IFRS Adoption: Korean experience
2010. 12. 8.
Chungwoo Suh
Chairman, Korea Accounting Standards Board (KASB)
Contents
I. Overview of Korean environment
II. Roadmap for IFRS Adoption in Korea
III. IFRS Implementation
IV. Lessons learned
1
I. Overview of Korean environment
2
I. Overview of IFRS Adoption in Korea
Where Korea stands
GDP ranking
• 15th (World Bank, 2009)
Internet subscribers
per100 inhabitants
• 5th (OECD, 2009)
• More than 30 companies
EU listed markets
International trade
in goodsand services
as a percentage of GDP
(including Samsung Electronics and LG Electronics)
• 3rd largest number among non-EU countries,
followed by US and India
• 12th (OECD, 2008)
3
I. Overview of IFRS Adoption in Korea
Korea's Gross National Income
(1970-2009)
USD billion
USD
1,100
1,000
900
800
700
600
500
400
300
200
100
0
22,000
20,000
18,000
16,000
14,000
12,000
10,000
8,000
6,000
4,000
2,000
0
70
72
74
76
78
80
82
84
86
GNI
88
90
92
94
96
98
00
02
04 06
08
Per capita GNI
Source : Bank of Korea & Statistics Korea
4
I. Overview of IFRS Adoption in Korea
Korea Stock Market Statistics
USD billion
KOSPI
(1998-2009)
1,300
1,200
1,100
1,000
900
2200
2000
1800
1600
800
1400
700
1200
600
1000
500
800
400
600
300
200
400
100
200
0
0
1998
1999
2000
2001
2002
Total market capitalization
2003
2004
2005
Trading value
2006
2007
2008
2009
KOSPI
Source : Bank of Korea & Korea Exchange
5
I. Overview of IFRS Adoption in Korea
Accounting environment in Korea

Korea’s accounting regulatory system
• Accounting oversight : Ministry of Strategy and Finance (MOSF)
Financial Services Commission (FSC)
Financial Supervisory Service (FSS)
• Standard-setting body :Korea Accounting Standards Board (KASB)
 The
1997 financial crisis awakened the importance of integrity
and reliability of accounting information generated by
private business entities
 The accounting system has been subject to major reform
6
I. Overview of IFRS Adoption in Korea
Accounting environment in Korea

Has developed phased convergence with IFRSs since 1997
•
Korean GAAP is almost equivalent to IFRSs except for a few
modifications

Enforced advanced monitoring system (e.g. External Audit Act)

KICPA has 10,282 active CPAs
However, Korean accounting system is recognised as lacking
global transparency, leading to “Korea discount” in global markets
7
II. Roadmap for IFRS Adoption in Korea
8
II. Roadmap for IFRS Adoption in Korea
Debate on strategies
Phased –in
Convergence
VS
IFRS Full
Adoption
Consensus on IFRS Full Adoption

Regulators(FSC/FSS), and standard setter(KASB) and
played a critical role in reaching the consensus
The Roadmap for IFRS Adoption announced
(15 March 2007)
9
II. Roadmap for IFRS Adoption in Korea
Major Pre-Roadmap events
2002~2005
Symposiums, forums, and round-table meetings
Feb 2006
IFRS Adoption Task Force(*) organized
Mar 2006~
Jan 2007
Public forums, seminars, and TF meetings
Feb 2007
Final agreement at the 8th official TF meeting
Mar 2007
Roadmap announced
(*) The Task Force consists of FSC, FSS, MOSF, KASB, Korea Listed Companies Association, KICPA,
Korea Exchange, KOSDAQ Listed Companies Association, Korea Federation of Small and Medium
Business, and representatives from academics and audit firms
10
II. Roadmap for IFRS Adoption in Korea
Reasons for big-bang approach

High quality standards
•

Global recognition
•

IFRSs has evolved into a single set of global high quality
standards through the efforts of IASB and its staff
More than 100 countries adopted or permitted IFRSs
Perception from users
•
Phased-in convergence did not convince markets that
Korea is compliant with IFRSs
11
II. Roadmap for IFRS Adoption in Korea
Expected benefits

