IFRS early-adopter’s performance
2010/10/29 1 Comment
IFRS early-adopter’s performance has increased in this second divergence.
We can notice that this second-divergence record of corporation which early induceinternational account standard has been improved.
Previous month, 31, the Korean exchange(KRX) and corporation consultative councilanalyzed 26 listed companies’record and found that consolidated operating profit is KRW 8.4919 trillion , which is 14.8% increased than the first one.
Consolidated net income is KRW 7.8850 trillion that is 17.8% increased than previous one. And consolidated selling is KRW 78.8517 trillion – 11,34 increased .
There has been much bigger improvement in profits from the viewpoint of half-yearly. The first half year of consolidated operating profits is KRW 15.8883 trillion that is 103.7%increased than the first half year of last year.Consolidated net profit is KRW 14.5775 trillion – 15.4% increased than first half of last year.Consolidated selling is KRW 149.1591 trillion- 16.42 increased than the first half of last year.
What makes it increased?
The first reason of makingimprovement is, one of the characteristic of IFRS,The public announcement system which is focused on the consolidated corporation.Unlike existing Accounting standards (K-GAAP), regulating the consolidationrange by the Law-based governing relationship,K-IFRS is regulating the consolidation range by actual governing relationship. Therefore, ranges of subsidiary are increased greatly.In conclusion, in IFRS, companies have to make consolidated financial statement including some companies which are not included existing K-GAAP, like SPC(Special purpose company), PEF(private equity fund) and subsidiaries that has below KRW 10 billion of asset so they were ruled out from consolidating range by K-GAAP.
Strictly speaking, the K-IFRS perceives the selling or operating profitthat is not perceived in existing K-GAAP rather than the K-IFRS increases of achievements.It especially cut a brilliant figure in IT and automobile industry that are key industries in Korea.Because these kinds of enterprises possess excellent selling and manufacturing corporations overseas whose assets are below KRW 10 billion so were excluded from consolidation range by existing K-GAAP.Therefore K-IFRS calculates the total assets, sales and operating profit by concluding these small overseas corporations. And this feature brings about the increasing in performance.
However, the K-IFRS doesn’t over-estimates performance of the companies.Measuring the body of corporation based on actual governing relationship, it will be more accurate than measuring by law-based governing relationship. Considering this, the K-IFRS which connects these to a holding company more exactly than K-GAAP.
Moreover, one of the reasons is extension in recognition of intangible asset.In existing K-GAAP, R&D investment can be recognized as intangible asset only if investment has a very high probability, over 80%, which contribute to benefit creating company’s profit. Otherwise it is regarded as whole the cost for the current term. While K-IFRS admit that over 50% contribution will be approved. with this, enterpriseswill do R&D investment actively because of decrease of the opportunity cost so companies can create more value by continuous R&D.And thanks to the asset made of development cost, net income in the beginningof period when company realizes intangible asset would be increased. Because ofthe company doesn’t have to measure whole R&D investment as not a cost but an asset. This is going to effects positively to the net income of corporations which givesmuch R&D investment such as; Samsung electronics, LG electronics, Hyundai motors and so on.
Another reason is that K-IFRS doesn’t have any regulation of amortizing goodwill which is spentpremiumon the back of M&A. In general, the company’s value is composed of not an asset but the reputation, regular customers, favorable positions and many other intangible values. Therefore seller wants to receive more money than company’s value that is shown on the financial statements and we call that overpaid value as ‘goodwill’.
In the existing K-GAAP, goodwill has to be amortized constantly every year within 20 years. But in K-IFRS,as mentioned before, there is no special amortizing regulation system involved this. However, companies have need toevaluate value of goodwill every year so they record any damage immediately. only in that case, they treat it as an expense.
The asset revaluation does not affect profit growth.
The asset revaluation is one of the features of IFRS and it is an unconventional view for people who are familiar with the existing accounting theory. (K-GAAP and US-GAAP)
In the K-GAAP, Once an asset is acquired, that is just depreciated during the durable years. However, with the IFRS, if the company chooses a revaluation method for asset evaluation, Company can evaluate their assets by fair value at every fiscal year and they will realize profit and loss from asset evaluation.
Also, If the company chooses a revaluation method, their debts should be revalued every year. But contrary to asset revaluation, debt for severance is the only object for revaluation and it will be revaluated by every year.
On the fact of it, asset revaluation is also one of the reasons of increasing in performance. yet that isn’t right, because gain from asset revaluation is included in not net income but other-general gain and loss(기타포괄손익).Usually, companies are evaluated their performance by net income so gain from asset revaluation is for nothing in company’s performance.
This feature of asset revaluation is incurred for preventing company’s, especially facing difficulties in management, performance fabrication. Because If the IFRS allows companies to realize gain from revaluation as net income, they will realize as many gain from revaluation as they can. This exaggeration can cause distrust of financial statements as measurement index. In this sense, to increase the credit of financial statements, The K-IFRS rules that loss from revaluation is realized as net loss contrary to gain from revaluation.
The plan to introduce and present condition on the IFRS in Korea,
(Road Map for the introductionof K-IFRS)
Republic of Korea has suffered inconvenience in international market after the Asian financial crisis in1997, as follows: high interest rate in financing, it’s called ‘Korea discount’, and recomposing financial statements for going public on overseas stock market which market isn’t admitting the K-GAAP. So the Korea government has tried to increase accounting transparency. Nevertheless, it was not easy to increase transparency remarkably and eventually the Korea government makes the road map on March, 2007 with global trend of unifying accounting standards. The IFRS, which is enacted by IASB, currently in use by 117 countries in the world and it is expected in use by about 150 countries in 2011.
The present conditions of IFRS-Roadmap
<The website of IFRS-Task force team>
Since 2007, the Korean government hasestablished legal and institutional foundations. Plus which, the government hasmade ceaseless efforts for successful settlement of IFRS.
Reform of the law: The law of capital market(Feb, 2009) The law of auditing for public corporations(Feb, 2009)
Enactment of accounting standard: K-IFRS(Dec, 2007), The general accounting standard(Dec, 2009. for non-public corporations)
Education and promotion: Making and operating task force for settlement of IFRS, Nationwide presentation for regional corporations(23 times), Establishment of IFRS help desks(Oct, 2009)