South Korea currently has a two-tier accounting system of local Korea Generally Accepted Accounting Principles (K-GAAP) and the Korea International Financial Reporting Standards (K-IFRS).
Accounting harmonisation is an international process of converging different accounting standards and rules that form the foundation of financial reporting (Parmod, Chris & Ronald, 2008, p. 114). Broadly, there are five different approaches for accounting harmonisation and convergence (Appendix A), ranging from an adoption of IFRSs in their entirety in the highest form to a continuation of local accounting standards with no IFRS adoption in the lowest form.
Till today, South Korea is still within the fourth stage, short of reaching the highest form of accounting harmonisation due to its two-tier accounting system. On one hand, it mandates the use of K-IFRS for listed companies, financial institutions and state-owned enterprises with greater exposure to public accountability. On the other hand, it allows the continuation of local K-GAAP by other unlisted companies with little or no exposure to public accountability.
2 History of South Korea’s Accounting System韩国会计制度的历史
When the Asian Financial Crisis struck South Korea in 1997, its financial market quickly suffered a continued loss of investor confidence, resulting in a fall of the Korean won by 50% and a real GDP decline of around 6% in 1998 (Jeon, 2010, pp. 105-108). This infamous financial crisis prompted the South Korean government to accept the IMF bailout package (Korean Culture and Information Service & Korea.net, 2018).
当1997年亚洲金融危机袭击韩国时，其金融市场迅速遭受投资者信心的持续损失，导致韩元下跌50%，1998年实际GDP下降约6% (Jeon, 2010, pp. 105-108)。在此次金融危机中，韩国政府接受了国际货币基金组织(IMF)的紧急援助(韩国文化信息院& Korea.net, 2018)。
In return of the IMF bailout package, South Korea agreed to carry out financial and corporate reforms to regain market confidence (Jeon, 2010, pp. 105-108). Consequently, it established the Korea Accounting Institute (KAI), now known as Korea Accounting Standards Board (KASB) in 1999 entrusted with the responsibility of developing the K-GAAPs for corporate financial reporting (KASB, 2017).
To conform to international standards, KAI subsequently decided in 2017 to commence with the voluntary adoption of IFRS from 2009 to 2011 (KASB & AASB, 2015, pp. 9-10). By 2011, it is mandatory for all listed companies, financial institutions, and state-owned enterprises to prepare their audited financial reports in accordance with K-IFRSs whereas other unlisted companies are given a choice of whether to use K-IFRS or K-GAAP in their financial reporting (Deloitte Anjin LLC, 2018).
In short, South Korea has reformed its pre-crisis local accounting standards due to its bitter lessons learnt from the 1997 Asian Financial Crisis, giving birth to its two-tier accounting system of both the rules-based K-GAAP and the principles-based K-IFRS.
3 Cultural Factors of South Korea’s Accounting System韩国会计制度的文化因素
3.1 Hofstede Model in South Korea’s Cultural Context韩国文化背景下的Hofstede模型
Along with legal and economic systems, culture has a great impact on developing the accounting system of a country (Parmod, Chris & Patel, 2008, pp. 112-113). Hofstede’s relevant data suggest that South Korea is a hierarchical society with a medium power distance score of 60, meaning that people are likely to accept hierarchical orders with no question (Appendix C). The low individualism score of 18 reflects South Korea as a collectivistic society where people have a preference for a tight-knit society and are willing to take responsibility for their family (Appendix C). With a perfect score of 100 in long-term orientation, South Korea maintains the highest level of pragmatism, thus focusing on the long-term outcomes of their decisions (Appendix C). With a high score of 85 in uncertainty avoidance, South Korea is highly intolerant of uncertainty and ambiguity, indicating that they are not willing to accept the risks (Appendix C).
