Radebough et al., 2006) and developed countries

(Jopson, 2006).

Role of culture certainly impacts national standards. This conclusion can be drawn

from previous research. Cultural values are associated with our divergence index and matter

even more than legal origin in explaining divergences from IAS. With regard to absence

index, there is no significant relationship either cultural values or legal origin (Ding et al.,

2005). After that, in the area of comparability and convergence, the obstacle of comparability

might be genuine comparability meanwhile cultural is an obstacle at a high level of quality

(Zeff, 2007). Economic motive is also a determinant in standard-setting. The association

between lobbying positions and both their home country’s tax and financial accounting

standards was found. Respondents oppose change in the status quo particularly those changes

that they perceive might cause them adverse economic consequences in the future (Larson

and Brown, 2001). While primarily justifications for the increasing recognition to IFRS is

economic; the other factors such as social and political are alternatives explanation for the

origin and diffusion of IFRS (Chua and Taylor, 2008).

Accounting standard setting is a focal point for critical accounting. The process has

potential to inflict large losses and yield windfall gains for the participants (Fogarty, 1998).

Thus, the accounting profession and large transnational corporations prefer accounting policy

to be determined according to the processes of self-regulation. Two interrelated premises:

globalization impacts on sovereignty of the nation states and accounting is implicated; to

manage the global commons involves democratizing organizational relationship and involves

working to combat the adverse impacts of global capitalism (Lehman, 2005). The possibility


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of competition has served us well by developing efficient frameworks in any fields.

Competitive interaction among standard-setter, business firm and investors across the globe

will lead us to better accounting practices and standards and to lower cost of capital (Sunder,

2002).

The rapid congruence is also happen in another ASIAN country. Continued growth

and the attraction of foreign capital to domestic ventures will depend on transparency of the

financial dealings. China, as an emerging market economy, has have been successful in

issued four sets of accounting regulations (1992, 1998, 2001, 2006) and was considered to be

the greater conformity with IFRS (IASB, 2006). The significant improvement in compliance,

consistency and comparability indices on the 1999 and 2002 annual report of Chinese listed

firms has proven the convergence of Chinese GAAP with IFRS (Peng et al., 2008). India is

still moving forward in line with IFRS but political and social impediments need to be tacked

in order to improved comparability for financial statement users (Perumpral et al., 2009).

Meanwhile, as an emerging country, Kazakhstan had little choice but to proceed with IFRS

and that IFRS relevance is likely to increase as Kazakh economic development continues.

Implementation of IFRS is proving problematic but it taking place slowly (Tyrall et al.,

2007). Kazakhstan has achieved outstanding success restructuring its economy from central

planning to market based system. Adoption of IFRS is premature action by the policymakers

and is likely to carry little benefit for economies in the foreseeable future. Policymakers

should a more planned and graduated approach to adopting IFRS in emerging economies to

meaningfully adopt of IFRS and benefit from the adoption exercise (Hossain and Rahman,

2007).


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The other facts in Iran are the newly reorganized standards setting board make use of

the provided opportunity to set internationally harmonized accounting standards while

making allowance for local socio-economic environment. Moreover, government ambition

for swift economic development persuading foreign and local private investors tended to

continue the pressure on high authorities to begin the third wave of privatizing which

produces more challenges for international harmonization in accounting standards setting

(Roudaki, 2007). In Iraq, accounting system might be useful for new Iraq is international

accounting standards. It appears more suitable for the new market based economy like Iraq

rather than experimenting with other countries’ standards. Previous exposure to American

and British accounting rules in both practice and education would ease the process of

adopting the international accounting standards (AlNajjar, 2008).

In order to ensure quality financial reporting practice in Pakistan, it requires proper

monitoring and enforcement mechanism. The statutory regulators must have adequate power,

capacity and authority that must be independent of accounting profession in Pakistan with a

view to strengthening the enforcement mechanism and authority to impose legal sanctions for

the vialators (Hossain and El-Shazly, 1997). The institute of Chartered Accountants of

Bangladesh working on the adoption of IAS but compliance with the accounting standards is

not legally required. The standard-setting process adopted by ICAB is eventually a closed-

door process and interested users of accounting information do not have any chance to

participate in the standard-setting process (Hossain et al., 1997).

