NATIONAL ECONOMICS UNIVERSITY

-------***-------

INTERNATIONAL ACCOUNTING
Group 4
Accounting system of South Korea

Instructor: Dr Peter Secord, PhD FCPA CIA

Class: Advanced International Business Class Intake 61

Group members:
Nguyễn Quý Dương – 11196515
Nguyễn Quỳnh Trang – 11196307
Đào Phương Oanh – 11194115
Lê Hòa Hưởng – 11196362
Vũ Hoàng Khanh – 11196209

Hanoi, 2022
Contents
I. Introduction ....................................................................................................................... 2
II. Factors influence accounting system................................................................................... 2
1. Source of finance ............................................................................................................ 2
2. Legal system ................................................................................................................... 3
3. Education ....................................................................................................................... 4
4. Inflation ......................................................................................................................... 4
5. Economic development ................................................................................................... 5
6. Culture........................................................................................................................... 5
7. Taxation ......................................................................................................................... 5
8. Political and Economic ties .............................................................................................. 6
III. Process prior to the adoption of IFRS in Korea ................................................................. 6
IV. Adoption of IFRS in Korea ............................................................................................... 6
1. Objective for IFRS adoption ........................................................................................... 6
2. Adoption Process ............................................................................................................ 6
3. Comparison (K- IFRS vs K- GAAP) ................................................................................ 7
V. Conclusion ........................................................................................................................ 7
References ............................................................................................................................. 8

I. Introduction

Korea is located between China and Japan. More importantly, it is the hub of aviation and maritime
logistics, linking the Asia-Pacific, Eurasia and the Americas. Korea has achieved phenomenal growth
and global integration since the 1960s. Nowadays, this high-tech industrialized economy is ranked the
world's tenth largest economy. This outstanding development was made possible primarily by the
flourishment of export-oriented sectors and the highly trained and skilled labor force, under the strong
support of the government.

II. Factors influence accounting system

1. Source of finance

Depending on whether funds are raised by issuing securities or through loans of credit from financial
institutions, accounting systems may be characterized by accounting systems whose primary source of
capital is the market. securities (equity oriented) or banks (debt oriented). Korea belongs to the group
of countries in the stock market (equity-oriented). Stock market capitalization to GDP for Republic of
Korea 2022 is 133.465601 and number of Domestic list company is 2,3182.

1
(FRED Economic Data, 2022)
2
(South Korea Listed Companies - Data, Chart, 2022)
 Financing system and financial report users according to Nobes (1998)
Loan-based financing system Securities-based financing system

“Insiders” prevail I III

“Outsiders” prevail II IV

South Korea belongs to Group IV (prevalence of outsiders, and securities – based funding).
Accordingly, the accounting systems of Group IV countries will be characterized by reporting that
focuses on the owners of securities. According to Nobes (1998) , Korean belongs to class A, which has
features: strong equity market, many outside shareholders, large auditing profession and separate
accounting and tax rules. Thus, financial reporting will be extensive and of high quality to facilitate the
efficient operation of the market and the efficient allocation of resources.

2. Legal system

Korea has a traditional civil law system as the laws were influenced largely by the European civil law
system3. However, Korea has adopted much of the American legal system, such as jury trial (in a limited
fashion), the law school system, sentencing guidelines, and amicus curiae briefs due to the increasing
influence from the American legal system.4

The “civil law systems” are derived from Latin ius civile, the law applicable to all Roman cives or
citizens. Its origins and model are to be found in the monumental compilation of Roman law
commissioned by the Emperor Justinian in the sixth century CE. Moreover, they are based on code
laws. shaped by the Roman law tradition, are the models of today's civil law systems. The contents of
the provisions of the legal system are already written.5

Korea follows the European financial reporting standards, while companies need to improve the quality
of their financial statements. This is the premise to create the development of the accounting system,
which has facilitated the development of IFRS.

3
(OnePass | Thomson Reuters, 2022)
4
(UPDATE: South Korean Law Research on the Internet - GlobaLex, 2021)
5
(THE COMMON LAW AND CIVIL LAW TRADITIONS, 2017)
3. Education

Ranking second of countries with the best education in the world:

South Korea ranked second just behind Finland in global ranking out of
50 countries surveyed by Pearson Education.6

Accounting education in Korea Meets International Standards: In

Korea, there are a number of universities that are highly regarded in the
world for accounting training such as Sejong University, Myongji
University, Sangmyung University,...7

To conclude, Korea is a country with a developed education, especially

accounting. Accountants trained in Korea are highly skilled and are an
abundant export resource for multinational accounting and auditing
corporations.