与法律和经济制度一样，文化对一个国家会计制度的发展也有很大的影响(Parmod, Chris & Patel, 2008, pp. 112-113)。霍夫斯泰德的相关数据显示，韩国是一个等级社会，中等权力距离得分为60，意味着人们有可能接受层次订单没有问题(附录C)。18的得分低个人主义反映了韩国作为一个集体主义的社会,人偏爱社会凝聚力,愿意为家庭承担责任(附录C),满分100分的长期(附录C)。韩国的不确定性规避得分为85分，这表明韩国对不确定性和模糊性的容忍度很高，表明他们不愿意接受风险(附录C)。
3.2 Cultural Influences on South Korea’s Accounting Standards
Based on the hypothetical Hofstede-Gray relationship (Appendix D), we expect to find a statutory-control model of authority and enforcement in South Korea’s accounting system with a more uniform and rules-based K-GAAP, a more conservative measurement of profits and assets, and limited disclosure of financial information.
In reality, we found that South Korea, being a code law country, uses statutory control to mandate the use of the more principle-based K-IFRS for listed firms and exercise a considerable degree of flexibility in allowing a choice of either K-GAAP or K-IFRS for other unlisted firms. As such, listed firms tend to use the more optimistic fair value accounting to measure assets and profits based on K-IFRSs whereas the unlisted firms tend to use the more conservative historical cost accounting based on K-GAAPs (Appendix F). As K-IFRS requires more extensive disclosure than K-GAAP, listed firms using K-IFRS tend to exhibit a greater transparency of accounting information than unlisted firms using K-GAAP.
In short, Hofstede model prescribes the suitability of rules-based K-GAAP in South Korea’s cultural context through Gray’s accounting values, but South Korea uses statutory control to implement the principles-based K-IFRS for the financial reporting of listed firms.
4 Reasons for a Shift from K-GAAP to K-IFRS
There are two main reasons behind the shift from K-GAAP to K-IFRS.
4.1 Korea Discount韩国的折扣
South Korea needed to address the phenomenon issue of “Korea Discount” whereby the Korean stock market received lower investor ratings than most Asian financial markets (Henderson, 2015, pp. 4-5). As financial reports prepared under K-GAAP lacked transparency, investors refused to invest in Korean listed companies, forcing many Korean companies to use debt-financing to raise capital instead of equity-financing. This obstructed South Korea from attracting foreign investments much needed for its economic growth. As such, its shift to K-IFRSs gave South Korea the opportunity to improve the transparency of its accounting system and thus enhance its accounting credibility among investors.
韩国需要解决“韩国折扣”现象，即韩国股市获得的投资者评级低于大多数亚洲金融市场(Henderson, 2015, pp. 4-5)。由于根据韩国公认会计准则(K-GAAP)编制的财务报告缺乏透明性，投资者拒绝对韩国上市公司进行投资，导致很多韩国上市公司没有通过股权融资，而是通过债务融资来筹集资金。这阻碍了韩国吸引经济增长所需的外国投资。因此，转向K-IFRSs为韩国提供了一个机会，以提高其会计系统的透明度，从而提高其在投资者中的会计信誉。
4.2 Importance of Global Trading to Korea’s Economic Growth
IFRS adoption has become an international trend in the convergence of accounting standards whereby more than 100 countries in 2007 were shifting from their respectively local accounting standards to a single set of IFRSs (Jang J.I. et al., 2016, p. 1650). As South Korea significantly relies on global trade, it faces a major task of implementing the international accounting standards in order to align itself with the accounting practices of other countries. South Korean companies used to prepare dual sets of financial reports based on both K-GAAP and IFRS for worldwide trading (Henderson, 2015, p. 5). The IFRS adoption has enabled Korean firms to save the time and costs of dual financial reporting by preparing a single set of financial reports under K-IFRS when they expand their markets overseas.
The shift from K-GAAP to K-IFRS enabled South Korea to eliminate the “Korea Discount” issue and compete with other countries in the global market. The strong push of Korea adoption is through the Big-Bang approach by mandating the entire use of IFRS for all listed companies and financial institutions at one specific time instead of in different phases or in convergence approach (Jang J.I. et al., 2016, p. 1651). In short, South Korea believed that the implementation of IFRS would resolve the above problems in its complex accounting system.
5 Harmonisation Problems
Despite the long-term benefits brought about by K-IFRS, South Korea still encounters several problems in its process of harmonizing its local K-GAAP with IFRS.
5.1 Lack of Comparability among Unlisted Companies
Survey results have shown the costs of IFRS adoption outweighing its benefits because its costs are easily quantifiable whereas the benefits are questionable (KAI, 2016, p. 49).
