Standards for the Combined

Financial Statements

The Securities & Futures Commission(SFC) issued the standards for the combined financial statements on October 21, 1998.

Financial Supervisory Commission

Please direct any question to Youngsoon Cheon (phone: 3771-5765)

1. Introduction of the Combined Financial Statements

The Korean accounting standards require firms that have subsidiaries to prepare consolidated financial statements. However, because of the unique chaebol ownership structure in Korea, several consolidated financial statements are issued within the same chaebol. Further, a parent-subsidiary relationship exists when a company as the largest shareholder directly or indirectly owns more than 30% of another companys voting interest. In contrast, an affiliate is any company that belongs to a chaebol regardless of the ownership relation. Therefore, an affiliate that is not a subsidiary of another affiliate is excluded from consolidated financial statements although it is under the common control of the chaebol. In order to address these issues, the Korean Congress passed a bill that requires combined financial statements for chaebols for fiscal years starting from January 1, 1999. The objectives of combined financial statements are to present financial positions, operating results, and cash flows of chaebols as a whole under the assumption that chaebol-affiliated companies constitute a single economic entity (the difference between consolidated financial statements and combined financial statements is depicted in figure 1).

2. Due Process

The Standards for the combined financial statements has been promulgated after several deliberations of the Korea Financial Accounting Standards Committee (KFASC) and solicitations of opinions from interested parties. The KFASC comprising 11 members from academia, businesses, accountants, and government deliberated on the standard at each step of the following due process.

- KFASC's deliberation on an action plan : January 1998

- Discussion memorandum drafted: May 1998

A Steering Committee was formed as an advisory committee in the process of drafting the discussion memorandum.

- KFASC's deliberation on the discussion memorandum: end of May 1998

- Exposure Draft released for public comments: August 1998

- Public hearing : August 31, 1998

- KFASC's deliberation on the comments received : September 7, 1998

- KFASC's deliberation on the final draft : September 21, 1998

- Securities & Futures Commission (SFC)'s deliberation and the final standards issued : October 21, 1998

3. Main Features of the Standards

a. Scope

According to the External Audit Law and its Decree, the 30 largest chaebols designated by the Fair Trade Commission are required to issue the audited combined financial statements. The combined financial statements include all domestic and foreign affiliates that are under the effective control of an individual owner and his/her relatives. The concept of effective control is consistent with International Accounting Standards 27 and other international best practice.

b. Combined financial statements

The combined financial statements consist of the combined balance sheet, combined income statement, and combined cash flow statements. The combined balance sheet, combined income statement, and combined cash flow statements present chaebols' financial positions, operating results, and cash flows information, respectively. These statements are prepared for current and previous years to enhance comparability over time. However, only the current year's combined balance sheet and combined income statements are required in the first year that a chaebol becomes subject to the combined financial statements. The statement of changes in combined equity is disclosed in a footnote.

c. Elimination of transactions among affiliated companies

The combined financial statements are prepared under the assumption that chaebol affiliates under the common control constitute a single economic entity. Thus, intragroup balances, intragroup transactions, and resulting unrealized profits and losses must be eliminated in the preparation of the combined financial statements, unless unrealized profits and losses are immaterial. The principle of 'substance over form' is used in identifying intragroup transactions.

d. Footnote disclosures of intragroup transactions

Footnote disclosures required by the standards are classified into four categories: general information, accounting policies adopted in the preparation of the combined financial statements, intragroup transactions, and segmental information. Disclosure requirements for the general information and accounting policies are consistent with disclosure requirements of international standards.

The standards also require footnote disclosures of intragroup transactions, including intragroup ownership interests, cross guarantees, cross pledging, intragroup borrowings, and intragroup sales. Especially, information useful in estimating risk of chaebols is presented in a form of matrix in which both related parties of transactions are shown with transaction amounts (see figure 2 for an example of the matrix disclosure).

Separate combined balance sheets and combined income statements will be disclosed in a footnote for financial affiliates and non-financial affiliates to enhance understandability of the combined financial statements. Further, segmental information by major industries and geographic regions will be footnoted.

e. Effective Date

The Standards for the Combined Financial Statements become operative for fiscal years beginning on or after January 1, 1999.

[Figure 1] Comparison of Consolidated Financial Statements and

Combined Financial Statements

[Figure 2] Matrix Disclosure

Cross Guarantees


Name of Chaebol (unit: ₩)


















1) An affiliate that guarantees debt of another affiliate within the same chaebol

2) An affiliate that is guaranteed by another affiliate(s) within the same chaebol