9

CHAPTER 2

LITERATURE REVIEW

2.1 The Development of Indonesian Accounting Standard

The Indonesian Institute of Accountants is the sponsoring body of the Financial

Accounting Standard Principles (or PSAK) in Indonesia. It has Dewan Standar

Akuntansi Keuangan (DSAK) that formulates and adjusts all of the standards.

Indonesian accounting standards have changed from time to time. The changes

are necessary to maintain the quality of financial information provided for both

external and internal users. The following sub-sections present the discussion

regarding the early stages of the Financial Accounting Standard Principles to the

convergence to IFRS and later, in the specific development of biological-asset

standard in Indonesia.

2.1.1 Earlier stages

Indonesian Institute of Accountants (or IAI) was established since 1973. Then,

IAI initiate a working group under the name of the Indonesian Accounting

Principles Committee (Komite Prinsip-prinsip Akuntansi Indonesia) to deal with

accounting standards which was Indonesian Accounting Principles (Prinsip-

prinsip Akuntansi Indonesia or PAI) before making a conceptual change in 1984

(Setiyono, Pinnarwan, Sugiri, & Suwardjono, 2011). From 1984 to 1994, PAI

was revised conceptually to synchronize it with 35 accounting standards in US

GAAP. Since then, the term has changed into Statement of Financial Accounting

Standards (Pernyataan Standar Akuntansi Keuangan or PSAK) until IFRS

convergence (Setiyono, Pinnarwan, Sugiri, & Suwardjono, 2011).

10

2.1.2 Convergence to International Financial Reporting Standards (IFRS)

As a member of G-20 countries, Indonesia should implement International

Financial Reporting Standards (IFRS). The convergence of SFAS to IFRS will

increase the quality of financial statements disclosed by companies in Indonesia.

As stated on November 15th

, 2008 in the G-20 forum in Washington DC, the

convergence to IFRS will:

1. Strengthen transparency and accountability

2. Enhance sound regulation

3. Promote integrity in financial markets

4. Reinforce international cooperation

5. Reform international financial institutions

IAI planned to implement all IFRS to SFAS in 2012; however some standards

encountered some objections and needed to be reviewed again. IAS 41

Agriculture is one of the standards that still in discussion and will be covered in

this study. This study evaluates the IAS 41 Agriculture and assesses the effect of

implementing the standards fully in Indonesia.

2.1.3 The Statement of Financial Accounting Standard (SFAS or PSAK) No. 32

Forestry

Before IAS 41 Agriculture, Indonesia has had an accounting standard for

biological assets which is PSAK 32 Forestry. After IFRS being released by the

IASB, all the accounting standard for specific industry were withdrawn. PSAK

32 regulates the accounting treatments specific for forestry industry (Ikatan

Akuntansi Indonesia, 2009). Essentially, PSAK 32 regulates a different

11

accounting regulation compared to IAS 41. The general insights of PSAK 32 are

as follows (Ikatan Akuntansi Indonesia, 2009):

1. PSAK 32 uses historical costs as the measurement while IAS 41 uses

fair value as a measurement and adjusts the value of the assets at the

end of financial period.

2. Also, unlike IAS 41 that only regulates the biological assets until the

point of harvest, PSAK 32 regulates the produce from the forest such

as timber, logs, and other produce.

3. PSAK 32 also regulates other non-forestry activities related to the

attempt to acquire the forest produce such as landscaping, roads and

bridge construction, and Bina Desa hutan.

4. Under PSAK 32 the plantations are depreciated or amortized whereas

in IAS 41 the depreciation or amortization costs only affect

plantations if there is no reliable fair value available in the market.

12

Table 2.1 below provides the differences between IAS 41 Agriculture and

PSAK 32 Forestry.

