Introducing New Accounting Standards

By Pae Ki-pyo

``I've heard that accounting standards are changing, does this apply to us small companies also? I'm worried because we don't have many accountants."

This was the question posed by a businessman that I know who runs a manufacturing company with approximately 70 employees. I told him that IFRS (International Financial Reporting Standards) aren't a requirement for companies that aren't listed on the stock market and that government support and about the subject would be available. However, I told him I'm concerned that many owners of minor enterprises still do not know about IFRS clearly.

On the surface, one can see that ``balance sheets" are known as statements of financial position and ``income statements" are statements of comprehensive income under IFRS. IFRS are a drastic change in the business environment for companies.

Since Korea's announcement of a roadmap to implement IFRS in 2007, Korea has gained a reputation as a leading economy promoting it in Asia. As IFRS are to take effect in 2011, 13 companies including KT&G and STX Pan Ocean have already incorporated them in their accounting process. Also, 27 additional companies including Samsung Electronics and LG Electronics have announced they will implement the system starting next year.

Up until now, theories of financial accounting have developed with the United States as the basis. However, the U.S. GAAP-based standard was to be used by countries with slight variations depending on the unique history and economic situation of the individual nations. However, as the capital market is in the process of globalization ― international trade is flourishing and multinational corporations are everywhere ― these ``unique" accounting standards of individual nations are causing problems and additional costs.

Even so, criticisms on how the GAAP-based standard's limitations have heavily influenced the acceleration of the recent financial crisis acted as a catalyst to promote change in global accounting standards. For these reasons, nations felt the need for a unified and trustworthy high quality principle-based standard. Thus, an international accounting standard was conducted under IASB, a nongovernment organization located in London, with participation from countries all around the world.

In Korea's case, it accepted the fact that it can't make its own accounting standards to the international standard. Consequently, under pragmatic logic, Korea announced it agreed to IFRS. The domestic and external advantages Korea gained by accepting IFRS are as follows.

First, domestically, Korean companies don't need to keep separate accounting books for domestic and international purposes. They now can be more efficient in business operations. Also, by organizing ``Fair Value Options" dealing with non-negotiable market price and an accounting standards de-recognition process, the chances of pinpointing the potentials of businesses through financial statements have increased.

Externally, Korea can compare financial statements of domestic companies with those of foreign companies, so the international reliability of Korea's accounting transparency will increase. This means an advantage is gained in providing quality information that will promote investors in the international capital market to invest and have confidence in Korea. Also, in the process, the Korean discount will decrease steeply from before, and efforts to supply foreign capital can be reduced.

On the other hand, it is true that there are concerns about whether our companies will have disadvantages as IFRS are built slightly favoring European countries. Critics assert that because IFRS are influenced by the interests and political influence of various countries, the standard may not fit Korea's reality.

In this situation ― where companies are waiting to implement the system ― the debate over whether IFRS are good or bad is nothing more than a weak point that may make the international community doubt Korea's abilities.

Now it is time to scrutinize the current process and focus on helping out minor enterprises that are facing difficulties in applying IFRS with realistic and pragmatic aid policies.

The writer is a U.S. public accountant. He can be reached at consultant@sne.ac.kr.