SUMMARY OF SIGNIFICANT DIFFERENCES BETWEEN Korean GAAP and US GAAP

SUMMARY OF SIGNIFICANT DIFFERENCES BETWEEN

KOREAN GAAP AND U.S. GAAP

 

 

In many respects, Korean GAAP are substantially the same as U.S. GAAP.  However, there are certain significant differences between Korean GAAP and U.S. GAAP which are summarized below.

 

This summary should not be taken as exhaustive of all Korean/U.S. GAAP differences.  No attempt has been made to identify all disclosure, presentation or classification differences that would affect the manner in which transactions or events are presented in the financial statements or notes thereto.

 

Consolidation of Subsidiaries

 

Under Korean GAAP, consolidated financial statements, including the accounts of majority owned (over 50%) subsidiaries and substantially controlled affiliates having assets in excess of ￦7 billion, are prepared in addition to the primary financial statements.  Generally, substantial control is deemed to exist when the investor is the largest shareholder owning more than 30% of the investee’s voting shares.  Further, the equity method is applied for certain minority owned companies in the consolidated financial statements.  Finally, Korean GAAP does not require consolidation of subsidiaries where activities are dissimilar from the parent.

 

U.S. GAAP generally requires consolidation of all majority owned subsidiaries and use of the equity method for minority owned (20% to 50%) companies.

 

Financial Statements

 

Under Korean GAAP, the statement of shareholders’ equity need not be prepared.  Instead, the statement of appropriations of retained earnings is presented as a basic financial statement.

 

U.S. GAAP requires the statement of shareholders’ equity to be disclosed in the financial statements.

 

Business Combinations

 

Korean GAAP does not distinguish between the purchase and pooling of interest methods of accounting for business combinations as required by U.S. GAAP.  Under Korean GAAP, an acquiring enterprise records the assets and liabilities of the acquired enterprises at fair value with some exceptions on the date of combination.  Korean GAAP also requires purchased goodwill to be written-off over no more than five years.  Negative goodwill is treated as a “gain on business combination” and is recorded as capital surplus.

 

Valuation of Marketable Securities and Investments

 

Under Korean GAAP, marketable equity securities held for trading purposes are required to be stated at market value.  Bonds held for trading purposes are stated at cost or market value, at the Company’s option.  Unrealized gains or losses from marketable securities are required to be included in non-operating income or expenses.  Investments in equity securities to be held for more than one year are required to be stated at market value, with the exception of equity investments in affiliates and non-marketable equity securities which are to be stated at cost.  Unrealized gains or losses on investments in equity securities to be held for more than one year are required to be included as a component of shareholders' equity.  Equity investments representing one 20% ownership may be stated using the equity method.  Equity securities of affiliated companies and non-marketable equity securities for which market value (marketable securities) or net book value (non-marketable securities) declines below acquisition cost and is not expected to recover are required to be stated at such market value or net book value.  Bonds not held for trading purposes are required to be stated at acquisition cost, less amortization of discount or premium.

 

Under U.S. GAAP, investments in marketable equity securities that have a readily determinable fair value, excluding investments for which the equity or consolidation methods of accounting apply, and all investments in debt securities are classified in three categories and are generally accounted for as follows :

 

(a)  debt securities that the company has a positive intent and ability to hold to maturity are classified as “held to maturity securities” and reported at amortized cost, unless a decline in value below cost is other than temporary ;

(b)  debt and marketable equity securities that are bought and held for the purpose of selling them in the near term are classified as “trading securities” and reported at fair value, with unrealized gains and losses included in earnings ; and

 

(c)  debt and equity securities not classified as either held to maturity securities or trading securities are classified as “available for sale securities” and reported at fair value, with unrealized gains and losses excluded from earnings and reported in a separate component of shareholders’ equity.

 

Revaluation of Property, Plant and Equipment and Depreciation

 

Under Korean GAAP, property, plant and equipment are recorded at cost, except for upward revaluation in accordance with the Assets Revaluation Law of Korea to give accounting recognition to some extent to the declines in purchasing power of the Korean won.  Such revaluation presents productive capacity and buildings at their appraised value, and land at the prevailing market price, as of the effective date of the revaluation.  The revaluation increment, net of a 3% asset revaluation tax, is first applied to offset accumulated deficit, if any, and the remainder may either be credited to capital surplus or transferred to capital stock.  In connection with the revaluation, a new basis for depreciation is established.

 

U.S. GAAP does not generally permit such revaluation, except in connection with certain acquisitions or changes in control.

 

Deferred charges

 

(1) Research and development costs

 

Under Korean GAAP, non-recurring expenditures incurred for research and development of new products or advanced technologies, from which future economic benefit is expected, are generally deferred as research and development costs and amortized over not more than five years using the straight-line method.  However, if a substantial amount of research and development costs are incurred in respect of particular research activity, such costs may be amortized over period not to exceed five years, beginning in the year the related revenue is realized.  If the possibility of recovering such costs is remote, the unamortized balance is required to be charged to expense.

 

Under U.S. GAAP, research and development costs are generally expensed as incurred.

