Regulatory Approach to Formulate Accounting Theory: Literature

Study of Developed Countries

Arthur Simanjuntak

, Dimita H. P. Purba

, Iskandar Muda

and Syafruddin Ginting

Student of Doctorate Program, Faculty Economic and Business,Universitas Sumatera Utara, Medan Indonesia

Lecture of Doctorate Program, Faculty Economic and Business,Universitas Sumatera Utara, Medan Indonesia

Keywords: Financial Accounting Standards; Regulatory Approach

Abstract: The purpose of Accounting is to provide user quantitative information, primarily on financial of an

economic entity that is intended to be useful in decisions making for external and internal parties, among

various other alternatives. The main purpose of accounting theory is to provide a basis for predicting and

explaining accounting behavior and events. A different approach has been adopted by accounting

researchers and academics to formulate accounting theory. The traditional approach being used for the

formulation of accounting theory has applied one of the normative or descriptive methodologies, theoretical

or non-theoretical approaches, deductive or inductive reasoning, and has a focus on the concept of

"fairness", "social welfare", or "economic welfare". The traditional approach has developed into an eclectic

approach and is now replaced by a more recent approach that stands out among them is a regulatory

approach that can technically be considered as the embodiment of accounting standards. Accounting can be

described as a business language. The development of Accounting Standards in Indonesia began in the

period 1973-1984 by forming an Indonesian Accounting Principles Committee. By the end of 1994 the

committee made an improvement of Indonesia's accounting principles. In order to apply the new accounting

standard, by the end 1995 the Indonesian Accountants Association continue the improvement. Until the end

of 2008 the number of IFRS adopted had only 10 IFRS standards from a total 33 standards, the Financial

Accounting Standards continuing the improvement continuously, both completion and additions of new

standards.

1 INTRODUCTION

Accounting has a conceptual theoretical framework

that forms the basis of the implementation of its

techniques, this conceptual basic framework consists

of standards (techniques, principles) and practices

that have been accepted by the public because of

their usefulness and logic. There are different

approaches to formulation accounting theory and

one of them is the regulatory approach. The

regulatory approach is the embodiment of

accounting standards. This approach is based on the

suggestion that accounting theory must be developed

by first identifying account users and then finding

out what information they need. The lack of

consistency in what constitutes accounting theory,

however, makes the results problematic.

It is recommended that this approach will enable

us to assess current accounting practices and help

guide the development of new procedures, thus

satisfying the objectives of accounting theory

(Hendriksen, 1994). If this user group is willing to

express its response to a financial report, important

materials will appear in the discussion and analysis

of accounting standards that are valid or not yet

regulated so that applicable accounting standards

will be continuously up to date in accordance with

the wishes of most of the users. Both of these groups

have contributed to the formulation of accounting

standards (Simanjuntak, 2018)

Financial Accounting Standards are provisions

that regulate business entities to compile financial

statements. Indonesia has its own accounting

standards generally accepted in Indonesia.

Accounting principles or standards that are generally

used in Indonesia are compiled and issued by the

Indonesian Institute of Accountants. The Indonesian

Accountants Association is an accountant

professional organization in Indonesia (Putra, 2018).

Simanjuntak, A., Purba, D., Muda, I. and Ginting, S.

Regulatory Approach to Formulate Accounting Theory: Literature Study of Developed Countries.

DOI: 10.5220/0009508811791184

In Proceedings of the 1st Unimed International Conference on Economics Education and Social Science (UNICEES 2018), pages 1179-1184

ISBN: 978-989-758-432-9

1179

Accounting standards dominate the duties of

accountants. These standards are constantly

changing, deleted, and / or added both in the United

States and in other countries. Standards provide

practical and easy instructions related to the duties

of accountants. Standards are generally accepted as

company rules, followed by sanctions for non-

compliance.

The history of accounting is an evolutionary

study of what we think of accounting practices that

occur and institutions involved in the accounting

field itself. The history of the development of

accounting is very important to learn to know the

development of accounting from time to time to

predict accounting developments in the future.