Table 2.1

A Comparison Between IAS 41 and PSAK 32

Key Factors IAS 41 (2003) PSAK 32 (revision 2009)

Regulates

Agricultural activity Forestry (planting, growing,

producing, manufacturing,

marketing also forest

maintenance)

Transformation of biological

asset until the point of

harvest

Agriculture produce will be

regulated under IAS 2

Inventories1

Also regulates the produce

Measurement Adjusted to fair value Recorded at historical cost

Profit

measurement

Fair value less cost to sell Using capitalized cost (historical

cost) less cost to sell

Depreciation Biological assets are not

depreciated

Not depreciated

If the fair value is not reliable

then use capitalized cost and

subtracts it by depreciation

and any impairment loss.

Classification

Classified into:

1. Consumable

biological assets

2. Bearer of biological

assets.

CBAs are treated under IAS

41.

Immature BBAs are treated

under IAS 41.

Mature BBAs are treated

under IAS 16 Property Plant

& Equipment

Classified into:

1. Natural forest (Hutan

alam)

2. Industrial forest (Hutan

tanaman industri/HTI)

1 IAS 2 Inventories covers producers of agricultural and forest products, and agricultural produce

after harvest as long as these products are measured at net realizable value, consistent with long-

accepted practice in agriculture industries (Mirza, Orrell, & Holt, 2008). The agricultural produce

after harvest is measured at fair value less cost to sell at the point it is harvested. This value becomes

its “cost” under IAS 2 Inventories (Mirza, Orrell, & Holt, 2008).

13

Table 2.1 (cont.)

Key Factors IAS 41 (2003) PSAK 32 (revision 2009)

Land Separately recorded under

IAS 16

Separately recorded under PSAK

16

Cost

capitalization

Planning, planting,

maintaining, safety,

harvesting, obligations to the

government and the

environment. Any unrelated

admin cost is not included in

production cost

Planning, planting, maintaining,

safety, harvesting, obligations to

the government and the

environment. Any unrelated

admin cost is not included in

production cost

After harvest Products are recorded as

inventory Products are recorded as inventory

Profit

recognition

Adjusted to fair value and

reported under profit and loss

at the end of the financial

year Not adjusted to fair value

Government

grants2

Government grants under

certain condition are reported

in the profit and loss

summary Not regulated

2.2 Insights into IAS 41 Agriculture

Agricultural industry runs differently in some aspects of other manufacturing

companies. Analysts can predict market trends, supply and demand, changes in

prices, and other significant terms for manufacturing companies. The kind of

information is available in the market. However, agricultural activities depend

heavily on nature. Hurricanes, tsunami, flood, or harvest failure cannot be as

easily predicted. Different area produces different agricultural products due to the

2 IAS 20 defines government grant as government assistance in the form of transfers of resources by

government to an entity in return for past or future compliance by the entity with certain conditions

relating to the operating activities of the entity. They exclude those forms of government assistance

that cannot be reasonably being valued and transactions with government assistance that cannot be

distinguished from other normal trading transactions of the entity. Government grants are

sometimes referred to as subsidies, subventions, and premiums.

14

diversity in geographical locations and climatic conditions (Bohusova &

Svoboda, 2013). Furthermore, each produce is unique; different area or different

animals and plantations need different treatments and length of growth. This

condition leads to a variety of the costs incurred and affecting the prices.

International Accounting Standards Committee (IASC) accommodates the unique

agricultural business activities by issuing IAS 41 Agriculture in February 2001.

In April 2001, International Accounting Standards Board (IASB) adopted the

IAS 41 Agriculture with the objective to have a uniform accounting standards

applied in the agriculture industry. There was no standardization in agricultural

sector before. The comparability of the financial statements for companies

engage in agricultural activities should increase by harmonizing accounting

standards in agricultural sector.

IAS 41 regulates the accounting treatment, financial statement presentation, and

the disclosures of financial activities for the biological asset of an agriculture

company.

IAS 41 defines agricultural activities as “the management by an entity of the

biological transformation and harvest of biological assets for sale or for conversion

into agricultural produce or into additional biological assets” (para. 5).