(2) New stock issuance costs

 

Under Korean GAAP, new stock issuance costs are generally deferred and amortized over a period not to exceed three years using the straight-line method.  However, effective from December 12, 1998, new stock issuance costs are deducted from the proceeds received and credited as paid in capital.

 

Under U.S. GAAP, stock issuance costs are deducted from the proceeds received and credited as paid-in capital.

 

(3) Debenture issuance costs

 

Under Korean GAAP, debenture issuance costs are generally deferred and amortized over the repayment period of the debentures using the straight-line method.  However, effective from December 12, 1998, debenture issuance costs shall be presented as a deduction from to the face value of debenture as a discount or premium on debentures.

 

Under U.S. GAAP, such expenses are deferred and amortized over the repayment period using the effective interest method.

 

Proceeds of Convertible Bonds

 

Under Korean GAAP, a portion of the proceeds from the issuance of convertible bonds is accounted for as attributable to the conversion feature.

 

Under U.S. GAAP, no portion is accounted for as attributable to the conversion feature.

 

Income Taxes

 

Under Korean GAAP, the provision for income taxes in based on corporate income tax and resident tax surcharges that are currently payable with respect to the current year.  Deferred income taxes not provided for temporary differences between income before taxes for financial reporting purposes and taxable income for income tax purposes.  There are certain charges which reduce taxable income in the year in which they are appropriated as special reserves.  Such charges are reported as appropriated retained earnings in the financial statements.  There special reserves appropriated for tax purposes are to be reversed over the next two to five years in the manner stipulated by Korean tax law.  The effect of these reversals is to increase taxable income in the year in which such reversals occur.  However, for fiscal years beginning on or after April 1, 1998, deferred income taxes are to be provided.

 

U.S. GAAP requires deferred income taxes, for all material temporary differences between the carrying value of assets and liabilities for financial statement purposes and their respective tax bases.  A valuation allowance is provided on deferred tax assets to the extent that it is not “more likely than not” such deferred tax assets will be realized.

 

Retained Earnings

 

Korean laws and Korean GAAP require the appropriation of retained earnings in certain circumstances.  The Korean commercial law requires the company to appropriate at least 10% of cash dividends to a legal reserve, until such reserve equals 50% of the capital stock.  This reserve is not available for payment of cash dividends but may be transferred to capital stock in connection with stock dividends or used to reduce any accumulated deficit through appropriate stockholders’ action.

 

Under U.S. GAAP, appropriation is permitted but not required.

 

Leases

 

Under Korean GAAP, lease agreements are accounted for as capital leases if one of the following conditions is satisfied ;

 

(1)  bargain purchase option,

(2)  transfer of ownership at the end of the lease term,

(3)  term of the lease agreement is longer than 75% of the estimated economic life of the leased property, or

(4)  discounted present value of the basic lease rental is more than 90% of the fair value of the leased property as of commencement date of the lease.

 

U.S. GAAP includes of fourth test, specifying capital lease treatment if the present value of minimum lease payments equals or exceeds 90% of the fair value of the leased asset.  U.S. GAAP also specifies capital lease treatment if the lease term exceeds 75% (rather than 100%) of the economic life of the asset.

Product Warranty Costs

 

Under Korean GAAP, there are no specific accounting requirements for warranty costs.  However, in practices, warranty costs are generally expensed as incurred.

 

Under U.S. GAAP, estimated warranty cots are generally accrued as liabilities at the time the related products are sold.

 

Earnings Per Share

 

Under Korean GAAP, earnings per share is calculated and disclosed by dividing net income attributable to common stock by the weighted average number of shares of common stock outstanding during the period.  Neither common stock equivalents nor other potentially diluted securities are considered.

 

U.S. GAAP requires consideration of the potentially diluted effects of convertible securities or other common stock equivalents outstanding in calculating earnings per share.  Further, U.S. GAAP requires, in certain circumstances, presentation of primary and fully diluted earnings per share.

 

Contingent Liabilities

 

Under Korean GAAP, contingent losses are generally recognized when ultimately incurred; accruals are not generally provided for probable and reasonably estimable losses as required under U.S. GAAP.  Footnote disclosure of loss contingencies is required,

 

Accounting Changes

 

Effective December 12, 1998, Korean GAAP requires the recording of the cumulative effect on prior years of certain accounting changes in the year of the change or, in certain cases, retroactive restatement as required by U.S. GAAP.

 

Segment and Quarterly Information

 

Under Korean GAAP, segment and quarterly information need not be disclosed in the notes to the financial statements as required by U.S. GAAP for public companies.

 

Prior Period Adjustments

 

Under Korean GAAP, certain transactions are accounted for as extraordinary gain or loss in the statement of income of current year.  Such transactions include additional payments of corporate income taxes for previous years, refinement of previous years’ estimates and resolution of matters outstanding from previous years.  However, effective December 12, 1998, the accumulated financial effect of prior period error corrections on assets and liabilities shall be reflected in the retained earnings, and the comparative prior years financial statements, if presented, shall be restated.

 

U.S. GAAP generally requires prior period adjustments only for a material correction of an error in the financial statements of a previous period, a material change in certain accounting principles, or in certain other, very limited, cases.