The Routledge Handbook of Accounting in Asia

Zhijun Lin, Zhijun Lin

• Publisher: Routledge
• Year: 2017
• ISBN:
  9781317281283
• Edition: 1
• Topic: Business
• Subtopic: Contabilità
• Index: Business

As the centre of world economic development has shifted towards Asia over the last two decades, many Asian countries have witnessed rapid growth in economic and business operations. In light of these recent changes, accounting has played a significant role in assisting economic transition and advancement in Asian countries. However, although the general trend over recent decades towards convergence in financial reporting standards and practices has dramaticallyimproved the comparability of accounting information, considerable variances remain in practices between countries.

This Handbook therefore provides an up-to-date review of contemporary accountancy across Asia, illustrating how standards have been reshaped to accommodate the needs of economic and social trends. As well as providing an overview of standards in the larger Asian economies of China, India and Japan, contributions to the Handbook also include studies of countries such as Sri Lanka, Nepal, Cambodia and Mongolia. In particular, this Handbook analyses:

• financial accounting and reporting

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• management accounting

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• auditing and accounting professionalization

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• governmental and public-sector accounting

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• accounting education

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• accounting development in Asian emerging economies

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The Routledge Handbook of Accounting in Asia offers students, academics, regulators and practitioners an essential reference guide to the current scholarship and practice in the field of accountancy in Asia. It will be a useful resource in particular for students of accountancy, business studies and Asian studies.

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Part I

Financial accounting and reporting

Financial accounting derived from the traditional accounting system is a process of recognition, measurement, recording, classification, summarization and reporting of the operating activities of an economic entity, and it aims to provide accounting information, on a regular basis, about the entity’s financial position and operating results to external users (mainly investors, creditors, government regulatory authorities and others) to assist their decision-making (FASB, SFAC, No. 1). To ensure the comparability of the reported information (i.e. financial statements), financial accounting and reporting must follow the authoritative accounting standards (e.g. the generally accepted accounting principles, GAAP) in each country; thus, financial accounting and reporting practices are subject to the influences and constraints of the specific political, economic, social and legal systems in each country, which results in the evolution of substantial differences in accounting standards and practices in different countries over a long period.

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However, internationalization of accounting standards has become a new trend of financial accounting and reporting since the early 1980s owing to cross-border capital flows and the increase of multinational business activities. In particular, following the rapid growth of economic globalization and the international integration of capital markets around the world, the process for the internationalization of financial accounting and reporting has sped up dramatically since the early 2000s. With the endorsement and support of international associations of capital market regulators (e.g. the International Organization of Securities Commissions, IOSCO) and some intergovernmental organizations (including the United Nations and the European Union), the International Accounting Standards (IAS) and the International Financial Reporting Standards (IFRS) developed by the International Accounting Standards Board (IASB) have been widely recognized and accepted since 2005. Most countries in the world have now engaged in international convergence with IAS/IFRS, albeit by varied approaches or to different extents. The progress of international accounting convergence has a significant impact on financial accounting and reporting in Asian countries. Some countries have fully accepted IAS/IFRS to replace their national accounting standards and some have adopted IAS/IFRS with modifications to accommodate local conditions, while other countries intended to take the adoption gradually. Nonetheless, almost all Asian countries have embarked on the journey of international accounting convergence at varied pace in the last decade.

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This section provides an updated description of the development of financial accounting and reporting in four Asian countries: Indonesia (Chapter 1), South Korea (Chapter 2), China (Chapter 3) and Pakistan (Chapter 4).

As explained in Chapter 1, Indonesia was historically under Dutch rule and its traditional accounting system has stemmed from the Dutch commercial codes but it has shifted to the American accounting models owing to the rapid growth of the domestic capital market over the recent two decades. Thus, Indonesia is a pioneer in the adoption of IAS/IFRS in the region, as its national accounting associations made a commitment in 2008 to full convergence with IAS/IFRS in the country. However, unlike the ‘big bang’ adoption approach in EU member countries, Indonesia has followed a gradual adoption process, in which some selected IAS/IFRS have been adopted each year as the Indonesian equivalents of IFRS. There are two major phases in the IAS/IFRS convergence process in Indonesia. In Phase I (2008–2012), the first batch of 35 IAS/IFRS and 20 interpretations were issued by the Indonesian standards setter with varied effective dates over the period. In Phase II (2012–2015), the convergence aimed to reduce the differences between Indonesian accounting standards as of 1 June 2012 and the IAS/IFRS, with another set of IFRS-equivalent Indonesian accounting standards being issued and implemented. Interestingly, Indonesia has also developed a set of Shari’a accounting standards to cater for businesses (mainly financial institutions) that operate according to Islamic norms, a unique feature of Indonesian financial accounting and reporting. Readers can also learn from this chapter about the economic and business environment, capital market development and regulatory framework for accounting and reporting in Indonesia.

