An Exploration of Accounting Conservatism Practise: Empirical Evidence from Developing Country

Abstract

This study explores the practice of accounting conservatism in developing countries that have recently adopted IFRS gradually since 2012. The aims of this study were to explore the practices of accounting conservatism in Indonesian company and to investigate the influence of debt covenant and litigation risk toward accounting conservatism. This study employed 90 manufacturing companies in Indonesian Stock Exchange during the period of 2013-2016. The data was analyzed by using a panel data regression with fixed effect model. Based on deskreptif statistical test, showed that 81% company in this study choose to apply the principle of non-moderate conservatism in recognizing income and expenses. It implies that accounting conservatism in Indonesia tends to be low, but it was increase gradualy. The result of this research reveals that debt covenant which is measured by leverage has no effect on accounting conservatism. On the other side, litigation risk which measured by litigation index has positive effect on accounting conservatism. The high litigation risks facing by Indonesian listed companies have been increased the prudential of reporting their financial information to the market.

Keywords: Debt Covenant, Litigation Risk, Accounting Conservatism.