[Asia Economy Reporter Park Jihwan] As the International Financial Reporting Standards (IFRS) prepare accounting standards for merger transactions between entities under common control, a survey has revealed a significant gap between the accounting methods expected to be widely applied in the future and the current accounting practices of domestic companies.
According to the Financial Supervisory Service (FSS) on the 18th, IFRS currently lacks separate standards related to business combinations between entities under common control, such as mergers between a parent company and its subsidiaries or between subsidiaries. Recently, the International Accounting Standards Board (IASB) proposed the need to establish related standards and suggested that, in cases of business combinations under common control, the assets and liabilities of the transferring company should, in principle, be measured using the 'fair value method.' This proposal stems from the absence of such standards.
However, contrary to the IFRS discussion paper indicating an expansion of fair value method application, it has been found that the book value method is frequently applied domestically. According to the FSS's investigation into the accounting treatment of merger transactions between entities under common control by domestic companies, out of 226 cases occurring over the past three years (2018?2020), 221 cases (97.8%) applied the book value method. Only 5 cases (2.2%) applied the fair value method.
The book value method is an accounting treatment method under Chapter 32 (Transactions under Common Control) of the Korean Generally Accepted Accounting Principles (K-GAAP). It measures the assets and liabilities of the merger target based on the carrying amount in the consolidated financial statements.
On the other hand, the fair value method measures the assets and liabilities of the merger target based on their fair value. Applying the fair value method results in recognizing intangible assets such as goodwill, which affects profit and loss trends by increasing capital or earnings compared to the application of the book value method.
The FSS stated, "In Korea, the accounting standards applied in business combinations under common control have become established as the book value method, unlike the IFRS discussion paper." It explained that if standards are established in the future to expand the application of the fair value method, domestic accounting practices could undergo significant changes.
An FSS official said, "We will continue to monitor the process closely and work with the Korea Accounting Standards Board to ensure that domestic accounting practices are considered during the IFRS standard-setting process."
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