Biological assets included in the IAS 41 are living animals and plants. Biological

transformation includes all changes in the form of quantity and quality in a

biological asset. IAS 41 classified biological assets into consumable biological

assets (CBA) and bearer of biological assets (BBA). Harvested and ready-to-sell

agricultural produce such as milk, fruits, meat, crops, and similar produce are

15

prescribed as consumable biological assets. Meanwhile, fruit trees, grape vines,

livestock for producing the milk and other biological assets with similar nature

are prescribed as bearer of the biological assets. Later, in its amendments,

biological assets in the form of plants will only be considered as BBAs only if the

plants have no use other than as bearers. The transitions of biological asset

reporting standards are illustrated in Figure 2.1.

Figure 2.1

Biological Assets Reporting Standards Transitions (Source: Adopted from Mirza, Orrell, & Holt,

2008).

Selling

IAS 18

Produce is futher processed

IAS 2

Mature biological assets harvested

IAS 2 (Fair value less cost to sell becomes new cost)

Growing biological assets

IAS 41

Seeds planted (for plantations)

IAS 41

16

Figure 2.1 illustrates the transition of biological assets reporting standards. IAS

41 regulates the biological assets only up to the point of harvest. After the

produce being harvested it will be treated under IAS 2 Inventories. Agricultural

products include fruits, milk, meat, wool, logs, etc. IAS 41 does not regulate the

process after harvest, such as converting fruits into drinks, wool into thread, and

logs into paper. After the produce being sold, the revenues are recorded under

IAS 18 Revenue provisions3.

2.2.1 Accounting Treatments under the Early IAS 41 Agriculture

As other accounting standards under IFRS, IAS 41 Agriculture applies fair value

measurement 4

. IAS 41 stated that biological assets are measured at fair value less

costs to sell. Costs to sell include commissions, taxes, and duties (Mirza, Orrell,

& Holt, 2008). Assets can be grouped for measurement purposes, for instance

according to the age, quality, or type. Companies should determine the fair value

used in reporting through a few ways. First, for assets that have an active market,

companies can use the most relevant current market price available 5

. Second,

companies can also use the most recent transaction price in the market.

Alternatively, companies can use the market prices of an equivalent asset. In the

case where fair value is not available, companies can try to estimate the prices by

3 According to IAS 18, revenue will be recognised when there is economic benefits related to the

transaction that will flow to the entity with measurable amount (IASB, 2001). 4 IAS 41 defines fair value as the amount for which an asset can be exchanged or a liability settled in

an arm’s-length transaction between knowledgeable and willing parties. The fair value of an asset is

based upon the present location and condition of the asset.

5 Active market is a market where the items traded are homogeneous, willing buyers and sellers are

normally found at any time, and the prices are available to the public (Ankarath, Mehta, Ghosh, &

Alkafaji, 2010).

17

referring to prices of similar assets or sector benchmarks recent transactions

(Mirza, Orrell, & Holt, 2008).

Biological assets also need to be adjusted to its fair value at the end of the

accounting period. The adjustments should be recognized in the profit and loss

statement with all the information related to the fair value stated. In the case

when there is no active market for the asset and fair value cannot be justified or

be considered as reliable, companies are allowed to use costs less any

accumulated depreciation or impairment, as stated in the IAS 41. Companies

should state all consideration as why the fair value cannot be applied.

Some disagreements arise due to this fair value method. IASC stated that fair

value measurement is the measurement that reflects the value of biological assets

because due to the increasing value from time to time in accordance with the

growth of the assets (Mirza, Orrell, & Holt, 2008). Rather than a historical

method, the fair value method is considered as the better indicator for the future

economic benefits expected from a biological asset (AOSSG, 2011). However, as

other IFRS, IAS 41 is principles based, which allows more rooms to apply

professional judgment (Wiecek & Young, 2009). This will allow accounting

records in a way that is more flexible with distinctive economic and business

circumstances whilst allow bias in the information provided.

