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 Economics

State University of Jakarta, Indonesia
Mail address: Faculty of Economics, State University of Jakarta
Building R, Jalan. Rawamangun Muka, Jakarta Timur, Indonesia
Ph.: +62 21 4721227 Fax: +62 21 4706285
E-mail address: azdelima@yahoo.com, adam@feunj.ac.id

2011 Cambridge Business & Economics Conference

ISBN : 9780974211428

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.

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2011 Cambridge Business & Economics Conference

ISBN : 9780974211428

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 standardsetting 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 Indonesias 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 firms 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 crossborder 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 crossnational 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 countrys 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 closeddoor 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 noncompliance, 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 firms financial statements following mandatory IFRS
adoption may lower a firms 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 firms 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 20s recovery, late 20s reversal trend, through out 30s
and the 40s 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 accountants and economists 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).
Other studies have found similarly, fair value disclosures have incremental explanatory

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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
property tax valuations in case the property is worth less vacant because it left empty (Mintz,
2009).

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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 firms 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 firms 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
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

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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
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

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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 stocks return relative
to the market (Sharpe and Walker, 1975). Due companys 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
annual report then followed by preliminary earnings and dividend report but rarely informed
in merger announcement or capital reconstruction (Standish and Ung, 1982).

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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
directors 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
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

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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 visions 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, 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

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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 /
equity. Assets revaluation program in 141 state-owned enterprises is also currently being an
agenda in Ministry of State-Owned Enterprise.

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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 companys decision in applying cost or revaluation model for property, plant
and equipment.

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Table 1. Multi Industry Data 2008

NO
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19

INDUSTRY CLASSIFICATION
Animal Feed and Husbandry
Mining
Constructions
Food and Beverages
Metal
Electronic and Office
Automotive
Photographic
Transportation
Telecommunication
Wholesale
Banking
Credit Agencies
Securities
Insurance
Real Estate and Property
Hotel and Travel
Holding and Investment
Others
Total

TOTAL
1
1
1
1
1
2
3
1
6
2
7
17
4
5
2
13
4
1
5
77

MODEL
Cost
Cost
Cost
Cost
Cost
Cost
Cost
Cost
Cost
Cost
Cost
Cost
Cost
Cost
Cost
Cost
Cost
Cost
Cost

Table 2. Multi Industry Data 2008

NO
1
2
3
4
5
6
7
8
9
10
11

INDUSTRY CLASSIFICATION
Mining
Construction
Food and Beverage
Metal
Electronic
Automotive
Telecommunication
Wholesale
Banking
Securities
Insurance
Total

4. Discussion.
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TOTAL
2
2
1
1
1
2
1
1
3
1
1
16

MODEL
Cost
Cost
Cost
Cost
Cost
Cost
Cost
Cost
Cost
Cost
Cost

2011 Cambridge Business & Economics Conference

ISBN : 9780974211428

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
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.
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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.
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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