FSS: "Most Frequent Cases of Revenue Recognition Accounting Errors in Shipbuilding and Construction Industries"

"Improving Accounting Portal Functions to Enhance Utilization of Audit Findings"

[Asia Economy Reporter Minji Lee] The Financial Supervisory Service (FSS) has disclosed 34 cases of accounting audit findings from the past three years (2015?2017) to prevent accounting errors.

According to the FSS on the 20th, the majority of the findings were related to revenue recognition in order-receiving industries such as shipbuilding and construction, with 12 cases concerning sales and cost of sales. There were 6 cases of evaluation errors related to equity investments and financial products, 3 cases of errors in setting allowance for doubtful accounts, 3 cases of overstatement of tangible and intangible assets, and 3 cases of unreported stocks, totaling 7 cases.

Examples of revenue recognition errors involving sales and cost of sales included situations where changes in the total estimated cost of ongoing construction were not reflected, resulting in distorted construction progress rates. There was also a case where used products that were actually manufactured but not moved were falsely recorded as delivered and recognized as sales.

Regarding equity investments and financial products, a case was found where the embedded conversion option in convertible preferred shares was recognized as a separate derivative liability, causing an evaluation error during fair value measurement and resulting in an understatement of the liability. For allowance for doubtful accounts errors, the allowance was understated by arbitrarily applying delinquency period-based default rates instead of individually assessing the recoverable amount for long-term trade receivables that had impairment. In relation to tangible and intangible assets, there were cases where declines in market value and impairment indicators of investment assets were clear but the decrease in value was not reflected.

The FSS has been helping companies apply principle-based IFRS and preventing similar accounting errors by creating a detailed database (DB) of companies’ accounting treatments, supervisory authorities’ findings, and judgment details since last year. At the end of last year, it announced 29 cases pointed out over the recent two years (2018?2019).

Additionally, the FSS improved the posting categories and search functions of the audit findings DB to make it easier to use. Users can easily search and compare findings by issue area, related standards, and other interests to refer to the supervisory authorities’ judgment details.

The FSS stated, “We will announce this year’s major audit findings in the first quarter of next year,” and added, “To secure diversity in audit findings, we will also disclose the DB of findings from 2011 to 2014, the first full implementation years of IFRS, in the third quarter of 2021.”

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