K-IFRS is taking root

When Korea accepted IMF bail-out package in 1997 to overcome severe financial crisis, Korea carried out a large scale of intense restructuring. As a part of reforming, Korea Generally Accepted Accounting Principles (K-GAAP) was made out to enhance accounting creditability. K-GAAP, however, was not enough to coincide with international standard, so Korean companies used to be derided with backwardness of accounting standards. As a result, Korea International Financial Reporting Standards (K-IFRS) was phased in from 2009, and the year 2011 was the first year for listed companies and financial companies to write the financial reports in accordance with K-IFRS, as a mandatory requirement.

Accordingly, Financial Supervisory Services (FSS) conducted to examine 2011 financial reports. Total 1,600 financial reports which consist of 655 listed on Korean Composite Stock Price Index (KOSPI) and 945 listed on Korea Securities Dealers Automated Quotation (KOSDAQ) were examined with 121 items.

The result of assessment is meant to be satisfactory. The major incompleteness which can affect users to misunderstand accounting information is not found. Compared to the first quarterly report in 2011 when the major incompleteness was found in 111 reports, this result deserves to be admirable. As a matter of fact, average number of errors per company committed was found only 4.5. The number of financial reports without any errors was as many as 288. The following table is a summary of the examination result.

Section

Market

Volume of Capital (Billion KRW)

KOSPI

KOSDAQ

Less than 100

100-500

500-2000

Over 2000

Average error/company

3.8

5.0

5.0

4.3

4.1

3.1

Total No. of company

655

945

671

646

183

100

According to the table, the smaller sized companies tend to make more errors than the bigger sized companies. Therefore, FSS will keep giving advices and instruction for those imperfect companies continuously. To modify the found errors, FSS is noticing privately for the companies to encourage modifying their own record.

Furthermore, there is an increasing trend that even not listed companies voluntarily make financial reports in conformity with K-IFRS voluntarily. Generally, adopting K-IFRS from 2011 is mandatory only for the listed companies and financial companies. However, despite of needlessness, 1,142 unlisted companies wrote their financial reports with using K-IFRS in 2011, and additional 261 companies are prospected to adopt K-IFRS in 2012. The major reasons for such trends to adopt K-IFRS voluntarily, notwithstanding the high converting cost, are the accordance of accounting standard between the holding company and the subsidiary company, preparation for the list, enhancing of accounting transparency and improvement of company image.

Korean financial authorities have made endeavours to achieve the competitiveness of accounting system. These endeavours are resulting in the improvement of accounting creditability of Korean companies. Also, it is positive sign for many unlisted companies to adopt K-IFRS spontaneously. At this rate, it is matter of time for IFRS to become established in Korea.

Chaehack Suh (chaeahck.suh@gmail.com)

Asia Financial Cooperative Network

Seok-dong Kim, the chairman of Financial Services Commission (FSC) visited Thailand and Hong Kong from June 9 to June 13. This business trip was an extension of his endeavour to establish Asia Financial Network including previous business trips to Mongol (September 2011) and Vietnam and Indonesia (March 2012).

It was a meaningful achievement to set up a cooperative system with Thailand and Hong Kong. Above all, Thailand has been Korea’s sincere allied nation since Korean War. In 1958, after establishing diplomatic ties, Thailand is now the 17th export country ($8.4billion), the 22nd import country ($5.4billion) and the 21st foreign direct investment country ($0.176billion).  Also, it is needless to say the importance of Hong Kong because, as a centre of global finance and trade, there are a lot of global finance companies including 34 Korean companies.

Beginning his first schedule, Kim reinforced the corporation between Korean and Thai financial authorities. In detail, FSC and Thai financial authorities such as Office of Insurance Commission (OIC) and Securities and Exchange Commission (SEC) signed MoU to strengthen cooperation. Considering geopolitical factor of Thailand which is located in the centre of Indochina Peninsula, close cooperation might play an important role for Korea to advance into Asia rising countries such as Laos, Cambodia and Myanmar. According to this MoU, both authorities can exchange information about financial policies and supervisions. Also, they agreed to share political experiences and professionalism through regular meeting. Especially, at the meeting with Vorapool Socatiyanurak, secretary general of Thai SEC, FSC agreed the close cooperation to foster capital market and establish financial infrastructure in ASEAN and Greater Mekong Subregion (GMS).  From this, both authorities expect for Korean private company to advance into Thailand actively.

