Financial Supervisory Service to Focus on Allowance for Doubtful Accounts Next Year... Announces 4 Key Accounting Issues

On the 13th, the Financial Supervisory Service (FSS) announced in advance the four key accounting issues, target industries, and precautions and error cases to be focused on during the review of financial statements of listed companies next year.

The FSS introduced and has been operating a thematic review system since 2013 to prevent investor damage caused by the disclosure and distribution of incorrect financial information. From 2014 to May of this year, it has focused on 36 issues pre-announced for 278 companies and took appropriate measures against 79 companies where accounting violations were found.

Next year, a focused review on the accounting treatment of allowance for doubtful accounts on trade receivables will be conducted across all industries except construction and shipbuilding. This is due to concerns over an increase in overdue trade receivables from clients amid the recent prolonged high interest rates, high inflation, and economic slowdown.

Target companies will be selected considering the proportion of trade receivables relative to total assets and sales, the ratio of allowance for doubtful accounts on trade receivables compared to the industry average, turnover rate of trade receivables, and changes in allowance for doubtful accounts. The FSS plans to examine whether expected credit losses on trade receivables have been appropriately recognized as allowance for doubtful accounts in accordance with impairment standards for financial instruments.

Additionally, the accounting treatment of convertible bond (CB) call options will be a focus of review. Some listed companies have caused social controversy by abusing third-party designated CB call options as a means of unfair trading. Target companies will be selected considering the balance of CBs relative to total assets and the number of issuances.

Due to recent increases in raw material prices and labor costs, construction costs related to long-term construction contracts have risen, so the accounting treatment of long-term construction revenue will also be closely reviewed. Furthermore, with ongoing high interest rates, there is growing attention on contingent liabilities such as guarantees provided by companies, and disclosures related to contingent liabilities will be examined as well.

An FSS official stated, "We will guide companies and auditors to thoroughly familiarize themselves with the key accounting issues and related precautions in advance when preparing financial statements and conducting audits for 2023. Once the 2023 fiscal year financial statements are disclosed, we will select target companies by accounting issue and conduct financial statement reviews, and take strict measures if accounting violations are found."

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