1. / 1 AAA Annual Meeting 2015 Economic Consequences of IFRS Adoption in Korea : A Review of Literature August, 2015 Jee In Jang Korean Accounting Standard Board

2. / 2 Contents I. Introduction Ⅱ. Background Ⅲ. A Review of Literature Ⅳ. Concluding Remarks

3. / 3 I. Introduction

4. / 4 Motivation of this research In 2007, Korean government announced its Roadmap for IFRS adoption and decided to fully adopt IFRS beginning from 2011, allowing voluntary early-adoption from 2009 1. To improve the accounting transparency of Korean entities; 2. To demonstrate Korea’s strong will to take part in the international movement towards a single set of high-quality global accounting standards

5. / 5 Ⅱ. Background 01. The IFRS Adoption Process in Korea 02. Difference Between IFRS and K-GAAP 03. Distinctive Features of IFRS Adoption in Korea

6. / 6 01. The IFRS Adoption Process in Korea Set out a roadmap for the IFRS Adoption March, 2007 Allowed voluntary adoption of IFRS January, 2009 Full adoption of IFRS for listed companies and all financial institutes January, 2011 Early Adoption PeriodFull Adoption Period 2009201020112014 Mandatory Adoption--1,7091,824 Voluntary Adoption331521,1422,054 Total331522,8513,878* * 17.2% of externally audited entities by law(as of December, 2014)

7. / 7 K-GAAP IFRS Expected Changes Rule-based accounting standards Principle-based accounting standards Increased discretion by management Separate financial statements as primary financial statements Consolidated financial statements as primary financial statements Enhanced comparability and value relevance Book value accounting with acquisition cost basis Expansion of the scope of fair value accounting Increased use of fair value measurement Relatively less detailed disclosures in notes Detailed disclosures in notes Improvement in quality and quantity of disclosures in notes 02. Difference Between IFRS and K-GAAP

8. / 8 03. Distinctive Features of IFRS Adoption in Korea 1 Big difference between K-GAAP and IFRS The effects of IFRS adoption would be more clearly observed (Bae. Et al. 2008) 2 3 Korean accounting culture is different from member countries of the Commonwealth. Korea fully adopted IFRS with a Big-Bang approach and no ‘carve-outs’ ‘Rule-based’ Korean accounting standards (K-GAAP) → ‘Principle-based’ IFRS. The ‘Big-Bang’ approach was employed instead of the ‘phase-in’ or ‘convergence’ approach. It may take a significant amount of time for IFRS adoption to have economic effects in Korea. Hofstede(1980); one of the most uncertainty avoiding countries in the world. Legal system; code law country. ‘Mandatory adoption of IFRS ‘(for all listed companies and financial institutions) K-IFRS: translated version of IFRS without ‘carve-outs’.

9. / 9 Ⅲ. A Review of Literature 01. Earnings Quality 02. Comparability of Financial Statements 03. Value Relevance 04. Analysts Behavior 05. Information Asymmetry 06. Cost of Equity Capital and Firm Value

10. / 10 * We focus on accounting literature published in leading accounting journals in Korea: - Korean Accounting Review - Korean Accounting Journal - Accounting, Tax & Auditing Research - Selected Korean Accounting Association conference papers (1) Earnings quality (2) Comparability of financial statements (3) Value relevance (4) Analysts’ behavior (5) Information asymmetry (6) Cost of capital firm value 18 empirical studies on the economic consequences of IFRS adoption in Korea Six areas

11. / 11 01. Earnings Quality Empirical findings Implications & Future research Improvements in earnings quality: Decrease in discretionary accruals (DA) This effect is enhanced in firms - with additional abnormal audit hours (Park et al. 2012) - with Non-Big4 auditors (Kim 2014) Decrease in DA in separate F/S while increase in DA in consolidated F/S (Jeong 2013) Due to the relatively large difference between K-GAAP and IFRS, earnings quality tends to be enhanced after IFRS adoption Future research: Why does increase in DA in consolidated F/S? - Use different proxy for earnings quality (eg: real activities manipulation, book and tax income difference) Choe and Son (2012); Park et al. (2012); Jeong (2013); Kim (2014); Yu and Cha (2014) Does the adoption of IFRS affect earnings quality?