Proactively deal with “a single set of global standards” policy

Enhance the national level of accounting transparency
•

“Korea discount” in the global market will be diminished
Efficient flow of capital across boarders with lower cost
•
Relieve burden of converting financial statements based on Korean
standards to those based on IFRS for globally listed companies
12
II. Roadmap for IFRS Adoption in Korea
Scope of Application
Mandatory for listed companies
 Optional for non-listed companies

Starting Period
company permitted to adopt  from 2009
 All listed companies required to adopt  from 2011
 Any
13
II. Roadmap for IFRS Adoption in Korea
2-tier financial reporting system from IFSR full adoption
Scope
~2008
2009~2010
2011~
Any company
Public company
Non-public company
IFRSs
Current Korean Standards
Korean Standards
(simplified)
14
III. IFRS Implementation
15
III. IFRS Implementation
IFRS Implementation Task Force

Formed in May 2007

Consists of representatives from:
 regulators, standard-setter, preparers, auditors, users, and academics
 To
address the challenges raised by various interest parties
16
III. IFRS Implementation
Facing many challenges for successful IFRS adoption

Overhaul of relevant laws and regulations
•
External audit Act, corporate tax Law, and listing and disclosure
regulations
Transition
to IFRS-compliant regulatory policies
 Enterprise-wide IFRS conversion for companies
 Extensive IFRS education and training for almost all
constituents, including preparers, users, auditors, and academics
 Translation of all IFRSs within limited time frame
17
III. IFRS Implementation
Three key channels to resolve the challenges

Streamlining Infrastructure
•

Support Activities
•

Alignment of laws and regulations with IFRS
Education and training
International Cooperation
18
III. IFRS Implementation
1. Streamlining Infrastructure
 Act
on External Audit of Stock Companies
•
Defined the scope of entities required to adopt IFRS from FY2011
• Redefined parent-subsidiary relationship in accordance with IFRS
• Consolidated and individual F/S subject to the same reporting
deadline

Financial Investment Services and Capital Markets Act
•
Interim reports on a consolidated basis
• Accelerated the due date for consolidated F/S
19
III. IFRS Implementation
1. Streamlining Infrastructure (cont'd)
Tax
Law
•
Proposed amendments will be put on the table for the legislative
endorsement in 2010
• Three principles of the proposed amendments
3 Principles
1
Equal tax accounting for IFRS-adopted companies and other companies
2
Minimize the reconciliation of tax reporting and financial reporting: permission of
financial reporting where the difference of periodic income is minimal and volume of
reconciliation is otherwise increased
3
Put more emphasis on proper tax accounting than on the increased tax burden; However,
tax relief is provided to mitigate the burden in the short-term
20
III. IFRS Implementation
1. Streamlining Infrastructure (cont'd)

Tax Law (cont’d)
•
Examples of proposed amendments
Item
Unrealized
gain or loss
on foreign
currency
denominated
asset
Current Tax Law
Proposed amendment
Financial institution:
unrealized gain or loss on all
assets is taxable
Financial institution:
unrealized gain or loss on financial
asset is taxable
Non-financial company:
unrealized gain or loss is nontaxable
Non-financial company:
Unrealized gain or loss on financial
asset is electively taxable
Lease
Aligned with current Korean
classification GAAP
Aligned with IFRS or Korean standards
(simplified) depending on the
company’s financial reporting
requirement
21
III. IFRS Implementation
1. Streamlining Infrastructure (cont'd)
Disclosure
2008
requirements prior to IFRS adoption
2009
2 years prior to the adoption:
- Plan and progress of adoption
- Main GAAP differences
2010
2011
1 year prior to the adoption:
- Plan and progress of adoption
(update)
- Change in the scope of consolidation
- Main quantitative impact on F/S
22
III. IFRS Implementation
2. Supporting Activities
 Education
and Support
KASB, FSS, KICPA, and other related organizations
- Held off-line education programs and establish on-line education service
• Operation of ‘Help Desk’ which gives a help to the companies in transition
to IFRS
•
 Development
of useful materials
• KASB updates major GAAP differences between K-GAAP and IFRS
- Annually and upon revision of IFRSs
• Periodicals regarding to IFRS trend in the world performed by FSS
23
III. IFRS Implementation
2. Supporting Activities (cont'd)
 Held
•
open seminars
KASB invited various speakers regarding IFRS issues
- IFRS updates, implementation status & issues in other countries etc.
-Tatsumi Yamada(IASB member), Wayne Upton(IASB director),
Kazuo Hiramatsu(ASBJ members), Steven Derrick(PwC Australia),
Kevin Stevenson(AASB chairman) joined the open seminar in Korea
•
Expected IFRS changes in the future and shared the implementation
issues
24
III. IFRS Implementation
2. Supporting Activities (cont'd)
 Translation
•
Contract-based translations
- Official agreement with IFRS Foundation was required
•
Word-for-word translation policy for precise translation and
consistency across IFRSs
•
Communication with IASB staff directly for precise translation
•
Successful completion of IFRSs translation
25
III. IFRS Implementation
3. International Cooperation

