Implication of the Adoption International Financial Reporting Standard (IFRS) towards Environmental Disclosures
Muhammad Miqdad
University of Jember
Novi Wulandari Widiyanti
University of Jember
Abstract
Indonesia has adopted International Financial Standards (IFRS) to increase the quality of financial report and the number of foreign investment. Following the establishment of IFRS as international accounting standards, there was also a public concern over the problems on global warming. Thus had led to the emergence on new paradigm of environmental disclosures. This study aims to examine whether there was an effect of IFRS adoption on the environmental disclosures among companies in manufacturing and minning industry which listed in Indonesian Stock Exchange during 2011-2016. The information was examined by analyzing the content of the environmental disclosures using GRI G-4 index in the companies’ annual report. It shows that there was a difference on the level of environmental disclosure before and after IFRS adopted in Indonesia. The number of environmental disclosure increase after IFRS had been adopted and thus lead to better control on management of environment of the company. Environmental disclosure needs to expose on several aspect of disclosure which were material, energy, water, biodiversity, emission, pollutan, product and services, compliance, delivering, supplier control, and etc.
Keywords:
Environmental disclosure, International Financial Reporting Standards (IFRS), Corporate Social Responsibility (CSR)
1.Introduction
International Financial Reporting Standards (IFRS) is a universally acceptedstandard of financial reporting. Currently, many countries are adopting IFRS, including Indonesia. IFRS is structured as a solution to the problem of standard differences of every country. By enacting the international financial reporting standards, financial statements of one country can be compared with other countries, and the reporting user will easily compare it. The adoption of IFRS is still a debate among academics and practitioners. The adoption of IFRS can improve the comparability of financial statements that allow multinational corporations to cross borders in their business. The goal of IFRS is to ensure that the company's financial statements contain high-quality information about the company's operations so that provide benefits to users in decision-making.
Bskerville (2010) et al. (2012) reveals that convergence can mean harmonization or standardization, but harmonization in an accounting context is seen as a process of improving the conformity of accounting practices by setting the diversity levels. If it’s associated with IFRS, then convergence can be interpreted as a process of adjusting Financial Accounting Standards (IFRS) to IFRS. Indonesia effectively conducted IFRS convergence through three stages, the first phase of adoption was from 2007 to 2010, the second phase of preparation was in the end of 2011, and the third phase is the implementation phase which was done in 2012.
Hilman (2007) stated that the state of the environment in the world including in Indonesia nowadays is a concern, and one of the environmental problems referred to is global warming. That's why environmental issues become the center of public attention today. Many of the environmental damage caused by the act of the less responsible companies, such as the case of PT Lapindo Brantas’ mud. Darwin (2007), saw that there were four reasons for increasingly significant environmental issues. First, the size of the company is getting larger. The larger the company, the higher accountability is required in making decisions related to the operations, products and services produced. Second, environmental activists and NGOs have grown rapidly throughout the world including Indonesia. They will reveal the negative side of the company related to environmental issues and will demand responsibility for environmental damage or social impacts arising by the company's operations. Third, the reputation and image of the company. Companies these days realize that the company's reputation, brand and image are high-value strategic issues and must be protected. Fourth, the development of communication technology is very fast. Negative environmental and social issues will spread and can be easily accessed using information technology.
The role of the environment is very important in people's lives. Corporate social responsibility disclosure today is no longer voluntary or commitment made by the company in account for business activities, but is mandatory for some companies to report it. The obligations are based on Undang-Undang Nomor 40 Tahun 2007 on Limited Corporation (UU PT), which was legalized on July 20, 2007. Article 74 of the Limited Corporation Law stipulates: (1) The Corporation which runs its business activities in the field and / or related to natural resources is required to do Social and Environmental Responsibility (TJSL) (2) TJSL is the Corporation's obligations budgeted and calculated as the Corporation's expenses which implementation is carried out with due observance of compliance and fairness, (3) The Corporation that does not fulfill its obligations shall be liable to sanctions in accordance with the provisions of legislation.
Industrialization, which originally had only an environmental impact on the surrounding area, has now created a perceived environmental impact worldwide. Situmorang (2011) states that the manufacturing company in its operation other than produce the product, also generate waste. This is due to the inefficiency in the operation of the company. The concept of environmental management understood by the company is limited to the management of waste generated from the production process, without any consideration to change the production process so that the waste can be reduced (Situmorang, 2011).
The mining sector in Indonesia has become much highlighted, especially by the community about its operations. The mining sector in its operations takes a lot of mine and among them are difficult or non-renewable mine (such as oil, gold, coal, etc.). In contrast to the concept of sustainable development that prioritizes the fulfillment of the needs of the present generation without diminishing the ability to fulfill the needs of future generations. It is interesting how the company can behave ethically by taking natural resources for its operations. It was mentioned in article 74 paragraph 1 in Undang-Undang Number 40 Tahun 2007 on Limited Corporation (PT), that mining company is one example of companies related to natural resources.
