Financial Services Commission to Adopt IFRS 18 Without Modification... Broadened Definition of Operating Profit

The structure of income statements for domestic companies will be overhauled for the first time in 15 years. Going forward, under the Korean International Financial Reporting Standards (K-IFRS), operating profit will be expanded to encompass not only the results from core business activities but also all residual profits and losses, excluding investment and financial income and expenses.

On December 18, the Financial Services Commission announced that a total of three amendments to accounting standards, including K-IFRS No. 1118 “Presentation and Disclosure of Financial Statements,” have been approved and will be promulgated after review and resolution by the Korea Accounting Standards Board’s Accounting Standards Committee.

This overhaul is a follow-up measure to the domestic adoption of IFRS 18, which was comprehensively revised by the International Accounting Standards Board (IASB) for the first time in 15 years. The new standards will apply to fiscal years beginning on or after January 1, 2027.

IFRS 18 introduces new subtotals in the income statement, such as operating profit, by category, and stipulates that operating profit should be measured as a residual concept, excluding investment and financing categories. The subtotals by category will be divided into operating, investing, financing, corporate tax, and discontinued operations, based on the source of profit and loss. The “operating category” will include both profit and loss from main business activities and residual profit and loss not classified under other categories.

Previously, IFRS did not specifically regulate the presentation or measurement methods for subtotals such as operating profit in the income statement, so domestic standards required companies to additionally present operating profit. Under the current system, operating profit was limited to profit and loss related to core business activities. However, from now on, operating profit will be broadened to include all residual categories of profit and loss not classified as investment or financing.

Additionally, companies will be required to define self-developed performance indicators, communicated outside of financial statements, as Management-Defined Performance Measures (MPMs), and to disclose calculation bases and adjustment details in notes to prevent arbitrary use.

The Financial Services Commission explained, “Given the ‘Korean specificity’ of operating profit management and the ‘operating profit-centered IR practices’ under our standards, concerns have been raised that adopting IFRS 18 without modification could cause confusion among information users and reduce comparability.”

Accordingly, the financial authorities decided that operating profit as defined by IFRS 18 will be presented in the main body of the income statement, while “operating profit under the current standards” will also be calculated separately and disclosed in the notes. After three years of implementation, authorities will comprehensively review the need for continued dual disclosure and decide whether to extend the note disclosure requirement.

Furthermore, to ensure that the change in the presentation location of operating profit under current standards does not result in lower penalties, the penalty guidelines will also be revised. In addition, recognizing that companies may face difficulties in the early stages of implementation, the system will be operated with a focus on guidance for two years, and errors in accounting treatment will not be penalized unless intentional.

To address accounting uncertainties related to corporate power purchase agreements (PPAs), the Financial Services Commission also amended K-IFRS No. 1109 “Financial Instruments” and No. 1107 “Financial Instruments: Disclosures.” The amendments clarify the application of the self-use exception for direct PPAs and relax the requirements for hedge accounting for virtual PPAs to reduce profit and loss volatility. These changes will apply to fiscal years beginning on or after January 1, 2025.

Through the amendment of K-IFRS No. 1117 “Insurance Contracts,” disclosure requirements related to surrender rates for non- and low-surrender value insurance products have also been strengthened. If the estimation techniques used by insurers differ from the principal estimation techniques required by insurance-related regulations, and if the differences are deemed relevant and material for financial statement users, the details and their impact on the financial statements must be disclosed in the notes. This will apply starting with the 2025 financial statements.

The Financial Services Commission stated, “We plan to work with relevant institutions to ensure the smooth adoption of the new and revised standards in the market through ongoing publicity and education,” adding, “We will continue our efforts to ensure that accounting uncertainties do not become an obstacle to productive finance.”