Meanwhile in Indonesia, accounting practices were

introduced in the Dutch colonial era by an

organization called Amphioen Society based in

Jakarta around the seventeenth century. This

bookkeeping practice is named the Double Entry

Bookkeeping system developed by Luca Pacioli.

(Simanjuntak, 2018)

Accounting standards will constantly change and

develop in accordance with the times and demands

of society. Some reasons for the importance of

standard accounting standards (Belkaoui, 1986) as

follows:

1. Can present information about financial

information, achievements, and activities of the

company. In this case the information compiled

must be based on common accounting standards

which are expected to have clear, consistent,

reliable and comparable characteristics.

2. Give guidelines and regulations to work for

accountants so that they can carry out their duties

carefully, independently, and can devote their

expertise and honesty through the preparation of

accounting reports after checking the accountant.

3. Providing a data base to the government about

various information that is considered important

in tax calculations, regulations about the

company, planning and economic regulations,

and increasing economic efficiency and other

macro objectives.

4. Can attract severe experts and practitioners in the

field of accounting theory and standards. In this

case, the more standards that are issued, the more

controversy and the more excited it is to debate,

polemic and conduct research.

The formulation of the problem from this

research is:

1. What is the Regulatory Approach to the

Formulation of Accounting Theory in Indonesia?

2. How the Development of Accounting Standards

in Indonesia?

3. How to compare the use of accounting standards

in the European Union and in Indonesia?

The purpose of this study is:

1. To find out the Regulatory Approach for the

Formulation of Accounting Theory in Indonesia.

2. To find out the development of accounting

standards in Indonesia.

3. To find out the comparison of the use of

accounting standards in the European Union and

in Indonesia.

2 DISCUSSION

2.1 Accounting Standards

Accounting standards are concepts, principles,

methods, techniques, and others that are deliberately

chosen on the basis of a conceptual framework by

the standard drafting body (or authorized) to be

applied in an environment or country and set forth in

the form of official documents to achieve the

objectives of the country's financial

reporting.(Suwardjono, 2005)

Accounting standards are official statements

issued by the competent body regarding the

concepts, principles and methods set out as the main

guidelines for accounting practices. Accounting

standards are an important problem in the profession

and all report users have an interest in them.

Therefore, the mechanism for preparing accounting

standard standards must be arranged in such a way

that it can provide satisfaction to all interested

parties to the financial statements. This accounting

standard will constantly change and develop

according to the development and demands of the

community. There are four reasons why accounting

standards are made (Belkaoui, 2006):

1. The standard provides information about the

financial position, work and organization of a

company to users of accounting information.

This information is considered clear, consistent,

reliable and comparable.

2. Standards provide guidelines and rules of action

for public accountants that enable them to apply

caution and audit company reports and prove the

validity of these reports.

3. Standards provide databases to the government

regarding various variables that are considered

very important in the implementation of taxation,

corporate regulation, economic planning and

regulation, as well as increasing efficiency and

other social goals.

4. Standards foster interest in principles and

theories for those who have attention in

accounting disciplines.

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2.2 The Nature of Accounting Standards

The nature of accounting standards dominates the

duties of an accountant. These standards are

constantly changing, deleted, and / or added both in

developed countries and developing countries.

Standards provide practical and easy instructions

related to the duties of accountants.

2.3 Purpose of Making Accounting Standards

There are several reasons why standards must be

made, among others, namely:

1. Standards provide information about the

financial position, performance, and organization

of a company to users of accounting information.

2. Standards provide guidelines and rules of action

for public accountants that enable them to apply

the principle of prudence and freedom in

"selling" their expertise and integrity in auditing

company reports and proving the validity of

these reports.

3. Standards provide databases to the government

regarding various variables that are considered

very important in the implementation of taxation,

company regulation, economic planning and

regulation, and increasing economic efficiency

and other social goals.

4. Standards foster interest in principles and

theories for those who have attention in

accounting disciplines.

