KLRI : KOREA LEGISLATION RESEARCH INSTITUTE

Ⅰ. Backgrounds and Purposes

▶ Capitalist accounting and socialist accounting

○ Capitalist accounting is a process of measuring, recording and delivering various information on the activities of an economic entity so that accounting information users can make rational decisions. Socialist accounting has great significance as a device for the nationwide management and control over the socialist planned economy.

▶ ‘Bookkeeping’was changed to‘socialist accounting’after the 7.1 reformative measures in 2002.

○ Whereas bookkeeping is a system within an institution or an enterprise, socialist accounting after the 7.1 reformative measures in 2002 is established as a ‘socialist’system by organizing ‘general accounting (jong-hap-hoe- gye)’suitable for the nationwide management of the planned economic system.

○ North Korea (“NK”) maintains a dual system of socialist accounting for the domestic economic sector and accounting for the foreign economic sector.

▶ Existing research and the purpose of this study

○ Research on North Korean accounting system has mainly focused on the domestic economic sector and that on the foreign economic sector is relatively insufficient. In particular, it is difficult to find a study on the development of accounting-related legal system for the foreign economic sector during the Kim Jong-un era.

○ The purpose of this study is to comprehensively review the current state of accounting-related legal system for the foreign economic sector in NK. Also, prospective changes will be discussed in comparison with the development process, system and characteristics of accounting-related legal system, and the process of adopting the International Financial Reporting Standards (“IFRS”) in South Korea and China.

 

Ⅱ. Major Contents

▶ Recent changes in accounting-related legal system for the foreign economic sector in NK

○ 「Law on the Accounting for Foreign-invested Businesses」(enacted in 2006, amended in 2011), 「Law on the Audit for Foreign-invested Businesses」(enacted in 2015) and 「Law of the Financial Management of Foreign-invested Businesses」(enacted in 2008, newly enacted in 2016) were enacted or amended.

○ As to 「Law on the Audit for Foreign-invested Businesses」 and 「Law of the Financial Management of Foreign-invested Businesses」, the Enforcement Regulations (“ER”) and the Detailed Rules for enforcement regulations (“DR”) were adopted in 2016~2017.

○ Regarding the Rason Economic and Trade Zone, 「Rason Regulations on the Financial Management of Foreign-Invested Businesses」, 「Rason Accounting Regulations for Foreign-Invested Businesses」 and 「Rason Audit Regulations for Foreign-Invested Businesses」 were enacted in 2015. However, regarding the Gaesong Industrial Complex, there has been no change during the Kim Jong-un era.

▶ Accounting-related legal system for the foreign economic sector in NK

○ As a general accounting-related legal system for the foreign economic sector, there are 「Law on the Accounting for Foreign-invested Businesses」, 「Law on the Audit for Foreign-invested Businesses」 and 「Law of the Financial Management of Foreign-invested Businesses」. As to the special economic zones, there are accounting-related legal systems for the Rason Economic and Trade Zone and the Gaesong Industrial Complex.

○ Regarding the 「Law on the Accounting for Foreign-invested Businesses」, there are no ER and DR. 「Detailed Rules on the Accounting for Foreign-invested Businesses」(2008) is mentioned in an article of NK, but its contents are not confirmed. The additional details of accounting for foreign-invested businesses are stipulated in 「Law of the Financial Management of Foreign-invested Businesses」 and its ER and DR.

As to 「Law on the Audit for Foreign-invested Businesses」 and 「Law of the Financial Management of Foreign-invested Businesses」, the ER and the DR were adopted, respectively.

○ The accounting-related legal system for the Gaesong Industrial Complex includes 「Gaesong Accounting Regulations」, 「Gaesong Audit Regulations」, 「Gaesong Corporate Financial Regulations」 and its DR. In addition, there are four guidelines or standards such as 「Gaesong Accounting Standards」, 「Gaesong Audit Standards」, 「Gaesong Audit Guidelines」 and 「Gaesong Appraisal Standards」.

○ The accounting-related legal system for the Rason Economic and Trade Zone includes 「Rason Accounting Regulations for Foreign-Invested Businesses」, 「Rason Audit Regulations for Foreign-Invested Businesses」 and 「Rason Regulations on the Financial Management of Foreign - Invested Businesses」. Any detailed rules or guidelines thereto are not confirmed.

○ The ER to the general accounting-related laws for foreign-invested businesses were adopted by the Cabinet, but the‘Regulations’ for the special economic zones were adopted by the Presidium of the Supreme People's Assembly just like the general laws.

○ Although it is difficult to ascertain the overall consistency of the priority of application, the relevant legislation seems to have been made keeping in mind the application order of the accounting-related legal system for the special economic zones, the general accounting-related legal system for foreign-invested businesses and the IFRS.

▶ Major contents and characteristics of accounting-related legal system for the foreign economic sector in NK

○ The major accounting-related legal system reviewed (please refer to the main text for details) :

- 「Law on the Accounting for Foreign-invested Businesses」 

- 「Law on the Audit for Foreign-invested Businesses」, its ER and DR

- 「Law of the Financial Management of Foreign-invested Businesses」, its ER and DR

- 「Gaesong Accounting Regulations」, 「Gaesong Audit Regulations」 and 「Gaesong Corporate Financial Regulations」 (comparing to general laws for foreign-invested businesses)

- 「Rason Accounting Regulations for Foreign-Invested Businesses」, 「Rason Audit Regulations for Foreign-Invested Businesses」 and 「Rason Regulations on the Financial Management of Foreign-Invested Businesses」 (comparing to general laws for foreign-invested businesses)

○ In capitalist accounting, the accrual basis is applied for the recognition of revenue and expense and the settlement principle of rights and obligations is applied to the tax law. However, the general accounting -related legal system for foreign-invested businesses in NK uses the concept of ‘determination,’ which appears to be a mixture of the accrual basis and the cash basis, and is also different from the settlement principle of rights and obligations.

