Korean Institute of Certified Public Accountants Hosts the 5th Value Evaluation Forum

Study on the Market Risk Premium in Korea for 2024

The Korean Institute of Certified Public Accountants (KICPA) announced on the 30th that it jointly held the "5th Valuation Forum" with the Korean Accounting Association on the 28th.

Previously, KICPA announced the "Market Risk Premium (MRP) Guidance" in June 2022 and June last year, respectively, and has continuously conducted research to timely update the guidance. At this forum, the research results on the risk premium calculated as of January were shared, and opinions from stakeholders were gathered. This year, the research results measuring MRP as well as the research results on the Size Risk Premium (SRP) were also announced, drawing attention.

Professor Jeong Nam-cheol of Hongik University explained in his presentation titled "2024 Korea MRP and SRP Update Research" at the forum that "MRP and SRP are indicators that greatly influence valuation work and fluctuate over time." MRP can be measured according to various calculation methods suitable for domestic conditions. The research showed that Korea's MRP as of January ranged widely from the 4% range to the 12% range depending on the measurement method.

SRP generally refers to the premium estimated due to size differences, where small-sized companies are considered to have higher risk compared to large-sized companies. Although it has relied on data from foreign service firms in the past, there is a growing trend to actively use KICPA data. The research results showed that Korea's SRP as of January had a maximum value of 3.75% based on the third quintile and up to 4.73% based on the fifth quintile.

In the comprehensive discussion, Professor Kim Jong-il of Catholic University served as the chair, and various stakeholders including standard-setting bodies, academia, the accounting industry, companies, and information users shared their opinions. Lee Chun-ho, head of the Financial Accounting Team at the Korean Accounting Standards Board, stated, "K-IFRS is a principle-based accounting standard and does not specify concrete methods for fair value measurement of assets and liabilities. The MRP and SRP data published by KICPA serve as specific guidelines that can be referenced when estimating discount rates, helping reduce the workload of practitioners and resolving uncertainties in accounting treatment."

Professor Jeong Kyung-chul of Kyungpook National University said, "KICPA's research on the somewhat practical topic of risk premiums has facilitated exchange between academia and the accounting industry, producing results that are academically meaningful and very useful in practice," and suggested, "I hope KICPA conducts direct surveys targeting domestic valuation experts."

Partner Kim Jeong-hwan of Han Young Accounting Corporation said, "KICPA's MRP is widely used in the accounting industry. It is used not only for financial reporting but also extensively for transaction purpose valuation work," and added, "Except for service companies' MRP, the MRP values generally appear around 5-6%, so Korea's MRP should be somewhat lowered compared to the previously announced guidance of 7-9%."

Manager Ko Hyun-woo of the Korea Listed Companies Association said, "KICPA's guidance is widely used by companies. Along with periodic updates of the guidance, promotion and education are necessary," and added, "I hope the MRP guidance presented as 7-9% will be subdivided by industry or size, and related materials will be posted on a bulletin board accessible to the general public to improve information accessibility."

Research Fellow Lee Sang-ho of the Korea Capital Market Institute said, "Service companies do not disclose the method of calculating MRP, making it difficult to estimate the reasons for changes in figures. Also, recent changes in figures show patterns that cannot be explained by Korea's capital market conditions, raising concerns about the rationality of service companies' MRP," and suggested, "Since various MRP measurement methods each have their pros and cons, a comprehensive review through a holistic approach by the committee is necessary to derive an MRP suitable for the domestic market."

KICPA plans to disclose the MRP guidance and SRP research results next month, taking into account the broad opinions presented by various sectors at the forum.