Regulatory Authorities Establish Supervisory Guidelines to Resolve Accounting Uncertainties Due to COVID-19

[Asia Economy Reporter Eunmo Koo] Due to the impact of the novel coronavirus infection (COVID-19), uncertainty has arisen in the preparation of corporate financial statements. As a result, regulatory authorities have decided that if companies make their best estimates based on available internal and external evidence at the time of preparing financial statements and disclose sufficiently, any subsequent changes to those estimates will not be considered accounting errors.

On the 10th, the Financial Services Commission, the Korea Accounting Standards Board, the Korean Institute of Certified Public Accountants, and the Korea Exchange announced supervisory guidelines to resolve accounting uncertainties related to the application of asset impairment standards by companies amid the COVID-19 situation.

According to these supervisory guidelines, if the assumptions and best estimates used by a company to estimate future cash flows are not clearly unreasonable, they will not be judged as accounting errors. Additionally, when estimating discount rates, even if there is no change in the company's fundamental strength, abnormal increases or decreases in market volatility due to COVID-19 are addressed by presenting an acceptable range of discount rate adjustments in the market to eliminate such effects. However, companies must document the assumptions and grounds used in measuring value in use and disclose them sufficiently in notes or other disclosures, and auditors must review the company's judgments.

These supervisory guidelines on the application of accounting standards are a follow-up measure to the Financial Services Commission's earlier announcement to provide supervisory guidelines on the interpretation of international financial reporting standards (IFRS), which are principle-based, to resolve uncertainties in corporate accounting treatments, especially for IFRS with significant real economic impact.

If a company has indications of impairment in its held assets, it must perform impairment tests to estimate the recoverable amount of the assets and reflect this in the financial statements. However, problems mainly arise in the value-in-use measurement process, which approaches from the company's own perspective, where the recoverable amount is the maximum. Among these, when the value in use is generally higher than the fair value less costs of disposal, companies have incentives to overvalue the value in use, while auditors tend to evaluate conservatively, causing issues. Especially in preparing the 2020 financial statements, there is uncertainty in estimating the end of COVID-19 and its impact on companies.

These guidelines aim to resolve market uncertainties by providing specific supervisory instructions within the reasonable interpretation scope of IFRS, rather than introducing new accounting standards or interpretations. Therefore, companies may apply accounting treatments differently from the guidelines based on reasonable grounds according to individual circumstances.

Regulatory authorities expect that by providing these supervisory guidelines, uncertainties in estimates related to COVID-19's impact on companies will be resolved, potential conflicts between companies and external auditors will be alleviated, and adverse effects such as deterioration of financial figures due to excessive recognition of impairment losses unrelated to the company's fundamental strength will be prevented.

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