South peninsula presently incorporates a two-tier method of accounting of native peninsula typically Accepted Accounting Principles (K-GAAP) and also the Korea International money coverage Standards (K-IFRS).
Accounting harmonisation is a world method of convergency completely different accounting standards and rules that kind the inspiration of economic coverage (Parmod, Chris & Ronald, 2008, p. 114). Broadly, there square measure 5 completely different approaches for accounting harmonisation and convergence (Appendix A), starting from AN adoption of IFRSs within their entireness within the highest kind to a continuation of native accounting standards with no IFRS adoption in the lowest kind.
Till today, South Korea continues to be inside the fourth stage, in need of reaching the very best style of accounting harmonisation because of its two-tier method of accounting. On one hand, it mandates the employment of K-IFRS for listed firms, money establishments and state-owned enterprises with larger exposure to public answerability. On the opposite hand, it permits the continuation of native K-GAAP by alternative unlisted firms with very little or no exposure to public answerability.
When the Asian money Crisis affected South Korea in 1997, its money market quickly suffered a continued loss of capitalist confidence, leading to a fall of the Korean won by five hundredth and a true GDP decline of around 6 June 1944 in 1998 (Jeon, 2010, pp. 105-108). This notorious money crisis prompted the South peninsulan government to simply accept the United Nations agency bailout package (Korean Culture and data Service & Korea.net, 2018).
In return of the United Nations agency bailout package, South Korea in agreement to hold out money and company reforms to regain market confidence (Jeon, 2010, pp. 105-108). Consequently, it established the peninsula Accounting Institute (KAI), currently called peninsula Accounting Standards Board (KASB) in 1999 entrusted with the responsibility of developing the K-GAAPs for company money coverage (KASB, 2017).
To conform to international standards, KAI afterwards determined in 2017 to begin with the voluntary adoption of IFRS from 2009 to 2011 (KASB & AASB, 2015, pp. 9-10). By 2011, it’s necessary for all listed firms, money establishments, and state-owned enterprises to organize their audited money reports in accordance with K-IFRSs whereas alternative unlisted firms square measure given a selection of whether or not to use K-IFRS or K-GAAP in their money coverage (Deloitte Anjin LLC, 2018).
In short, South Korea has reformed its pre-crisis native accounting standards because of its bitter lessons learnt from the 1997 Asian money Crisis, parturition to its two-tier method of accounting of each the rules-based K-GAAP and also the principles-based K-IFRS.
Along with legal and economic systems, culture incorporates a nice impact on developing the method of accounting of a rustic (Parmod, Chris & Patel, 2008, pp. 112-113). Hofstede’s relevant knowledge recommend that South Korea could be a hierarchal society with a medium power distance score of sixty, that means that folks square measure probably to simply accept hierarchal orders with absolute confidence (Appendix C). The low individualism score of eighteen reflects South Korea as a collectivized society wherever individuals have a preference for a integrated society and square measure willing to require responsibility for his or her family (Appendix C). With an ideal score of one hundred in long orientation, South Korea maintains the very best level of pragmatism, therefore that specialize in the long outcomes of their choices (Appendix C). With a high score of eighty five in uncertainty turning away, South Korea is extremely impatient uncertainty and ambiguity, indicating that they’re not willing to simply accept the risks (Appendix C).
Based on the theoretic Hofstede-Gray relationship (Appendix D), we have a tendency to expect to search out a statutory-control model of authority and social control in South Korea’s method of accounting with a additional uniform and rules-based K-GAAP, a additional conservative mensuration of profits and assets, and restricted revealing of economic info.
In reality, we have a tendency to found that South Korea, being a code law country, uses statutory management to mandate the employment of the additional principle-based K-IFRS for listed companies and exercise a substantial degree of flexibility in permitting a selection of either K-GAAP or K-IFRS for alternative unlisted companies. As such, listed companies tend to use the additional optimistic truthful price accounting to live assets and profits supported K-IFRSs whereas the unlisted companies tend to use the additional conservative historical accountancy supported K-GAAPs (Appendix F). As K-IFRS needs additional in depth revealing than K-GAAP, listed companies exploitation K-IFRS tend to exhibit a larger transparency of accounting info than unlisted companies exploitation K-GAAP.
In short, Hofstede model prescribes the quality of rules-based K-GAAP in South Korea’s cultural context through Gray’s accounting values, however South Korea uses statutory management to implement the principles-based K-IFRS for the money coverage of listed companies.