Research related compliance with IAS found that there is a significant extent of non-

compliance, especially in respect with IAS disclosures, and that key factors associated with

level of compliance including listing status, being audited by Big 5+2 firms, the type of


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reference to IAS and country of domicile (Street and Gray, 2002). Another research found

that foreign ownership is a positive determinant of higher IFRS compliance and that higher

IFRS compliance is positively related to share turnover. Thus greater foreign ownership and

improving the quality of a domestic firm’s financial statements following mandatory IFRS

adoption may lower a firm’s cost of capital (Bova, 2008).

2.2. Assets Revaluation

The goal of IAS 16 apply for beginning or after January 1, 2005 is to prescribe the

accounting treatment of tangible fixed assets, so the users of financial statement may know

information about the investment that the institution has in its property and equipment as well

as the changes that have occurred in that investment. Accounting information is reflected by

its instruments so that can affect firm’s value. Fair value information is value relevant for the

users of financial statement. Therefore, measuring instruments at fair value can assist

investors for better decision.

The change of assets value can be caused by general price level of change for

instance the magnitude of US war and post war but also by other dynamic elements in the

economic system such as change in public tastes or buying habits. This will cause expansion

of sales in some industries relative to others. Consequently, the value of plant, machinery,

land, retail outlet locations, equipment will rise in such industries, decline in others. Data on

asset revaluations compiled from US 272 large industrial corporations from 1925-1934. This

fact was based on the cyclical increase of write-up in prosperity periods before US great

depression in 1929 and write-down in depression periods then. Sound principles of asset

provide a basis for approximations of current value. Instead of difficulties of practical


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implementation, revaluations of assets take place in practice (Weston, 1953). The need to

depart from cost basis originally backed by a half century events which is address to US

economy such as World War I, early 20’s recovery, late 20’s reversal trend, through out 30’s

and the 40’s again reversed the cycle. Cost or its equivalent has been the time honored basis

for the valuation of fixed assets on the balance sheet but revaluation under certain conditions

can also be denied (Kempner, 1952). Both the accountant’s and economist’s measure of

value and income are needed. Retain original cost as a basis of accountability and to have a

monetary measure of income based on cost offer following considerations: tax return and

government report, public understanding, management performance measurement, basic for

adjustment to reflect economic values and economic income. On the other hand, the

supplementary statements showing economic income and the condition of the business as

expressed in current dollars are very useful for the economist and the businessman (Bell,

1953).

Measuring property, plant and equipment in USA is strictly using historical cost but

revaluations to fair value are acceptable practice under international and national accounting

standards such as IFRS, UK, Australia and New Zealand. In 1930s, SEC discouraged asset

write ups to fair value for public offering registration. SEC essentially removed the option of

upward revaluation of property, plant and equipment in 1940s through the enforcement of

financial statement information filed with SEC registration statements (Hermann et al.,

2006). SEC was using its registration powers to ‘censor’ financial statements which referred

to estimates of current values, regardless of evidence used to arrive at those estimates

(Walker, 1992). This ban continued in 1950s, disclosure of fair values in the footnotes to

financial statement was extended.


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Assumed the Korea economy in stability, the Property Revaluation Law of 1958

(Law No. 468) was enacted in January 1958. Despite its compulsory and price continued to

rise, majority of the business corporations and practically all sole proprietorships did not

adopt revaluation procedures. Then, by the time they began to realize the advantages and

necessity of revaluation, the political situation had become complicated. The Law 1962 was

simpler than the 1958 Law since firms were given choice of revaluing or not revaluing

properties using general price level index (Lee, 1965). During and immediately after World

War II, Japan experienced in a wild inflation. Price index increased fourfold from 1945 to

1946 and tripled again in the following year. This extraordinary rise of prices raised many

economic problems. Zeisei Shingikai Plan was released and fixed assets and land could be

revalued as of June 30, 1949. Then, upon request of the Supreme Commander of the Allied

Power, recommendations made by American economists and tax specialists to Japan

Ministry of Finance. After economic recovered its prosperity, another steps taken: the