12. / 12 02. Comparability of Financial Statements Empirical findings Implications & Future research Mixed results: Reduced comparability due to the lack of standards on disclosure of operating income; while improved comparability after the KASB requirement of operating income (Cheon and Ha 2011; Lee et al. 2012) Improved comparability in post-IFRS adoption period (Choi et al. 2013) No definition and requirement for disclosure of ‘operating profit or loss’ in IFRS The amendments to K-IFRS 1001 (equivalent to IAS1 ) in 2012 - Mandatory disclosure of ‘operating profit or loss’ and define as an amount of sales minus cost of sales and selling and administrative expenses Future research - Use different model suggested by Cascino and Gassen (2015) to control for the endogeneity problem Cheon and Ha (2011); Lee at al. (2012); Choi et al. (2013) Does the adoption of IFRS affect financial statement comparability?

13. / 13 03. Value Relevance Empirical findings Implications & Future research Mixed results: No significant difference in value relevance of both book value of equity and net income under K-GAAP and IFRS (Choi 2013) Value relevance of NI: IFRS > K-GAAP Value relevance of BVE: IFRS < K-GAAP (Choi et al. 2013) Future research Why the improvement in earnings quality does not result in the increase in value relevance? - short test periods (1 year: 2010, 2011) and the omitted variables problem - need to use longer periods (5-10 years) in the analysis Choi (2013); Choi et al (2013); Kim et al. (2014) Does the adoption of IFRS affect value relevance of accounting information?

14. / 14 04. Analysts Behavior Empirical findings Implications & Future research Enhanced information environment for analysts: Decrease in both analysts’ forecasts error and their variance (Yu and Cha 2014) Analysts provide more accurate earnings forecasts for the firms with asset revaluation under IFRS (Choe and Son 2011) The results suggest that financial analysts cope effectively with the transition to IFRS Future research - Investigate the differences in forecast accuracy between domestic and foreign analysts after IFRS adoption Choe and Son (2011); Yu and Cha (2014) Does the adoption of IFRS affect financial analysts’ forecast accuracy?

15. / 15 05. Information Asymmetry Empirical findings Implications & Future research Decrease in information asymmetry: Decrease in the standard deviation of daily stock returns (Kim and Cho 2014) Decrease in stock price synchronicity (Shin and Choi 2014) Report consistent empirical evidence that information asymmetry decreases following IFRS adoption Future research - Use longer test periods - analyze information asymmetry issue using different model(eg. ACCRSQ model) by Frankel et al. (2006) Shin and Choi (2014); Kim and Cho (2014) Does the adoption of IFRS affect information asymmetry?

16. / 16 06. Cost of Equity Capital and Firm Value Empirical findings Implications & Future research Decrease in cost of capital and increase in firm value: Decrease in cost of equity capital (Kim and Cho 2014; Yu and Cha 2014) K-GAAP IFRS Kim and Cho(2014) 13.30% > 10.20% Yu and Cha(2014) 12.93% > 11.12% Increase in Tobin’s Q (Kim and Cho 2014) IFRS adoption may reduce information asymmetry and uncertainty, and hence be rewarded with a lower cost of capital Future research - Examine the changes in foreign direct investments after IFRS adoption - Test the differential effects on the cost of capital and firm value Kim and Cho (2014); Yu and Cha (2014) Does the adoption of IFRS affect cost of capital and firm value?

17. / 17 Ⅳ. Concluding Remarks

18. / 18 Summary & Suggestions for future research Overall, Korean studies provide evidence that IFRS adoption has led to improvements in financial reporting and accounting environment and plays a positive role in Korean capital market. Research results on economic consequences of IFRS adoption in Korea would provide useful insights to countries considering or in the process of adopting IFRS, especially countries with similar institutional environment to Korea. Future research - to address national characteristics and the different effects of IFRS adoption (eg: legal tradition, accounting quality in pre IFRS, legal enforcement, importance of capital markets, difference between GAAP and IFRS) - to investigate changes in home bias after IFRS adoption - to investigate effects of translation risk

19. / 19 Thank you