Empirical Evidence on Formal and Material Harmonization of National Accounting Standards

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INTRODUCTION

Although the numbers of studies on formal (de jure) and material (de facto) harmonization have increased recently, little evidence of the relationship between both types of harmonization is produced because traditionally researchers prefer to measure each type of harmonization separately. Some argue that measuring formal harmonization is more preferable because of the growing influence of accounting standards to accounting practices (Fontes, Rodrigues, & Craig, 2005; Garrido, Leon, & Zorio, 2002; Rahman, Perera, & Ganeshanandam, 1996); whereas others prefer to measure material harmonization (Herrmann & Thomas, 1995; Archer, Pascale, & McLeay, 1995; Emenyonu & Gray, 1996; Krisement, 1997; Canibano & Mora, 2000) where much of their work is highly influenced by van der Tas (1988, 1992b) and Tay & Parker (1990, 1992), which maintain that the ultimate concern of harmonization is to increase the comparability of financial reporting. Evidence of the relationship between formal and material harmonization, if any, show mixed results where most of researchers found that improvement of formal harmonization leads to that of material harmonization (Morais & Fialho, 2008; Peng, 2005).

This paper integrates formal (de jure) and material (de facto) harmonization measurements into one study. Measurement methods used are Jaccard's Coefficients and Spearman's Correlation Coefficients (Fontes et al., 2005), Euclidean Distances (Fontes et al., 2005), (Garrido, et al., 2002), H index and C index (van der Tas, 1988, 1992b), and Chi-square statistics (Cooper & Schindler, 2001). The benefits of this research are two-fold. First, it serves as a pioneer of comprehensive preliminary assessment of the levels and the progress of formal and material harmonization of Indonesian Accounting Standards (PSAK), which represents developing countries' accounting standards that have not received sufficient attention from accounting scholars. Second, it provides empirical evidence that contradicts mainstream beliefs, where the progress of formal harmonization does not lead to the improvement of material harmonization.

The International Accounting Standards Board (IASB) will be interested in this paper because there are only few empirical studies on formal and material harmonization of developing countries, especially on Indonesia. The board needs to make certain that its third objective, which is promoting convergence between national accounting standards and International Financial Reporting Standards (IFRS), has been accomplished in developing countries. It can also use the results of this study to better comprehend the extent of harmonization of IFRS among developing economies so that the IASB can devise more suitable strategies and apt accounting standards.

For standards-setting bodies in Indonesia and other developing countries, this study will provide vivid pictures of the positions and improvement of formal and material harmonization of national accounting standards with IFRS. Specifically, it suggests that harmonizing national accounting standards with IFRS might not result in more comparable financial reporting.

Development of Indonesian Accounting Standards

Indonesian Institute of Accountants (IAI) is the only accounting profession body in Indonesia. The institute was established in 1957 in order to govern and coordinate the activities of accountants that comprise financial accountants, management accountants, government accountants, and academic accountants (Foo, 1997). Started with only 30 members, in 2005 the membership grew to approximately 6,000 accountants out of about total 40,000 accountants in Indonesia (Kusuma, 2005). In 2007, the IAI has issued 59 Indonesian Accounting Standards (PSAK) and 6 Indonesian Islamic Accounting Standards in 2007. The latter were internally developed by the IAI, the former were fully and partially adopted and adapted from standards promulgated by the IASB and Financial Accounting Standards Board (FASB), subjected to slight and significant additions and deductions. …