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Financial Supervisory Service www.fss.or.kr
July 28, 2011
Impact of IFRS Adoption on Bank Holding Cos and Adequacy of First IFRS Reporting
Domestic financial holding companies have been required to adopt International Financial Reporting Standards (IFRS) since January 2011. The Financial Supervisory Service (FSS) analyzed the financial impact of IFRS adoption* on bank holding companies based on their first quarter reports and examined the adequacy of their disclosure**.
*Seven bank holding companies, excluding two companies established this year, were researched for their consolidated net assets and consolidated net income data calculated under the previous accounting standards and K-IFRS, respectively.
**Seven bank holding companies which disclosed the first quarter reports were checked against standards for filling out the corporate disclosure form and about 90 items required for disclosure under K-IFRS.
1. Financial Impact of IFRS Adoption 1) Impact on Consolidated Net Assets
Consolidated net assets of bank holding companies under K-IFRS as of the end of 2010 totaled KRW110.9 trillion, up 8.1% or KRW8.4 trillion from KRW102.6 trillion under previous accounting standards.
The adoption of IFRS changed major accounting standards including the scope of consolidation of financial statements, criteria for calculating loan loss provisions and criteria for classifying items into equity and liability.
(1) Change in scope of consolidation: KRW2.5 trillion drop in consolidated net assets
A company, which is a majority shareholder and holds more than 30% of shares with voting rights (not more than 50%), and fixed-return trust was exempted from consolidation under IFRS.
(2) Change in loan loss provisioning: KRW2.9 trillion rise in consolidated net assets
Previously, the regulation stipulated minimum requirements on loan loss provisions. But under IFRS, loan loss provisions are determined based on an incurred loss model, supported by objective evidence of impairment. This led to a drop in the total reserve balance.
When loan loss provisions built under previous standards fall short of K-IFRS requirements, the difference will be set aside as loan loss reserves (Articles 27 and 28 of Regulation on Financial Holding Company Supervision)
(3) Change in classification of a financial instrument as liability or equity: KRW6.4 trillion rise in consolidated net assets
Press Release
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Financial Supervisory Service www.fss.or.kr
Hybrid securities tһаt wеrе recognized in accordance with previous K-GAAP аѕ liability are reclassified as equity in accordance with IFRS because a financial instrument should be classified as either a financial liability or an equity instrument according to the substance of the contract as opposed to the legal form.
(4) Revaluation of tangible assets: KRW2.3 trillion rise in consolidated net assets
With the IFRS adoption, some bank holding companies made a revaluation of tangible assets as of January 1, 2010 and made gains on revaluation.
At individual firm level, KDB Financial Group lost KRW2.9 trillion in net assets due to the exemption of large subsidiaries (Daewoo Shipbuilding & Marine Engineering, etc.) from the consolidation. On the other hand, other six holding companies experienced an increase in consolidated net assets.
In particular, the rate of increase in net assets of Woori, Shinhan and SC financial groups far exceeded 10%, with 20.0%, 17.2% and 27.5% increases respectively, mostly due to reclassification of hybrid securities as equity.
Change in Net Assets by Bank Holding Company
(Unit: KRW in trillions, %)
Category
Net assets under K- GAAP (a)
Net assets under K- IFRS (b)
Increase in net assets (b-a)
Rate of increase
Change in scope of consolidation
Change in loan loss provisions
Hybrid securities
Revaluation of tangible
assets
Other
Woori 16.92 20.31 3.39 0.17 -0.15 2.38 0.81 0.18 20.0
Shinhan 23.20 27.20 4.00 0.13 0.96 2.52 0.62 -0.23 17.2
Hana 11.37 12.74 1.37 -0.07 0.53 0.40 0.58 -0.07 12.1
KB 18.44 19.67 1.23 -0.06 0.53 0.68 - 0.08 6.7
SC 4.44 5.66 1.22 0.09 0.38 0.38 0.27 0.10 27.5
KDB 22.62 19.72 -2.90 -2.21 0.57 - - -1.26 -12.8
Citi 5.60 5.64 0.04 -0.55 0.06 - - 0.53 0.7
Total 102.59 110.94 8.35 -2.50 2.88 6.36 2.28 -0.67 8.1
2) Impact on Consolidated Net Income
Consolidated net income of bank holding companies under IFRS in 2010 totaled KRW7.444 trillion, up 6.5% or KRW452.3 billion from KRW6.991 trillion under the previous standards.