The accounting treatments of IAS 41 are in adherence to the given characteristic

of biological transformation stated in the IAS. The revenues are increasing along

with the growth process (Aryanto, 2011). For example, the more the fruits grow,

18

the higher the selling price will be. However, the fair value method is considered

as inappropriate for mature bearer of biological assets (BBAs), as the mature

BBAs do not undergo any biological transformation anymore (IASB, 2012a).

Mature BBAs, especially plantations, function similarly to production machines

in a factory thus it is more appropriate to classify mature BBAs into IAS 16

Property Plant and Equipment. Furthermore, the time needed for biological

transformation varies across biological assets. For example, teak trees will need

25 years until maturity while corns need less than half a year. The changes of

price of corns will be more rapid than the teak trees. The fair value of a teak tree

probably will not be a lot different than a week before whilst there will be

considerable changes in the fair value of corn.

Market prices also vary between areas and a lot of assumptions are needed. In

some cases, the fair value is far from prices of the market of commodities (Elad

& Herbohn, 2011). Therefore, financial statement users deem the fair value as

unreliable and tend to ignore the information (IASB, 2012a). The fair value

measurement also leads to earnings volatility. With the rise and fall price

environment, the inclusion of fair value in the profit and loss summary and

balance sheet will mislead the information because end users do not look at fair

value as it is not a cash item (AOSSG, 2011). Companies can also raise or drop

the earnings in financial statements for companies’ interests due to subjective

valuation (Fisher, Mortensen, & Webber, 2010) in other words, increasing the

possibility of earnings management. The standards also fall short to address the

harmonization between valuation methods used (Elad & Herbohn, 2011). Under

19

these arguments, IAS 41 does not fulfil the comparability and reliability

principles that IFRS promotes.

2.2.2 The Amendments of IAS 41 Agriculture

Critics lead to a conclusion that IAS 41 needs improvements. Asian-Oceanian

Standard Setters Group (AOSSG), in November 2011, has appealed to the IASB

for improvements in IAS 41 Agriculture. AOSSG consists of accounting standard

setter authorities in Asia and Oceania, including representatives from The

Institute of Chartered Accountants of India (ICAI), Malaysian Accounting

Standards Board (MASB), Accounting Standards Board of Japan (ASBJ), China

Accounting Standards Committee (CASC), Indonesia Institute of Accountants

(IAI), Korea Accounting Standards Board (KASB), and Hong Kong Institute of

Certified Public Accountants (HKICPA).

AOSSG proposes to distinguish the treatments of CBAs and BBAs under IAS 41

Agriculture. AOSSG recommends that mature BBAs should be included within

the IAS 16 Property, Plant and Equipment (PP&E) as the role of mature BBAs is

closer to PP&E. AOSSG also recommends two options for immature BBAs

measurement–under IAS 41 (at fair value) or under IAS 16 (at cost) - until

maturity. The fair value approach will be suitable for BBAs which can be defined

as both consumer and bearers for example hens and cows, while cost approach

will be suitable for BBAs as the sole bearers for example palm oil trees for palm

oil.

20

Supporting the recommendation, MASB stated that according to the survey (as

quoted in AOSSG, 2011) the majority of analysts specializing in plantation

companies find fair value information within profit or loss for BBAs are not

useful due to several reasons:

1. By using fair value, financial statements will be distorted due to subjective

valuation. Thus, loss its purpose to reflect the reliable view of companies’

earnings.

2. IAS 41 relies much on assumptions. However, companies use different

assumptions therefore making IAS 41 point less.

3. Fair value information is useless unless supported with other information

such as area, productivity, selling price assumed, age profile, and other

information related to the calculation.

4. Fair value measurement reduces the reliability and understandability of

financial statement presentation because end users do not know the

computation of the fair value.

5. End-users always exclude the biological gains and losses from earnings and

do not look at fair values as it is not cash items.

