|Ji Yeoun Kim|
One notable event taking place in the Korean capital market this year is the mandatory application of the Korean International Financial Reporting Standards (K-IFRS) for listed companies and selected unlisted financial institutions including financial holding companies, banks, insurance companies, credit card companies, investment traders, investment brokers, collective investment business entities and trust business entities.
Listed companies with assets of KRW2 trillion ($1.78 billion) or more will be required to report semi-annual and quarterly consolidated financial statements from 2011, while other listed companies are allowed a two-year grace period for semi-annual and quarterly reports. Korea has been preparing for the adoption of IFRS since 2007, and has finally adopted the new standards with the amendment of the Act on External Audit of Stock Companies in 2009. Since then, companies have voluntarily prepared financial reports in accordance with the new standards.
There are some significant differences between K-IFRS and Korean Generally Accepted Accounting Principles (K-GAAP). First of all, K-IFRS provides for principles-based standards which allow businesses to prepare comprehensive financial reports, with consolidated financial statements now being the norm, replacing the requirement to prepare separate financial statements under K-GAAP. The implementation of fair value accounting is also a critical issue for companies facing the new paradigm.
Under K-IFRS, the actual value of real estate investments or financial products would raise the value of companies. This aspect is definitely intended under the general framework of IFRS. On the other hand, researchers and academics project an increase in companies' debt ratios, which will accordingly have flow-through effects in the way some businesses are structured. For instance, banks would be reluctant to provide credit lines for special purpose vehicles in structured finance transactions while financial professionals would be driven to create and offer financial products which are not regarded as debt.
According to an announcement made by the International Accounting Standards Board, the main purpose of IFRS is to develop a high quality and globally accepted standard, and the Korean Financial Supervisory Service expects that South Korea will hold a greater appeal to foreign investors as a secure place for investment as a result of the introduction of K-IFRS. It is further envisaged that strict adherence to K-IFRS by accounting professionals will place South Korea at the centre of the global market.
Ji Yeoun Kim