Participation in Working Group in IASB
•
F/S distortion by foreign currency fluctuation
- In 2008 many emerging market countries suffered from abnormally large
devaluation on their currencies, which led to recognize huge loss in I/S
•
KASB’ effort to resolve the problem
- Presentations and suggestions by KASB in various meetings
•
Established the WG with Australia, Canada, India, Brazil, Mexico
and South Africa with support of IASB
- Currently under research for revision of IAS 21 “The Effects of Changes in
Foreign Exchange Rates”
26
III. IFRS Implementation
3. International Cooperation (cont'd)

Contribution to establishment of AOSSG(Asian-Oceanian
Standard Setters Group)
•
Needs for solid communication channel with IASB
- Asia-Oceania countries have common concerns over communicating our views
& situations to IASB
- Need more contribution to IASB’s work but individual voice may not be heard
as effectively as it wishes
• The 1st and the 2nd AOSSG meeting were held successfully in
Malaysia in 2009 and in Japan in 2010, respectively
- The 3rd AOSSG meeting is scheduled to be held in Australia in 2011
27
III. IFRS Implementation
Status of IFRS Implementation
 1,753
companies (93.0%) out of 1,884 companies which have to apply
IFRS from next year have started preparation for IFRS as of July 2010
• Most of large companies and financial companies completed their IFRS
preparation project
• Small and medium sized listed companies (SMEs) have actively been preparing
for IFRS and 89.3% of SMEs with total assets of less than 100 billion won have
started making preparations for IFRS as of July 2010
28
III. IFRS Implementation
IFRS Adoption in Korea has been changing economic systems
Regulatory bodies
 IFRS-compliant listing and disclosure regulation
 More principle-based regulatory policies
 Principle-based application of accounting standards
Companies
 Increase of fair value measurement
 Complex and burdensome disclosure
Auditors
 Working toward adoption of Clarified ISA
 Strengthened international cooperation
 More constructive contributions to IFRSs
Analysts
 Modified analysis techniques and models
 More utilization of note information as well as the
information on the face of the financial statements
29
IV. Lessons learned
30
IV. Lessons learned


Early yet thorough preparation is the key to successful IFRS adoption
and implementation
•
Develop a concrete consensus among all constituents
•
Comprehensive assessment of GAAP differences and their effects
•
Customized IFRS education and training for all different constituents
Capitalize on prior experiences of IFRS adopted countries and
make your own appropriate strategy
31
[Appendix]
A Company Case of IFRS Implementation project
’07.6
’08.2
Phase I (8M)
Analysis
GAP analysis
• Impact analysis
• Benchmarking
• Phase II planning
•
Transition Date
’09.12
Phase III
Application
Phase II (22M)
Policy, design and development
•
•
•
•
•
New accounting policy and
detailed methodology
Financial reporting process
re-design
Accounting manual drafting
IFRS IT system development
IFRS training
’11.1
•
•
•
•
Triple GAAP
reporting (K/ US/ IFRS)
IFRS closing and
external audit
SOX update
SEC filing under IFRS
32
[Appendix]
A Company Case of IFRS Implementation project (cont'd)
1
2
3
4
Policy and process
 Achieve
high-level global accounting transparency
 Opportunity to improve accounting infrastructure
Integration of group’s financial information
 System flexibility for further IFRS developments
 User friendly and automated system
IT system

Enhancing
IFRS capability

Communication

IFRS interpretation and applications
 Business impact correspondence
 Effective and various training programs
Sharing and resolving issues through proactive
communications with external stakeholders
 Leading IFRS practice in Korean banking industry
33
THANK YOU!