KDB Financial Group* and Citigroup Korea lost KRW305.6 billion and KRW8.6 billion, respectively, in consolidated net income due to change in the scope of consolidation, while
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five others witnessed a rise in consolidated net income.
*DSME, which generated KRW780.1 billion in net income, was exempted from consolidation.
Consolidated Net Income by Bank Holding Company (as of end-2010)
(Unit: KRW in billions, %)
Woori Shinhan Hana KB SC KDB Citi Total
K-IFRS 1,600.7 2,684.6 1,044.6 219.9 277.6 1,411.1 205.1 7,443.6
K-GAAP 1,299.6 2,383.9 1,000.2 100.2 277.0 1,716.7 213.7 6,991.3
Increase 301.1 300.7 44.4 119.7 0.6 -305.6 -8.6 452.3
Rate of increase 23.2 12.6 4.4 119.5 0.2 -17.8 -4.0 6.5
2. Adequacy of Disclosure in the First IFRS Reports for 1Q ’11
Since the IFRS adoption, the first disclosures made by domestic bank holding companies were found to be generally appropriate.
Still, regarding some findings, the FSS requested immediate corrective disclosures or follow-ups on semi-annual or business reports depending on the significance.
(1) Immediate corrective disclosures
Two companies were found having failed to disclose matters regarding loan loss reserves.
- They did not disclose in footnotes regarding loan loss reserves including transfer to/reversal of loan loss reserves, adjusted net income after reflecting loan loss reserves and adjusted earnings per share after reflecting loan loss reserves.
A company omitted matters regarding operating income.
- It did not make disclosures in footnotes regarding operating income even if it did not distinguish between operating profit and loss in the main reporting documents.
(2) Follow-ups on semi-annual or business reports
Three companies did not disclose matters regarding items used in calculating operating income.
- They did not make disclosures in footnotes regarding items used in calculating operating income even if such items are different from ones under previous standards.
Four companies did not disclose quantitative and non-quantitative information related to capital management.
- They did not provide quantitative information related to capital management such as debt-to-equity ratio and BIS ratio and non-quantitative information such as the purpose and policies of capital management.
Four companies did not provide information about the evaluator and the methods of evaluation despite the revaluation of tangible assets and fair value measurement of
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financial instruments.
3. Comprehensive Assessment and Future Plans
An analysis of the impact of IFRS adoption on domestic bank holding companies showed that consolidated net assets and net income increased in accordance with IFRS compared with previous accounting standards.
However, consolidated equity capital under BIS decreased* even with the increase in consolidated net assets, and the consolidated BIS capital ratio was also estimated to fall, though small in size**.
*Under BIS standards, hybrid securities have already been classified as equity. Therefore the reclassification of hybrid securities as equity under IFRS has no effect. The decrease in loan loss provisions under IFRS does not affect the BIS equity capital because loan loss reserves are excluded from equity capital under BIS.
** The BIS ratio of bank holding companies as of end-March 2011 under IFRS stood at 13.48%, maintaining a similar level to 13.52% at the end of December 2010 when the previous accounting standards were applied.
Despite the increase in net assets and net income, companies are required to set aside loan loss reserves*, apart from loan loss provisions. Gains on revaluation of tangible assets are not allowed for dividend payments**. Therefore, the chance of more outflows through dividend payments is expected to be slim.
* As of end-2010, loan loss reserves for bank holding companies amounted to KRW5.6 trillion.
**Gains on revaluation are recognized as supplementary capital in calculating BIS ratio only in case dividend payments are restricted. (2-A-(2)-(b), Appendix 1-2, Enforcement Decree of Regulation on Financial Holding Company Supervision)
As disclosures in the first IFRS financial statements were found to be generally adequate, despite some findings, IFRS seemed to have been introduced without big problems.
The FSS will continuously provide guidelines and check for all related matters to ensure that the transition to IFRS is successful.
Contact Person:
Soomi Kim
Foreign Press Spokesperson Public Affairs Office
Financial Supervisory Service Tel: +82-2-3145-5803 Fax: +82-2-3145-5808 E-mail: soomi.kim@fss.or.kr
