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)

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Meeting of Finance Ministers and Central Bank Governors in Paris

 

                                                                                                  

The G20 Finance Ministers and Central Bank Governors met in Paris on the 18th and 19th of February 2011. The main topic was to address ongoing economic and financial difficulties and to concur on a way forward to achieve the orders given. The ministers and governors have confirmed their commitment to manage policy action by all G20 members to accomplish powerful, sustainable and balanced development. Main priority actions involve carrying out fair term fiscal consolidation proposals modified according to national circumstances in line with Toronto commitment, searching for pertinent monetary policy, improving exchange rate flexibility to better reveal economic fundamentals and structural improvements, to assist global demand, enlarge potential growth, develop job creation and contribute to global rebalancing. Also, discussed progress made since the Seoul Summit and showed the need to diminish excessive imbalances and carry on present account stability at sustainable levels by intensifying multilateral cooperation.

               The leaders agreed on a set of measures that will allow us to focus, through an integrated two-step process, on those persistently huge imbalances which need policy actions. In order to complete the mandatory work for the basic step, their aim is to agree, by following meeting in April, on indicative guidelines against which each of these indicators will be evaluated, acknowledging the demand to take into account national or regional circumstances, including large supply producers. While not aims, these indicative guidelines will be employed to assess the following indicators: (i) public debt and fiscal deficits; and private savings rate and private debt (ii) and the external imbalance organized of the trade balance and net investment income flows and transfers, taking due deliberation of exchange rate, fiscal, monetary and other policies. Adopting a schedule for developing the 2011 action plan that will implement for Framework for Strong, Sustainable and Balanced Growth and look over the commitments that are already made, is another consent they reached. As approved in Seoul, IMF has been called on to distribute an assessment as part of the Mutual Assessment Process on development towards external sustainability and consistency of policies at the October meeting. At the moment, the leaders would make sure to review a report on the MAP including an action plan knowledgeable according to the examination on the root causes of continuously large imbalances based on the agreed guidelines.

                                 The leaders and governors at the meeting are looking forward to the completion by the next Leaders’ Summit of the following ongoing work on systemically important financial institutions as arranged in the FSB work program for 2011. For example, resolution of Global-systemically important financial institutions by FSB and national authorities based upon indicative standard; useful resolution scope including in a cross-border context; capital surcharges, contingent capital and bail-in instruments; and other supplementary requirements as determined by the national authorities including systemic levies. Once the frame initially applicable to G-SIFIs is agreed, the G20 Finance Ministers and Central Bank Governors will move promptly to cover all SIFIs. The 2 reports should be finalized by the BIS, IMF and FSB on macro-prudential frameworks and by the FSB, IMF and World Bank with input of national powers on financial stability matters in emerging market and developing economies by our October meeting. Not only that but also, the recommendations that the FSB will prepare by mid-2011 on regulation and oversight of the shadow banking system to efficiently address the risks, notably of arbitrage, associated with shadow banking and its interactions with the regulated banking system should be good to go. They also decided to call on the OECD, the FSB and other relevant international organizations to develop common principles on consumer protection in the field of financial services by our October meeting as well.

               The Group of 20 finance ministers and central bank governors meeting surely ended with a compromise on which major economic indicators to include in the “indicative guidelines.” A communiqué was released by setting their goal for the next meeting in April to agree on the guidelines being used to evaluate any indicators; public debt, fiscal deficits, and the private savings rate.

JiMin Park (parkjm0718@naver.com)

Financial Stability Board’s strong outreach in Global Financial resilience is expected

Korea will be the first emerging economy to host the Financial Stability Board meeting on the 20th of October, 2010. In its third plenary meeting in Basel, Switzerland, the board decided to have the fourth event in Seoul before the G20 summit. Since Korea is also the chair country of upcoming G20 forum, a Financial Services Commission official said that Korea will be able to take the lead in reforming the financial framework.

 The Financial Stability Board (FSB) was established in April 2009 as the successor to the Financial Stability Forum (FSF). The FSF was founded in 1999 by the G7 Finance Ministers and Central Bank Governors to promote stability in the international financial system. Yet, among the leaders of G20 countries, there had been a broad consensus on stronger institutional ground with an expanded membership. And this movement resulted in the creation of FSB, an extended form of FSF. In an attempt to strengthen its effectiveness, financial authorities from the G20 nations, international financial institutions and several global standard setting bodies joined the FSB as the new members. The FSB performs the initiative role to develop and implement strong regulatory, supervisory and other policies in pursuit of financial stability. 

