“The impact of Indonesian financial accounting standard implementation, credit risk, and credit restructuring on allowance for credit losses in Indonesia”

This study examines the impact of the implementation of the Indonesian Financial Accounting Standard, credit risk, and credit restructuring on the formation of Allowance for Credit Losses (ACL) of commercial banks listed on the Indonesia Stock Exchange. The formation of ACL is regulated in PSAK 71 which is part of the Indonesian Financial Accounting Standard. The implementation of PSAK 71, and credit risk are expected to increase the ACL of commercial banks, however, credit restructuring programs will reduce the ACL. The research population is commercial banks listed on the Indonesia Stock Exchange in 2019–2020. The research sample is the entire research population. This study uses panel data regression analysis to examine the effect of the application of PSAK 71, credit risk, and credit restructuring on ACL for commercial bank loans. The findings show that the implementation of PSAK 71 and credit risk have a positive effect on the ACL, meanwhile, credit restructuring has a negative effect on the ACL.


INTRODUCTION
Banks are financial institutions that run the business of collecting funds from the public and channeling them to the public in the form of loans.Banks must be prepared to face the risk of loss from various fund investments.Bank's Allowance for Credit Losses (ACL) is established to recognize losses that may occur due to the risk of default.Allowance for Credit Losses (also known as loan loss provisioning) is a reserve established to cover possible losses arising in connection with the investment of funds into productive assets, both in rupiah and in foreign currency (Ikatan Akuntan Indonesia, 2006).The ACL must reflect the expected future losses on the loan portfolio disbursed by banks (Curcio et al., 2017).ACL changes will be recorded in the form of accruals as expenses by the bank in the income statement, so the greater the additional ACL formed, the greater the ACL costs recorded and then reduce the profit reported by the bank.
ACL is considered by the central bank and accounting standard-setting institutions (Ozili & Outa, 2017).The formation of ACL is regulated in Indonesia Financial Accounting Standards (PSAK) 71 con-cerning Financial Instruments (Ikatan Akuntan Indonesia, 2020).PSAK 71 adopts the expected loss model which requires companies to form ACL on all credit collectability, namely current, doubtful, non-current, and loss so that the adoption of PSAK 71 is expected to have an impact on increasing ACL that must be formed by banks.
At the beginning of 2020, banks in Indonesia were faced with the COVID-19 pandemic.The decline in the economic activity reduces the income and profits received by a company, thereby reducing the ability to pay off the principal and/or interest on loans received from banks, which will increase the risk of credit disbursed by banks.Banks will anticipate increased risk by increasing ACL formed by banks.The decline in the company's ability to pay off loans extended by banks during the COVID-19 pandemic was overcome by a restructuring program.The restructuring program is expected to reduce credit risk, then reduce the amount of ACL formed by banks.

LITERATURE REVIEW AND HYPOTHESES
Allowance for Credit Losses (ACL) is a non-cash fee charged by banks to anticipate possible future losses from non-performing loans (Ajekwe et al., 2017).ACL accounting policies are regulated by PSAK 71, which was adopted from International Financial Reporting Standard (IFRS) 9. Research on the impact of the ACL formation method on income smoothing or manipulation of earnings reports has been carried out by many researchers (Ozili & Outa, 2017, 2018 The effect of PSAK 71 implementation on the determination of the ACL amount can be explained by the theory of economic consequences proposed by Zeff (1978).Economic consequences is a concept that asserts that accounting policies will affect the economic value of the company and have an impact on the behavior of businesses, governments, and creditors in making decisions.Pawlina (2010).Previous studies discussed problems in debt restructuring in the private and public sectors.Restructuring topics were discussed, including the determinants of debt restructuring; the relationship between the credit cycle and credit restructuring; the impact of debt restructuring on investment, as well as the relationship between political connections and the implementation of debt restructuring.However, previous studies have not discussed the impact of restructuring on the ACL for bank loans.Based on the previous studies and the phenomenon (the change in Indonesian accounting standard and credit restructuring program due to the increase of credit risk), the formulation of the hypothesis is as follows: H1: The application of PSAK 71 has a positive effect on the Allowance for Credit Losses (ACL).
H2: Credit risk has a positive effect on the ACL.
H3: Credit restructuring has a negative effect on the ACL.

RESEARCH METHODS
This research was motivated by the application of PSAK 71 on financial instruments to replace PSAK 50, 55, and 60.PSAK 71 adopted IFRS 9 which was issued by the International Accounting Standard Board.PSAK 71 regulates the formation of Allowance for Credit Losses (ACL) on productive assets.In the banking sector, productive assets are loans.PSAK 71 requires banks to establish credit allowances for the Expected Credit Loss method.The application of this method is expected to increase the ACL.At the same time, in early 2020 the banking sector faced the PSBB problem as a result of the COVID-19 pandemic.
The variables of this study consisted of independent and dependent variables.The dependent variable of the study is the ACL for bank credit.The independent variables of the study were the application of PSAK 71, credit risk, and credit restructuring.ACL is the amount of allowance made by banks to anticipate losses on debtor defaults.The higher the ACL, the better the bank is ready to face the credit risk that will occur.The ACL variable is measured by the following ratio: Restructuring is an effort made by banks to improve credit activities for customers who have difficulty meeting obligations.Loan restructuring is measured by the number of restructured loans divided by the number of loans extended by the bank.The credit restructuring variable is measured by the following ratio: .

