Accounting Standards for Derivatives in Korea: A Comparison with U.S. GAAP and International Accounting Standards
Jin, Jongdae, Huh, Sung K., Journal of International Business Research
The rapid changes during last several years in size and diversity of the Korean derivative market may warrant the introduction of new accounting standards for derivatives in Korea. One feasible and effective way to obtain ideas for new standards fitting into Korea derivative market is to compare Korean, US, and international accounting standards for derivatives. Thus, the objectives of this paper are two-fold. The first is to make a comparison between Korean, US, and international accounting standards for derivatives. The second is to make a recommendation for new accounting standards for derivatives in Korea. To achieve these objectives, the following steps were taken. First, compare current Korean, US, and international accounting standards for derivatives. Secondly, a literature survey on this issue of derivative accounting and examination on current trading practice of derivatives in Korea were conducted to draw an insightful inference for derivative accounting standards setting process. Finally, make a recommendation for new accounting standards for derivatives in Korea. Potential contributions of this study would be to setting new accounting standards for derivatives in Korea and to developing a general body of knowledge that provides meaning insights to accounting standards for derivatives.
Derivative instruments (derivatives in short, hereafter) are instruments whose value depends on the values of other more basic underlying variables. In spite of relatively short trading history, derivatives become increasingly important in the Korean capital market (1). The derivative market in Korea has grown dramatically in terms of trading volume, trading value, the number of products, and their diversity. 17 derivatives, eight different types, are currently traded in two security exchanges: i.e., 8 derivatives in Korean Futures Exchange (KOFEX) and 9 derivatives in Korean Security Exchange (KSE).
Ever since its opening in 1999, KOFEX has been growing so much that the trading volume for the year 2001 surpassed 10 million contracts and the trading value exceeded 1,000 trillion Korean won (i.e., equivalent to approximately US$ 860 billion). The trading value of derivatives in KSE also increased dramatically that it reached about 1,176 trillion Korea won (i.e., equivalent to US$ 1,022,billion) in 2001. The growth of Korean derivative market has been significantly pronounced during the last two-year period starting late 2000. Korean derivative market increased more than 400% and ten new derivatives were listed in KOFEX or KSE during the period (2).
Accounting and reporting of derivatives are standardized in Korean Financial Accounting Standards (KFAS), Accounting Standards (AS) for security industry, & Accounting Standards for banking industry. KFAS were originally issued in April 1998 and revised in August 2000 by Korean Financial Accounting Standards Board, which is a Korean counterpart of FASB in US, while AS were originally issued in December 1998 and revised in December 1999 by Financial Supervisory Service of Korea, which is a Korean counterpart of SEC in US. Therefore, the above- mentioned significant changes in Korean derivative market during 2001 and 2002 were not incorporated in these standards. These standards require an entity to recognize derivatives as assets or liabilities at their fair value. Any gains or losses on derivatives due to fair value changes should be recognized as current income items unless the purpose of holding derivatives is hedging. There are brief disclosure requirements for derivatives in the standards, too. But, in general, the current standards are not articulate and specific enough to capture the diverse nature of derivatives traded in Korea. The rapid changes in size and product diversity of the Korean derivative market may warrant the introduction of more advanced accounting and reporting standards for derivatives in Korea. …