Sheldon Goh at Wolters Kluwer Financial Services
Nico Deprez at Wolters Kluwer Financial Services
Sheldon Goh and Nico Deprez from Wolters Kluwer Financial Services take a look at the IFRS environment in Indonesia, demonstrating the complexities of the Bank Indonesia requirements and point to their experience with Bank Rakyat Indonesia.
The global financial crisis has resulted in the need for greater transparency and accountability in the financial sector, which has inevitably spurred on a plethora of new regulatory requirements, including the new International Financial Reporting Standards (IFRS). In the simplest of descriptions, IFRS has been developed so that financial statements may be produced, read and understood by both local and international market players, and ultimately forms a critical element of our global economy.
The focus of this article looks at the adoption of the IFRS in Indonesia specifically. With a GDP growth of 6.4% in 2011, a rapidly growing Finance sector and an estimated number of 120 banks, Indonesia is strong becoming one of the fastest emerging economies in Asia. The rising wealth and pro-business environment in the region encourages firms to not only enter the market, but also thrive.With a vast and varied range of firms operating in Indonesia, it is also one of the best countries for financial services solution vendors to provide their services to customers. However with that said, there is also a host of various local regulatory and compliance requirements which firms must adhere to. The local requirements for firms in Indonesia are strict due to the move from principle based accounting to a more rule based accounting procedure.
The central bank, Bank Indonesia, like many of its counterparts,has set out to strengthen the soundness and resilience of the country’s financial system following the turbulence of the financial crisis. It has since published several guidelines conforming to the global accounting and risk management framework for IFRS but also Basel II & III. Banks in Indonesia have been swept with rapid changes and increasingly stringent regulations over the last three years in areas such as accounting standards and risk management.
The new IFRS requirements demand more data to be submitted at more frequent intervals, with more complicated calculations, therefore increasing the strain on financial institutions’ time and resource. Adoption of IFRS in Indonesia – and in fact in Asia overall – is unfamiliar territory for many firms in the region who would have only previously used prudential accounting.Therefore the transition is far more complex and changes to accounting standards are far greater conceptually in comparison to European firms, for example.
Whilst IFRS adoption is applicable on an international scale, each financial authority has its own local interpretations of the standards and Indonesia with PSAK 50/55 (the local interpretation of IAS 32/39) is no different. Therefore, firms and the solution they implement must cater for the localised requirements, such as the various methods for financial instruments, valuations, and different methods of calculation for both individual and collective impairments.
There are two key aspects to the Indonesian specific implementations which differ in comparison to global standard for IFRS. The first is related to incurred loss models for collective impairment in which a Roll Rate method is used. Despite the fact that this a proven method within economics, IFRS itself does not recognise this method as the standard approach, whereas the ‘Bank Indonesia published implementation guidelines’ do, making it a clear requirement.
The second differentiator is that the law in Indonesia prohibits having large trading portfolios which include derivatives. This is a direct result from fair value calculation- based on market prices – becoming impossible due to the absence of an active market within Indonesia. Furthermore, Indonesian authorities have published their own set of regulatory requirements covering most topics of IAS 32 and parts of IFRS 7.
IFRS compliant reporting can be achieved in various different ways. If the current source systems are not able to deliver data required to comply with the IFRS requirements, such as fair values of financial instruments, effective interest rate calculation, probability of default and loss given default, or amortised cost, then a solution is required which can compute the missing information.
Case Study: Bank Rakyat Indonesia
In 2012, Bank Rakyat Indonesia (BRI), one of the largest firms in the region with over 40 million retail customers, selected Wolters Kluwer Financial Services’ IFRS solution. The bank specialises in small scale and microfinance style borrowing and lending to its customers from its 8,000 branches and as of this year, is the second largest bank in Indonesia by asset.
BRI conducted a thorough evaluation of IFRS solutions available on the market in order to adhere to IFRS and PSAK 50, 55. The bank selected Wolters Kluwer Financial Services’ solution following the system’s strong benchmarking results.
“As one of the largest banks in Indonesia we naturally have considerable volumes to process so finding a solution that is technically sound and could process these volumes quickly and efficiently was a key requirement for us. With the Wolters Kluwer Financial Services’ IFRS solution we can now successfully process more than seven million accounts in seven hours. We are very pleased with our decision to work with Wolters Kluwer Financial Services.”said Achmad Baiquni, Director of Bank Rakyat Indonesia.
BRI benefits from calculation and reporting functionalities to cover the amortized cost and fair value accounting, effective interest rate, impairment assessments (collective and individual), hedge accounting (cash flow, fair value and net investment in foreign currency), as well as hedge effectiveness testing models encompassing both the balance sheet and off-balance sheet positions. By combining both the economic view (IFRS standards) and the statutory view (local GAAP)the IFRS solution enables the bank to review and report the same balance sheet positions captured from its data.
A solution with a modular architecture allows a firm whom may already have addressed aspects of the IFRS requirements, but not entirely, to select add-ons in order to achieve a complete and comprehensive solution. Indonesian firms require an IFRS solution which is user-friendly, complete in coverage of financial instruments and optimized performance for processing huge data volume in an efficient and timely manner.
BRI saw true value in a complete range of services and not just a software platform, but also the provision of local expertise of the Indonesian market. The knowledge of Wolters Kluwer Financial Services’ experts proves invaluable to firms, who require simple and clear understanding of regulatory requirements in Indonesia, no matter whether they are new to the market, or an established player. Firms in Indonesia require a solution which is flexible enough to acclimate to the local adaptions through combining technology flexibility with sound local expertise.This is one key aspect of why firms in Indonesia have chosen the Wolters Kluwer Financial Services’ IFRS solution and consequently why it is recognised as the industry leader.
To find out more of Wolters Kluwer Financial Services’ leading IFRS solution, please visit our website