Korean on its way to adopting IFRSs

As one of the region’s leading economies, Korea’s decision to fully embrace IFRSs has provided further evidence that Asia is a firm believer in global standards. Yet the transition to a principle-based environment has been a difficult one to make. Dr Chungwoo Suh, Chairman of the Korean Accounting Standards Board (KASB), provides an insight into Korea’s plans for transition. Adoption takes time. Korea has been working on the process since 2002. But the critical point was the announcement of a road map in March 2007. ‘Before that we spent four to five years in preparation for the full adoption’, said Dr Chungwoo Suh. ‘Initially, we tried to converge by adopting standard by standard but that was not as effective as we expected’, he said. ‘Foreign investors thought that we were not 100 per cent IFRS and we did not want this to lead to any downside for us and our companies.’

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For a country that ranks third in the number of listed companies in EU markets that is quite an understandable worry.

IFRS adoption task force

After several years of preparation Korea decided in February 2006 that a task force for IFRS adoption should be organised.

‘In that task force we invited every interested party—the KASB, the government, big accounting firms, big economic institutions and listed companies’, said Dr Suh. ‘We had regular meetings every month analysing whether we needed full adoption right now or whether we should follow the standard-by-standard process.’

Then a decision was taken. ‘We decided to go for a big bang approach, heading for full implementation simultaneously so that companies could be recognised abroad as 100 per cent adopters’, he said.

‘We made the official announcement of the road map in March 2007.’ A new task force was set up to co‑ordinate the translation of IFRSs into Korean and to negotiate the amendment of all the relevant laws and regulations to bring them into line with IFRSs. This process is still in progress. ‘We hope to finish that by the end of the year’, said Dr Suh.

Challenges and setbacks

Certainly a major change does not come without some challenges and setbacks along the way. The first was reluctance from smaller listed companies. ‘They did not want to apply IFRSs because they felt they were not ready and were lacking the necessary resources’, said Dr Suh.

‘They wanted us to delay adoption. But we took time to help them understand why we had to go for full adoption.  There were considerable difficulties but now we have a satisfactory agreement and they see that there will be more benefits than costs from applying IFRSs. Foreign investors may become interested in them and they have a better chance of raising capital’, he said.

The second was the process of amending laws. ‘We have so many laws, all with so many goals. They don’t just exist for the capital markets and amending them is not easy’, he said. ‘Each law comes under a different government department with its own structure and aims. We needed to co‑ordinate their work. So there was a lot of talking and meeting at the beginning’, he said looking back at the time.

One long-term change that the country is undergoing is the move to a principle-based approach. ‘We didn’t have the right infrastructure for principle-based standards’, he explained and continued: ‘Korean GAAP is quite similar to US GAAP and is very much a rule-based system.

But accountants, companies and regulators are used to a rule-based approach. CFOs and accounting firms needed to train or get the personnel for a principle-based approach. The transition from rule-based to principle-based standards is indeed challenging. We have to change everything—every law, every auditing system.’

Future benefits

But he is confident that all those challenges can be overcome. ‘There are many future potential benefits of adoption’, he said.

The most positive one among those is that people will undoubtedly recognise Korea as a full IFRS adoption country. ‘Leadership and fresh initiatives will make it happen. It was important that IASB members visited us and provided a persuasive explanation to people in Korea’, he said. ‘We have also had great help from our neighbour countries, like Australia, China, Hong Kong and Japan. They have different approaches and experiences but they all urged us to do it as early as possible.’

Korea has decided that from 2009 any company can choose to apply IFRSs, with the use of IFRSs becoming mandatory for all listed companies from 2011.