With the new international accounting standard IFRS 18 about three months away, South Korea's financial regulator has urged companies to test the rules in advance using their own data. Because firms must also restate past financial information presented for comparison, they need to secure the necessary records and produce and verify draft financial statements ahead of time.
K-IFRS No. 1118, covering the presentation and disclosure of financial statements, becomes mandatory for fiscal years beginning on or after Jan. 1 next year, the Financial Supervisory Service said on the 13th. Companies with December fiscal year-ends that prepare quarterly and half-year statements must apply the new standard starting with their first-quarter statements next year.
The standard requires all income and expenses in the income statement to be sorted into five categories: operating, investing, financing, income taxes and discontinued operations. Confusion is expected among companies and users of disclosures, particularly because the definition of operating profit — a key gauge of corporate profitability — changes. Previously, operating profit covered income and expenses tied to a company's main business activities. Under the new standard, it covers income and expenses that do not fall into the other categories, such as investing and financing.
Companies must also disclose operating profit under the existing standard and include in the notes a reconciliation explaining the difference from the new figure. Operating profit can shift depending on how items are classified even when actual business performance is unchanged, so companies need to explain the reasons clearly, and investors need to distinguish between differences caused by the rule change and genuine changes in earnings.
Disclosure of performance indicators that companies use externally will also be strengthened. If such an indicator qualifies as a management-defined performance measure, or MPM, the company must disclose how it is calculated and reconcile it with the most comparable subtotal under accounting standards, such as operating profit. Rules on aggregating and disaggregating line items in financial statements will likewise be tightened so that material information is not obscured by being lumped together.
The FSS laid out preparation steps for individual companies: analyzing how the new standard affects the company, spelling out key accounting policies and judgment criteria, upgrading systems and closing procedures, producing and verifying financial statements and comparative information using actual data, and addressing gaps before a final review.
The regulator stressed that companies should not stop at building systems but should actually prepare financial statements with real data. They should analyze the size and causes of differences between figures under the existing and new standards and check for classification or calculation errors and omissions. Firms should also verify in advance whether they hold enough historical source data for retrospective application and whether their systems produce comparative information accurately.