2.4 Purpose of Setting Accounting Standards

A standard may be beneficial for one party, but it

can also harm the other party. This is a form of

social choice. This choice encourages standard

compilers to adopt the process of politicians in order

to obtain accommodation. If social welfare is used as

a criterion in accepting a standard, a serious question

arises that relates to the legitimacy of the

membership of a standard drafting board that is not

through election. This question determines the

approach to justice in accounting policy.

2.5 Entities with an Interest in Accounting

Standards

Entities with an interest in Accounting Standards

are(Belkaoui, 2006):

1. Individual and public accounting office

2. American Institute of Certified Public

Accountants (AICPA)

3. American Accounting Association (AAA).

4. Financial Accounting Standards Boards (FASB).

5. Securities and Exchange Commission (SEC).

6. Other Professional Organizations.

7. Users of Financial Statements.

2.6 Legitimacy of the Process of Preparing

Accounting Standards

Legitimacy of the Process of Preparing Accounting

Standards is (Belkaoui, 2006):

1. Pessimistic Prognosis

The legitimacy of the standard setting process is

sometimes associated with its ability to create an

optimal accounting system, that is, a system

whose expectation of return to a user who applies

an optimal decision strategy is greater than or

equal to a similar return from another alternative

system.

2. Optimistic Prognosis

Cushing provides an optimistic prognosis

regarding the large number of responsibilities of

optimal accounting principles, provided that

assumptions from heterogeneous users and

underlying assumptions paradox Arrow are not

used (abandoned).

Bromwich offers the possibility of a partial

accounting standard; standard for one or more

accounting problems, which are made isolated from

standards or other accounting problems.

Chamber chose to exclude economics that Demski

described as impossible. The Chamber proposes an

idea that assumes the existence of norms or

standards that apply to certain situations.

measurements with close values.

2.7 Approach in Standard Determination

Determination of standards is a social choice so that

an essay standard may be beneficial to certain

parties and harm others. Most issues related to

political accountability are sensitive due to them:

1. The need for accounting standards arises when

there is conflict;

2. Accounting information can affect the level of

prosperity of its use.

In determining standards there are two approaches,

namely:

1. Representative Faithfulness.

2. Economic Consequences.

Two approaches that can be used in determining

accounting standards are:

1. Free Market Approach

This approach is based on the assumption that

accounting information is an economic

commodity similar to other goods or services.

Thus accounting information will be influenced

by the strength of demand and supply.

2. Regulatory Approach

This approach argues that market failure or

information is asymmetrical in relation to

quantias and quality. Supporters of this approach

believe that market failure can be seen in the

following factors:

3. Regulatory Theory

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The existence of a crisis in determining standards

has led to the emergence of accounting regulation

policies. Therefore the demand for a policy or

standard such as this is driven by the crisis that

emerges, the standard determinant responds by

providing the policy. (Belkaoui, 1986) said that

regulation is generally assumed to be designed and

operated for the sake of existing industrial interests.

There are two regulatory theories in the industry,

namely:

1. Public Interest Theory

2. Interset Group Therory.

The public interest theory holds that regulation is

needed in response to public demand for inefficient

and unfair market practices. While the theory of

group interest holds that regulation is provided in

response to requests from certain groups to

maximize their income.

2.8 Strategy for Establishing Accounting

Standards for Developing Countries

Developing countries have accounting systems that

are relatively inadequate and less reliable and

institutes are generally new and untested. The

standard setting process in developing countries

does not follow a unique and appropriate strategy for

each country. There are four types of strategies that

can be identified:

1. Evolutionary Approach;

An evolutionary approach consists of an isolationist

approach to making standards in which developing

countries develop their own standards without

interference or outside influence.

2. Development through the transfer of

accounting technology;

Development through the transfer of accounting

technology can result from the operations and

activities of international accounting firms,

multinational companies, and academics practicing

in developing countries or various international

agreements and cooperative agreements that request

the exchange of information and technology.

3. Application of international accounting

standards;

Use of International Accounting Standards. A

strategy that is also available to developing countries

is to join the International Accounting Standards

Committee (IASC) or the previously identified

international standards body and apply the overall

provisions.

4. The development of accounting standards is

based on an analysis of accounting principles and

practices in developed countries against the

background of the underlying investment.