4. Inflation

Consumer Prices Index up to July 2022 8

South Korea's inflation rose 6% for the first time in more than two decades in June as prices for energy
spiked due to Russia's invasion of Ukraine.9 This is the 15th consecutive month that consumer prices in
Korea have been above the 2% inflation target set by the central bank in the medium term. Korean
inflation is at an alarming rate with the possibility of an upcoming increase. Increasing inflationary
pressure is also the reason leading to many speculations that the Bank of Korea (BOK) will continue to
raise the basic interest rate this July. Korea with a high inflation rate has chosen to use price-level
accounting rather than historical cost with some revaluations. The adjustment of financial statements in
the context of an inflationary economy has been noticed by different countries in the world since very
early.

6
(Korea Ranks Second on Global Education Index, 2012)
7 (Các Trường đại Học Hàn Quốc đào Tạo Kế Toán Hàng đầu Xứ Kim Chi, 2022)
8
(Kang, 2022)
9
(S. Korea징짱s inflation gains fastest in 24 years at 6% in June and 4.6% H1 - 쨍, 2022)
5. Economic development

After November 1997, the Korean economy suffered a sudden financial crisis. The Korean government
carried out various reforms to resolve the problems. Accounting system reform is one of them. The
main contents of the accounting system reform were to improve transparency and accountability of
financial information. The Korean accounting system reform was directed by IBRD's request to meet
international accounting standards. The combined financial statements were introduced to prevent the
chaebol from such practices as intra-group transactions, share-holding between affiliates, cross-debt
payment guarantees and credit trading.

The news that the United Nations Conference on Trade and Development recently upgraded South
Korea from a “developing country” to a “developed country” elated the Korean people greatly. It means
Korea has most basic accounting requirements in place.

6. Culture

Hofstede Model in South Korea’s Cultural Context 10

The cultural factor has a significant impact on the

Korean accounting system. To be specific,
Hofstede cultural dimensions of Korea are
compatible with rules-based accounting. The
reason is that, this country’s uncertainty
avoidance is evaluated extremely high, it’s
compulsory that the accountants here comply
accurately and conservatively with its strict and
detailed accounting rules. Also, being a
hierarchical society, Koreans are fairly willing to
conform to the government’s accounting
standards. Additionally, their characteristics
include collectivism and restraint, which require the uniformity of the accounting practices.

7. Taxation

There is often a close relationship between financial accounting and tax accounting. All taxation
involves accounting processes which is the practice of calculating tax deductions and payments.

A company's tax year is its accounting period as specified in the articles of incorporation, which
normally is a 12-month period. The tax year cannot exceed 12 months.11 Financial statements and a
business report must be filed each accounting year. Corporate income tax is imposed on a company's
taxable income, which is its book net income after adjustments for differences between the accounting
and tax rules. The corporate income tax rate is progressive from 10% to 25% (11% to 27.5% including
local tax)12.

10
(Henderson, et al, 2015)
11
(South Korean Tax System - Santandertrade.Com, 2020)
12
(International Tax Korea Highlights 2022, 2022)
8. Political and Economic ties

South Korea has benefited from the experiences of advanced foreign countries, however, their
accounting style has not been profoundly impacted by one single foreign country due to its ancient
history as independent countries. Yet, similarities still exist. For example, from the US (Securities and
Exchange Commission) and Japan (statutory auditors).

III. Process prior to the adoption of IFRS in Korea

Before applying IFRS, the Korean accounting system applied K-GAAP. However, K-GAAP has some
disadvantages. Firstly, Financial statements are prepared under K-GAAP lacking transparency, so it is
not reliable enough for investors to compare the financial information of Korean companies with those
in other countries. This adversely affects the valuation of Korean enterprises. Second, South Korean
companies have to prepare dual sets of financing statements in both K-GAAP and IFRS for international
transactions, which makes doing business in the international market more troublesome. Therefore, it
is necessary for Korea to apply IFRS accounting standards.13

IV. Adoption of IFRS in Korea

1. Objective for IFRS adoption

In 2007, Korea announced its Roadmap for IFRS adoption and decided to fully adopt IFRS beginning
from 2011, allowing voluntary early-adoption from 2009. The full adoption of IFRS was decided as
part of the effort to improve the accounting transparency of Korean entities and to demonstrate Korea’s
strong will to take part in the international movement towards a single set of high-quality global
accounting standards.

2. Adoption Process

Multiple laws and regulations required reform in order for certain IFRS principles to be valid in South
Korea. The first law that was changed is the Act on External Audit of Stock Companies which “sets out
the composition and names of basic financial statements, the accounting standard setter, the scope of
subsidiaries for consolidated financial statements,” etc.

