The Effects of the Implementation of Earning Management and Subsidy Policy: A Case Study of Government Company

12 Pages Posted: 11 Jan 2017  

Aminullah Assagaf

Trisakti University - Sustainable Development Management Program, Economics Faculty

Syarifa Yunindiah Lestari

Trisakti University - Economics Faculty

Muhammad Zilal Hamzah

Trisakti University; Indonesian Business Institute

Date Written: October 30, 2016


Profit management is a policy which is done to affect the level of company profitability or a form of management intervention in presenting the financial statements that can flatten, raise and lower of the profit/loss statement. Technical implementation is done by taking advantage of opportunities, making accounting estimates, changing the method of accounting, shifting the cost and revenue period, hence the company's profit can be smaller or larger as expected. Factors motivating earning management among others are bonus plan, long-term debt contract or debt covenant, political and taxation motivations, and the placement of company’s management.

This paper is a case study of State-Owned Enterprises (SOEs) that is The National Electricity Company (PLN). PLN shows its undergoing losses due to lower electricity rates compared to the basic cost of supply. That is way the government provides a financial aid or subsidies through the state budget subsidies which the amount is very big, for example in 2014 and 2015, respectively around IDR 103.3trillion and IDR 101.2trillion. Accounting records on the financial aid can be carried out by the following alternatives: (a). as operating income and (b). as additional to government’s shares subscription. The second alternative depends on interpretation, the definition used, accounting estimation opportunity and expected financial reporting objectives. Recording as operating income as it is conducted so far in which PLN gained the profit in the amount of IDR 3.2trillion in 2014 and had loss in the amount of IDR 29.52013 trillion in 2015. If the financial aid is recorded as additional to government’s shares subscription, the PLN suffered IDR 100.1trillion losses in 2014 and IDR 130.7trillion in 2015.

From earning management point of view, the recording of subsidies as operating income provides a positive perception that PLN has been successfully in managing the company in a better financial performance. On the contrary, if the recording of subsidies is consider as an addition to share subscription, the perception would appear that PLN is in unhealthy of financial performance and management fails to manage the company.

These conditions provide a challenge or impetus of management to seek for more realistic efforts to improve its financial performance, instead of expecting state budget subsidies. In addition, tariff adjustment effort will be easier to disseminate to consumers because the burden of the loss was very high. For comparison, in other countries such as TNB and Petronas in Malaysia, they are not a record in statement of income (loss) about the subsidies on operating revenues.

This paper suggested that the alternatives that are used in recording the financial aid or subsidies of the state budget must be based on policy on using a definition that does not violate the applicable accounting standards. The important one its implications for public perception able to decrease the impact on decision-making relating to the public interest, the interests of the company's internal matters, and responses of the parties that are lack of full understanding of the information related to the financial statements. It needs a formulation from state-owned enterprises policy on earning management which having eligible reliability and relevance. Hence the financial statements can be presented fairly, beneficial and sustain to both internal and external parties of the company.

Keywords: Accounting Theory; Agency Theory; Earning Management; State-Owned Enterprises; Subsidies; Income Statement.

Suggested Citation

Assagaf, Aminullah and Lestari, Syarifa Yunindiah and Hamzah, Muhammad Zilal, The Effects of the Implementation of Earning Management and Subsidy Policy: A Case Study of Government Company (October 30, 2016). OIDA International Journal of Sustainable Development, Vol. 09, No. 10, pp. 23-34, 2016. Available at SSRN:

Aminullah Assagaf (Contact Author)

Trisakti University - Sustainable Development Management Program, Economics Faculty ( email )


Syarifa Yunindiah Lestari

Trisakti University - Economics Faculty ( email )


Muhammad Zilal Hamzah

Trisakti University ( email )


Indonesian Business Institute ( email )

United States

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