In Hong Kong, Kim made an effort to establish the market stabilization plan against the Eurozone crisis. Visiting Hong Kong Monetary Authority (HKMA) and Hong Kong Securities and Futures Commission (HKSFC), he shared opinions about Euro crisis and tried to seek cooperative counter plan. In particular, HKSFC conceded the necessity of reinforcement of cooperation, so acceded to cooperate with signing MoU in the near future as well as currently availing through International Organization of Securities Commissions (IOSCO) and APRC.

During the business trip, Kim also held a meeting with local advanced businessmen in both Thailand and Hong Kong. The participants highly requested for Korean government to support the companies’ advances and the local business activities continuously. They said the support is critical because Thailand and Hong Kong are located in the centre of Indochina and the core of Chinese economic region respectively.

FSC evaluated this cooperation with Thailand and Hong Kong as a promising achievement because of their geopolitical advantages. With the previous business trip to Mongol, Vietnam and Indonesia, this business trip has a significant meaning of expanding Asian Financial Cooperative Network to Indochina Peninsula and Hong Kong (China). FSC will keep strengthening financial diplomacy concentrating on the rising countries to support Korean companies’ advances to the global market.

Chaehack Chad Suh (chaehack.suh@gmail.com)

‘Crisis is not over’: Kim says the current global crisis is as crucial as the Great Depression.

World economy has been experiencing the most critical crisis since the Great Depression in the 1930s. Euro crisis which started from Greek financial deficit has now spread to Spain’s bank crisis. At the executive council meeting on June 4th, Seok-dong Kim, the chairman of Financial Services Commission (FSC), diagnosed the global economic challenge to have originated fromEurope.

 

At the meeting, Kim emphasized the importance of the ability to confront crises. He discussed the possible reasons behind deteriorating crisis inEurope, stating the conceptual problem of the single currency as well as the Greek government’s failure to respond expeditiously.

 

The ambiance of the meeting room grew tense as the debate moved on to the Spanish crisis. Since, the economic size ofSpainis five times larger than that ofGreece, if theSpain’s crisis becomes a reality, the impact on the world economy and the financial market will be beyond imagination. Given the situation, Kim requested people to realize the seriousness of the current situation and to take proactive measures.

 

During the meeting, the executives suggested another analogy. The devastating circumstances of Euro crisis could not help but be compared to the unforgettable economic tragedy, the Great Depression. The similarity lies in each event’s strong momentum to shift existing economic paradigm into a new one. We have already witnessed the Great Depression drive out a principle of laissez-faire, and bring forth revised capitalism. Now we are on the brink of another transition to a newly advent paradigm, so called capitalism 4.0*, which will highlight the market autonomy with better stability and order, the protection of investors, and social responsibility. As one of the main organizations responsible for the installation of capitalism 4.0 inKorea, FSC and financial fields will have to carry out these adaptations with much care to overcome the crisis.

 

*capitalism 4.0 – refers to the latest version of capitalism. The idea was suggested in the book Capitalism 4.0: The Birth of New Economy in the Aftermath of Crisis by Anatole Kaletsky. Briefly, capitalism 1.0, 2.0, 3.0 and 4.0 matches to Adam Smiths laissez-faire, Keynesianism after the Great Depression, Regan’s new paradigm after the stagflation in the 60-70s, and the well balanced capitalism in construction today, respectively.

 

What we have done

 

Thanks to many experiences from 1997 Asian financial crisis and 2008 global financial crisis,Koreais already well trained for crisis management. First of all, Korean government has cleaned up the troubled savings banks which were one of the most obstructive factors. Twenty savings banks which amount to 40% of its assets were successfully cleaned up without injecting public funds. This successful action curbed the spread of distrusts and anxieties from other banks. Moreover, a well-planned-out strategy was established by the government to control household debts. Policies such as microfinance were reconsidered within this context to include the lower income households.

 

In addition, the plans against the danger of bubble in Korean capital market are in smooth progress. The amount of call money on stock firms has decreased from 13.9 trillion won in May 2011 to 8.2 trillion won this May. The credit loan balance was reduced by 38.5% this year. Speculative trades are restrained by raising FX margin deposit and planning to make healthy ELW market. Lastly, Stress test of banks inKoreahas been performed since the second quarter of 2011, earlier than any other countries. At the same time, delivering medium and long term foreign funds has expanded. These efforts fostered the ability to react against the foreign capital deficit which was one of the most vulnerable at every crisis in the past.

 

What we have to do

 

Chairman Kim insisted that even though we have made a considerable effort to build strong risk-handling system against the financial crisis, all our endeavors may become useless if not equipped with proper policy and prompt reaction. With this in mind, he addressed that the crisis management plans should be ready to be applied whenever they are needed. A brief outline of future direction of policy is as follows.

