Abstract

Korea has officially adopted International Financial Reporting Standards(hereafter “K－IFRS”) in2011, and one of the major changes in Korea’s business environment that have resulted from theadoption is consolidated financial statements becoming primary financial statements of an entity. Particularly, as all listed and companies are required to prepare and disclose their consolidatedfinancial statements for quarterly reporting starting from 2013, understanding of consolidatedfinancial statements has become more important than ever. In addition, starting from 2013, the K－IFRS 1027 “Consolidated and Separate FinancialStatements” and SIC Interpretation No. 2012 “Consolidation：Special Purpose Entities” werereplaced by K－IFRS 1110 “Consolidated Financial Statements.” K－IFRS 1110 provides variouscases related to application of de facto control, which had not been clearly defined in the previousstandards, thus providing additional guidelines to help entities make decisions on whether toconsolidate the financial statements of their subsidiaries with less than 50% ownership interest. However, no comprehensive study has been done to date on how many entities have actuallyincluded their subsidiaries with less than 50% ownership in their consolidation with theapplication of substantial and de facto control and the basis they used for the inclusion. Accordingly, this study analyzed the actual applications of substantial and de facto control andthe respective bases used for the 1,102 entities that have disclosed their consolidated financialstatements as primary financial statements as of the end of 2011. Our study revealed that the 1,102 entities have, on average, 6.57 subsidiaries that are subject toconsolidation and that the average ownership percentage is 88.48%. In addition, of the 1,102entities, there are 184 entities that have subsidiaries of less than 50% ownership and the averageownership is 36.40%. Meanwhile, we analyzed the bases used for the application of de factocontrol for those 184 entities, and it was identified that 41.7% of the bases are SPE－related,11.2% related to having a power to appoint and dismiss more than half of the members of theboard, 9.2% related to the power to exercise voting rights granted by wide stock dispersion and 6.9% related to the power to exercise voting rights granted by agreements. Lastly, application of substantial and de facto control is, in part, clearly supported by relevantstandards, but as we reviewed the actual practices, we acknowledged that depending on the intentor strategic choices of management, decisions may be changed. Therefore, in order toappropriately support the decision making of information users, it seems very important to disclosea basis for consolidation in more detail and apply it in a continuous and consistent manner whenincluding subsidiaries in consolidation.

Keywords

• K－IFRS
• Consolidated financial statements
• De Facto Control

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