Financial Supervisory Service Selects Four Major Audit Issues Including Inventory Accounting in Financial Statements

[Asia Economy Reporter Minji Lee] The Financial Supervisory Service (FSS) announced on the 21st that it has identified four key accounting issues to focus on during the 2021 financial statement review: ▲inventory accounting ▲intangible asset accounting ▲foreign sales accounting ▲deferred corporate tax accounting.

The FSS plans to proceed with procedures such as selecting target companies and reviewing financial statements in 2021, when the 2020 financial statements are finalized. From this year, the FSS will present the industries subject to review by accounting issue, so companies and auditors in the relevant industries need to pay particular attention.

First, the FSS plans to focus on whether inventory accounting has been appropriately conducted. Despite exposure to rapid value declines and obsolescence risks of inventory due to economic downturns, there is an increasing incentive to avoid applying the lower of cost or net realizable value method by not applying net realizable value to inventory, thereby maintaining favorable performance and financial condition. The target industries are those with high obsolescence risk of inventory, such as electronic components, electrical equipment, and automobile-related industries. The FSS intends to apply the lower of cost or net realizable value method in cases of physical damage, obsolescence, price declines, and cost increases to evaluate at net realizable value.

Along with this, the FSS plans to examine whether accounting for intangible assets, excluding goodwill and development costs, has been properly conducted. An FSS official stated, “There is a possibility that companies on the brink of failure may perform impairment tests inadequately to avoid reflecting losses,” adding, “Since goodwill and development rights have been inspected through thematic reviews, this time the scope will be limited to other intangible assets such as intellectual property rights, copyrights, and publishing rights.”

The target industries are broadcasting and video content production and distribution sectors. The FSS will assess whether expenditures have been capitalized based on reasonable and objectively verifiable grounds and whether recoverable amounts have been measured based on reasonable assumptions during impairment evaluations.

The FSS will also scrutinize foreign sales, which carry higher transportation and credit risks than domestic transactions. The target industries include manufacturing, information and communication, and science and technology services with a high proportion of foreign sales. Accounting must be conducted by applying revenue recognition models based on objective evidence of transactions and the substance of transactions. Attention should be paid to eliminating intercompany transactions in consolidated entities and accounting for gross and net amounts according to the substance of transactions.

Finally, the FSS plans to examine whether deferred corporate tax accounting has been appropriately conducted. This applies to all industries. The FSS explained, “Even in cases where the likelihood of taxable income is low due to poor performance caused by economic recession, there is a strong incentive to recognize deferred tax assets to reduce debt ratios.” It should be noted that deferred tax assets can only be recognized when there is a high likelihood of sufficient taxable income arising from deductible temporary differences, unused tax losses, and tax credits.

The FSS stated, “For auditors, the announced accounting issues will be selected as key audit matters, and enhanced monitoring procedures may be applied,” adding, “Since the announcement timing of key inspection areas was moved forward from December to June starting last year, companies and auditors will have sufficient time to pay attention in advance, creating an environment for preventing accounting errors and ensuring prudent accounting treatment.”

This content was produced with the assistance of AI translation services.