Financial Services Commission Considers 3-Year Postponement of Periodic Designation System

'Accounting Day' Commemoration Ceremony at FKI Hall
Discussion on 'Periodic Designation System Relaxation and IFRS Adoption'
Sensitive Issues Addressed... Call for Audit Quality Enhancement

Financial Services Commission Chairman Kim Byung-hwan urged on the 31st, "For the public interest of enhancing accounting transparency, I ask all sectors to make concessions and listen to each other's voices." The photo shows Chairman Kim Byung-hwan attending a government event on the 28th. Photo by Jo Yong-jun

Kim Byung-hwan, Chairman of the Financial Services Commission, urged on the 31st, "For the public interest of enhancing accounting transparency, all sectors should make concessions and listen to each other's voices."

On the morning of the same day, Chairman Kim held a government awards ceremony at the Federation of Korean Industries (FKI) building in Yeouido, Seoul, to mark 'Accounting Day,' followed by a meeting with the accounting industry.

Chairman Kim stated, "Although international evaluations in the accounting field have improved through accounting reforms, they still do not match our economic status," and urged, "The accounting industry, business sector, and academia should work together to achieve substantial results."

Earlier, the government announced a policy to ease the periodic designation of excellent companies in accounting and audit governance. A task force (T/F) has been formed with related agencies to prepare governance evaluations and deferral plans. However, during this process, there is a sharp conflict of interests between the accounting industry, which wants to maintain the original plan, and the business community, which calls for easing.

FSC: "Considering a 3-year deferral for periodic designation"

At the subsequent meeting with the accounting industry, the Financial Services Commission shared the main directions and future plans for accounting policies. The key topic was the improvement direction of the periodic auditor designation system (periodic designation system). The FSC reiterated that the goal of this policy is "to reasonably ease the burden on companies while inducing improvements in governance related to accounting audits to enhance accounting transparency."

The FSC stated that it is reviewing system improvements in the direction of a 'deferral' (3 years) rather than an 'exemption' from designation. Additionally, detailed criteria will be established within the year to evaluate companies without concerns of accounting fraud, focusing on ▲ independent and professional composition of audit committees ▲ effective operation ▲ efficiency of internal accounting management. An evaluation committee will be formed next year to decide on evaluations and deferral targets, with deferrals to begin in 2026.

Regarding awarding additional points to value-up excellent companies during the periodic designation deferral evaluation, Chairman Kim emphasized, "We will faithfully consider governance from the selection stage of value-up excellent companies to alleviate concerns from the accounting industry," and added, "For value-up excellent companies with weak governance related to accounting and audits or with significant concerns about accounting fraud, detailed criteria will be prepared to exclude them from receiving additional points."

"IFRS 18 Exposure Draft to be Released Within the Year"

Support will also be provided for the smooth introduction of IFRS 18, the financial statement presentation and disclosure accounting standard, to minimize confusion among companies and investors. Currently, the FSC has been operating a task force with related agencies since June after announcing the IFRS 18 implementation plan in April 2027. The IFRS 18 exposure draft will be released within the year, and the standard will be established next year.

The first major content is that IFRS defines operating profit and loss, which was previously undefined, as a residual category and requires classification and presentation of profit and loss in the income statement by source such as operating, investing, and financing. This differs from the current method of presenting operating profit and loss in Korea. When announcing the exposure draft within the year, the FSC plans to disclose inspection points and response measures. To identify issues by industry and company size, the four major accounting firms will participate in the T/F to conduct impact assessments and provide education and guidance. For areas of concern among companies and investors, the FSC will continuously review modified implementation plans and coordinate with the IASB, which establishes and revises IFRS.

The second major content is that when management uses performance measures not included in financial statements during public communication with investors, these will be regarded as MPM (Management-defined Performance Measures), disclosed in the financial statement notes, and subject to external audit.

Chairman Kim said, "To reduce the burden on companies due to mandatory note disclosure, the initial implementation will focus on guidance," and added, "With IFRS 18 as an opportunity, we will develop incentives so that companies and management can faithfully inform shareholders and investors of company performance and foster a capital market culture where various performance measures are developed and utilized." In other words, during the guidance period, sanctions will be mitigated even if issues are pointed out during inspections, provided there is no intentional or gross negligence.

Considering Easing Corporate Burdens Such as Standard Audit Hours

Measures to rationalize corporate burdens and improve systems related to inspections and sanctions will also be implemented. Various measures will be prepared to ease corporate burdens related to standard audit hours and the periodic designation system. Regarding standard audit hours, the FSC plans to revise criteria so that companies' efforts to improve external audit efficiency can be deducted when applying standard audit hours. Partial application and deferral extensions will be allowed for mid-sized and small-to-medium enterprises.

Additionally, issues raised during the operation of the Audit Committee and the Securities and Futures Commission will be improved. Unreasonable sanctions or burdens on auditors and affiliated certified public accountants will be reasonably eased, while internal controls of accounting firms will be strengthened to meet international standards.

The Korean Institute of Certified Public Accountants stated, "We will carefully identify corporate difficulties to help accounting reforms settle and communicate them to the government," and added, "We plan to actively prepare self-help measures to enhance the ethical awareness of certified public accountants following recent incidents." Regarding recent concerns about oversupply of personnel in the accounting industry, they said, "We are also prepared to implement practical training support measures for those who pass this year's CPA examination at any time."

The accounting industry stated, "It is necessary to revitalize competition in audit quality among accounting firms by giving mid-sized and small accounting firms, which show continuous efforts to improve quality control, opportunities to audit larger designated companies." They also requested that the 'auditor registration requirements for listed companies,' which have been somewhat abstract and hinder auditors' predictability, be specified more concretely. Institutional support was also proposed to encourage efforts to improve audit quality at the accounting firm level, such as the introduction of digital audit techniques.

In response, Chairman Kim said, "Efforts by accounting firms to improve audit quality are essential to enhance our accounting transparency," and added, "We will consider ways to promote competition in audit quality and institutionally support accounting firms' efforts to improve audit quality."

Meanwhile, the FSC awarded 81 honors, including medals, plaques, and commendations, to meritorious persons selected at the Accounting Day ceremony. Accounting Day has been held since 2018 under the auspices of the Korean Institute of Certified Public Accountants to commemorate the new External Audit Act enacted in 2017. In 2021, it was designated as a statutory memorial day through amendments to the External Audit Act.