Explaining the IFRS and the Value Relevance of IFRS Adoption in Indonesia
The IFRS adoption in Indonesia gradually started in 2007, and the new standard took effect in 2012. The IFRS has three main characteristics, higher use of fair value as an assessment basis, and more disclosure.
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Benefits of Adopting the IFRS
- Improves financial accounting standards (SAK)
- Reduce costs of SAK
- Improves credibility and financial statements usefulness
- Better financial reporting
- More financial transparency
- Lower capital funding opportunities cost through the market capital
- Better financial statements efficiency
It is not easy to implement new standards. A lot of businesses have complained about the same.
In order to accommodate relevant information needs, the IFRS focuses on a fair value approach. Using this method, the company must respond to the market through stock price changes. This IFRS adoption produces competent financial reporting, therefore, increasing its value relevance.
Value relevance pertains to the accounting information’s capability to show the firm value so that it can make investors change their prior decisions. The change of investors’ choices is shown in stock price variations if there is a higher value of accounting information. Accounting information must have value relevance when prices of stocks fluctuate because of the report.
Adoption of IFRS to Financial Statements
Companies that implement accounting standards IFRS ‘just to show’ will have a low commitment to transparent financial statements. At the same time, the company that sincerely applies IFRS accounting standards will strongly commit to giving transparent financial statements. Earlier research already found higher transparency is going to lessen the risk of estimation that reduces capital costs.
If you want useful advice about the IFRS adoption in Indonesia, contact us at 3E Accounting. You can also hit us up for more accounting services.