2.9 Financial Accounting Standards

Financial Accounting Standards are Financial

Accounting Standard Statements and Interpretations

of Financial Accounting Standards issued by the

Standards Board of the Indonesian Institute of

Accountants and the Sharia Standards Board of the

Indonesian Accountants Association and regulations

of the capital market regulator for entities under

their supervision.

Financial Accounting Standards are the results of

the formulation of the Indonesian Accounting

Principles Committee in 1994 replacing the

Indonesian Accounting Principles in 1984. SAK in

Indonesia is an application of several existing

accounting standards such as International

Accounting Standards (IAS), International Financial

Accounting Standards (IFRS), Accounting Standards

Entity Finance Without Public Accountability,

Generally Accepted Accounting Principles (GAAP).

In addition there are also Statements of Islamic

Financial Accounting Standards and also

Government Accounting Standards.

In addition to the uniformity of financial

statements, accounting standards are also needed to

facilitate the preparation of financial statements,

facilitate auditors and facilitate financial report

readers to interpret and compare the financial

statements of different entities. In Indonesia the

Financial Accounting Standards applied will be

based on IFRS in 2012. International Financial

Reporting Standard (IFRS) is an international

financial reporting standard issued by the

International Accounting Standards Board (IASB),

an independent organization registered in America

but based in London, England (Sitorus and Ardiati,

2014).

Fewer differences between Financial Accounting

Standards in Indonesia and IFRS can provide

benefits to stakeholders in Indonesia. Companies

that have public accountability, regulators that seek

to create the necessary infrastructure, especially in

capital market transactions, and users of financial

statement information can use the Financial

Accounting Standards as a guide in improving the

quality of information produced in financial

statements.

The preparation and revocation of the Financial

Accounting Standards must follow the due process

procedure stipulated in the Organizational

Regulation of the Indonesian Accountants

Association. The process includes: identification of

issues; issue consultation with the Financial

Accounting Standards Consultative Council (if

needed); doing limited research; discussion of

Financial Accounting Standard material; ratification

and publication of exposure drafts; conducting

public hearings; implementation of limited hearing

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(if needed); discussion of public input; and

ratification of Financial Accounting Standards.

While the preparation of technical bulletins and

annual improvements is not required to follow the

entire stages of the due process procedure(Indonesia,

2018).

3 PROBLEM ANALYSIS

3.1. Development of Accounting Standards in

Indonesia

In 1973-1984, the Indonesian Accounting

Association formed the Indonesian Accounting

Principles Committee to set accounting standards,

which became known as the Indonesian Accounting

Principles.

In 1984-1994, the Indonesian Accounting

Principles Committee fundamentally revised the

Indonesian Accounting Principles of 1973 and then

published the Indonesian Accounting Principles in

1984. Towards the end of 1994, the Indonesian

Principles of Accounting began to make major

revisions to the Indonesian Accounting Principles by

announcing additional accounting standards and

issuing interpretation of the standard. The revision

resulted in 35 statements of financial accounting

standards, most of which were harmonized with the

IAS issued by the IASB.

In 1994-2004, there was a change in Qibla from

US GAAP to IFRS, this was demonstrated since

1994, it has become a policy of the Financial

Accounting Standards Committee to use the

International Accounting Standards as a basis for

establishing Indonesian financial accounting

standards. And in 1995, IAI made a major revision

to implement new accounting standards, most of

which were consistent with IAS. Some standards

adopted from US GAAP and others are self-made.

In the 2006-2008 period, IFRS Phase 1

convergence, from 1995 to 2010, the Financial

Accounting Standards book continued to be revised

continuously, both in the form of improvements and

additions to new standards. The revision process was

carried out six times on 1 October 1995, 1 June

1999, 1 April 2002, 1 October 2004, 1 June 2006, 1

September 2007, and version 1 July 2009. In 2006 at

the congress of the Indonesian Institute of

Accountants X in Jakarta it was determined that full

IFRS convergence would be completed in 2008. The

target at that time was to be fully compliant with all

IFRS standards in 2008. But on the way it was not

easy. Until the end of 2008 the number of IFRS

adopted had only reached 10 IFRS standards out of a

total of 33 standards.

