Hankyung Research Institute "Concerns Over Overestimation of Corporate Dividend Capacity... Need to Review Accounting Standards"

Seminar on Exploring New Accounting Treatments for Treasury Stock and Dividends

[Asia Economy Reporter Dongwoo Lee] Although companies are expanding dividends and treasury stock acquisitions as means of shareholder returns, there are criticisms that the current methods of providing accounting information do not reflect the actual conditions of companies. There are calls for a comprehensive review of accounting standards, the Commercial Act, and related legal systems.

The Korea Economic Research Institute under the Federation of Korean Industries announced on the 13th that it held a seminar titled "Exploring New Accounting Treatments for Treasury Stock and Dividends" at the FKI Conference Center in Yeouido, Seoul. Treasury stock refers to shares issued by a company that the company itself acquires and holds as its own property.

In his opening remarks, Kwon Tae-shin, president of KERI, stated, "While dividends and treasury stock acquisitions are being expanded as shareholder return measures, the current methods of providing accounting information do not reflect the actual conditions of companies," emphasizing, "Before demanding an expansion in the scale of dividends and treasury stock purchases, a correct understanding of the actual situation of companies is necessary, and this should be based on sustainable growth and future investment of companies."

Professor Hwang In-tae of the Department of Business Administration at Chung-Ang University, who presented at the seminar, pointed out through his study "Research on Improvement Measures for Treasury Stock Accounting" that the acquisition of treasury stock is not reflected in retained earnings, leading to an overestimation of corporate retained earnings.

Professor Hwang emphasized, "When treasury stock is acquired, the current accounting treatment discloses it as a deduction from other capital, so it does not affect retained earnings, which can lead to an overestimation of a company's dividend capacity by external parties."

Under current accounting laws, treasury stock can be acquired up to the limit of distributable profits, which effectively reduces distributable profits. However, in accounting treatment, it is recorded as other capital unrelated to distributable profits. Furthermore, when classified as other capital, it is calculated as 'retained earnings,' also known as internal reserves, which can lead to issues related to disposal and investment pressure.

He explained, "Reflecting treasury stock acquisition in retained earnings to indicate the reduction in distributable profits would allow for accurate accounting reflection and prevent the adverse effects of classification as internal reserves." He also proposed that information related to treasury stock acquisition, such as profit cancellation and net acquisition amount of treasury stock, be disclosed together in dividend information in business reports.

Professor Hwang suggested as an improvement that dividend information in business reports should disclose profit cancellation and net acquisition amount of treasury stock together. Furthermore, he added that in cash dividend payout ratio disclosures, the effects of treasury stock acquisition and profit cancellation should be reflected by introducing actual payout ratio and deemed payout ratio, providing dividend information in three stages.

The cash dividend payout ratio is calculated by dividing cash dividends by net income, but since the effects of treasury stock acquisition and profit cancellation are not included, it may appear understated.

In the comprehensive discussion, there was general agreement on the additional provision of accounting information related to dividends and treasury stock treatment.

Professor Song Min-seop of Sogang University stated that if different accounting treatments are applied to the same economic event depending on its form, resulting in different dividend amounts, it could be problematic. Park Se-hwan, standing member of the Korea Accounting Standards Board, said that as a priority, alternatives such as recommending or encouraging voluntary disclosure of dividend and treasury stock information in notes could be considered.

Kang Kyung-jin, accounting system team leader at the Korea Listed Companies Association, pointed out, "While Japan’s financial statement presentation methods and distributable profit calculation methods are consistent, Korea’s Commercial Act structure, which deducts distributable profits from net assets, is inconsistent." Choi Jun-seon, honorary professor at Sungkyunkwan University Law School, argued, "In Korea, where there is no defense mechanism for management rights, treasury stock holdings are also used as a means of defending management rights. With the increasing shareholder return demands from institutional investors such as the National Pension Service, a comprehensive review and development of accounting standards, the Commercial Act, and related legal systems are necessary."

Professor Son Sung-kyu of Yonsei University, who chaired the seminar, said, "It is necessary to closely examine the alternatives discussed at the seminar within the institutional framework," adding, "IFRS entrusts the accounting treatment methods to the autonomy of each country rather than specifying them concretely, so it is essential to continuously strengthen the competitiveness of Korean accounting standards by reflecting changes in related laws and corporate environments."

This content was produced with the assistance of AI translation services.