K-GAAP vs. K-IFRS: which accounting framework should a Korean entity adopt?

One of the questions frequently raised by foreign companies establishing a new entity in Korea is whether the Korean entity may apply IFRS, or whether it is required to maintain separate accounting records and prepare financial statements under Korean local GAAP (K-GAAP).

In principle, non-listed companies in Korea may choose to apply either Korean International Financial Reporting Standards (“K-IFRS”) or Korean Generally Accepted Accounting Principles (“K-GAAP”). Accordingly, foreign-invested entities are not necessarily required to maintain separate sets of books for local statutory reporting and group reporting purposes.
 

Accounting frameworks applicable in Korea

Under K-IFRS, financial reporting is based on consolidated financial statements and the application of fair value measurement, whereas K-GAAP primarily adopts separate financial statements and the historical cost principle. In addition, K-IFRS follows a principles-based approach, while K-GAAP is generally considered more rules-based. The choice of accounting framework may vary depending on the nature and size of the company, including whether it is listed, privately held, or operates in a regulated industry.

K-IFRS (Korean International Financial Reporting Standards)

K-IFRS is the Korean adoption of International Financial Reporting Standards (IFRS) and is mandatory for:

• Listed companies in Korea (excluding KONEX-listed companies)
• Companies preparing for listing in Korea (excluding KONEX)
• Certain financial institutions (such as financial holding companies and banks)

K-GAAP (General Standards for Non-Public Entities)

K-GAAP is an accounting framework available to companies that are not subject to the mandatory application of K-IFRS. Compared to K-IFRS, K-GAAP provides a more practical framework for many privately held companies, with relatively simplified disclosure requirements. In addition, certain accounting reliefs are available for small and medium-sized enterprises (“SMEs”), including exemptions in areas such as deferred tax accounting. Accordingly, non-listed companies may choose either K-GAAP or K-IFRS based on their reporting requirements and operational needs.
 

What is commonly seen in practice?

In practice, even where the parent company applies IFRS, Korean entities often maintain their accounting records under K-GAAP. In particular, this approach is commonly adopted in the following situations:

• The parent company applies an accounting framework other than IFRS, such as US GAAP or German GAAP.
• The primary objective is to comply with Korean statutory requirements, tax filing obligations, and local financial reporting requirements.
• Significant IFRS adjustments, such as lease accounting and provisions, are managed centrally at the group level.

However, some companies elect to adopt K-IFRS in order to align their local accounting framework with the group reporting framework and minimize separate conversion procedures.

Therefore, when selecting an accounting framework, companies should consider operational efficiency, group reporting requirements, and the group's accounting policies and practices to determine the most appropriate framework for their Korean operations, rather than simply following the accounting framework adopted by the parent company.