IFRS requires companies to disclose more about the company's operations. By making more disclosure, it is expected to improve the quality of financial statement information. Decision making can work better with such quality of information. But not all companies do such disclosure. Evandhini and Darsono (2014), stated that the average manufacturing company in Indonesia has not yet widely disclosed its social information.
The Global Reporting Initiative (GRI) is an international, independent organization that helps businessman, governments, and other organizations to understand and communicate business impacts on sustainability crisis issues such as climate change, human rights,
corruption and many others. GRI has been a pioneer of sustainability reporting since the late 1990s by providing the world's most widely used sustainability reporting and disclosure standards. The sustainability reporting and disclosure standards provided by GRI cover three categories: economic, environmental, and social. There are more than 90 countries that have already used these standards, including Indonesia. Companies in Indonesia use standards that was enacted by GRI in preparing sustainability reports.
The lack of environmental disclosure resulting in public dissatisfaction requires companies to undertake corrective action on corporate social responsibility in the dimensions of environmental disclosure as outlined in the annual report or sutainibility report. IFRS requires companies to disclose more about the company's activities. Indonesia adopted IFRS and has been implemented since 2012. Through the adoption, it is expected to improve the company's corporate financial statements and make more disclosure in the interests of stakeholders. GRI guidelines on the environment can be used as a reference for companies to carry out environmental responsibility for environmental sustainability due to company activities.
The Government of Indonesia through the Ministry of Environment and Forestry conducted the Corporate Performance Rating Program in Environmental Management (PROPER) to enhance the company's role in environmental conservation programs (Rakhiemah and Agustia, 2009). PROPER in providing the company's environmental performance ratings is using colors of gold, green, blue, red, and black. The results of the assessment are announced to the public to know the environmental management undertaken by the company. Companies that have good ratings then get incentives such as reputation or a good image in public interest (Suhendah and Haryanto, 2014).
IFRS adoption in Indonesia requires companies to follow the rules, including to reveal more corporate activities. Moreover, if it is related to the disclosure of the corporate environment affected by their operational activities. So, the researchers examine the IFRS adoption impact on the increasing number of companies that disclose the environmental condition or not. The sample of this research is manufacturing and mining industry companies registered in PROPER. Manufacturing and mining industry companies are selected to be the sample because their activities both before, during and after production have a major impact on the environment. These impacts affect environmental sustainability because of the pollution, waste, or environmental exploitation. The study period began in 2011, the year prior to the adoption of IFRS until 2016. The year of 2012-2016 was chosen as the year of comparison after the adoption of IFRS to see in what year the adoption of IFRS had an impact on corporate environmental disclosure. This study also aims to measure to which extend is the widespread development of environmental disclosure in the manufacturing and mining industry for the 2011-2016 research period.
2. Theoretical Basis
2.1. Signaling Theory
The signaling theory states that a good quality company will deliberately signal the market (public), thus the market is expected to differentiate good and bad quality companies (Indriani, 2014). The signals given by the company are expected to be captured by the target community, and in turn the public will have a perception of the company according to what the company wants.
Disclosure of various information in the financial statements as well as annual reports is a way to signal to the public, where the information includes the transparent disclosure of financial and non-financial information. The disclosure transparency of information should not only be done to the public, but also to shareholders. Shareholders are owners of companies that must receive transparent disclosure of information so as to obtain a better picture according to the actual condition of the company as a basis in decision making.
Disclosure of an environmental disclosure activity that is part of corporate’s corporate social responsibility (CSR) is a good signal given by the company, where the company wants to show that the company is active in carrying out CSR activities. Gray (2005) states that the quality of financial reporting is a signal to financial markets and stakeholders that the management is considered capable of controlling social and environmental risks within the company. A good social performance of the company helps the company to gain a good perception or image of the community.
2.2. Stakeholders Theory
Stakeholders are groups or individuals who can influence and / or be influenced by a particular goal achievement. Stakeholder theory considers the various stakeholders in the community and how the expectations of the stakeholder group have a bigger (smaller) impact on the company's strategy. This theory has implications for management policies in managing stakeholder expectations. Stakeholder companies basically have different expectations about how the company operates. The Company will seek to achieve the expectations of ruling stakeholders by stating the disclosure, including the reporting of social and environmental activities.
Stakeholders theory states that a company is not an entity that only operates for its own interests, but must provide benefits for stakeholders (Purwanto, 2011). Stakeholders theory discusses matters related to the interests of various parties, where the parties are entitled to obtain information related to company activities. At last, the stakeholders armed with the information has the authority to influence management in the process of utilizing all the potential possessed by the organization so that good management will be achieved.