2.2.3 Recent Status of IAS 41 Agriculture

As a response to AOSSG, IASB (2013) decides to restrict the BBAs only to

plants that have no CBAs attributes. BBAs will be covered under IAS 16. The

recognition and disclosure of BBAs under IAS 16 can be applied without

modification. Accounting treatments for BBAs will be similar to machinery

before being placed into production. Therefore, the BBAs are measured at

accumulated cost. However, CBAs and other produce grows on BBAs will still

21

be measured under IAS 41. For example, before the fruit trees can produce any

fruits, the trees will be treated under IAS 41; after the trees mature can produce

fruits, then the fruits will be treated under IAS 41 until being harvested whilst the

trees will be treated under IAS 16. These amendments affected the IAS 16

Property Plant and Equipment as well as IFRS 1 First Time Adoption of

International Financial Reporting Standards. IASB targets to publish the final

revision of IAS 16 and IAS 41 in the first quarter of 2014 and will be effective in

2015.

2.3 Recent Implementation of IAS 41 Agriculture

2.3.1 Asia

Agriculture plays a significant role in developing countries including third-world

countries with emerging economies. Asian countries produce and export a great

amount of agricultural produce across countries. For example, Indonesia is

known as the top producer of palm oil and rubber in the world; China has the

largest agricultural output in the world; and India is known for producing tea

(IASB, 2012a). IAS 41 for BBAs has been a major problem across Asian

countries. For instance, Indonesia and Malaysia have adopted IAS 41 with

modification for certain assets (IASB, 2012a). These countries have not fully

adopted IAS 41 because there is a possibility of the IAS 41 amendments

regarding BBAs. Thus, companies delay the full adoption of IAS 41.

In Thailand, the adoption of IAS 41 has some problems because the reliable fair

value are not available in the market, especially for easy buy and sell market

because it is still inconstant in Thailand (Chalomklang, 2012). In the study of the

22

orchard business in Thailand by Chalomklang (2012), the SME in Thailand have

not adequately trained to apply IAS 41 in their businesses creating some

problems in the financial reporting.

The problems are quite similar to the fair value method. The method is

subjective, complex, and difficult to measure especially when there is no active

market for the assets. Chalomklang (2012) stated that practitioners do not

understand the basic of IAS 41. The definition of BBAs becomes bias in certain

countries such as India because differently from other countries; cows have no

consumable attributes in India. Companies that have plantations with various

maturities also face some problems because IAS 41 gives the same treatment for

all biological assets.

2.3.2 IAS 41 Adoption Worldwide

IAS 41 was released in 2001. European countries have adopted it since 2005. The

adoption of IAS 41 in European countries was not without problems. For

example, Bohusova & Svoboda (2013) detected that the application of IAS 41 in

wine industry led to earnings volatility; and that the fair value measurement was

subjective. Most French companies value their biological assets by using

historical cost, whereas Australian and British companies commonly using the

fair value method (Elad & Herbohn, 2011). Furthermore, Nobes (as quoted in

Elad & Herbohn, 2011) argued that systematic differences in accounting

practices still present despite of the adoption of international accounting

standards.

Elad & Herbohn (2011) stated that various proxies for fair value are used across

countries such as net present value, independent/external valuation, net realizable

23

value, and market price. Various proxies result in different ways of accounting

treatments which mean different perspective, judgments, and assumptions

resulting in incomparability between financial reports. Thus, IAS 41 has failed to

achieve the international comparability of accounting practices.

2.4 IAS 41 and Its Importance for Agriculture Industry in Indonesia

This section reviews the structure of agriculture industry in Indonesia and

highlights the importance of Indonesia agriculture industry. According to Badan

Pusat Statistik (BPS), in 2010 there are 237,641,326 people living in Indonesia

with 41,494,941 people work in the agricultural industry. The last number

represents almost 20% of the total population. Hence, the agriculture industry has

a significant role in the Indonesian economy.