Two other laws that were amended are the Financial Investment Services and Capital Markets Act, as
well as the corporation tax law. The Capital Markets Act was changed in relation to the periods that
reports are submitted.

The IFRS Adoption Process in Korea14

2007 2009 2011 2013

-The Early-adoption of Mandatory adoption of IFRS Quarterly and half-year

Roadmap IFRS (excluding (quarterly and half-year reporting for companies with
announced. financial reporting for companies with total assets less than 2 trillion
-K-IFRS institutions). total assets greater than 2 KRW.
endorsed. trillion KRW). (KASB 2012)

13
(A Comparative Study of the Accounting Systems of Five Countries in East and Southeast Asia, 1988)
14
(Economic Consequences Of IFRS Adoption In Korea: A Literature Review, 2016)
On the other hand, corporate tax laws were revised in order to prevent increases in companies’ tax
burdens and the arduous work of tax adjustments. Another preparation for the adoption of K-IFRS was
the translation of IFRS to Korean, an inevitable step because Korea’s national language is not English.
The changing of disclosure and regulatory requirements was also required to enable financial statement
users to garner a better picture of the current and future security of South Korean entities.

3. Comparison (K- IFRS vs K- GAAP)15

K-IFRS K-GAAP

Principle-based accounting standards Rule-based accounting standards

Assets and liabilities are permitted, even Except for financial instruments, all assets are not
compulsory, to be adjusted to fair value as K- allowed to be revalued on the financial
IFRS attaches importance to fair value statements.
measurements.

Consolidated financial statements are Consolidated statements are only compulsory to

compulsory for all public companies, making it companies whose subsidiary reported assets
easier for managers and investors to evaluate the above 10 billion won, if not, stand-alone financial
company's overall financial health. reports will be used.

Detailed disclosures in notes, as the leniency of Relatively less detailed disclosures in notes
principle-based accounting standard makes it
necessary to provide supplementary information

A securitization is not considered a true sale even A securitization would be considered a true sale
if meeting all criteria. if it met certain criteria.

Change in classification leads to larger amounts Fewer amounts of assets and liabilities on the
of assets and liabilities on the balance sheet. balance sheet.

V. Conclusion

Certainly, the IFRS adoption brought the greatest changes to the Korean accounting system ever since
the accounting system was put in place in Korea. Changes following the IFRS adoption were not limited
to the ones in the financial reporting standards, but encompassed every single area related to the
accounting system. Outwardly, there were extrinsic changes such as realignment of laws and regulations
or rebuilding of disclosure and regulatory policies, but change in the perception of constituents at a
fundamental level was most remarkable and significant.

15
(Henderson, et al, 2015)
References

A Comparative Study of the Accounting Systems of Five Countries in East and Southeast Asia. (1988,
August). Vtechworks.
https://vtechworks.lib.vt.edu/bitstream/handle/10919/53674/LD5655.V856_1988.C522.pdf?sequence
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oFrg4GeI

Các Trường đại Học Hàn Quốc đào Tạo Kế Toán Hàng đầu Xứ Kim Chi. (2022, June 26).
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Economic Consequences Of IFRS Adoption In Korea: A Literature Review (Vol 32)(No. 6). (2016).
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FRED Economic Data. (2022, March 23). Fred.Stlouisfed.Org.

https://fred.stlouisfed.org/series/DDDM01KRA156NWDB

Henderson, Rebecca, "South Korea's Transition from K-GAAP to IFRS" (2015). University Honors
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Henderson, Rebecca, "South Korea's Transition from K-GAAP to IFRS" (2015). University Honors
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International Tax Korea Highlights 2022. (2022, January). Deloitte.

https://www2.deloitte.com/content/dam/Deloitte/global/Documents/Tax/dttl-tax-koreahighlights-
2022.pdf

Kang, M. J. (2022, July 5). Higher-than-expected inflation will push Bank of Korea into taking a ‘big
step’ in July. ING Think. https://think.ing.com/snaps/higher-than-expected-inflation-will-push-bank-
of-korea-into-taking-a-big-step-in-july

Korea ranks second on global education index. (2012, November 28). Koreatimes.
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S. Korea징짱s inflation gains fastest in 24 years at 6% in June and 4.6% H1 - 쨍. (2022, July 5).
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South Korea Listed companies - data, chart. (2022). TheGlobalEconomy.Com.

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THE COMMON LAW AND CIVIL LAW TRADITIONS. (2017). Law.Berkeley.Edu.

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UPDATE: South Korean Law Research on the Internet - GlobaLex. (2021). Globalex 2015.
https://www.nyulawglobal.org/globalex/South_Korea1.html