The perceived benefits of IFRS adoption are mainly enterprise value improvement, improved quality of accounting information, reduction in cost of capital, and reduced financial reporting costs of cross-listed firms (KAI, 2016, pp. 50-51). However, such benefits can only be perceived by listed firms because they are required to prepare financial reports in accordance with K-IFRS. Furthermore, more than 85% of the firms surveyed do not experience a significant decline in the cost of capital. The decrease in costs for dual financial reporting is offset by an increase in costs of preparing consolidated financial statements in accordance with new standards.
采用IFRS的感知收益主要是企业价值的提高，会计信息质量的提高，资本成本的降低，以及交叉上市公司财务报告成本的降低(KAI, 2016, pp. 50-51)。然而，这种好处只能被上市公司感知，因为他们被要求按照K-IFRS编制财务报告。此外，超过85%的被调查公司没有经历资本成本的显著下降。双重财务报告费用的减少被按照新标准编制合并财务报表费用的增加所抵消。
On the contrary, the costs of pre-IFRS adoption are incurred for training staff with IFRS knowledge, developing new accounting system and advisory services whereas the costs of post-IFRS adoption are fair value measurement costs such as hiring external appraisers, increased time costs in preparation of financial reports and disclosures and costs of making professional judgments (KAI, 2016, pp. 51-52). All these costs can be easily perceived by many firms, be it listed or unlisted.
As the costs of IFRS adoption can be more easily quantifiable than its benefits, it is natural for many firms to perceive the costs outweighing its benefits in the short term. As a result, many unlisted firms would more likely to remain using K-GAAP in their financial reporting. This could lead to the lack of comparability among unlisted firms in the long run where some unlisted firms, particular the Chaebol-affiliated ones adopt K-IFRS for consistency group reporting while many other unlisted firms remain using K-GAAP.
5.2 Complex Ownership Structure of Chaebols
Researches have highlighted the lack of comparability in the case of family-owned Chaebols in South Korea. Among the family business groups in Korea comprising subsidiaries (Lee & Gaur, 2013, p. 444), Chaebols continue to make significant contributions to the Korean economy, accounting for greater than 50% of the market shares in Korean stock market (Baik et al., 2016, p. 338). In addition, Chaebols have pyramidal ownership structures in which family-owned companies are the biggest shareholders of a few key parent companies, which operate as the largest shareholders of other subsidiaries (Lee & Gaur, 2013, p. 448). Due to the complex ties between the parent company and its subsidiaries, this raises the question of whether comparability can be achieved through the adoption of IFRS (Zeff, 2007, p. 291). This problem can be observed in the case in which a single parent company whose listed subsidiaries mandatorily complying IFRS in the preparation of the financial statements whereas its unlisted subsidiaries choose to adopt K-GAAP. Also, a study points out that Chaebols do not have strong corporate governance and high transparency between entities (Baik et al., 2016, p. 338). As a result, the hierarchical ties between a parent and its subsidiaries motivates companies to involve in earnings management (Jang J.I. et al., 2016, p. 1654).
5.3 Temporary Cultural Mismatch between K-GAAP and K-IFRS
The mandatory of adopting IFRS in entirety is quite challenging for all listed companies and unlisted financial institutions in South Korea where the culture is built on a rules-based society. Similarly, South Korea is a code law country with a two-tier accounting system of the local rules-based K-GAAP and the principles-based K-IFRS. This may cause confusion for accountants who are familiar with rule-based accounting standard as IFRS allows them to choose various accounting methods and measurements. Based on Gray’s accounting values, the characteristics of K-GAAP are statutory control, uniformity, conservativism, and secrecy. In reality, those of K-IFRS are professionalism, flexibility, optimism, and transparency.
However, the idea of professional judgment required in K-IFRS places many Koreans in a difficult position due to their customs of following rules (Henderson, 2015, p. 15). Due to the lack of preparation, around 25% of companies failed to meet the IFRS implementation deadline (Henderson, 2015, p. 17). All these suggest a temporary cultural mismatch between K-GAAP and K-IFRS.