Revaluation Law 1950, the 1951 amendment and the 1953 amendment, the Law 1954 and

1957. The Japanese demonstrates successful experiences (Davidson and Yasuba, 1960).

Using framework of qualitative characteristics of accounting information in SFAC

No. 2 (FASB, 1980), academic research has shown that fair value for property, plant and

equipment are more relevant to decision makers for example in predicting stock price, future

earning, dividend policy etc. Fair value measures for property, plant and equipment are

superior to historical cost based on predictive value, feedback value, timeliness, neutrality,

representation faithfulness, comparability and consistency. Verifiability appears to be sole

qualitative characteristics favoring historical cost over fair value (Herrmann et. Al., 2006).


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Other studies have found similarly, fair value disclosures have incremental explanatory

power (Bublitz et al., 1985; Murdoch, 1986; Haw and Lustgarten, 1988). Conversely, several

studies resulted differently (Beaver et al., 1982; Beaver and Ryan, 1985; Bernard and

Ruland, 1987).

In financial industry, requiring fair value as the reported measure may not improve

the quality for information over historical cost measure of all bank holding companies unless

appropriate estimation methods / guidance for the market instrument, that are not traded in

active market, are used by firm with less sophisticated information system (Khurama and

Kim, 2003). German bankers granted significantly higher loans to companies reporting

property, plan and equipment at fair value, while US bankers granted significantly higher

loans to companies reporting using historical cost (Nichols and Buerger, 2002). Historical

cost figures dominate current and replacement cost disclosures (Beaver and Landsman, 1983;

Beaver et al., 1982; Beaver and Ryan, 1985; Bernard and Ruland, 1987). The other studies

found that fair value disclosures have incremental explanatory power (Bublitz et al., 1985;

Haw and Lutsgarten, 1988).

Operationalising the fair value for the concept of accounting and legal purposes

sometime faces difficulty especially in the situation where the property being valued is

subject to imperfect or incomplete markets. This can result in uncertainty, ambiguity and

measurement error in accounting valuation. Accountants and auditors can look to the various

legal decisions (McCathie, Clifford and Mallet; Ramsay; Sapir; Murdoch; Turnbull) for

guidance on how the courts have dealt with various valuation issues (Betts and Wines, 2004).

Restructuring company through asset revaluations can ask local jurisdiction for lower


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property tax valuations in case the property is worth less vacant because it left empty (Mintz,

2009).

Motives for asset revaluation have been investigated by several researchers like

(Piera, 2007): leverage, ownership, foreign sales, and investment opportunities; customers,

supplier and foreign investor on firm’s accounting-policy choices (cullinan, 1999, Inoue and

Thomas, 1996), by reducing ROE and ROA, upward valuations reduce political costs borne

by firms (Brown et. al., 1992), the scope of inflation accounting standards (Griffiths, 1990),

help avoid violations of debt covenants, restricting debt level (Brown et al., 1992; Cotter,

1999; Whittred and Chan, 1992), serve to dissuade hostile takeover bids (Brown et al., 1992;

Easton et al., 1993), earning management policy (Black et al., 1998), positive link between

asset upward revaluation and the firm’s future performance (Aboody et al., 1999; Jaggi and

Tsui, 2001); associated with size, debt, fixed asset intensity and profitability (Lin and

Peasnell, 2000); for low level of debt firms, revaluation may posses value relevance because

they represent bona fine efforts by management to share inside information and thus reduce

information asymmetry while high level of debt firms have behave opportunistically

(Courtenay and Cahan, 2004).

Other research concerning motivation for revaluing assets conducted. Surveyed by

telephone, Chief Financial Officers (CFO) of Australian listed firms was asked their

revaluation policy. Primary motivations: true and fair financial statement, debt-to-asset ratio,

following takeover, takeover defense, political costs and stock dividend while other

important motivations: insurance, goodwill measurement and restructure firm. True and fair

financial statement resulted as the major answer chosen. Biggest gap between cost and

market was the main reason for revaluating property than other assets meanwhile valuation is


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not easily/reliably obtained was major reason why plant and equipment is not revalued

frequently/extensively as property. In section regarding why assets are not revalued in

account by non revaluing firms, assets are not of a type appropriate to revalue answer was

selected by most CFOs. The use of capital profit reserve and asset realization reserve spread

relatively similar which is for capital profit only, realized revaluation surpluses only etc. This

paper concluded that book values including asset revaluation reserves are more aligned with

the market value of the firm than book values excluding asset revaluations. Thus, asset

revaluation reserves as reported under Australian GAAP help to provide a better summary of

the current state of the firm (Easton et al., 1993).