On the other hand, the accounting-related legal system for the Gaesong Industrial Complex applies the accrual basis, and that for the Rason Economic and Trade Zone does not stipulate specific details on the recognition of revenue and expense.

○ The general accounting-related legal system for foreign-invested businesses does not stipulate the concept of ‘residual value’ that is considered in the depreciation method of capitalist accounting. This appears to be due to the view that the depreciation is an accumulation for the purpose of renovation or renewal of fixed assets rather than cost allocation. On the other hand, the accounting-related legal system for the Gaesong Industrial Complex includes the concept of residual value, and the legal system for the Rason Economic and Trade Zone does not stipulate specific details on the depreciation method.

○ The general accounting-related legal system for foreign-invested businesses include relatively detailed rules for calculating labor costs (salaries). The accounting-related legal system for the Gaesong Industrial Complex also stipulate the standards for labor costs and cash prize, while the legal system for the Rason Economic and Trade Zone does not stipulate specific details on labor costs.

○ One characteristic item among expenses in the general accounting 

-related legal system for foreign-invested businesses is the ‘excess of prime costs,’ which seems to strongly reflect the nature of management accounting for internal management purposes rather than financial accounting.

○ The general audit-related legal system for foreign-invested businesses and that for the Rason Economic and Trade Zone include various types of audits such as  investment audit, settlement audit, calculation audit, liquidation audit, audit of transfer and delivery, audit of external assistance, audit of remittance, and audit of the change in the fixed assets. However, the relevant legal system for the Gaesong Industrial Complex focuses only on investment audit, settlement audit and liquidation audit.

○ Overall, the accounting-related legal system for the Gaesong Industrial Complex seems to be the closest to the capitalist accounting. The general accounting-related legal system for foreign-invested businesses and that for the Rason Economic and Trade Zone were enacted or amended around the same time, and have many similarities in contents. The accounting-related legal system for the Rason Economic and Trade Zone is relatively poor in its contents as there are no separate ER, DR or guidelines.

▶ Comparison with South Korean and Chinese accounting-related legal system

○ South Korea has already adopted the IFRS in its entirety. Thus, it is not so meaningful to estimate the relative position of NK’s accounting -related legal system for the foreign economic sector through comparison with South Korea.

○ China has reorganized both accounting-related legal systems in the domestic and foreign economic sectors after declaring the reform and opening-up policy, and later unified both legal systems. The IFRS has already been adopted to a large extent.

○ NK has shifted from a negative stance toward the IFRS to a practical or pragmatic stance starting from 2006. This change seems to be closely related to China's adoption of the new accounting rules in 2006, which largely adopted the IFRS.

○ NK's accounting-related legal system for the foreign economic sector seems to correspond to the initial stage of China's reform and opening up.

▶ Problems in accounting-related legal system for the foreign economic sector in NK

○ Problems or matters requiring improvement include :

- It was formed by borrowing or combining capitalist accounting as needed, and thus, does not have an overall consistent system.

- Accounting and tax areas are mixed.

- Laws, ER and DR were not systematic, and many overlapping contents were found.

- There are cases where the content of the same issue differs between related laws and regulations.

- The relationship between the general accounting-related legal system and that for the special economic zones is not clear.

- Even between the two accounting-related legal systems for special economic zones, there are differences in composition and specificity. It appears that each has been made separately without mutual linkage or adjustment processes. 

- It is not appropriate to apply general dispute resolution procedures such as ‘Shin-so' to accounting disputes that require accounting expertise.

▶ Prospects and suggested directions for the development

○ Regarding prospects, NK would probably adopt the IFRS gradually similar to China. The dual system of socialist accounting for the domestic economic sector and accounting for the foreign economic sector may be maintained for a considerable period of time.

○ Suggested directions for the development :

- Under the premise that the problem of international sanctions will ultimately be resolved and reform and opening will take place, the accounting-related legal system should be rearranged in a way that meets international standards.

- It is necessary to reorganize the legal system by transferring tax-related contents in the accounting-related legal system to the tax-related legal system.

- In the short-term, the matters to be stipulated in laws, ER, DR and guidelines need to be reorganized systematically and consistently, and it would seem reasonable to apply in the order of the accounting- related legal systems for special economic zones, the general accounting-related legal system for foreign-invested businesses and the IFRS.

- In the mid- to long-term, it would be desirable to integrate the general accounting-related legal system for foreign-invested businesses and the region-based accounting-related legal systems for special economic zones and to supplement the accounting-related legal system according to the size of company or the industry.

- It is necessary to research on the accounting theories as the basis of an integrated and systematic accounting-related legal system.

- It would be appropriate to adopt the IFRS gradually, similar to the case of China. 

- It is necessary to develop professional manpower with accounting expertise.

 

Ⅲ. Expected Effects

○ This study may contribute in gathering data for future research by reviewing the current state and possibility of changes in the accounting -related legal system for the foreign economic sector, summarizing the discussions in NK on the IFRS and comparing with the cases of South Korea and China.

○ This study may contribute in gathering data for future policy development for inter-Korean cooperation in the area of accounting -related legal system or for supporting NK in developing accounting infrastructure.