3.2. Use of Accounting Standards in Advanced

Countries and in Developing Countries

The adoption of accounting standards in this case

IFRS has been carried out in several countries,

including in the European Union, which requires all

listed companies to prepare consolidated financial

statements in accordance with IFRS, while in the

UK standards resembling IFRS are needed to avoid

problems with registered companies not listed on the

stock exchange and IFRS is considered a challenge,

which ultimately welcomes IFRS to reduce

differences between accounting standards in the UK

and IFRS.

1. England

Financial accounting standards in the UK are

corporate law and the accounting profession. The

activities of companies established in the United

Kingdom are broadly governed by a deed

referred to as company law.

Financial Reporting

United Kingdom financial reporting is among the

most comprehensive in the world.

Accounting Measurement

The UK allows both the acquisition and merger

methods to record accounting for business

combinations.

2. Netherlands

Regulations in the Netherlands remained liberal

until 1970. The law was part of a large program

of changes in the field of corporate law and was

introduced in part to reflect the harmonization of

corporate law within the European Union that

occurred.

Financial Reporting

Mandatory financial statements must be prepared

in Dutch, but in English, French and German can

be accepted.

Accounting Measurement

Dutch accounting measurements have flexibility,

this can be seen by allowing the use of present

value for tangible assets such as inventory and

depreciated assets.

3. Germany

Before 1998, Germany did not have the function of

establishing financial accounting standards as

understood in English-speaking countries. The

German Accounting Standards Committee (GASC)

or in German (Deutches Rechnungslegungs Standard

Committee or DRSC) was established shortly

thereafter and was immediately recognized by the

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Ministry as the authority in setting standards in

Germany.

Broadly speaking, accounting in Germany is

similar to systems in the United Kingdom and the

United States. However, it is important to note that

the GASB standard is a mandatory recommendation

that only applies to consolidated financial

statements. The GASB was formed to develop a

German standard that complies with international

accounting standards. In 2003 the GASB

implemented a new strategy and aligned its work

program with the IASB's efforts to achieve

convergence of accounting standards globally.

Financial Reporting

In the Accounting Act of 1985 determine the

provisions of accounting, auditing and financial

reporting that vary according to company size.

Accounting Measurement

The German Accounting Standards (GAS) are more

stringent when compared to Handelsgesetzbuch

(HGB) in the case of consolidated financial

statements, applying GAS 4, the revaluation method

must be used.

4 CONCLUSION

1. Regulatory Approach to the Formulation of

Accounting Theory in Indonesia

The regulatory approach used for the establishment

and implementation of existing standards turns out

to be based on broad principles and can be

contrasted with comparisons between the pros and

cons of relevant theories, and then chosen on the

basis of standard drafting bodies.

2. Development of Accounting Standards in

Indonesia

The development of Indonesian Accounting

Standards began in the period 1973-1984 by forming

an Indonesian Accounting Principles committee.

Towards the end of 1994 the committee made a

major revision of Indonesia's accounting principles

by producing 35 Statement of Financial Accounting

Standards. In the 1995 period the Indonesian

Accountants Association then revised it again to

apply the new accounting standard. From 1995 to

2010, the Financial Accounting Standards book has

been continuously revised, both in the form of

improvements and additions to new standards. And

in 2006 at the congress it was determined that full

IFRS convergence would be completed in 2008. The

target was full compliance with all IFRS standards

in 2008. Until the end of 2008 the number of IFRS

adopted had only reached 10 IFRS standards out of a

total of 33 standards.

3. Use of Accounting Standards in the European

Union and in Indonesia

In the European Union countries have now adopted

the use of IFRS starting from 2005, even though the

decision to adopt the use of accounting standards has

been proposed since 2002. While accounting

standards in Indonesia are currently not fully

adopted (full adoption) International Financial

Reporting Standard (IFRS) . Current accounting

standards in Indonesia refer to (United Stated

Generally Accepted Accounting Standard (US-

GAAP), but in some articles have adopted

harmonization IFRS

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