별도재무제표의 유용성 제고 방안에 관한 연구 = A Study on the Usefulness of Separate Financial Statement under K-IFRS: Proposed Reform Measures to Improve the Usefulness

다국어 초록 (Multilingual Abstract)

This paper investigates the usefulness of the separate financial statements, defined as individual financial statements presented by a parent company, under the K-IFRS regime. It further tests whether the usefulness of separate financial statements can be enhanced with the application of equity method by parents to account for their investments in subsidiaries, associates or joint ventures. We first conduct questionnaire survey targeting accounting practitioners employed by companies, financial analysts, external auditors, and other users of accounting information, to examine the extent of the usage, perspectives on pros and cons, and potential improvements of the current separate financial statement system. We next conduct a series of empirical analyses to determine the quality of separate financial statement information from the viewpoint of information users. Specifically, we test value relevance of accounting numbers available from the current separate financial statements and examine signs of possible earnings management. In addition, we examine whether the equity method as applied to the parents` investment in subsidiaries and associates would improve the value relevance of the separate financial statement information. We also constructed a validation sample consisting solely of holding companies, arguably the most vulnerable to the exemption of equity method, to replicate the empirical analyses. Main results of the analyses are summarized as follows. Firstly, the questionnaire survey shows that various stakeholders rely on separate financial statements as much as the consolidated financial statements for a variety of purposes. Accounting practitioners as well as auditors point out the burdens associated with the preparation and disclosure of separate financial statements as one of the main practical difficulties. The information user group such as financial analysts and other users on the other hand, indicated that the lack of consistency and comparability between consolidated and separate financial statements as the major obstacle in understanding the true financial position and operating performance of a parent company as a separate entity. More than half of the respondents to the survey approved of the adoption of equity method in lieu of cost or fair value method, and notably, the proportion in favor of the equity method exceeded 89% for information user group. The results of empirical analyses show that the individual financial statements surpass separate financial statements in terms of the explanatory power of accounting earnings and net book value for the stock price levels. Earnings numbers available from separate financial statements exhibit greater degree of income smoothing, lower and higher observed frequencies corresponding to slightly negative and positive intervals respectively relative to those from individual financial statements on the earnings level distribution, indicating greater degree of earnings management to avoid loss reporting. Furthermore, equity method conversion appears to improve the explanatory power of accounting information for firm value as applied to the valuation of parent`s investment in subsidiaries and associates. Equity conversion effect variable turns out to have an incremental value relevance over earnings and book value of separate financial statement. The conversion effect variable is proxied by the difference between controlling interest on net income as reported in the consolidated comprehensive income statement and the net income reported in the separate comprehensive income statement of a parent company. In sum, these results corroborate the limitations inherent in the current K-IFRS based separate financial statements despite their wide-spread use. This paper also suggests that the adoption of equity method is likely to mitigate some of those limitations effectively.