 As a member of FSB, Korea, especially the Bank of Korea and Financial Services Commission came to have an even more crucial role. FSC is involved in FSB Steering Committee which provides operational guidance and sets the agenda in general. So FSC has been trying to boost regular meetings among the FSB leaders and to continue active discussions. One of them was the financial reform conference called “Envisioning a New Financial System: An Emerging Market Perspective” which Dong-Soo Chin, the chairman of FSC held on Sep.2 in Seoul. The conference called attention to the increasing impact of emerging markets to the world economy, paving the way for more balanced participation of emerging countries in the global finance sector.

 

 

(Sep.2th Korea-FSB Financial Reform Conference, taken from Herald Media)

In fact, a decade ago, Korea felt the tremendous pain due to 1997 Asian Financial Crisis. In the wake of 1997 crisis, Korea had no choice but to strongly restructure corporate and financial field, dealing with long-neglected structural problems hidden behind rapid growth. Passing a time of economic revitalization and renewal, Korea learned valuable lessons and now, it is positioned as one of the competitive global economies. This unique experience enables Korea to serve as a potential broker that can bridge the gap between the emerging and the advanced markets.

 Sharing Korea’s pre-experience and know-how, particularly on financial regulation reform, perspectives of emerging economies can be brought into the global reform process. Many experts admit that Asia will be the engine of future global economic growth. In order to make the emerging markets less vulnerable to external shocks, global financial safety net is strongly required and in this sense, international standards will help them free from poor financial infrastructure.

 Currently, a lot of critical financial agenda are on the FSB table. For instance, to enhance transparency among market participants, prudent oversight of capital, liquidity, leverage and risk management is necessary. Along with Basel III, which delineates the rate of bank capital buffer, Bank Levy is considered a possible measure to increase banks’ crisis management capability, although the feasibility of the proposal still remains to be seen. Furthermore, efforts to reduce systemic risk generated by interconnectedness among financial institutions worldwide led to global coordination to devise measures that cover broader range of financial markets and instruments. Systemically important financial institutions will be strictly monitored and the size of “shadow banking” such as hedge funds and off-balance sheet entities will be shrunk. New international controlling standards on hedge funds will emerge and Central Counter Parties will be installed for over-the-counter (OTC) derivatives. In addition, more standardized forms of OTC products will be used and regulation on credit rating agencies will be intensified. 

                                                                                               (Picture from the Korea Times)

The FSB will take up a vital role of making these regulatory reform recommendations to the G20 summit. Once a certain regulatory reform is approved and adopted through the Financial Stability Board and G20 forum, those international standards are to be implemented by each country. Throughout this highly critical process, Korea is anticipated to undertake a number of initiatives to assess each regulation across sectors, identify regulatory gaps and examine related issues, and reflect emerging Asian market perspective. Gearing up for the G20 summit, FSB activities are an important step in facilitating G20 reform agenda. Everyone hopes to see successful outcome from the impending FSB meeting in Seoul.

Lee, Ki Yeon (kiyeon.m.lee@gmail.com)

How Korean companies will be affected by adopting IFRS

 

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 (taewon.jang83@gmail.com)

Weekly e-Briefing 5. Korea’s role in the FSB

Korea’s role in the FSB

A special guest for FSC Weekly e-Briefing, Mr. Chin, Dong-Soo, the Chairman of Korea’s Financial Services Commission and the representative of Korea’s Financial Stability Board told Korea has been selected as the host of FSB Plenary Meeting in this October.
Following issues will  be deliberated at the FSB Plenary Meeting in Korea before final decisions are made by the leaders at the G-20 Summit in Seoul;1) Improving Basel committee regulations on capital liquidity 2) Reducing moral hazard of systematically important financial institution 3) Assessing improvement of compensation practices of financial institutions 4) Discussing future plans and schedules and monitoring the progress on the implementing international standards and strengthening financial cooperation.

As the chair of the G-20 Summit as well as a member of the FSB, Korea will make every efforts to play a mojor role in achieving consensus on financial reforms and setting improved international standards. See more from http://fsc.go.kr/eng/index.jsp

FSC Press Release_ November 20th

Financial Institutions’ FX Soundness and Strengthened Supervision

The soundness of domestic financial institutions’ foreign-exchange management recovered to pre-crisis levels on the strength of the government’s countermeasures and the voluntary efforts of institutions. But insofar as the weak links in their FX management became apparent during the crisis, the need has grown to fine-tune related systems to prevent a crisis relapse even while steps continue to be taken to improve FX soundness. Click here