FSS: "Definition of Operating Profit to Change... Differences Between Old and New Operating Profit Must Be Clearly Disclosed"

Definition of Operating Profit and Loss Changes Under K-IFRS No. 1118

Disclosure of Management-Defined Performance Measures Introduced

The Financial Supervisory Service has urged companies to specifically disclose changes in operating profit and loss and their causes resulting from the introduction of new accounting standards. This is because the calculation method for operating profit and loss is changing, which may result in different profit and loss outcomes compared to previous results.

The Financial Supervisory Service announced on April 14 that it has distributed exemplary cases of prior footnote disclosure in accordance with the introduction of Korean International Financial Reporting Standards (K-IFRS) No. 1118.

This measure was prepared to help companies publicly disclose changes in advance before the implementation of K-IFRS No. 1118, which was established in December last year. Under No. 1118, companies are required to disclose in advance the impact of the new accounting standards before their application.

The most significant change resulting from the adoption of No. 1118 is the category of operating profit and loss. Previously, only profits and losses related to operating activities were considered operating profit and loss, but under No. 1118, all income and expenses that do not fall under the investment or financing categories are considered operating profit and loss. In addition, to enhance transparency in disclosures of non-GAAP financial information, new disclosure requirements related to management-defined performance measures (MPM) will also be introduced.

When implementing No. 1118, companies must disclose the classification of operating profit and loss categories, the previous level of operating profit and loss, and the differences from the previous operating profit and loss, all in the footnotes. They must also specifically explain the changes in operating profit and loss and their causes resulting from the reclassification of profit and loss. Furthermore, if a company’s main business involves investing in specific assets, the classification of profit and loss categories may change, and information related to this must also be provided. For example, companies mainly engaged in real estate investment will now classify real estate investment activities under the operating category, not the investment category.

Regarding MPM disclosures, companies must also provide information such as the definition of MPM and disclosure requirements. If adjusted operating profit and loss is assessed as an MPM, the disclosure must include the reasons for reporting it, the calculation method, and details of adjustments between the adjusted operating profit and loss and the operating profit and loss under No. 1118. If the MPM has not yet been finalized, the progress of the related evaluation must be disclosed.

In accordance with the establishment of No. 1118, companies must also include information revised similarly to K-IFRS No. 1007. When applying No. 1007, they must specify exactly how much cash flow results from operating, investing, and financing activities, and must include an explanation that interest received and dividend income previously classified as operating cash flows are now classified as investing cash flows.

A representative from the Financial Supervisory Service stated, "Prior to the introduction of the new accounting standards, we will provide guidance on exemplary cases of prior footnote disclosure so that companies can thoroughly analyze the main impacts and provide sufficient disclosure."

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