Over 100 countries around the world either have adopted or will adopt the International Financial Reporting Standard (IFRS). In line with this global trend, Korea announced its own roadmap for convergence with IFRS in March 2007 in order to reform its local capital markets and enhance transparency in financial reporting.
At the end of 2007, the Korean International Financial Reporting Standards (K-IFRS) was released. The K-IFRS are a word-for-word translation of the full IFRS issued by the International Accounting Standards Board (IASB) and will become mandatory for Korean listed companies with asset over 2 trillion won, from 2011, with voluntary early adoption for all companies from 2009 except financial institutions. However, companies, of which asset is less than 2 trillion won, is allowed to keep their current accounting system until 2013.
What has changed?
Revaluation of assets
One of the main changes incurred by introducing IFRS is that unlike K-GAAP, K-IFRS generally uses historical cost, but intangible assets, property, plant and equipment (PPE) an investment property may be revalued to fair value. Derivatives and certain other financial instruments and biological assets are also revalued to fair value. Because of these changes, if revaluation makes profit, companies are able to expect to a decrease in liabilities. Therefore, companies owning many of fine tangible assets such as land, buildings are expected to get benefits by adopting IFRS to their current accounting system and it will make their books more attractive.
Changes in the recognition of A/C Receivables
However, under IFRS, accounts receivables are recognized as liability to the companies until the actual cash inflow occurs. For example, construction and shipbuilding companies were able to recognize certain percentage of their completeness of works as sales or revenue, but from next year, those receivables are only recognized when the actual cash inflows are incurred and works are completed. Therefore, companies in those industries are likely to have more liabilities than current accounting system on their books.
Combined financial statements
After adopting IFRS, the balance sheet and income statements are reported as consolidated statements quarterly. By implementing worldwide used of a single set of high quality financial reporting standard, it is expected easier to compare domestic and foreign companies that mainly use consolidated financial statements. Also, it will not be necessary for companies to duplicate similar external financial statements; hence it will reduce the costs and time of making two types of financial statements.
Increase in the amount of notes
From 2009, 11 domestic companies tested the external financial statements by IFRS, 50 ~ 60% of accounts were resulted to reduce but notes were increased twice than before, since IFRS recommend to simplify the accounts and make notes for further explanation. Simplified financial statements might cause the confusion when the external users interpret the financial statement. Companies need to be clear when they make notes on their financial statements, also external users will be needed to look reports more carefully.
Need IFRS experts
When the whole adoption is completed, it is expected that companies demand IFRS experts for more efficient work process. Also, external auditing companies and financial regulators will require IFRS experts. To meet these demands, Korea will need professional and systematic training system for the current and future accountant.
Supports from Financial Services Commission
For smooth adoption of IFRS, Korean companies will need stable finance/accounting regulatory system. Financial Services Commission (FSC) helps them by making and exercising those regulations. FSC made and run IFRS consulting team, which consists of worldwide renowned professional and IFRS experts. FSC is also running task force team that helps IFRS adoption and settlement. FSC is also supporting relatively small companies, of which asset is less than 2 trillion won, by considering their current situations and allowing them to adopt IFRS until 2013 because cost of changing accounting system is too demanding for those companies. Under those supports, by using K-IFRS, Korean companies are expected to get benefits, as more capital will be gathered from investors around the world.
by Taewon Jang (email@example.com)