Research associated asset revaluations and future performance resulted in

significantly positively over one, two and three years subsequent to the revaluation. Control

test for future change is in performance, risk, growth and size. More findings are revaluation

balance is significantly positively associated with price incremental to net income and book

value of equity. Current year upward revaluations are significantly positively associated with

returns (Aboody et. Al., 1999). Another research has been done regarding revaluation amount

and share prices and or returns (Amir et al., 1993; Easton et. Al., 1993; Barth and Clinch,

1996; Barth and Clinch, 1998); and positive market reaction to upward revaluation

announcement (Standish and Ung, 1982; Sharpe and Walker, 1975).

Using data from Australian public companies which announced upward asset

revaluations during 1960-1970, it was associated with substantial upward movements in

stock prices and generally sustained in the post-announcement months. Furthermore, stock

market appears to digest this new information quickly into stock prices as the adjustment was

almost complete at the close of the announcement month. Assets revalued including Land


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and building which is more revalued than plant and equipment. This research found that

market regards as announcement of an asset revaluation as information significance, the

market appears to absorb the information content of asset revaluations quickly into security

prices, and finally, there is little evidence to support the view that the announcement of asset

revaluations is associated with systematic changes in the volatility of a stock’s return relative

to the market (Sharpe and Walker, 1975). Due company’s assets is greatly in excess of

figures shown on the book, the effect is equity of shareholders has been understated and a

more correct of the shares has not been disclosed. As a consequence, company must consider

issuing stock dividends or bonus shares (Chambers, 1958).

Using data of British companies listed in the period 1964-1973 the examination

resulted in a positive upward movement in the cumulative average residual around the

announcement date of asset revaluation. It also appears that revaluations associated with

unexpected positive returns when taken by the capital market as a pointer to other favorable

signals from a company and to increase future benefit of stockholders. Assets revaluation

would be seen by the capital market in the following circumstances: the company estimates

the present value of assets as greater than their reported book value, given expectation of

future earnings such as dividend; reducing debt/equity ratio would raise potential further

debt; revaluation commonly followed by announcement of dividend pay out ratio, earnings

increases, increases in the dividend rate per share. On the other hand, revaluations could be

regarded unfavorable in these circumstances: upward revaluation produces an increase of net

book assets and a decline in the rate of return; revaluation undertaken as a defense against

takeover bids. The disclosure of assets revaluation is mostly announced on the release of


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annual report then followed by preliminary earnings and dividend report but rarely informed

in merger announcement or capital reconstruction (Standish and Ung, 1982).

Australian firms can base revaluations on director or independent appraiser value

estimates. In most cases, revalued assets based on director and independent appraiser

valuations are significantly positively associated with price. But there is a little evidence to

indicate that director- and independent-based valuations are viewed differently, suggesting

director’s private information enhance value estimates despite their potential self-interested

financial statements management incentives (Barth and Clinch, 1998). The distinction

between director and independent valuations is unclear and the regression result of each

sources have similar explanatory power (Easton, 1998). During telephone survey, indicated

that many directors’ valuations were supported by independent which is then for disclosure

purpose of balance sheet, independent valuations reviewed by director and this regard as

directors’ revaluations (Easton et al., 1993). The other study found that independent

appraisers are more likely to be used for revaluations of land and building and directors are

more likely for investment, plant and equipment and identifiable intangibles. This is as

evidence of firms harnessing directors’ knowledge of asset specificities. Firms with less

independent boards are more likely to use independent appraisers as evidence substitutability

between governance mechanisms (Cotter and Richardson, 2002).

