Value-relevance of the regulatory non-GAAP adjustments in the Korean banking industry

Abstract

IAS 39 requires firms to use the incurred-loss model for bad debt expenses. However, the Korean Financial Supervisory Commission requires banks to record additional loan-losses based on the expected-loss model. These non-GAAP adjustments include adjustments to book values as well as net income. We examine the incremental value-relevance of these non-GAAP adjustments and fail to find incremental value-relevance over unadjusted IFRS net income. However, the non-GAAP book value adjustment does have a partial, incremental value-relevance over unadjusted book values of equity. In addition, the non-GAAP loan-loss adjustments required by regulators may be disclosed either on the face of the financial statements or in the notes, but the disclosure location also appears to lack value-relevance.