South Korea required to handle the development issue of “Korea Discount” whereby the Korean exchange received lower capitalist ratings than most Asian money markets (Henderson, 2015, pp. 4-5). As money reports ready beneath K-GAAP lacked transparency, investors refused to take a position in Korean listed firms, forcing several Korean firms to use debt-financing to boost capital rather than equity-financing. This occluded South Korea from attracting foreign investments abundant required for its economic process. As such, its shift to K-IFRSs gave South Korea the chance to enhance the transparency of its method of accounting and therefore enhance its accounting credibleness among investors.
IFRS adoption has become a world trend within the convergence of accounting standards whereby over one hundred countries in 2007 were shifting from their severally native accounting standards to one set of IFRSs (Jang J.I. et al., 2016, p. 1650). As South Korea considerably depends on international trade, it faces a serious task of implementing the international accounting standards so as to align itself with the accounting practices of alternative countries. South Korean firms wont to prepare twin sets of economic reports supported each K-GAAP and IFRS for worldwide mercantilism (Henderson, 2015, p. 5). The IFRS adoption has enabled Korean companies to avoid wasting the time and prices of twin money coverage by making ready one set of economic reports beneath K-IFRS after they expand their markets overseas.
The shift from K-GAAP to K-IFRS enabled South Korea to eliminate the “Korea Discount” issue and contend with alternative countries within the international market. The sturdy push of peninsula adoption is thru the Big-Bang approach by mandating the complete use of IFRS for all listed firms and money establishments at one specific time rather than in several 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 higher than issues in its complicated method of accounting.
Despite the long edges led to by K-IFRS, South Korea still encounters many issues in its method of harmonizing its native K-GAAP with IFRS.
Survey results have shown {the prices|the prices} of IFRS adoption outweighing its edges as a result of its costs square measure simply quantitative whereas the advantages square measure questionable (KAI, 2016, p. 49).
The perceived edges of IFRS adoption square measure chiefly enterprise price improvement, improved quality of accounting info, reduction in price of capital, and reduced money coverage prices of cross-listed companies (KAI, 2016, pp. 50-51). However, such edges will solely be perceived by listed companies as a result of they’re needed to organize money reports in accordance with K-IFRS. what is more, over eighty fifth of the companies surveyed don’t expertise a big decline within the price of capital. The decrease in prices for twin money coverage is offset by a rise in prices of making ready consolidated money statements in accordance with new standards.
On the contrary, the prices of pre-IFRS adoption square measure incurred for coaching employees with IFRS data, developing new method of accounting and consultative services whereas {the prices|the prices} of post-IFRS adoption square measure truthful price mensuration costs like hiring external appraisers, raised time prices in preparation of economic reports and disclosures and prices of constructing skilled judgments (KAI, 2016, pp. 51-52). of these prices are often simply perceived by several companies, be it listed or unlisted.
As the prices of IFRS adoption are often additional simply quantitative than its edges, it’s natural for several companies to understand the prices outweighing its edges within the short term. As a result, several unlisted companies would additional probably to stay exploitation K-GAAP in their money coverage. this might cause the dearth of alikeness among unlisted companies within the long haul wherever some unlisted companies, explicit the Chaebol-affiliated ones adopt K-IFRS for consistency cluster coverage whereas several alternative unlisted companies stay exploitation K-GAAP.
Researches have highlighted the dearth of alikeness within the case of family-owned Chaebols in South Korea. Among the closed corporation teams in peninsula comprising subsidiaries (Lee & Asian wild ox, 2013, p. 444), Chaebols still create important contributions to the Korean economy, accounting for larger than five hundredth of the market shares in Korean exchange (Baik et al., 2016, p. 338). additionally, Chaebols have pointed possession structures during which family-owned firms square measure the most important shareholders of some key parent firms, that operate because the largest shareholders of alternative subsidiaries (Lee & Asian wild ox, 2013, p. 448). because of the complicated ties between the parent company and its subsidiaries, this raises the question of whether or not alikeness are often achieved through the adoption of IFRS (Zeff, 2007, p. 291). This downside are often determined within the case during which one parent company whose listed subsidiaries compulsorily yielding IFRS within the preparation of the money statements whereas its unlisted subsidiaries like better to adopt K-GAAP. Also, a study points out that Chaebols don’t have sturdy company governance and high transparency between entities (Baik et al., 2016, p. 338). As a result, the hierarchal ties between a parent and its subsidiaries motivates firms to involve in earnings management (Jang J.I. et al., 2016, p. 1654).
