[Edaily Marketin LEE GEON-EOM Reporter] Tension is mounting as domestic credit rating agencies adopt an extremely cautious stance ahead of the introduction of the new accounting standard, International Financial Reporting Standard (IFRS) 18. Mindful of past instances where the adoption of IFRS caused significant confusion, the agencies plan to take a conservative, cash-flow-focused approach for the time being rather than directly revising their rating methodologies.

According to the credit rating industry on the 13th, major domestic credit rating agencies—including Korea Ratings Corporation(034950), Korea Credit Rating, and NICEHoldings—have decided to monitor market conditions rather than immediately change their existing credit rating methodologies following the introduction of IFRS 18 next year. Instead, they plan to create a buffer zone during the initial implementation phase by presenting operating profit calculated under both the existing and new standards side-by-side in their rating reports until the new system is fully established.

The Quagmire of Residual Profit and Loss… Significant Variations Expected by Industry

The reason credit rating agencies are proceeding cautiously lies in the increased volatility of key profit indicators that IFRS 18 will bring. Under the new standard, the income statement will be divided into operating, investing, and financing categories, and operating profit will be redefined as “residual profit.” This structure inevitably means that non-operating income and expense items—which were previously strictly excluded—will now be included in operating profit.

This distortion is expected to be particularly pronounced in cyclical industries, such as capital-intensive sectors with large-scale facilities. In industries like steel, petrochemicals, and shipbuilding, impairment losses on aging equipment or gains from disposals occur depending on market conditions; under IFRS 18, these items will be fully reflected in operating profit. This could create an optical illusion where earnings volatility increases solely due to a change in accounting standards, even though the business’s fundamental profit-generating capacity remains unchanged.

For example, suppose a steelmaker with 1 trillion won in revenue recognizes an impairment loss of 50 billion won on an aging blast furnace at the trough of the business cycle. Under the previous standards, operating profit would be calculated independently of this impairment loss, but under IFRS 18, operating profit would be reduced by that exact amount.

Conversely, if the market recovers and a gain of 30 billion won is realized from the disposal of aging equipment during a replacement process, this amount is added in full to operating profit. In other words, even though the business’s fundamental profit-generating capacity remains unchanged, the change in accounting standards alone can result in a wider gap between operating profits at market troughs and peaks.

Distinguishing True Repayment Capacity Through Cash Flow

Given this situation, some observers speculate that following the adoption of IFRS 18, the focus of corporate credit rating assessments may shift from book profits to the “cash flow” actually generated by companies. They explain that since the criteria for items included in operating profit vary by company—making comparisons within the same industry difficult—attention will inevitably turn to cash flow, which most objectively reflects a company’s ability to repay debt.

A corporate bond market official predicted, “The increased volatility of profit indicators is itself a form of risk and uncertainty,” adding, “Until the new accounting standards are fully established and data accumulates, from a conservative perspective, cash flow from operating activities will serve as the key benchmark for gauging a company’s fundamentals.”

However, there is also a view that the shift toward cash flow-based evaluation is unlikely to lead to a “complete replacement” of existing metrics. This is because metrics such as earnings before interest, taxes, depreciation, and amortization (EBITDA) relative to debt or the interest coverage ratio are deeply entrenched in corporate bond issuance terms and financial covenants, making it difficult for their use to decline in the short term.

A “Soft Landing” Tailored to the K-Capital Market

The actions of financial regulators and companies are also lending weight to this “cautious stance” taken by credit rating agencies. In fact, the Financial Services Commission has finalized a “phased implementation” approach requiring companies to report operating income under both the current and new standards in parallel. Since a significant number of companies are also expected to disclose earnings calculated under the previous method in footnotes, credit rating agencies have determined that it is more reasonable to monitor the stabilization of disclosures by presenting both new and old standards side by side—as has been done in the past—rather than rushing to finalize their methodologies.

This is not unrelated to the painful confusion experienced during the full-scale adoption of K-IFRS in 2011. At that time, the lack of clear calculation standards led companies to report operating income and losses in various ways, reducing comparability; ultimately, financial authorities had to rush to clarify the standards and mandate their disclosure the following year to resolve the situation.

An official from the credit rating industry explained, “We will monitor market conditions after the system is introduced and will only make limited revisions to our rating methodologies when we determine that the impact on actual corporate creditworthiness is significant,” adding, “In particular, under the new accounting standards, we plan to conduct credit ratings with a focus on actual cash flow generation rather than book profits for the time being.”

Meanwhile, credit rating agencies—such as Korea Ratings and Korea Credit Rating—whose major shareholders are global credit rating agencies, are independently assessing market trends regarding this restructuring without prior consultation with Fitch or Moody’s. This is seen as a strategic move to facilitate a soft landing by taking into account the unique characteristics of the domestic capital market and companies, rather than adhering to a one-size-fits-all global standard.