It has been found that major South Korean companies’ half-yearly reports for this year have been insufficient in most cases when it comes to the description of their preparation for the introduction of K-IFRS 15 and its potential effects. K-IFRS 15 is characterized by revenue recognition being based on asset transfer to a customer.
The South Korean financial authorities told companies early this year to describe their preparation and the effects, releasing some footnote disclosure guidelines. The financial authorities also advised them to refer to the guidelines for their half-yearly financial statements for this year.
Nevertheless, most companies did not provide details except for their analysis of financial effects. Besides, some of them did not carry out their disclosure. This is because the disclosure is just a recommendation.
The financial authorities did not call this into question though as the recommendation was to increase the awareness of K-IFRS 15 and prepare for it in advance. “Financial statements for the first half of this year showed some improvement on those for the second half of last year when it comes to their footnote disclosures,” the Financial Supervisory Service explained, adding, “It seems that companies are exercising caution as the new standards are like a principle applied to every industry.”
Still, some are pointing out that K-IFRS 15 is being regarded as an issue limited to order-based industries and companies in the other industries are failing to pay enough attention.
Major companies in order-based industries are currently claiming that revenue recognition should be on a progress basis as it has been so far because the industries such as construction and shipbuilding are characterized by being complex in terms of dates of contract signing and a change in revenue recognition can lead to a high level of performance volatility. They are also saying that research has been conducted on K-IFRS 15 since the second half of this year but various sales-related issues such as licensing, returning and variable considerations have been relatively neglected during the course.
The variable considerations, in particular, are subjected to unconditional estimate under the new accounting standards whereas the considerations, if not estimated, did not constitute revenue recognition in the past. Still, companies are paying little attention to this part now. This means a lot of companies can fall into trouble if accounting firms opt to apply a conservative standard. “Things can become awkward if a company whose sales show a significant change under the new accounting standards fails to provide appropriate evidence.” said a local accounting firm.