Information regarding the corporate social activities has important meaning to the stakeholders today. According to Riswari (2012), disclosure of CSR is important because stakeholders need to evaluate and know the extent to which the company performs its role in accordance with the wishes of stakeholders. Thus demanding corporate accountability for CSR activities that have been done. Stakeholder theory emphasizes organizational accountability far beyond a simple financial or economic performance (Widodo 2014). The
information provided by the company is not only limited to economic indicators, but has shifted to a wider range of areas, ie, to the social sphere of society.
Stakeholders are the controller for the company to always evaluate its activities. The company's awareness of the importance of stakeholders will encourage the company to innovate and evaluate, so that the company can grow forth.
2.3. Legitimacy Theory
One of the theory that supports the submission of social and environmental accountability reports is legitimacy theory (Deegan, 2004). Legitimacy theory explains that organizations will continuously operate within the limits and values received by communities around the company in an attempt to gain legitimacy. Company norms are constantly changing following changes over the time, so the company must follow its development. Enterprises ’ effort to follow changes to gain legitimacy is a continuous process. The process of obtaining legitimacy related to t he social contract between what was made by the company with the various parties in society. Company performance is not only measured by profits generated by the company, but also by other performance measurement related to various interested parties.
To gain legitimacy the company has an incentive to conduct the social activities expected by the community around the company's operational activities. Failure to meet the expectations of the community will result in the loss of legitimacy and will then impact on the support provided by the community to the company. Corporate disclosure through annual financial statements is a company's effort to communicate the social activities that has been done by the company to gain legitimacy from the community so that the company's survival is guaranteed. The company will show that it is capable to fulfill its social contract with the surrounding community.
2.4. The Convergence of International Financial Reporting Standards (IFRS) in Indonesia
International Financial Reporting Standards (IFRS) are standards, interpretations, and basic frameworks for the preparation and presentation of financial statements (in the absence of standards or interpretations) adopted by the international accounting standards board. On the other hand, IFRS is an effort to strengthen the global financial architecture and seek long-term solutions to the lack of financial transparency (Dewangga, 2010). International Financial Reporting Standards (IFRS) is a hot topic for accountants and top management in companies that have been on the global Stock Exchange as well as academics and Auditors who will conduct checks on companies that have implemented the IFRS.
The objective of Indonesia to adopt the international accounting standards (IAS) is to facilitate foreign companies that will sell shares in this country or vice versa. However, to adopt the international standards is not an easy thing because it requires understanding. Furthermore, the cost of socialization is expensive. Iqbal, Melcher and Elmallah (1997: 18) define international accounting as accounting for transactions between countries, comparison of accounting principles in different countries and harmonization of accounting standards worldwide.
Indonesia has fully adopted IFRS in 2012, there are two kinds of adoption strategy that was done for convergence, namely big bang strategy and gradual strategy. Big bang strategy adopts full IFRS at once, without going through certain stages. This strategy is used by the developed countries. While in the gradual strategy, the adoption of IFRS is done gradually. This strategy is used by developing countries like Indonesia.
The 2012 IFRS Convergence target, is revising PSAK to materially conform to the 1 January 2009 version of IFRS which was effective on 2012, IFRS Convergence in Indonesia is done in stages. The benefits of IFRS convergence are facilitating the understanding of financial statements with the usage of SAK which is internationally known, increasing global investment flows through transparency, lowering capital costs by opening up fund raising opportunities through global capital markets, creating efficient financial reporting (Kustina, 2012).
2.5. Disclosure Quality
In addition to reports that must be reported in the form of financial statements, management can convey signals of success or failure related to the company's operations. Wolk et al. (2004) explains that there are several reasons why firms report voluntary disclosure.
The reasons are as follows :
1)The willingness of the company to make voluntary disclosure is required in the framework of competition between companies to obtain capital with the smallest risk, and if the company successfully earned it, it will raise the company's reputation.
2)Companies need to continuously maintain the "image" so that investor interest to invest can be maintained. In the perspective of signaling theory, companies report both mandatory reporting and voluntary reporting, in the hope that investors remain interested to always investing in the company, because information
asymmetry can be eliminated through disclosure of information both mandatory disclosure and which is voluntary disclosure.
The same thing is conveyed by Suwardjono (2005: 583) that signaling theory underlies voluntary disclosure. Therefore, management always strives to disclose private information which according to its consideration is very interesting to investors and shareholders especially if the information is good news. Management is also interested in delivering information that can improve its credibility and company's success even though such information is not required. With the willingness of management in this voluntary disclosure, the mandatory level of mandatory disclosure can be directed to a reasonable level.
In addition, Iriyanto and Nugroho (2014) said that in making decisions by stakeholders required information related to corporate activities, so that companies need to provide various information to seek support of stakeholders. According to stakeholder theory, a company is not an entity that only operates to provide its own interests but must provide benefits for its stakeholders that include shareholders, creditors, consumers, suppliers, governments, communities, analysts, and others. So this supports the existence of voluntary disclosure issued by the company for the fulfillment of information needed by the stakeholders in order to get support by stakeholders that affect the survival of the company.