Accounting standards a product of political action

Accounting standards a product of political action

By Djohan Pinnarwan

JAKARTA (JP): There was once a time, not so many years ago,
when accounting could be thought of as an essentially
nonpolitical subject. If it was not as far removed from politics
as was mathematics or astronomy, it was at least no more
political than psychology or surveying or computer technology or
statistics.

Even in areas of accounting such as taxation, which might be
thought to be most relevant to questions of public policy,
practitioners were generally content to confine themselves to
technical issues without getting involved as accountants in the
discussion of tax policy.

Today, accounting can no longer be thought of as nonpolitical.
The numbers that accountants report have, or at least are widely
thought to have, a significant impact on economic behavior.
Accounting rules therefore affect human behavior.

Hence, the process by which they are made is said to be
political. Charles Homgren writes that "the setting of accounting
standards is as much a product of political action as of flawless
logic or empirical findings.

"Why? Because the setting of standards is a social decision.
Standards place restrictions on behavior; therefore, they must be
accepted by the affected parties.

"Acceptance may be forced or voluntary or some of both. In
democratic society, getting acceptance is an exceedingly
complicated process that requires skillful marketing in a
political arena."

Few, if any, accounting standards are without some economic
impact. Numerous politically sensitive accounting reports could
be cited, but none has received as much attention as the recently
issued accounting standards by the Committee on Financial
Accounting Standards of Indonesia, Institute of Accountants, that
are Pernyataan Standar Akuntansi Keuangan (PSAK) or Statement of
Financial Accounting Standards No.38 on "Accounting for
Restructuring of Entities Under Common Control" and Interpretasi
Standar Akuntansi Keuangan (ISAK) or Interpretation of PSAK No.4
on "The Allowed Alternative Treatment for Exchange Differences".

The first requires all restructuring transactions of entities
under common control be accounted for at net book value.
Previously, those transactions have been treated at whatever
amount, usually at market value, in order to boost the bottom
line of assets reported. Since its effective date, Oct. 1, 1997,
all restructuring of entities under common control shall be
accounted at its net book value using the pooling of interest
method.

The second has been waited for by almost every enterprise. It
tries to interpret the allowed alternative treatment for exchange
differences which are prescribed by paragraph 32 PSAK 10 on
"Foreign Currency Transactions".

Normally, the exchange differences (both realized or
unrealized) should be directly recognized as income or as
expenses in the income statement in the period which they arise.

Under the allowed alternative treatment, the exchange
differences may be included in the carrying amount of the related
assets if certain criteria and tests are met.

The criteria are (1) the exchange differences result from a
severe devaluation or depreciation which it is impossible to
hedge, resulting in liability which can not be settled as a
consequence of the acquisition of an asset that is to be settled
in a foreign currency, and (2) the adjusted carrying amount does
not exceed the lower amount of the replacement cost and the
amount recoverable from the sale or use of the asset.

ISAK 4 defines what "severe devaluation or depreciation" and
"impossible to hedge" mean. If the depreciation of rupiah against
some foreign currencies reaches 133 percent of average rupiah
depreciation in the last three calendar years, the Committee
concludes that a severe devaluation or depreciation has happened.
While the criteria of "impossible to hedge" is met if (1) hedging
premium reaches 133 percent of average hedging premium in the
last three years, or (2) hedging facility is not available.

The Committee ignores the phrase "resulting in liability which
can not be settled". The writer is not sure whether the ignorance
of that phrase is intentional or unintentional. But one thing is
sure, if the phrase "resulting in liability which can not be
settled" is not ignored in the ISAK 4, under no circumstances
will the exchange differences be capitalized to the related
assets because until now, there is no exchange control in
Indonesia.

Therefore the liability arising from the acquisition of the
assets denominated in foreign currency can be settled. In other
words, if we strictly apply the requirement of paragraph 32 PSAK
10 on "Foreign Currency Transaction", the issuance of ISAK 4 is
useless, but is a kind of compromise so the enterprise could
defer part, but not all, of the exchange loss incurred in this
year.

Since most enterprises in Indonesia have huge amounts of
liability denominated in other foreign currency, it is believed
that most enterprises will report large amounts of exchange loss
if the requirement of PSAK 10 still applicable.

The issuance of ISAK 4 is actually an overruling of PSAK 10 in
its interpretation. It does not make sense at all. How can the
requirement at lower level overrule the requirement at higher
level which is very clear?

The fact that the enterprises suffer a huge amount of exchange
loss is still there and can not be erased just by changing the
accounting treatment.

In my opinion, whichever of the methods is chosen, the amount
of foreign currency still has to be disclosed in the notes of the
financial statements so everybody will know the facts. Are the
users of financial statements fool enough to be deceived so their
decisions will change like the changing of the accounting method?

The above example will serve to illustrate some of the points
of contact between accounting and politics. Many more could be
cited. Some believe that "because the Committee has the power to
influence economic behavior, it has an obligation to support
national goals (that is to rescue most enterprises from reporting
huge amounts of foreign exchange loss)".

Simply because information has an effect on human behavior
does not mean that it should not seek to be neutral between
different desired modes of behavior. Neutrality in accounting
implies representational accuracy. Neutrality does not imply that
no one gets hurt.

As the American Accounting Association committee on the social
consequences of accounting information says: "Every policy choice
represents a trade-off among differing individual preferences,
and possibly among alternative consequences, regardless of
whether the policy-makers see it that way or not. In this sense,
accounting policy choices can never be neutral. There is someone
who is granted his preference, and someone who is not."

David Solomons writes that "information cannot be neutral --
it cannot therefore be reliable -- if it is selected or presented
for the purpose of producing some chosen effect on human
behavior.

"It is this quality of neutrality which makes a map reliable;
and the essential nature of accounting is cartographic.
Accounting is financial mapmaking. The better the map, the more
completely it represents the complex phenomena that are being
mapped.

"We do not judge a map by the behavioral effects it produces,
but we judge the map by how well it represents the facts. People
can then react to it as they will. As the geographic features
that cartographers map, different financial facts need to be
represented in different ways, and different facts are needed for
different purposes."

In every standard-setting process, the profession is always
confronted by a choice between appearing to be indifferent to
national objectives or endangering the integrity of their
measurement techniques.

But if in the long-run the well-being of our discipline is
what matters, the right choice should be made. It is our job --
as accountants -- to make the best maps we can. If we are going
to make a decision, principles should govern our decisions.
Otherwise, we would lose our credibility and then our capacity to
serve society, and in the long run, we all lose.

Moreover, the issuance of ISAK 4 is contrary to the initial
reason to adopting the International Accounting Standard as a
benchmark standard so our accounting practices will be of a
world-class standard. Instead of moving to harmonize, it moves to
disharmonize.

The allowed alternative treatment for exchange differences
under ISAK 4 is not what it is meant by International Accounting
Standard 21 on "The Effects of Changes in Foreign Exchange
Rates". For the enterprise which is required to reconcile the
accounting principles in Indonesia to some other benchmark
accounting standards, the choice to capitalize certainly makes
them bear additional cost to reconcile ISAK 4 to the benchmark
standards.

One lesson from the current volatility of rupiah exchange
rates against other foreign currency, is that from now on, the
government is no longer "subsidizing" the interest rate for those
who borrow foreign currency, loans of which usually carry a lower
interest rate than loans denominated in rupiah. It is time for
enterprise to manage its risks arising from the volatility of
exchange rates.

The writer is professional member of staff at Kantor Akuntan
Publik Drs. Hadi Sutanto & Rekan (Price Waterhouse). The views
expressed in this article are strictly personal and do not
reflect the views of the firm for which the writer works.