然而，K-IFRS中所要求的专业判断的理念，使许多韩国人由于遵守规则的习惯而处于困境(Henderson, 2015, p. 15)。由于缺乏准备，约25%的公司未能满足IFRS实施期限(亨德森，2015，第17页)。所有这些都表明了K-GAAP与K-IFRS之间的暂时性文化不匹配。
5.4 Opportunities for Earnings Management
The principles-based K-IFRS has given companies more discretion over the use of accounting methods and measurements, paving the opportunities for potential fraud or earnings management (Henderson, 2015, p. 15). For instance, a shift from separate financial statements to consolidated financial statements after the IFRS implementation may give group companies more incentives to manage their earnings through its unlisted subsidiaries (Jang J.I. et al., 2016, p. 1653). For another instance, the IFRS adoption gives managers considerable discretion over the categorisation of interest payments in the cash flow. This enables financially troubled firms, firms with greater debt-financing and Chaebol-related entities to categorise their interest payments as financing cash flows instead of operating cash flows (OCF), thereby increasing the total amounts of OCF (Baik et al., 2016, pp. 331-332). These two examples illustrate that the principles-based K-IFRS would give managers greater leeway and incentives to manage their earnings to paint a more optimistic picture of their financial reports to their concerned stakeholders such as investors and banks or top management.
5.5 Translation Issue from IASB IFRS to KASB K-IFRS从IASB IFRS到KASB K-IFRS的翻译问题
When IFRS changes, K-IFRS must be updated to account for newly published IFRS and some additional disclosure requirements. However, the translation issue arises as it needs to be translated from English into Korean language in terms of timeliness and accuracy. This is a common problem in many non-English-speaking countries such as Korea. Word-for-word translation method is not truly translated specific terminologies in IFRS, which could result in the misinterpretation and inconsistency of accounting standard (KAI, 2016, pp. 111-112).
当IFRS发生变化时，K-IFRS必须更新以适应新公布的IFRS和一些额外的披露要求。但是，从及时性和准确性上看，需要将英文翻译成韩国语，因此出现了翻译问题。这是韩国等非英语国家普遍存在的问题。逐字翻译法并不是真正翻译IFRS中的特定术语，这可能会导致会计准则的误解和不一致(KAI, 2016, pp. 111-112)。
However, the limitation of the assist from IFRS interpretation committee makes Korea difficult to obtain timely advice as there are only four face-to-face and two online meeting annually standard (KAI, 2016, pp. 107-108).
Currently, the South Korean government has created awareness of IFRS through education by mandating all universities to teach IFRS from 2009 onwards and including IFRS in its uniform KICPA syllabus from 2010 onwards (Henderson, 2015, p. 16). To alleviate the recent harmonisation problems, our group has come up with the following recommendations.
6.1 Enhancing auditing practices and standards
Due to the principle nature of IFRS, consistent professional judgement is required to overcome earnings management. According to the survey, 59.5% of CPAs acknowledged the growing importance of the role of global auditing firms such as big 4 in the IFRS compliance (KAI, 2016, p. 95). This suggests that South Korea needs to enhance its monitoring and auditing system relating to consolidated financial reporting for the purpose of evaluation, inspection, and regulatory views. Hence, we recommend policy suggestions such as increased penalties for poor auditing work and development of several IFRS case studies to ensure strong compliance with IFRS (KAI, 2016, pp. 96-97).
6.2 Timeline to gradually adopt K-IFRSs in entirety
As South Korea still has a rules-based mindset, we recommend for the gradual step-by-step shift from K-GAAP to K-IFRS for all unlisted entities.
Following the current two-tier accounting system, entities with foreign operations should adopt K-IFRSs. This helps investors at large to compare such firms with other global entities as well as assists domestic firms in complying with international standards when they expand business overseas in the future. In the further stage, parents with control over one or more subsidiaries should adopt K-IFRSs for consistency purposes. At the final stage, all other unlisted firms should use K-IFRSs where all future trained accountants would have been equipped with the IFRS knowledge by their university education and KICPA profession.
With the planting of IFRS seeds in its education system, our group is confident that South Korea will one day reach the highest point where all Korean firms will adopt IFRS in entirety in their financial reporting. This would eliminate most of the harmonisation problems such as lack of comparability, cultural mismatch, and translation issues.
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