Income statements set for major overhaul next year, FSS urges early preparation

A sweeping overhaul of how companies prepare their financial statements takes effect next January, requiring firms to classify income statement revenues and expenses into five categories and disclose performance metrics used internally by management. Because the changes apply retroactively to prior-period financial data, the Financial Supervisory Service is urging companies to begin thorough preparations now.

According to the FSS on Tuesday, K-IFRS No. 1118 — "Presentation and Disclosure in Financial Statements" — becomes mandatory in about three months. Once in force, the standard will fundamentally reshape how financial statements are presented and disclosed.

Companies will be required to classify income statement revenues and expenses into five categories — operating, investing, financing, income tax, and discontinued operations — and report subtotals for each. They must also disclose in the notes management-defined performance measures (MPMs) and a breakdown of operating expenses by nature and function.

Because the standard applies retrospectively, companies must also restate historical financial information presented for comparison in their first set of financial statements prepared under the new rules.

The FSS said companies should use actual data to draft and verify financial statements under K-IFRS No. 1118 in advance, and correct any errors or gaps before the standard takes effect.

Firms should compare their current presentation and disclosure methods against the new standard's requirements to identify key accounting issues — including the classification of revenues and expenses by category, the definition of primary business activities, and MPMs — and determine whether additional data collection or system changes are needed.

Based on preliminary analysis, companies should document their accounting policies and judgment criteria for each major issue, and update their systems — including account codes, mapping frameworks, and financial statement and disclosure templates — along with related internal control procedures.

"Gaps identified in accounting policies, data, systems, and closing procedures during the drafting and verification process must be addressed," the FSS said. "Companies should conduct a final review of their overall readiness, from data collection through to financial statement preparation."

The FSS also called for companies to faithfully disclose in their third-quarter financial statements the major impacts identified to date — including anticipated changes in accounting policies, reasons for shifts in operating profit or loss, and MPM-related matters.

"We plan to work with related organizations — including the Korea Listed Companies Association, the Kosdaq Listed Companies Association, and the Korean Institute of Certified Public Accountants — to encourage preparation for the new standard and continue providing education on key accounting issues," the FSS said.

The FSS has also launched an internal control review targeting operators of institutional private equity funds. The regulator said it would conduct sequential reviews of roughly 30 domestic PEF-dedicated managers registered in Korea starting this month, covering internal control practices, the dissemination of best practices, and guidance on areas requiring improvement. The initiative comes about six months after the FSS published its "Standard Internal Control Guidelines for General Partners of Institutional Private Equity Funds" in March, with the aim of embedding a culture of self-regulation.

In the review, authorities plan to examine not only whether firms have formally put internal rules in place, but also whether their internal control systems are functioning in practice. Five areas will be scrutinized: internal control organization and framework, compliance officer operations, information-flow management, conflict-of-interest assessment, and the management of employees' financial investment product transactions.