Using a UK sample over period of 1994-1998, research has done for revaluers in

timing issue. Revaluers have significant higher industry median debt-to-total asset ratio,

larger total sales and fixed asset intensity and are less likely to be in a high tech or R&D

intensive industry. Revaluers also have higher return in the year before, year and the year

after revaluations. Findings stated that a current upward revaluation is associated with past


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share return indicate upward revaluations are not entirely timely. Furthermore, investigation

finds revaluers are dominated by firms with both a higher share return in the past two years

and higher industry leverage indicating UK firms delay the recognition of increased asset

values until this good news has been confirmed by their superior market performance, and

when industry leverage is high (Cheng and Lin, 2009). UK firms also delay their upward

asset revaluations because they can reduce future profit, return on total asset and equity

during economic-recovering period (Lin and Peasnell, 2000).

2.3. Accounting Standard for Property Plant and Equipment in Indonesia

Indonesian Institute of Accountant (IIA) established in December 23, 1957. At that

time, the objectives were to supervise, guide accounting profession, to achieve higher

standard of accounting education and higher accounting service quality. These also concern

with the national development objectives which is includes the quality of human resource.

Thus, professional competence of accountant at last would be in line with previous

statements. IIA vision’s is to be the leading professional organization in developing

knowledge and accounting, business management and public practice which is ethic, social

responsibility and environmentally oriented in national and international perspective.

The history of accounting profession in Indonesia can be divided into two phases

(Tuanakotta, 2007): First, Pre-Independence day on August 17, 1945 to the end of Indonesian

first president era, Ir. Soekarno in 1966. In this phase, Indonesia was occupied by Dutch.

This condition obviously influenced the law and accounting infrastructures. Though his

heroic fighting, Indonesian new government struggled in overcoming hyper inflation

problem and people suffered from economic crisis until the end of Soekarno era. Second,


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new Indonesian economy during Indonesian second president era, Soeharto and followed by

the other presidential government up to now. Huge capital inflows and foreign debts financed

this nation. Beside national companies, multinational corporations are altogether developing

new economy. As a consequence, laws amendment and accounting system has also changed.

First capital market established in 1973 and Indonesian Accounting Principles was

also codified. In line with the new business environment, 1984 Accounting Principles settled

and new standards was launched in 1994 to harmony the international accounting standards.

Currently, Indonesian Financial Accounting Standards is in progress to adopt of International

Financial Reporting Standards. 2007-2010 was adoption periods continued by infrastructure

finishing in 2011 and full adopted standards would be implemented start in 2012.

Meanwhile, the impact of that implementation is gradually evaluated.

Applying asset revaluation in Indonesian is relevant to government and business

practice. At first government had difficulties due to limited auditors, staff, valuation base,

documents and legal aspect. During implementation of valuing government asset, it refers to

Law No.1/2004: State Treasury, Government Rule 6/2006: State and Local Asset (valuation

using fair value method and regularly valued every 5 years), Governmental Accounting

Standards No. 7: Fixed Asset Accounting (acquired asset using at cost/historical cost and

estimation cost for unidentified/unavailable market value) as also explained in Finance

Minister Rule No 59/2005. Since it is not allowed to value all government assets in Rupiah 0,

so it must be revalued. This problem has caused fixed assets disclosed undervalued in

balance sheet of Indonesian central government so far until asset revaluation program

finished. Furthermore, this decade financial performance has effect negative net assets /


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equity. Assets revaluation program in 141 state-owned enterprises is also currently being an

agenda in Ministry of State-Owned Enterprise.

Indonesian GAAP / Accounting Standard Statement 16 released in 1994 for Property,

Plant and Equipment have been revised in 2007 and start to apply from 2008. According to

this standard, which was adopted from IAS 16, companies might choose cost or revaluation

model in valuing their property, plant and equipment. It replaced previous standard since

1994 which was only allowed cost model/historical cost for valuation purpose. Furthermore,

fixed asset can reveal fair market value as it stated in balance sheet and it benefit financial

statement users in decision making. For the taxation purpose, Financial Minister Rule No.

79/PMK.03/2008: asset revaluation was also been revised, replacing Financial Minister

Decree No. 486/KMK.03/2002.

