Hangonghoe Announces Advance Notice on Key Inspection Areas of Financial Statements for Unlisted Corporations

by Kim Daehyun

Published 25 Jun.2024 13:21(KST)

The Korean Institute of Certified Public Accountants (KICPA) announced on the 25th the key accounting issues to be focused on next year regarding financial statements of unlisted companies.

[Provided by the Korean Institute of Certified Public Accountants]

KICPA recently reviewed errors in financial statements mainly based on disclosure materials. For minor violations (negligence), it recommends corrective disclosures, and if corrective disclosures are implemented, the case will be closed with minor measures (warnings, cautions). Serious violations will be strictly dealt with through audits.

Additionally, from 2019 until last month, 15 pre-announced issues were intensively reviewed for 243 companies, and corrective actions were taken against 24 companies (10%) where accounting violations were found.

First, attention should be paid to the appropriateness of recognition and measurement of provisions and the possibility of omission in contingent liabilities notes. This is because companies have incentives to understate provisions and contingent liabilities related to post-sale quality guarantees, loss-bearing contracts, lawsuits, etc., and frequent errors due to overlooking these have been identified.

[Provided by the Korean Institute of Certified Public Accountants]

When capitalizing intangible assets, reasonable and objective evidence is required. If estimating recoverable amounts is complex, the use of independent external experts is also necessary. KICPA emphasized, "especially, internally generated intangible assets should only be recognized as assets if expenditures incurred during the development phase meet requirements such as technical feasibility and demonstration of methods to generate future economic benefits."

In the revenue recognition and measurement process, all relevant facts such as contract terms and transaction forms must be considered. Care should be taken not to recognize revenue solely based on formal requirements such as issuance of tax invoices and legal transfer of ownership.

When classifying current and non-current items, liquidity should be clearly distinguished considering the nature of assets and liabilities. Assets should ensure that non-current assets are not classified as current assets, and liabilities should ensure that current liabilities are not classified as non-current liabilities.

A KICPA official stated, "After the financial statements for the 2024 fiscal year are disclosed, companies will be selected for review based on the pre-announced accounting issues," adding, "to prevent accounting errors and promote careful accounting treatment, precautions during closing and external audits will be posted on the KICPA website, and guidance documents will be sent to companies and auditors, with plans to strengthen education and publicity."