 

As mentioned before, one of the continuous issues for Korean economy was how to cope with the market volatility. The vulnerability of Korean market has always been the high dependence on foreign capitals. However, through constant inquiry, FSC has come up with numerous methods to mitigate the fluctuation. FSC will strictly regulate the short selling by improving transparency. At the same time, intensive monitoring on ELW and FX margin trade will be conducted. These will encourage removing immoderate speculative trading and restructuring foreign dependent capital market.

 

Another point brought up was the significance of protecting small and medium enterprises (SMEs). These enterprises are what consist of so called “the real economy”. The real economy takes up a considerable ratio of trade not only with GDP but also with the capital market. Moreover, the real economy is also a vulnerable subject to further proliferation of Euro crisis. Thus, it is inevitable assignment for FSC to establish a secure bulwark to help SMEs survive through the crisis.

 

On top of all these efforts, Kim promised that FSC will take endless actions against the potential crisis and market jitters with much readiness and investigation.

 

Chaehack Suh(chaehack.suh@gmail.com)


Attracting Private Capital to Green Growth

Since President Lee Myung-bak declared ‘Low Carbon Green Growth’ as the country’s new vision, Korea has been trying to be a fast mover under a comprehensive plan to transform the nation into an economy powered by green technologies. To achieve the goal of being an initiative country, the Financial Services Commission (FSC) and relevant agencies have prepared financing plans, which is called the green financing, to promote green industries. Though many efforts to propel, some business participants complain that the current governmental support is not enough to induce private investment. Moreover, the recent economic slowdown and Euro crisis make the situation worse. Under these circumstances, the FSC and relevant agencies examined the green financing policies and announced additional measures on May 2.

The overall result of the current policies provide systematic frame for green financing. Firstly, green business firms get advantages to receive both public and private loans. The amount of policy loans to green business firms has been increased to 8 trillion won in 2011. The amount of guaranteed private loans by Korea Credit Guarantee Fund and Korea Technology Finance Corporation (KIBO) also has been increased 7.8 trillion won per performance in 2011. In addition to this, those companies are also benefited by direct financing from stock and share markets. The green funds, which invest to green technologies, accumulated about 5 trillion won in 2011. To induce private capital through a bond market, Primary CBO has been issued. A KOSDAQ entry barrier for green business firms was alleviated. Also, The Green Industry Index was created, and the Green ETF was listed. Lastly, infrastructures such as the Green Certification System and the Green Finance Portal have been strengthening to create a demand for green financing.

Despite of all of these achievements, highly dependent of policy loans and low inflow of private capital still need to be improved. Because of long payback period and uncertainty, it is difficult for private capital to invest to green industries. Policies which can guarantee the long term functionality and future benefits of green technologies need to be implemented to attract private capital.

In order to compensate for the insufficiency in current green financing policies and support the green growth, the FSC and relevant agencies announced a strategy to promote an influx of capital and to support financing and funding.

First of all, forming a market of green industries will be supported. The biggest change is the expanding factoring finance, which is not only for LED industry but also for other green industries. If the companies cannot use factoring system, debt ratio which makes it difficult to collect invested money may seriously rise. Therefore, the Korea Finance Corporation (KoFC) will adjust the maximum limit of the factoring financing from 35billion won to 70billion won in 2012. Besides, solar energy businesses and energy service companies can get factoring benefits.

Secondly, development circumstances of green business companies will be improved. The FSC will give incentives to financial companies which have high loan performances with certified green technologies. This will make easier for green business firms to be invested by private capital. Furthermore, small and medium enterprises (SMEs) which have potentials to develop green technologies will be supported in every step of R&D stages. Along with these, KONEX, new market for SMEs, will be one of their sources for financing.

Third, supporting exports of green related products will be enhanced. FSC will encourage creating insurance products which defend the risk of long payback period, which can be helpful for solar energy industries. The insurance is critical for the green business because many SMEs are losing their opportunities to show even prototype to buyers due to lack of money. This kind of insurances will promote Korean companies to enter into expanding global new renewable energy market.

Lastly, green financing will be highly highlighted. KIBO and KoFC will establish new organization which is exclusively responsible for the green financing. Policy loans for green finance will be increased up to 21.4 trillion won in 2012. Green fund which is investing to green companies’ stocks and shares will grow as well.

It was meaningful to examine how green growth policies have been effective as less than one year of tenure of the president is left. With all the efforts to promote the green growth, it is ready for Korea’s green industries to enter the stage of growth.

Chaehack Suh(chaehack.suh@gmail.com)