Empirical Evidence on Formal and Material Harmonization of National Accounting Standards

Abstract

This paper empirically measures and compares the levels and progress of formal and material harmonization in Indonesia. It reveals the extent of harmonization Indonesian Accounting Standards (PSAK) with International Financial Reporting Standards (IFRS) and the improvement of that extent (de jure or formal harmonization). Additionally, it also uncovers the degree of the comparability of Indonesian companies' choices of accounting treatments and the improvement of that degree (de facto or material harmonization). Formal harmonization is measured by assessing 43 accounting methods of 18 accounting standards of International Financial Reporting Standards (IFRS) 2007 and their corresponding standards in Indonesian Accounting Standards (PSAK) 2003 and 2007, applying Jaccard’s Coefficients, Spearman’s Correlation Coefficients, Euclidean Distances, and Chi-square statistics. Using the same accounting methods, material harmonization is measured by examining 2004 and 2008 financial statements of 100 listed Indonesian companies and applying H index, C index, and Chi-square statistics.This paper finds that the extents of formal and material harmonization are high, although some divergences still occur. However, the improvement of formal harmonization is not followed by that of material harmonization.