Statistical data from BPS suggested that in 2012 the total output of exported

agricultural produce was around 35,263,291,518 kilograms or equivalent to

US$38, 241,481,245 with a positive balance of 14,374,723,585 kilograms or

US$23, 140,930,575 means Indonesia exports more than importing agricultural

produce. In 2012, the interim statistical data from BPS suggested that the

agriculture industry contributes 6.9% to the total Gross Domestic Product

(GDP)6. This makes agriculture industry the second largest contributor to the

total GDP after basic industry in Indonesia7. Agriculture industry represents 14%

to 15% of national employment in Indonesia. The main commodities are rubber,

coconut, sugar cane and palm oil. In terms of productivity, palm oil plantation

6 GDP is the market value of goods and services produced within a selected geographical area (usually

a country) in a selected interval in time (often a year) (Leamer, 2009, pg. 19). 7 Basic industry is the industry that processed raw material to be used by other industries (Pusat

Bahasa Departemen Pendidikan Nasional, 2007).

24

productivity increased by 1.28% in 2012 and by 5.51% for sugar cane (Deptan,

2012). The data also indicated that the agriculture industry in Indonesia is an

important industry in the Indonesian economy. Therefore, investigating the

potential effect of adopting IAS 41 Agriculture fully on the financial performance

of agriculture companies in Indonesia is an urgent need.

2.4.1 Current State of Accounting Standard for Agriculture in Indonesia

There has been no financial accounting standard specifically addressing

agriculture industry in Indonesia. The future adoption of IAS 41 Agriculture will

create the first and only financial accounting standard in Indonesia that directly

addresses the agriculture industry. IAS 41 Agriculture is now under the review of

DSAK. In current state, agricultural companies in Indonesia have adopted the

IAS 41 with modifications as shown in the 2012 financial performance. Further

information regarding the modifications is presented in the following sub-section.

2.4.2 The Modified IAS 41 in Indonesia

Agriculture companies in Indonesia have implemented accounting treatments that

are the modification of IAS 41. The modification usually involves the application

of the historical cost method and the depreciation of BBAs as PP&E. The

different maturity time between plants becomes an issue because it creates

earnings volatility. Additionally, some BBAs have no active market. For

example, there is no active market for palm oil tree or grapevines as it has to be

with the land underneath. Thus, fair values are not accessible for single asset sold

separately and may result in false or misleading information in the presentation

of financial statements.

25

The following table presents the modified IAS 41 by the companies in detail.

Data for the modified IAS 41 come from the 2012 financial reports of all

agricultural companies in Indonesia. Accounting policies sections of the reports

are the main sources of accounting treatment information listed in Table 2.2 as

the modified IAS 41 applied by agricultural companies in Indonesia.

Table 2.2

A Comparison Between the Modified IAS 41 and IAS 41

Aspects

Practiced by agricultural

companies in Indonesia –

the modified IAS 41

IAS 41

Areas to

regulate

Agricultural activity

Transformation of biological asset

until the point of harvest

Agriculture produce will be

regulated under IAS 2 Inventories

Measurement Recorded at historical cost Adjusted to fair value

Profit

measurement

Using capitalized cost

(historical cost) less cost to

sell

Fair value less cost to sell unless

fair value is considered unreliable

Depreciation Immature plants are not

depreciated

Immature biological assets are not

depreciated

Mature plants are

depreciated

If the fair value is not reliable then

use capitalized cost subtract by

depreciation or any impairment

loss.

Classification

Classified under Plantation

or Inventory

Some companies divide the

plantation into immature and

mature plantations.

Classified into:

1. Consumable biological

assets

2. Bearer of biological assets.

CBAs are treated under IAS 41.

Immature BBAs are treated under

IAS 41.

Mature BBAs are treated under

IAS 16 Property Plant &

Equipment

Land Separately recorded as a

fixed asset

Separately recorded as a fixed

asset

26

Table 2.2 (cont.)