The necessary of adopting IFRS in entireness is sort of difficult for all listed firms and unlisted money establishments in South Korea wherever the culture is made on a rules-based society. Similarly, South Korea could be a code law country with a two-tier method of accounting of the native rules-based K-GAAP and also the principles-based K-IFRS. this could cause confusion for accountants United Nations agency square measure at home with rule-based principle as IFRS permits them to decide on varied accounting strategies and measurements. supported Gray’s accounting values, the characteristics of K-GAAP square measure statutory management, uniformity, political theory, and secrecy. In reality, those of K-IFRS square measure expertness, flexibility, optimism, and transparency.
However, the concept of skilled judgment needed in K-IFRS places several Koreans during a troublesome position because of their customs of following rules (Henderson, 2015, p. 15). because of the dearth of preparation, around twenty fifth of firms didn’t meet the IFRS implementation point in time (Henderson, 2015, p. 17). of these recommend a short lived cultural mate between K-GAAP and K-IFRS.
The principles-based K-IFRS has given firms additional discretion over the employment of accounting strategies and measurements, paving the opportunities for potential fraud or earnings management (Henderson, 2015, p. 15). as an example, a shift from separate money statements to consolidated money statements when the IFRS implementation could provide cluster firms additional incentives to manage their earnings through its unlisted subsidiaries (Jang J.I. et al., 2016, p. 1653). for an additional instance, the IFRS adoption provides managers wide discretion over the categorisation of interest payments within the income. this permits financially troubled companies, companies with larger debt-financing and Chaebol-related entities to reason their interest payments as funding money flows rather than in operation money flows (OCF), thereby increasing the entire amounts of OCF (Baik et al., 2016, pp. 331-332). These 2 examples illustrate that the principles-based K-IFRS would provide managers larger leeway and incentives to manage their earnings to color a additional optimistic image of their money reports to their involved stakeholders like investors and banks or prime management.
When IFRS changes, K-IFRS should be updated to account for freshly printed IFRS and a few extra revelation necessities. However, the interpretation issue arises because it must be translated from English into Korean language in terms of timeliness and accuracy. this can be a typical downside in several non-English-speaking countries like Korea. exact translation methodology isn’t actually translated specific terminologies in IFRS, that might lead to the misunderstanding and inconsistency of principle (KAI, 2016, pp. 111-112).
However, the limitation of the assist from IFRS interpretation committee makes Korea tough to get timely recommendation as there square measure solely four face-to-face and 2 on-line meeting annually commonplace (KAI, 2016, pp. 107-108).
Currently, the South Korean government has created awareness of IFRS through education by mandating all universities to show IFRS from 2009 forrader and as well as IFRS in its uniform KICPA programme from 2010 forrader (Henderson, 2015, p. 16). To alleviate the recent harmonisation issues, our cluster has return up with the subsequent recommendations.
Due to the principle nature of IFRS, consistent skilled judgement is needed to beat earnings management. per the survey, 59.5% of CPAs acknowledged the growing importance of the role of worldwide auditing companies like massive four within the IFRS compliance (KAI, 2016, p. 95). this means that South Korea must enhance its observation and auditing system regarding consolidated money news for the aim of analysis, inspection, and restrictive views. Hence, we have a tendency to suggest policy suggestions like raised penalties for poor auditing work and development of many IFRS case studies to make sure robust compliance with IFRS (KAI, 2016, pp. 96-97).
As South Korea still contains a rules-based mentality, we have a tendency to suggest for the gradual bit-by-bit shift from K-GAAP to K-IFRS for all unlisted entities.
Following the present two-tier register, entities with foreign operations ought to adopt K-IFRSs. This helps investors at massive to check such companies with different international entities further as assists domestic companies in obliging with international standards after they expand business overseas within the future. within the additional stage, folks with management over one or a lot of subsidiaries ought to adopt K-IFRSs for consistency functions. At the ultimate stage, all different unlisted companies ought to use K-IFRSs wherever all future trained accountants would are equipped with the IFRS data by their university education and KICPA profession.
With the planting of IFRS seeds in its education system, our cluster is assured that South Korea can at some {point|in the future|someday|sooner or later|in some unspecified time in the future} reach the very best point wherever all Korean companies can adopt IFRS in entireness in their money news. this could eliminate most of the harmonisation issues like lack of compare, cultural couple, and translation problems.