Financial Supervisory Service to Begin Thematic Inspection of Construction Companies

Long-term Construction Revenue and Contingent Liabilities Focused Inspection

Financial Supervisory Service building in Yeouido, Seoul. Photo by Younghan Heo younghan@

The Financial Supervisory Service (FSS) plans to initiate a thematic inspection targeting construction companies after the year-end closing. The focus will be on long-term construction revenue and contingent liabilities.

According to the FSS on the 19th, the accounting division of the FSS intends to start a thematic inspection of business reports for the construction industry after the year-end closing of listed companies.

In June last year, the FSS designated four themes for this year's thematic audit: △long-term construction revenue △contingent liabilities △accounts receivable △convertible bonds (CB) call options. Long-term construction revenue and contingent liabilities are closely related to order-based industries, especially construction. Recently, as risks in real estate project financing (PF) have expanded, the FSS has been closely monitoring the soundness and liquidity issues of financial companies.

Amid this, concerns over construction company insolvency grew after Taeyoung Construction applied for workout earlier this year, leading to a decision to intensively review the accounting treatment of construction companies (listed companies). Order-based industries such as construction carry out long-term projects lasting more than a year, recognizing construction revenue based on progress. There have been cases of earnings manipulation where projects incurring losses are disguised as profitable.

Construction companies listed on the stock market conducting year-end closing must immediately reflect increases in construction costs and labor costs related to long-term construction revenue items. According to K-IFRS No. 1037, if construction losses are expected, the related present obligations must be recognized as provisions. It is problematic if sales revenue is overstated by not increasing the total construction cost despite cost-increasing factors such as rising raw material prices and construction delays.

All contingent liabilities must also be disclosed in the notes. Until now, each construction company has disclosed contingent liabilities in the notes based on its own judgment. There are various types of PF-related contingent liabilities such as joint payment guarantees, completion guarantees, debt assumption, debt agreements, and unsold unit agreements, and it was common to disclose only some of them. For example, Company A did not disclose the PF loan payment guarantee amount provided to the developer and joint contractor as contingent liabilities in the notes, despite a very low sales rate and a decline in sales prices. The FSS plans to intensively crack down on such contingent liability note items in this year-end closing business report notes.

An accounting expert said, "Contingent liabilities are not recognized as liabilities on the financial statements but are shown only in the notes if there is a possibility they may be recognized as liabilities," adding, "From an investor's perspective, this increases access to information about listed companies in a situation where it is difficult to forecast the real estate market."

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