3. Methodology and Data

This is a descriptive paper which is not applying a statistical test. The evaluation of

companies use whether cost or revaluation model benefit research in financial accounting

area. There are about 400 companies listed in Indonesian Stock Exchange. Annual report was

taken from internet for year 2008 and 2009. Due to lower level of disclosure through internet,

only 93 samples had randomly been collected from 35 industry classifications. These two

tables explain company’s decision in applying cost or revaluation model for property, plant

and equipment.


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Table 1. Multi Industry Data 2008

NO INDUSTRY CLASSIFICATION TOTAL MODEL

1 Animal Feed and Husbandry 1 Cost

2 Mining 1 Cost

3 Constructions 1 Cost

4 Food and Beverages 1 Cost

5 Metal 1 Cost

6 Electronic and Office 2 Cost

7 Automotive 3 Cost

8 Photographic 1 Cost

9 Transportation 6 Cost

10 Telecommunication 2 Cost

11 Wholesale 7 Cost

12 Banking 17 Cost

13 Credit Agencies 4 Cost

14 Securities 5 Cost

15 Insurance 2 Cost

16 Real Estate and Property 13 Cost

17 Hotel and Travel 4 Cost

18 Holding and Investment 1 Cost

19 Others 5 Cost

Total 77


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Table 2. Multi Industry Data 2008

NO INDUSTRY CLASSIFICATION TOTAL MODEL

1 Mining 2 Cost

2 Construction 2 Cost

3 Food and Beverage 1 Cost

4 Metal 1 Cost

5 Electronic 1 Cost

6 Automotive 2 Cost

7 Telecommunication 1 Cost

8 Wholesale 1 Cost

9 Banking 3 Cost

10 Securities 1 Cost

11 Insurance 1 Cost

Total 16

4. Discussion.

In the early year adoption of PSAK 16, 2008 and 2009, companies chose cost model

rather than revaluation model. Many differences in financial report and taxation purpose have

discouraged companies in applying revaluation model. This fact is explained by following

reasons:

1) Companies are still considering revaluation model which is just offered in term of

advantages and disadvantages. It is not practicable to estimate the effect of component


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approach and residual value of assets. Moreover, the adoption of new standard has not

resulted in change significantly for property, plant and equipment.

2) Companies have to provide extra money for appraiser service and 10 % tax liable of

upward revaluation of assets.

3) Too many items of property, plant and equipment can also be problems for revaluation

because fair value is not easily and reliably available and probably not of a type

appropriate to revalue.

4) True and fair financial statements purposes, and other motives it is not considered so far

and reliability is more focus rather than relevant for qualitative characteristic of

accounting information.

5) Companies who want to revaluate their assets must have permission from General

Director of Tax according to Finance Minister Rule No. 79/PMK.03/2008 which was

released shortly after PSAK 16 2008. The process itself sometimes takes time longer than

expected.

6) Finance Minister Rule No. 79/PMK.03/2008 state that all types of assets including land

must be revaluated, meanwhile PSAK 16 allow companies to revaluate only a group of

assets. This cause companies must prepare 2 scenarios for assets revaluation.

7) Finance Minister Rule No. 79/PMK.03/2008 offers companies to revaluate in every 5

years, but refer to PSAK 16 companies may revaluate their assets every year as long as

there is a significant difference between carrying costs and market value. This basic

difference really bothers companies which intend to revaluate their assets though time

difference can be settled through fiscal reconciliation.


23


8) A 10 % tax must be paid from the increase of market value in 12 months whereas

previously, Financial Minister Decree No. 486/KMK.03/2002 allow that payment in 2-5

years installment. Companies which suffer cash flow problem must consider the effect of

asset revaluation decision.

5. Conclusion

In summary, companies so far still view there are difficulties in applying revaluation

model for financial accounting and taxation purpose. Without considering the motives and

effect of asset revaluation, companies look still prefer cost method.

6. Limitation and Suggestion

Further research should consider asking companies for motives or reasons of not

revaluate their assets through questionnaire as well as using more samples and observation

years. This can provide deeper analysis and higher level of confidence using statistical tests.

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the early years adoption of cost or revaluation model for property

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