The Korean experience with IFRS adoption
The Korean Accounting Standards Board (KASB) has released a report on the lessons learned from Korea's adoption of International Financial Reporting Standards (IFRS). The report outlines the history of Korea's adoption of IFRS, the steps undertaken in preparation for and during the transition to IFRS, and recommendations for other countries considering adopting IFRS.
Korea announced a 'roadmap' for the adoption of Korean equivalents of International Financial Reporting Standards (K-IFRS) in 2007. Under the roadmap, all listed companies were required to prepare their annual financial statements under K-IFRSs from 2011. In addition, listed companies other than financial institutions were permitted to apply K-IFRS starting from 2009.
The report provides a summary of the number of entities applying IFRS in Korea:
- 14 entities early-adopted IFRS in 2009
- 59 entities early-adopted IFRS in 2010
- A total of 3,126 entities, including 1,783 listed entities, 201 non-listed financial institutions and 1,142 non-listed entities, started to apply IFRS in 2011.
The report asserts that Korea's adoption was successful because "interested parties have thoroughly prepared for the IFRS adoption in a multilateral manner since the announcement of the Roadmap", including prompt translations of IFRS into Korean, the effective amendment of government laws and regulations, and the support of professional accounting and business organisations, and entity preparations.
The report contains a chapter devoted to the issues encountered in Korea's transition process, including:
- The move from more "specific and detailed requirements on various different transactions and events" under Korean GAAP to a more "principles based" regime under IFRS which requires professional judgement, and sufficiently trained professional accountants
- The emphasis on reporting the economic substance of transactions, which had impacts in areas such as the classification of redeemable preference shares, the measurement of loan loss reserves and securitisations
- Changes from past Korean practice on consolidation, changing the boundaries of the reporting entity
- The expansion of the use of fair value accounting, providing more relevant information but introducing more volatility in financial statements and requiring reliable measurements to be made.
Some of the direct effects of adoption noted in the report include the elimination of the need for Korean companies raising funds in foreign markets to prepare multiple sets of financial statements under various GAAPs, improve transparency, and an enhanced international status and role for Korea.
The executive summary of the report notes the following:
The IFRS adoption process in Korea was rather a bumpy ride: there were troubles relating to unexpected additional costs, lack of accounting professionals, unwelcoming public sentiment, etc. While trying to overcome the stumbling blocks, however, Korea realised that the followings are essential in promoting successful implementation of IFRS in any country: invigorating discussions about IFRS among constituents at home and abroad; preventing the psychological stress of stakeholders from getting exaggerated by providing sufficient education and promotion of IFRS; and receiving more robust support from the IFRS Foundation. Adopting IFRS means changing the financial reporting language of a country. Thus, such a significant event would be carried out smoothly only when it is accompanied by the unwavering will of the adopting country, reorganisation of the related systems, and strong support from the Foundation.
The report is available on the KASB website.