Credit Restructuring amount of restructured loans
Credit amount The type of data used is secondary data in the form of 2019 and 2020 audited financial statements of banks listed on the The regression model refers to the panel data regression results estimated by REM as shown in Table 4.The classical assumption test consists of three tests: normality test, multicollinearity test, and autocorrelation test.This is because the regression method chosen is the REM and the advantage of REM is that heteroscedasticity can be eliminated.The regression model does not contain multicollinearity, there is no problem of normality and there is no autocorrelation in the model.
According to the test result described in Table 4, adjusted R-squared is 0.295996.This means that the implementation of PSAK 71, credit risk and credit restructuring explain the variation of ACL by 29.5996 %.The significance level of F-statistic is 0.000000, which implies that the entire regression model is feasible to interpret the effect of the independent variables on ACL.
The t-statistics of all independent variables are statistically significant (less than 0.05).These results indicate that all proposed hypotheses are accepted.Thus, all independent variables (implementation of PSAK 71, credit risk, and credit restructuring) have an impact on the allowances for credit losses (ACL).

DISCUSSION
The result shows that the implementation of PSAK 71 affects the amount of allowance for credit losses formed by commercial banks listed on the Indonesian Stock Exchange (support H1).The increase in the amount of allowance after the implementation of PSAK 71 is confirmed from the results of the t-test, which reports positive regression coefficient.The findings support the theory of economic consequences proposed by Zeff (1978)  Credit restructuring is an effort to improve credit activities for debtors who have difficulty meeting their obligations.Restructuring is one way of controlling credit risk disbursed by banks.In terms of credit recipients, credit restructuring will provide flexibility for companies to fulfil their obligations.In such a way, it will indirectly provide space for companies to allocate funds to company operations.It is expected to have an indirect impact on a company's financial performance in the form of a significant difference in the company's financial performance in the period before and after the credit restructuring.
A company provides credit restructuring facilities to debtors with certain conditions.Banks can only restructure loans for debtors who have difficulty in paying credit principal and/or interest.Moreover, credit restructuring is analyzed based on the debtor's business prospects and ability to pay according to cash flow projections and analyzed by a party who is competent in credit analysis, independent and has a good reputation.Thus, to ensure that the restructured credit can be returned by the debtor.
Restructuring is a bank program to assist debtors who have difficulty in repaying loan principal and/ or interest.Restructuring is carried out by taking into account the business prospects of the debtor and the ability to repay the principal and/or interest on the loan in the future.Credit restructuring is expected to control credit risk (i.e., controlling credit defaults, and reducing the amount of reserve for impairment losses on credit).

CONCLUSION
This study proves that the formation of ACL for credit is higher after the implementation of PSAK 71.This result proves that the expected credit loss method is more conservative than the loss incurred method.The enactment of PSAK 71 has economic consequences because it affects the behavior of the management in making decisions on the formation of ACL.
This study proves that the establishment of credit allowances takes into account credit risk.The results of this study indicate bank compliance in implementing PSAK 55 and 71.PSAK 55 and PSAK 71 require the establishment of ACL to anticipate risks arising from default events that may occur in the future.Banks are required to evaluate credit impairment every Balance Sheet Date.The increase in credit risk or the risk of default will have a positive impact on the amount of ACL formed by a bank.
This study proves that credit restructuring has a negative effect on the amount of ACL formation.The credit restructuring program aims to control credit risk.This program to control credit risk is carried out by providing concessions to debtors to fulfill their obligations.Credit risk is expected to decrease and reduce the formation of ACL for bank loans.Restructuring is given to debtors who have difficulty in paying off loan principal and/or interest, are estimated to have good business prospects, and have the ability to expand loan principal and/or interest in the future.
Based on the results of the study, some suggestions can be given to several parties.This study proves that the implementation of PSAK 71 to replace PSAK 55 has economic consequences.This is indicated by the increasing number of ACL formations after the implementation of PSAK 71.These results provide input for investors in analyzing the comparison of the financial performance of banking sector companies listed on the Indonesia Stock Exchange in 2020 and the previous year.This study found that credit restructuring had a negative effect on the amount of ACL formed by banks.Restructuring is proven to be able to control credit risk and the amount of allowance for impairment losses on credit established by banks.Banks should be careful in implementing the restructuring program by considering the business prospects and the debtor's ability to repay the loan principal and/or interest.

Table 1 .
Descriptive statistics of research variablesSource: Processed data.

Table 3 .
Hausman test result Source: Processed data.