Firms Not Ready for Fair Value Accounting
By Cho Jin-seo
Staff Reporter
A quarter of listed firms have not begun preparations for the adoption of new accounting rules due next year, the Financial Supervisory Service (FSS) said Tuesday.
The introduction of the International Financial Reporting Standard (IFRS) will be compulsory for 1,672 firms listed on the stock market, as well as for 253 unlisted financial service firms. But the majority of small firms with less than 100 billion won in assets have not made any preparations for this, a recent FSS survey revealed.
"Most of the firms that have not started preparations said they would take on the job sometime before June. But still, they need to give more attention to this matter," the FSS said in a press release.
The survey showed that the degree urgency firms feel regarding the transition widely varies according to their size. For big firms with assets larger than 100 billion won, only one in 20 has not started the process. But for smaller firms, the ratio goes up to 66 percent.
This can be a serious problem that the firms may not acknowledge yet, an official of the FSS said.
"If they don't meet the new financial accounting standard in due time, it could be considered a reason for de-listing," said FSS official Yu Seung-dong. "It is not a matter they can just ignore."
The IFRS is one of two dominant accounting standards in the world, but is gaining wider support from countries around the world. It had been notably used in European Union member economies, but soon came to rise as the global standard in the accounting world as an alternative to U.S.-style accounting.
By 2011, more than 150 countries are expected to adopt the IFRS, including India, China and Brazil.
The major difference between the current K-GAAP system used by Korean firms and the IFRS is that the latter is more focused on the "fair value," or the current market price, of assets, while the former is more oriented on their actual purchasing price. This makes the accounting book reflect the current market value of the firms' assets.
But the global financial crisis over the past two years has brought criticism over the worthiness of the IFRS. Firms, especially financial firms with big investments in risky assets, had massive assets on their books when the prices of assets were valued high during economic bubbles, and they suddenly lost the value when the bubble burst.
Thus, firms will have more autonomy under the IFRS when assessing the value of their assets and liabilities, while analysts will have to take more caution in reading the books.
The main reasons why many small firms are reluctant to shift to the new accountant system are cost and the lack of knowledge of the management, the FSS said. On average, the transition requires 280 million won for non-financial firms and 2.7 billion won for financial firms, which includes hiring consultants.
The good news for Korean firms is that the cost has been decreasing over the past year, and the government is considering a tax break for firms adopting the IFRS. "The Ministry of Planning and Finance is discussing various measures about tax cuts," a FSS official said.