Aspects

Practiced by agricultural

companies in Indonesia

– the modified IAS 41

IAS 41

Cost

capitalization

Planning, planting,

maintaining, safety,

harvesting, obligations to

the government and the

environment. Any

unrelated admin cost are

not included in production

cost

Planning, planting, maintaining,

safety, harvesting, obligations

to the government and the

environment. Any unrelated

admin cost is not included in

production cost

After harvest Products are recorded as

inventory

Products are recorded as

inventory

Profit

recognition Not adjusted to fair value

Adjusted to fair value and

reported under profit and loss at

the end of the financial year

Government

grants

Government grants under

certain condition are reported in

the profit and loss summary

Differences between the practiced modified IAS 41 and the IFRS version of IAS

41 in Indonesia show some problems to adopt IAS 41 fully. As discussed before,

practical matters such as the potential unavailability of data required and strategic

matters such as the impact of the full adoption of IAS 41 on the financial

performance of agriculture companies can be the sources of the problems. The

proposed study will focus on the strategic side of IAS 41 that is the impact of the

full adoption of IAS 41 on the financial performance of the agriculture industry

in Indonesia.

27

2.5 Prior Studies on IAS 41 in Indonesia

Agriculture industry supports the economy of Indonesia as well as other

developing countries. The Indonesian agriculture industry has many different

aspects due to the climatic conditions and wide range of locations. Indonesia has

two seasons and numerous biological entities. This results in the large numbers of

variants of agricultural biological assets and products in Indonesia.

Chen, Gul, & Su (1999) compared the earnings reported under GAAP that used by

Chinese companies at that time with earnings reported under IAS. Using

companies from the Shanghai Stock Exchange, the study found that there were

significant differences in the earnings reported under Chinese GAAP from those

based on IAS. The study revealed that 15% of the reported profit became loss due

to the differences in accounting standards and financial rules as well as unusual

market-wide events. Indonesia as well as China, has a wide area of agriculture.

The geographical state results in varieties of the agricultural products, as well as

plantations and livestock. The effect of agricultural markets in certain locations

might affect others; the prices will also differ from one area to another, creating

problems for companies with branches located in some different areas.

Regarding the forestry industry in Indonesia, the study about timber conducted by

PricewaterhouseCoopers (2009) reported that markets for timber are limited and

users may not appreciate the judgments and uncertainties that are inherent in the

valuation of forest assets8. In the studies, PricewaterhouseCoopers (2009) stated

that when the companies used fair value method, the companies typically based the

8 Big Four Public Accountant Firm

28

fair value calculations on the estimated current volume of standing timber and the

unadjusted current market price. In addition, the calculations usually presented

with no further disclosure regarding the applied price-variables in details. Thus, the

implementation of IAS 41 in the Indonesian forestry industry should be observed

and developed to be perfected.

To anticipate the demand for full convergence to IAS 41, PT. Perkebunan

Nusantara I-XIV (Persero) and PT. Rajawali Nusantara Indonesia (2012) releases a

guide for state-owned companies entitled Pedoman Akuntansi BUMN Perkebunan

Berbasis IFRS. This guideline has adhered fully to IAS 41 Agriculture. The

guideline indicates significant interest on the prospect to implement fully IAS 41

although the guideline is only for government-owned companies. Therefore,

studies that will present the impact of the full adoption of IAS 41 on the financial

performance of agricultural companies in Indonesia are urgently needed.

However, Yapa (2011) claimed that education and training regarding IFRS and

financial insights in Indonesia are still inadequate. Financial news is not

sufficiently provided in the financial newspaper and in other media such as TVs or

magazines. Yapa (2011) also mentioned that the journals and websites available in

the IAI website need improvements. Thus, the studies for IFRS implementation in

Indonesian companies are significant for the development of the Indonesian

economy.

This study specifically addresses the implementation of IAS 41 Agriculture in

Indonesian agricultural companies. The studies on IAS 41 have been done

29

minimally in Indonesia even though it is urgently needed. Therefore, this study

provides new insights regarding the IAS 41 Agriculture and the agriculture

industry in Indonesia as well as the impact of convergence to IAS 41 Agriculture in

Indonesia on the financial performance of agriculture companies in Indonesia.