The Trouble with IFRS

2011 is looming closer - and so is the deadline the Korean government has set for full compliance to a new set of accounting rules called the International Financial Reporting Standards (IFRS). However, rumblings of discontent and worry persist among domestic companies forced to make the switch. What will change, and what is the issue? Here is everything you need to know to dispel some of the mystery surrounding Korea’s IFRS compliance efforts.

What is the IFRS?

IFRS refers to a global standard for accounting set up and promoted by the International Accounting Standards Board (IASB). At present, 117 countries have adopted the IFRS and require or permit its use in reporting finances, including the European Union, which has required its companies to use IFRS since 2005. Some of the larger Asian economies, such as Japan and India are planning to adopt the standard soon.

In 2007, the Korean government made IFRS compliance mandatory for all Korean companies publicly traded or planning to issue stock in the near future. Financial regulators judged that the ensuing transparency in finance reporting for foreign entities will boost the country’s competitive edge in the international market, as well as facilitate report analysis and partnerships with foreign firms.

Switching down

The switching process to IFRS from the current accounting standards used by Korean firms, or the Generally Accepted Accounting Principles of Korea (K-GAAP), has been anything but easy. A recent survey by the Financial Supervisory Service reported that nearly 25 percent of firms that must make the switch have not even begun implementation. Companies are citing various grievances, from the often costly and convoluted modification process to concerns over the wider consequences of IFRS compliance.

The most visible difference between IFRS-style accounting and the former K-GAAP standards was illustrated in early April, when Samsung Electronics issued an earnings report using IFRS for the first time. Samsung announced that its consolidated operating profits for the fourth quarter of 2009 was 3.44 trillion won ($3.07 billion) under the new guideline, was approximately 260 billion less than an earlier report using K-GAAP. Furthermore, Samsung’s fourth-quarter sales figure was 2.67 trillion won less than the 138.99 trillion won reported earlier.

With such conspicuous discrepancies, worries that adoption of the IFRS could cause some companies to appear less profitable and cause investor apprehension are gaining traction. “Investors who are not aware of the changes arising from IFRS might think the companies are underperforming,” said Kim Dong-jun, an analyst at Shinhan Investment Corporation.

More objections to IFRS

Local small and mid-sized enterprises are arguing that such sweeping changes in their financial standards are too great an economic burden when considering subsequent consulting fees and new hardware. A survey among 500 small and mid-sized companies with less than 200 billion won ($170 million) in total assets conducted by the Korea Chamber of Commerce and Industry revealed that 50.5 percent believed that IFRS enforcement should be delayed to ease the financial shock.

Perhaps most troublesome of all, some companies fear higher corporate taxes under the IFRS. An industry insider claims that under the new accounting standard, an additional 5.52 billion won will be spent on corporate tax for every 100 billion won spent on capital expenditures, causing companies to shun investments so as to avoid being walloped with heavy taxes.

However, financial regulators remain adamant regarding the original schedule. “Changing the deadline at this point with further the confusion,” said Lee Ho-hyeong, an official of the Financial Services Commission’s Fair Market Division.

Perhaps the point of convergence for the circling issues surrounding IFRS was provided by David Tweedie, chairman of IASB, in his mid-march interview concerning Korean preparation for IFRS compliance. Stressing the importance of explaining the changes to the markets and analysts well in advance so as to remove any surprises, Mr. Tweedie reminded that accounting firms are international and will have no problem switching over, since other countries have already been there before.