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South Korea is an economy with a high growth rate in Asia and it has exercised significant economic influence in the region and the world. However, as pointed out by the authors of Chapter 2, contrasting with its rapid and steady economic growth, Korea received the lowest ever score for its accounting transparency before 2011. Accounting and reporting practices in Korea were inherited from the German-style commercial civil law systems owing to a history of Japanese annexation before World War II. Chapter 2 explains that the massive aid plans from the US after the Korean War led to the creation of dominant government-controlled banks, which required accounting information mainly for government capital allocation and banks’ credit analysis. Therefore, the initial accounting and reporting standards in Korea were framed mainly to facilitate government economic development policymaking and banks’ credit rationing instead of the information needs of capital market participants in the country. In addition, two sets of accounting standards were formulated for publicly traded companies and non-traded companies, respectively, in Korea. Such an accounting system resulted in less transparent and reliable corporate reporting, which, indirectly, induced or exacerbated the financial crisis in the country in 1997. After the bailout by the International Monetary Fund (IMF) and the World Bank following the financial crisis, significant accounting and auditing reforms have been implemented to shift to US-style accounting and reporting systems in Korea. With the establishment of the Korea Accounting Standards Board (KASB) in 1999, Korea has actively participated in the international convergence process, aiming at fully adopting IAS/IFRS (renamed as K-FRS) in the country. However, a unique feature of KASB is that it allows companies to submit IFRS-related interpretation enquires (i.e. local interpretations). As pointed out by the authors of Chapter 2, Korea has not rejected any accounting policy option permitted by IAS/IFRS, but KASB has added some presentation and disclosure requirements following requests from local users and regulators. Thus, some concerns have emerged about whether K-FRS is essentially identical to IFRS since a few discrepancies do exist in current Korean accounting and reporting practices. An accounting scandal is also analysed to show how and why IRFS adoption alone does not necessarily improve accounting transparency. The authors have thus offered some recommendations for immediate changes to improve accounting transparency and financial reporting quality in Korea, which should also be relevant to other countries in the region.

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1

Development of financial reporting standards and practices in Indonesia

Agus Fredy Maradona and Parmod Chand

Introduction

Indonesia, the largest economy in South East Asia, is one of the emerging economies currently engaged in the process of converging their national accounting standards with the International Accounting Standards (IAS) or the International Financial Reporting Standards (IFRS). Unlike the ‘big-bang’ adoption approach in the European Union member countries and Australia, IFRS adoption in Indonesia follows a gradual process in which some selected IFRS are adopted each year and published as the Indonesian equivalents of IAS/IFRS which are promulgated by the International Accounting Standards Board (IASB). Indonesia provides an interesting example of how IAS/IFRS are adopted in an emerging economy, as the country has a unique history in the development of national accounting structures and has experienced a rapid expansion in its financial systems.

Indonesia was colonized by the Dutch, thus early Indonesian accounting practices were heavily influenced by the Dutch accounting system (Diga and Yunus, 1997). When the accounting system was later changed to the Anglo-American model, the influence of Dutch accounting remained apparent. More recent accounting standards setting in the country has been oriented towards the IFRS.

Indonesia has pledged its support for the global convergence with IAS/IFRS, and in 2008 the Indonesian Institute of Accountants, the national body of the accounting profession, which oversees the setting of accounting standards, formalized its commitment to full convergence with IAS/IFRS in the country (Deloitte Touche Tohmatsu, 2009). Over the last decade, the Indonesian accounting standards-setting body has worked towards the gradual adoption of IAS/IFRS, with the intention of ensuring that Indonesian accounting standards will be fully converged with IAS/IFRS in the near future.

This chapter examines the development of accounting standards and practices in Indonesia since its early stages to the current period of convergence of the country’s national accounting standards with IFRS. We first provide an overview of Indonesia’s economy and business environment, followed by a description of the regulatory framework that governs financial reporting and auditing in the country. We then outline the development of the Indonesian accounting profession since the 1950s. This section is followed by a detailed examination of the development of Indonesian accounting standards. The last section presents a brief summary and conclusions.

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An overview of Indonesia’s economy and business environment

Economic development

Indonesia is an archipelagic country of more than 13,000 islands, spanning the equator between the Asian mainland and Australia and between the Indian Ocean and the Pacific Ocean. With a total land area of 1,811,570 square kilometres, Indonesia is ranked fifteenth in the world in terms of land area. Indonesia had a population of 254.5 million in 2014, making it the fourth most populous country in the world, just behind China, India, and the US (World Bank, 2016). Of the total population, 67 per cent falls within the working-age category and about 49 per cent constitutes the country’s labour force. Indonesia has a multicultural society that comprises numerous ethnic groups with different traditional languages, all united by a single national language, Bahasa Indonesia.

Historically, Indonesia was colonized by the Dutch, who first came to the archipelago in the sixteenth century in search of spices and to establish trade in this commodity. An early Dutch settlement was marked by the establishment in 1603 of the first permanent trading post of the Dutch East India Company (Vereenigde Oost-Indische Compagnie – VOC), a Dutch government-backed company that monopolized the spice trade in the region. The Dutch colonial government formally took control of the region in 1800 following the demise of the Dutch East India Company (Ricklefs, 2001). After a prolonged national revolutionary struggle, Indonesia eventually proclaimed its independence as a United Republic in 1945.

While the Indonesian economy in the early period after independence was heavily weighted towards the agricultural sector, its economic structure began to change in the late 1960s when the Indonesian government commenced a gradual process of industrialization. This process accelerated in the 1980s when the government decided to diversify into manufactured exports instead of solely focusing on oil exports (Goeltom, 2007; Wie, 2012). Indonesia’s economy has expanded substantially ever since the beginning of the industrialization era, although this economic expansion was interrupted by a significant economic downfall in the late 1990s when the country was severely affected by the East Asian financial crisis. Being the largest economy in South East Asia and the sixteenth largest in the world, Indonesia’s GDP in 2014 stood at 888.5 billion US dollars, which is more than three times the country’s 2004 GDP (World...