KoreaToday Local Firms Brace for New Accounting Rule
By Simon Ferry
Senior consultant at Hewitt Associates
Recently, more and more Korean companies are trying to understand the implications for their published accounts of adopting the International Financial Reporting Standards (IFRS).
These standards will be mandatory for companies listed in Korea from 2011. Some companies are also looking to adopt early and are already preparing accounts under IFRS. The way in which many aspects of company finances are reported is significantly different than under the Korean Generally Accepted Accounting Principles (KGAAP).
One area which has caused much debate has been valuing employee benefits, which is described in the International Accounting Standard 19 (IAS 19). IFRS requires that some benefits, such as severance pay and defined benefit pension plans are valued by considering the expected value of future benefit payments in today's money terms. In particular, the way that future projected benefits are turned into today's money terms, using a ``discount rate'' has caused some confusion.
Under IAS 19, the discount rate is selected based on market conditions at the time the benefits are valued. Namely, it is based on the yield on ``high quality corporate bonds'' if the corporate bond market is considered ``deep.''
A deep market should be of sufficient size and be regularly traded to mean that prices are not influenced by day-to-day trades. If the corporate bond market is not considered deep, IAS 19 requires that the discount rate is set with reference to the yield on government bonds. There have been mixed views on whether the Korean corporate bond market is considered deep - hence the debate.
The International Accounting Standards Board (IASB) recently met to discuss potential future changes to IAS 19. Following discussion with the Accounting Standards Subcommittee of the International Actuarial Association, the IASB is proposing to remove the requirement to use government bonds, with the intention to implement this change by late 2009. Instead, the discount rate will be based on corporate bonds or an estimate of the corporate bond yield if the market is not deep.
This change could be significant for companies which have been preparing accounts using a discount rate based on government bonds, leading to a large impact on the company's disclosed balance sheet. However, if adopted, this will clarify one aspect of the ongoing debate for many companies in Korea as they prepare for 2011.