Financial Supervisory Service Improves Merger Ratio Calculation Method... "Both Losses and Gains from Prior Period Error Corrections Reflected in Asset Value"

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[Asia Economy Reporter Ji-hwan Park] The Financial Supervisory Service (FSS) has decided to improve the system to allow profits, as well as existing losses, to be reflected in asset values when correcting prior period errors in the calculation of asset values used for determining merger ratios.

When evaluating stocks with market prices, it will be permitted to use the market price as of the analysis reference date, and for stocks without market prices that are evaluated using the cost method, increases will be reflected if the net asset value exceeds the acquisition cost.

The FSS announced on the 5th that it will improve the method of calculating asset values used in determining merger ratios, following criticisms that the current method does not adequately reflect changes in accounting standards and the actual value of assets.

According to the detailed amendments, if the possibility of conversion is certain, it will be codified to assume conversion and reflect it in net assets and the total number of issued shares. Previously, the practice was to guide asset value calculation only when the exercise of rights for securities that could increase capital, such as convertible bonds, was certain.

The evaluation method for non-marketable investment stocks will also be improved to reflect increases when the net asset value exceeds the acquisition cost. Previously, only decreases were deducted when the net asset value of non-marketable stocks evaluated at acquisition cost was lower than the acquisition cost. However, it will still not be allowed to increase impaired non-marketable investment stocks without separate impairment reversal review, due to concerns about asset value overestimation. For marketable stocks, evaluation will be based on the market price as of the analysis reference date.

Additionally, the timing for adding treasury stocks will be aligned with the net asset evaluation date by adding treasury stocks as of the end of the most recent business year. While net assets are evaluated at the end of the most recent business year, treasury stocks were previously added as of the analysis reference date, which raised concerns about overvaluation of asset values by the amount of treasury stocks acquired in the merger year.

The FSS has also established grounds for deducting non-controlling interests to increase the use of consolidated financial statements, allowing merger amounts to be calculated using consolidated financial statements. The prior period error correction rule has been improved from conservatively reflecting only prior period error correction losses in asset values to allowing prior period error correction gains to also be reflected.

The FSS stated, "By revising related regulations to ensure that asset values used in determining merger ratios appropriately reflect the actual value of the merging companies, it has enabled merger ratio calculations centered on consolidated financial statements," and added, "We expect that rational calculation of merger ratios will protect shareholders' rights and enhance market trust in merger ratios."

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